FW Woolworth Co. v. United States, 455.

• Decision Date: 19 July 1937
• Docket Number: No. 455.,455.
• Citation: 91 F.2d 973
• Parties: F. W. WOOLWORTH CO. v. UNITED STATES.
• Court: U.S. Court of Appeals — Second Circuit

91 F.2d 973 (1937)

F. W. WOOLWORTH CO. v. UNITED STATES.

No. 455.

Circuit Court of Appeals, Second Circuit.

July 19, 1937.

Tolbert, Ewen & Patterson, of New York City (Ward V. Tolbert and Bertram F. Bongard, both of New York City, Douglas H. Thayer, of Yonkers, N. Y., and John L. McMaster, of New York City, of counsel), for plaintiff.

Lamar Hardy, U. S. Atty., of New York City (David McKibbin, 3d, Sp. Asst. U. S. Atty., and Leon E. Spencer, Asst. U. S. Atty., both of New York City, of counsel), for defendant.

Claude R. Branch, of Providence, R. I., and Edward H. Green, of New York City (Choate, Hall & Stewart, of Boston, Mass., and Sullivan & Cromwell, of New York City, of counsel), amici curiæ.

Before MANTON, L. HAND, and CHASE, Circuit Judges.

L. HAND, Circuit Judge.

Both sides appeal from a judgment in an action under the Tucker Act (28 U.S.C. A. § 41(20) to recover income taxes alleged to have been unlawfully collected from the plaintiff for the years 1922, 1923, 1924, and 1925. With one exception the issues raised concern taxes paid by foreign corporations of whose shares the plaintiff owned more than a majority. The first question is whether the plaintiff should have been credited with payments alleged to have been withheld as taxes from dividends declared by a British subsidiary, of whose shares it held sixty-two per cent. It depends upon the construction of section 238 (a) of the Revenue Acts of 1921 and 1924 (42 Stat. 258, 43 Stat. 286), and is the same question which we decided this term in Biddle v. Commissioner, 86 F.(2d) 718, under section 131 (a) (1) of the Revenue Act of 1928 (26 U.S.C.A. § 131 (a) (1) and note). The plaintiff reargues the point and asks us to reconsider our decision. In the earlier case we accepted the testimony of an expert in English law that the shareholder was regarded in that country as the taxpayer, but we thought it irrelevant because the question was of the meaning of the word, "paid," in section 131 (a) (1). We have no doubt that, so far at least, our earlier decision is unassailable; we are dealing with our own statute, and until the contrary appears, we should not assume that Congress adopted a shifting standard, or meant to incorporate other definitions by reference. What then is that meaning? It is first necessary to see what are the facts in which the word is to be applied. The primary duty or liability under the British law, as with us, is laid upon the corporation as a juristic person; the tax is "charged on" and must be "paid by" it. (Miscellaneous Rules Applicable to Schedule D § 1.) The only money received by the Crown is what comes from the corporate treasury; at least unless the corporation fails to declare dividends in the form hereinafter stated, in which event it has been intimated that the shareholder is liable. Hamilton v. Commissioners Inland Revenue, (1931) 2 K.B. 495, 521. The British law might have so far treated the corporation as separate from the shareholders that it also taxed them on their dividends. That it did not do, deeming that that would be double taxation, for beneficially the corporation is merely the aggregate of its shareholders. The implications of that concept it worked out scrupulously in other problems which arose: as to exemption, as to minimum income, and later as to surtax, "supertax." If a shareholder is exempt, the tax paid by the corporation becomes in part his tax and he is entitled to a refund; so too when his total income including the dividend is below the minimum. Again in estimating his surtax his dividend is not its strict measure if the corporation is a mere aggregate; his income includes his aliquot part of the corporate income and the corporate tax may not be deducted from it any more than the "normal tax," as we call it, should be deducted from any other part of it. All this the British law affects to do; the result being that the corporate tax is for these purposes treated as though it were distributed ratably among the shareholders. The law does not, it is true, try to do this to the penny; instead, it substitutes a method which in the long run is an equivalent. When the corporation declares a dividend it is "less income tax" or "free of income tax," which means that a nominal dividend is declared upon which a nominal tax is levied at the rate current in that year, regardless of the rate in force when the corporation paid the tax on the earnings declared. The shareholder must compute his "supertax" upon that nominal dividend, though he never gets it and never pays the nominal tax which is considered as withheld from it. The scheme in this aspect is designed as if the shareholders were the taxpayers; though the only legal duty is imposed upon the corporation and the remedies run against it; and although the English courts have, to put it moderately, never committed themselves to the doctrine that the corporation merely acts as paying agent for the shareholders.

Our own law does not proceed on that theory. It is true that it does not tax both corporate income and dividends; so far it recognizes that beneficially the corporation is an aggregate of the shareholders. But there it stops; it does not attempt to go back into the corporate finances to accommodate practice to principle as to minimum incomes or surtaxes; the shareholder's income is his dividend. It seems to us therefore that when Congress used the word, "paid," we should read it upon the background of our own fiscal system, and treat the shareholder as paying no part of the tax levied upon and paid by the corporation. Welch v. St. Helens Petroleum Co., 78 F. (2d) 631 (C.C.A. 9). Perhaps it is better to conceive of the corporation as merely a paying agent for the group, but it is not our way. We might agree that if the plaintiff could point to a legal duty laid upon shareholders which was discharged, section 238 (a) would protect it, but it cannot do so. At most it can say that the shareholders may in some circumstances be sureties for a tax primarily imposed upon the corporate personality, but that would not make them "pay" the tax any more than any other surety pays when the principal pays. It does not advance the solution to say, as in United Shoe Machinery Co. v. White, 89 F.(2d) 363 (C.C.A. 1), that it makes no difference to the shareholder whether he pays the tax, or whether the corporation pays it and takes it out of his dividend. That is true, but the final incidence of the tax does not determine its legal nature; else the shareholders would pay the normal corporate tax under our own system. We adhere to our decision in Biddle v. Commissioner, supra, 86 F.(2d) 718.

The plaintiff insists that in any event the Commissioner concluded himself by a "closing agreement" executed by him on January 22, 1932. This first recited the plaintiff's "gross income," its "allowable deductions from gross income" and the "allowable credits for taxes paid or accrued to foreign Governments," as the Commissioner had determined them for five years, including the four here in question, and then stipulated that the gross income and allowable deductions "other than deductions for foreign taxes" should be final, except that the taxpayers might reopen "allowable deductions * * * claimed by them for foreign taxes paid or accrued * * * to the extent that the same may be disallowed as credits." The agreement concluded by expressly leaving open for adjustment "credits allowable under, and the proper interpretation of Section 238 * * * for taxes paid or accrued to foreign countries." The Commissioner had disallowed these credits on December 6, 1930, over a year before, so that the issue had been already raised. (We attach no significance to the wording of an earlier proposed closing agreement.) Naturally the plaintiff had to include the nominal dividends in its gross income, since the equally nominal "payments" could not at once be credits upon its tax and no part of its income. Therefore, the argument runs, the Commissioner agreed that the sums deducted from the nominal dividends should be treated as credits, because the dividends were otherwise confessedly too large, and because they could not be "deductions" from gross income as that word is used in our statutes. Thus in spite of the express reservation as to credits, the plaintiff asks us to suppose that the Commissioner unintentionally gave away his case. It may be that the plaintiff's stipulation works unjustly against it; certainly it does, if, as it concedes, the amounts which we are refusing to treat as credits under section 238 (a) cannot be "deductions" from its gross income. The reservation as to deductions should doubtless have been made more comprehensive, so as to include as such all sums which were not allowed as credits to the plaintiff under section 238 (a). If it were possible we should make that adjustment now, but, we cannot take the heart out of the stipulation because it works harshly.

The judge agreed with what we have said so far, but felt bound to yield to contrary rulings of the Treasury, both before and after the Acts of 1921 and 1924. For a number of years this very plaintiff had been allowed as taxes paid under section 238 (a) the deductions of its subsidiary from the supposititious dividends declared. The reasoning by which such rulings are deemed to be incorporated into the law upon its reënactment are familiar, and we should have no right to disregard it, whether or not in a given instance it represents a real assent by Congress. But not every ruling is incorporated in the text because it is not repudiated; no one has ever suggested anything of the sort. At most, administrative practice is a weight in the scale, to be considered, but not to be inevitably followed. Here the inference is a good deal weaker than usual because it rests upon an interpretation applicable to the British act which is but a part of all the section covers. To suppose that Congress must particularly correct...