Works v. Comm'r of Internal Revenue , Docket No. 2651-70.

• Decision Date: 15 June 1972
• Docket Number: Docket No. 2651-70.
• Citation: 58 T.C. 464
• Parties: GLEASON WORKS, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

58 T.C. 464

GLEASON WORKS, PETITIONER

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 2651-70.

United States Tax Court

Filed June 15, 1972.

Richard S. Fischer, for the petitioner.

Stephen M. Miller, for the respondent.

Petitioner was owed $221,839.43 by its wholly owned British subsidiary. In 1965, the latter paid petitioner $135,876.73 and withheld the amount of British tax payable in the United Kingdom on income of $221,839.43, pursuant to sec. 169 of the British Income Tax Act of 1952, to wit, $85,962.70. On its return for 1965, petitioner reported as interest income the $135,876.73 which it received, added to this amount, i.e., ‘grossed up,‘ the amount of British tax withheld by the payor, and claimed a foreign tax credit in the amount of $85,962.70 under sec. 901, I.R.C. 1964. Held, the British standard tax on interest was imposed on petitioner and paid by it within the meaning of sec. 901(b)(1), I.R.C. 1954, and sec. 1.901-2(a), Income Tax Regs. Biddle v. Commissioner, 302 U.S. 573(1938), and Irving Air Chute Co., 1 T.C. 880(1943), affd. 143 F.2d 256 (C.A. 2, 1944), not controlling.

OPINION

TANNENWALD, Judge:

Respondent determined a deficiency in petitioner's income tax in the amount of $46,763.71 for the taxable year 1965. The sole issue for decision is whether petitioner is entitled to a foreign tax credit under section 901 ¹ for the amount of British income tax on interest due from its wholly owned subsidiary and in respect of which tax was paid by the subsidiary and withheld by the subsidiary from its payment to petitioner pursuant to section 169 of the British Income Tax Act of 1952 (hereinafter sometimes referred to as I.T.A. 1952).

All of the facts have been stipulated. The stipulation, together with the exhibit attached thereto, is incorporated herein by this reference.

Petitioner is a New York corporation having its principal office and place of business in Rochester, N.Y., at the time of filing the petition herein. It filed its return for the taxable year 1965 with the district director of internal revenue, Buffalo, N.Y. Petitioner maintains its books and files its tax returns on the accrual basis of accounting.

Gleason Works, Ltd. (hereinafter referred to as Limited), is a wholly owned subsidiary of petitioner organized under the laws of Great Britain in 1959 with its principal office and place of business in England.

During 1959, 1960, and 1961, petitioner loaned Limited $402,000 by way of cash advances and sold a substantial amount of equipment to Limited on an open account, the balance of which changed from month to month. Petitioner carried these amounts on its books as accounts receivable which bore interest charges of 4 1/2 percent and 5 1/2 percent. Petitioner did not accrue as income the yearly amounts of interest applicable to the receivables.²

As of December 31, 1964, Limited owed petitioner $221,839.43 for interest on the receivables. Of this amount, Limited, in 1965, paid petitioner the amount of $135,876.73, and it withheld the amount of British tax payable on income of $221,839.43, pursuant to section 169, I.T.A. 1952, to wit, $85,962.70.

On its return for 1965, petitioner reported as interest income the $135,876.73 which it received, added to the amount, i.e., ‘grossed up,‘ the amount of British tax withheld by Limited ($85,962.70), and claimed a foreign tax credit in the amount of $85,962.70 under section 901.

Section 901(b)(1) permits a domestic corporation to claim a foreign tax credit for ‘the amount of any income, war profits, and excess profits taxes paid or accrued during the taxable year to any foreign country.’ Section 1.901-2(a), Income Tax Regs., provide:

The term ‘amount of any income * * * taxes paid or accrued during the taxable year’ means taxes proper, paid or accrued during the taxable year on behalf of the taxpayer claiming credit. * * *

Since it is not disputed that the tax in question was properly withheld by Limited from its payment to petitioner, pursuant to I.T.A. 1952, the only question is whether such tax was an income tax paid or accrued during the taxable year by petitioner on or its behalf.

The answer to this question depends upon the effect of section 169, I.T.A. 1952, and the possible contrasting effect of section 170, I.T.A. 1952. Insofar as concerns this case, the former section relates to interest payments ‘Out of Profits or Gains Already Taxed’ and the latter section relates to interest payments ‘Not Made Out of Profits or Gains Already Taxed.’ See pp. 473-474 infra. Respondent apparently concedes that if the interest payments herein had been made pursuant to section 170, I.T.A. 1952, petitioner would have paid the British tax in question and would be entitled to the claimed foreign tax credit. But respondent contends herein that there is a crucial distinction between sections 169 and 170 and that, since it has been stipulated that the interest payments herein was covered by section 169, petitioner's subsidiary paid the British tax on its own and not petitioner's behalf. Consequently, respondent asserts that petitioner is not entitled to the claimed foreign tax credit. Petitioner contends that the British tax was paid by it or on its behalf and that accordingly the claimed foreign tax credit should be allowed.

Resolution of the issue thus presented depends not only upon an analysis of British law but, more importantly, upon a clear understanding of the long and sometimes tortuous history of the operation of the foreign tax credit provisions of the Internal Revenue Code in relation to the British income tax. In our judgment, that understanding is an essential prerequisite to such analysis. See Holmes, The Common Law 37 (1923 ed.): ‘The history of what the law has been is necessary to the knowledge of what the law is.’ Accordingly, we will first review that history in some detail. (For the analysis of British tax law, see pp. 472-479 infra). In so doing, and in evaluating the impacts of that history on our decision herein, we are mindful of the observation of Mr. Justice Holmes that ‘a page of history is worth a volume of logic.’ See New York Trust Co. v. Eisner, 256 U.S. 345, 349(1921).

Our starting point is Biddle v. Commissioner, 302 U.S. 573(1938). In that case, the British standard tax had been levied on a United Kingdom corporation's ‘profits or gains.’ The corporation then paid a dividend to United States taxpayers and withheld therefrom the portion of the tax it had paid ‘appropriate’ to the dividend pursuant to Rule 20 of the British Income Tax Act of 1918.³ The United States taxpayers claimed the right to report as income for United States income tax purposes the gross amount of the dividend (i.e., the amount received plus the amount withheld) and to take credit (up to the statutory limit) against their United States income tax for the amount withheld as ‘income * * * taxes paid or accrued’ under section 131(a)(1) of the Revenue Act of 1928 (the predecessor of section 901(b)(1). The Commissioner asserted that the British standard tax had been imposed on the British corporation, not the United States taxpayers, and that the latter were entitled to report for Federal income tax purposes merely the actual amount received without any credit for the amount withheld. The Supreme Court rejected the taxpayers' contention.⁴ The structure of its opinion has a direct bearing upon our analysis of the issue presented to us herein.

First, the Supreme Court established the principle that the determination as to whether a foreign income tax had been ‘paid or accrued’ within the meaning of the Federal taxing statute was to be made in accordance with the criteria established by our own revenue laws and court decisions and not by ‘a shifting standard * * * adopted by reference to foreign characterizations and classifications of the tax legislation.’ Hence the fact that British law ‘regarded’ the standard tax as having been paid by the recipient of the dividend was ‘not conclusive’ but as most ‘a factor to be considered in deciding whether the stockholder pays the tax within the meaning of our own statute.’ See Biddle v. Commissioner, 302 U.S.at 578-579; Arundel Corp. v. United States, 102 F.Supp. 1019, 1022 (Ct.Cl. 1952). Compare Commissioner v. American Metal Co., 221 F.2d 134, 137 (C.A. 2, 1955); Keasbey & Mattison Co. v. Rothensies, 133 F.2d 894, 897 (C.A. 3, 1943); F. W. Woolworth Co., 54 T.C. 1233, 1260(1970); Lanman & Kemp-Barclay & Co. of Colombia, 26 T.C. 582, 587(1956).

Next, the Supreme Court examined the operation of the British income tax law as far as the standard tax ‘appropriate’ to dividends was concerned. It concluded that the tax was legally imposed on the corporation and that the stockholder merely suffered the economic burden of the tax by virtue of the provision of the British law permitting the corporation to withhold the amount of the tax ‘appropriate’ to the dividend which would otherwise have been paid to the stockholder.

Finally, the Supreme Court pointed out that although a stockholder in a United States corporation ultimately bears the economic burden of the income taxes paid by the corporation, our revenue laws give no recognition to that fact. Both the corporation and the stockholder are required to pay their respective taxes and our revenue laws ‘have never treated the stockholder for any purpose as paying the tax collected from the corporation.’ On the basis, the Court concluded that to allow the claimed credit would extend to stockholders of a British corporation ‘a privilege not granted to stockholders in our own corporations.'⁵ See 302 U.S.at 581.

On the basis of the foregoing, the Supreme Court concluded that, although the recipient of the dividend bore the economic burden of the British standard tax, that was not sufficient to justify the conclusion that he should be allowed a credit for that tax. The fact that such economic burden resulted in his being ‘regarded’ under British law...