Fides v. Commissioner of Internal Revenue
| Citation | 47 BTA 280 |
| Decision Date | 07 July 1942 |
| Docket Number | Docket No. 102738. |
| Parties | FIDES, A. G., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Robert T. Woodruff, Esq., for the petitioner.
L. A. Spalding, Esq., for the respondent.
Respondent has determined a deficiency in personal holding company surtax in the sum of $9,427.71 and a 25 percent delinquency penalty of $2,356.93 for the calendar year 1936, under sections 351 and 291 of the Revenue Act of 1936.1 The issues are (a) whether petitioner, a foreign corporation, having no place of business in the United States, is liable for surtax as a personal holding company and, if so, (b) whether the computation of the tax by respondent is correct in his application of section 233 of the Revenue Act of 19362 in refusing to allow deductions or credits in determining its net income for purposes of computing the surtax.
FINDINGS OF FACT.
The stipulated facts are as follows:
1. The petitioner is a nonresident foreign corporation. During the year 1936 it was not engaged in trade or business within the United States nor did it have an office or place of business therein. It was incorporated in the year 1911 under the Laws of the Canton of Schaffhausen, Switzerland. Approximately fifteen years ago, it acquired a portfolio of American securities and since that time it has held and owned American securities and received the income therefrom consisting of dividends and interest. Its activities in the United States during the year 1936 and for many years prior thereto consisted only in effecting transactions in the United States in stocks and securities through a resident broker or custodian and in receiving the income from the securities held.
2. The petitioner files its Federal income tax returns on the basis of cash receipts and disbursements.
3. The authorized stock of the petitioner consists of 1,000,000 Swiss Francs consisting of 400 shares of the par value of 2500 Swiss Francs each. During the last half of the taxable year 1936 more than 50% in value of its outstanding stock was owned directly or indirectly by or for not more than five individuals. All of the stockholders of the petitioner during the entire year 1936 and at all times prior thereto were nonresident alien individuals not engaged in trade or business within the United States and not having an office or a place of business therein.
4. The gross income from sources within the United States for the three-year period ending December 31, 1935 was 28.54% of the total gross income of the petitioner from all sources for such period.
5. During the calendar year 1936 the gross income of the petitioner from sources within the United States was $66,504.53 (the gross income for 1936 as shown by the notice of deficiency was $69,554.53 which has been revised by the deductions therefrom of $3,050.00 representing dividends paid by Creole Petroleum Corporation, which the respondent now concedes to be income from sources without the United States.) During the calendar year 1936 the gross income of the petitioner from sources without the United States was $57,303.11. All of the petitioner's gross income consisted of interest and dividends.
6. During the calendar year 1936 the petitioner declared and paid in Switzerland a dividend of 100,000 Swiss Francs, which, for the purpose of this proceeding, were equivalent at the time of such payment to $28,041.25.
7. During the calendar year 1936 the petitioner paid Federal Income Tax withheld at the source in the amount of $2,586.04. In the notice of deficiency the respondent in determining the adjusted net income of the petitioner allowed a deduction on account of Federal Income Taxes paid of $2,695.42. It is conceded by both the petitioner and the respondent that the petitioner is entitled to a deduction of the Federal Income Taxes paid in the amount of $2,586.04 in determining its adjusted net income.
8. During the calendar year 1936 the petitioner paid interest in respect of indebtedness incurred within the United States to the creditors located therein in the sum of $831.02. In determining the deficiency herein, no deduction was allowed on account of such payment.
9. During the calendar year 1936 the petitioner also paid out the following sums for the purposes indicated:
Custodian fees ___________________________________________ $3,567.43
Accounting fees __________________________________________ 2,106.47
Legal fees _______________________________________________ 990.44
Traveling ________________________________________________ 144.60
Delivery and Clearance fees ______________________________ 18.00
Bank charges, Cables, Safe Deposit, Rent, etc ____________ 391.40
Federal and State Stock Transfer stamps __________________ 1,525.57
_________
8,743.91
The respondent in determining the deficiency herein allowed no deduction in respect of any of these expenditures. Such expenditures were made in respect of income of the petitioner from sources both within and without the United States.
In addition to the facts thus stipulated, it is alleged in the petition and admitted in the answer that petitioner filed, under protest, a personal holding company return for 1936 on January 3, 1940, with the collector of internal revenue at Baltimore, Maryland.
Respondent denied petitioner the benefit of deductions or credits in computing its net income subject to the surtax on the ground that the return filed did not include the information necessary for their calculation as required by section 233 of the Revenue Act of 1936.
Petitioner contends that it is not subject to the provisions of section 351 of the Revenue Act of 1936, supra, because of the fact that all of its stockholders are nonresident aliens who would not be subject to surtax by the United States on any dividend distributions made to them by petitioner.
It is argued that the intent and purpose of Congress in the enactment of that section was to force distributions of earnings by personal holding companies so that surtax might be laid upon and collected from such distributions upon their receipt by the stockholders. Upon this premise it is urged that the application of this section to a corporation whose stockholders are not subject to surtax is to extend the meaning of the section beyond the Congressional intent.
Petitioner admits that it is within the definition of a personal holding company, as set out in subsection 351 (b) (1), supra, because (1) its earnings are of the character there specified and (2) more than 50 percent of its capital stock was owned during the described period by not more than five individuals. It is obvious, concededly so, that petitioner is included in the unrestricted purview of "any corporation" as provided by that subsection. In short, petitioner in effect admits it is within the taxed class if the language of the statute is controlling. It is urged, however, that in order to stay within the manifest purpose and policy of the legislation, as established by its history, the term "any corporation" must be construed to mean "any corporation whose stockholders would be subject to surtax on distributed corporate earnings." It is contended that the ascertainment of the Congressional intent by reference to the history and purpose of the legislation which points to this construction, is justified by reason of the injustice and hardship of a literal application of the statute. Such application places on a foreign corporation, which could have no purpose in its organization or operation of avoiding surtax upon its nonresident foreign stockholders, a burden greater than that imposed on one organized and operated for that purpose.
It is undoubtedly true that the literal application of section 351 in the present situation is harsh. Despite that harshness we do not feel justified, in view of the plain and unambiguous language of that section, to restrict its meaning. As the Supreme Court announced in Caminetti v. United States, 242 U. S. 470, that language "* * * must be taken as the final expression of legislative intent and * * * is not to be added to or subtracted from by considerations drawn from titles or designating names or reports accompanying their introduction, or from any extraneous source." See also Phanor J. Eder, 47 B. T. A. 235.
Moreover, although the question has not been presented upon similar facts before, we have had occasion to consider the propriety of a literal application of section 351, supra, in the face of an attack upon the ground of harshness of result. In each such instance we refused to restrict the construction of "any corporation." Thus, in O'Sullivan Rubber Co., 42 B. T. A. 721, we held that section 351 included a dissolved corporation in process of liquidation. In affirming the decision, the Court of Appeals for the Second Circuit said (120 Fed. (2d) 845):
Being a corporation for the purpose of Title I, petitioner is also one for the purpose of Title IA, which imposed the personal holding company surtax in issue here. Section 351 refers to "any corporation" and by section 351 (b) (4) this term "shall have the same meaning as when used in Title I." Petitioner does not suggest, nor can we find, any justification in the language for exempting it under Title IA without also exempting it under Title I.
Our decisions in Foley Securities Corporation, 38 B. T. A....
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