*1029 A domestic corporation owned a majority of the voting stock of a Canadian corporation which, in turn, owned a majority of the voting stock of a British corporation. The British corporation declared and paid a dividend. Held, that no part of the amount which was paid by the British corporation as British income tax upon the dividend and served to reduce the amount received by the Canadian corporation may be regarded under setion 131(f) of the Revenue Act of 1934 as "any income, war-profits, or excess-profits taxes paid by" the Canadian corporation "to any foreign country" and no proportion thereof shall be deemed to have been "paid" by the domestic corporation so as to entitle it to a credit under section 31.
*234 The Commissioner determined a deficiency of $80,253.79 in petitioner's income tax for the fiscal year ended November 30, 1935. He denied a credit claimed for a foreign tax said to have been paid by its Canadian subsidiary. Petitioner contends that it should*1030 be deemed to have paid a tax in the amount which its Canadian subsidiary was entitled to deduct from the Canadian tax in respect of British income tax paid by a British subsidiary on a dividend.
FINDINGS OF FACT.
Petitioner, a Delaware corporation with principal place of business in Chicago, Illinois, is engaged in the manufacture and sale of women's foundation garments. In 1935 it owned all of the capital stock of the Canadian H. W. Gossard Co., Ltd., a Canadian corporation engaged in the same business at Toronto, Canada. Until January 15, 1935, the Canadian corporation owned all of the capital stock of the British H. W. Gossard Co., Ltd., a British corporation *235 engaged in the same business in Great Britain. The petitioner and the Canadian corporation regularly employed an accrual method of accounting and a fiscal year ending November 30.
On January 15, 1935, the British corporation declared a dividend the amount of which, before subtracting the "amount of tax appropriate to the dividend" in accordance with the British income tax laws, was $828,876.42. In accordance with the provisions of the Income Tax Act 1918 and Finance Acts of Great Britain in effect during*1031 the taxable year, and British corporation deducted $186,497.17 (22 1/2 percent) from the dividend and paid such amount to Great Britain. The Canadian corporation received from the British corporation the remaining amount of $642,379.25. In May 1935 the Canadian corporation declared and paid to petitioner, its stockholder, a dividend of $1,270,000.
The Canadian corporation filed a Canadian income tax return for its fiscal year ended November 30, 1935, on which it reported in a schedule of "Undivided Profits or Surplus Account" a debit of $186,497.17 as "British taxes on dividend" and a credit of $828,876.42 as "Dividend from British Co." It did not report in income the gross dividend of $828,876.42 of the British corporation, as is required by section 3, Income War Tax Act of 1917, as amended, of the Dominion of Canada, and made no explicit claim under section 8(a) of that act, which provides that:
* * * A taxpayer shall be entitled to deduct from the tax that would otherwise be payable by him under this Act,
(a) * * * the amount paid to Great Britain * * * for income tax in respect of the income of the taxpayer derived from sources therein; * * *
The Canadian tax rate was*1032 13 1/2 percent. The British tax of $186,497.17 was ample to offset the amount "otherwise payable" to Canada in respect of the dividend. The Canadian tax return was accepted without change in respect of the dividend.
In its United States income tax return for the fiscal year ended November 30, 1935, petitioner reported the dividend of $1,270,000 received from the Canadian corporation, and claimed a credit of $89,649.79 for "Income Tax Paid to a Foreign County." The Commissioner allowed the credit to the extent of $10,905.70 by eliminating any amount representing Canadian income tax on account of the aforesaid British tax of $186,497.17.
OPINION.
STERNHAGEN: The petitioner, a domestic corporation which owns the majority of the voting stock of a foreign corporation, viz., the Canadian corporation, from which in May 1935 it received a dividend of $1,270,000, seeks, under section 31 of the Revenue Act of *236 1934, 1 to use as a credit the amount which represents the portion of the British 22 1/2 percent tax ($186,497.17) paid by the British corporation which by the Canadian statute the Canadian corporation is entitled to deduct from the 13 1/2 percent Canadian tax that*1033 would otherwise be payable by the Canadian corporation.
*1034 We think the Commissioner correctly held that no part of the amount paid by the British corporation to the British Government which served to reduce the amount received as dividend by the Canadian corporation may be regarded under section 131(f) as paid by the petitioner's subsidiary, the Canadian corporation. This view is required by . That case held that the British tax paid by a British corporation upon a dividend declared by it could not, under the United States conception of payment inherent in section 131, be said to have been paid by a United States individual shareholder. No more, we think, can it, under the same conception, be said here that the Canadian shareholder paid the British tax. See . And, since the United States conception controls, it *237 is not significant that the Canadian Government for its tax purposes treats the Canadian corporation as if in fact it did pay the British tax, thus reducing the amount which the Canadian corporation is required to pay as its tax to the Canadian Government. Hence it can not be recognized under*1035 section 131(f), as to the amount paid by the British corporation to the British Government, that it was "any income, war-profits, or excess-profits taxes paid by" the Canadian corporation "to any foreign country", and hence there is no proportion thereof which the petitioner "shall be deemed to have paid."
There is no decision since the Biddle decision which is at variance with this view. See . The decision in , now on review, C.C.A., 2d Cir., is entirely harmonious. There the taxpayer's Canadian subsidiary paid to Canada a tax which had a dual character, and the Board held it to be a tax paid on income, war profits or excess profits, even though it also satisfied a coordinate excise tax on premiums. It was paid by the Canadian corporation to Canada and actually served as a payment of income, war profits, or excess profits tax. There is a plain distinction between such a tax and an amount paid to another part of the British Empire not by the Canadian corporation but by another corporation which amount Canada permits to be deducted from the Canadian corporation's*1036 tax as if it had been paid by the Canadian corporation.
Extensive arguments are submitted by both parties, which have been given consideration, but they must either yield or stand aside before the principal proposition established by the Biddle case, i.e., that the tax paid by the British corporation is not to be treated as paid by its shareholders.
Decision will be entered under Rule 50.
Footnotes
1. SEC. 31. TAXES OF FOREIGN COUNTRIES AND POSSESSIONS OF UNITED STATES.
The amount of income, war-profits, and excess-profits taxes imposed by foreign countries or possessions of the United States shall be allowed as a credit against the tax, to the extent provided in section 131.
SEC. 131. TAXES OF FOREIGN COUNTRIES AND POSSESSIONS OF UNITED STATES.
(a) ALLOWANCE OF CREDIT. - If the taxpayer signifies in his return his desire to have the benefits of this section, the tax imposed by this title shall be credited with:
(1) CITIZEN AND DOMESTIC CORPORATION. - In the case of a citizen of the United States and of a domestic corporation, the amount of any income, war-profits, and excess-profits taxes paid or accrued during the taxable year to any foreign country or to any possession of the United States; and
* * *
(f) TAXES OF FOREIGN SUBSIDIARY. - For for the purposes of this section a domestic corporation which owns a majority of the voting stock of a foreign corporation from which it receives dividends in any taxable year shall be deemed to have paid the same proportion of any income, war-profits, or excess-profits taxes paid by such foreign corporation to any foreign country or to any possession of the United States, upon or with respect to the accumulated profits of such foreign corporation from which such dividends were paid, which the amount of such dividends bears to the amount of such accumulated profits: Provided,↩ That the amount of tax deemed to have been paid under this subsection shall in no case exceed the same proportion of the tax against which credit is taken which the amount of such dividends bears to the amount of the entire net income of the domestic corporation in which such dividends are included. The term "accumulated profits" when used in this subsection in reference to a foreign corporation, means the amount of its gains, profits, or income in excess of the income, war-profits, and excess-profits taxes imposed upon or with respect to such profits or income; and the Commissioner with the approval of the Secretary shall have full power to determine from the accumulated profits of what year or years such dividends were paid; treating dividends paid in the first sixty days of any year as having been paid from the accumulated profits of the preceding year or years (unless to his satisfaction shown otherwise), and in other respects treating dividends as having been paid from the most recently accumulated gains, profits, or earnings. In the case of a foreign corporation, the income, war-profits, and excess-profits taxes of which are determined on the basis of an accounting period of less than one year, the word "year" as used in this subsection shall be construed to mean such accounting period.