Texas Co. v. Comm'r of Internal Revenue

• Decision Date: 31 May 1949
• Docket Number: Docket No. 17621.
• Citation: 12 T.C. 925
• Parties: THE TEXAS COMPANY (CARIBBEAN) LTD., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

12 T.C. 925

THE TEXAS COMPANY (CARIBBEAN) LTD., PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 17621.

Tax Court of the United States.

Promulgated May 31, 1949.

Petitioner corporation, on an accrual basis, reported on Form 1118 the amount of income tax for 1938 paid to the Government of Jamaica in 1940 in an amount in excess of the amount for which it claimed credit under section 131 of the Revenue Act of 1938 in its return for 1938. The amount of such foreign taxes paid was correctly stated in terms of the foreign currency in Form 1118, but an error was made in applying the rate of exchange in converting the amount paid into terms of American dollars. The erroneous amount of dollars was used in a later claim for refund filed in 1942, which was allowed by respondent in 1943. In 1947 respondent determined a deficiency in petitioner's tax for 1938 in an amount equivalent to the amount erroneously refunded to petitioner in 1943. Held, such deficiency is barred by limitation provisions of the Internal Revenue Code. Clayton E. Turney, Esq., for the petitioner.

Walt Mandry, Esq., for the respondent.

OPINION.

KERN, Judge:

In this proceeding respondent determined a deficiency in petitioner's income tax for the calendar year 1938 in the amount of $1,302.53. Petitioner's sole assignment of error is that the deficiency is barred by the limitation provisions of section 275(a) of the Revenue Act of 1938. The notice of deficiency was mailed on December 29, 1947, after the expiration of the period of limitation prescribed in the section. Respondent's answer is that the deficiency arises under section 131(c) of the 1938 Act, and hence the period of limitation is inapplicable. Stated narrowly, the issue is whether or not the claimed deficiency does fall within section 131(c). If it does, petitioner concedes that the deficiency should be sustained in full.

All of the facts have been stipulated and are hereby found accordingly.

Petitioner, a Delaware corporation, filed its income and excess profits tax return for the calendar year 1938 with the collector for the district of Delaware on June 8, 1939. It kept its books and rendered its tax returns on the accrual basis.

In its 1938 return petitioner reported net income of $76,269.65 and a total tax liability of $12,584.49. It also claimed therein a credit for income taxes paid to a foreign country (the Government of Jamaica) in the amount of $1,554.62, leaving a balance of tax of $11,029.87, which amount was assessed and paid. In a schedule attached to the return petitioner stated that ‘Receipts for the amount of $1,554.62, claimed as a credit in this return, are not yet available, but will be filed with Form 1118 at a later date.‘

On January 2, 1940, petitioner made actual payment to the Government of Jamaica of income tax levied by that government for the calendar year 1938 in the amount of $2,747-15-4. Thereafter, petitioner filed for the year 1938 Form 1118 (Statement in Support of Credit Claimed by Domestic Corporation for Taxes Paid or Accrued to a Foreign Country or a Possession of the United States), to which was attached a photostatic copy of the receipt for payment of taxes to Jamaica in the amount of $2,747-15-4. On the form it was stated that the amount of taxes paid to a foreign country was in the amount of $2,747-15-4. It was also reported on Form 1118 that by using a rate of exchange of $4.639791, the rate of exchange in effect on December 31, 1938, the amount of Jamaican taxes paid, converted into American dollars, equaled $12,749.06, limited by section 131(b)(1) to a credit of $12,161.37.

On May 26, 1942, petitioner filed with the collector for the district of Delaware a claim for refund of Federal income tax for the calendar year 1938 in the amount of $10,606.75, based upon the allowability of credit under section 131 of the Revenue Act of 1938, in the amount of $12,161.37, with respect to the taxes paid o Jamaica in 1940. In the statement attached to the claim for refund, the following appeared:

In the Income and Excess Profits Tax Return, duly filed by this corporation for the calendar year 1938, there was claimed, as a credit for income taxes paid to a foreign country, the amount of $1,554.62, whereas the correct amount of such credit allowable is $12,161.37. Claim is now made for a refund of the difference, amounting to $10,606.75.

On March 30, 1943, petitioner received a refund of Federal income tax for 1938 in the amount of $10,265.01, based upon a certificate of overassessment issued by respondent.¹

The deficiency in this proceeding arises out of a redetermination by respondent that the credit for income taxes for the calendar year 1938 paid to Jamaica on January 2, 1940, should be $10,858.84, instead of the amount of $12,161.37, which was allowed in computing the refund. The amount now said by respondent to be correct is determined by him by applying to the Jamaican tax payment an exchange rate of $3,951.88, the rate of exchange in effect on January 2, 1940, the date of the payment of the tax to Jamaica, and not the rate of exchange employed by petitioner, which was the rate in effect on the last day of taxable year involved.

Section 131(c) of the Revenue Act of 1938, which concerns itself with adjustments on payment of accrued taxes of foreign countries, provides, in part, as follows:²

If accrued taxes when paid differ from the amounts claimed as credits by the taxpayer, or if any tax paid is refunded in whole or in part, the taxpayer shall notify the Commissioner, who shall redetermine the amount of the tax for the year or years affected, and the amount of tax due upon such redetermination, if any, shall be paid by the taxpayer upon notice and demand by the collector, or the amount of tax overpaid, if any, shall be credited or refunded to the taxpayer in accordance with the provisions of section 322. * * *

It is not disputed in this proceeding that in cases properly cognizable under section 131(c) the general provisions of limitation contained in section 275(a) are inapplicable,³ and we so held in Pacific Metals Corporation, 1 T.C. 1028.

The parties also recognize that only two general situations are covered by section 131(c): (1) Where the amount of foreign tax when paid differs from the amount claimed as a credit; and (2) where the taxpayer receives a refund of foreign tax, which he previously claimed as a credit. They also agree that this proceeding does not fall within the second situation. The parties disagree as to whether it falls within the first.

It is respondent's position that this case involves an adjustment under the first situation; whereas petitioner urges to the contrary, and concludes that section 131(c) is not involved, and the limitation of section 275(a) is therefore applicable.

In brief, what occurred is this: Petitioner claimed on its 1938 tax return a credit for foreign tax in the amount of $1,554.62. It also advised respondent that the data to support the credit was not then available, and Form 1118 would be filed at a later date when the information was available. On January 2, 1940, it paid such taxes, in the amount of L2,747-15-4 which, according to the rate of exchange prevailing at the date of payment, was convertible to American dollars in the amount of $10,858.84. By the erroneous use⁴ of the rate of exchange prevailing at the last day of the year for which the taxes were paid, petitioner claimed on Form 1118 and on its claim for refund a foreign tax payment converted to American dollars in the amount of $12,161.37. It did, however, correctly report on Form 1118 the amount of foreign taxes in the foreign currency, as required. Respondent, perpetuating the error of the use of the rate of exchange prevailing on December 31, 1938, ⁵ made in 1943 the refund as claimed by petitioner. Upon discovering his error after the limitation for recovery of an erroneous refund had run, respondent now seeks to correct the error by maintaining that this proceeding falls under section 131(c), to which the limitation provisions generally do not apply.

The present deficiency did not result from the fact that the amount of the foreign taxes paid was a lesser amount than the credit claimed on Form 1118, or was in a lesser amount than the credit claimed in its return. The foreign taxes paid were seven times greater than the credit claimed in its return, so that, without doubt, it would have been entitled to a refund in accordance with the provisions of sections 131(c) and 322. What happened as a result of the use of the erroneous exchange rate⁶ in converting the amount of foreign taxes paid into terms of American currency was that petitioner received a greater refund than that to which it was legally entitled— greater by $1,302.53, the amount of deficiency involved. Whether these circumstances remove this proceeding from the ambit of section 131(c) and permit it to remain within the general limitation provisions of section 275(a) is really the problem posed.

The legislative history of section 131(c) on this problem is unilluminating. ⁷ Its purpose was generally stated in Pacific Metals, supra, at page 1030:

* * * Section 131(c) is a special provision and its terms are clear. It operates to postpone the time for the payment of the net balance of the domestic income tax for a particular year until the collector has made demand upon the taxpayer for payment of the balance of the domestic tax due after the taxpayer has ascertained the correct amount of the foreign tax and has notified the Commissioner of the correct amount. Reading (c) with (a) of section 131, the credit under (a) initially taken is a provisional or interim credit, subject to correction by the taxpayer himself. Since subsection (c) imposes upon the taxpayer the duty of notifying the Commissioner of the facts relating to the correct amount of the foreign tax and imposes upon the taxpayer the obligation of paying any balance found to be...