Forres v. Commissioner of Internal Revenue
| Citation | 25 BTA 154 |
| Decision Date | 13 January 1932 |
| Docket Number | Docket No. 40229-40233,43972,43973. |
| Parties | LORD FORRES (ARCHIBALD WILLIAMSON), PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. SIR ROBERT BALFOUR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. ALEXANDER B. WILLIAMSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. JOHN LAWSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. THOMAS J. WHITSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Henry D. Costigan, Esq., J. M. Mannon, Jr., Esq., A. Crawford Greene, Esq., and James D. Adams, Esq., for the petitioners.
John D. Foley, Esq., for the respondent.
In these proceedings, which were consolidated for hearing, deficiencies in income taxes are asserted as follows:
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Petitioner | 1923 | 1924 | 1925
-----------------------------------------|-----------|---------|----------
Lord Forres ____________________________ | $905.76 | $87.17 | _________
Sir Robert Balfour _____________________ | 14,046.42 | _______ | _________
Alexander B. Williamson ________________ | 3,972.03 | 368.56 | $4,234.18
John Lawson ____________________________ | 2,482.95 | _______ | _________
Thomas J. Whitson ______________________ | 584.44 | _______ | _________
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The following issues are raised in these cases:
(1) Whether the petitioners, and each of them (except John Lawson), may deduct from their respective gross incomes for the year 1923, their proportionate shares of British income taxes, paid in 1927 by a domestic partnership of which they were members (2) Whether the petitioners, and each of them, are subject to income tax on dividends received from the Olympic Portland Cement Company, Ltd., and, if taxable,
(3) What is the amount of the dividends received by each of said petitioners from said company; and
(4) Whether section 217 (a) (2) of the Revenue Acts of 1921 and 1924 is unconstitutional.
As an additional complaint, in the appeal of John Lawson it is asserted that the respondent erred in reducing petitioner's net loss for the year 1922, carried forward to 1923, by including in income for 1922 dividends received from the Olympic Company, and, further, that he is barred from so doing by the expiration of the statute of limitations with respect to the year 1922.
An additional error alleged in the appeal of Alexander B. Williamson was waived at the hearing.
FINDINGS OF FACT.
During the period here involved each of the petitioners was a subject of and a resident in the United Kingdom of Great Britain, and a nonresident alien of the United States. Except petitioner Lawson, who made a business trip to this country in each of the years 1923 and 1924, none of the petitioners was in the United States during the period before us.
All these petitioners were members of the domestic partnership of Balfour, Guthrie & Company, which maintained its principal office at San Francisco and branch offices at Seattle, Portland and Tacoma. During the taxable years before us the total holdings of all the partners were 84½ shares, of which the petitioners herein held shares as follows:
Partner: Share
Lord Forres ___________________________________________________________ 4
Sir Robert Balfour ____________________________________________________ 16
Alexander B. Williamson _______________________________________________ 14½
John Lawson ___________________________________________________________ 13½
Thomas J. Whitson _____________________________________________________ 6½
The partnership kept its books of account and made its income-tax information returns for the calendar year 1923 upon the accrual basis. The earnings of this partnership were subject to tax by the United Kingdom. As of December 31, 1923, the partnership books disclosed a reserve for British tax liabilities for 1923 and prior years which was considerably in excess of the amounts thereof as finally determined. The British tax year terminated on April 5 of the years 1922, 1923, 1924 and 1925, respectively. The determination of the liabilities of the partnership for British taxes for these periods was in controversy, which was concluded shortly prior to December 5, 1927, when payments were made as follows, the current rate of exchange for British pounds sterling also being shown below:
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| | Rate of
For year ended | Pounds sterling | exchange
-------------------------------------|------------------|------------
April 5, 1923 ______________________ | £XXXX-XX-X | $4.66¾
April 5, 1924 ______________________ | 3135- 1-10 | 4.30 9/16
April 5, 1925 ______________________ | 4968- 4-6 | 4.77 13/16
Dec. 5, 1927 _______________________ | ________________ | 4.88 1/8
|__________________|____________
Total ___________________________ | 13,178- 4-4 | ___________
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On May 13, 1924, the partnership of Balfour, Guthrie & Company, filed income-tax information return for the calendar year 1923, in which it reported dividends received from domestic corporations in the amount of $173,279.50; trading profit in the amount of $270,422.58; and a total net income of $443,702.08. Thereafter, respondent determined and allowed additional deductions from income amounting to $27,500. The individual income-tax returns for the calendar year 1923 filed by these petitioners returned income from the partnership as follows:
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| | Dividend
Petitioner | Income from | received
| partnership | through
| | partnership
---------------------------------|---------------|----------------
Sir Robert Balfour _____________ | $45,997.17 | $32,810.32
Lord Forres ____________________ | 11,499.29 | 8,202.58
Alexander B. Williamson ________ | 41,684.94 | 29,734.35
Thomas J. Whitson ______________ | 18,686.35 | 13,329.19
John Lawson ____________________ | 0 | 0
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Except for the further deductions allowed by respondent and the deduction for British tax liability now claimed by petitioners, no error is alleged with respect to the income of the partnership, or as to the distributive shares of petitioners therefrom.
During the period here involved, the Olympic Portland Cement Company, Ltd., was a corporation, organized and existing under the laws of the United Kingdom. Its sole office was in London, and from this office its business was conducted by its directors and executive officers. Its books of account were kept on an accrual basis. It owned properties in the United States and elsewhere and, while accurate accounts were kept reflecting its earnings from its properties in this country, those earnings, when remitted to the company's office in England, were commingled with earnings from its properties without the United States and with its general funds.
Of the total value of the company's properties everywhere, the following table shows the proportionate value of its properties in this country:
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| Properties | Properties |
Year | in United | outside United | Total
| States | States |
--------------------------------------------|------------|----------------|---------
1922 ______________________________________ | £364,588 | £60,952 | £425,540
1923 ______________________________________ | 372,465 | 77,540 | 450,005
1924 ______________________________________ | 368,780 | 108,103 | 476,883
1925 ______________________________________ | 379,414 | 48,745 | 428,159
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The following is an analysis of the surplus of the company showing sources of profits, dividends paid and the surplus at the end of the years 1920 to 1925, inclusive:
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Item | 1920 | 1921 | 1922 | 1923 | 1924 | 1925
----------------------------------------|----------|----------|----------|---------|----------|---------
Surplus at beginning of year __________ | £21,491 | £31,257 | £56,206 | £82,634 | £109,198 | £137,476
|==========|==========|==========|=========|==========|=========
Profits from United States ____________ | 46,475 | 51,819 | 78,312 | 84,657 | 81,186 | 86,416
Profits from without United States ____ | 942 | 18,646 | 9,300 | 5,927 | 8,982 | 3,813
|__________|__________|__________|_________|__________|_________
Sub-total, current profits ______ | 47,417 | 70,465 | 87,612 | 90,584 | 90,168 | 90,229
Deductions for London Office expense, | | | | | |
debenture interest, and depreciation | 25,401 | 28,016 | 30,965 | 31,505 | 37,788 | 38,493
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