United Shoe Machinery Corporation v. White

• Decision Date: 06 December 1935
• Citation: 13 F. Supp. 97
• Parties: UNITED SHOE MACHINERY CORPORATION v. WHITE, Collector of Internal Revenue. SAME v. NICHOLS, Former Collector of Internal Revenue.
• Court: U.S. District Court — District of Massachusetts

13 F. Supp. 97

UNITED SHOE MACHINERY CORPORATION v. WHITE, Collector of Internal Revenue.

SAME v. NICHOLS, Former Collector of Internal Revenue.

District Court, D. Massachusetts.

December 6, 1935.

Choate, Hall & Stewart and Frank W. Knowlton, all of Boston, Mass., for plaintiff.

Francis J. W. Ford, U. S. Atty., and J. Duke Smith, Sp. Asst. to the U. S. Atty., both of Boston, Mass., Frank J. Wideman, Asst. Atty. Gen., and Andrew D. Sharpe and John G. Remey, Sp. Assts. to the Atty. Gen., for defendants.

McLELLAN, District Judge.

In these actions at law the plaintiff seeks to recover in separate counts varying sums which it was compelled to pay by way of income taxes for the years 1923 to 1926, inclusive. The cases were tried on agreed statements of facts on file, on certain papers marked as exhibits, on an oral stipulation to be stated presently, and upon the testimony of Mr. James Allan, who had charge of the tax department of the United Shoe Machinery Corporation.

From Mr. Allan's testimony I find that he had correspondence and conferences with the Commissioner of Internal Revenue, his deputies and subordinates, and submitted certain claims for foreign credits already in evidence. The Bureau of Internal Revenue asked him for detailed information in regard to various foreign taxes and this information he furnished as requested. No statement was ever made to him, and he heard of none, to the effect that he had not given sufficiently detailed information to the Bureau of Internal Revenue.

The oral stipulation was that "The court may refer to the British income tax and corporation profits tax laws and the decisions of the British courts thereon to the same extent as if they had been introduced in evidence."

The other and principal facts are such as appear in the written agreed statements of fact and in the exhibits, which agreed statements and exhibits are incorporated herein by reference. There is no occasion to repeat the facts thus found in detail, and I shall state here only my conclusions of fact and law.

At the outset, a preliminary matter pertaining only to a single count requires decision. A claim for credit filed under section 238 of the Revenue Act of 1921, 42 Stat. 227, 258, on the regular Form 1118 does not constitute a sufficient claim for refund under the provisions of United States Code, title 26, § 156 (26 U.S.C.A. §§ 1672-1673) and for the reason that no claim for refund was filed, the action cannot be maintained as to the first count in the case numbered 4978. Tucker v. Alexander, 275 U.S. 228, 48 S.Ct. 45, 72 L.Ed. 253; Arizona Commercial Mining Company v. Casey (D.C.Mass.) 32 F.(2d) 288. See, also, Rock Island, Arkansas & Louisiana Railroad Co. v. United States, 254 U.S. 141, at page 142, 41 S.Ct. 55, 56, 65 L.Ed. 188, holding that the statute authorizing an appeal required a claim to be filed after payment of the tax, and that a claim for abatement made to the Commissioner before payment was not enough, and where Mr. Justice Holmes said:

"It is urged that the `appeal' to him to remit made a second appeal to him to refund an idle act and satisfied the requirement of § 3226 26 U.S.C.A. §§ 1672-1673 and note. Decisions to that effect in suits against a collector are cited, the latest being Loomis v. Wattles (C.C.A.) 266 F. 876. But the words `on appeal to him made' mean, of course, on appeal in respect of the relief sought on appeal — to refund if refunding is what he is asked to do. The words of § 3226 also must be taken to mean an appeal after payment, especially in view of § 3228 26 U.S.C.A. § 1433 and note, requiring claims of this sort to be presented to the Commissioner within two years after the cause of action accrued. * * *

"Men must turn square corners when they deal with the Government. If it attaches even purely formal conditions to its consent to be sued those conditions must be complied with. * * * But in this case we cannot pronounce the second appeal a mere form. On appeal a judge sometimes concurs in a reversal of his decision below. It is possible as suggested by the Court of Claims that the second appeal may be heard by a different person. At all events the words are there in the statute and the regulations, and the Court is of opinion that they mark the conditions of the claimant's right."

As to the other counts in both actions, the plaintiff duly filed claims for refund and its right to recover depends upon two questions. Unless the first question is resolved in the plaintiff's favor, neither action can be maintained. If both questions are decided in the plaintiff's favor, it is entitled to judgment. If the second question is resolved in favor of the defendant, I cannot tell whether the plaintiff is entitled to judgment for something, and if so, for what. In such event, a recomputation of the tax is required.

The credits for foreign taxes here involved are governed by sections 238 (a) and (e) of the Revenue Acts of 1921 (42 Stat. 258), 1924 (43 Stat. 286), and 1926 (44 Stat. 44). These sections as they appear in the three acts are so nearly identical that for practical purposes it is enough to refer to those sections of the Revenue Act of 1921, which follow:

"Sec. 238. (a) That in the case of a domestic corporation the tax imposed by this title, plus the war-profits and excess-profits taxes, if any, shall be credited with the amount of any income, war-profits, and excess-profits taxes paid during the same taxable year to any foreign country, or to any possession of the United States: Provided, that the amount of credit taken under this subdivision shall in no case exceed the same proportion of the taxes, against which such credit is taken, which the taxpayer's net income (computed without deduction for any income, war-profits, and excess-profits taxes imposed by any foreign country or possession of the United States) from sources without the United States bears to its entire net income (computed without such deduction) for the same taxable year."

"Sec. 238. (e) For the purposes of this section a domestic corporation which owns a majority of the voting stock of a foreign corporation from which it receives dividends (not deductible under section 234) in any taxable year shall be deemed to have paid the same proportion of any income, war-profits, or excess-profits taxes paid by such foreign corporation to any foreign country or to any possession of the United States, upon or with respect to the accumulated profits of such foreign corporation from which such dividends were paid, which the amount of such dividends bears to the amount of such accumulated profits: Provided, That the credit allowed to any domestic corporation under this subdivision shall in no case exceed the same proportion of the taxes against which it is credited, which the amount of such dividends bears to the amount of the entire net income of the domestic corporation in which such dividends are included."

The defendant urges that the limitation on the amount allowable under subdivision (a) as a credit for foreign taxes paid by a domestic corporation applies to the credit allowed under subdivision (e) for taxes paid by its foreign subsidiaries. The plaintiff urges the contrary, and contends that these two subdivisions provide for separate and distinct credits, each with its limiting proviso. The defendant contends that any such construction of this section will mean that in certain cases the taxpayer will pay less than the American rate on the purely American income, and that since Congress could not have intended such a result, section 238 (e) should be construed to read back to the opening words of section 238 (a), and hence that the limiting proviso which follows in 238 (a) should be held applicable to both subdivisions.

The ambiguity, if any, arises from the phrase in subdivision (e) "For the purposes of this section a domestic corporation * * * shall be deemed to have paid. * * *" The defendant says this means for the purpose of giving the credit provided for in subdivision (a). But the statute does not so provide. Subdivision (e) says "for the purposes of this section," and the purpose of the whole section is plainly to provide for avoiding double taxation by allowing credit for foreign taxes paid under certain circumstances. Burnet v. Chicago Portrait Company, 285 U.S. 1, 52 S.Ct. 275, 76 L.Ed. 587. There is nothing to show that the purposes of section 238 are limited to those set forth in subdivision (a) of that section. The principle stated in Crooks v. Harrelson, 282 U.S. 55, 51 S.Ct. 49, 75 L.Ed. 156, and Burnet v. Niagara Falls Brewing Company, 282 U.S. 648, 51 S.Ct. 262, 75 L.Ed. 594, that taxing statutes are construed strictly in favor of the taxpayer, is here applicable.

The legislative history of the statute supports the construction urged by the plaintiff. In the act of 1918, these two subdivisions were in separate sections (40 Stat. 1080, 1081, §§ 238, 240). As soon as that act was in operation, it became evident that with the high taxes prevailing in Europe directly after the war, the credit for foreign taxes might easily swallow up the tax on the purely American income. Hence, in the act of 1921, limitations on the amount of credits to be so taken were for the first time introduced. If at that time Congress had considered the two subdivisions as interrelated in the manner contended by the defendant, it would not have provided the special limitation created in subdivision (e). The discussion of subdivision (e) in the Senate indicates that Congress at that time had no idea that the credit under subdivision (e) was controlled by or subject to any other proviso more general in scope such as appears in subdivision (a). When section 238 (e) was first proposed in its present form, Senator Smoot read a short explanation of the purpose of the amendment under consideration, and said:

"In order to protect the American tax, a further limitation is established. It is provided...