Mid-Continent Supply Co. v. Comm'r of Internal Revenue , Docket No. 1429—75.

Citation67 T.C. 37
Decision Date18 October 1976
Docket NumberDocket No. 1429—75.
PartiesMID-CONTINENT SUPPLY CO., PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
CourtUnited States Tax Court

OPINION TEXT STARTS HERE

Held, for purposes of the overall limitation on foreign tax credit, the phrase ‘portion of the consolidated taxable income attributable to such (Western Hemisphere trade) corporations' in sec. 1503(b)(1), I.R.C. 1954, has the same meaning as it does in sec. 1.1502—25, Income Tax Regs., relating to the computation of the consolidated deduction under sec. 922, I.R.C. 1954. Held, further, this Court did not abuse its discretion in denying a motion for continuance, filed by petitioner to obtain time to seek through discovery a technical advice memorandum, and facts relating thereto, allegedly issued by the National Office of the Internal Revenue Service. Whitfield J. Collins, for the petitioner.

Robert M. Smith, for the respondent.

OPINION

FEATHERSTON, Judge:

Respondent determined deficiencies in the amounts of $532,874.53 and $126,178.29 in petitioner's Federal income tax for 1969 and 1970, respectively. Petitioner did not contest the determination of the deficiency for 1969; other issues having been settled by the parties, the issues remaining for decision as to the 1970 taxable year are as follows:

(1) Whether the foreign tax credit allowable in respect of Western Hemisphere trade corporation members of an affiliated group of petitioner's corporations filing a consolidated Federal income tax return for 1970 should be reduced from $442,639.96 to $323,861.95, or by a total of $118,778.01, by reason of the application of the limitation imposed by section 1503(b)(1).1

(2) Whether the Court abused its discretion in denying a motion for a continuance of the trial, filed by petitioner to obtain time to seek through discovery a technical advice memorandum, and facts relating thereto, allegedly issued by the National Office of the Internal Revenue Service.

All the facts are stipulated.

Mid-Continent Supply Co. (hereinafter referred to as petitioner or Midco), the parent corporation of a group of affiliated corporations, and subsidiaries filed a consolidated Federal income tax return for 1970 with the Director, Internal Revenue Service Center, Austin, Tex. Midco's principal place of business on the date of filing its petition herein was Fort Worth, Tex.

Issue 1

Included in the affiliated group of corporations filing the 1970 consolidated return were four domestic subsidiaries, each of which qualified as a Western Hemisphere trade corporation (hereinafter referred to as a WHTC or collectively as WHTCs)2 and, as such, for a special deduction under section 922. These 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 petitioner's affiliated group qualifying as a WHTC for 1970, before allowing any section 922 deduction, and the aggregate income of all such 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 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  ¦
                +-----------------+------------¦
                ¦Total            ¦1,439,971.85¦
                +------------------------------+
                

The aggregate taxable income of all members of petitioner'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 adjusting for those losses the consolidated taxable income of the group, before allowing any section 922 deduction, was $6,736,875.01.

The special deduction allowed a WHTC under section 9223 is computed by multiplying the taxable income of that corporation by a fraction, the numerator of which is 14 percent and the denominator of which is that percentage which equals the sum of the normal tax rate and the surtax rate for the taxable year as prescribed by section 11. During the year in controversy, section 51(d)(3) imposed a 2.5-percent surcharge (bringing the denominator of the fraction to 49.2 percent). Where consolidated returns are filed, the consolidated section 922 deduction for the taxable year is determined under section 1.1502—25(a), Income Tax Regs., by multiplying this fraction by ‘that portion of the consolidated taxable income attributable to those members of the group which are Western Hemisphere trade corporations for such year.’ Section 1.1502—25(c), Income Tax Regs., defines that portion of the consolidated taxable income as follows:

(c) Portion of consolidated taxable income attributable to Western Hemisphere trade corporations.—(1) In general. For purposes of paragraph (a) of this section, the portion of the consolidated taxable income attributable to those members of the group which are Western Hemisphere trade corporations is an amount equal to the consolidated taxable income (computed without regard to the section 922 deduction) multiplied by a fraction, the numerator of which is the sum of the taxable incomes of those members which are Western Hemisphere trade corporations, and the denominator of which is the sum of the taxable incomes of all the members.4

The portion of consolidated taxable income attributable to WHTC members of petitioner's affiliated group in 1970 for purposes of calculating the consolidated section 922 deduction was 13.657109 percent (i.e., $1,658,582.09 $12,144,459.38) of $6,736,875.01 or $920,062.36.5 The parties agree that the consolidated section 922 deduction for 1970 was 14/49.2 percent of $920,062.36 or $261,806.36.

In order to prevent double taxation of income which is taxed by a foreign country, a corporation is allowed generally to take a credit against its United States taxes for the amount of the tax paid to all foreign countries taxing its income. See sec. 901. A fundamental limitation on the foreign tax credit allowed against domestic tax liability, however, is found in section 904(a)(2). 6 This limitation may be computed in one of two ways: (1) The per-country limitation or (2) the overall limitation. If a taxpayer elects the overall method (as did Midco in the instant case), taxes paid to all foreign countries are aggregated, and the total amount of foreign tax credit is limited to the ratio of the taxpayer's taxable income from sources without the United States to the group's entire taxable income for that year.7

Without some limitation on their use, the section 922 deduction and the section 904(a)(2) overall limitation on the foreign tax credit could be combined by an affiliated group of WHTCs and non-WHTCs (some of whom have foreign source income and pay foreign taxes) filing a consolidated return to obtain a double benefit. The section 922 deduction effectively reduces the United States tax rate on WHTCs' taxable income to 34 percent,8 and the section 904(a)(2) overall limitation on the foreign tax credit would allow the WHTCs' foreign taxes in excess of the United States taxes computed at this 34-percent rate to be credited against the United States taxes on the foreign source income of non-WHTC members. To prevent this double benefit, section 1503(d)(1), redesignated in Act of February 26, 1964, Pub. L. 88—272, 78 Stat. 19, 113, as section 1503(b)(1), was enacted as a Senate amendment to the House version (H. Rept. No. 1358, 86th Cong., 2d Sess. (1960), 1960—2 C.B. 865) of Pub. L. 86—780, 86th Cong., 2d Sess. (1960), 1960—2 C.B. 720, in S. Rept. No. 1393, 86th Cong., 2d Sess. (1960), 1960—2 C.B. 874, 878.9 Section 1503(b) (1) is as follows:

SEC. 1503. COMPUTATION AND PAYMENT OF TAX.

(b) SPECIAL RULE FOR APPLICATION OF FOREIGN TAX CREDIT WHEN OVERALL LIMITATION APPLIES.—

(1) IN GENERAL.—If the affiliated group includes one or more Western Hemisphere trade corporations (as defined in section 921), and if for the taxable year an election under section 904(b)(1) (relating to election of overall limitation on foreign tax credit) is in effect, then the amount of taxes paid or accrued to foreign countries and possessions of the United States by such Western Hemisphere trade corporations which may be taken into account for purposes of section 901 shall be reduced by the amount (if any) by which—

(A) the amount of such taxes (or, if smaller, the amount of the tax which would be computed under subsection (a), if such corporations were not Western Hemisphere trade corporations, with respect to the portion of the consolidated taxable income attributable to such corporations), exceeds

(B) the amount of the tax computed under subsection (a) with respect to the portion of the consolidated taxable income attributable to such corporations.

The bone of contention in the instant case is the meaning of the phrase ‘portion of the consolidated taxable income attributable to such (WHTC) corporations' as used in section...

To continue reading

Request your trial
7 cases
  • Romano-Murphy v. Comm'r
    • United States
    • United States Tax Court
    • May 21, 2019
    ...Id. Powell, 945 F.2d at 378, distinguished Mid-Continent Supply Co. v. Commissioner, 571 F.2d 1371, 1376 (5th Cir. 1978), aff'g 67 T.C. 37 (1976), in which the Court of Appeals for the Fifth Circuit held that a taxpayer has no right to the same erroneous treatment afforded to a similarly si......
  • Rowlee v. Comm'r of Internal Revenue
    • United States
    • United States Tax Court
    • June 15, 1983
    ...course of conduct engaged in by petitioner. See Mid-Continent Supply Co. v. Commissioner, 571 F.2d 1371, 1376 (5th Cir. 1978), affg. 67 T.C. 37 (1976). Fourth, petitioner complains of an order that certain matters be deemed stipulated pursuant to Rule 91(f). The order was made after petitio......
  • Jaggard v. Comm'r of Internal Revenue
    • United States
    • United States Tax Court
    • February 12, 1981
    ...Commissioner.* * *See also Davis v. Commissioner, 69 T.C. 716 (1978); Cocker v. Commissioner, 68 T.C. 544 (1977); Mid-Continent Supply Co. v. Commissioner, 67 T.C. 37 (1976), affd. 571 F.2d 1371 (5th Cir. 1978). But see Sirbo Holdings, Inc. v. Commissioner, 476 F.2d 981 (2d Cir. 1973), rema......
  • Union Carbide Corp. v. United States
    • United States
    • Court of Federal Claims
    • December 12, 1979
    ...tends to show that the fractional method without losses is incorrect. Finally, defendant cites the decision in Mid-Continent Supply Co. v. Commissioner, 67 T.C. 37 (1976), aff'd, 571 F.2d 1371 (5th Cir. 1978), as precedent for upholding the validity of the regulation. That case is clearly p......
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT