Missouri Pacific Railroad Company v. United States, 40-63.

CourtCourt of Federal Claims
Writing for the CourtPER CURIAM
Citation392 F.2d 592
Docket NumberNo. 40-63.,40-63.
Decision Date15 March 1968


Quinn O'Connell, Washington, D. C., for plaintiff. Gerald J. O'Rourke, Jr., Washington, D. C., attorney of record. Robert T. Molloy and Robert E. Simpson, Washington, D. C., of counsel.

Richard J. Boyle, Washington, D. C., with whom was Asst. Atty. Gen. Mitchell Rogovin, for defendant. Philip R. Miller, Washington, D. C., of counsel.

Before COWEN, Chief Judge, and LARAMORE, DURFEE, DAVIS, SKELTON and NICHOLS, Judges.



This case was referred to Chief Trial Commissioner Marion T. Bennett with directions to make findings of fact and recommendation for conclusions of law under the order of reference and Rule 57 (a). The commissioner has done so in an opinion and report filed on June 23, 1967. Plaintiff and defendant except in part to the commissioner's opinion and findings* and the case has been submitted to the court on oral argument of counsel and the briefs of the parties. Since the court agrees with the commissioner's findings, opinion, and recommended conclusion of law, as hereinafter set forth, it hereby adopts the same as the basis for its judgment in this case. Therefore, plaintiff is entitled to recover and judgment is entered for plaintiff with the amount of recovery to be determined pursuant to Rule 47(c).


BENNETT, Chief Commissioner:

This is a suit by the taxpayer for the recovery of excess profits taxes paid by taxpayer's predecessor for the year 1950. The sole issue remaining for determination is defendant's setoff of $67,309.02, arising by virtue of the defendant's treating taxes paid by taxpayer in 1950 to the Republic of Mexico as a deduction from gross income under section 23(c) of the 1939 Internal Revenue Code, ch. 2, § 23(c), 53 Stat. 12, rather than as a foreign tax credit against the United States tax liability under section 131(a), 131 (b), or 131(h) of the Code, as amended, ch. 619, § 158, 56 Stat. 856. This issue presents two separate questions: (1) Whether the tax imposed by the Republic of Mexico is an income tax or a tax in lieu of an income tax within the meaning of section 131 of the 1939 Code so as to entitle taxpayer to a foreign tax credit, and (2) if the Mexican tax is either an income tax or a tax imposed in lieu of an income tax, what is the amount which taxpayer may take as a foreign tax credit for 1950? For reasons hereinafter shown, it is concluded that taxpayer is entitled to the foreign tax credit. The amount of the credit is determined in this opinion.

Taxpayer is a common carrier by rail, and operates in interstate commerce subject to the jurisdiction of the Interstate Commerce Commission, hereinafter referred to as the I.C.C. One aspect of this commerce of particular relevance to this case is the freight car interchange system. Under this system, railroad cars owned by taxpayer were delivered, by interchange, to other railroads, for use by those other railroads on their lines.

Under the equipment interchange rules established by the Association of American Railroads, the using railroads paid a daily rental to the taxpayer known as "per diem," for the period during which the taxpayer's cars were located on their lines. Similarly, when cars of another railroad, referred to as "foreign cars," were located on the taxpayer's lines, taxpayer was required to pay these railroads the per diem.

The Mexican railroads also participated in this interchange system and subscribed to the interchange rules. Freight cars of the taxpayer were transported to the Mexican border, at which point the receiving Mexican railroad would hook on to them with one of its own locomotives and haul them away.

In 1950, the per diem to taxpayer for its freight cars in Mexico was $2.05. Taxpayer's reported income for the year from the rental of freight train cars to railroads in Mexico was $330,251, representing payment for 161,098 freight car days in Mexico at the stipulated rate of $2.05 per day.

In 1950, taxpayer, in conjunction with Mexican railways, operated a passenger train service into Mexico. Taxpayer received from Mexican railroads a rental income of 10 cents for each mile each car was operated on the lines of railroads in Mexico, resulting in a total income for the year from this source of $47,510. Taxpayer operated 781 passenger car days in Mexico in 1950.

Thus, the total income taxpayer received in 1950 from rental of freight and passenger cars to Mexico was $377,761. Taxpayer had no other commercial association with Mexico, since taxpayer had no operations in that country, owned no facilities there, and had no control over cars after an interchange with Mexican railroads until the cars were returned.

The above-mentioned rental income from Mexican sources was subject to tax imposed by the Republic of Mexico pursuant to the provisions of the Mexican law entitled "Ley del Impuesto Sobre la Renta," the translation of which is "Income Tax Law." Pursuant to the provisions of the Mexican income tax law, taxpayer paid to the Republic of Mexico in 1950 a tax in the amount of $116,050 on the rental income received. In filing its federal income and excess profits tax return for the taxable year 1950, on a calendar-year basis and under the accrual method of accounting, taxpayer claimed and was allowed the full amount of the tax paid to Mexico as a foreign tax credit.

Subsequently, the Commissioner of Internal Revenue, hereinafter referred to as the Commissioner, determined that taxpayer was liable for additional income and excess profits taxes in the amount of $203,239. The deficiencies were duly assessed and were paid by taxpayer on January 17, 1956. On November 16, 1956, taxpayer filed a timely claim for refund of $184,048 of excess profits taxes paid in 1950. That claim was amended on June 10, 1960, to claim the relief provided by section 94 of the Technical Amendments Act of 1958 (Pub.L. 85-866, 72 Stat. 1606, 1669 (1958)). In considering taxpayer's claim for refund, the Commissioner disallowed as a foreign tax credit the $116,050 tax paid to Mexico and instead treated the tax as a deduction from gross income under section 23(c) of the Internal Revenue Code of 1939 and treated the barred deficiency resulting from that determination ($67,309) as an offset against taxpayer's claim for relief under section 94 of the Technical Amendments Act. Following the institution of this suit, a taxpayer received a $116,739 refund for the balance of its claim. Plaintiff now seeks to defeat the offset.


Sections 131(a) and 131(h) of the 1939 Code1 provide that United States taxpayers may credit against their United States tax liability amounts paid or accrued on account of foreign income taxes or taxes imposed in lieu of income taxes. The first prong of attack by the Commissioner's setoff is his contention that the tax which the taxpayer paid to the Republic of Mexico was neither an income tax nor a tax imposed in lieu of an income tax within the meaning of section 131.

Article 1 of Ley del Impuesto Sobre la Renta, hereinafter referred to as the Mexican income tax law, sets forth the general nature of the tax:

The Income Tax is payable on profits, gains, rentals, products, benefits, participations and in general, on all amounts received in cash, in securities, in kind or in credit, which by reason of any of the items set forth in this Law, modify the taxpayer\'s possessions.

The rest of the Mexican statute goes on to establish a schedular tax system. It imposes a graduated tax on income and gains under five different schedules, each schedule having its own determination of taxable income and its own specific tax rates. Almost all economic activity or sources of income will fall within and be taxed under one of the five schedules. Schedules I and II are the only schedules relevant to the instant case.2 Schedule I is the general schedule covering business or commercial income. It subjects to tax those who "execute acts of commerce, or operate an agricultural or industrial business." In general, all acts performed by a business entity in connection with its business are classified by the Mexican Commercial Code as acts of commerce, and therefore fall under schedule I unless specifically included elsewhere.

The taxpayer's car rental income was specifically included under schedule II, however, and this was the schedule under which the tax was imposed. Compared with schedule I, schedule II is a somewhat narrow and specific schedule, covering, inter alia, the following sources of income:

ARTICLE 15. * * *
XIII. — Rentals, premiums, royalties and returns of all kinds which the owners or possessors of movable property receive from persons to whom they have granted exploitation rights without transferring ownership.
The concerns which lease or in any other manner grant the use or enjoyment of rolling stock to concerns which operate in the country, even though the contracts are made abroad * * * are specially considered as included under this Section.

The tax imposed on taxpayer's car rentals under schedule II was payable on the gross amount of the revenue, since schedule II makes no provision for deductions. This is the basis of the Commissioner's contention that the tax was not an income tax.

It is well settled that the question of whether the foreign tax is an income tax within the meaning of section 131(a) must be decided under criteria established by our own revenue laws and court decisions. Commissioner of Internal Revenue v. American Metal Co., 221 F.2d 134 (2d Cir. 1955), cert. denied, 350 U.S. 829, 76 S.Ct. 61, 100 L.Ed. 740; Biddle v. Commissioner of Internal Revenue, 302 U.S. 573, 58 S.Ct. 379, 82 L.Ed. 431 (1938). In other words, to be creditable under section 131(a), the foreign tax must be the substantial equivalent of an income tax as the term is...

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