New York & H. Rosario Min. Co. v. Commissioner of Int. Rev., 250

• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)
• Citation: 168 F.2d 745
• Docket Number: No. 250,Docket 20894.,250
• Parties: NEW YORK & HONDURAS ROSARIO MIN. CO. v. COMMISSIONER OF INTERNAL REVENUE.
• Decision Date: 01 June 1948

168 F.2d 745 (1948)

NEW YORK & HONDURAS ROSARIO MIN. CO.
v.
COMMISSIONER OF INTERNAL REVENUE.

No. 250, Docket 20894.

Circuit Court of Appeals, Second Circuit.

June 1, 1948.

168 F.2d 746

Reeves, Todd, Ely & Beaty, of New York City (Julian B. Beaty, David Cohen, and Francis D. Murray, all of New York City, of counsel), for petitioner.

Theron Lamar Caudle, Asst. Atty. Gen., and Sewall Key, A. F. Prescott, and S. Dee Hanson, Sp. Assts. to Atty. Gen., for respondent.

Before L. HAND, SWAN, and CLARK, Circuit Judges.

SWAN, Circuit Judge.

The petitioner is a New York corporation engaged in gold and silver mining operations in the Republic of Honduras. During the taxable years in suit it paid taxes to the Honduras Government which it contends were "income taxes" entitling it to credits against its United States income taxes for the same years by virtue of section 131(a) (1) of the Internal Revenue Code, printed in the margin.¹ The Tax Court's disallowance of the credits, 8 T.C. 1232, resulted in the deficiencies before us for review.

Mining operations in Honduras are regulated by a comprehensive mining Code, namely, Decree No. 64 of February 15, 1937 as amended by Decree No. 3 of December 11, 1939. Article 221 of this Code requires all "mining enterprises" to "pay to the State at least five per cent of the liquid profits of the exploitation, said percentage to be fixed by contract with the executive power with the special approval by the national congress." Pursuant to this provision the petitioner made a contract with Honduras, approved by the National Congress by Decree No. 67 of February 13, 1940, which fixed the rate of tax at 7 per cent. for the years in suit. The contract was to cover a twenty year period ending December 31, 1960, and the company agreed to, and did, advance to the Honduran Government

168 F.2d 747

$250,000, against which should be charged future "income tax" assessments.² Of the $250,000 so deposited, Honduras applied $21,120.27 in payment of the 7% tax for 1941 and $32,724.47 in payment of the 7% tax for 1942. The Tax Court held that such payments were not "income taxes" paid to a foreign country but were privilege taxes, which were deductible from gross income as a business expense but were not entitled to be credited against United States taxes under § 131 of the Internal Revenue Code. The correctness of that ruling is the sole question before us

The provision for credit of foreign income taxes first appeared in section 238 of the Revenue Act of 1918, 40 Stat. 1080. As explained in Burnet v. Chicago Portrait Company, 285 U.S. 1, at page 7, 52 S.Ct. 275, 277, 76 L.Ed. 587, the purpose of the provision was to "mitigate the evil of double taxation" of domestic corporations on income derived from foreign sources. In the application of section 131 the criteria prescribed by our own revenue laws and court decisions control the meaning of the words "income taxes" as used therein. Biddle v. Commissioner, 302 U.S. 573, 578, 579, 58 S.Ct. 379, 82 L.Ed. 431; Keasbey & Mattison Co. v. Rothensies, 3 Cir., 133 F.2d 894, 897, certiorari denied 320 U.S. 739, 64 S.Ct. 39, 88 L.Ed. 438. Hence the ultimate question for determination is whether the foreign tax is the substantial equivalent of an "income tax" as that term is understood in the United States.

The Tax Court was of opinion that the taxes in question were payments for the privilege of exploiting the particular mining properties which the petitioner operated. We do not agree. Chapter XII of Decree No. 64 (which we refer to as the Mining Code) is entitled "Grant and Forfeiture of the Ownership of Mines." Articles 149 and 150 of Chapter XII apparently impose two excise taxes: one upon the exploitation of mines, the other upon "reduction works," which we understand to mean smelters.³ Failure to pay these taxes results in forfeiture of the privileges (Article 151), as does also "failure of constant work and exploitation" (Article 154). Article 221 under which the taxes in suit were paid appears in Chapter XVI entitled "Rights and Obligations of the Miners in General." This Article, requiring a mining enterprise to pay to the Government a percentage of its liquid profits, was first enacted in 1937.⁴ It was amended in 1939 to read as follows:

"Article 221. The mining...