STAGG, MATHER & HOUGH, v. Descartes

• Decision Date: 17 May 1957
• Docket Number: No. 5131.,5131.
• Citation: 244 F.2d 578
• Parties: STAGG, MATHER & HOUGH, Plaintiff, Appellant, v. Sol Luis DESCARTES, Secretary of the Treasury of Puerto Rico, Defendant, Appellee.
• Court: U.S. Court of Appeals — First Circuit

244 F.2d 578 (1957)

STAGG, MATHER & HOUGH, Plaintiff, Appellant, v. Sol Luis DESCARTES, Secretary of the Treasury of Puerto Rico, Defendant, Appellee.

No. 5131.

United States Court of Appeals First Circuit.

May 17, 1957.

Walter L. Newsom, Jr., San Juan, P. R., Brown, Newson & Cordova, San Juan, P. R., on the brief, for appellant.

Manuel J. Medina Aymat, Asst. Atty. Gen. of Puerto Rico, J. B. Fernandez Badillo, Atty. Gen. of Puerto Rico, on the brief, for appellee.

Before MARIS, WOODBURY and KALODNER, Circuit Judges.

WOODBURY, Circuit Judge.

This appeal from a judgment, obviously a "final decision," of the Supreme Court of Puerto Rico is properly before this court under Title 28 U.S.C. § 1293, for not only is a substantial federal constitutional question involved, but also the value of the insular taxes in controversy far exceeds $5,000, exclusive of interest and costs.

The plaintiff-appellant, Stagg, Mather & Hough, is a common law partnership of professional accountants organized in New York expressly under the laws of that State. It maintains its principal office in the City of New York and branch offices in Havana, Cuba and San Juan, Puerto Rico. Of the several partners, only one, who manages the San Juan branch, is a resident of Puerto Rico.

During the tax years involved, 1942 to 1947 inclusive, the partnership paid the insular income taxes on its local income due from the partnership as a taxable entity, but it paid these taxes at the statutory rate for "domestic" partnerships, not at the higher rate set for "foreign" ones. On its tax returns for those years it gave its main office as in the Bank of Nova Scotia Building in San Juan. We are not here directly concerned with the liability for income taxes imposed by local law on the partnership as a business unit. Our concern is with the legal liability of the partnership to withhold income taxes on the profits from its local business distributable to the individual partners who are non-residents of Puerto Rico and concededly not citizens of that Commonwealth.

Puerto Rico, in addition to imposing income taxes on both foreign and domestic partnerships as such, also imposes income taxes on the partners individually, be they citizens of Puerto Rico or nonresidents who are not citizens of the Commonwealth, on their respective distributive shares of what remains after payment of the partnership tax. See Ballester v. Descartes, 1 Cir., 1950, 181 F.2d 823, 831, 832. It does not, however, make any attempt to tax non-resident, non-citizen partners on income except from sources within Puerto Rico. The Income Tax Act of 1924, Act No. 74 of August 6, 1925, Laws of Puerto Rico 1925, p. 400 et seq., as it stood at the critical time after numerous amendments, principally by Act No. 31 of April 12, 1941, Laws of Puerto Rico 1941, p. 478 et seq., after defining gross income in broad and conventional terms, provided in § 15(c):

"In the case of a nonresident individual not a citizen of Porto sic Rico gross income means only the gross income from sources within Porto sic Rico, determined under the provisions of Section 19."

And Section 19, so far as here material, provided:

"(a) In the case of a nonresident individual not a citizen of Puerto Rico the following items of gross income shall be treated as income from sources within Puerto Rico.

* * * * *

"(2) The amount received as partnership profits * * * when more than twenty (20) per centum of its gross income has been derived from sources within Puerto Rico, as determined under the provisions of this Section. * * *"

Then in Section 22(a) it was provided in material part:

"All persons, in whatever capacity acting, including * * * all * * partnerships having the control * * * of * * * participation in partnership * * * profits, and other fixed or determinable annual or periodical profits or income, of any nonresident individual not a citizen of Puerto Rico, shall * * * deduct and withhold from such annual or periodical * * * profits or income, the normal and additional tax fixed by this Act on any nonresident individual not a citizen of Puerto Rico. * * *"

In the definition sections of the Act as it stood amended at the time involved, it was provided by § 2(a) (3) that:

"The term `partnership\' includes civil, business, industrial, agricultural and professional partnerships or of any other kind, whether or not its constitution is set forth by public deed or private document; and it shall include, further, two or more persons, under a common name or not, engaged in a joint venture for profit."

And following this in subdivisions (4) and (5) it was respectively provided:

"The term `domestic\' when applied to corporations or partnerships means those created or organized in Porto sic Rico under the laws of Porto sic Rico.

"The term `foreign\' when applied to corporations or partnerships means all those which are not domestic."

The Act taxed citizens of Puerto Rico at a lower rate than nonresidents who are not citizens, and domestic partnerships at a lower rate than foreign ones.

During the years involved Stagg, Mather & Hough took the position that in view of § 19(a) (2), supra, it was not required to withhold income taxes on the distributive shares of the non-resident, non-citizen partners¹ in the income and profits of its local business for the reason that substantially less than 20% of its annual gross income was derived from sources within Puerto Rico. The Treasurer of Puerto Rico, however, thought otherwise and on August 23, 1949, notified the partnership of the assessment of withholding tax deficiencies for the years in question totalling approximately $17,000. His assessment was administratively affirmed and the partnership thereupon filed a complaint against the Treasurer in the Tax Court of Puerto Rico, now no longer in existence, asking that the deficiency assessment be set aside. The Treasurer answered asserting, inter alia, that the plaintiff, as to its local business, was not a foreign partnership having a branch in Puerto Rico, but on the contrary, for insular income tax purposes, it was a domestic professional partnership, or sociedad, which derived 100% of its income from sources within Puerto Rico with the result that the provisions of § 19(a) (2) supra did not apply to relieve it of the obligation to withhold taxes on the distributive shares of its non-resident, non-citizen partners. Alternatively the Treasurer asserted that even though the plaintiff were not a domestic partnership or sociedad, as he contended, nevertheless it was estopped to deny its domestic status by its payment of the income taxes assessed against it as a partnership at the statutory rate for domestic partnerships and its statements in its returns that its main office was in San Juan.

The Tax Court after hearing found that Stagg, Mather & Hough was a professional partnership organized in and under the laws of the State of New York and that it offered its services as public accountants and comptrollers within and outside the United States. And it found that although the partnership did business in Puerto Rico during the tax years involved, its gross income from its activities in Puerto Rico during each of those years was substantially less than 20% of its total gross income as reported for federal income tax purposes. Nevertheless the Tax Court found that the partnership was not excused from withholding the income taxes due from its non-resident, non-citizen partners by the 20% provision of § 19(a) (2) supra. The Tax Court did not base this conclusion on the Treasurer's theory. It recognized that Stagg, Mather & Hough was a foreign partnership but it concluded that because the Puerto Rico statutes did not provide for the admission to do business in Puerto Rico of foreign partnerships, as local statutes did for foreign corporations, it was not and could not be admitted as a partnership to carry on its business locally and therefore had no juridical personality in Puerto Rico and hence was not a partnership or sociedad, within the statutory definition. Thus the Tax Court concluded that Stagg, Mather & Hough did not fit within the provisions of § 19(a) (2) with respect to partnerships deriving less than 20% of their gross income from sources within Puerto Rico. It regarded the members of the partnership as merely individuals doing a local business through the agency of one of their number who represented them locally, so that the net income from their local activities distributable by the local member to the non-resident, noncitizen members of the partnership was subject to withholding tax under § 22(a) above. The Tax Court also suggested an alternative basis for its result which we need not state. It will suffice to say that in the view it took of the tax statutes it affirmed the Treasurer's assessment without finding it necessary to consider his estoppel argument.

Stagg, Mather & Hough appealed from the Tax Court to the Supreme Court of Puerto Rico and that court entered the judgment of affirmance from which this appeal is taken.

We are rather in the dark as to the reasons for the Supreme Court's judgment of affirmance. One justice filed an opinion favoring affirmance on the Treasurer's theory, but not on the reasoning of the Tax Court.² Only the Chief Justice concurred in this opinion, one Justice took no part, another dissented and there was one vacancy on the Court at the time. While the two remaining Justices must have agreed to affirmance, otherwise the judgment would not have had the support of a majority, we do not know their reasons. Obviously they did not concur on the reasoning of the only opinion written in the case. Nor can we safely assume that they must have agreed with the Tax Court's reasoning for in that event we suppose their concurrences would have been noted as resting on the decision of that court.

While we feel somewhat handicapped by the lack of any authoritative rationale for the decision arrived...