TANNENWALD

Leroy A. Brill and Benjamin Stolper, for the petitioner. Albert Squire, for the respondent.

On its income tax return for 1967, petitioner reported and paid the alternative tax under sec. 1201, I.R.C. 1954, because it was less than the regular tax under sec. 11. None of petitioner's net operating losses from 1965 and 1966 could be availed of in the computation of such alternative tax. Petitioner sustained additional net operating losses in 1968 and 1970. If all of petitioner's unused net operating losses through 1970 are carried to 1967 and included in its net operating loss deduction for that year, the regular tax becomes less than the alternative tax petitioner originally reported and paid for that year. Held: All of petitioner's unused net operating losses must be carried to 1967 and deducted in that year, leaving none available for deduction in 1969. Sec. 172. Sec. 6214(b and Chartier Real Estate Co., 52 T.C. 346 (1969), affirmed per curiam428 F.2d 474 (C.a. 1, 1970), do not prevent such result.

OPINION

TANNENWALD, Judge:

Respondent determined a deficiency of $59,863.57 in petitioner's income tax for the taxable year ended January 31, 1969.

The entire deficiency arises from respondent's disallowance of the net operating loss deduction petitioner claims for that year.

The facts of the case have been stipulated.

Petitioner is a Delaware corporation engaged in the business of farming. Its principal place of business was in Middletown, Del., at the time the petition was filed in this case. Petitioner filed its Federal income tax return for 1969 with the Internal Revenue Service Center at Philadelphia, Pa.

The table below shows petitioner's taxable income before any net operating loss deduction and its net operating losses for the taxable years 1965 through 1970:

+-------------------------------------------------------+ ¦ ¦Taxable income before net ¦ ¦ +------+---------------------------+--------------------¦ ¦Year ¦operating loss deduction ¦Net operating loss ¦ +------+---------------------------+--------------------¦ ¦ ¦ ¦ ¦ +------+---------------------------+--------------------¦ ¦1965 ¦ ¦$8,207.60 ¦ +------+---------------------------+--------------------¦ ¦1966 ¦ ¦30,124.62 ¦ +------+---------------------------+--------------------¦ ¦1967 ¦$259,621.12 ¦ ¦ +------+---------------------------+--------------------¦ ¦1968 ¦ ¦30,529.78 ¦ +------+---------------------------+--------------------¦ ¦1969 ¦135,130.89 ¦ ¦ +------+---------------------------+--------------------¦ ¦1970 ¦ ¦23,490.08 ¦ +-------------------------------------------------------+

In 1967 petitioner had a net long-term capital gain of $313,531.39, no net short-term capital loss, and deductions in excess of ordinary income (exclusive of any net operating loss deduction) of $53,910.27.

In 1969 petitioner had a net long-term capital gain of $227,576.32, no net short-term capital loss, and deductions in excess of ordinary income (exclusive of any net operating loss deduction) of $92,445.43.

Petitioner filed a timely Federal income tax return for 1967. In computing its tax liability for that year, petitioner used both the ‘regular’ and ‘alternative’ methods of computation. The regular method is prescribed in section 11 and the alternative method for corporations is prescribed in section 1901(a).

The regular method produced the following result:

+-------------------------------------------------------------------------+ ¦Taxable income before net operating loss deduction¦ ¦$259,621.12¦ +--------------------------------------------------+----------+-----------¦ ¦Less: Net operating loss deduction: ¦ ¦ ¦ +--------------------------------------------------+----------+-----------¦ ¦Net operating loss carryover for 1965 ¦$8,207.60 ¦ ¦ +--------------------------------------------------+----------+-----------¦ ¦Net operating loss carryover for 1966 ¦30,124.62 ¦38,332.22 ¦ +--------------------------------------------------+----------+-----------¦ ¦Taxable income ¦ ¦221,288.90 ¦ +--------------------------------------------------+----------+-----------¦ ¦Normal tax (sec. 11(b)(2)): 22% X $221,288.90 ¦ ¦48,683.56 ¦ +--------------------------------------------------+----------+-----------¦ ¦Surtax (sec. 11(c)(3)): ¦ ¦ ¦ +--------------------------------------------------+----------+-----------¦ ¦Taxable income ¦221,288.90¦ ¦ +--------------------------------------------------+----------+-----------¦ ¦Less: Surtax exemption (sec. 11 (d)) ¦25,000.00 ¦ ¦ +--------------------------------------------------+----------+-----------¦ ¦26% X ¦196,288.90¦51,035.11 ¦ +--------------------------------------------------+----------+-----------¦ ¦“Regular” tax ¦ ¦99,718.67 ¦ +-------------------------------------------------------------------------+

The alternative method produced the following result:

+---------------------------------------------------------------+ ¦Taxable income ¦$221,288.90¦ +---------------------------------------------------+-----------¦ ¦Less: Excess of net long-term capital gain over net¦ ¦ +---------------------------------------------------+-----------¦ ¦short-term capital loss ¦313,531.39 ¦ +---------------------------------------------------+-----------¦ ¦Balance ¦0 ¦ +---------------------------------------------------+-----------¦ ¦Sec. 1201(a)(1): 22% X 0 ¦0 ¦ +---------------------------------------------------+-----------¦ ¦Sec. 1201(a)(2): 25% X $313,531.39 ¦78,382.85 ¦ +---------------------------------------------------+-----------¦ ¦Alternative tax ¦78,382.85 ¦ +---------------------------------------------------------------+

Because the alternative tax thus computed ($78,382.85) was less than the regular tax thus computed ($99,718.67), petitioner reported the former amount on its return as its income tax liability for 1967 and paid that amount less allowable credits.

Petitioner filed a timely Federal income tax return for 1969. On that return, petitioner determined its tax under section 11 and claimed a net operating loss deduction of $122,772.27, consisting of the following items:

Net operating loss carryover from 1965 . . . . . $8,207.60

Net operating loss carryover from 1966 . . . . . 30,124.62

Net operating loss carryover from 1968 . . . . . 30,529.78

Carryover of total deductions for 1967 (exclusive of net operating loss deduction) . . . . . 53,910.27

Petitioner filed a timely Federal income tax return for 1970, reporting a net operating loss of $23,490.08 for that year. On April 30, 1970, petitioner filed an Application for Tentative Refund from Carryback of Net Operating Loss, in which it claimed a tentative refund of Federal income tax paid for the taxable year 1969, based on the carryback to that year of its net operating loss for 1970. On June 18, 1970, respondent notified petitioner of his disallowance of that application.

By notice of deficiency dated February 7, 1972, respondent also disallowed the net operating loss deduction claimed on petitioner's return for 1969 and determined a deficiency of $59,863.57 in petitioner's income tax for that year.

Respondent contends that petitioner's net operating losses for 1965, 1966, 1968, and 1970 must be carried to petitioner's taxable year 1967 pursuant to the provisions of section 172

and entirely absorbed as the net operating loss deduction for that year, leaving no net operating losses available for deduction in 1969.

The linchpin of respondent's argument is that the alternative tax provisions of section 1201(a) are mandatory for all purposes and may not be used unless they produce a lesser tax than that produced by the application of the regular method of computation under section 11. On this theory, respondent has recomputed petitioner's tax for 1967 under section 11,

which results in a tax of $73,789.14 as compared with the alternative tax of $78,382.85, as reported by petitioner on its 1967 return.

Respondent further contends that petitioner's deductions in excess of ordinary income (exclusive of any net operating loss deduction) for 1967 in the amount of $53,910.27 do not constitute a ‘net operating loss' as defined in section 172(c) and therefore may not be carried over to petitioner's taxable year 1969, even though they were not to be absorbed as deductions from petitioner's gross income for 1967.

Petitioner argues that its income tax liability for 1967 may not be recomputed under section 11. It admonishes us that our only task herein is the redetermination of al alleged deficiency in its income tax for 1969 and points to the fact, stipulated by the parties, that respondent is barred by the statute of limitations from assessing a deficiency in petitioner's income tax for 1967. Sec. 6501(a). Petitioner urges that, under these circumstances, a recomputation of its income tax liability for 1967 would amount to a determination of an overpayment in its tax for that year and that section 6214(b)

is a jurisdictional bar to such a determination.

It is well settled that we may determine the correct amount of taxable income or net operating loss for a year not in issue (whether or not the assessment of a deficiency for that year is barred) as a preliminary step in determining the correct amount of a net operating loss carryover to a taxable year in issue. ABKCO Industries, Inc., 56 T.C. 1083, 1088-1089 (1971), affirmed on another issue 482 F.2d 150 (C.A. 3, 1973), and cases cited therein. See also Anthony Mennuto, 56 T.C. 910, 923 (1971), involving the analogous determination of an investment credit carryover, and cases cited therein. But petitioner argues that such cases are not precedents for what respondent asks us to do in this case, namely, to recompute the tax for a barred year and not just the correct taxable income or net operating loss for such a year. It is such a recomputation of the tax for a year not in issue that, according to petitioner, section 6214(b) prohibits by providing — The Tax Court * * * shall have no jurisdiction to determine whether or not the tax for any other year has been overpaid or underpaid.

We think that petitioner misconceives the import of section 6214(b). It is true that respondent's disallowance of petitioner's claimed net operating loss deduction for 1969 depends on a determination that section 1201 does not apply to petitioner's taxable year 1967 because a recomputation of the regular tax for 1967 shows that it is less than the alternative tax. What concerns us in this proceeding, however, is not the correct amount of petitioner's tax liability for 1967 but the deductions to be used in correctly calculating that amount, whether under section 11 or section 1201.

Section 6214(b) says that we have no power to determine an overpayment or underpayment of tax for a year not in issue which would form the basis of a refund suit or an assessment of a deficiency. Commissioner v. Gooch Co., 320 U.S. 418 (1943) (decided under the predecessor of present section 6214(b). See also Robbins Tire & Rubber Co., 53 T.C. 275, 279 (1969). It does not prevent us from computing, as distinguished from ‘determining,‘ the correct tax liability for a year not in issue when such a computation is necessary to a determination of the correct tax liability for a year that has been placed in issue. Commissioner v. Gooch Co., supra 320 U.S. at 420-421 and fn. 5; Lawrence W. Carpenter, 10 T.C. 64, 66-68 (1968); J. C. Blair Co., 11 B.T.A. 673, 679 (1928); D. N. & E. Walter & Co., Inc., Et al., 10 B.T.A. 620, 630-631 (1928); Evens & Howard Fire Brick Co., 8 B.T.A. 867, 876-877 (1927). Nor is the rationale of the decided cases limited to situations where the recomputation of the tax liability for the barred year involves the propriety of omissions or deductions from gross income for such year; it extends to a recomputation of the tax liability itself, even though no adjustments are made to taxable income. Anthony Mennuto, supra. In the same vein, we find no impediment to our use of facts in a later year as part of the process of recomputing a tax liability for an earlier barred year in order to arrive at the correct tax liability for an open year in issue. See Springfield Street Railway Co. v. United States, 312 F.2d 754, 758-759 (Ct. Cl. 1963). In this connection, we note that there is no dispute as to the existence or amount of petitioner's 1970 net operating loss. Such being the case, we perceive no obstacle to taking that loss into account in computing petitioner's tax liability for 1967. See James G. Maxcy, 59 T.C. 716, fn. 15 (1973).

The crux of petitioner's argument is that the alternative tax provisions of section 1201(a) are in effect optional and that its original decision

not to file a claim for refund prevents the respondent from initiating such a recomputation in this proceeding in order to deny the net operating loss deduction claimed for 1969.

The fact of the matter is that the unambiguous provisions of sections 172 and 1201 contradict petitioner's assertions. Section 172(b)(2) provides (with exceptions not pertinent herein) that the entire amount of the net operating loss for any taxable year shall be carried to the earliest of the taxable years to which such loss may be carried, and further provides that the portion of such loss which shall be carried to each of the other taxable years shall be the excess, if any, of the amount of such loss over the sum of the taxable income for each of the prior taxable years to which such loss may be carried. Therefore, when the taxpayer claims a net operating loss for the year in issue, it is necessary, under section 172(b)(2), to determine whether the net operating losses claimed as a deduction for that year are still available or were absorbed as allowable deductions in prior taxable year. Ellery Willia Newton, 57 T.C. 245, 247-248 (1971); Romer v. United States, 216 F.Supp. 832 (S.D.N.Y. 1963).

A net operating loss deduction for a prior year which would have been allowable if claimed must be considered as actually having been allowed when determining the availability of a net operating loss carryover to a subsequent year. Springfield Street Railway Co. v. United States, 312 F.2d at 759. That the taxpayer may have failed to claim the benefits of the deduction in the previous year does not excuse us from implementing the express provisions of the statute.

Springfield Street Railway Co. v. United States, supra at 834. Cr. Dravo Corporation v. United States, 138 F.Supp. 274, 276 (Ct. Cl. 1956), and A. Teichert & Son, Inc., 18 T.C. 785, 787 (1952), where, in the analogous context of excess profits credit carrybacks, the courts refused to disregard the plain language of the statute, even though it resulted in an increase rather than a decrease in petitioner's tax liability.

Section 1202 is similarly unambiguous and applies whenever the alternative tax is less than the regular tax for that year computed under section 11. See Amelia J. Taylor, 27 T.C. 361, 372 (1956), affirmed on another issue 258 F.2d 89 (C.A. 2, 1958), where we rejected the respondent's contention that the alternative tax applies only when the taxpayer originally elects its use. Cf. Clarence Co., 21 T.C. 615 (1954), where the tax was less under the regular method than under the alternative method and the lesser amount was required to be used in computing the personal holding company tax. See also Arc Realty Co. v. Commissioner, 295 F.2d 98, 106 fn. 7 (C.A. 8, 1961), reversing on another issue 34 T.C. 484 (1960).

Nothing in Chartier Real Estate Co., 52 T.C. 346 (1969), affirmed per curiam 428 F.2d 474 (C.A. 1, 1970), heavily relied upon by petitioner, affects our analysis. In that case, the alternative tax provisions of section 1201 applied in all events. See 52 T.C. at 351. The threshold question with which this case was concerned simply did not arise. Chartier is therefore of no help to petitioner herein.

We hold that petitioner's net operating losses for 1965, 1966, 1968, and 1970 must be carried to petitioner's taxable year 1967 and — together with its deductions in excess of ordinary income (exclusive of the net operating loss deduction) for 1967 in the amount of $53,910.27 — deducted in that year, leaving them unavailable for carryover to 1969 and deduction in that year. In view of this conclusion, we need not decide whether the $53,910.27 of deductions for 1967 could have been carried over to 1969 and deducted in that year they were not absorbed as deductions from petitioner's gross income for 1967.

Decision will be entered for the respondent.

+-------------------------------------------------------------------------+ ¦Taxable income before net operating loss deduction¦ ¦$259,621.12¦ +--------------------------------------------------+----------+-----------¦ ¦Less: Net operating loss deduction: ¦ ¦ ¦ +--------------------------------------------------+----------+-----------¦ ¦Net operating loss carryover from 1965 ¦$8,207.60 ¦ ¦ +--------------------------------------------------+----------+-----------¦ ¦Net operating loss carryover from 1966 ¦30,124.62 ¦ ¦ +--------------------------------------------------+----------+-----------¦ ¦Net operating loss carryback from 1968 ¦30,529.78 ¦ ¦ +--------------------------------------------------+----------+-----------¦ ¦Net operating loss carryback from 1970 ¦23,490.08 ¦92,352.08 ¦ +--------------------------------------------------+----------+-----------¦ ¦Taxable income ¦ ¦167,269.04 ¦ +--------------------------------------------------+----------+-----------¦ ¦Normal tax: 22% X $167,269.04 ¦ ¦36,799.19 ¦ +--------------------------------------------------+----------+-----------¦ ¦Surtax: ¦ ¦ ¦ +--------------------------------------------------+----------+-----------¦ ¦Taxable income ¦167,269.04¦ ¦ +--------------------------------------------------+----------+-----------¦ ¦Less: Surtax exemption ¦25,000.00 ¦ ¦ +--------------------------------------------------+----------+-----------¦ ¦26% X ¦142,269.04¦36,989.95 ¦ +--------------------------------------------------+----------+-----------¦ ¦Regular tax ¦ ¦73,789.14 ¦ +-------------------------------------------------------------------------+