Associated Telephone & Telegraph Co. v. United States

• Decision Date: 30 July 1962
• Docket Number: Docket 27396.,No. 333,333
• Citation: 306 F.2d 824
• Parties: ASSOCIATED TELEPHONE AND TELEGRAPH COMPANY, Appellant and Cross Appellee, v. UNITED STATES of America, Appellee and Cross Appellant.
• Court: U.S. Court of Appeals — Second Circuit

306 F.2d 824 (1962)

ASSOCIATED TELEPHONE AND TELEGRAPH COMPANY, Appellant and Cross Appellee, v. UNITED STATES of America, Appellee and Cross Appellant.

No. 333, Docket 27396.

United States Court of Appeals Second Circuit.

Argued April 27, 1962.

Decided July 30, 1962.

Winthrop, Stimson, Putnam & Roberts, New York City, by John J. Boland, New York City, a member of the firm (Theodore F. Brophy, Robert Adelson, Robert P. Adelman, New York City, of counsel), for appellant.

Robert M. Morgenthau, U. S. Atty., S. D. N. Y. (Robert Arum, Asst. U. S. Atty., Harold C. Wilkenfeld, Atty., Dept. of Justice, of counsel), for appellee.

Before WATERMAN, SMITH and MARSHALL, Circuit Judges.

WATERMAN, Circuit Judge.

This case presents two distinct questions of federal income taxation under the Internal Revenue Code of 1954, one involving the treatment of capital losses on a consolidated return, the other involving the foreign tax credit provisions. The taxpayer brought this action in the United States District Court for the Southern District of New York pursuant to 28 U.S.C. § 1346, seeking a refund of a portion of the federal income taxes it had paid for the taxable year 1954. The district court in an opinion reported at 199 F.Supp. 452 (S.D.N.Y.1961) granted summary judgment for the Government on the consolidated return issue and summary judgment for the taxpayer on the foreign tax credit issue. Each party appealed from the judgment against it. On the consolidated return issue we affirm on the able opinion of Judge Levet below, 199 F.Supp. at 469-477.

Thus we turn to a consideration of the foreign tax credit issue raised by the Government's appeal. The facts relevant to this issue were stipulated by both parties. They are as follows:

The plaintiff taxpayer Associated Telephone and Telegraph Co. (Associated) is a Delaware corporation with its principal place of business in New York City. Associated has a wholly-owned subsidiary, Automatic Electric Co. (Automatic), also a Delaware corporation. Automatic formerly had two wholly-owned subsidiaries, Pan-American Telephone & Telegraph Company (Panco), a Delaware corporation, and Filcrest Co., Ltd. (Filcrest), which was organized and existed under the laws of Canada. All of these corporations were within the affiliated group of the plaintiff Associated.

In 1954 the directors and shareholder of Filcrest adopted resolutions providing for the liquidation of that corporation. On December 15, 1954, the Filcrest liquidator, appointed by the Supreme Court of Ontario, Canada, distributed assets having an aggregate fair market value of $9,574,386.10 to Filcrest's sole shareholder Automatic.¹ Out of this sum the liquidator paid $283,396.13 directly to the Director of Internal Revenue, Taxation Division, of the Dominion of Canada, to satisfy the 5% dividend withholding tax imposed by the Canadian Income Tax Act and in accord with Article XI.2 of the Income Tax Convention between the United States and Canada.

For the taxable year 1954 the plaintiff filed a consolidated United States income tax return, pursuant to the Internal Revenue Code of 1954 §§ 1501 and 6012 (a), 26 U.S.C.A. §§ 1501, 6012(a), for itself and its subsidiary corporations, Automatic, Filcrest and Panco. The return disclosed consolidated taxable income in the amount of $14,969,808.42 and consolidated income tax liability in the amount of $5,189,174.48, which latter amount the plaintiff paid to the Delaware District Director of Internal Revenue.

The gain to Automatic on the distribution of Filcrest's assets, $5,069,868.67, was reported on the 1954 consolidated return as a long-term capital gain.

At the time of its liquidation distribution Filcrest had, for federal income tax purposes, accumulated earnings and profits after February 28, 1913, in the amount of $6,322,008.64. Upon these accumulated earnings and profits Filcrest had paid to the Dominion of Canada and the provinces of Quebec and Ontario income and excess profits taxes in the aggregate amount of $2,387,564.86. Treating Filcrest's liquidating distribution to Automatic as income received from a foreign source, the plaintiff on its 1954 United States consolidated return, to the extent of Filcrest's accumulated earnings and profits, treated the distribution as a "dividend" within the meaning of Int. Rev.Code of 1954 § 902(a), 26 U.S.C.A. § 902(a). Accordingly, the taxpayer claimed a foreign tax credit, pursuant to Int.Rev.Code of 1954 §§ 901, 902, and 904, 26 U.S.C.A. §§ 901, 902, 904, for the Canadian taxes of $2,387,564.86 paid by Filcrest on its earnings and profits. This credit was claimed in addition to the credit claimed under § 901 for the amount of the 5% Canadian dividend withholding tax paid there on the liquidating distribution.

The Commissioner of Internal Revenue disallowed the $2,387,564.86 foreign tax credit claimed by Associated for the Canadian taxes paid by Filcrest on its earnings and profits.² The taxpayer paid the ensuing deficiency and filed a claim for its refund. After the Commissioner disallowed the claim, Associated brought this action in the district court, where the judge below rejected the position taken by the Commissioner, and, accordingly, granted summary judgment for the taxpayer.

The sections of the 1954 Code which are primarily relevant here are §§ 901, 902(a) and 904(a). In brief, § 901 of the Internal Revenue Code of 1954 authorizes a credit against one's federal income tax liability for like taxes paid to foreign countries.³ Section 902(a) makes a foreign tax credit available to a domestic corporation in any taxable year in which the domestic corporation receives "dividends" from a foreign corporation for a proportionate share of the income taxes paid or deemed to have been paid by the foreign corporation to a foreign country on accumulated earnings and profits.⁴ Section 904(a) limits the total credit to which the taxpayer is entitled for taxes paid to a particular foreign country to that proportion of the taxpayer's United States income tax which its taxable income from that foreign country bears to its entire taxable income under the Internal Revenue Code for the same taxable year.⁵

The question we are called upon to decide is whether the term "dividends" in § 902(a) includes liquidating distributions. If the term does not include liquidating distributions, the Commissioner was correct in disallowing the credit the taxpayer claimed it was permitted to take upon the liquidation of Filcrest.

Both the taxpayer and the Government seek to substantiate their respective positions by extensive analysis of successive revenue acts. A review of the history of the provisions relevant here is therefore appropriate.

The first act which allowed a credit to a domestic corporation for taxes paid by a foreign corporation in which the domestic corporation was a shareholder was the Revenue Act of 1918. As in all subsequent acts and codes, the credit was allowed at the time the domestic corporation received a "dividend" from the foreign corporation.⁶ This type of foreign tax credit has often been referred to as the "deemed to have been paid" credit. In that revenue act, the two prior acts, and all subsequent acts and codes, the general definition of a dividend, without certain qualifications not relevant here, was "any distribution of property made by a corporation to its shareholders out of its earnings and profits accumulated after February 28, 1913."⁷ In the 1918 Act liquidation distributions were treated as payments in exchange for stock.⁸

In the Revenue Act of 1921, Congress expanded the foreign tax credit provision so as to allow to a domestic corporation holding stock in a foreign corporation a credit for foreign taxes paid by the foreign corporation on its accumulated profits in years prior to the year in which the pertinent dividend was paid or was payable to the domestic corporation.⁹ See American Chicle Co. v. United States, 316 U.S. 450, 62 S.Ct. 1144, 86 L. Ed. 1591 (1942). Furthermore, in the 1921 Act the treatment of liquidating distributions as payments in exchange for corporate stock was removed; and liquidating distributions were to be treated like ordinary dividends. Treas.Reg. 62, art. 1545.

The 1924 Act did not change the foreign tax credit provisions involved here. However, it did reinstate exchange treatment for liquidating distributions.¹⁰ The 1924 Act also began capital gain treatment for sales and exchanges of capital assets held by individual taxpayers, but not by corporations.¹¹

In the Revenue Act of 1942, Congress for the first time extended capital gain treatment to corporations.¹²

The provisions outlined above became parts of the Internal Revenue Code of 1954 without significant change. See S. Rep.No.1622, 83d Cong., 2d Sess. 419 (1954); H.R.Rep.No.2543, 83d Cong., 2d Sess. 68 (1954). The foreign tax credit allowed to domestic corporations for foreign taxes paid by a foreign corporation or paid by the subsidiary of a foreign corporation is § 902(a) of the 1954 Code. The general dividend provision is § 316 (a). The exchange treatment for corporate liquidations is found in § 331(a), 26 U.S.C.A. § 331(a).

On the basis of this history the Government argues that the original predecessor to the present § 902(a) was the provision above referred to that appears in the Revenue Act of 1918, and that at that time distributions in liquidation were considered by Congress as payments in exchange for corporate stocks, not corporate dividends. Therefore, the Government argues that the 1918 Congress did not intend the term "dividend" in the "deemed to have been paid" foreign tax credit provision to include a distribution in liquidation. To support its position the Government relies upon the Supreme Court's decision in Hellmich v. Hellman, 276 U.S. 233, 48 S.Ct. 244, 72 L.Ed. 544 (1928). That case involved the credit accorded an individual against the normal tax upon his net income for amounts "received as...