Helvering v. Campbell

• Decision Date: 10 January 1944
• Docket Number: No. 5129,5130.,5129
• Citation: 139 F.2d 865
• Parties: HELVERING, Com'r of Internal Revenue, v. CAMPBELL. SAME v. NELL.
• Court: U.S. Court of Appeals — Fourth Circuit

139 F.2d 865 (1944)

HELVERING, Com'r of Internal Revenue, v. CAMPBELL.

SAME v. NELL.

Nos. 5129, 5130.

Circuit Court of Appeals, Fourth Circuit.

January 10, 1944.

Carlton Fox, Sp. Asst. to Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key and Helen R. Carloss, Sp. Assts. to Atty. Gen., on the brief), for petitioner and cross-respondent.

Clark J. Milliron, of Los Angeles, Cal., for respondents and cross-petitioners.

Before PARKER, SOPER, and DOBIE, Circuit Judges.

PARKER, Circuit Judge.

These are petitions and cross petitions to review decisions of the United States Tax Court in cases involving the tax liability of Oscar F. Campbell and Edward J. Nell. Both taxpayers during the tax years in question were citizens of the United States, married and residing with their wives in the Philippine Islands. In 1939 Campbell and wife filed income tax returns for the years 1918, 1919 and 1920 with the Collector at Baltimore. During the same year Nell and wife filed returns with the same collector for the years 1925 to 1931 inclusive. Both taxpayers had filed returns and paid taxes during the years in question to the Philippine Collector under the Philippine income tax law on income from sources wholly within the Philippine Islands. The Commissioner added the income reported by the wife in each case to that of the husband and assessed deficiencies based on the amounts due under the applicable income tax statutes, with deduction for the amounts paid under the Philippine Act, but in the case of Nell with deduction of only that part of the Philippine tax imposed on income which was held subject to federal tax.

The Tax Court held that both taxpayers were liable as citizens of the United States for income tax under the Revenue Act of 1918 and subsequent acts applicable to the years in question; that their liability was not barred by limitations; that taxpayers were taxable as to only half of the income received because of the community property law prevailing in the Philippines and that they were entitled to credit the entire Philippine tax on their tax liability. The petitions of the Commissioner challenge the last two of these determinations, the cross petitions of the taxpayers challenge the first two.

The Question of Tax Liability.

The contention of the taxpayers is that they were subject to tax only under the Revenue Act of 1916 as amended, which authorized the imposition of an income tax for the Philippine Islands and Porto Rico, upon citizens and residents of these possessions of the United States. This tax was collected by the internal revenue officers of the governments of these possessions and accrued "intact to the general Governments thereof". See Revenue Act of 1916 sec. 23, 39 Stat. 776; Revenue Act of 1918 sec. 261, 40 Stat. 1087; sec. 261 of the Revenue Act of 1921, 42 Stat. 271, and section 261 of Revenue Acts 1924, 1926, 43 Stat. 294, 44 Stat. 52, 26 U. S.C.A. Int.Rev.Acts, pages 52, 199. There is no reason, however, to construe the Acts of Congress under which this tax was levied as exempting from the general provisions of the income tax laws of the United States those citizens of the United States who happened to be residing in the Philippine Islands; and it is perfectly clear that no such exemption was intended.

The Revenue Act of 1918 was a war measure and the federal income and excess-profits taxes for which it and subsequent acts provided were imposed upon the net income of "every individual". Secs. 210 and 211, 40 Stat. 1062, 42 Stat. 233, 43 Stat. 264, 265, 44 Stat. 21, 26 U.S.C.A. Int. Rev.Acts, pages 15, 16, 160. They were imposed upon income of citizens residing in foreign countries and possessions of the United States and express provision was made for the deduction from the tax imposed of income, war-profits and excess-profits taxes paid upon income derived from sources in such foreign countries or possessions. Sec. 222(a) (1) provides: "That the tax computed under Part II of this title shall be credited with: (1) In the case of a citizen of the United States, the amount of any income, war-profits and excess-profits taxes paid during the taxable year to any foreign country, upon income derived from sources therein, or to any possession of the United States." That sec. 222(a) (1) was intended to apply to citizens residing in possessions, and not merely to those residing in the United States and deriving income from sources in the possessions, is shown by the fact that another subsection, 222(a) (2), provided for the deduction of taxes paid to the possession by "residents" of the United States.

The history of the legislation shows clearly that citizens of the United States deriving income from sources in Porto Rico or the Philippines should pay tax thereon, notwithstanding they had paid tax thereon to such possession, subject to credit, however, for the last named tax. The matter was discussed in the Conference Committee Report in connection with Amendment No. 118 (1939-1 Cum.Bull. part 2 138), which was incorporated in the Act as a part of sec. 222. The report states: "Amendment No. 118. The House bill provided that a citizen of the United States might credit against his income tax the amount of any income, war-profits, and excess-profits taxes paid to any foreign country, Puerto Rico, or the Philippine Islands, upon income derived from sources therein, and allowed a similar credit to an alien resident if his country makes reciprocal provisions. The senate amendment entirely rewrites the section and broadens it to include a credit for taxes paid to any possession of the United States, which is also to be given to an alien resident of the United States."

Additional proof of Congress' continuing conception that the general tax provisions applied to citizens of the United States residing in the Philippines as well as in our other possessions is found in the provisions of sec. 262 of the 1921, 1924 and 1926 Acts, 42 Stat. 271, 43 Stat. 294, 44 Stat. 53, 26 U.S.C.A. Int.Rev.Acts, pages 53, 200, and sec. 251 of the Act of 1928, 45 Stat. 850, 26 U.S.C.A. Int.Rev.Acts, page 420. These provisions grant partial relief from the application of the tax law to United States citizens residing in the possessions of the United States (except the Virgin Islands) and deriving substantial income from trade or business therein. They exempt certain parts of the taxpayer's income from gross income taxable to the United States Treasury and are applicable to citizens of the United States residing in the Philippines. Haussermann v. Burnet, 61 App.D.C. 347, 63 F.2d 124; Peterson v. Com'r, 45 B.T.A. 624. That such an exemption from taxation by the United States was thought necessary by Congress to put citizens of the country trading in our possessions on an equal footing with traders from other countries, shows conclusively that Congress understood that they were required to pay income taxes into the United States Treasury on their income derived from sources within the possessions.

Contemporary administrative interpretation of the Act supports the conclusion reached. Treasury Regulations 45 Art. 1132, provides: "Art. 1132. Taxation of individuals between United States and Porto Rico and Philippine Islands. — (a) A citizen of the United States who resides in Porto Rico, and a citizen of Porto Rico who resides in the United States, are taxed in both places, but the income tax in the United States is credited with the amount of any income, war profits and excess profits taxes paid in Porto Rico. See Sec. 222 of the statute and articles 381-384. * * * The same principles apply in the Philippine Islands."

All of the adjudicated cases dealing with the matter support the conclusion. See Lawrence v. Wardwell, 9 Cir., 273 F. 405; Cotterman v. United States, 62 Ct.Cl. 415; Peterson v. Commissioner, 45 B.T.A. 624; Robinette v. Commissioner, 46 B.T.A. 1138, affirmed 6 Cir., 139 F.2d 285. In Cook v. Tait, 265 U.S. 47, 44 S.Ct. 444, 68 L.Ed. 895 the Supreme Court held the general provisions of the income tax act applicable to income of a citizen of the United States residing in a foreign country; the credit section above quoted allows the same credit for a tax paid to a possession as for one paid to a foreign country; and no reason suggests itself why Congress should have intended an exemption from the federal tax for citizen residing in a possession not accorded a citizen residing in this country or in a foreign country. Reason as well as authority is clearly to the contrary.

The question was fully examined by the Circuit Court of Appeals of the 9th Circuit in Lawrence v. Wardwell, supra, a case which was decided in the year 1921. We agree with the following statement of the law made in that case by Judge Hunt 273 F. 409:

"The comprehensiveness of the 1918 act is as great as language could make it, for it applied to the income of every individual, changing the rates, and obviously imposing taxes at the new rates, where no tax could have been imposed prior to the 1918 act. * * * "In the repealing clauses of the act of 1918, as quoted in the statement of the case, the act of 1916, as amended by the act of 1917, in force in the Philippines, was continued in force, except as might be otherwise provided by the local Legislature. As a general statute of the United States there was clear repeal, but as to the Philippines the act of 1916 was kept alive, as direct legislation by Congress with respect to the local affairs of the island, and not as a general statute of the United States.

"A citizen of the United States residing in the Philippines becomes subject to the Income Tax Law under the act of 1918. By section 261, supra, of that act, the tax shall be levied, collected, and paid in accordance with the act of 1916, as amended, returns to be made and taxes to be paid under title I of the act by `every individual who is a citizen or resident' of the island; the local Legislature having power as already...