and prepared its federal income tax returns on the calendar year basis and on the accrual basis of accounting.
The consolidated income tax returns filed by plaintiff for the calendar years 1949 and 1954 showed that there was no tax due for those years and that on a consolidated basis there was a net operating loss in each of those years.
In its consolidated return for the year 1952 the taxpayer reported a total income tax liability of $308,589.19, which was paid in full. In computing its tax liability for 1952 the taxpayer carried over the net operating loss for the year 1949 as part of its net operating loss deduction for 1952.
On November 13, 1956 the taxpayer filed a timely refund claim for the year 1952 in the amount of $308,589.19, pursuant to the net operating loss carryback provisions of section 172(b) of the Internal Revenue Code of 1954. The basis of the claim for refund was that a net operating loss sustained in 1954 was sufficient to eliminate all net income for the year 1952.
On February 1, 1962 the taxpayer was advised in statutory notice of partial disallowance that $47,756.56 of its claim for refund had been disallowed. Thereafter the balance of $260,832.63 of the claim was paid to the taxpayer. The basis of the partial disallowance was a reduction in the amount of $137,282.20 in the net operating loss for the year 1949, which had the result of reducing the net operating loss deduction for 1952. The sum of $137,282.20, as mentioned above, is an interest deduction claimed by the taxpayer in 1949. The Commissioner of Internal Revenue determined that this was not a proper item of deduction for the year 1949 on the ground that it had not accrued in that year. It is the $47,756.56 disallowance which plaintiff alleges was erroneously and illegally collected by the Government.
A review of certain earlier proceedings between the parties is essential to a fuller understanding of the instant controversy.
In 1942 the taxpayer's original consolidated return reported a net loss and no tax was paid. For 1943 the taxpayer reported net income of $3,260,542.55 and a tax liability of $1,338,322.49. For 1944 the taxpayer reported net income of $2,270,764.45 and a tax liability of $924,954.86. In 1945 the taxpayer's original return reported a net loss of $4,352,237.24.
After filing its 1945 return the taxpayer filed claims of refund for 1943 and 1944 on the basis of the carryback of the net operating loss for 1945. At this time the Commissioner of Internal Revenue, through an Agent, commenced an extensive examination of the taxpayer's returns for the years 1941 through 1946. This examination was completed on September 13, 1948, the Internal Revenue Agent making these determinations:
(1) Net income for 1942 before carrybacks was increased from zero to $868,981.71 and a tax deficiency was computed.