Associated Telephone and Telegraph Co. v. United States

• Decision Date: 08 November 1961
• Citation: 199 F. Supp. 452
• Parties: ASSOCIATED TELEPHONE AND TELEGRAPH COMPANY, Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Southern District of New York

199 F. Supp. 452

ASSOCIATED TELEPHONE AND TELEGRAPH COMPANY, Plaintiff, v. UNITED STATES of America, Defendant.

United States District Court S. D. New York.

November 8, 1961.

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

Robert M. Morgenthau, U. S. Atty. for Southern Dist. of New York, New York City, for defendant, U. S., Robert M. Arum, Asst. U. S. Atty., New York City, of counsel.

LEVET, District Judge.

Both plaintiff and defendant have moved for summary judgment in this action, which is a suit brought against the United States of America pursuant to United States Code, Title 28, Section 1346 for the refund of federal income taxes in the amount of $3,639,297.27, with interest, representing an alleged overpayment of plaintiff's consolidated corporate income tax for the calendar (taxable) year 1954.

Plaintiff's Claims

Plaintiff's claims are two-fold:

1. The first is based upon an alleged erroneous disallowance by the Commissioner of Internal Revenue of credits against plaintiff's federal income tax under the provisions of Section 902 of the Internal Revenue Code of 1954, 26 U.S. C.A. § 902, covering taxes paid to foreign countries.

2. The second is predicated upon an alleged erroneous reduction by the Commissioner of the basis of certain stock sold by an affiliated corporation under the provisions of Section 1502 of the Internal Revenue Code of 1954, 26 U.S.C.A. § 1502, authorizing the Secretary or his delegate to prescribe such regulations as are deemed necessary to determine the tax liability of an affiliated group of corporations.

THE FIRST QUESTION

Facts

The material and relevant facts affecting both claims have been stipulated (see stipulation dated May 17, 1961). These facts insofar as they pertain to the first claim of plaintiff may be summarized as follows:

1. Plaintiff, Associated Telephone and Telegraph Company (hereinafter designated as "Associated"), is a Delaware corporation with its principal place of business at 730 Third Avenue, New York, N. Y.

2. Automatic Electric Company (hereinafter designated as "Automatic") is a wholly-owned subsidiary of Associated, organized under the laws of the State of Delaware.

3. Filcrest Company, Limited (hereinafter designated as "Filcrest") for all relevant periods was a corporation duly organized and validly existing under the laws of the Dominion of Canada, being a wholly-owned subsidiary of Automatic.

4. Pan-American Telephone and Telegraph Company (hereinafter designated as "Panco"), another corporation included in the affiliated group of plaintiff Associated, was a wholly-owned subsidiary of Automatic and for all relevant periods a duly organized and existing corporation under the laws of the State of Delaware.

5. On November 11, 1954 and November 15, 1954, the directors and stockholders of Filcrest, at meetings held in Chicago, Illinois, adopted resolutions providing for the liquidation of Filcrest; on November 25, 1954, the Supreme Court of Ontario, Canada, authorized the liquidation of Filcrest. Insofar as it relates to the instant action, the "winding up" of a Canadian corporation is the same as a liquidation of an American corporation.

6. On December 15, 1954, the Filcrest liquidator, appointed by the Supreme Court of Ontario, Canada, distributed assets to Automatic, conceded by the parties hereto to have an aggregate fair market value of $9,574,386.10. Of this sum, $283,396.13 was paid directly to the Director of the Department of Internal Revenue, Taxation Division, of the Dominion of Canada by the liquidator in satisfaction of the 5% dividend withholding tax imposed by Article XI.2 of the Income Tax Convention between the United States and Canada and the Canadian Income Tax Act, said tax authorities having previously determined that the amount of Filcrest's undistributed earnings and profits for Canadian tax purposes was $5,667,922.60 ($5,485,486.30 Canadian). The gain thus realized by Automatic on the liquidating distribution from Filcrest was reported as a long-term capital gain on plaintiff's 1954 consolidated return hereinafter mentioned.

7. Commencing with the taxable (calendar) year 1952, and for the taxable years 1953 and 1954, plaintiff filed consolidated federal income tax returns for itself and its subsidiary corporations (Automatic, Filcrest and Panco)—the "affiliated group." On or about September 15, 1955, plaintiff duly filed with the Delaware District Director of Internal Revenue (the "District Director") a consolidated federal income tax return (the "1954 consolidated return") for the affiliated group on Treasury Department Form 1120 for the calendar year 1954 under the provisions of Sections 1501 and 6012(a) of the Internal Revenue Code of 1954, as amended (the "1954 Code") 26 U.S.C.A. §§ 1501, 6012(a). The 1954 consolidated return disclosed consolidated taxable income in the amount of $14,969,808.42 and a consolidated income tax liability in the amount of $5,189,174.48, which latter amount was paid to the District Director within the time prescribed by law.

8. On December 15, 1954, at the time of Filcrest's liquidating dividend to Automatic, Filcrest, for federal income tax purposes, had accumulated earnings and profits after February 28, 1913 from Canadian sources in the amount of $6,322,008.64. With respect to such accumulated earnings and profits, Filcrest had paid to the Dominion of Canada and the Provinces of Quebec and Ontario income and/or excess profits taxes in the aggregate amount of $2,387,564.86.

9. The liquidating distribution referred to above in paragraph 6 was treated (by plaintiff) on the 1954 consolidated return, to the extent of Filcrest's accumulated earnings and profits, as a "dividend" within the meaning of Section 902(a) of the 1954 Code; and, accordingly, pursuant to the provisions of Sections 901, 902 and 904 of the 1954 Code, 26 U.S.C.A. §§ 901, 902, 904 (as interpreted by plaintiff), plaintiff claimed a foreign tax credit for Canadian taxes in the amount of $2,387,564.86 (exclusive of the credit claimed under Section 901 for the amount of $283,396.13, the amount of the 5% Canadian tax withheld from the liquidating distribution).

10. The Commissioner of Internal Revenue of the United States of America (the "Commissioner") in determining the amount of the deficiency with respect to the 1954 consolidated return, however, through his agents and deputies, disallowed the above-mentioned $2,387,564.86 of the foreign tax credit claimed by plaintiff on the ground that liquidating distributions resulted in capital gain or loss for tax purposes and are not to be considered as "dividends" for purposes of Section 902(a) of the 1954 Code, the effect of which was to increase the amount of the consolidated federal income tax for the year 1954 by the sum of $2,387,564.86.

11. The plaintiff, after receipt of the "30-day letter" asserting other deficiencies (referred to in the Second Claim of plaintiff herein), paid the total asserted deficiency and interest and filed a claim for refund, which was disallowed, all as set forth in the stipulation above referred to.

Issue

The question presented to this court is, whether Automatic, a wholly-owned subsidiary of plaintiff, included in plaintiff's consolidated return for the year 1954, is entitled to a foreign tax credit for that year for income and/or excess profits taxes paid to the Dominion of Canada and the Provinces of Quebec and Ontario by Filcrest, with respect to Filcrest's accumulated earnings and profits since February 28, 1913, which were received by Automatic in the form of a liquidating distribution during the year 1954.

Statutes

The relevant portions of the pertinent sections of the Internal Revenue Code of 1954 are as follows:

"§ 301. Distributions of property

"(a) In General.—Except as otherwise provided in this chapter, a distribution of property (as defined in section 317(a)) made by a corporation to a shareholder with respect to its stock shall be treated in the manner provided in subsection (c).

"(b) Amount distributed.—

"(1) General rule.—For purposes of this section, the amount of any distribution shall be—

"(A) Noncorporate distributees. —If the shareholder is not a corporation, the amount of money received, plus the fair market value of the other property received.

"(B) Corporate distributees.—If the shareholder is a corporation, the amount of money received, plus whichever of the following is the lesser:

"(i) the fair market value of the other property received; or

"(ii) the adjusted basis (in the hands of the distributing corporation immediately before the distribution) of the other property received, increased in the amount of gain to the distributing corporation which is recognized under subsection (b) or (c) of section 311.

"(2) Reduction for liabilities.— The amount of any distribution determined under paragraph (1) shall be reduced (but not below zero) by—

"(A) the amount of any liability of the corporation assumed by the shareholder in connection with the distribution, and

"(B) the amount of any liability to which the property received by the shareholder is subject immediately before, and immediately after, the distribution.

"(3) Determination of fair market value.—For purposes of this section, fair market value shall be determined as of the date of the distribution.

"(c) Amount taxable.—In the case of a distribution to which subsection (a) applies—

"(1) Amount constituting dividend.—That portion of the distribution which is a dividend (as defined in section 316) shall be included in gross income.

"(2) Amount applied against basis.—That portion of the distribution which is not a dividend shall be applied against and reduce the adjusted basis of the stock.

"(3) Amount in excess of basis.—

"(A) In general.—Except as provided in subparagraph (B), that portion of the distribution

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