DocketNumber: Docket No. 7779-70
Citation Numbers: 1972 U.S. Tax Ct. LEXIS 67, 58 T.C. 909
Judges: Tannenwald
Filed Date: 8/28/1972
Status: Precedential
Modified Date: 1/13/2023
*67
Petitioner elected, under art. XIII of the United States-United Kingdom Income Tax Convention, to treat the British standard tax appropriate to the dividends received by it from two wholly owned United Kingdom subsidiaries as having been paid by it. On its returns for 1961 and 1962, petitioner reported the amount of such tax plus the amounts actually received as dividend income, i.e., "grossed up" the amount of such tax. In computing its credit, under
*909 Respondent determined deficiencies*70 in petitioner's income tax for the taxable years 1961 and 1962 in the amounts of $ 65,272 and $ 354,020, respectively. The sole issue involved is the amount of the dividend that should be utilized as the numerator of the first fraction applicable in calculating the foreign tax credit to which petitioner is entitled under
OPINION
All of the facts have been stipulated. The stipulation of facts, together with the exhibits attached thereto, is incorporated herein by this reference.
Petitioner is a domestic corporation with its principal office in Niagara Falls, N.Y., at the time of filing the petition herein. It filed its Federal income tax returns for the taxable years 1961 and 1962 on *910 the accrual basis with the district director of internal revenue, Buffalo, N.Y.
Petitioner is engaged directly and through subsidiaries in the manufacture and sale of a diversified*71 line of abrasive materials and machines, refractory materials, and other nonmetallic materials as well as pollution control equipment.
In 1961 and 1962, petitioner owned all of the outstanding stock of Carborundum Co., Ltd. (hereinafter referred to as CCL), and British Resistor Co., Ltd. (hereinafter referred to as BRC), corporations organized under the laws of, and resident in, the United Kingdom. During the years in issue, CCL and BRC (hereinafter collectively referred to as the U.K. subsidaries) had gains, profits, and income (hereinafter referred to as total profits) as follows:
1961 | 1962 | |
CCL | $ 3,047,644 | $ 3,013,682 |
BRC | 16,653 | 23,893 |
In 1961 and 1962, the U.K. subsidaries were subject in the United Kingdom to an income tax at the standard rate (hereinafter referred to as the standard tax), which is imposed upon both individual and corporate taxpayers, and a profits tax, which is imposed only on corporate profits. Both the standard tax and the profits tax were imposed on the U.K. subsidiaries' total profits for the taxable year without deduction of any dividend declared from those earnings; neither tax was deductible in computing the other.
During the taxable *72 years involved, a United Kingdom resident corporation could declare dividends either "with deduction of standard tax" or "free of standard tax." When a dividend was declared "with deduction of standard tax," the corporation computed the standard tax payable on that portion of the total profits equal to the declared amount of the dividend and paid the balance of the declared amount to the shareholder. When a dividend was declared "free of standard tax," the amount declared as a dividend was distributed to the shareholder.
The U.K. subsidiaries in 1961 and 1962 paid the following standard and profits taxes to the United Kingdom:
CCL: | 1961 | 1962 |
Standard tax | $ 931,117 | $ 943,415 |
Profits tax | 382,593 | 387,780 |
BRC: | ||
Standard tax | 6,475 | 9,232 |
Profits tax | 1,918 | 3,297 |
The standard and profits taxes paid by the U.K. subsidiaries to the United Kingdom in 1961 and 1962 constitute "income, war profits, or *911 excess profits taxes" within the meaning of that phrase as used in
During 1961 and 1962, petitioner received dividends "free of standard tax" from its U.K. subsidiaries and elected to treat the standard tax appropriate to such dividends in accordance with article XIII(1) of the convention by including in its gross income the amount of the standard tax appropriate to the dividends and claiming a direct foreign tax credit therefor on its Federal income tax returns for those years pursuant to the provisions of
The amount of the dividends distributed to the petitioner, the standard tax appropriate to such dividends, and the "grossed-up" dividends were as follows:
CCL: | 1961 | 1962 |
Dividend distributed to petitioner | $ 858,263 | $ 860,563 |
Standard tax appropriate to the dividend | 542,987 | 544,437 |
Grossed-up dividend | 1,401,250 | 1,405,000 |
BRC: | ||
Dividend distributed to petitioner | 6,015 | 6,047 |
Standard tax appropriate to the dividend | 3,806 | 3,825 |
Grossed-up dividend | 9,821 | 9,872 |
In addition to the direct credit for the amount of the standard tax appropriate*74 to the dividend, petitioner, for 1961 and 1962, also claimed an indirect credit pursuant to the provisions of
The question before us involves the computation of the indirect foreign tax credit to which petitioner is entitled under
Accumulated | ||||||
Dividends | profits of | |||||
to parent | subsidiary | Foreign tax | Indirect | |||
X | X | paid by | = | foreign tax | ||
Accumulated | Total profits of | subsidiary | credit | |||
profits of | subsidiary | |||||
subsidiary |
*912 The "accumulated profits" terms cancel out and the single fraction which may be used to determine what portion of a foreign tax is creditable is dividends over total profits.
The dispute herein requires a determination of what should*75 be included in dividends in the first fraction of the foregoing formula. The issue is one of first impression.
Much of the background material which underpins our resolution of this issue is set forth at length in our recent opinion in
In
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*78 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 tax legislation." Hence, the fact that British law "regarded" the tax appropriate to the dividend as having been paid by the stockholder-recipient was "not conclusive" but at most "a factor to be considered in deciding whether the stockholder pays the tax within the meaning of our own statute."
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 *79 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 this 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."
In 1946, the result in
ARTICLE XIII
(1) Subject to
Colin F. Stam, chief of staff of the Joint Committee on Internal Revenue Taxation, in explanation of article XIII(1) to a subcommittee of the Senate Foreign Relations Committee, stated:
[The convention] makes another important change over existing law which will further benefit American citizens. There was a case that went up to the Supreme Court, the
This convention
* * * *
* * * The British have a system in which tax is levied on the corporation and the tax is paid into the British treasury; then, when the British corporation later declares a dividend to its shareholders, the corporation recoups from that dividend the amount of the tax which it has paid into the treasury. In other words, if the British corporation was going to declare a dividend of $ 100,000, 50 percent of that $ 100,000 would be retained by the corporation because it had paid the 50 percent tax to the British treasury. The shareholder will actually receive only $ 50,000, but he must report the entire gross dividend of $ 100,000 in his return. And he will get a tax credit of $ 50,000. The British surtax does not start until $ 8,000.
* * *
[Hearings on Conventions with Great Britain and Northern Ireland Respecting Income and Estate Taxes before a *82 Subcommittee of the Senate Foreign Relations Committee, 79th Cong., 1st Sess., pp. 70-71 (1945), reprinted in 2 Legislative History of United States Tax Conventions 2636-2637 (1962). Emphasis added.]
Article XIII was amended by a supplementary protocol, effective, as regards United States tax, for taxable years beginning on or after January 1, 1956, reading, in pertinent part, as follows:
ARTICLE XIII
(1) Subject to
*915 (a) the recipient of a dividend paid by a corporation which is a resident of the United Kingdom shall be deemed to have paid the United Kingdom*83 tax appropriate to such dividend * * *
* * *
if the recipient of the dividend * * * elects to include in his gross income for the purposes of United States tax the amount of such United Kingdom income tax. [[1958] 9 U.S.T. 1331.]
It is against the foregoing background that we turn to a consideration of the contentions of the parties.
Petitioner elected to employ article XIII(1). It claims that, having taken into income the amount of the dividend received plus the standard tax appropriate thereto, its election operates throughout
Respondent*84 accords article XIII(1) a narrow reading. His position is that the numerator should consist of only the amounts which petitioner actually received. He argues that the effect of an election under article XIII(1) is limited to the computation of the direct foreign tax credit under
In support of his contention, respondent seeks to draw a distinction based upon the fact that petitioner was not
If petitioner had actually received the amount of the "gross dividend" and then had paid the standard tax directly, it could hardly be argued that that amount would not be the numerator in the
Adoption of the position advanced by respondent would also appear to create an anomaly with respect to the meaning of the terms "dividends" and "accumulated profits" in the
Contrary to respondent's contention, the legislative history of the changes made in
*89 Finally, neither
*90 The pivotal fact in this case is that the
To reflect certain concessions made by petitioner,
1. All references are to the Internal Revenue Code of 1954, as in effect during the years involved, unless otherwise specified.↩
2. No significance was attached to the fact that two of the three subsidiaries involved therein declared dividends "free of standard tax" rather than "with deduction of standard tax." See
3. "The profits or gains to be charged on any body of persons shall be computed in accordance with the provisions of this Act on the full amount of the same before any dividend thereof is made in respect of any share, right, or title thereto, and the body of persons paying such dividend shall be entitled to deduct the tax appropriate thereto." This rule was incorporated, in substantially the same terms, into sec. 184, I.T.A. 1952, and was repealed by Finance Act 1965, sch. 22, pt. IV.↩
4. Actually the history of the allowance of a foreign tax credit in respect of the British standard tax appropriate to a dividend begins with S.M. 3040,
5. Similarly, the Technical Memorandum of the Treasury Department on the convention stated in reference to article XIII that it "in effect, revokes the principle of
6. We say "for purposes of
7. See Schoenfeld, "Some Definitional Problems in the Deemed Paid Foreign Tax Credit of
8. We note that
9. In
10. The indirect credit claimed herein relates only to the British profits tax, and thus we are not faced with the same issue which the Court of Appeals was confronted with in
National Cash Register Co. v. United States , 400 F.2d 820 ( 1968 )
Welch v. St. Helens Petroleum Co. , 78 F.2d 631 ( 1935 )
Wisconsin Gas & Electric Co. v. United States , 64 S. Ct. 1106 ( 1944 )
Biddle v. Commissioner , 58 S. Ct. 379 ( 1938 )
American Chicle Co. v. United States , 62 S. Ct. 1144 ( 1942 )