Welch v. St. Helens Petroleum Co., 7488-7493.

• Decision Date: 09 July 1935
• Docket Number: No. 7488-7493.,7488-7493.
• Citation: 78 F.2d 631
• Parties: WELCH, Collector of Internal Revenue, v. ST. HELENS PETROLEUM CO., Limited, and three other cases.
• Court: U.S. Court of Appeals — Ninth Circuit

78 F.2d 631 (1935)

WELCH, Collector of Internal Revenue, v. ST. HELENS PETROLEUM CO., Limited, and three other cases.

Nos. 7488-7493.

Circuit Court of Appeals, Ninth Circuit.

July 9, 1935.

Frank J. Wideman, Asst. Atty. Gen., and Sewall Key and M. H. Eustace, Sp. Assts. to the Atty. Gen., and Peirson M. Hall, U. S. Atty., Alva C. Baird, Asst. U. S. Atty., and Eugene Harpole, Sp. Atty., Bureau of Internal Revenue, all of Los Angeles, Cal., for appellants.

Joseph D. Peeler, of Los Angeles, Cal., and George M. Naus, of San Francisco, Cal. (George M. Wolcott and Donald V. Hunter, both of Washington, D. C., of counsel), for appellees.

William H. Hotchkiss, John S. Breckinridge, Arthur A. Ballantine, and George E. Cleary, all of New York City, and A. L. Weil, of San Francisco, Cal., amici curiæ.

Before WILBUR, GARRECHT, and DENMAN, Circuit Judges.

WILBUR, Circuit Judge.

These actions were brought by the taxpayers, St. Helens Petroleum Company, Limited, a British Corporation, and the Kern River Oilfields of California, Limited, a British corporation, to recover money paid for excess profit taxes and income taxes upon incomes accruing to the taxpayers derived from oil wells in California. The primary question involved is whether or not the amounts of taxes paid upon their incomes to the British government under the British law imposing such taxes are to be deducted from the gross incomes of the companies derived from their oil wells in California in the proportion fixed by the law of the United States in ascertaining the net incomes upon which the excess profit taxes and the income taxes are to be determined. The Commissioner of Internal Revenue, in fixing the amounts of taxes to be paid by the taxpayers, made no deduction for the taxes paid to the British government.

After the argument the appellees moved to strike out the bill of exceptions in each of these cases "upon the ground that none of said bills affirmatively shows that it was settled or signed or authenticated within either the term of court in which the trial occurred or the term of court in which judgment was entered, nor within any valid extension of either of said terms." Appellees cite in support of their motion our decision in United States v. Payne (C. C. A.) 72 F.(2d) 593. That decision, however, is not controlling here. The certificate to the bill of exceptions in each of these cases is in the following language: "The following Bill of Exceptions duly proposed and agreed upon by counsel for the respective parties, is correct in all respects and is hereby approved, allowed and settled and made a part of the record herein and said Bill of Exceptions may be used by the parties plaintiff or defendant upon any appeal taken by either party plaintiff or defendant."

The trial judge having certified to the fact that each of the bills of exceptions had been "duly proposed," it thus affirmatively appears that each of the bills of exceptions was submitted to the court for settlement within the time allowed by law. The motion to strike the bills of exceptions is denied.

The three actions, cases Nos. 7489, 7491, and 7492, brought by the Kern River Oilfields of California, Limited, are to recover a portion of the taxes paid for the fiscal years ending May 31, 1923, 1924, and 1925. The three actions, cases Nos. 7488, 7490, and 7493, brought by the St. Helens Petroleum Company, Limited, are to recover a portion of taxes paid for the fiscal years ending May 31, 1921, and May 31, 1922, and also involve the collection of excess profit taxes determined under section 328 of the Revenue Acts of 1918 and 1921 (40 Stat. 1057, 1093; 42 Stat. 227, 275), as to which there is an independent question concerning the power of the court to render judgment in favor of the taxpayer. This issue is not involved in the other cases, because no excess profit tax was imposed for any period after December 31, 1921.

The one issue common to all these cases is whether or not under section 234 (a) of the Revenue Act of 1921 (42 Stat. 227, 254), and the corresponding and practically identical provisions of the Revenue Act of 1918 (40 Stat. 1057, 1077), the taxes paid by these British corporations to the British government should be deducted from their gross incomes in determining their net incomes taxable under the law of the United States. In this connection it should be stated that the parties have agreed to the amount of the deduction to which the taxpayers are entitled on account of the payment of British taxes, if they are entitled to any deduction therefor. For example, in case No. 7488 it is agreed that the amount to be deducted, if any, is $41,553.05, being 99.75 per cent. of the total tax of $41,657.19 paid to the British government; it being agreed that income of the taxpayer from sources within the United States during the fiscal year ending May 31, 1921, was 99.75 per cent. of the total net income of plaintiff from all sources during said taxable year. The excess profit tax upon the St. Helens Petroleum Company, Limited, for the fiscal year ending May 31, 1921, was fixed by the Commissioner at $525,320.16. The income tax for the same period was based upon a net income of $2,350,425.78, less interest on United States obligations, $143,352.56, and excess profit tax as aforesaid of $525,320.16, leaving net income of $1,681,753.06 taxable at the rate of 10 per cent., amounting to $168,175.31.

Section 234 (a) of the Revenue Act of 1921, supra, directs that, in computing the net income of a corporation subject to the tax imposed by section 230, there shall be allowed as deductions "* * * (3) taxes paid or accrued within the taxable year." Section 234 (b) of the Revenue Act of 1921 provides: "In the case of a foreign corporation * * * the deductions allowed in subdivision (a) shall be allowed only if and to the extent that they are connected with income from sources within the United States. * * *" The question is whether the taxes paid to Great Britain come within the meaning of the phrase "taxes paid" in section 234 (a) (3) of the Revenue Act of 1921. That the tax in question was a tax paid to the British government by the corporation is conceded. The point made by the collector is that, although the tax was paid in the first instance by the corporation to the British government, it is not a tax of the corporation taxpayer such as is contemplated by the statute permitting a deduction (234 (a) (3), supra), because the tax was ultimately returned by the stockholder to the corporation, and the tax, although paid by the corporation in the first instance, was really one imposed upon the dividends received by the stockholder, and thus a tax of the stockholder and not of the corporation. It is urged that the corporation, in paying the tax, was merely the agent of the stockholder. It appears from the British statutes and decisions quoted by the parties and presented to this court by stipulation that, under the law of Great Britain, although the tax upon the profits of the corporation is paid in the first instance by the corporation at the current rate for the year in which the tax is paid, when the corporation thereafter declares a dividend from its profit, it may deduct from the dividend paid to each stockholder a credit for the payment of such tax equal to the tax upon the amount of the dividend at the current rate for the year in which the dividend is paid. It thus appears that, if the tax rate in the year in which the tax is paid by the corporation differs from the tax rate in the year in which the corresponding dividend is paid to the stockholder, the amount paid by the corporation and the amount retained by the corporation from the dividends paid would not be identical.

In the case at bar, however, it is stipulated that the total amount paid by the corporation was deducted from the dividends paid, and presumably the dividend was paid in the same year that the corporation paid the tax. It appears from the stipulation that the corporation had been completely reimbursed for the tax which it paid, and at first blush it might seem that the payment and recoupment of taxes would counterbalance each other and that in a strict sense the corporation had not paid any tax at all. On the other hand, it is to be observed that the corporation, while recognized as a legal entity, is in fact owned by the stockholders, and in one of its aspects is merely a creation of its stockholders who operate through the corporation. Consequently, the burden of any tax paid by the corporation must ultimately fall upon the stockholders. It does, however, appear from the decisions of the British courts that in estimating the amount of taxes due from individual stockholders to the government the stockholder is charged with the entire dividend derived from the corporation; that this income is added to his other income, and, after appropriate deductions from his gross income, the amount of his tax is estimated. If it appears that the total tax charged to him is less than that which had been deducted from the dividend paid him by the corporation (and the same would probably be true with reference to the other sources of income from which similar deductions had been made), the government refunds directly to the stockholder the excess tax paid. In such an instance the stockholder is treated as if he were the taxpayer who paid to the British government the amount which had been deducted for taxes by the corporation from the dividend paid to him; that is to say, although the corporation had in the first instance paid the entire tax to the government, the government in adjusting the taxes due from the stockholder treats the amount deducted by the corporation from his dividend as if it were paid directly by him to the government. There are other instances which we need not cite where the British government recognizes the tax paid by the corporation for certain purposes as a tax paid by the stockholder. In a recent...