*199 Decision will be entered under Rule 50.
1. Petitioner is the income beneficiary of a testamentary trust created under the will of his deceased wife. During her lifetime, the deceased wife owned stock in two companies which operated plantations in the Philippine Islands, dividends on such stocks being subject to tax by the Commonwealth of the Philippines. On the facts, held, that petitioner is not entitled to any credit for foreign tax paid or accrued under section 131, I. R. C., with respect to a deficiency in tax which was paid by the administrator of her estate, because the tax was on income of the deceased wife received by her during her lifetime, none of which was ever includible in the income of the testamentary trust or of petitioner.
2. The testamentary trust received stocks of the same companies and dividends on the stocks. The companies withheld 8 percent of the dividends as the tax due the Commonwealth of the Philippines in 1941. Payment of the withheld tax was due in May 1942, but because the Japanese had invaded the Islands and counsel advised continued withholding, the tax has not yet been paid to a Government of the Philippines. Held, that petitioner*200 is entitled to credit under section 131 of the tax withheld, but not yet paid, because he has furnished direct evidence that the tax was withheld at the source.
*991 Respondent has determined a deficiency in petitioner's income tax for the year 1941 in the amount of $ 286.83. At the hearing petitioner abandoned his claim for a $ 35 business expense deduction. The only issue remaining relates to petitioner's claim for a credit under section 131 of the Internal Revenue Code for income taxes imposed by the Commonwealth of the Philippines. The total amount of the credit now sought by amendment to the petition is $ *202 349.94.
Petitioner filed his returns with the collector for the first district of California.
FINDINGS OF FACT.
Petitioner is a lawyer and a citizen of the United States, residing in San Francisco, California. Petitioner's wife, Belle S. Lederman, died on September 30, 1939, also domiciled in California. By will she left one-third of her estate outright to each of her two daughters and the remaining third in trust to pay the income to petitioner for life and at his death to pay the corpus, free and clear of the trust, equally to the two daughters. At the time of her death, petitioner's wife owned shares of common and preferred stock of the Calamba Sugar Estate, a business trust, hereinafter called Calamba, and of the *992 American Rubber Co., a corporation, hereinafter called American, both of which operated plantations in the Philippine Islands, a possession of the United States.
By the National Internal Revenue Code (Commonwealth Act No. 466), which became effective on July 1, 1939, the Commonwealth of the Philippines levied upon every nonresident alien individual not engaged in trade or business within the Philippines or not having an office or place of business there, a*203 tax, for each taxable year, equal to 8 percent of the net income derived from all sources within the Philippines. Under the code, Calamba and American were constituted withholding agents and they were required to deduct at the source 8 percent of the dividends which they paid to nonresident alien individuals and to pay the tax so withheld to the Philippine Government on or before the 15th day of May following the year of withholding.
Issue 1.
During 1939 Calamba paid dividends quarterly on both its common and preferred stock. American paid dividends quarterly on its common stock and semiannually on its preferred stock. Belle S. Lederman remained the stockholder of record of Calamba and American until after January 1941, and all dividends paid by Calamba and American in 1939 were payable to her individually. Except for the last quarterly dividends paid by both companies on October 2, 1939, after the death of petitioner's wife, all other dividends paid in 1939 by Calamba and American were paid while she was alive. Calamba and American did withhold the 8 percent tax on the October 2, 1939, dividends, but did not withhold any tax whatsoever on any of the earlier dividends which*204 were received by petitioner's wife. As a result, the collector of internal revenue of the Philippines determined a deficiency in the 1939 income tax of petitioner's wife, and by letter dated March 7, 1941, notified the administrator of her estate of a deficiency of $ 381.49 in the "1939 Philippine income tax return of the Estate [sic] of Mrs. Belle S. Lederman" because of an understatement of the amount received as dividends from Calamba and American. On May 13, 1941, after the administrator had distributed the estate to the two daughters and to the trustees of the testamentary trust in accordance with the will of Belle S. Lederman, he paid the deficiency of $ 381.49 to the collector of internal revenue of the Philippines from funds of the estate which he had retained for that purpose. No income of the testamentary trust for 1941 was used to pay the deficiency. The only dividends which were received by the estate in 1939 from Calamba and American were the October 2 dividends, on which the 8 percent tax had been fully satisfied by withholding, and the payment of the $ 381.49 deficiency was in satisfaction of the tax individual liability *993 of petitioner's wife on the*205 dividend income received by her from Calamba and American prior to October 2, 1939, for which no tax had been withheld at the source.
Petitioner has included one-third of the above deficiency payment, or $ 127.16, in his claim for foreign tax credit.
Issue 2.
The testamentary trust, of which petitioner was the sole life income beneficiary, was set up in accordance with the will of Belle S. Lederman. Included in the corpus of the trust were shares of common stock of Calamba and shares of common and preferred stock of American. During 1941, Calamba and American paid dividends to the trust which were distributable to petitioner. Calamba and American withheld the 8 percent tax for payment to the Philippine Government on all the dividends paid in 1941 on the shares of stock held by the trust. Out of a total of $ 2,784.73 payable as dividends in 1941, Calamba and American withheld $ 222.78 and paid $ 2,561.95 to the trustees. A breakdown of the dates of payment, amount of dividends payable, tax withheld, and dividends received by the trust is as follows: 1
| Calamba Sugar Estate Stock. | |||
| Dividends | |||
| Date of payment | Dividends | 8% tax | received by |
| payable | withheld | trustees | |
| Jan. 2 | $ 693.33 | $ 55.46 | $ 637.87 |
| Apr. 15 | 693.20 | 55.46 | 637.74 |
| July 1 | 693.20 | 55.46 | 637.74 |
| Total | 2,079.73 | 166.38 | 1,913.35 |
| American Rubber Co. Common Stock. | |||
| Jan. 15 | 100.00 | 8.00 | 92.00 |
| Apr. 4 | 100.00 | 8.00 | 92.00 |
| July 1 | 200.00 | 16.00 | 184.00 |
| Oct. 1 | 200.00 | 16.00 | 184.00 |
| Total | 600.00 | 48.00 | 552.00 |
| American Rubber Co. Preferred Stock. | |||
| Jan. 2 | 52.50 | 4.20 | 48.30 |
| July 1 | 52.50 | 4.20 | 48.30 |
| Total | 105.00 | 8.40 | 96.60 |
Although the trustees had actually received $ 2,561.95 in dividends from Calamba and American in 1941, petitioner reported in his 1941 income tax return, and on Form 1116 attached thereto, that, out of *994 $ 3,704.18 received by him as income from the trust in 1941, only $ 1,938.90 represented dividends received from Calamba and American. And, although Calamba and American actually withheld $ 222.78 in taxes in 1941, petitioner on his return and on Form 1116 claimed a credit of $ 282.28 for foreign taxes paid and he originally ascribed only $ 155.12 as taxes withheld by Calamba and American over and above his claim for the $ 127.16 paid as his share of his wife's 1939 tax deficiency. At the hearing petitioner was allowed to file an amended petition increasing the credit claimed for*207 taxes withheld by Calamba and American from $ 155.12 to $ 222.78, which, with the $ 127.16 claimed as his share of the wife's foreign tax deficiency, makes a total credit now sought by petitioner in the amount of $ 349.94.
Calamba and American did not pay the $ 222.78 of withheld taxes to the collector of internal revenue of the Philippines on May 15, 1942, the date set for payment, because the Japanese had invaded the Islands before that date. The resident Commissioner of the Philippines in Washington, D. C., was later appointed deputy collector of internal revenue for the Philippines, but Calamba and American did not pay him the taxes they had withheld in 1941 because they had been advised by counsel that he was not properly authorized to receive payment of taxes due the Philippine Government. As of July 17, 1945, the date of the hearing in this case, the withholding agents, Calamba and American, still retained the $ 222.78 withheld as taxes on the dividends paid in 1941, and they fully intended to pay the $ 222.78 of withheld tax to the duly constituted Government of the Philippines once it began operating in the Islands.
Petitioner did not file, nor has he been requested to *208 file, any bond for so much of the tax credit which he may have claimed for taxes accrued but not paid to the Philippine Government.
OPINION.
Issue 1. -- We think that there are two answers to petitioner's contention that he is entitled to a credit of $ 127.16 for taxes paid to a possession of the United States, representing one-third of the taxes paid in 1941 by the administrator on the $ 381.49 deficiency assessed by the Philippine Government against his wife's 1939 Philippine income tax liability. It is true that section 131 of the Internal Revenue Code, as amended, 2*210 when read in conjunction with *995 section 23 (c)(1)(C), allows a citizen the choice of taking the amount of income taxes imposed by a possession of the United States either as a deduction from gross income or as a credit against the tax, and of changing the choice, within prescribed time limits, when once made. See S. Rept. No. 1631, 77th Cong., 2d sess., 1942, p. 132. And it is also true that an individual beneficiary of an estate or trust may claim the credit for his proportionate share of the foreign taxes of the estate or trust. But the primary design of this credit provision was to mitigate the *209 evil of double taxation, Burnet v. Chicago Portrait Co., 285 U.S. 1">285 U.S. 1, which exists only when the same income is taxed both *996 in the possession and in the United States, Hubbard v. United States (Ct. Cls.), 17 Fed. Supp. 93; certiorari denied, 300 U.S. 666">300 U.S. 666. As to petitioner there was never any double taxation. No amount of the income on which the Philippine tax deficiency was paid was ever includible in either petitioner's or the testamentary trust's taxable income. That the wife, had she lived, would have been able to allocate the 1941 deficiency payment as a tax credit against other Philippine income received by her in 1941 to mitigate the possible double taxation of her 1939 income, see United States v. Rogers, 122 Fed. (2d) 485 (C. C. A., 9th Cir.), is no reason to allow the credit to petitioner who did not receive the 1939 income. 3 Cf. Hubbard v. United States, supra;Helvering v. Campbell, 139 Fed. (2d) 865 (C. C. A., 4th Cir.).
Moreover, even assuming that the payment in 1941 by the administrator in satisfaction of the wife's 1939 Philippine income tax liability could give rise to a tax credit, petitioner's "proportionate share of such taxes of the * * * estate" (sec. 131 (a) (4)) was in no sense one-third of the amount paid, or, for that matter, any lesser amount. The income tax due the Philippines by the wife was a claim against her estate. Despite petitioner's testimony that he did not know whether the claim had been paid by the administrator from principal or from income of the estate, the claim was payable from and chargeable only to the assets of the estate and it served to reduce the amount of principal available for distribution to the trust and the two daughters. As to the trust, the payment of the $ 381.49 had the effect of reducing its corpus by $ 127.16. But petitioner had no interest in the corpus, as such; he *211 was only the life income beneficiary. If the tax credit could be claimed by anyone, it would have to be by the two daughters, whose interests as remaindermen in the corpus had been adversely affected by the payment. Obviously, the amount of income which would be available to petitioner from a corpus $ 127.16 greater is not the "proportionate share" of the taxes within the intendment of the statute. Yet petitioner can point to no other harm. In a sense, the problem is similar to that raised in cases where taxes or other expenses payable from the corpus of a trust do not serve as a deduction or to reduce the amount of income currently distributable to the income beneficiary. See Ardenghi v. Helvering, 100 Fed. (2d) 406 (C. C. A., 2d Cir.); certiorari denied, 307 U.S. 622">307 U.S. 622.
It is held that petitioner is not entitled to a credit in the amount of $ 127.16.
Issue 2. -- The second issue relates to petitioner's claim for a foreign tax credit in the amount of $ 222.78, the amount of tax withheld at the *997 source by Calamba and American on dividends paid in 1941 to the trust. Petitioner has made claim for a credit*212 for taxes paid, upon the argument that the withholding by Calamba and American constitutes payment of the foreign tax for the purposes of section 131 and for the purposes of determining his right to the credit for the year 1941. Respondent concedes on brief that, if the withholding constitutes payment of the foreign tax under section 131, petitioner is entitled to the claimed credit in 1941 for tax paid. However, respondent argues that a withheld tax is only an accrued tax. He takes the position that because Calamba and American had not paid in 1941 to a Government of the Philippines, the amount withheld for payment of tax, and since the amount withheld has not been paid up to the present time to a Government of the Philippines, petitioner can not take a credit for a tax paid.
There is no doubt that $ 222.78 was withheld by Calamba and American for payment to a Government of the Philippines. The stock transfer and dividend disbursing agent in San Francisco of Calamba and American testified in this proceeding that the above sum had not yet been paid to a Philippine Government, but that it would be paid to the duly constituted government as soon as it becomes established*213 in the Philippine Islands.
We think petitioner's contention should be sustained. While the situation existing in the Philippine Islands on and after May 15, 1942, was unusual, the date when the withholding agent would have paid the tax withheld to the Philippine Government, and in this particular case necessitated the procedure which has been adopted by Calamba and American, nevertheless it is not unusual for a withholding agent to pay to a government a tax which has been withheld in a year subsequent to the year in which the tax was withheld. Nothing in the statute or regulations suggests that the credit for taxes paid is not to be taken in the year of withholding, but must be claimed only in the year in which the withholding agent actually turns over the funds to the foreign country or possession. Once the taxpayer has parted with his funds, there seems to be no reason to correlate the credit for taxes paid to an actual payment date by the withholding agent, a date over which the taxpayer has no control whatsoever. For example, in the instant case, were Calamba to pay the tax to the Philippine Government in 1946, and American in 1947, respondent would have to say that*214 these payment dates should control even though as to petitioner both taxes were paid in the fiscal sense in 1941, when they were withheld. Moreover, section 131 (c) of the Internal Revenue Code, which allows the Commissioner to require a bond conditioned upon performance where a credit for taxes accrued is claimed, was to assure that a citizen or resident might not take advantage of the difficulty *998 of collecting the foreign tax and avoid payment of both the Federal and foreign tax. A tax collected at the source by withholding presents no such problem, and it does not seem that the statute contemplates that the taxpayer whose tax has already been withheld must nevertheless be subject to the obligation of furnishing a bond that the withholding agent will properly perform.
Further support for the view that the date of withholding is the proper date of payment for purposes of the credit for taxes paid may be found in the information and proof requirements of the regulations. Schedule C of Form 1116, applicable to taxes paid or accrued on withheld income, asks for information only on the amount of tax withheld and the date of withholding. No space is provided in the*215 forms in which to set forth the date of payment to the foreign government or to a possession by the withholding agent. In all the other schedules the dates of accrual and payment (if paid) must be specified. Thus, it is clear that withholding and payment are considered to be the same for purposes of the credit.
Moreover, section 29.131-3 of Regulations 111, which sets forth the provisions of section 19.131-3 of Regulations 103, amended by T. D. 5056, C. B. 1941-2, p. 139, provides as follows:
Where it has been established to the satisfaction of the Commissioner that it is impossible (1) to furnish a receipt for such foreign tax payment or (2) the foreign tax return [for taxes accrued], or (3) direct evidence of the amount of tax withheld at the source, secondary evidence of the payment or accrual of the tax or of the withholding of the tax may, in his discretion, and under such rules as he may prescribe, be accepted by the Commissioner. [Italics added.]
Thus, it seems clear from the regulation which sets forth the "Conditions of Allowance of Credit," that direct evidence of the fact that tax has been withheld at the source and of the amount withheld*216 are satisfactory and sufficient proof to support a claim for credit, regardless of whether the claim is for tax paid or tax accrued. Petitioner has furnished such direct evidence in this case through the testimony of the San Francisco agent of Calamba and American and the introduction of the canceled dividend checks showing the amount of the tax withheld.
Although not strictly analogous, both the United States and the Philippine Islands internal revenue codes allow their respective nonresident aliens a credit for taxes withheld at the source, and payment by the withholding agent is not made a prerequisite of the allowance of the credit. See section 143 (d) of the Internal Revenue Code and section 53 (d) of the Philippine National Internal Revenue Code.
It is held, therefore, that petitioner is entitled to a credit for taxes paid, subject to the limitations of section 131 (b) of the Internal Revenue Code, for the $ 222.78 withheld by Calamba and American in 1941.
*999 Allowance of a credit now is of course without prejudice to respondent to assert in a subsequent proceeding the applicability of section 131 (c) of the Internal Revenue Code if the withheld taxes are not actually*217 paid over by Calamba and American to the Philippine Government. See Pacific Metals Corporation, 1 T.C. 1028">1 T. C. 1028.
The petition contains the statement that it has been filed "on behalf of [petitioner] himself and also on behalf of other stockholders of American Rubber Company and Calamba Sugar Estate * * * all of whom have been disallowed deductions claimed for taxes that had accrued during the year 1941 in favor of the Philippine government * * *." The other stockholders are not before this Court in this proceeding. Therefore, the decision in this case is limited to the income tax liability of petitioner only.
Decision will be entered under Rule 50.
Footnotes
1. The trust was substituted as the stockholder of record of one-third of the shares after the January 1941 distributions. The amounts shown for January, therefore, represent one-third of the amounts received by the administrator.↩
2. SEC. 131. TAXES OF FOREIGN COUNTRIES AND POSSESSIONS OF UNITED STATES. [As amended by the Revenue Acts of 1939, 1942, and 1943.]
(a) Allowance of Credit. -- If the taxpayer chooses to have the benefits of this section, the tax imposed by this chapter, except the tax imposed under section 102 or section 450, shall be credited with:
(1) Citizens and domestic corporations. -- 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
* * * *
(4) Partnerships and estates. -- In the case of any such individual who is a member of a partnership or a beneficiary of an estate or trust, his proportionate share of such taxes of the partnership or the estate or trust paid or accrued during the taxable year to a foreign country or to any possession of the United States, as the case may be.
Such choice may be made or changed at any time prior to the expiration of the period prescribed for making a claim for credit or refund of the tax imposed by this chapter.
(b) Limit on Credit. -- The amount of the credit taken under this section shall be subject to each of the following limitations:
(1) The amount of the credit in respect to the tax paid or accrued to any country shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's net income from sources within such country bears to his entire net income, in the case of a taxpayer other than a corporation, or to the normal-tax net income in the case of a corporation, for the same taxable year; and
(2) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's net income from sources without the United States bears to his entire net income, in the case of a taxpayer other than a corporation, or to the normal-tax net income, in the case of a corporation, for the same taxable year.
(c) Adjustments on Payment of Accrued Taxes. -- If accrued taxes when paid differ from the amounts claimed as credits by the taxpayer, or if any tax paid is refunded in whole or in part, the taxpayer shall notify the Commissioner, who shall redetermine the amount of the tax for the year or years affected, and the amount of tax due upon such redetermination, if any, shall be paid by the taxpayer upon notice and demand by the collector, or the amount of tax overpaid, if any, shall be credited or refunded to the taxpayer in accordance with the provisions of section 322. In the case of such a tax accrued but not paid, the Commissioner as a condition precedent to the allowance of this credit may require the taxpayer to give a bond with sureties satisfactory to and to be approved by the Commissioner in such sum as the Commissioner may require, conditioned upon the payment by the taxpayer of any amount of tax found due upon any such redetermination; and the bond herein prescribed shall contain such further conditions as the Commissioner may require.
(d) Year in Which Credit Taken. -- The credits provided for in this section may, at the option of the taxpayer and irrespective of the method of accounting employed in keeping his books, be taken in the year in which the taxes of the foreign country or the possession of the United States accrued, subject, however, to the conditions prescribed in subsection (c) of this section. If the taxpayer elects to take such credits in the year in which the taxes of the foreign country or the possession of the United States accrued, the credits for all subsequent years shall be taken upon the same basis, and no portion of any such taxes shall be allowed as a deduction in the same or any succeeding year.
(e) Proof of Credits. -- The credits provided in this section shall be allowed only if the taxpayer establishes to the satisfaction of the Commissioner (1) the total amount of income derived from sources without the United States, determined as provided in section 119, (2) the amount of income derived from each country, the tax paid or accrued to which is claimed as a credit under this section, such amount to be determined under rules and regulations prescribed by the Commissioner with the approval of the Secretary, and (3) all other information necessary for the verification and computation of such credits.
* * * *↩
3. At least in the absence of the applicability of section 126 (b) (1) of the Internal Revenue Code↩, relating to credits of decedents with respect to taxable years ending after December 31, 1942.