Aluminum Co. of America v. United States
| Decision Date | 31 October 1941 |
| Docket Number | No. 7675.,7675. |
| Parties | ALUMINUM CO. OF AMERICA v. UNITED STATES. |
| Court | U.S. Court of Appeals — Third Circuit |
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William B. Waldo, Sp. Asst. to Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., Sewall Key and Helen R. Carloss, Sp. Assts. to Atty. Gen., and Charles F. Uhl, U. S. Atty., and Elliott W. Finkel, Asst. U. S. Atty., both of Pittsburgh, Pa., on the brief), for appellant.
Paul G. Rodewald, of Pittsburgh, Pa. (David B. Buerger and Smith, Buchanan & Ingersoll, all of Pittsburgh, Pa., on the brief), for appellee.
Before CLARK, JONES, and GOODRICH, Circuit Judges.
The question involved on this appeal concerns the amount of credit allowable to a domestic corporation against its income tax liability for income which it receives from a foreign subsidiary as dividends from profits upon which the subsidiary paid foreign income taxes for the same year. The answer depends upon the interpretation to be given Sec. 238(e) of the Revenue Act of 1926, c. 27, 44 Stat. 9, 26 U.S.C.A. Int.Rev.Acts, pages 189, 190, which, in part here material, provides that:
The following is summarized from the facts as stipulated by the parties in the court below to which the case was tried without a jury.
The plaintiff, a Pennsylvania corporation, was the owner of all of the voting stock of the Aluminum Company of Canada, Ltd., a Canadian corporation. In the year 1927, the foreign subsidiary had total profits of $2,879,101.63, upon which it paid income and profits taxes to the Dominion of Canada and provinces thereof in an aggregate amount of $214,168.13, leaving $2,664,993.50 of accumulated profits as defined by the above quoted provision of the Act. In the same year, the subsidiary paid to the plaintiff from its accumulated profits a dividend of $1,000,000. The plaintiff, in returning the dividend as a part of its 1927 income, took credit against its domestic tax liability, under the Revenue Act of 1926, to the extent of $80,365.09 of the foreign income taxes paid by the subsidiary. The Commissioner disallowed the credit, as thus claimed, but did allow a credit in the sum of $74,357.14. The plaintiff paid its tax on the basis of the reduced credit and then sued for refund because of the disallowed portion of the credit.
The difference in amount between the credit claimed and the credit allowed is due to the differing factors taken into consideration by the parties in their respective calculations. Thus, the plaintiff claims as credit the proportion of the total foreign tax paid by the subsidiary for the critical tax year which the dividend received by the plaintiff in that year bore to the foreign subsidiary's accumulated profits for the same year. The defendant, on the other hand, takes as the tax credit base, only that proportion of the subsidiary's total foreign taxes for the year which its accumulated profits for the year bore to its total taxable profits for the year and, to that base, it then applies the ratio of dividends to accumulated profits, as prescribed by the Act. The court below approved the plaintiff's method of calculating the credit and entered the judgment from which the defendant took the pending appeal.
So much, the defendant concedes. It states in its brief that "the complete formula is dividends over accumulated profits, times (accumulated profits over total profits times total tax) * * *."
It is apparent that, upon simplifying the defendant's equation, by cancelling the identical numerator and denominator ("Accumulated Profits"), the defendant's formula reduces to dividends received over total profits times total foreign tax equals the credit. This, the plaintiff contends, fails to give effect to accumulated profits as the denominator of the fraction which the statute prescribes for apportioning the tax allowable as a credit. The defendant answers that its equation is the necessary result of the requirement of the Act which provides that the credit fraction shall be applied to the foreign taxes "upon or with respect to the accumulated profits of such foreign corporation from which such dividends were paid." From this, the defendant argues that the foreign tax on the total profits must first be prorated to reflect the portion thereof attributable to the accumulated profits which, as the Act defines, are the corporation's gains in excess of its income and profits taxes, i. e., the profits after payment of the taxes thereon.
The important inquiry, therefore, is whether the statutory phrase upon which the defendant relies was intended to mean what the defendant imputes to it or whether it was intended merely to make certain that the foreign taxes for which credit is claimed were paid on the subsidiary's total income out of which the dividend was distributed after payment of the foreign corporation's tax on its total profits. Strictly speaking, an income tax cannot be said to have been levied "upon or with respect to" the residual profits after deduction from the total net income of the income taxes paid with respect thereto. The tax is imposed upon and with respect to the total net income. And, obviously, the profits from which dividends are paid can in no event be other than the residual net profits after payment of the income taxes assessed upon the total net income. The payment of taxes on the total taxable income necessarily precedes any distribution of the income.
It so happens that the formula which the defendant advances for ascertaining the tax credit reduces to the same equation which Sec. 240(c) of the Revenue Act of 1918, c. 18, 40 Stat. 1057, 1082, had previously prescribed, viz., dividends received over total taxable income times total tax equals the credit. It is of no present materiality that the 1918 provision made no allowance for tax credit on account of a foreign corporation's distribution of earnings from prior years. The distribution here involved was from earnings in the current tax year. It was the provision in the Revenue Act of 1918 which Sec. 238(e) of the Revenue Act of 1921, c. 136, 42 Stat. 227, 259, was intended, in part, to amend; and Sec. 238(e) of the Revenue Act of 1926, with which we are now concerned, is in all material respects the same as Sec. 238(e) of the Revenue Act of 1921.
The mere fact that an amendatory statute produces no actual change in the statute amended, of course, furnishes no reason for not giving effect to the amendment as written. The requirements of the words of a statute are not to be read out of it by judicial interpretation. United States v. Felt & Tarrant Manufacturing Company, 283 U.S. 269, 273, 51 S.Ct. 376, 75 L.Ed. 1025. But at the same time, it is also to be borne in mind that legislative intent is to be gained from a view of every material part of a statute. Hellmich v. Hellman, 276 U.S. 233, 237, 48 S.Ct. 244, 72 L.Ed. 544, 56 A.L.R. 379. And a court will adopt that construction which gives effect to all parts of a statute to the end that the manifest purpose of Congress will not be obstructed. United States v. Troy, 293 U.S. 58, 62, 55 S.Ct. 23, 79 L.Ed. 197.
The defendant urges that the intent of Sec. 238(e) of the Revenue Act of 1921 was to enable parent corporations, through dividends from foreign subsidiaries, to bring in the subsidiaries' undistributed earnings of prior years and thus obtain a tax credit on account of the foreign income taxes paid thereon. Such, indeed, was a purpose of the section in further part not here material. But, the argument fails to supply the reason why Congress, in 1921, prescribed a new formula for ascertaining the foreign credit and defined accumulated dividends. If the intent was merely to carry forward the credit formula which had been prescribed by the Revenue Act of 1918, Congress could have readily...
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