United States v. WATERMAN STEAMSHIP CORPORATION, 20040.

• Decision Date: 04 May 1964
• Docket Number: No. 20040.,20040.
• Citation: 330 F.2d 128
• Parties: UNITED STATES of America, Appellant, v. WATERMAN STEAMSHIP CORPORATION, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

330 F.2d 128 (1964)

UNITED STATES of America, Appellant, v. WATERMAN STEAMSHIP CORPORATION, Appellee.

No. 20040.

United States Court of Appeals Fifth Circuit.

March 30, 1964.

Rehearing Denied May 4, 1964.

David I. Granger, Sherman L. Cohn, Attys., Dept. of Justice, Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson, Atty., Dept. of Justice, Washington, D. C., Vernol R. Jansen, U. S. Atty., Mobile, Ala., Morton Hollander, Stephen B. Swartz, I. Henry Kutz, Attys., Dept. of Justice, Washington, D. C., for appellant.

John W. McConnell, Jr., William H. Armbrecht, Armbrecht, Jackson, McConnell & DeMouy, Mobile, Ala., for appellee, Armbrecht, Jackson, McConnell & DeMouy, Mobile, Ala., of counsel.

Before RIVES, CAMERON and HAYS,^* Circuit Judges.

RIVES, Circuit Judge.

This suit for refund of income taxes for the years 1947 through 1950 was tried by the district court without a jury. Pursuant to a carefully considered opinion reported as Waterman Steamship Corporation v. United States, D.C., 203 F.Supp. 915, the court entered judgment for the taxpayer Waterman in the total amount of $2,241,388.30, together with interest. On appeal there is no complaint as to the rulings on the three issues which the district court captioned: "I. WATERMAN BUILDING" (203 F.Supp. 917-921), "II. BABY FLAT-TOPS" (Id. 921-925), and "IV. ALABAMA STATE TAX" (Id. 926-928). The remaining questions are: (1) whether Waterman is entitled to a foreign tax credit under section 131 of the Internal Revenue Code of 1939 for certain taxes paid to the Republic of the Philippines;¹ (2) whether the district court correctly determined Waterman's cost basis for depreciation of eighteen vessels whose sales prices were adjusted pursuant to the Merchant Ship Sales Act of 1946;² (3) whether the district court correctly held that interest paid by Waterman on Government-advanced progress payments was properly included in "the original purchase price" of eighteen vessels for purposes of the price adjustment authorized by section 9 of the Merchant Ship Sales Act of 1946.

1. The Foreign Tax Credit Issue.

The facts pertaining to this issue as stipulated by the parties and found by the district court appear at page 925 of 203 F.Supp.

Generally taxes are allowed as deductions in computing income taxes, rather than as credits against the tax itself.³ The primary purpose of the provision for credit of foreign income taxes which first appeared in the Revenue Act of 1918 was to mitigate the evil of double taxation. In the case of domestic corporations there was also a purpose to facilitate their foreign enterprises. Burnet v. Chicago Portrait Co., 1932, 285 U.S. 1, 7, 9, 52 S.Ct. 275, 76 L.Ed. 587; New York & H. Rosario Min. Co. v. Commissioner, 2 Cir. 1948, 168 F.2d 745, 12 A.L.R.2d 355.

At first the Act allowed as a credit against the tax simply "the amount of income, war-profits and excess-profits taxes imposed by foreign countries, etc." I.R.C.1939, sections 31 and 131(a) (1). Under that provision there has never been any contention but that Waterman is entitled to a foreign tax credit for the taxes paid to the Republic of the Philippines pursuant to Title II, Income Tax, of the Philippine National Internal Revenue Code (14 Philippine Annotated Laws, Title 72). The taxes as to which credit is questioned are those paid pursuant to Title V, Privilege Taxes on Business and Occupation. The nature of the taxes is indicated by the following brief quotations from sections 178 and 192 of Title V:

"Sec. 178. Payment of privilege taxes. — A privilege tax must be paid before any business or occupation hereinafter specified can be lawfully begun or pursued. * * *"

"Sec. 192. Percentage tax on carriers and keepers of garages. — Keepers of garages, transportation contractors, persons who transport passengers or freight for hire, and common carriers by land, air, or water, except owners of bancas, and owners of animal-drawn two wheeled vehicles, shall pay a tax equivalent to two per centum of their gross receipts * * *."

The district court sustained Waterman's claim for a foreign tax credit for the Title V privilege taxes paid to the Philippines under section 131(h) of the 1939 Internal Revenue Code, which reads:

"(h) as added by sec. 158(f), Revenue Act of 1942, c. 619, 56 Stat. 798. Credit for Taxes in Lieu of Income, etc., Taxes. For the purposes of this section and section 23 (c) (1), 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 or by any possession of the United States."

As indicated, section 131(h) was added in 1942. Its intent was to extend the scope of the section, and the limits of that extension appear both from the plain wording of the section and from the report of the Senate Finance Committee accompanying the Act:

"In the interpretation of the term `income tax,\' the Commissioner, the Board, and the courts have consistently adhered to a concept of income tax rather closely related to our own, and if such foreign tax was not imposed upon a basis corresponding approximately to net income it was not recognized as a basis for such credit. Thus if a foreign country in imposing income taxation authorized, for reasons growing out of the administrative difficulties of determining net income on taxable basis within that country, a United States domestic corporation doing business in such country to pay a tax in lieu of such income tax but measured, for example, by gross income, gross sales or a number of units produced within the country, such tax has not heretofore been recognized as a basis for a credit. Your committee has deemed it desirable to extend the scope of this section. Accordingly, * * * the term `income, war profits, and excess profits taxes\' shall, for the purpose of sections 131 and 23(c) (1), include a tax paid by a domestic taxpayer in lieu of the tax upon income, war profits, and excess profits taxes which would otherwise be imposed upon such taxpayer by any foreign country or by any possession of the United States." (Emphasis added.)

S.Rep.No.631, 77th Cong., 2d sess., p. 131 (1942-2 Cum.Bull. 504, 602).

Under section 131(h) the extension was to "include a tax paid in lieu of a tax upon income, war-profits, or excess-profits otherwise generally imposed by any foreign country." That the quoted language accurately expressed the congressional intent clearly appears from that part of the language in the Senate Report which we have emphasized. That report explicitly states that the scope of the section was extended to cover the case where "a foreign country in imposing income taxation" authorized the payment of "a tax in lieu of such income tax but measured, for example, by gross income, gross sales, etc." The section was not extended so far as to cover every tax measured by gross income, gross sales, or gross receipts.

Waterman made no showing that the Title V privilege tax at issue was levied in lieu of an otherwise generally imposed income or profits tax, and the district court made no such finding unless it be in the following statement:

"Where, as here, the administrative problem of collecting an income tax from foreign corporations leads the taxing authority to impose additional taxes as a means of bolstering the nation\'s income producing revenue, it is the duty of the taxing authorities in this country to allow a credit for the additional tax if it is in the nature of an income, war-profits, or excess-profits tax as those terms are understood in this country." 203 F. Supp. at p. 926.

There is no evidence in the record to support that statement. As the statute itself and the Senate Committee Report plainly state, one inquiry under section 131(h) is whether the tax was levied by the foreign country in place of or instead of or as a substitute for some existing income or profits tax.⁴

Referring to Treasury Regulation 118, § 39.131(h)-1(b)⁵ the district court said: "If taken in its plain meaning, the Treasury Regulation would seem to preclude a tax credit in the instant case since the amount paid the Philippine government was assessed under two different titles of the Philippine Code." (203 F.Supp. 925, 926.) Waterman, in brief, vigorously attacks the validity of that regulation and claims that it "abrogated entirely the purpose of extending the scope of section 131." We need not examine that question because Waterman has made no showing to bring the Title V privileges taxes within the scope of the statute unaided by the regulation.

2. Cost Basis of Vessels for Depreciation.

For the purpose of the depreciation issue the facts were also stipulated, and are fairly stated by the district court in 203 F.Supp. at 928. The difference between the amounts contended for as the proper cost basis of the vessels for depreciation is $8,818,838.55.

The district court decided this issue in favor of the plaintiff taxpayer in line with earlier decisions in Barber Oil Corporation v. Manning, D.C.N.J.1955, 135 F.Supp. 451, 458-461, and Socony Mobil Oil Co. v. United States, Texaco, Inc. v. United States, Mississippi Shipping Co. v. United States, Ct.Cl.1961, 287 F.2d 910. Later the District Court for the District of Delaware, in an extensive opinion, declined to agree with any of the earlier decisions and decided the issue in favor of the United States. National Bulk Carriers, Inc. v. United States, D.C.Del.1963, 214 F.Supp. 585.⁶

After careful study, we are constrained to agree with the District of Delaware, and set forth briefly the reasons which lead us to that decision. The language of the statute and its legislative history show that Congress intended pre-enactment purchases to be treated as if the sale had occurred on the date of enactment, that is, on a parity with post-enactment purchases. That is explicitly stated in the opening paragraph of section 9(b):

"(b) Such adjustment shall be made, as

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