Irving Air Chute Co. v. Commissioner of Internal Rev. , 143 F.2d 256 ( 1944 )

L. HAND, Circuit Judge

(dissenting).

The question is whether when a licensee .withholds the amount of the British income tax from the royalties due a patentee, and afterwards pays the same amount as part of a tax levied upon all his “profits or gains,” the patentee pays that part of the tax. The British law in form anyway levies the tax upon the royalties; and if the patentee were explicitly to agree with the licensee that he should deduct the tax and use the amount retained to pay a tax levied on that part of his “profits or gains” which the royalties represented, I should not think that there could be any doubt that the patentee would be paying the tax. But that it seems to me, is just what the British law requires the licensee to do without any agreement; as is very clearly brought out in case the licensee has no “profits or gains” subject to tax. For in that event General Rule 21 requires the licensee to deduct the tax from the royalties just the same, and to account for it to the Treasury. Indeed, it becomes his debt. The Tax Court itself thought it likely that in such cases the patentee would pay the tax. Yet I suppose it must often be uncertain, when the licensee pays the royalty, whether he will have taxable “profits or gains” for that year; and it would be absurd, I submit, to say that the patentee pays the tax, according to whether the licensee is himself taxed upon enough “profits or gains” to equal the royalties he has paid.

In Biddle v. Commissioner, 302 U.S. 573, 58 S.Ct. 379, 82 L.Ed. 431, the only question was whether, when a corporation deducted on the face of its dividend the shareholder’s proportion of the tax levied on the corporate income, the shareholder paid a tax. Such a deduction has absolutely no effect upon the shareholder; the tax paid is the same whether it is endorsed, so to say, on the dividend or not: The only difference is whether the dividend showed that it has been computed first without the tax, and then the tax had been deducted, or whether only the difference between the two sums appears. It has the purpose, and only the purpose, of enabling the shareholder to compute his “supertax” in calculating which he is not allowed to deduct the company’s “standard” taxes. A patentee and his licensee are however persons in conflicting interest, unlike a corporation and its shareholders; the tax in the end comes out of the patentee’s pocket not out of the licensee’s, whatever the form.

Dalgety’s Case, [1930] A. C. 527, was this. The British law gives relief, if the same income is taxed by the United Kingdom and a Dominion. The taxpayer there at bar earned most of its income in Australasia, and was taxed upon it by both the United Kingdom and those Dominions. It had issued debentures, and, as permitted, it had deducted a tax upon the interest which it paid at the time of payment. This was a lawful deduction, because the debtor was not allowed to deduct the interest from its taxable “profits or gains”; and in this way it made itself whole for the United Kingdom tax on all its income. It was however allowed relief under the statute, on the ground of double taxation as to so much of its “profits or gains” as came from Australasia, although obviously it had never paid two taxes on that income except in form. Lord MacMillan in his speech admits, as I read it, that this is contrary to the general purpose of the provision; but, like the rest, he felt bound by the fact that the company had literally paid two taxes on the same income.