F.W. Woolworth Co. v. Comm'r of Internal Revenue
| Decision Date | 15 June 1970 |
| Docket Number | Docket Nos. 84442,2130-62.,91247 |
| Citation | 54 T.C. 1233 |
| Parties | F. W. WOOLWORTH CO., PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
54 T.C. 1233
F. W. WOOLWORTH CO., PETITIONER
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
Docket Nos. 84442
91247
2130-62.
United States Tax Court
Filed June 15, 1970.
[54 T.C. 1233]
Charles B. McInnis, G. Kibby Munson, Roger H. Munzall, and James J. O'Neil, for the petitioner.
William F. Chapman, for the respondent.
1. Certain taxes paid by petitioner's English subsidiary under Schedule A of the English Income Tax Act of 1952 do not for foreign tax credit purposes qualify as an income tax or a tax paid in lieu of an income tax within the meaning of secs. 901 and 903, I.R.C. 1954.
2. Respondent's allocation of various deduction items to certain foreign-source income in order to reduce petitioner's per country limitation on taxes paid or deemed paid to England, Germany, Puerto Rico, and Cuba, was not required under the provisions of sec. 862(b) and the applicable underlying regulations.
STERRETT, Judge:Respondent determined deficiencies in petitioner's income tax for 1957, 1958, and 1959 as follows:
+----+
¦¦¦¦¦¦
+----+
Increased
Year Docket Deficiency deficiency in Total
No. amended deficiency
answer
1957 84442 $133,397.54 $47,183.98 $180,581.52
1958 91247 217,124.05 217,124.05
1959 2130-62 66,981.50 951,687.04 1,018,668.54
The issues are (1) whether the tax paid by petitioner's British subsidiary (F. W. Woolworth & Co., Ltd.) under schedule A of the English Income Tax Act, 1952, constitutes an income tax or a tax in lieu of an income tax within the meaning of sections 901, 902, and/or
[54 T.C. 1234]
903 of the Internal Revenue Code of 1954; 1 And (2) whether for purposes of determining the numerator of the limiting fraction of the per country limitation with respect to foreign taxes paid or deemed paid by petitioner, various deduction items are allocable under section 862(b) and the applicable regulations to certain foreign source income received by the petitioner.
Some of the facts were stipulated and they are so found.
F. W. Woolworth Co. (hereinafter called petitioner) is a corporation organized and existing under the laws of the State of New York with its principal office and place of business at 233 Broadway, New York, N.Y. During the years here involved and at all times here pertinent petitioner employed an accrual method of accounting and filed its Federal income tax returns on the basis of a calendar year. Petitioner filed its Federal income tax returns for 1957, 1958, and 1959 with the district director of internal revenue, Manhattan District, New York, N.Y.
During the years 1957, 1958, and 1959 and at all times here relevant petitioner was engaged in the direct operation of a chain of variety stories located throughout the United States, Cuba, and Puerto Rico. The number of such variety stores operated by petitioner varied between 2,100 and 2,200 during the years 1957, 1958, and 1959.
During the years here involved petitioner owned 52.7 percent of the common capital stock in which voting power resides (71,145,000 shares out of 135 million shares outstanding) and 140 shares of preferred stock (nonvoting) out of 5 million outstanding of F. W. Woolworth & Co., Ltd. (England), which company operated a chain of approximately 1,100 variety stores throughout the British Isles. During the years here involved petitioner owned 97 percent of the capital stock of F. W. Woolworth Co., G.m.b.H. (Germany), which company operated a chain of variety stores throughout the Republic of West Germany ranging from 75 stores in 1957 to 91 stores in 1959. During the years here involved petitioner owned 100 percent of the capital stock of F. W. Woolworth Co., Ltd. (Canada), which company operated approximately 215 variety stores throughout the Dominion of Canada.
Petitioner has a substantial investment in its English and German subsidiaries. Petitioner's balance sheet as of December 31, 1959, shows its investment in the English subsidiary in the amount of $30,880,118 and its investment in the German subsidiary in the amount of $3,262,291.
[54 T.C. 1235]
According to the closing quotation on the London Stock Exchange as of December 31, 1959, the ordinary (common) stock in the English subsidiary held by petitioner had an aggregate market value of $680,987,000.
During the years here involved petitioner operated stores in Cuba and Puerto Rico. Such stores were operated by petitioner directly through its New York regional office as branch operations rather than through subsidiary corporations.
Petitioner reported the following amounts of income in its Federal income tax returns for 1957, 1958, and 1959:
+----+
¦¦¦¦¦¦
+----+
Gross profit Interest Net capital
Year from sales Income 1 Rents gains or ordinary
losses 2
1957 $309,019,925.68 $180,824.41 $4,046,874.06 $157,860.14
1958 316,834,560.32 213,145.75 3,909,021.42 55,389.50
1959 337,247,739.01 321,644.52 3,877,334.88 (385,177.23)
During the years 1957, 1958, and 1959 petitioner received dividends from various sources in the following amounts:
+---+
¦¦¦¦¦
+---+
1957 1958 1959
Domestic sources $68.65
English subsidiary $11,421,251.19 $11,498,047.00 13,789,290.31
Canadian subsidiary 2,025,000.00 4,050,000.00
German subsidiary 1,411,537.01 738,045.99 2,685,628.04
After deducting all applicable expenses (including a charge to each Cuban store for a portion of petitioner's executive office expenses allocated on the same basis as to a store in the continental United States), petitioner's branch in Cuba had net earnings for the years 1957 through 1959 as follows: $514,997.27 in 1957; $467,498.15 in 1958; and $851,907.98 in 1959.
After deducting all applicable expenses (including a charge to each Puerto Rican store for a portion of petitioner's executive office expenses allocated on the same basis as to a store in the continental United States), petitioner's branch in Puerto Rico had net earnings for the years 1957 through 1959 as follows: $65,860.86 in 1957; $172,205.25 in 1958; and $272,016.64 in 1959.
During the year 1957 petitioner received other taxable income in the total amount of $47,623.57 which it reported in its Federal income tax return for that year. Petitioner's total gross income for the years 1957 through 1959, as reported in its Federal income tax returns
[54 T.C. 1236]
for those years, was as follows: $328,310,896.06 in 1957; $337,298,209.98 in 1958; and $357,536,528.16 in 1959.
Petitioner paid taxes to the Cuban Government and claimed a credit for such taxes in its Federal income tax returns as follows:
+-----------------------------------------------+
¦ ¦ ¦Credit claimed under ¦
+----+-------------------+----------------------¦
¦ ¦Total Cuban taxes ¦sec. 904 limitation ¦
+----+-------------------+----------------------¦
¦ ¦ ¦ ¦
+----+-------------------+----------------------¦
¦1957¦$204,317.73 ¦$204,317.73 ¦
+----+-------------------+----------------------¦
¦1958¦203,578.03 ¦203,578.03 ¦
+----+-------------------+----------------------¦
¦1959¦428,546.20 ¦428,546.20 ¦
+-----------------------------------------------+
Respondent contended in his amended answers in docket No. 84442 (1957) and docket No. 2130-62 (1959) that the Cuban taxes paid and the credits therefor should be in the following amounts:
+-----------------------------------------------+
¦ ¦ ¦Credit allowed under ¦
+----+-------------------+----------------------¦
¦ ¦Total Cuban taxes ¦sec. 904 limitation ¦
+----+-------------------+----------------------¦
¦ ¦ ¦ ¦
+----+-------------------+----------------------¦
¦1957¦$204,317.73 ¦$204,317.73 ¦
+----+-------------------+----------------------¦
¦1958¦216,130.42 ¦216,130.42 ¦
+----+-------------------+----------------------¦
¦1959¦428,546.20 ¦415,993.48 ¦
+-----------------------------------------------+
Petitioner paid taxes to the Puerto Rican Government and claimed a credit for such taxes in its Federal income tax returns as follows:
+------------------------------------------+
¦ ¦Total Puerto ¦Credit claimed under ¦
+----+--------------+----------------------¦
¦ ¦Rican taxes ¦sec. 904 limitation ¦
+----+--------------+----------------------¦
¦ ¦ ¦ ¦
+----+--------------+----------------------¦
¦1957¦$8,754.09 ¦$8,754.09 ¦
+----+--------------+----------------------¦
¦1958¦28,647.18 ¦28,647.18 ¦
+----+--------------+----------------------¦
¦1959¦55,569.26 ¦55,569.26 ¦
+------------------------------------------+
Respondent made a minor adjustment in the taxes paid and credit claimed for 1958, which adjustment is not in dispute here.
Petitioner claimed and was allowed a foreign tax credit under section 902 for a portion of the taxes paid by its three foreign subsidiaries (English, German, and Canadian) to the English, German, and Canadian Governments, as well as a credit for taxes withheld at the source on dividends paid to petitioner by its German and Canadian subsidiaries.
Respondent made no adjustment for the years 1957, 1958, and 1959 to petitioner's foreign tax credit with respect to its income from its Canadian Subsidiary.
In its Federal income tax returns for the years 1957, 1958, and 1959 petitioner claimed credit for a portion of the income taxes paid by its English subsidiary under schedule D of the British Income Tax Act of 1952 and for a portion of the profits taxes paid by its English subsidiary as follows:
+-----------------------------------------------+
¦ ¦Total English ¦ ¦
+----+-------------------+----------------------¦
¦ ¦taxes deemed paid ¦Credit claimed under ¦
+----+-------------------+----------------------¦
¦ ¦by petitioner ¦sec. 904 limitation ¦
+----+-------------------+----------------------¦
¦ ¦ ¦ ¦
+----+-------------------+----------------------¦
¦1957¦$6,039,577.30 ¦$5,928,035.61 ¦
+----+-------------------+----------------------¦
¦1958¦6,063,753.66 ¦5,973,885.36 ¦
+----+-------------------+----------------------¦
¦1959¦6,781,814.03 ¦6,781,814.03 ¦
+-----------------------------------------------+
[54 T.C. 1237]
The English taxes deemed paid and the credits for such taxes were...
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