RESPONDENT: G. D. Searle & Company
LOCATION: Huntington National Bank
DOCKET NO.: 151
DECIDED BY: Warren Court (1958-1962)
LOWER COURT: United States Court of Appeals for the Seventh Circuit
CITATION: 367 US 303 (1961)
ARGUED: Mar 21, 1961 / Mar 22, 1961
DECIDED: Jun 12, 1961
Facts of the case
Media for Jarecki v. G. D. Searle & CompanyAudio Transcription for Oral Argument - March 22, 1961 in Jarecki v. G. D. Searle & Company
Audio Transcription for Oral Argument - March 21, 1961 in Jarecki v. G. D. Searle & Company
No. 151 John T. Jarecki, former collector of Internal Revenue, et al., Petitioners, versus G.D. Searle & Company.
Wayne G. Barnett:
Mr. Chief Justice, may it please the Court.
This case and the Polaroid case which follows it, arise under the Excess Profits Tax Act of 1950, that's the so called Korean War excess profits tax.
The taxpayer is a corporation engaged in the development, manufacture and sale of ethical drugs.
During the years 1946 to 1949, before the excess profits tax years, the taxpayer developed two new chemical compounds, one of which proved to be effective in the treatment of peptic ulcers and was sold under the trade name of, “Banthine”.
The other was proved effective in the prevention and treatment of motion sickness and was sold under the name, “Dramamine”.
In 19 -- during the years 1950 to 1953, which are the excess profits tax years, the taxpayer realized very substantial amounts of income from the manufacture and sale of these two products.
It included that income in the computation of its excess profits tax for those years.
Later, however, they filed claims for refund, claiming that a part of that income in sale of those two products was entitled to relief in part from the excess profits tax under Section 456 of the Internal Revenue Code of 1939.
At the outset, I like to explain briefly what Section 456 really is.
Section 456 is one of a wide variety of provisions ultimately designed to provide a more equitable measure of the income that should be subjected to the special war time rate imposed by the excess profits tax.
Its particular profits is income which is realized during the excess profits tax years, but in fact is attributable to events or work done in prior years.
The clearest example might be income which was fully earned before the war, but was subject to litigation which was not resolved until after the excess profits tax was enacted.
And I think there is good reason not to subject that income to the full burden of the excess profits tax, simply because it wasn't really realized until that time.
Charles E. Whittaker:
Wayne G. Barnett:
I will come to the precise definition.
I'm -- at this point I was just suggesting the -- the general purpose of the provision.
There are three requirements to qualify for relief.
I'm speaking again in broad terms.
The first is you must have an eligible kind of income, income, an eligible class of income, income which is of a kind to which the section applied.
The second requirement is that it must -- that class, the eligible class of income, must be abnormal in amounts, which is defined to mean in excess of 115% of the average income of that same class for the four previous years.
Now, at this point, I think I can clarify Mr. Justice Whittaker's problem.
The statute in the definition of abnormal income first speaks of income which is abnormal in kind, income that is not normal for the taxpayer to receive and then speaks of income which is normal to receive, but which is abnormal in amount.
Now practically, it is only the abnormality in amount that is important because any income that is not normal to receive will also be abnormal in amount.
Such -- the -- the only real quantitative -- the only test that the abnormality test imposed is the quantitative test, but if you have income that is an eligible kind and which meets the quantitative test, then you have what is called abnormal income and the excess of that over the 115% average for the four or five years, less allocable deductions is the -- is called the net abnormal -- the net abnormal income.
Now you're not automatically entitled to relief for the net abnormal income.
The third step is that you must show that that income or part of it is in fact attributable to other years.
Now, if you satisfy all three of those tests, eligibility in kind, abnormality in amount and attributability to other years, then the relief that you get is that you reallocate the net abnormal income to the years to which it is attributable.