United States v. Woodmansee

• Decision Date: 15 January 1975
• Docket Number: No. C-74-1346.,C-74-1346.
• Citation: 388 F. Supp. 36
• Court: U.S. District Court — Northern District of California
• Parties: UNITED STATES of America, Plaintiff, v. W. Keith WOODMANSEE and Teresa Woodmansee, Defendants.

388 F. Supp. 36

UNITED STATES of America, Plaintiff, v. W. Keith WOODMANSEE and Teresa Woodmansee, Defendants.

No. C-74-1346.

United States District Court, N. D. California.

January 15, 1975.

COPYRIGHT MATERIAL OMITTED

James L. Browning, Jr., U. S. Atty., Martin A. Schainbaum, Asst. U. S. Atty., Tax Div., San Francisco, Cal., for plaintiff.

W. Keith Woodmansee, Walnut Creek, Cal., for defendants.

MEMORANDUM OF OPINION AND ORDER

RENFREW, District Judge.

This is a civil action brought by the United States of America pursuant to Section 7405, Int.Rev.Code of 1954, to recover erroneous refunds of income taxes paid to W. Keith and Teresa Woodmansee ("taxpayers"). Federal jurisdiction over the subject matter arises under 28 U.S.C. §§ 1340, 1345. Taxpayers filed a motion to dismiss the complaint for failure to state a claim entitling the Government to relief. Subsequently plaintiff filed a motion for summary judgment. Pursuant to Rule 12(b) of the Federal Rules of Civil Procedure, the Court has treated taxpayers' motion as one for summary judgment.

Defendant W. Keith Woodmansee ("Woodmansee") was a flight engineer for Pan American Airlines whose duties resulted in service on Pan American's foreign air routes.¹ With the exception of a period from late 1960 until early 1964, Woodmansee resided in and was based in the United States. During the 1961-1963 period he resided abroad and claims he flew as a flight engineer entirely within German air space. During 1961, 1962 and 1963 he paid German income taxes on his wages and apparently was exempted from United States income taxes.²

In 1960 and 1964 taxpayers elected to take the benefits of Section 901 of the Internal Revenue Code of 1954 and took a foreign tax credit against their United States income tax for those years on the basis of the German income tax which they paid. On their 1965 income tax return taxpayers took an additional foreign tax credit of $56 representing German income tax withheld by Pan American for income earned by Woodmansee during the 1960-1964 period.³

In 1971 taxpayers elected to utilize the foreign tax credit carryover provisions of Section 904(d), Int.Rev.Code of 1954. Accordingly, they filed amended United States income tax returns for 1964, 1965, 1966, and 1967.⁴ In effect, taxpayers took against United States income taxes for 1964-1967 a direct credit for all of the German income taxes which were paid during the 1961-1963 period. Because taxpayers paid no United States income tax for the 1961-1963 period, this dollar-for-dollar reduction resulted in a windfall tax shelter in excess of $8,100. Subsequently, the Internal Revenue Service paid the claims for refund after auditing the amended return and making minor adjustments.

The Internal Revenue Service issued four separate refund checks. In its complaint the Government alleges that the refund check for the 1966 amended return was issued on or about June 26, 1972. Woodmansee, however, alleges that he received the refund check on June 24, 1972. It appears from an affidavit that the check in question was dated June 23, 1972, and was inscribed by taxpayers' bank with the date June 26, 1972.⁵ The complaint in this action was filed on June 26, 1974.

The Government contends that as a matter of law the refunds in question were erroneous because the amended returns were filed after the statutory deadline prescribed by § 6511(a), Int. Rev.Code of 1954.⁶ Taxpayers, however, contend that the applicable statutory limitation is prescribed by § 6511 (d)(3)(A) and therefore that their claim is not barred by the statute of limitations. Additionally, they contend that § 6532(b) bars the Internal Revenue Service suit as to the 1966 refund payment. The Court agrees with this last contention and grants summary judgment for taxpayers as to the 1966 refund. However, the Court finds that as a matter of law taxpayers are not entitled to utilize the benefits of the foreign tax credit provisions under the circumstances of this case and hence grants the Government's motion for summary judgment as to the 1964, 1965, and 1967 refunds.

The issues before the Court are the following:

1. Are taxpayers entitled to the benefits of § 901 even if the 10-year limitation period is applicable?

2. Does § 6532(b) bar the Government from bringing suit to collect the 1966 refund?

Section 901 provides that a taxpayer may elect, subject to the limitations of § 904, to take a tax credit against his United States income tax for the amount of any income taxes paid or accrued during the taxable year to any foreign country.⁷ Section 904(a) establishes two alternate limitations on the size of the foreign tax credit.⁸ The overall limitation elected by taxpayers in the instant case provides that the foreign tax credit shall not exceed that same proportion of taxpayers' United States tax which taxpayers' foreign source taxable income bears to their entire taxable income for the same taxable year. Section 904(d) establishes a carryback and carryover provision for that part of the foreign tax credit which taxpayers are unable to utilize due to the limitations prescribed in § 904(a).⁹ Section 275(a) provides that a taxpayer cannot take a deduction for any foreign taxes as to which he has taken a foreign tax credit.¹⁰

I. Applicability of the Foreign Tax Credit

A literal reading of the foreign tax credit provisions of the Code and the regulations promulgated thereunder would in the absence of any other considerations result in the applicability of the credit in the instant case. However, it is the duty of the Court to interpret Code provisions consonant with Congress' legislative purpose. See generally Gregory v. Helvering, 293 U.S. 465, 469-470, 55 S.Ct. 266, 79 L.Ed. 596 (1935). It is manifestly clear from both the legislative history and the subsequent case history that the primary purpose of the foreign tax credit provisions was to prevent double taxation of the income of taxpayers whose business activities were subject to taxation by both foreign countries and the United States. The predecessor to Section 901 first appeared in the Revenue Act of 1918. At that time Congress recognized that if a taxpayer's income was subject to both the United States income tax and a foreign income tax, he would be subject to such a severe tax burden that the effective rate would approach a confiscatory level.¹¹ Congress also realized that the resulting double taxation would place United States taxpayers at a competitive disadvantage and would tend to constrain American trade abroad.¹² When the Internal Revenue Code of 1954 was enacted, Congress reiterated that the foreign tax credit provisions were designed to prevent double taxation of foreign source taxable income by treating taxes imposed by a foreign country as if they were imposed by the United States.¹³

Congress found it immediately necessary to correct an abuse which arose out of the predecessor foreign tax credit provision. Utilization of the foreign tax credit by a taxpayer where the foreign tax rate was higher than the United States rate resulted in the credit sheltering United States source income from the United States tax properly attributable to it. In order to eliminate this abuse, Congress enacted the predecessor provision to the overall and per-country limitations found in Section 904(a).¹⁴ These provisions limited the credit to the United States tax attributable to the taxpayers' foreign source income. Congress did not intend to mitigate high foreign tax rates but rather intended only to shield taxpayers from foreign taxes to the extent that they duplicated the United States income tax burden.¹⁵

It was not until 1958 that Congress enacted the foreign tax credit carryback and carryover provisions.¹⁶ The purpose of most carryback and carryover provisions in the Internal Revenue Code is to mitigate the effect of taxing on an annual basis as opposed to some other time frame.¹⁷ Yet that rationale is inapposite in the case of a foreign tax credit, because the time period over which taxable income is computed has no impact on double taxation. Double taxation is concerned solely with whether a particular dollar of taxable income is being taxed by both the United States and foreign entities, and this question is completely independent of any subsequent or prior events.¹⁸ Congress did not intend to shield taxpayers from higher foreign tax rates and thus vitiate the effect of the limitations provisions found in § 904(a). See footnotes 14 and 15, supra. If Congress had wanted to foster that purpose, it could have repealed those limitation provisions.¹⁹ The legislative reports accompanying the 1958 Amendment to the Internal Revenue Code show that § 904(d) was intended to apply to one particular set of circumstances. Congress realized that double taxation was possible notwithstanding the foreign tax credit provisions because of differences in reporting income in the United States and certain foreign countries. If in a given period foreign source income was reportable in the foreign country but not in the United States, double taxation could result. In period one although a foreign tax credit would arise from the payment of foreign income taxes, the § 904(a) limitation provisions would preclude the utilization of the credit in that period because for United States tax purposes there would be no taxable foreign source income. In period two when the limitation would allow a large credit, because there would be no payment of a foreign tax, no credit would arise. Section 904(d) represents an attempt by Congress to eliminate double taxation in such a case.²⁰ Allowance of a windfall tax saving by a taxpayer because of Congressional imprecision in drafting would emasculate the legislative purpose underlying the foreign tax credit provisions.

The cases construing the foreign tax credit provisions do not support a contrary interpretation. Many courts have found that "the primary design of the...