Mid-Continent Supply Co. v. Commissioner of I.R.S., MID-CONTINENT
| Decision Date | 28 April 1978 |
| Docket Number | No. 76-4388,MID-CONTINENT,76-4388 |
| Parties | 78-1 USTC P 9405 SUPPLY CO., Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE SERVICE, Respondent-Appellee. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Whitfield J. Collins, Kirk R. Manning, Fort Worth, Tex., for petitioner-appellant.
Scott P. Crampton, Asst. Atty. Gen., Tax Div., Gilbert E. Andrews, Act. Chief, Appellate Sec., U. S. Dept. of Justice, Meade Whitaker, Chief Counsel, I. R. S., Myron C. Baum, Acting Asst. Atty. Gen., Richard Farber, John A. Dudeck, Jr., Attys., Tax Div., Dept. of Justice, Washington, D. C., for respondent-appellee.
APPEAL FROM THE DECISION OF THE TAX COURT OF THE UNITED STATES.
Before TUTTLE, COLEMAN and RONEY, Circuit Judges.
This is an appeal from a decision of the United States Tax Court determining a deficiency in federal income taxes for the taxable year 1970 in the amount of $126,178.29. The opinion of the Tax Court is reported at 67 T.C. 37. Although we are satisfied with the reasons for decision in that opinion, it seems appropriate to set forth the facts and the holding here so that our decision will furnish a clear precedent in this Circuit on this technical point of tax law.
We hold that in determining the amount of foreign tax credit allowable to Western Hemisphere trade corporations filing consolidated returns with other corporations, the "portion of the consolidated taxable income attributable" to such Western Hemisphere trade corporations, referred to in section 1503(b) (1) of the Internal Revenue Code, 26 U.S.C.A. § 1503(b)(1), should be calculated the same way as the "portion of the consolidated taxable income attributable" to Western Hemisphere trade corporations is calculated for the consolidated section 922 deduction as described in § 1.1502-25(c) of the Treasury Regulations, 26 C.F.R. § 1.1502-25(c).
The material facts are not in dispute and are as follows: Taxpayer, Mid-Continent Supply Co. (Midco), the parent corporation of a group of affiliated corporations and subsidiaries, filed a consolidated federal income tax return for 1970. Included in the affiliated group of corporations were four domestic subsidiaries, each of which qualified as a Western Hemisphere trade corporation (WHTC) and, as such, were entitled to a special deduction under section 922 of the Code. Under section 922 of the Code, Western Hemisphere trade corporations are given a special deduction resulting in a 14% Tax rate differential. Generally, for the year at issue here WHTCs were taxed at a reduced 35.2% Tax rate rather than at the 49.2% Tax rate normally applicable to corporations. The four WHTC subsidiaries and other members of the Midco group had foreign source income and paid foreign taxes during the year in issue.
The taxable income of each of the four members of Midco's affiliated group qualifying as WHTCs for 1970, before allowing any section 922 deduction, and the aggregate income of all such WHTC members for such year were as follows:
Mid-Continent Supply
Western Hemisphere Co. $ 426,065.11
Loffland Brothers
International, Inc. 143,341.47
Loffland Brothers Co. of Canada 538,763.58
Midco Caribe Co. 550,411.93
-------------
Aggregate income of
WHTC members $1,658,582.09
-------------
The aggregate taxable income of all members of Midco's affiliated group showing net income for the year 1970, before allowing any section 922 deduction for WHTC members, was $12,144,459.38. Some of the non-WHTC members of the Midco affiliated group suffered substantial losses in 1970, and after adjustment for those losses, the consolidated taxable income of the group, before allowing any section 922 deduction, was $6,736,875.01.
The United States federal income tax of the Midco affiliated group for 1970, before allowing any credit under section 901 for taxes paid to foreign countries, was $3,171,341.65, and the United States tax applicable to foreign source income was $1,569,730.01. The foreign taxes available for credit against the United States taxes of the affiliated group for 1970, before applying any limitation, were as follows:
WHTC members $ 442,639.96
Non-WHTC members 997,331.89
-------------
$1,439,971.85
The parties stipulated that, for section 922 purposes, the portion of consolidated taxable income attributable to WHTC members of Midco's affiliated group (before allowing any section 922 deduction for WHTC members) was $920,062.36. This amount was determined in accordance with the formula prescribed by section 1.1502-25 of the Treasury Regulations, as follows:
Consolidated Taxable Income of Portion of
Taxable Income X WHTC Members = Consolidated
----------------------
of All Members Sum of Taxable Incomes Taxable Income
(After Adj. for of All Members Attributable
Losses) (Before Losses) to WHTC Members
$6,736,875.01 X $1,658,582.09 = $920,062.36
----------------------
$12,144,459.38
The parties also agreed that the special deduction allowed Midco's Western Hemisphere trade corporation subsidiaries under section 922 of the Code was $261,806.36, computed as follows:
In filing its federal income tax return for taxable year 1970, Midco elected to use the consolidated foreign tax credit determined in accordance with the overall limitation on taxes paid to foreign countries. See section 1.1502-4, Treasury Regulations and section 904(a)(2) of the Code. In the case where, as here, Western Hemisphere trade corporations file a consolidated return with other domestic corporations and elect to use the overall limitation on the foreign tax credit, section 1503(b)(1) of the Code prescribes a special limitation designed to eliminate any foreign tax credit attributable to the special 14 percent tax rate differential allowed to Western Hemisphere trade corporations under section 922 of the Code. Generally, under section 1503(b) (1), the amount of taxes paid to foreign countries by Western Hemisphere trade corporations which is in excess of the taxes computed on the portion of the consolidated taxable income attributable to such WHTCs and taxable at the special lower rate is not taken into account for purposes of the allowance of the foreign tax credit.
Midco would compute the special limitation under section 1503(b)(1) as follows:
Section 1503(b)(1)(A) amount
-----------------------------
Lesser of
(1) Foreign taxes paid of $442,639.96 $442,639.96
(2) U. S. tax on WHTC's portion of consolidated
taxable income without section 922 deduction
(49.2%) X ($1,658,582.09) = $816,022.39
Section 1503(b)(1)(B) amount:
-----------------------------
U. S. tax on WHTC's portion of consolidated
taxable income with section 922 deduction:
(49.2%) X ($1,658,582.09 less
$ 261,806.36) = $687,213.66 $687,213.66
-----------
Section 1503(b)(1)reduction:
-----------------------------
Excess of section 1503(b)(1)(A) amount over
section 1503(b)(1)(B) amount: $ -0-
-----------
Section 1503(b)(1)(A) amount:
-----------------------------------------------------
Lesser of:
(1) Foreign taxes paid of $442,639.96 $442,639.96
(2) U.S. tax on WHTC's portion of consolidated
taxable income without section 922 deduction:
(49.2%) X ($920,062.36) = $452,670.68
Section 1503(b)(1)(B) amount:
-----------------------------------------------------
U. S. tax on WHTC's portion of consolidated
taxable income with section 922 deduction:
(49.2%) X ($920,062.36 less
$261,806.36) = $323,861.95 $323,861.95
-----------
Section 1503(b)(1) reduction:
-----------------------------------------------------
Excess of section 1503(b)(1)(A) amount over section
1503(b)(1)(B) amount: $118,778.01
-----------
In calculating that the special limitation on taxes paid to foreign countries under section 1503(b)(1) was zero, as illustrated above, Midco's computation of the consolidated taxable income attributable to its WHTCs, i. e., $1,658,582.09, was based on a separate aggregation of the taxable incomes of the WHTCs isolated as a group.
The Commissioner of Internal Revenue in his notice of deficiency to Midco for taxable year 1970 determined that the section 1503(b)(1) reduction in the foreign tax credit was $118,778.01. This reduction in the foreign tax credit was based on the Commissioner's determination that the portion of the consolidated taxable income attributable to the WHTCs was the amount determined under Treasury Regulations § 1.1502-25(c), i. e., $920,062.36, and not $1,658,852.09 as claimed by taxpayer. The Commissioner's calculation of the section 1503(b)(1) reduction of the foreign tax credit was as follows:
In sustaining the Commissioner's determination, the Tax ...
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