General Foods Corp. v. Commissioner

General Foods Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent

General Foods Corp. v. Commissioner

Docket No. 2178

United States Tax Court

4 T.C. 209; 1944 U.S. Tax Ct. LEXIS 39;

October 19, 1944, Promulgated

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Decision will be entered under Rule 50.

Petitioner, a domestic corporation, received dividends during the taxable years from certain of its wholly owned foreign subsidiaries. The dividends were paid in part from the subsidiary's current profits and in part from the profits of prior years. Held, in computing the foreign tax credit under section 131 (f) of the Revenue Act of 1934, the foreign tax deemed to have been paid by the petitioner should be computed for each separate year on the accumulated profits from which the dividends were paid; held, further, that the limitation upon the credit under the proviso in section 131 (f) is determined by a single computation based upon the ratio of the dividends received by the domestic corporation to the domestic corporation's entire net income for the year in which the dividends were received.

George S. Herr, Esq., and Oscar McPeak, Esq., for the petitioner.

Walt Mandry, Esq., for the respondent.

Harron, Judge.

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HARRON

The respondent determined deficiencies in income tax and excess profits tax for the taxable years 1934 and 1935 as follows:

		Excess profits
Year.	Income tax	tax
1934	$ 8,573.88	$ 1,125.38
1935	30,834.25	992.24

The deficiencies in excess profits tax are not in controversy here. Petitioner claims an overpayment of income tax for the year 1935. Not all of the adjustments are in dispute. The only issue is the amount of foreign tax credit allowable to petitioner under section 131 (f) of the Revenue Act of 1934. The issue involves the question of the proper method of computing the credit under the cited section.

Petitioner filed its returns for the taxable years with the collector for the third district of New York.

The parties submitted an agreed statement of facts and they filed joint exhibits. The exhibits consist of several tables showing the record of the profits, dividend payments, and foreign taxes of several Canadian subsidiaries of petitioner. There is no dispute regarding the figures and general detail of these schedules. The statement of facts and all of the schedules set forth in exhibits are incorporated herein by reference. The following findings of fact constitute findings of such facts as are necessary for an understanding of the issue presented. We do, however, adopt as part of the findings of fact all of the schedules set forth in the exhibits.

FINDINGS OF FACT.

The petitioner is a domestic corporation organized and existing under the laws of the State of Delaware, with its principal office in New York, New York. During the taxable years it kept its books and filed its returns on an accrual basis.

Throughout the taxable years, petitioner owned the entire capital stock (except directors' qualifying shares) of each of four Canadian subsidiaries (foreign corporations) from which it received dividends during such years. The amounts, stated in Canadian dollars, and the dates of payment of the dividends so received by the petitioner from the respective subsidiaries were as follows:

	Taxable year 1934	Taxable year 1935
Canadian subsidiary		Date		Date
	Dividend	of	Dividend	of
		payment		payment
Canadian Postum Co., Ltd	$ 1,500,000	12/27/34	$ 1,500,000.00	7/18/35
Douglas-Pectin, Ltd	239,070	12/27/34	59,767.50	8/6/35
General Foods, Ltd	50,000	12/27/34	600,000.00	8/9/35
Jell-O Co. of Canada, Ltd	5,000	12/27/34

The entire amount of the dividend of $ 50,000 so received by the petitioner from General Foods, Ltd., in the taxable year 1934 was paid by that subsidiary from its earnings or profits for the year in which paid, and the remaining six dividends so received by the petitioner in the taxable years 1934 and 1935 were paid by the several subsidiaries in part from their earnings or profits for the years, respectively, in which such dividends were paid and in part from their earnings or profits for prior years.

The tables, to which reference is made and which are incorporated herein by reference, show the applicable rate of conversion from Canadian to United States exchange, the year or years from the accumulated profits of which the dividends were paid, the total profits of the subsidiary for such years, the foreign taxes imposed with respect to such profits, the profits in excess of the foreign taxes imposed with respect to the total profits, the prior dividends paid from such profits, the balance of undistributed profits for the years from which the dividends were paid in the taxable years, and the dividends paid by the subsidiaries in the taxable years segregated into the years from the accumulated profits out of which they were paid. (Exhibits 1-A and 2-B.)

The dividends so received by the petitioner from its Canadian subsidiaries in the taxable years, as adjusted for conversion into United States dollars at applicable rates of exchange, were included in its gross income as reported by petitioner in its income tax returns, and in its net income for those years as determined by respondent.

In its income tax returns for each of the taxable years 1934 and 1935 petitioner claimed credit in the amounts of $ 205,553.15 and $ 255,912.09, respectively, against its United States tax on account of foreign taxes deemed to have been paid by it to the Dominion of Canada. With said returns and as a part thereof, petitioner filed Treasury Department Form 1118, entitled "Statement in Support of Credit Claimed on Corporation Income Tax Return for Taxes Paid or Accrued to a Foreign Country or a Possession of the United States," and the schedules required by that form. The petitioner, in computing the foreign tax credit on its returns for the taxable years, followed in principle the method prescribed by such forms. No change was made in the method of computation as set forth on the forms until Treasury Department Form 1118 was issued for the year 1938.

Respondent, in determining the deficiencies herein, allowed petitioner a foreign tax credit of $ 196,613.66 for the year 1934 and a foreign tax credit of $ 228,193.36 for the year 1935 in respect of the dividends received by petitioner from its Canadian subsidiaries during those years. The respondent, in determining said foreign tax credits, followed in principle the method of computation set forth in Treasury Department Form 1118 for the year 1938.

In an amended petition filed at the hearing petitioner claimed foreign tax credits for the taxable years 1934 and 1935 in the amounts of $ 200,620.47 and $ 265,813.67, respectively. Petitioner's method of computing these credits differed from that originally used in its income tax returns.

The petitioner's United States tax for the taxable year 1934 against which credit is taken is $ 205,187.54, and its entire net income for that year is $ 1,498,782.37. Petitioner's United States tax for the taxable year 1935 against which credit is taken is $ 282,791, and its entire net income for that year is $ 2,056,755.46.

The following schedule, schedule 1, shows petitioner's present method of computation of the foreign tax credit with respect to the dividend received from its wholly owned Canadian subsidiary, Douglas-Pectin, Ltd. All money figures are in terms of Canadian dollars unless otherwise indicated.

Schedule 1. -- Taxable Year 1935
Particulars	1929	1935
(1) Total gains, profits or income of subsidiary,
by years	$ 113,131.54	$ 39,338.30
(2) Foreign taxes imposed upon or with
respect to such profits or income	10,770.97	10,322.91
(3) Profits of subsidiary, by years, less tax imposed
thereon	102,360.57	29,015.39
(4) Dividends paid by subsidiary prior to 1935 from
such profits	53,598.82
(5) Undistributed profits of subsidiary for years
indicated at the date of payment of the dividend
paid in 1935 (Co. G -- profits for 1935 averaged
to 8/6/35, $ 29,015.39 x 218/365, or $ 17,329.74	48,761.75	17,329.74
(6) Dividend paid by subsidiary in 1935
(7) Most recently accumulated profits, by years, from
which the dividend was paid in 1935	42,437.76	17,329.74
(8) Corresponding total profits of subsidiary, by
years (item 1 X item 7/item 3)	46,903.31	23,495.20
(9) Tax paid upon or with respect to such total
profits, by years (item 8 less item 7)	4,465.55	6,165.46
(10) Tax paid upon or with respect to accumulated
profits from which dividend was paid
(item 7 total x item 9 total/item 8 total)
(11) Ratio of amount of dividend received by
petitioner to accumulated profits of subsidiary
from which paid (item 6 divided by item 7 total)
(12) Amount of tax deemed to have been paid by
petitioner upon or with respect to accumulated
profits of subsidiary from which dividend was
paid, the proviso limitation of subsection 131
(f) not considered (item 10 multiplied by
item 11)
(13) United States tax of petitioner against which
foreign tax credit is claimed (United States
dollars)
(14) Entire net income of petitioner in which dividend
received from subsidiary was included (United
States dollars)
(15) Limitation upon amount of tax deemed to have
been paid by petitioner (item 12) under proviso
of subsection 131 (f) (item 6 X item 13/item 14)
(16) Rate of conversion from Canadian to United States
dollars
(17) Foreign tax credit (item 14 or item 15, whichever
is smaller, multiplied by item 16) (United States
dollars

Schedule 1. -- Taxable Year 1935
Particulars	Total
(1) Total gains, profits or income of subsidiary,
by years	$ 152,469.84
(2) Foreign taxes imposed upon or with
respect to such profits or income	21,093.88
(3) Profits of subsidiary, by years, less tax imposed
thereon	131,375.96
(4) Dividends paid by subsidiary prior to 1935 from
such profits	53,598.82
(5) Undistributed profits of subsidiary for years
indicated at the date of payment of the dividend
paid in 1935 (Co. G -- profits for 1935 averaged
to 8/6/35, $ 29,015.39 x 218/365, or $ 17,329.74	66,091.49
(6) Dividend paid by subsidiary in 1935	59,767.50
(7) Most recently accumulated profits, by years, from
which the dividend was paid in 1935	59,767.50
(8) Corresponding total profits of subsidiary, by
years (item 1 X item 7/item 3)	70,398.51
(9) Tax paid upon or with respect to such total
profits, by years (item 8 less item 7)	10,631.01
(10) Tax paid upon or with respect to accumulated
profits from which dividend was paid
(item 7 total x item 9 total/item 8 total)	9,025.60
(11) Ratio of amount of dividend received by
petitioner to accumulated profits of subsidiary
from which paid (item 6 divided by item 7 total)	1.0
(12) Amount of tax deemed to have been paid by
petitioner upon or with respect to accumulated
profits of subsidiary from which dividend was
paid, the proviso limitation of subsection 131
(f) not considered (item 10 multiplied by
item 11)	9,025.60
(13) United States tax of petitioner against which
foreign tax credit is claimed (United States
dollars)	282,791.00
(14) Entire net income of petitioner in which dividend
received from subsidiary was included (United
States dollars)	2,056,755.46
(15) Limitation upon amount of tax deemed to have
been paid by petitioner (item 12) under proviso
of subsection 131 (f) (item 6 X item 13/item 14)	8,217.66
(16) Rate of conversion from Canadian to United States
dollars	998750
(17) Foreign tax credit (item 14 or item 15, whichever
is smaller, multiplied by item 16) (United States
dollars)	8,207.39

The following schedule, schedule 2, shows respondent's method of computation of the foreign tax credit with respect to the dividend received from petitioner's wholly owned Canadian subsidiary, Douglas-Pectin, Ltd. All figures are in Canadian dollars unless otherwise indicated.

Schedule 2. -- Taxable Year 1935
	Year 1929	Year 1935
1. Amount received during taxable year as dividends
from the controlled foreign corporation
(Canadian dollars)		$ 59,767.50
2. Entire net income of domestic corporation (United
States dollars)		2,056,755.46
3. Total tax due United States by domestic
corporation (United States dollars)		282,791.00
4. Dividends paid out of accumulated profits
segregated by years	$ 42,437.76	17,329.74
5. Total profits of controlled foreign corporation
before tax was deducted therefrom	113,131.54	39,338.30
6. Accumulated profits (total profits less tax
thereon) out of which dividends were paid	102,360.57	29,015.39
7. Amount of tax payments or taxes accrued upon
item 5	10,770.97	10,322.91
8. Ratio of accumulated profits to total profits
(item 6 divided by item 5)	.9047925	.7375863
9. Tax paid on or with respect to accumulated
profits (item 7 multiplied by item 8)	9,745.49	7,614.04
10. Ratio of amount of dividends received to
accumulated profits (item 4 divided by item 6)	.4145909	.5972603
11. Amount of tax payments deemed to have been paid
on profits distributed as dividends (item 9
multiplied by item 10)	4,040.39	4,547.56
12. Ratio of amount of dividends received from
controlled foreign corporation to entire net
income including such dividends (item 4 divided
by item 2)	.0206334	.0084258
13. Limitation on amount of tax payments made by
controlled foreign corporation which are deemed
to have been paid by the domestic corporation
(item 3 multiplied by item 12)	5,834.93	2,382.84
14. Amounts of tax payments made by controlled
foreign corporation which are deemed to have
been paid by the domestic corporation
(Canadian dollars) (item 11 or item 13,
whichever is smaller)	4,040.39	2,382.84
15. Rate of conversion into United States dollars	.998750	.998750
16. Amount of tax payments made by controlled foreign
corporation which are deemed to have been paid
by the domestic corporation (United States
dollars) (item 14 multiplied by item 15)	4,035.34	2,379.86
17. Total of tax payments deemed to have been paid on
profits distributed as dividends
(total of item 16)		6,415.20

OPINION.

The only question presented is the proper method of computing the foreign tax credit to which petitioner is entitled under section 131 (f) of the Revenue Act of 1934. ¹ During the taxable years, petitioner had received dividends from certain of its wholly owned foreign subsidiaries. These subsidiaries had paid income taxes to a foreign government and the dividends received by petitioner were part of the income which had been previously taxed by the foreign government. The issue between the parties relates only to the amount of credit allowable under the statute. Petitioner contends that it is entitled to foreign tax credit in the amounts of $ 200,620.47 and $ 265,813.67 for the taxable years 1934 and 1935, respectively. Respondent claims that the proper amounts of credit are $ 196,613.66 and $ 228,193.36. The differences in the amounts of credit arise from different methods of computation based upon divergent interpretations of the statute.

In computing the foreign tax credit to which a domestic corporation is entitled under section 131 (f), two computations must be made. The first computation relates to the amount of foreign tax which the domestic corporation is deemed to have paid on the dividends received by it from its foreign subsidiary. This computation is made under the first part of section 131 (f) and, in the usual case, the amount of credit is readily determinable. However, in this proceeding, the computation is complicated by the fact that the dividends received by petitioner were paid in part from the subsidiary's profits of the current year and in part from the subsidiary's profits of prior years.

The second computation is based upon the proviso or limitation in section 131 (f) that the amount of foreign tax deemed to have been paid shall in no case exceed the ratio of the dividends received by the domestic corporation to the domestic corporation's entire income for the year in which the dividends were received applied to the United States tax of the domestic corporation for that year. These computations are separate and distinct from each other and involve ratios based upon entirely different factors. The parties disagree on the method to be applied to both computations.

The first computation is made under that part of section 131 (f) which provides that "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 * * * taxes paid by such foreign corporation to any foreign country * * * 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." The term "accumulated profits" is defined in the subsection as the amount of the foreign corporation's gains, profits, or income in excess of the taxes imposed upon such profits or income. The subsection further provides that respondent "shall have full power to determine from the accumulated profits of what year or years such dividends were paid * * *."

In computing the foreign tax deemed to have been paid by petitioner under the subsection, respondent has used the ratio of the dividend paid by the subsidiary to the accumulated profits of the subsidiary from which such dividend was paid. He has then applied the ratio to the foreign taxes paid by the subsidiary. In this he has followed the statute. However, since the dividends were paid in part from the profits of the current year and in part from the profits of prior years, respondent, in order to apply the ratio, determined the accumulated profits for each year, the dividends paid out of accumulated profits segregated by years, and the foreign taxes paid for each year. He then computed the credit for the foreign tax deemed to have been paid by separate years and then took a total of such credits. See schedule 2. This was the method of computation used by petitioner on its original returns and it conformed to the rules and regulations in effect during the taxable years. The regulations provided that if a domestic corporation signified in its return a desire to claim the foreign tax credit, Treasury Department Form 1118 was to be filed and "that form was to be carefully filled in with all the information there called for and with the calculations of credits there indicated." Regulations 86, art. 131-3. Schedule B of Form 1118 required that the dividends paid out of accumulated profits be segregated by years, as well as the accumulated profits, as defined in the statute, the total profits, and the amount of tax payments made annually by the foreign subsidiary. The ratio as set forth in the first part of section 131 (f) was then applied for the separate years and the "amount of tax payments deemed to have been paid on profits distributed as dividends" was determined by totaling the credits for the separate years.

Petitioner argues that the language of the statute requires that the terms "accumulated profits," "the accumulated profits * * * from which such dividends were paid," and "the amount of such accumulated profits" be construed not as relating to the accumulated profits of a particular accounting year, but as relating to the entire amount, as a single sum or unit, of the accumulated profits of the foreign corporation from which the dividends received by the domestic corporation were paid. It argues that the term "accumulated profits" is properly to be considered as synonymous with "surplus" or "earned surplus." Similarly, it argues that the amount of dividends received by the domestic corporation within the taxable year is a single sum or unit, regardless of the number of accounting years from the accumulated profits of which such dividends were paid; that the "income * * * taxes paid * * * upon or with respect to the accumulated profits * * * from which such dividends were paid" are a single unit derived by computation; and that only one computation is to be made to determine the tax paid upon or with respect to accumulated profits from which the dividend was paid.

We think respondent's method of computation under the first part of section 131 (f) is consistent with both the meaning and purpose of the statute. Although it has never been judicially passed upon, it has been consistently used over a long period of years and has been before the courts in many cases. See ; affd., ; ; . The subsection gives the term "accumulated profits" a particular meaning and not the meaning for which petitioner contends. The meaning of "accumulated profits," as defined in the statute, can not be given effect when dividends are paid in part from prior years unless the dividends are segregated to separate years. The subsection gives the respondent the right to determine that segregation. Taxes are imposed on the profits of an accounting year or period and the term "accumulated profits" as defined in the subsection would indicate a meaning of annual accumulated profits rather than accumulated profits in the nature of surplus. To properly give effect to the language of the subsection, it is necessary to relate the tax credit to the particular year or years in which the accumulated profits (from which the dividends were paid) were earned and taxed. The legislative history of the subsection also supports this interpretation. See .

Petitioner's computation of the foreign tax credit with respect to the dividend received from Douglas-Pectin, as set forth in schedule 1 in the findings of fact, is difficult to understand and does not appear to be in accordance with the language and purpose of the subsection. The ratio set forth in the subsection is the dividend paid to the accumulated profits on which the foreign taxes were levied. On brief, however, petitioner claims that the dividend paid aggregates the accumulated profits; i. e., petitioner argues that the accumulated profits of the foreign corporation from which a dividend or series of dividends is paid during the taxable year of the domestic corporation must in the aggregate be equal to the total amount of the dividends so paid. This apparently renders the statutory language ineffective. The first nine items of petitioner's computation in schedule 1 are determined on the basis of separate years. The tenth item then applies a ratio of the totals of the separate years. The effect of the tenth is to strike a mean figure of the foreign tax deemed to have been paid. The result of that mean figure is that the tax deemed to have been paid for one of the years may actually exceed the foreign tax paid by the subsidiary for that year. The language of the subsection does not warrant a result of that nature.

Moreover, petitioner states in its brief that the directions contained in article 131-3 of Regulations 86 and the instructions contained in Treasury Department Form 1118, considered together, are reasonably to be construed as representing administrative regulations interpreting the subsection. Petitioner agrees that the reenactment of the subsection without material change at a time when the administrative regulations had been in effect over an extended period gives validity to the interpretation of the subsection as set forth in the regulations. But, petitioner argues that the language of the subsection plainly and unambiguously sustains its method of computation. The position of the petitioner, accordingly, appears to be that the terms of section 131 (f) have been misconstrued, which puts the regulations off on the wrong track. For the reasons heretofore stated, we can not agree with petitioner in this respect. It is, therefore, held that respondent's method of computing the foreign tax deemed to have been paid by petitioner under the first part of section 131 (f) is sustained.

The next question is the proper computation of the limitation on the amount of the credit for taxes deemed to have been paid the foreign country as set forth in the proviso to section 131 (f), which reads as follows:

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.

In computing the tax under the limitation, petitioner has followed the exact words of the statute, using the following formula:

Amount of Total Dividends Received by Petitioner/Entire Net Income of Petitioner in which Dividend Received from Subsidiary was Included X United States Tax of Petitioner Against which Foreign Tax Credit is claimed = Limitation Upon Amount of Tax Deemed to have been Paid by Petitioner Under Proviso of Section 131 (f)

We think this method of computing the limitation against the credit is correct.

As heretofore stated, section 131 (f) in its entirety requires two separate and unrelated methods of computation. In the first computation it is necessary to ascertain the tax credit by separate years in order to give credit for a proportion of the foreign subsidiary's taxes attributable to the accumulated profits of prior years from which part of the dividends were paid. The purpose of this computation is to ascertain the amount of the foreign taxes deemed to have been paid by the domestic corporation by virtue of the receipt of dividends from the foreign subsidiary. The purpose of the proviso, however, is to prevent the dividend income from being taxed at a lesser rate than the domestic corporation's other income. See In this view, it is unnecessary and immaterial to compute by separate years the dividends paid out of accumulated profits or to apply the ratio of the amount of dividends paid out of accumulated income for each separate year to the entire net income of the domestic corporation for the taxable year, as was done by respondent.

Petitioner's method of computing the limitation on the credit conforms to the method which respondent prescribed in Treasury Department Form 1118, in effect during the taxable years. See line 15 of schedule 1. Petitioner has done no more than to comply with respondent's own rules. See Petitioner's method of computing the limitation on the credit as set forth in the proviso to section 131 (f) is sustained. Accordingly,

Decision will be entered under Rule 50.

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Footnotes

• 1. SEC. 131. TAXES OF FOREIGN COUNTRIES AND POSSESSIONS OF UNITED STATES.

  * * * *

  (f) Taxes of Foreign Subsidiary. -- 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.