Lawyers' Paradise

Thousands of U.S. corporation lawyers last week were attacking in force at a seeming loophole in the U.S. tax laws. Their objective: to get back almost half an estimated $7 billion of excess profits taxes which their companies have paid to the government since 1940. This, very possibly, would double their annual profits overnight. The loophole: Section 722, a "relief" amendment which Congress had tacked on to last year's tax bill.

The passage of Section 722 was political fence-mending of a high and tricky order. In 1940 Congress had plastered U.S. corporations with a 40% to 60% graduated tax on their excess profits. In 1942 the tax took another drastic leap: henceforth a flat 90% of excess profits would have to be paid into the Treasury. Corporations began to scream that they were being milked unfairly; they pleaded that they would have no postwar reserves. At first Congress turned a deaf ear. But between the tax laws and the war there had arisen many inequities; some industries were unfairly scrunched. The legislators took pity, thought twice, and finally cut a loophole in the tax fence.

In effect, Section 722 specifies the means by which a corporation can modify its prewar, four-year excess profits base on which the tax is estimated. Thus, since the top bracket is 90%, even a slight upward revision of the average base would mean an enormous rebate. To make sure that no corporation was frozen out of at least a chance to claim such a recount, Congress made Section 722 a long, loosely-phrased document offering several broad formulas for arriving at a new tax base. Example: if, during one of the four tax-base years, a corporation's profits were below normal, it could compute a new average tax base for four normal years. Then Congress dumped the actual settlement of cases into the laps of Internal Revenue agents.

Just under 33,000 claims, totaling about $3 billion, have been filed with the Bureau so far. Under the vague phraseology in the law, almost every corporation which can collar an unemployed lawyer can gamble a few thousand dollars with a chance of winning a rebate many times as big. But by the same token the money spent to prepare a claim is likely to be a bet on the whim of a tax official. The lawyers know this, and thus are engaging in an unprecedented amount of paper work. One big company submitted a 900-page rebate claim. Another sent in a 100-page brief but kept a barrel-full of supporting evidence on hand.

So few cases have been decided that there is as yet no indication of what the trend will be. But the Treasury is worried, partly at the vast amount of paper work ahead--one company expects its $50,000 investment for a few weeks' paper work by its lawyers to pay off more than its huge sales can show in a year's profits.

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