Domenech v. United Porto Rican Sugar Co.

• Decision Date: 29 December 1932
• Docket Number: No. 2690.,2690.
• Citation: 62 F.2d 552
• Parties: DOMENECH, Treasurer, v. UNITED PORTO RICAN SUGAR CO.
• Court: U.S. Court of Appeals — First Circuit

62 F.2d 552 (1932)

DOMENECH, Treasurer, v. UNITED PORTO RICAN SUGAR CO.

No. 2690.

Circuit Court of Appeals, First Circuit.

December 29, 1932.

William Cattron Rigby and Fred W. Llewellyn, both of Washington, D. C. (Charles E. Winter, of San Juan, Puerto Rico, and Blanton Winship, of Washington, D. C., on the brief), for appellant.

Henri Brown, of San Juan, Puerto Rico, for appellee.

Before BINGHAM, WILSON, and MORTON, Circuit Judges.

BINGHAM, Circuit Judge.

This action is brought by the Treasurer of Puerto Rico against the United Porto Rican Sugar Company, a Puerto Rican corporation, to collect taxes alleged to be owed by certain Maryland banks and other Maryland corporations, assessed against these corporations upon income of, or payments of interest made to them by, certain Puerto Rican corporations (defendant's predecessors whose obligations it assumed) on loans contracted in Maryland, the principal and interest of which were payable and paid in Maryland, which taxes it is alleged the defendant's predecessors should have retained and paid to the plaintiff.

The action was brought in the District Court of San Juan. The defendant filed an answer admitting certain facts alleged in the plaintiff's declaration and averring certain other facts, to which the plaintiff demurred on the ground that the facts set up in the answer did not constitute a defense. The District Judge sustained the demurrer and entered judgment for the plaintiff. On appeal to the Supreme Court of Puerto Rico, the judgment of the District Court was reversed, and the action dismissed. This appeal is from the latter judgment.

It is stated that the answer, the original draft of which is in Spanish, is inadequately transcribed, but that the facts set out in the answer are correctly stated in the appellant's brief and the opinion of the Supreme Court.

The facts are that Central Pasto Viejo, Inc., Juncos Central Company, and Caguas Sugar Company, all Puerto Rican corporations and predecessors of the defendant, entered into contracts at Baltimore, Md., with several Maryland banks and corporations whereby they obtained loans of money, in which it was stipulated that the principal and interest should be payable in Baltimore; that the money loaned was delivered to the Puerto Rican corporations in Baltimore, and that the payments of interest constituting the income here taxed were made in Baltimore; that none of the Maryland corporations were engaged in business in Puerto Rico, and had no office, place of business, or agent in Puerto Rico; that part of the money thus loaned was used by the borrowers in the United States and part in Puerto Rico; that the Puerto Rican corporations were engaged in the purchase of sugar cane and the manufacture of sugar therefrom in Puerto Rico; and that they sold the manufactured sugar in New York and in other states of the Union or places outside of Puerto Rico The Caguas Sugar Company paid interest to its Maryland creditors from which it is alleged that it should have withheld as taxes of the creditor corporations for the years 1924, 1925, 1926, and 1927 the sums of $13.74, $1,989.01, $3,081.61, and $12,460.34, respectively; that the Central Pasto Viejo, Inc., paid its creditors interest from which it is alleged that it should have withheld as taxes of the creditors for the years 1926 and 1927, the sums of $822.90 and $1,295.20, respectively; that the Juncos Central Company paid its creditors interest from which it should have withheld taxes of the creditors for the years 1926 and 1927, the sums of $2,365.95 and $10,423.73, respectively — or a total of $32,452.48, which the plaintiff seeks to recover, plus interest at 12 per centum per annum from the filing of the complaint.

The errors assigned are that the court erred (1) "in holding that the defendant is not obliged to pay taxes on interest paid to various foreign corporations in the United States by certain domestic corporations which had assigned their assets and liabilities to the defendant, and whose taxes were due according to section 3 of Law No. 43 of 1921"; (2) "in holding that debts for interest have not a taxable situs in Puerto Rico"; (3) "in not holding that, irrespective of the situs of intangible property, a corporation can be taxed in Puerto Rico for income received from Puerto Rico when the interest is paid by the debtor in Puerto Rico and sent from Puerto Rico to the continental United States, as was the case in the present suit"; (4) in not sustaining the demurrer to the answer; (5) "in reversing the judgment of the District Court"; and (6) "that the judgment is contrary to law."

Section 3 of Act No. 43, Laws of Porto Rico, 1921, so far as material to this case, provides:

"Sec. 3. All income defined herein received or earned by citizens of the United States * * * residing * * * without Porto Rico, and by any corporation * * * organized * * * in the United States * * * and * * * who in any way derive income from sources located in this Island, or from the sale in Porto Rico or elsewhere of fruits, products or manufactures harvested, produced or manufactured in Porto Rico, shall be subject to the payment of the income tax hereby established."

Section 9 of the Act of 1921, so far as here material, defines the gross income of a corporation organized in the United States, as follows:

"Sec. 9. In the case * * * of a corporation * * * organized * * * in the United States * * * the gross income includes only the gross income derived from sources within Porto Rico, or from the sale in the Island or elsewhere of the fruits, products or manufactures harvested, produced or manufactured in Porto Rico, including also rents, interest on bonds, notes, mortgages or other interest-bearing obligations of residence residents, whether individuals, corporations or entities of any kind."

A like provision is contained in Act No. 74 of the Laws of Porto Rico of 1925, section 31 (b) and section 19 (a) (1), so that, under the Act of 1925, as well as under the Act of 1921, it is provided that, in case of a foreign corporation, the following items shall be treated as gross income from sources within Puerto Rico:

"(1) Interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise."

Act No. 43, of July 1, 1921, in section 49, provides:

"Section 49. The tax levied hereunder shall be withheld by every * * * corporation * * * who pay interest, rents, salaries, annuities, compensation or any other income subject to taxation, except dividends * * * of any citizen of the United States, nonresident of Porto Rico * * * or of any foreign corporation * * * not engaged in business in Porto Rico and which has no place of business, office or agent in Porto Rico."

And the corresponding section in Act No. 74 of the Laws of 1925 provides:

"Section 35. — In the case of foreign corporations * * * subject to taxation under this title not engaged in trade or business within Porto Rico and not having any office or place of business therein, there shall be deducted and withheld at the source in the same manner and upon the same items of income as is...