Burns v. Commissioner , 12 B.T.A. 1209 ( 1928 )

W. J. BURNS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

ALEXANDER BAILLIE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

MRS. ALEXANDER BAILLIE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Burns v. Commissioner

Docket Nos. 4753, 4784, 4783.

United States Board of Tax Appeals

12 B.T.A. 1209; 1928 BTA LEXIS 3380;

July 9, 1928, Promulgated

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1. Where a partnership kept its books on an accrual basis and where the partners kept their books on a cash receipts and disbursements basis, held that such partners were entitled to the credits provided by section 222 of the Revenue Act of 1918 for all foreign income taxes which were not paid, but which were accrued on the books of the partnership and which were the obligations of the partnership; but that such partners were not entitled to accrue such foreign taxes where they were the obligations of the individual partners.

2. Where a partnership set up on its book reserves for foreign taxes in excess of the amount finally paid, held that the amount finally paid should be substituted for the amount set up as a reserve and that in computing the amount of a credit under section 222 of the Revenue Act of 1918, the rate of exchange at the date of payment should be used.

Warren Olney, Jr., Esq., J. M. Mannon, Jr., Esq., and A. Crawford Greene, Esq., for the petitioners.

Granville S. Borden, Esq., for the respondent.

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MILLIKEN

These proceedings were by motion made and granted consolidated and involve deficiencies in income taxes for the years 1918 and 1919. In the appeal of W. J. Burns the deficiencies are for the year 1918, $87,308.31, and for the year 1919, $54,225.01. In the appeal of Mrs. Alexander Baillie the deficiencies are for the year 1918, $31,074.04, and for the year 1919, $16,799.72. In the appeal of Alexander Baillie the deficiencies are for the year 1918, $11,923.01, and for the year 1919, $5,886.60. Each of the petitioners allege as errors, (1) the disallowance of the deduction by the partnership Balfour, Guthrie & Co. for the year 1918 of a bad debt in the amount of $170,879.91 and (2) the disallowance of credits against taxes taken by petitioners on account of their respective shares of British and Canadian taxes of the partnership Balfour, Guthrie & Co. which accrued during the years 1918 and 1919.

Respondent has confessed error as to error (1) and has stipulated that the petitioner W. J. Burns is entitled to a deduction from his gross income for the year 1918 in respect to said error of $23,068.79, and that the petitioners Alexander Baillie and Mrs. Alexander Baillie are each entitled to deduct from their gross income for the year 1918 the amount of $9,825.59.

FINDINGS OF FACT.

Petitioner W. J. Burns (hereinafter called Burns) is now and was during the taxable years 1918 and 1919 a citizen of the United States. Burns now resides at San Francisco, Calif., but during the taxable years of 1918 and 1919, resided at Portland, Oreg. Burns was during said years a member of the partnership of Balfour, Guthrie & Co. (hereinafter called the partnership).

Petitioner Alexander Baillie (hereinafter called Baillie) is now and was during the taxable years 1918 and 1919 a citizen of the United States. Baillie now resides at San Francisco, Calif., but during said taxable years 1918 and 1919 resided at Seattle, Wash. Baillie was during said years a member of the partnership.

Petitioner Mrs. Alexander Baillie (hereinafter called Mrs. Baillie) was during the taxable years of 1918 and 1919 a citizen of the United States and a resident of Seattle, Wash. Mrs. Baillie was during said taxable years 1918 and 1919 the wife of said Baillie and she and said Baillie lived together in the State of Washington and were subject to the community property law of said State. Under said community property law Mrs. Baillie, during the said years 1918 and 1919, was the owner of and taxable upon one-half of the income from the partnership which would otherwise belong to Baillie, and was entitled to one-half of any deductions and credits to which Baillie would otherwise be entitled because of the transactions of the partnership; also, Baillie was the owner of and taxable upon only one-half of said income from the partnership and was entitled to only one-half of the deductions and credits arising out of the transactions of said partnership during said years.

The partnership was during all of said taxable years 1918 and 1919 a domestic partnership having its principal office in the Balfour Building, 351 California Street, San Francisco, Calif. During all of said years the complete and exclusive control and management of the business of the partnership was situate in the United States and belonged solely to the partners permanently resident in San Francisco, Calif., Portland, Oreg., and Seattle, Wash., together with such other partners as were personally present at said places, but only while so present. Under the partnership agreement Burns was, during said years, entitled to 13 1/2 per cent of the net profits of said partnership, and was liable for 13 1/2 per cent of the losses, if any, of said partnership, and Baillie was, during said years, entitled to 11 1/2 per cent of the net profits of said partnership and liable for 11 1/2 per cent of the losses, if any, of said partnership.

During the taxable years 1918 and 1919, the books of account of the partnership were kept on an accrual basis and the partnership made its United States income-tax information returns for said two years likewise upon an accrual basis and upon a calendar year basis. Neither Burns, Baillie, nor Mrs. Baillie, during said years, kept any individual books of account aside from the partnership books. For said two years, Burns, Baillie, and Mrs. Baillie made United States income-tax returns on a calendar year basis in which they reported their respective shares of the net profits of said partnership in accordance with the books and information returns of said partnership, that is to say, on an accrual basis, and similarly treated all items of deduction or credit on account of the operations of said partnership; but in said returns they and each of them reported all other items of income and deductions and credits on a receipts and disbursements basis and not on an accrual basis. For each of said years the major portion of the income of said Burns, Baillie, and Mrs. Baillie, and each of them, as shown by their said returns, was accrued income of said partnership, as shown on its information return for each of said years.

On November 12, 1920, the partners paid to the Dominion of Canada income taxes for the calendar year 1918 amounting to 3,602.77 Canadian dollars. No credit on account of Canadian taxes for 1918 was allowed by respondent in computing the taxes of petitioners in the deficiency letters on which these appeals are based.

On February 3, 1920, the partnership paid to the British Government income taxes amounting to 17,291 pounds sterling, 14 shillings, 6 pence for the British tax year commencing April 6, 1917, and ending April 5, 1918. Of said year 95 days, or 95/365, were in the United States tax year or calendar year 1918, and 95/365 of said taxes accrued during the said United States tax year 1918. No credit on account of British taxes for the British tax year commencing April 6, 1917, and ending April 5, 1918, was allowed by respondent in computing the taxes of petitioners in the deficiency letters aforesaid.

On May 19, 1927, the partnership paid to the British Government income taxes amounting to 25,893 pounds sterling and 6 shillings for the British tax year commencing April 6, 1918, and ending April 5, 1919. Of said year 270 days, or 270/365 were in the United States tax year or calendar year 1918, and 95 days, or 95/365 were in the United States tax year or calendar year 1919. Of said taxes 270/365 accrued during the United States tax year 1918, and 95/365 accrued during the United States tax year 1919. No credit on account of British taxes for the British tax year commencing April 6, 1918, and ending April 5, 1919, was allowed by respondent in computing the taxes of petitioners in the above-mentioned deficiency letters.

On May 19, 1927, the partnership also paid to the British Government income taxes amounting to 989 pounds sterling and 2 shillings, for the British tax year commencing April 6, 1918, and ending April 5, 1919. Of said year 270 days, or 270/365 were in the United States tax year or calendar year 1918, and 95 days, or 95/365 were in the United States tax year or calendar year 1919. Of said taxes 270/365 accrued during theUnited States tax year 1918 and 95/365 accrued during the United States tax year 1919. No credit on account of British taxes for the British tax year commencing April 6, 1918, and ending April 5, 1919, was allowed by respondent in computing the taxes of petitioners in the deficiency letters aforesaid.

On May 19, 1927, the partnership also paid to the British Government income taxes amounting to 20,637 pounds sterling, 12 shillings, for the British tax year commencing April 6, 1919, and ending April 5, 1920. Of said year 270 days, or 270/365 were in the United States tax year or calendar year 1919. Of said taxes 270/365 accrued during the United States tax year 1919. No credit on account of British taxes for the British tax year commencing April 6, 1919, and ending April 5, 1920, was allowed by respondent in computing the taxes of petitioners in the deficiency letters aforesaid.

On May 19, 1927, the partnership also paid to the British Government income taxes amounting to 350 pounds sterling, 9 shillings, and 6 pence, for the British tax year commencing April 6, 1919, and ending April 5, 1920. Of said year 270 days, or 270/365 were in the United States tax year or calendar year 1919. Of said taxes 270/365 accrued during the United States tax year 1919. No credit on account of British taxes for the British tax year commencing April 6, 1919, and ending April 5, 1920, was allowed by respondent in computing the taxes of petitioners in the deficiency letters aforesaid.

The correct rates of exchange and the correct values in United States currency of Canadian dollars and of British pounds sterling were as follows on the following dates:

Date	Foreign monetary unit	Value in U.S. dollars
Dec. 31, 1918	Canadian dollar	$0.98 1/16
Nov. 12, 1920	do	.87 5/8
(Date of payment of Canadian 1918 tax.)
Dec. 31, 1918	British pound sterling	4.7655
Dec. 31, 1919	do	3.765
Feb. 3, 1920	do	3.365
(Date of payment of British 1917-18 taxes.)
May 19, 1927	do	4.85
(Date of payment of British 1918-19 and 1919-20 taxes.)

During the calendar year 1918 the partnership, in accordance with its system of accounting upon an accrual basis, established on its books a reserve of $250,000 to cover British and Canadian income taxes for the calendar year 1918. Burns' share of said reserve, namely, 13 1/2 per cent, was $33,750. The share of Baillie and of Mrs. Baillie each in said reserve, namely, one-half of 11 1/2 per cent, was $14,375. Burns, Baillie, and Mrs. Baillie, in their income-tax returns or amended returns for 1918, took credit for their respective shares of said reserve in computing their United States income taxes. Respondent disallowed said credits in computing their taxes in the deficiency letters aforesaid. Taxpayers consent that such credits may be considered as properly disallowed to the extent that they exceed the respective shares of said Burns, Baillie and Mrs. Baillie in the amounts of British and Canadian taxes actually paid for 1918.

During the calendar year 1919 said partnership, in accordance with its system of accounting upon an accrual basis, established on its books a reserve of $500,000 to cover British and Canadian income taxes for the calendar year 1919. Petitioners, however, understood that said reserve was only $350,000 and estimated their credits on account of said reserve upon the basis of $350,000. Burns' share of $350,000, namely, 13 1/2 per cent, was $47,250. The share of Baillie and Mrs. Baillie each in said amount of $350,000, namely, one-half of 11 1/2 per cent, was $20,125. Petitioners in their income-tax returns for 1919 took credit for their respective shares of said reserve, figured as $350,000, in computing their United States income taxes. Respondent disallowed said credits in computing their taxes in the deficiency letters aforesaid. Taxpayers consent that such credits may be considered as properly disallowed to the extent that they exceed the respective shares of said Burns, Baillie, and Mrs. Baillie in the amounts of British and Canadian taxes actually paid for 1919.

The following computations have been prepared by petitioners to show the amounts of the credits on account of the British and Canadian taxes claimed by Burns, Baillie, and Mrs. Baillie, respectively, and counsel for respondent agrees that said computations are mathematically correct:

Canadian Taxes.
(1918 only.)
Canadian tax for 1918, paid on November 12, 1920, was	$3,602.77
This amount in American dollars at rate of exchange November
12, 1920 ($0.87625 per Canadian dollar) is	3,156.93
Mr. Burns' share of this (13 1/2%) is	426.19
Mr. Baillie's share of same (11 1/2%) is	363.05
One-half of Mr. Baillie's share (for community property returns)
is	181.52
British Taxes.
A. 1918.
(1) January 1-April 5, 1918 (British tax year 1917-1918):
British tax for 1917-18, paid Feb. 3, 1920, was	@17,291.14.6
This amount in dollars at rate of exchange of February 3, 1920
($3.365 per pound) is	$58,186.65
95/365ths of this (allocable to 1918) is	15,144.47
Mr. Burns' share of this (13 1/2%) is	2,044.50
Mr. Baillie's share of this (11 1/2%) is	1,741.61
One-half of Mr. Baillie's share (for community property returns)
is	870.80
(2) April 6, 1918-December 31, 1918 (British tax year 1918-1919):
(a) British tax on profits -
British tax for 1918-19, paid May 19, 1927, was	@ 25,893.6.0
This amount in dollars at rate of exchange of May 19, 1927
($4.85 per pound) is	$125,582.50
270/365ths of this (allocable to 1918) is	92,896.64
Mr. Burns' share of this (13 1/2%) is	12,541.05
Mr. Baillie's share of same (11 1/2%) is	10,683.11
One-half of Mr. Baillie's share (for community property returns)
is	5,341.55
(b) British tax on interest -
British tax for 1918-19, paid May 19, 1927, was	Pound 989.2.0
This amount in dollars at rate of exchange of May 19, 1927
($4.85 per pound) is	$4,797.13
270/365ths of this (allocable to 1918) is	3,548.56
Mr. Burns' share of same (11 1/2%) is	479.06
Mr. Baillie's share of same (11 1/2%) is	408.08
One-half of Mr. Baillie's share (for community property returns)
is	204.04
B. 1919.
(1) January 1-April 5, 1919 (British tax year, 1918-19):
(a) British tax on profits -
British tax for 1918-19, paid May 19, 1927, was (as above)	@ 25,893.6.0
This amount in dollars at rate of exchange of May 19, 1927
($4.85 per pound) is (as above)	$125,582.50
95/365ths of this (allocable to 1919) is	32,685.86
Mr. Burns' share of this (13 1/2%) is	4,412.59
Mr. Baillie's share of same (11 1/2%) is	3,758.87
1/2 of Mr. Baillie's share (for community property returns) is	1,879.43
(b) British tax on interest -
British tax for 1918-19, paid May 19, 1927, was (as above)	@ 989.2.0
This amount in dollars at rate of exchange of May 19, 1927
($4.85 per pound) is (as above)	$4,797.13
95/365ths of this (allocable to 1919) is	1,248.57
Mr. Burns' share of this (13 1/2%) is	168.56
Mr. Baillie's share of same (11 1/2%) is	143.58
One-half of Mr. Baillie's share (for community property returns)
is	71.79
(2) April 6, 1919-December 31, 1919 (British tax year 1919-20):
(a) British tax on profits -
British tax for 1919-20, paid May 19, 1927, was	@ 20,637.12.0
This amount in dollars at rate of exchange of May 19, 1927
($4.85 per pound) is	$100,092.36
270/365ths of this (allocable to 1919) is	74,040.92
Mr. Burns' share of this (13 1/2%) is	9,995.52
Mr. Baillie's share of same (11 1/2%) is	8,514.70
One-half of Mr. Baillie's share (for community property returns)
is	4,257.35
(b) British tax on interest -
British tax for 1919-20, paid May 19, 1927, was	Pound 350.9.6
This amount in dollars at rate of exchange of May 19, 1927
($4.85 per pound) is	$1,699.80
270/365ths of this (allocable to 1919) is	1,257.39
Mr. Burns' share of this (13 1/2%) is	169.75
Mr. Baillie's share of same (11 1/2%) is	144.60
One-half of Mr. Baillie's share (for community property returns)
is	72.30

British Statutes Governing the Tax Years, Bases and Rates of British Income Tax for the Years 1918 and 1919.

I. JANUARY 1, 1918-APRIL 5, 1919.

TAX YEAR: Taxes Management Act, 1880 (43 & 44 Vict. c. 19):

SEC. 48. Every assessment shall be made for the year commencing and ending on the days as herein specified

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(3) As regards income tax -

In Great Britain and Ireland from the sixth day of April to the following fifth day of April, inclusive.

BASIS OF TAX IN GENERAL: Income Tax Act of 1853 (16 & 17 Vict. c. 34.):

II. For the purpose of classifying and distinguishing the several Properties, Profits, and gains for and in respect of which the said duties are by this Act granted, and for the purpose of the Provisions for assessing, raising, levying, and collecting such Duties respectively, the said Duties shall be deemed to be granted and made payable yearly for and in respect of the several Properties, Profits, and Gains respectively described or comprised in the several Schedules contained in this Act, and marked respectively (A), (B), (C), (D), and (E), and to be charged under such respective Schedules; (that is to say) * * *

Schedule (D).

For and in respect of the annual Profits of Gains arising or accruing to any Person residing in the United Kingdom from any kind of Property whatever, whether situate in the United Kingdom or elsewhere, and for and in respect of the annual Profits or Gains arising or accruing to any Person residing in the United Kingdom from any Profession, Trade, Employment or Vocation, whether the same shall be respectively carried on in the United Kingdom or elsewhere, and to be charged for every Twenty Shillings of the annual Amount of such Profits and Gains:

And for and in respect of the annual Profits or Gains arising or accruing to any Person whatever, whether a Subject of Her Majesty or not, although not resident within the United Kingdom, from any Property whatever in the United Kingdom, or any Profession, Trade, Employment, or Vocation exercised within the United Kingdom, and to be charged for every Twenty Shillings of the annual Amount of such Profits and Gains:

And for and in respect of all Interest of Money, Annuities, and other annual Profits and Gains not charged by virtue of any of the other Schedules contained in this Act, and to be charged for every Twenty Shillings of the annual Amount thereof.

Provisions governing taxation of partnership part of whose members are resident in Great Britain and part outside.

Finance Act, 1914 (4 and , c. 10):

10. (1) Where any trade or business is carried on by two or more persons in partnership, and the control and management of such trade or business is situate abroad, the said trade or business shall be deemed to be carried on by persons resident outside the United Kingdom and the said partnership shall be deemed to reside outside the United Kingdom, notwithstanding the fact that some of the members of the said partnership are resident in the United Kingdom and that some of the trading operations of the said partnership are conducted within the United Kingdom.

(2) Where any part of the trade or business of a partnership firm whose management and control is situate abroad consist of trading operations within the United Kingdom, the said firm shall be assessable in respect of the profits of such trading operations within the United Kingdom to the same extent as, and no further than, a person resident abroad is assessable in respect of trading operations by him within the United Kingdom, notwithstanding the fact that one or more of the members of said firm are resident in the United Kingdom, provided that, for the purpose of assessing any such firm in respect of the profits of the said trading operations within the United Kingdom, an assessment may be made on said firm in respect of the said profits in the name of any partner resident in the United Kingdom.

RATE OF TAX: Finance Act, 1918 (8 & , c. 15):

17. (1) Income tax for the year beginning on the sixth day of April, nineteen hundred and eighteen, shall be charged at the rate of six shillings, and the additional income tax under section twenty-seven of the Finance Act, 1916, on securities which the Treasury are willing to purchase, shall be charged, levied, and paid for that year at the same rate as was charged for the year beginning on the sixth day of April, nineteen hundred and seventeen.

(2) All such enactments relating to income tax, including the said additional income tax, as were in force with respect to the duties of income tax granted for the year beginning the sixth day of April, nineteen hundred and seventeen, shall have full force and effect with respect to any duties of income tax granted by this Act.

II. APRIL 6-DECEMBER 31, 1919.

TAX YEAR: Income Tax Act, 1918 (8 & , c. 40):

1. Where any Act enacts that income tax shall be charged for any year at any rate, the tax at that rate shall be charged for that year in respect of all property, profits, or gains rsepectively described or comprised in the Schedules marked A, B, C, D, and E, contained in the First Schedule of this Act and in accordance with the Rules respectively applicable to those schedules.

2. Every assessment and charge to tax shall be made for a year commencing on the sixth day of April, and ending on the following fifth day of April, except where under the provisions of this Act weekly wage-earners are to be assessed and charged quarterly

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EFFECTIVE DATE OF ACT: Income Tax Act, 1918 (8 & , c. 40)

239. - (1) This Act may be cited as the Income Tax Act, 1918.

(2) This act shall come into operation on the sixth day of April nineteen hundred and nineteen:

Provided that the provisions of this Act shall not apply to any duties of income tax granted by Parliament prior to the commencement of this Act, or to any enactment, matter or thing touching any of such duties, and in respect of any such duties the Acts applicable thereto which are repealed by this Act shall have the same effect as if this Act had not been passed.

BASIS OF TAX - IN GENERAL: (See under Tax Year above; also the following.) Income Tax Act, 1918 (8 & , c. 40)

Schedule D.

1. Tax under this Schedule shall be charged in respect of -

(a) the annual profits or gains arising or accruing -

(i) to any person residing in the United Kingdom from any kind of property whatever, whether situate in the United Kingdom or elsewhere; and

(ii) to any person residing in the United Kingdom from any trade, profession, employment, or vocation, whether the same be respectively carried on in the United Kingdom or elsewhere; and

(iii) to any person, whether a British subject or not, although not resident in the United Kingdom, from any property whatever in the United Kingdom, or from any trade, profession, employment or vocation exercised within the United Kingdom; and

(b) All interest of money, annuities, and other annual profits or gains not charged under Schedule A, B, C, or E and not especially exempted from tax; in each case for every twenty shillings of the annual amount of the profits or gains.

Provisions governing taxation of partnerships part of whose members are resident in Great Britain and part outside.

Income tax Act, 1918 (8 & , c. 40):

Schedule D, Sec. 12.

12. (1) Where any trade or business is carried on by two or more persons in partnership, and the control and management of such trade or business is situate abroad, the trade or business shall be deemed to be carried on by persons resident outside the United Kingdom, and the said partnership shall be deemed to reside outside the United Kingdom, notwithstanding the fact that some of the members of the said partnership are resident in the United Kingdom and that some of the trading operations of the said partnership are conducted within the United Kingdom.

(2) Where any part of the trade or business of a partnership firm whose management and control is situate abroad consists of trading operations within the United Kingdom, the said firm shall be chargeable in respect of the profits of such trading operations within the United Kingdom to the same extent as, and no further than, a person resident abroad is chargeable in respect of trading operations by him within the United Kingdom, notwithstanding the fact that one or more of the members of the said firm are resident in the United Kingdom:

Provided that for the purpose of charging any such firm in respect of the profits of the said trading operations within the United Kingdom, an assessment may be made on the said firm in respect of the said profits in the name of any partner resident in the United Kingdom.

RATE: Finance Act, 1919 (9 & , c. 32):

14. (1) Income tax for the year 1919-1920 shall be charged at the rate of six shillings, and the rates of super-tax for the purposes of section four of the Income Tax Act, 1918, and the rates of tax for the purposes of sections fourteen and fifteen of that Act (which relate respectively to relief in respect of earned income where the income does not exceed two thousand five hundred pounds, and relief in respect of unearned income where the income does not exceed two thousand pounds), shall be the same for that year as for the year 1918-19.

Dominion of Canada statutes in effect for the tax year 1918 governing the tax year, basis, method of computation and rate of the war income tax.

(References are either to the War Income Tax Act of 1917, Acts of Parliament of Dominion, 7 & 8 Geo. V., Chap. 28, or to the 1919 amendment of this Act, Acts of Parliament of Dominion, 9 & 10 Geo. V., Chap. 55.)

TAX YEAR: 1917 Act, Section 2, subdivision (g). 'Year' means the calendar year.

Basis of Tax, Method of Computation and Rates.

(1917 Act as amended by 1919 Act.)

3. (1) For the purposes of this Act, "income" means the annual net profit or gain or gratuity, whether ascertained and capable of computation as being wages, salary, or other fixed amount, or unascertained as being fees or emoluments, or as being profits from a trade or commercial or financial or other business or calling, directly or indirectly received by a person from any office or employment, or from any profession or calling, or from any trade, manufacture or business, as the case may be, whether derived from sources within Canada, or elsewhere; and shall include the interest, dividends or profits directly or indirectly received from money at interest upon any security or without security, or from stocks, or from any other investment, and, whether such gains or profits are divided or distributed or not, and also the annual profit or gain from any other source; including the income from, but not the value of property acquired by gift, bequest, devise or descent; and including the income from but not the proceeds of life insurance policies paid upon the death of the person insured, or payments made or credited to the insured on life insurance endowment or annuity contracts upon the maturity of the term mentioned in the contract or upon the surrender of the contract and including the salaries, indemnities or other remuneration of members of the Senate and House of Commons of Canada and officers thereof, members of Provincial Legislative Councils and Assemblies and Municipal Councils, Commissions or Boards of Management, any Judge of any Dominion or Provincial Court appointed after the passing of this Act, and of all persons whatsoever whether the said salaries, indemnities or other remuneration are paid out of the revenues of His Majesty in respect of His Government of Canada, or of any province thereof, or by any person, except as provided in section five of this Act; with the following exemptions and deductions:

(a) such reasonable amount as the Minister, in his discretion, may allow for depreciation, and the Minister in determining the income derived from mining and from oil and gas wells and timber limits shall make such an allowance for the exhaustion of the mines, wells and timber limits as he may deem just and fair;

(b) for the purposes of the normal tax only, two hundred dollars for each child under eighteen years of age who is dependent upon the taxpayer for support;

(c) amounts paid by the taxpayer during the year to the Patriotic and Canadian Red Cross Funds, and other patriotic and war funds approved by the Minister;

(d) dividends received by or credited to shareholders of a corporation which is liable to taxation under the provisions of this Act shall not be liable to the normal tax in the hands of the shareholders, but shall be liable to the supertax and surtax provisions of this Act or any amendment thereto. The amount of the exemption from the normal tax to the shareholder shall not exceed the net amount of such dividends after the deduction of the interest or carrying charges, if any, in respect of such dividends;

(e) in determining the income no deduction shall be allowed in respect of personal and living expenses, and in cases in which personal and living expenses form part of the profit, gain or remuneration of the taxpayer, the same shall be assessed as income for the purposes of this Act;

(f) deficits or losses sustained in transactions entered into for profit but not connected with the chief business, trade, profession of occupation of the taxpayer shall not be deducted from income derived from the chief business, trade, profession or occupation of the taxpayer in determining his taxable income.

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(3) In the case of the income of persons residing or having their head office or principal place of business outside of Canada but carrying on business in Canada, either directly or through or in the name of any other person, the income shall be the net profit or gain arising from the business of such person in Canada. * * *

1917 Act as amended by 1919 Act.

4. (1) There shall be assesed, levied and paid upon the income during the preceding year of every person residing or ordinarily resident in Canada or carrying on any business in Canada, the following taxes:

(a) four per centum upon all income exceeding fifteen hundred dollars in the case of unmarried persons and widows or widowers without dependent children, and exceeding three thousand dollars in the case of all other persons; and in addition thereto,

(b) two per centum upon the amount by which the income exceeds six thousand dollars and does not exceed ten thousand dollars; and,

(c) five per centum upon the amount by which the income exceeds ten thousand dollars and does not exceed twenty thousand dollars; and,

(d) eight per centum of the amount by which the income exceeds twenty thousand dollars and does not exceed thirty thousand dollars; and,

(e) ten per centum of the amount by which the income exceeds thirty thousand dollars and does not exceed fifty thousand dollars; and,

(f) fifteen per centum of the amount by which the income exceeds fifty thousand dollars and does not exceed one hundred thousand dollars; and,

(g) twenty-five per centum of the amount by which the income exceeds one hundred thousand dollars.

(2) Corporations and joint stock companies, no matter how created or organized, shall pay the normal tax upon income exceeding three thousand dollars, but shall not be liable to pay the super-tax; and the Minister may permit any corporation subject to the normal tax, the fiscal year of which is not the calendar year, to make a return and to have the tax payable by it computed upon the basis of its income for the twelve months ending with its last fiscal year preceding the date of assessment.

(3) Any persons carrying on business in partnership shall be liable for the income tax only in their individual capacity; provided, however, that a husband and wife carrying on business together shall not be deemed to be partners for any purpose under this Act. A member of a partnership or the proprietor of a business whose fiscal year is other than the calendar year shall make a return of his income from the business, for the fiscal period ending within the calendar year for which the return is being made, but his return of income derived from sources other than his business shall be made for the calendar year.

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(5) Taxpayers shall be entitled to the following deductions from the amount that would otherwise be payable by them for taxes under the provisions of this Act:

(a) the amount paid by such taxpayer for corresponding accounting periods under the provisions of Part I of The Special War Revenue Act, 1915, and any amendments thereto, or The Business Profits War Tax Act, 1916, and any amendments thereto: Provided, that in computing the taxable income hereunder the taxpayer shall not include any taxes paid under the said Acts in the expenses of his business, and the Minister shall have power to determine any questions that may arise in consequence of any difference in the several periods for which the taxes under the said Acts and under this Act, respectively, are payable, and the decision of the Minister shall be final and conclusive. In the case of a partnership, each partner shall be entitled to deduct such portion of the tax paid by the partnership under The Business Profits War Tax Act, 1916, and any amendments thereto, as may correspond to his interest in the income of the partnership: Provided that such deduction shall not affect the liability of the taxpayer to tax hereunder in respect of any income which does not form part of the profits assessed under The Business Profits War Tax Act, 1916, but such income shall be assessed for income tax purposes in the same manner as if it were the only income of the taxpayer.

(b) The amount paid to Great Britain or any of its self-governing colonies or dependencies for income tax in respect of the income of the taxpayer derived from sources therein, and the amount paid to any foreign country for income tax in respect of the income of the taxpayer derived from sources therein, if, and only if, such foreign country in composing such tax allowed a similar credit to persons in receipt of income derived from sources within Canada; Provided, that such deduction shall not at any time exceed the amount of tax which would otherwise be payable under the provisions of section three of chapter twenty-five of the statutes of 1918, or of any amending Act, in respect of the said income derived from sources within Great Britain or any of its self-governing colonies or dependencies or any foreign country; and further provided, that the said deduction shall be allowed only if the taxpayer furnishes evidence satisfactory to the Minister showing the amount of tax paid and the particulars of income derived from sources within Great Britain or any of its self-governing colonies or dependencies or any foreign country.

OPINION.

MILLIKEN: The facts were stipulated and our findings of fact follow the stipulation. There is but one question presented for decision and that is whether a partner who makes his tax returns on a cash receipts and disbursements basis is entitled to take as a credit under section 222 of the Revenue Act of 1918, the amount of income, war-profits and excess-profits taxes due from the partnership to a foreign country, but which were not paid within the taxable year, the books of the partnership being kept on an accrual basis. Incidental to this is the question whether such taxes were obligations of the partnership or of the individual partners.

The method of reporting partnership gains is provided by section 218(a) and section 224 of the Revenue Act of 1918. These provisions read: -

SEC. 218. (a) That individuals carrying on business in partnership shall be liable for income tax only in their individual capacity. There shall be included in computing the net income of each partner his distributive share, whether distributed or not, of the net income of the partnership for the taxable year, or, if his net income for such taxable year is computed upon the basis of a period different from that upon the basis of which the net income of the partnership is computed, then his distributive share of the net income of the partnership for any accounting period of the partnership ending within the fiscal or calendar year upon the basis of which the partner's net income is computed.

The partner shall, for the purpose of the normal tax, be allowed as credits, in addition to the credits allowed to him under section 216, his proportionate share of such amounts specified in subdivisions (a) and (b) of section 216 as are received by the partnership.

SEC. 224. That every partnership shall make a return for each taxable year, stating specifically the items of its gross income and the deductions allowed by this title, and shall include in the return in names and addresses of the individuals who would be entitled to share in the net income if distributed and the amount of the distributive share of each individual. The return shall be sworn to by any one of the partners.

While a partnership, as such, is not made liable by the Revenue Act of 1918 for the payment of income taxes and therefore, strictly speaking, is not in this respect a taxable entity, it is nevertheless an entity, the income from which is computed and taxed in a manner peculiar to such organizations. A partnership is required by section 224 to make and to file a return and a partner is taxed on his share of the income of the partnership whether he actually receives it or not, irrespective of the fact that such partner keeps his accounts and makes his returns on a cash basis. This is also ture of such a partner, even though the partnership keeps its books on an accrual basis. See ; ; and .

There is another distinctive feature of the taxation of partnership income. A partner is required to report as income not what he may have actually received from the partnership during his taxable year nor, if the partnership is upon an accrual basis, his share of such income as may have accrued during such year, but is required to report his share of the partnership income for the whole accounting period of the partnership which falls within his taxable year. Thus, one keeping his books on a calendar year basis, and who was a member of a partnership which kept its books on the basis of a fiscal year, was required to report as taxable income his share of the net profits of the partnership for its entire accounting period, which ended within his taxable year, although he had in fact received a part of his share during his preceding taxable year. .

We have in this proceeding the peculiar situation of partners on the cash basis making returns of their partnership income on the accrual basis and at the same time returning their other individual income on the cash basis. Both these methods are required of petitioners by the Revenue Act. Congress, while not imposing the tax upon the partnership, has given full recognition to the fact that such an organization is an entity and has provided that partnership income shall be taxed in a manner peculiar to such entities and has segregated such income from all other individual income. Under these circumstances, a partner should not be denied a right to the credits provided by section 222, which are inseparably connected and interwoven with his share of the partnership income, unless there is something in the statute which demands such a construction. The following are the pertinent parts of the Revenue Act of 1918 with reference to credits:

SEC. 200. That when used in this title -

* * *

The term "paid," for the purposes of the deductions and credits under this title, means "paid or accrued" or "paid or incurred," and the terms "paid or incurred" and "paid or accrued" shall be construed according to the method of accounting upon the basis of which the net income is computed under section 212.

SEC. 214. (a) That in computing net income there shall be allowed as deductions:

* * *

(3) Taxes paid or accrued within the taxable year imposed * * *; or (d) in the case of a citizen or resident of the United States, by the authority of any foreign country, except the amount of income, war-profits and excess-profits taxes allowed as a credit under section 222; * * *.

SEC. 222. (a) That the tax computed under Part II of this title shall be credited with:

(1) In the case of a citizen of the United States, the amount of any income, war-profits and excess-profits taxes paid during the taxable year to any foreign country, upon income derived from sources therein, or to any possession of the United States; and

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(4) In the case of any such individual who is a member of a partnership or a beneficiary of an estate or trust, his proportionate share of such taxes of the partnership or the estate or trust paid during the taxable year to a foreign country or to any possession of the United States, as the case may be.

(b) If accrued taxes when paid differ from the amounts claimed as credits by the taxpayer, or if any tax paid is refunded in whole or in part, the taxpayer shall notify the Commissioner who shall redetermine the amount of the tax due under Part II of this title for the year or years affected, and the amount of tax due upon such redetermination, if any, shall be paid by the taxpayer upon notice and demand by the collector, or the amount of tax overpaid, if any, shall be credited or refunded to the taxpayer in accordance with the provisions of section 252. In the case of such a tax accrued but not paid, the Commissioner as a condition precedent to the allowance of this credit may require the taxpayer to give a bond with sureties satisfactory to and to be approved by the Commissioner in such penal sum as the Commissioner may require, conditioned for the payment by the taxpayer of any amount of tax found due upon any such redetermination; and the bond herein prescribed shall contain such further conditions as the Commissioner may require.

A taxpayer is permitted by subdivision (b) of section 222 to accrue such foreign taxes where his books are kept on an accrual basis. See .

To meet the facts of this proceeding, we should, under the provisions of section 200, substitute in section 222(a)(4) the term "accrued" for the term "paid." When so read, it is clear that the accrued taxes therein referred to are the taxes due from the partnership. The taxes there referred to are taxes of the partnership. A partner is allowed credits for accrued taxes not on condition that he pays or accrues the taxes, but on the condition that the partnership pays or accrues the taxes. No valid distingtion can be drawn in such pays or accrues the taxes. No valid distinction can be drawn in such it accrues. In both cases, the individual partner is entitled to the credit. To deny petitioners the right to these credits on the sole ground that the credits pertained to the individual partners, who were on a cash basis, would be to read into the statute words which are not there; to introduce a new element into the scheme of taxation of partnership income; to separate from the partnership income the vital factor of partnership taxes, the deduction of which is denied by section 214(a)(3); to distort the partnership income; and, finally, to inflict the wrong which Congress sought to remedy - the double taxation of the same income for the same year.

Of course, a partnership can accrue only liabilities of the partnership. It can not accrue liabilities of the individual partners. This brings us to the question whether the British and the Canadian income taxes involved herein were the liabilities of the partnership or of the individual partners. These taxes were imposed under statutes of foreign countries. Such statutes do not prove themselves but must be proven as facts. The same is true of the unwritten law of such countries. Jones on Evidence, secs. 502, 503. With respect to the British and Canadian statutes, all we have before us is the stipulation of the parties and parts of certain British and Canadian statutes which were added as appendices to the brief filed in behalf of petitioner, and which we have set forth in our findings of fact. The stipulation reads:

It is further hereby stipulated and agreed that all British and Canadian tax laws and statutes shall be considered as in evidence and that the counsel for the taxpayers or for the Commissioner may refer to and quote from and rely upon any printed official copy of the same in the same manner as laws and statutes of the United States.

In the brief filed in this proceeding in behalf of respondent it is stated:

Certain provisions of the British and Canadian laws may be considered part of the evidence and these statutes are set forth as Appendix A and Appendix B in the brief submitted by the petitioners.

We accept as proven the statutes set forth in petitioners' brief, which respondent agrees may be read in evidence. Beyond that we have no right to go, since no other statutes or laws have been introduced in evidence and proven. Parties can not by omnibus stipulation covering all the laws of a foreign country introduce all such laws in evidence any more than they can introduce in evidence the books of a corporation by stipulating that the Board may go to its office and search them. We, therefore, repeat that we confine ourselves to the statutes which have been specifically agreed upon as the stautes of the United Kingdom and of Canada.

Confining ourselves strictly to the proven laws of these foreign countries, we are of opinion that the British statute imposed a tax on partnership such as the one involved in this proceeding. Section 10(2) of the Finance Act, 1914 (4 & , ch. 10), provides that the firm "shall be assessable" and if one or more of the members of the firm are residents of the United Kingdom, "an assessment may be made on said firm in respect of the said profits in the name of any partner resident in the United Kingdom." Section 12(2) of the Income Tax Act, 1918 (8 & , ch. 40), contains similar provisions. The British tax was assessable or chargeable against the firm and might be assessed against a resident partner for the purpose of insuring collection. On the other hand, section 4(3) of the Canadian Act of 1919, amending the War Income Tax Act of 1917 provides, "Any persons carrying on business in partnership shall be liable for the income tax only in their individual capacity; * * *." The construction we have placed on these tax statutes is borne out by the stipulation of the parties. It is stipulated as to the Canadian tax that "the partners paid" the tax and as to the British taxes that "the partnership paid" the taxes.

Since the British taxes were obligations of the partnership and since the partnership was on an accrual basis, it had the right to accrue these taxes and deduct them from the share of each petitioner and this right in turn inured to the benefit of each petitioner. Petitioners are entitled to credit the British taxes as against their domestic income taxes for the periods for which the British taxes were assessed and for which they were accrued.

On the other hand, since the Canadian tax was an obligation not of the partnership but of each individual partner, and since each of the petitioners was on a cash basis, none of them possesses the right to credit such tax against his income tax, except in the year in which such tax was paid, and since the tax was paid in 1920, which is not involved in this proceeding, the right of credit as to the Canadian tax must be denied. See , and .

The British taxes were accrued on the books of the partnership. The exact amount of the taxes has since that time been ascertained and they have been paid. The amounts set up on the books were in excess of the amounts ascertained and paid. In , we said with reference to a similar situation:

With these facts before us, and for the purpose of determining the final net taxable income of the taxpayer for the year 1920, the amounts of damages and losses as finally determined must now be substituted for the estimate originally made, and in place of the deductions claimed by the taxpayer in his return and disallowed by the Commissioner the losses and damages as finally settled must be allowed as the deduction contemplated by the law.

The amounts actually paid should, therefore, be substituted for the amounts accrued. For the same reason the rate of exchange on the date of each payment should be used in computing the amount paid.

Judgment will be entered under Rule 50.