*1567 1. British income taxes paid by domestic partnership held deductible pro rata by the several partners, following W. J. Burns et al.,12 B.T.A. 1209">12 B.T.A. 1209.
2. In determining petitioner's taxable income for the year 1923, Commissioner may redetermine net loss claimed by petitioner for 1922, although assessment and collection of deficiency for that year are barred by the statute of limitations.
3. Sections 213 and 217(a)(2)(B) of the Revenue Acts of 1921 and 1924 held not unconstitutional. Held, further, that, in accordance with said statutory provisions, there shall be included in the gross incomes of each of petitioners, all of whom are nonresident aliens, the dividends received from a foreign corporation, more than 50 per centum of whose income was derived from sources within the United States, even though the corporation's earnings in this country were removed to England, commingled with other corporate funds, and there paid out as dividends.
*1568 *154 In these proceedings, which were consolidated for hearing, deficiencies in income taxes are asserted as follows:
| Petitioner | 1923 | 1924 | 1925 |
| Lord Forres | $905.76 | $87.17 | |
| Sir Robert Balfour | 14,046.42 | ||
| Alexander B. Williamson | 3,972.03 | 368.56 | $4,234.18 |
| John Lawson | 2,482.95 | ||
| Thomas J. Whitson | 584.44 |
The following issues are raised in these cases:
(1) Whether the petitioners, and each of them (except John Lawson), may deduct from their respective gross incomes for the year 1923, their proportionate shares of British income taxes, paid in 1927 by a domestic partnership of which they were members;
*155 (2) Whether the petitioners, and each of them, are subject to income tax on dividends received from the Olympic Portland Cement Company, Ltd., and, if taxable,
(3) What is the amount of the dividends received by each of said petitioners from said company; and
(4) Whether section 217(a)(2) of the Revenue Acts of 1921 and 1924 is unconstitutional.
As an additional complaint, in the appeal of John Lawson it is asserted that the respondent erred in reducing petitioner's net loss for the year 1922, carried forward to 1923, by including*1569 in come for 1922 dividends received from the Olympic Company, and, further, that he is barred from so doing by the expiration of the statute of limitations with respect to the year 1922.
An additional error alleged in the appeal of Alexander B. Williamson was waived at the hearing.
FINDINGS OF FACT.
During the period here involved each of the petitioners was a subject of and a resident in the United Kingdom of Great Britain, and a nonresident alien of the United States. Except petitioner Lawson, who made a business trip to this country in each of the years 1923 and 1924, none of the petitioners was in the United States during the period before us.
All these petitioners were members of the domestic partnership of Balfour, Guthrie & Company, which maintained its principal office at San Francisco and branch offices at Seattle, Portland and Tacoma. During the taxable years before us the total holdings of all the partners were 84 1/2 shares, of which the petitioners herein held shares as follows:
| Partner: | Share |
| Lord Forres | 4 |
| Sir Robert Balfour | 16 |
| Alexander B. Williamson | 14 1/2 |
| John Lawson | 13 1/2 |
| Thomas J. Whitson | 6 1/2 |
The partnership kept its*1570 books of account and made its income-tax information returns for the calendar year 1923 upon the accrual basis. The earnings of this partnership were subject to tax by the United Kingdom. As of December 31, 1923, the partnership books disclosed a reserve for British tax liabilities for 1923 and prior years which was considerably in excess of the amounts thereof as finally determined. The British tax year terminated on April 5 of the years 1922, 1923, 1924 and 1925, respectively. The determination of the liabilities of the partnership for British taxes for these periods was in controversy, which was concluded shortly prior to December *156 5, 1927, when payments were made as follows, the current rate of exchange for British pounds sterling also being shown below:
| For year ended | Pounds sterling | Rate of exchange |
| April 5, 1923 | Pound 5074-18-0 | $4.66 3/4 |
| April 5, 1924 | 3135- 1-10 | 4.30 9/16 |
| April 5, 1925 | 4968- 4-6 | 4.77 13/16 |
| Dec. 5, 1927 | 4.88 1/8 | |
| Total | 13,178- 4-4 |
On May 13, 1924, the partnership of Balfour, Guthrie & Company, filed income-tax information return for the calendar year 1923, in which it reported dividends received from domestic*1571 corporations in the amount of $173,279.50; trading profit in the amount of $270,422.58; and a total net income of $443,702.08. Thereafter, respondent determined and allowed additional deductions from income amounting to $27,500. The individual income-tax returns for the calendar year 1923 filed by these petitioners returned income from the partnership as follows:
| Petitioner | Income from partnership | Dividend received through partnership |
| Sir Robert Balfour | $45,997.17 | $32,810.32 |
| Lord Forres | 11,499.29 | 8,202.58 |
| Alexander B. Williamson | 41,684.94 | 29,734.35 |
| Thomas J. Whitson | 18,686.35 | 13,329.19 |
| John Lawson | 0 | 0 |
Except for the further deductions allowed by respondent and the deduction for British tax liability now claimed by petitioners, no error is alleged with respect to the income of the partnership, or as to the distributive shares of petitioners therefrom.
During the period here involved, the Olympic Portland Cement Company, Ltd., was a corporation, organized and existing under the laws of the United Kingdom. Its sole office was in London, and from this office its business was conducted by its directors and executive officers. Its books of account*1572 were kept on an accrual basis. It owned properties in the United States and elsewhere and, while accurate accounts were kept reflecting its earnings from its properties in this country, those earnings, when remitted to the company's office in England, were commingled with earnings from its properties without the United States and with its general funds.
Of the total value of the company's properties everywhere, the following table shows the proportionate value of its properties in this country:
| Year | Properties in United States | Properties outside United States | Total |
| 1922 | Pound 364,588 | Pound 60,952 | Pound 425,540 |
| 1923 | 372,465 | 77,540 | 450,005 |
| 1924 | 368,780 | 108,103 | 476,883 |
| 1925 | 379,414 | 48,745 | 428,159 |
*157 The following is an analysis of the surplus of the company showing sources of profits, dividends paid and the surplus at the end of the years 1920 to 1925, inclusive:
| Item | 1920 | 1921 | 1922 | 1923 | 1924 | 1925 |
| Surplus at beginning of year | Pound 21,491 | Pound 31,257 | Pound 56,206 | Pound 82,634 | Pound 109,198 | Pound 137,476 |
| Profits from United States | 46,475 | 51,819 | 78,312 | 84,657 | 81,186 | 86,416 |
| Profits from without United States | 942 | 18,646 | 9,300 | 5,927 | 8,982 | 3,813 |
| Sub-total, current profits | 47,417 | 70,465 | 87,612 | 90,584 | 90,168 | 90,229 |
| Deductions for London Office expense, debenture interest, and depreciation | 25,401 | 28,016 | 30,965 | 31,505 | 37,788 | 38,493 |
| Remainder, current profits | 22,016 | 42,449 | 56,657 | 49,079 | 52,380 | 51,736 |
| Dividends paid | 12,250 | 17,500 | 30,219 | 22,515 | 24,102 | 27,365 |
| Remainder, current profits | 9,766 | 24,949 | 26,428 | 26,564 | 28,278 | 24,371 |
| Surplus at end of year | 31,257 | 56,206 | 82,634 | 109,198 | 137,476 | 161,847 |
*1573 Each of these petitioners was a stockholder in this corporation and received dividends therefrom. The stock certificates always were kept in various depositories in England. The dividends, after declaration by the directors and approval by the stockholders at meetings held at the company's offices in London, were paid by checks upon the company's accounts in London or Liverpool banks and were cashed by the recipients in England. None of the checks issued to these petitioners in payment of dividends from the corporation passed through this country. The dividends were declared and paid without regard to the source of the income of the company and no segregation was made of the amount of dividends paid from earnings derived from sources within the United States.
Dividends were paid to the following petitioners on the dates and in the amounts stated:
| Date paid | Lord Forres | Sir Robert Balfour | A. B. Williamson | T. J. Whitson |
| May 3, 1923 | Pound 292- 6-1 | Pound 263-5-9 | Pound 504- 5-4 | Pound 103- 5-0 |
| Nov. 15, 1923 | 217-12-8 | 196-0-8 | 375- 9-2 | 76-17-6 |
| Apr. 10, 1924 | 323-11-4 | 563- 3-8 | ||
| Nov. 15, 1924 | 198- 1-10 | 378-10-2 | ||
| Apr. 30, 1925 | 681- 6-5 | |||
| Nov. 14, 1925 | 387-13-4 |
*1574 Dividends were paid to John Lawson in 1922 as follows: May 18, 1922, Pound 400-3-5; November 15, 1922, Pound 175-13-5.
*158 The rates of exchange of British pounds sterling current on the above dates were as follows:
| May 18, 1922 | $4.44-3/4 |
| May 3, 1923 | 4.62-3/8 |
| Nov. 15, 1924 | 4.62-7/8 |
| Nov. 15, 1922 | 4.47-13/16 |
| Nov. 15, 1923 | $4.30-3/8 |
| Apr. 30, 1925 | 4.8447 |
| Apr. 10, 1924 | 4.32-3/4 |
| Nov. 14, 1925 | 4.8469 |
John Lawson's return for the year 1922 reported a net loss of $32,543.32, which was carried forward as a deduction from gross income for the year 1923. Respondent, in determining petitioner's tax liability for the year 1923, reduced this net loss by the amount of $7,101.60, which, he estimated, was the amount of dividends received by Lawson from the Olympic Company in 1922.
Respondent determined, basing his determination upon an estimate, that petitioners received the following amounts as dividends from the Portland Cement Company, Ltd., during the year 1923:
| Lord Forres | Pound 2,500 |
| Sir Robert Balfour | 2,500 |
| Alexander B. Williamson | 2,500 |
| John Lawson | 1,500 |
| Thomas J. Whitson | 1,000 |
The rate of exchange used in converting*1575 these estimated dividends into dollars was $4.3233.
OPINION.
GOODRICH: The deductibility, by the several partners, of the liability for British income taxes of the partnership of Balfour, Guthrie & Company, is not different from the question previously considered and determined in W. J. Burns et al.,12 B.T.A. 1209">12 B.T.A. 1209. Following that decision, we hold that the distributable share of the partnership income for the year 1923 of each of the petitioners herein (except John Lawson) should be reduced by his pro rata share of the British income taxes accrued against the partnership for that year and paid by it on December 5, 1927, as set out in our findings of fact.
We are not impressed with the argument made on behalf of petitioner Lawson that respondent's action in redetermining the net loss for the year 1922, claimed as a deduction from petitioner's income for the year 1923, results in the indirect assessment of a deficiency against him for the year 1922, now barred by the statute of limitations. The statute has not run as to 1923, and it is for that year that respondent seeks to impose a tax. In computing petitioner's taxable income for the year 1923, it is respondent's*1576 duty to consider and determine all items and elements thereof, including the net loss carried forward from the preceding year. He is not limited by the 1922 return in determining the correct amount of that loss as it may affect the deficiency for 1923. However, respondent has *159 reduced the net loss claimed for 1922 by $7,101.60 which, he estimates, was the amount of dividends received by Lawson from the Olympic Company. This amount is in excess of the dividends received by Lawson and should be corrected in accordance with our findings of fact.
The principal issue in the case presents greater difficulties. Respondent seeks to levy a tax upon dividends received by nonresident aliens from a foreign corporation. He acts under authority of sections 213 and 217(a)(2)(B), 1 of the Revenue Acts of 1921 and 1924, the pertinent parts of which provide that there shall be included in the gross income of a nonresident alien individual the amount of dividends received from a foreign corporation, 50 per centum of whose gross income for three years prior to the date of declaration of such dividends was derived from sources within the United States. There is no ambiguity in the*1577 statute, and the record discloses, indeed, it is admitted, that these provisions clearly are applicable to these cases and that respondent has acted strictly in accordance therewith. But petitioners contend that these statutory provisions are unconstitutional and for that reason the taxes here charged are invalid. The Board will consider a question of constitutionality. Independent Life Insurance Co. of America,17 B.T.A. 757">17 B.T.A. 757; Estate of Robert Todd Lincoln,24 B.T.A. 334">24 B.T.A. 334.
*1578 Petitioners invoke the Fifth Amendment, which provides in part that no person shall be deprived of property without due process of law. They urge that the source of the dividends here sought to be taxed was in Great Britain, not in the United States, because the corporation paying these dividends was incorporated, controlled, and located in England, the stock certificates had their situs in England, the funds from which these dividends were paid were kept in England, the payments were there made and that, therefore, since petitioners were nonresident aliens in relation to the United States, the tax here sought to be imposed is arbitrary and unreasonable and amounts to a taking and confiscation of property without due process of law.
Beyond doubt, these petitioners, although nonresident aliens, may obtain the protection of the due process clause of the Fifth Amendment. *160 See Lem Moon Sing v. United States,158 U.S. 538">158 U.S. 538; Downes v. Bidwell,182 U.S. 244">182 U.S. 244, and other cases therein cited.
The power of Congress to lay and collect taxes on incomes, from whatever source derived, is plenary under the Sixteenth Amendment to the Constitution. *1579 This power is not limited by the Fifth Amendment (see McCray v. United States,195 U.S. 27">195 U.S. 27; Billings v. United States,232 U.S. 261">232 U.S. 261; Flint v. Stone Tracy Co.,220 U.S. 107">220 U.S. 107; Brushaber v. Union Pacific Railroad Co.,240 U.S. 1">240 U.S. 1), unless so improperly enforced as to be deemed an unreasonable and arbitary exercise of the taxing power amounting to a confiscation rather than a tax. Nichols v. Coolidge,274 U.S. 531">274 U.S. 531; Blodgett v. Holden,275 U.S. 142">275 U.S. 142; 276 U.S. 594">276 U.S. 594; Untermyer v. Anderson,276 U.S. 440">276 U.S. 440.
Our attention is called to a number of cases arising under the Fourteenth Amendment to the effect that a tax by a State upon property or income wholly outside the State constitutes a denial of due process and is invalid. These cases are not controlling here, for we are not here concerned with the taxing power of a State, and the constitutional limitations imposed upon a State, in the exercise of that power, have no application to the Federal Government. *1580 United States v. Bennett,232 U.S. 299">232 U.S. 299.
Nor is the taxing power of the Federal Government in its sovereign capacity confined within the geographical limits of the United States. It may tax the income of a citizen even though the citizen receiving the income and the property from which it arises are both outside the territorial limits of the United States. United States v. Bennett, supra;Cook v. Tait,265 U.S. 47">265 U.S. 47. And it may tax the income from property within the United States owned by a nonresident alien. DeGanay v. Lederer,250 U.S. 376">250 U.S. 376.
But petitioners here contend that the income - that is, the dividends themselves, - the property from which it is derived, and the recipients thereof are all beyond the taxing power of the United States. That these elements are all beyond the territorial limits of the United States, seems clear. The tax here is sought to be levied not on the corporation, but on the stockholders. They are separate and distinct entities and their incomes are separate and distinct. *1581 Eisner v. Macomber,252 U.S. 189">252 U.S. 189. The earnings derived by the corporation from its properties within the United States were taken to England and commingled or invested with its general funds, which are the property of the corporation, not of the stockholders. From these funds or properties, all without the United States, the dividends were paid. Petitioners argue, therefore, that the source of the dividends was outside the United States, citing DeGanay v. Lederer, supra;Eisner v. Macomber, supra;Standard Marine Insurance Co.,4 B.T.A. 853">4 B.T.A. 853; Estate of L. E. McKinnon,6 B.T.A. 412">6 B.T.A. 412; Ethel M. Codrington,6 B.T.A. 415">6 B.T.A. 415. Neither the question of domicile of the *161 recipient nor situs of the property, or income arising therefrom, is here involved, for these petitioners are residents of England, the stocks are kept there, and the dividends there paid and received.
Do these extreme conditions remove this income beyond the taxing power of the United States as a sovereign? We think not. As we have stated, there is no ambiguity respecting the statute under which the tax*1582 here is levied. The intent and purpose of the Congress are clear and exact - it moved to lay a tax upon distributions by corporations to nonresident aliens of monies earned by such corporations in this conuntry. It is clear that Congress regarded the source of such earnings as being within the United States, regardless of the manner in which they might be removed, invested or distributed by the corporations subsequent to the first acquisition thereof within this country. That view is not unreasonable. The commonly accepted definition of the term "source" is "that from which anything comes forth, regarded as its cause or origin, the first cause." Webster's New International Dictionary. In the case at bar it appears that the corporation's earnings coming from its properties within the United States were more than sufficient to provide for the dividends here in question. The corporation's earnings within this country were the first cause or origin - the "source" - of the subsequent dividends. It was the distribution of such earnings that Congress intended to tax for they were acquired within this country by the corporation under the protection which our laws afforded to its properties*1583 and operations. That such protection of the corporation inured to the benefit of its stockholders can not be denied. True, the corporation itself has in a measure paid for that protection by way of taxes upon its properties and earnings within this country. That much is demanded of every domestic corporation, unless specifically exempted. But the Government may go further, and does so by laying a second tax upon corporate distributions to individual recipients, In charging this tax against these nonresident aliens it is demanding no more than it demands of its own citizens, who have been benefited in their ownership of corporate stocks by the protection given to the properties and operations of the corporations themselves. In our opinion, therefore, the provisions of section 213 and 217 of the Revenue Acts of 1921 and 1924 do not violate our Constitution. We see in these provisions no deprivation of property without due process of law, no unreasonable and arbitrary exercise of the taxing power such as is prohibited by the Fifth Amendment.
Petitioners question the expediency of this means of taxation from the view of international comity and suggest jurisdictional difficulties*1584 in the way of enforcement of the statutory provisions here involved. These difficulties are not determinative of the question of constitutionality and they do not concern us. The policy of this, or any *162 other form of taxation is for Congress to determine; the responsibility rests upon it, not on this Board nor the courts. Cf. concurring opinion, Bradley, J., in United States v. Erie Ry. Co.,106 U.S. 327">106 U.S. 327.
Petitioners' contention is denied, and the dividends received from the Olympic Company during the periods before us will be included in their respective individual taxable incomes as by statute provided.
Perhaps we should concede the possibility of an opposite view with respect to dividends paid by the corporation from earnings received from properties situate without the United States whose operations have received no protection and benefit from this country. But that is a matter of proof. The record discloses that the corporation's earnings from sources within the United States were more than sufficient to provide for the dividends it paid. It is quite possible for the corporation, or for the courts to accurately divide the earnings of*1585 the company and its investments of those earnings, the funds from which these dividends were paid, and, consequently, the dividends themselves, as between sources which the United States has protected and benefited and those which it has not. No such separation having been made, we must assume that the payments received by petitioners were made from sources properly taxable by the United States and refuse to hold the whole tax invalid because of the possibility of the failure of a part thereof.
Reviewed by the Board.
Judgment will be entered under Rule 50.
ARUNDELL concurs in the result.
SEAWELL dissents.
TRAMMELL, dissenting: I believe that the statute is unconstitutional as being beyond the power of Congress under the Fifth Amendment.
Footnotes
1. Sec. 213. (c) In the case of a nonresident alien individual, gross income means only the gross income from sources within the United States determined under the provisions of section 217.
Sec. 217. (a) That in the case of a nonresident alien individual * * * the following items of gross income shall be treated as income from sources within the United States:
* * *
(2) The amount received as dividends * * * (B) from a foreign corporation unless less than 50 per centum of the gross income of such foreign corporation for the three-year period ending with the close of its taxable year preceding the declaration of such dividends (or for such part of such period as the corporation has been in existence) was derived from sources within the United States as determined under the provisions of this section. ↩