Porto Rico Coal Co., Inc. v. Edwards

• Decision Date: 04 August 1921
• Docket Number: L 20-280.
• Parties: PORTO RICO COAL CO., Inc., v. EDWARDS, Collector of Internal Revenue (two cases).
• Court: U.S. District Court — Southern District of New York

275 F. 104

PORTO RICO COAL CO., Inc., v. EDWARDS, Collector of Internal Revenue (two cases).

No. L 20-280.

United States District Court, S.D. New York.

August 4, 1921

'These cases involve the validity of taxes levied on the plaintiff for the years 1917 and 1918, and paid under duress in the city of New York, and now sought to be recovered in the first cause of action in action No. 1 and in the only cause of action in action No. 2. The plaintiff, which now seeks to recover them, is a corporation organized under the laws of New York, but deriving all its income, with an insignificant exception, from Porto Rico, and doing all its business owning all its property, and keeping its books of account in that island. The point raised in each action is whether under the statutes, such a corporation may be so taxed in New York at the same general rates as though the income were derived from the continental United States, or whether it is liable to be taxed only in Porto Rico. The further point involved is whether, if the statutes so tax it, they are constitutional. For the year 1917 only an excess profits tax is involved; for the year 1918, not only that tax, but an income tax of 12 per cent.

Francis W. Aymar and R. Floyd Clarke, both of New York City, for plaintiff.

Richard S. Holmes, of New York City, and Ferdinand Tannenbaum, for defendant.

LEARNED HAND, District Judge (after stating the facts as above).

(a) Excess Profits Tax of 1917.

Action No. 1 covers only the excess profits tax levied under title 2 of the Revenue Act of 1917 (Comp. St. 1918, Secs. 6336 3/8a-6336 3/8f). Section 201 of that act levies such a tax 'upon the income of every corporation,' and section 206(c) (section 6336 3/8g) provides how the income shall be ascertained. For the year 1917 it refers back to title 1 of the Revenue Act of 1916 (Comp. St. Secs. 6336a-6336x), and by that reference incorporates it, except 'as amended by this act.' Section 10 of the Revenue Act of 1916, which was itself amended by section 1206 of the very Revenue Act of 1917 (Comp. St. 1918, Sec. 6336j), provides, as so amended, that the tax shall be levied upon 'the total net income received * * * from all sources by every corporation * * * organized in the United States,' and this must be deemed, therefore, the warrant of authority for ascertaining the amount of the excess profits tax. It includes an income derived from Porto Rico.

To meet this the plaintiff argues as follows: By section 9 of the Organic Act of Porto Rico of 1917 (Comp. St. 1918, Comp. St. Ann. Supp. 1919, Sec. 3803ccc) it was provided that all laws should apply to Porto Rico except internal revenue laws. The taxation of the Porto Rican income of a New York corporation under either the Revenue Act of 1917 or of 1918 would violate this section and cannot be justified, unless there be some express provision applying the tax to such income. This is a very condensed statement of the plaintiff's position and may be incorrect. It is mixed up with much irrelevant and incorrect matter, as, for example, that section 9 repealed the Revenue Act of 1916 as to Porto Rico, which it clearly did not, and that the Revenue Act of 1917 did not reinstate it, which it clearly would have done, if it had ever been repealed. But all this is of no moment, because it is conceded by both sides that the excess profits tax never applied to Porto Rico and that is all we have to consider.

The important thing is that the excess profits tax of 1917 has nothing to do with Porto Rico or with its tax system. While it does levy a tax 'on' incomes there arising, it levies them against persons living in the United States. In that respect Porto Rico is precisely in the position of Mexico, which could not deem itself prejudiced by a tax levied on the Mexican incomes of citizens of the United States. If the Revenue Act of 1917 or 1918 endeavored to follow the incomes to Porto Rico and to collect them out of the property there, the plaintiff's argument would begin to be relevant, but not till then. The confusion lies in identifying the plaintiff, which is for all purposes a resident of New York, with its income, which happens to arise only in Porto Rico, but which might arise all over the world. The Porto Rican taxes remain as 'intact' as ever, however little the plaintiff's income be 'intact.' By computing the tax on the basis of that income, Porto Rico can be affected only because the plaintiff may withdraw some part of the income which might otherwise remain. It could do that anyway, and the internal revenue laws do not 'apply' in Porto Rico, because they make that result possible or even probable.

It is, of course, true that in the case of the tax for 1918 this will result in an apparent double taxation. The plaintiff is taxed on its income in New York, and its income is taxed in Porto Rico under section 261 of the Revenue Act of 1918 (Comp. St. Ann. Supp. 1919, Sec. 6336 1/8z). As to 1917 I should think this would not occur, because section 23 of the Revenue Act of 1916, without the aid of section 261 of the Revenue Act of 1918, would not, I should suppose, give Porto Rico the right to reach the income of a nonresident. But the point need not be pressed, because, as I have said, it is clearly true for 1918.

There is no final objection to a set of statutes that they involve double taxation, though the implication is against it; but in the case at bar, in spite of what I have said, there is no such duplication. The taxes levied under section 23 of the Revenue Act of 1916 and section 261 of the Revenue Act of 1918 are for the exclusive benefit of Porto Rico, and for the matter of that Congress probably was acting merely as local sovereign when it passed them. The excess profits taxes of 1917 and 1918 and the income tax proper was for the support of the general government. The situation is therefore no different from the case of the plaintiff, if it had drawn its income from New York, or Massachusetts, or any other state of the Union having an income tax. It would have been subject to two taxes on the same property-- one for local, and one for general, purposes. There is nothing illegal in such a local tax, when the taxpayer is a nonresident, Shaffer v. Carter, 252 U.S. 37, 40 Sup.Ct. 221, 64 L.Ed. 445; Travis v. Yale & Towne Mfg. Co., 252 U.S. 60, 40 Sup.Ct. 228, 64 L.Ed. 460. While, therefore, I do not mean to imply that the result would be different, even if both taxes had been federal, properly speaking, they were not, and any canon of interpretation derived from that circumstance does not apply.

For the foregoing reasons, I interpret the language of section 10 of the Revenue Act of 1916, 'from all sources,' as including the Porto Rican income of the plaintiff, and I hold the tax to have been properly levied.

(b) Excess Profits Tax and Income Tax of 1918.

Action No. 2 includes not only an excess profits tax for 1918, but an income tax of 12 per cent. as well. First, as to the excess profits tax:

Section 301(a) of title 3 of the Revenue Act of 1918 (Comp. St. Ann Supp. 1919, Sec. 6336 7/16aa) imposes a tax 'upon the net income of every corporation. ' This income for 1918, under section 320(a)(3), being section 6336 7/16g, is to be ascertained in the same manner as provided in title 2 of the same act (sections 6336 1/2a-6336 1/2z); i.e., the income tax title. Part 3 of that title applies to corporations, and is comprised in sections 230-241. Section 230(a), which levies the income tax on corporations, merely repeats the words 'every corporation.' We must go, therefore, to sections 232 and 233 to learn what is the income to be taxed, and section 233 refers us back to section 213. That defines 'gross income,' which alone is here material, as 'gains,' etc., 'derived from any source whatever'-- substantially the same phrase as in section 10 of the Revenue Act of 1916. It appears, moreover, from section 233 (though apparently only by inference), that the phrase 'every corporation,' in section 230, means only domestic...