H.H. Robertson Co. v. Comm'r of Internal Revenue, Docket No. 2587-70.

• Decision Date: 10 October 1972
• Docket Number: Docket No. 2587-70.
• Citation: 59 T.C. 53
• Parties: H. H. ROBERTSON COMPANY, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

59 T.C. 53

H. H. ROBERTSON COMPANY, PETITIONER
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 2587-70.

United States Tax Court

Filed October 10, 1972.

[59 T.C. 54]

William M. Horne, Jr., Thomas A. Arbogast, and Norman W. Goldin, for the petitioner.

Louis A. Boxleitner and John C. Calhoun, for the respondent.

1. T, a U.S. corporation, in anticipation of liquidating a wholly owned foreign corporation (R.H.), sought and obtained a ruling from the Commissioner under sec. 367 of the 1954 Code that the liquidation would be nonrecognizable under sec. 332, on condition that all of the earnings and profits of R. H. be distributed as a dividend to T upon liquidation of R.H. The liquidation was consummated on Dec. 28, 1965. Prior thereto, on Dec. 22, 1964, R.H. had distributed to T as a dividend-in-kind certain shares of stock in a second-tier subsidiary having a basis of $251,650 and a fair market value at the time of such distribution in the amount of $1,925,000. R.H.‘s earnings and profits were substantially in excess of such fair market value at the time of the distribution, and the parties are in agreement that T received a taxable dividend in 1964 in the amount of that fair market value. Secs. 301(b)(1)(C), 301(c)(1), and 316. However, in determining the amount of the dividend to be charged to T in 1965 pursuant to the ruling under sec. 367, the parties are in disagreement as to the extent to which R.H.‘s earnings and profits were reduced by the 1964 distribution of the foregoing appreciated shares. Held, pursuant to the explicit provisions of sec. 312(a)(3), R.H.‘s earnings and profits were reduced by the amount of the basis of such shares rather than by the amount of their far market value, and the taxable dividend received by T at the time of liquidation of R.H. was in the amount of $2,920,453.

2. In addition to the foregoing dividend on liquidation of R.H., T received a cash dividend of $3,366,658 from R.H. on Jan. 20, 1965. For purposes of computing the ‘deemed paid’ foreign tax credit under sec. 902(a)(1), T does not dispute the Commissioner's determination under sec. 902(c)(1) that such cash dividend was paid from the ‘accumulated profits' of R.H. for years prior to 1965. In the year 1965 itself, R.H. had total profits of $1,422,921, paid creditable foreign taxes in the amount of $153,527, and had remaining ‘accumulated profits' for that year in the amount of $1,269,394 out of which taxable dividends could be paid. Held: In computing the sec. 902(a)(1) foreign tax credit, dividends only to the extent of, $1,269,394 were paid out of the 1965 ‘accumulated profits' of R.H., with the consequence that the numerator of the sec. 902(a)(1) fraction could not exceed that amount. Under the statutory scheme, any excess of dividends paid in 1965 were to be attributed to any available undistributed ‘accumulated profits' of prior years. Sec. 902(c)(1); General Foods Corporation, 4 T.C. 209. However, in this case, the ‘accumulated profits' of each of the pre-1965 years back to the beginning of R.H.‘s existence in 1952 had been fully allocated to taxable distributions prior to the final dividend, and there remained no ‘accumulated profits' for any pre-1965 year which could absorb any portion of the 1965 excess. Accordingly, no additional foreign tax credit under sec. 902(a)(1) was available for 1965. The Commissioner's method of computing the foreign taxes paid by R.H. from its inception in 1952 to its liquidation in 1965; no additional credit is permissible under the statute. T's method of computing the credit requires a sec. 902(a)(1) fraction greater than one over one, which is not consistent with a proper interpretation of sec. 902(a)(1).

The Commissioner determined deficiencies in petitioner's income tax as follows:

+--------------------+
                ¦Year ¦Deficiency ¦
                +------+-------------¦
                ¦ ¦ ¦
                +------+-------------¦
                ¦1964 ¦$56,891 ¦
                +------+-------------¦
                ¦1965 ¦951,455 ¦
                +--------------------+
                

Subsequent to these determinations, but before the hearing in this case, the Commissioner in his Amendment to Answer requested pursuant to section 6214, I.R.C. 1954, that the Court redetermine the amounts of the respective deficiencies in excess of the above determinations.

In 1964 petitioner's wholly owned foreign subsidiary, H. H. Robertson Holdings, Ltd., distributed to petitioner as a dividend certain shares of stock which had appreciated in value while held by the foreign corporation. In 1965 petitioner caused H. H. Robertson Holdings, Ltd., to be liquidated. The liquidation of the foreign subsidiary was effected pursuant to a ruling which the petitioner had obtained from the Commissioner under section 367, I.R.C. 1954, that no gain or loss would be recognized by petitioner as a consequence of the liquidation if petitioner included in its income H. H. Robertson Holdings, Ltd.‘s earnings and profits. After concessions by both parties, the two issues which remain for decision both relate to the taxable year 1965 and concern (1) the amount of the earnings and profits of the foreign subsidiary which were required to be taken into petitioner's 1965 income as a dividend pursuant to the ruling obtained by petitioner from the Commissioner under section 367, I.R.C. 1954, and (2) the computation of the so-called ‘indirect’ or ‘deemed paid’ foreign tax credit under

[59 T.C. 55]

section 902, I.R.C. 1954, in respect of this dividend and another cash dividend received by petitioner from H. H. Robertson Holdings, Ltd., in 1965.

Specifically, the first issue involves the effect of the dividend of appreciated stock distributed by H. H. Robertson Holdings, Ltd., to petitioner in 1964 upon the ‘earnings and profits' of the foreign subsidiary under section 312, I.R.C. 1954, for the purpose of computing the amount of the ‘earnings and profits' which were available to be taken into petitioner's income in 1965 as required by the Commissioner's ruling under section 367, I.R.C. 1954. The resolution of the second issue depends on whether the ‘dividends' used in the numerator of the fraction relating to the credit for 1965 foreign taxes under section 902, I.R.C. 1954, cannot exceed the amount of the foreign subsidiary's ‘accumulated profits' in the denominator.

FINDINGS OF FACT

The parties have stipulated certain facts, which, together with the attached exhibits, are incorporated herein by this reference.

H. H. Robertson Co. (hereinafter referred to as petitioner) is a corporation organized and existing under the laws of the Commonwealth of Pennsylvania. At the date of the filing of the petition in this case, petitioner's principal office was at Pittsburgh, Pa. It filed its corporate income tax returns for the calendar year 1964 and 1965 with the district director of internal revenue at Pittsburgh, Pa.

At all times here pertinent, petitioner has been engaged in the manufacture, sale, and erection of building products in the United States, primarily for commercial and industrial purposes. Its principal products have been in the field of steel flooring, protected metal roofing and siding, and ventilators. In addition, petitioner has engaged in foreign branch operations and has owned either directly or indirectly substantial, if not controlling, interests in a number of foreign corporations and businesses, which were involved in activities abroad that were similar or related to those conducted by it in the United States.

In 1922 petitioner organized such a branch operation in the United Kingdom, which was similarly engaged in the manufacture, sale, and erection of building products. Petitioner continued to conduct certain of its business activities through this branch operation until 1952, at which time a United Kingdom corporation, Robertson Thain, Ltd., was organized for the purpose of incorporating the United Kingdom branch operation; petitioner transferred the assets of the branch operation to Robertson Thain, Ltd., in exchange for stock in that corporation. Subsequently in 1961 Robertson Thain, Ltd., was reorganized

[59 T.C. 56]

and split up into four separate corporations (as hereinafter described), and the name of Robertson Thain, Ltd., itself was changed to H. H. Robertson Holdings, Ltd. (‘Robertson Holdings' or the ‘United Kingdom holding company’). At all times here pertinent petitioner held the majority of the outstanding stock of Robertson Thain, Ltd., and Robertson Holdings, and at the time of liquidation in 1965 petitioner was the sole owner of such stock.

From 1958 until its liquidation in 1965 Robertson Thain, Ltd., and its successor Robertson Holdings acquired interests in numerous subsidiaries doing business in Europe, Australia, and South Africa. Most of these corporations were engaged in the manufacture, sale, and/or erection of products similar or identical to those produced by petitioner in the United States.

One such subsidiary company in which Robertson Thain, Ltd., and later Robertson Holdings, held an interest was Robertson Thain (Africa) Proprietary, Ltd. (R. T. Africa). R. T. Africa was organized on October 13, 1958, under the laws of the Union of South Africa (Republic of South Africa since May 31, 1961) by Robertson Thain, Ltd., and G. H. Langler & Co., Ltd. (Langler), a firm of manufacturers'representatives, for the purpose of engaging in the building products business in South Africa. The initial authorized capital of R. T. Africa was 100,000 shares of par value stock. At the time of the formation of R. T. Africa, Robertson Thain, Ltd., subscribed for 33,376 shares of stock and Langler subscribed for the remaining 16,624 of the 50,000 shares initially issued.

In 1959 Robertson Thain, Ltd., acquired an additional 17,952 shares and Langler an additional 9,048 shares of R. T. Africa stock. Thereafter, on February 15, 1960, Robertson Thain, Ltd., purchased the 25,672 R. T. Africa shares held by Langler and thereby acquired all the R. T. Africa Africa stock (77,000 shares) issued and outstanding at that time. The total cost...