DocketNumber： Docket Nos. 23617, 36395-36399.
Citation Numbers： 24 B.T.A. 1, 1931 BTA LEXIS 1715
Judges： Blacx
Filed Date： 9/2/1931
Status： Precedential
Modified Date： 1/12/2023
*1715 The petitioners, which kept their books of account and made their income-tax returns on the accrual basis, were advised in 1923 that their French branch had paid certain taxes for the years 1918, 1919 and 1920 during the year 1922.
*1 In these proceedings, which have been consolidated for hearing and decision, the petitioners seek a redetermination of their tax liability for the calendar year 1923. The total amount of the deficiency asserted by the Commissioner is $22,197.80, and it has been apportioned by the Commissioner among the parent corporation and its subsidiaries, according to their respective net incomes. Petitioners acquiesce in a deficiency of $1,952.50 and appeal only from the balance of $20,245.30.
*2 Petitioners in their consolidated return for the calendar year 1923, filed by the parent corporation, Armstrong Cork Company, deducted, as a credit from the amount of income taxes due*1716 on the return, $16,730.81 as income taxes paid to a foreign country, and used as a deduction from gross income $28,115.91 representing the balance of income taxes claimed to have been paid to a foreign country.
Counsel for petitioners conceded at the hearing that the credit taken on the 1923 consolidated return for $16,730.81 was in error, because such taxes were not in fact paid in 1923. Petitioners contend, however, that the full amount of such taxes paid by one of its subsidiaries in 1922 to the French Government, to wit, $44,876.42, is a proper deduction as a business expense for 1923. This, therefore, presents the only remaining issue.
At the hearing, counsel for the petitioners filed an agreement signed by each of the petitioners, whereby it is agreed that the total Federal income tax found due for the year 1923 shall be assessed against and paid by the parent company, Armstrong Cork Company.
FINDINGS OF FACT.
The Armstrong Cork Company, one of the petitioners herein, is a Pennsylvania corporation with principal offices in the year 1923 at Pittsburgh, and was engaged in the business of manufacturing corks, linoleum, etc. For that year it filed a consolidated return*1717 for itself and subsidiaries.
The Armstrong Cork Company, the parent corporation, had a purchasing agency in Water Street, New York, N.Y., named Bucknall, Scholtz & Company, for the purpose of importing raw cork from Europe in its various forms. This firm was run as a branch of the Armstrong Cork Company. Bucknall, Scholtz & Company maintained several purchasing stations in Spain, Southern France, and Algeria, the later being a French province.
In the latter part of 1922 all of the above mentioned purchasing stations were taken over by a corporation organized for that purpose, called the Armstrong Cork Company of France, with headquarters at Toulon, France. The Armstrong Cork Company (petitioner) retained control over the French company and operated it merely as a branch, and included its operations in its own income-tax-return.
In 1922 the French Government assessed an income and war-profits tax against Armstrong Cork Company of France (formerly Bucknall, Scholtz & Company) under the income and war-profits-tax law of December 22, 1917, entitled "Contribution Extraordinaire sur des Benefices Exceptionnels ou Supplementaires Realises Pendant la Guerre," for the years 1918, *1718 1919 and 1920.
*3 Petitioner's agents, Bucknall, Scholtz & Company (incorporated in 1922 as the Armstrong Cork Company of France), were acting in a French province, the sole business being the purchasing of raw cork, and there was doubt as to whether or not this tax applied in the provinces, but after certain test cases in which the court held that it did apply to French provinces, in the latter part of 1921 or 1922 representatives of the French Government went through the several provinces for the purpose of determining the taxes and during the year 1922 the Armstrong Cork Company knew that its subsidiary, Armstrong Cork Company of France, might have to pay some kind of a tax for the prior years, although its officials in the United States did not consider it subject to an income tax because it made no profit from its business in the provinces where it was located, its sole business being the buying of cork.
The French taxes in question, amounting to $44,846.72, were paid in 1922 by the Armstrong Cork Company of France at the foreign office of that company at Djelli, Algeria, said taxes being paid in installments, part prior to the formation of the Armstrong Cork Company*1719 of France and part after its formation, but they were all finally entered on the books of the Armstrong Cork Company of France because it took over the foreign operations as of January 1, 1922.
The books of account and records of the branches and also that of the petitioners were kept on the accrual basis of accounting and efforts were made to accrue all known liabilities, including taxes, and all returns filed by the petitioners to date were submitted on the accrual basis of accounting.
The books of the Armstrong Cork Company of France were badly kept in 1922, under the direction of a French accountant whom it had employed, and petitioner, Armstrong Cork Company, the parent corporation, was not notified of the tax payments and the amounts thereof which had been made to the French Government until it received a report from its auditors in September, 1923. Upon learning that the payments had been made, petitioner, Armstrong Cork Company, placed them on its books as accrued and paid in 1923.
OPINION.
BLACK: The only issue for us to decide in this proceeding is whether the amount of income taxes paid to the French Government by the Armstrong Cork Company of France in the*1720 calendar year 1922 may be taken as a deduction from gross income in a consolidated return filed for 1923, the year in which the parent company claims it was first definitely notified that the payments had been made.
*4 Petitioners urge, as reasons why they should be permitted to take this deduction from consolidated income in 1923, substantially the following state of facts: That in 1922 the Armstrong Cork Company of France was organized to take over the various purchasing agencies previously operated by Bucknall, Scholtz & Company, a partnership; that a French accountant was employed to supervise the bookkeeping of the Armstrong Cork Company of France and that he was to prepare a statement each month showing the financial operations of the French company and mail a copy thereof to the parent corporation at its principal office in Pittsburgh, Pa.; that this was not done and the parent corporation, which was furnishing the funds, had no statement of the details of the operation of the French company for 1922; that in 1923 the parent company employed the Paris offices of the firm of Price-Waterhouse & Company, certified public accountants, to make an audit of the Armstrong*1721 Cork Company of France, and this firm, after making an inspection, reported that no audit was possible until the records were sorted out and a system of bookkeeping installed; that the firm was thereupon employed to do this work and that it was not until September, 1923, that it received information and proper papers showing payment by the Armstrong Cork Company of France of the amount of taxes paid to the French Government and it was then that it, the parent corporation, gave its subsidiary credit on its books for the payment of these taxes, and that the transaction, because of the facts stated, was not handled on its books until 1923, and hence the deduction from gross income in 1923 is proper.
The pertinent provisions of the Revenue Act of 1921 read as follows:
SEC. 324. (a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions;
* * *
(3) Taxes paid or accrued within the taxable year except * * * (d) so much of the income, war-profits and excess-profits taxes imposed by the authority of any foreign country * * * as is allowed as a credit under section 238. * * *
Section 200 of the Revenue Act*1722 of 1921 reads in part as follows:
That when used in this title -
* * *
(4) The term "paid," for the purpose of the deduction 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.
The Armstrong Cork Company and its subsidiaries kept their books and filed their returns for the years 1918 to 1923, inclusive, on an accrual basis of accounting, and the Commissioner accepted the *5 accrual basis as properly reflecting the taxpayer's net income for those years. This being true, petitioners would not be entitled to deduct, from 1923 gross income, taxes which were paid in 1922 to the French Government and which accrued for the years 1918, 1919, and 1920. It seems to us that the Supreme Court of the United States, in , and , has settled the question contrary to the contention made by the petitioners. Counsel for petitioners in their brief cite in*1723 support of their contention article 111 of the Treasury Department's regulations, relating to when charges are deductible, which reads in part as follows:
It is recognized, however, that particularly in a business of any magnitude there are certain overlapping items both of income and deduction, and so long as these overlapping items do not materially distort the income they may be included in the year in which the taxpayer, pursuant to a consistent policy, takes them into his accounts.
It seems clear to us that the above quoted regulation has no application to such a situation as we now have before us. Under authority of