Motland v. United States

• Decision Date: 28 March 1961
• Docket Number: Civ. No. 916.
• Parties: Ingolf MOTLAND, Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Northern District of Iowa

192 F. Supp. 358

Ingolf MOTLAND, Plaintiff, v. UNITED STATES of America, Defendant.

Civ. No. 916.

United States District Court N. D. Iowa, E. D.

March 28, 1961.

Ingolf Motland, pro se.

F. E. Van Alstine, U. S. Dist. Atty., William R. Crary, Asst. U. S. Dist. Atty., Sioux City, Iowa, and Bruce S. Lane, Trial Atty., Tax Div., Dept. of Justice, Washington, D. C., for defendant.

GRAVEN, District Judge.

This action was brought by the plaintiff for the purpose of recovering the individual income taxes paid to the defendant for the 1952 taxable year. Such taxes totaled $727.22. Plaintiff alleges that the Internal Revenue Service erred in the method which it used for computing the credit allowed for taxes paid to foreign governments during the same taxable year. It is plaintiff's position that if such credit had been properly computed the credit would have more than offset the tax otherwise owed.

There is no disagreement as to the relevant facts in the case. In 1952 the plaintiff received a gross amount of $103,235 as the result of the liquidation of the Carribean Sugar Company of Havana, Cuba, a corporation in which he had owned stock for a period in excess of six months. Plaintiff's recognized gain from this transaction for Federal income tax purposes was $22,299.86. Of the total proceeds received by the plaintiff from the liquidation, $44,275 represented accrued dividends. The Cuban government levied a 6% tax on these accrued dividends in the amount of $2,656.50, which the plaintiff paid. Shortly thereafter, the plaintiff removed the $103,235 proceeds from Cuba to the United States and the Cuban government levied a 2% export tax on that entire sum. Thus, the taxes paid by the plaintiff to the Cuban government during the 1952 taxable year were as follows:

                6% tax on the accrued dividends        $2,656.50
                2% export tax on the gross
                   amount received from the
                   liquidation                         $2,064.70
                                                      __________
                Total taxes paid to the Cuban
                  government                           $4,721.20
                

On his 1952 Federal income tax return, the plaintiff claimed a credit of $4,721.20 for foreign income taxes paid. In a subsequent audit of that return, the Internal Revenue Service determined that the 2% export tax was not an income tax within the meaning of Section 131(a) (1) of the Internal Revenue Code of 1939, 26 U.S.C.A. § 131(a) (1) and, therefore, a credit was not allowed for the payment of that tax to the Cuban government. The plaintiff was allowed, however, to claim the full amount of that tax as a deduction under Section 23(c) of the Code, 26 U.S.C.A. § 23(c). In regard to the $2,656.50 paid to the Cuban government as a tax on the accrued dividends, the Internal Revenue Service determined that the tax in question was an income tax for which a credit was allowable under Section 131(a) (1) of the Internal Revenue Code of 1939, but that Section 131(b) (1) of the Code placed a limit on the amount of the credit. Under the limiting formula contained in Section 131(b) (1), the Internal Revenue Service computed the maximum credit for the Cuban income tax as $2,400.77. Plaintiff objects to both the disallowance of any credit for the 2% export tax and the limitation placed upon the credit allowed for the 6% Cuban income tax. The latter dispute involves a determination of the meaning of the term "net income" as used in Section 131(b) (1) of the Internal Revenue Code of 1939.

Plaintiff's claim as to the status of the 2% tax imposed upon the funds removed from Cuba will first be considered. Section 131(a) (1) of the Internal Revenue Code of 1939 provides that a credit may be taken against income taxes owed the Federal government for "* * * the amount of any income, war-profits, and excess-profits taxes paid or accrued during the taxable year to any foreign country * * *." (Emphasis supplied.) In addition, Section 131(h) of the Code provides:

"For the purposes of this section * * * the term `income, war-profits, and excess-profits taxes' shall include a tax paid in lieu of a tax upon income, war-profits, or excess-profits otherwise generally imposed by any foreign country * * *."

Plaintiff, in his Federal income tax return, claimed a credit for the full amount of the 2% export tax on the theory that it was an income tax. In the present action, he is apparently claiming only a portion of that tax to be an income tax for which a credit should be allowed. It is his theory that $44,275 of the $103,235 exported had constituted income within the scope of the Cuban income tax laws and that, therefore, the 2% export tax levied on this sum was an additional tax on "income" and thus was itself an income tax. The defendant maintains that the 2% tax in question is an excise tax on the privilege of removing capital from the country.

It is well settled that in the application of Section 131(a) (1) the criteria prescribed by our own revenue laws and court decisions control the meaning of the words "income taxes" as used therein and the label placed upon the tax by a foreign taxing authority does not determine whether it is an income tax or an excise tax. Biddle v. Commissioner, 1938, 302 U.S. 573, 58 S.Ct. 379, 82 L.Ed. 431; New York & Honduras Rosario Mining Co. v. Commissioner, 2 Cir., 1948, 168 F.2d 745, 747, 12 A.L.R.2d 355; Keasbey & Mattison Co. v. Rothensies, 3 Cir., 1943, 133 F.2d 894, 897, certiorari denied, 1943, 320 U.S. 739, 64 S.Ct. 39, 88 L.Ed. 438; Irving Air Chute Co. v. Commissioner, 2 Cir., 1944, 143 F.2d 256, 259, certiorari denied, 1944, 323 U.S. 773, 65 S.Ct. 134, 89 L.Ed. 618; L. Helena Wilson, 1946, 7 T.C. 1469, 1471. In Biddle v. Commissioner, supra, the United States Supreme Court had to determine whether certain items which American stockholders in British corporations were required to report as income on their British income tax returns could be considered in determining income taxes paid to a foreign country for purposes of Section 131(a) (1) of the Revenue Act of 1928. The pertinent provisions of Section 131(a) (1) in that Act were substantially the same as they appear in the Internal Revenue Code of 1939. There the Court stated (302 U.S. at pages 578-579, 58 S.Ct. at page 381):

"Section 131 does not say that the meaning of its words is to be determined by foreign taxing statutes and decisions, and there is nothing in its language to suggest that, in allowing the credit for foreign tax payments, a shifting standard was adopted by reference to foreign characterization and classifications of tax legislation. The phrase `income taxes paid,' as used in our own revenue laws, has for most practical purposes a well understood meaning to be derived from an examination of the statutes which provide for the laying and collection of income taxes. It is that meaning which must be attributed to it as used in section 131."

In Keasbey & Mattison Co. v. Rothensies, supra, the Court of Appeals for the Third Circuit had before it the question of whether or not a tax paid to the Province of Quebec was an income tax within the meaning of Section 131(a) (1) of the Internal Revenue Code of 1936 which was identical to the provision here under construction. The Court pointed out that, under the holding in the Biddle case, the criteria prescribed by our revenue laws are controlling in the characterization of a foreign tax. The Court then proceeded to set forth some of the commonly accepted elements of an income tax as such tax exists in this country. The Court stated in this regard (133 F.2d at page 897):

"* * * These commonly accepted criteria, although not defined in the statute, may be easily ascertained. It is clear from a reading of the Act, as well as the revenue acts which preceded it, and the cases interpretive of its provisions, that an income tax is a direct tax upon income as therein defined. * * * Cases cited. The defined concept of income has been uniformly restricted to a gain realized or a profit derived from capital, labor, or both. Section 22(a) of the Internal Revenue Act of 1936. Cases cited. It seems logical to conclude that any tax, if it is to qualify as a tax on income within the meaning of Section 131(a) (1), is subject to the same basic restrictions. The Supreme Court, without advancing any precise definition of the term `income tax', has unmistakably determined that taxes imposed on subjects other than income, e. g., franchises, privileges, etc., are not income taxes, although measured on the basis of income. Cases cited. These criteria are determinative of the nature of the tax in question." (Emphasis supplied.)

The tax imposed by the Province of Quebec was labeled by that government as a tax on "annual profits." It was levied upon mine operators on the basis of the gross value of the output of their mines. The expenses incident to the general conduct of the business were not deductible for purposes of computing the tax. Because the tax was levied directly upon the value of the output of the mines without regard to realization of gain or derivation of profit, the Court held that it was not an income tax but rather an excise tax levied upon the privilege of mining.

In the case of Commissioner v. American Metal Co., 2 Cir., 1955, 221 F.2d 134, the issue was whether metal production taxes paid to the Mexican government could be considered as income taxes for which a foreign tax credit might be taken. The tax in question was imposed on the basis of the amount of ore extracted from Mexican mines. The operator of the mine was subject to the tax even though the ore was never sold or any profit realized on the mining operation. The Court held that this was clearly not an income tax but rather a tax upon the privilege of extracting ore. In the case of New York & Honduras Rosario Mining Co. v. Commissioner, 2 Cir., 1948, 168 F.2d 745, 12 A.L.R.2d 355, the issue also concerned a mining tax. The tax in that case was paid to the Honduran government and was based not...