*1020 The limitation upon the credit for income, war profits, and excess profits taxes provided for in subdivision (a) of section 238 of the Revenue Acts of 1924 and 1926 is applicable to the amount determined under subdividion (e) of that section.
*1108 This proceeding is for the redetermination of deficiencies in income tax of $766.75 and $3,211.23 for the calendar years 1925 and 1926, respectively.
The sole issue presented for comsideration is one of law, involving the interpretation of subdivisions (a) and (e) of section 238 of the Revenue Acts of 1924 and 1926, the petitioner alleging error in the application of said subdividions in the determination of the deficiencies here in controversy by reason of the respondent's (a) failure to allow the sums of $23,198.19 and $23,149.38 as credits in the years 1925 and 1926, respectively, paid and accrued during said years as income taxes to foreign countries; (b) his determination of the credit for foreign taxes under the provisions of section 238 aforesaid by applying the limitation*1021 provisions contained in subdivisions (a) and (e) thereof to the total taxes paid by the petitioner and its foreign subsidiaries instead of applying the limitations of the two subdivisions separately; (c) his determination of the credits by adding both credits for taxes paid by petitioner and taxes paid by foreign corporations of which petitioner owns the majority of the voting stock and applying the limitation provisions to the total taxes so paid instead of applying such limitation to each tax and thereafter totaling the two taxes for the purpose of the credit allowance; (d) his determination that the deduction *1109 for taxes accrued for the year 1925 is $6,060.50 instead of $9,523.48; (e) his determination that the credit for foreign taxes accrued for the year 1925 is $14,837.32 instead of $15,924.22; (f) his failure to determine the deduction in the year 1925 for taxes accrued by adding the sum of $8,360.87 to the sum of $14,837.32 in the determination of the portion of the excess to be allowed as a deduction; (g) his failure to allow for taxes accrued in the year 1926 the sum of $4,224.72; (h) his failure to determine the deduction in the year 1926 for taxes accrued by*1022 adding the sum of $7,528.36 to the sum of $15,621.02 in the determination of the portion of the excess to be allowed as a deduction; and (i) his determination that the credit for foreign taxes accrued in the year 1926 is $15,621.02 instead of $16,888.56.
FINDINGS OF FACT.
The petitioner is a corporation, organized under the laws of the State of New York, with its principal place of business at No. 220 36th Street, Brooklyn, New York.
The books of the petitioner are, and were at all times hereinafter mentioned, kept on an accrual basis and its income tax returns for the years 1925 and 1926 were filed on such basis.
The petitioner at the beginning of the year 1925 owned 2,262 shares out of a total of 3,000 shares of the outstanding capital stock of Societe Cadum, a foreign corporation, incorporated under the laws of the Republic of France and doing business in France. At the end of the year 1925 it woned 2,232 shares of such stock. This corporation had only one class of stock.
In the year 1925 there accrued against Societe Cadum income taxes due the Republic of France in the total sum of 457,987.65 francs, which converted at the rate of exchange in effect at the date*1023 of the accrual of the taxes amounted to $17,308.53. These taxes have been paid by Societe Cadum.
The petitioner received from Societe Cadum during the year 1925 dividends in the total sum of 2,251,800 francs, which converted at the rate of exchange in effect at the date of receipt amounted to $101,605.73.
During the year 1925 the total profits of Societe Cadum were 4,661,637.41 francs and the accumulated profits, representing the total profits less the tax thereon, out of which said dividends were paid and which were included in net income on which the tax was based were 4,203,739.76 francs, which converted at the rate of exchange in effect at the end of the year 1925 totaled $158,901.36.
During the year 1925 the net income of the petitioner totaled $126,091.83. The total tax due from the petitioner to the United States in accordance with item 30, of the income tax return, Form *1110 1120, filed for such year was $16,391.94 (i.e., before any deduction or credit for foreign taxes paid or accrued).
In the year 1925 there accrued against the petitioner income taxes due to the Republic of France in the sum of 403,324.20 francs, which converted at the rate of exchange*1024 in effect at the date when the taxes were due amounted to $18,288.99. These taxes were measured by dividends in the sum of $101,605.73 received by the petitioner from Societe Cadum.
In the year 1925 there accrued against the petitioner income taxes due to the United Kingdom of Great Britain and Northern Ireland in the sum of Pounds 541.5, which converted at the rate of exchange in effect at the due date of the taxes amounted to $2,608.83. These taxes were measured by dividends in the sum of $12,527.46 received by the petitioner from Omega, Ltd., a corporation organized under the laws of the United Kingdom of Great Britain and Northern Ireland, not engaged in business or receiving income from sources within the United States.
The petitioner throughout the year 1926 owned 2,232 shares out of a total of 3,000 shares of the outstanding capital stock of Societe Cadum, a foreign corporation, incorporated under the laws of the Republic of France and doing business in France. This corporation had only one class of stock.
In the year 1926 there accrued against Societe Cadum income taxes due the Republic of France in the total sum of 120,150.20 francs. These taxes have been paid*1025 by Societe Cadum.
The petitioner at the beginning of the year 1926 owned 237 shares out of a total of 300 shares of the outstanding capital stock of Societe Donge, a foreign corporation, incorporated under the laws of the Republic of France and doing business in France. At the end of the year 1926 it owned 219 shares of such stock. This corporation had only one class of stock.
In the year 1926 there accrued against Societe Donge income taxes due the Republic of France in the total sum of 164,550.40 francs. These taxes have been paid by Societe Donge.
The taxes paid to the Republic of France by Societe Cadum and Societe Donge totaled 284,700.60 francs, which converted at the rate of exchange in effect at the date of the accrual of the taxes amounted to $11,259.91. The petitioner received from Societe Cadum and Societe Donge during the year 1926 dividends of 2,232,000 and 603,000 francs, respectively, or of the total sum of 2,835,000 francs, which converted at the rate of exchange in effect at the date of receipt amounted to $98,669.13.
During the year 1926 the total profits of Societe Cadum and Societe Donge were 1,898,000 francs and the accumulated profits representing*1026 *1111 the total profits less the tax thereon, out of which said dividends were paid and which were included in net income on which the tax was based for the Societe Cadum and Societe Donge were 680,850 francs for Societe Cadum and 932,449.60 francs for Societe Donge, or a total of 1,613,299.60 francs, which converted at the rate of exchange in effect at the end of the year 1926 totaled $63,806.
During the year 1926 the net income of the petitioner totaled $139,498.13. The total tax due from the petitioner to the United States in accordance with item 30 of the income tax return, Form 1120, filed for such year was $18,832.25 (i.e., before any deduction or credit for foreign taxes paid or accrued). In the year 1926 there accrued against the petitioner income taxes due to the Republic of France in the sum of 340,200 francs, which converted at the rate of exchange in effect at the date when the taxes were due amounted to $11,840.33. These taxes were measured by dividends in the sum of $98,669.13 received by the petitioner from Societe Cadum and Societe Donge.In the year 1926 there accrued against the petitioner income taxed due to the United Kindom of*1027 Great Britain and Northern Ireland in the sum of Pounds 779.08, which converted at the rate of exchange in effect at the due date of the taxes amounted to $3,780.69. These taxes were measured by dividends in the sum of $18.903.36 received by the petitioner from Omega, Ltd., a corporation organized under the Laws of the United Kingdom of Great Britain and Northern Ireland, not engaged in business or receiving income from sources within the United States.
In rejecting the contentions advanced by the petitioner respecting the disputed credits the respondent stated in his deficiency notice: In connection with the protest referred to, attention is directed to your contention that there are two separate and distinct and distinct credits provided by Section 238 of the Revenue Act of 1926, each with its own limitation, and that the sum of the two credits so computed is the total allowable against domestic tax, rather than an amount determined by limiting such sum to that proportion of the domestic tax on entire income before diduction of foreign taxes which foreign income before deduction of foreign taxes bears to entire income before deduction of such taxes.You are advised*1028 that after careful consideration of this issue in your case, it is held by this office that the tax credit as computed and limited in Section 238(c)(e) should be included in the sum total of other foreign taxes for which credit may be taken by a domestic corporation and that the limitation provided in Section 238(a) should be applied to this total.
OPINION.MORRIS: The fundamental inquiry is whether there are two separate and distinct credits provided for in section 238 of the Revenue Acts of 1924 and 1926 to be computed and determined according to *1112 their separate limitations as therein prescribed, that is, a credit under subdivision (a) for any income, war profits, and excess profits taxes paid in the instant case to the Republic of France and to the Kingdom of Great Britain, the amount thereof being limited by the provisions of the subdivision, and another credit under subdivision (e) of that section for such income, war profits, or excess profits taxed "deemed" to have been paid by the petitioner's foreign subsidiaries to those countries upon accumulated profits from which dividends were declared and received by this petitioner, said credit to be separately*1029 computed and limited only by the provisions of that subdivision, and the sum of the two to be allowed as credits against the income taxes found to be due the United States, as the petitioner contends, or, whether the total allowance in any event is governed by the limitation prescribed in subdividion (a) of that section, as the respondent contends.
The pertinent provisions of the Acts of 1924 and 1926, which are the same for our purposes, are as follows:SEC. 238. (a) In the case of a domestic corporation the tax imposed by this title shall be credited with the amount of any income, war-profits, and excessprofits taxes paid or accrued during the same taxable year to any foreign country, or to any possession of the United States: Provided, That the amount of such credit shall in no case exceed the same proportion of the tax (computed on the basis of the taxpayer's net income without the deduction of any income, war-profits, or excess-profits taxes imposed by any foreign country or possession of the United States), against which such credit is taken, which the taxpayer's net income (computed without the deduction of any such income, war-profits, or excess-profits tax) *1030 from sources without the United States bears to its entire net income (computed without such deduction) for the same taxable year. * * *
* * *
(e) 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 (not deductible under section 234) in any taxable year shall be deemed to have paid the same proportion of any income, was-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 cerporation from which such dividends were paid, which the amount of such dividends bears to the amount of such accumulated profits: Provided, That the credit allowed to any domestic corporation under this subdivision shall in no case exceed the same proportion of the taxes against which it is credited, 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. * * *
Prior to the enactment of the Revenue Act of 1918 a taxpayer who had paid income, war profits, and excess profits*1031 taxes to a foreign country was only permitted to deduct such taxes from gross income in arriving at the net income upon which the United States income tax was imposed. The Congress, recognizing the manifest *1113 unfairness in the prevailing method of treatment and in order to mitigate the evils of couble taxation, provided, in section 238 of that act, for an un imited credit for taxes paid to such foreign countries or possessions of the United States against taxes found to be due the United States. Rept. 767, p. 31, accompanying H. R. 12863. See also Burnet v. Chicago Portrait Co., 50 Fed.(2d) 683; affd., 285 U. S. 1. Thus, we see that subdivision (a) of section 238 of the acts under consideration originated with the enactment of the Revenue Act of 1918, when the complexities of income taxation were little appreciated, preciated, particularly as it pertained to those corporations enjoying an affiliated status and entitled to file consolidated returns under the acts. So that it was not at all surprising that the Congress, in the enactment of the Revenue Act of 1921, should find it necessary to place a limitation upon the credit theretofore*1032 allowed. This it did by inserting a limitation clause in section 238(a) of the Revenue Act of 1921 and, as so amended, that subdivision was carried into the Revenue Acts of 1924 and 1926 in substantially the same language as there used. Subdivision (e) of section 238 found its origin in section 240(c) of the Revenue Act of 1918, which section pertained to and provided for the filing of consolidated returns by corporate taxpayers. That subdivision then read as follows:
For the purposes of section 238 a domestic corporation which owns a majority of the voting stock of a foreign corporation shall be deemed to have paid the same proportion of any income, war-profits and excess-profits taxes paid (but not including taxes accrued) by such foreign corporation during the taxable year to any foreign country or to any possession of the United States upon income derived from sources without the United States, which the amount of any dividends (not deductible under section 234) received by such domestic corporation from such foreign corporation during the taxable year bears to the total taxable income of such foreign corporation upon or with respect to which such taxes were paid: Provided,*1033 That in no such case shall the amount of the credit for such taxes exceed the amount of such dividends (not deductible under section 234) received by such domestic corporation during the taxable year.
That subdivision was likewise modified by the Revenue Act of 1921 and was incorporated in the act as subdividion (e) of section 238, the language of which has remained as therein found.
The right of individual citizens of the United States to claim credits for war profits and excess profits taxes paid to foreign countries or possessions of the United States upon income derived from sources therein was granted in section 222 of the Revenue Act of 1918 and that right has been perpetuated throughout the succeeding revenue acts except that, and an interesting historical parallel exists here between the individual right and the corporate right to such credits, the Congress found it necessary to place a limitation upon *1114 the credit allowed to individuals as it did in that same act in the case of corporations.
In commenting upon section 238 of the Revenue Act of 1921 the Finance Committee, at page 19 of its Report No. 275 accompanying H. R. 8245, said:
Section 238 grants*1034 to corporations substantially the same credits for income and profits taxes paid to foreign countries or possessions of the United States as are granted to individuals by section 222.
The limitation clauses in section 238(a) and section 222 referred to in the foregoing Committee Report are the same in principle.
The foregoing brief, but sbustantially complete, historical sketch of the subdivisions of the acts now under consideration brings us to consideration of the issue presented and the contentions advanced. Our fundamental guide in this quest is to determine, as far as possible, from the language used, what the intention of the Congress was. In re Matthews,109 Fed. 603.
One thing of which we are certain is that the Congress did not intend to grant full credit in all cases for all taxes paid to foreign countries, by reason of the fact that it placed a definite limitation thereon under the Revenue Act of 1921 after it had doubtless learned that the unlimited credit enjoyed under the Revenue Act of 1918 worked a hardship upon the United States and deprived it of taxes upon substantial incomes derived from sources within the United States. It is believed*1035 that the Congress intended to allow only what it regarded as a reasonable credit consistent with the best interests of this Government. Therefore, the language which it added to the 1921 Act must be construed in the direction of limitation of the privilege rather than in the extension thereof.
It must also be borne in mind, in the construction of these acts, that they were designed for the production of revenues to the United States. Credits and exemptions were mere incidents in this design. Therefore, the disputed provisions of the acts must be viewed in such a manner that the production of revenue will result except where the act expressly indicates otherwise. In other words, we must impute to the Congress no intention to permit domestic corporations having foreign affiliates to completely deprive the United States of taxes upon income otherwise taxable, by reason of the fact that foreign countries in which they operate have imposed a heavier tax levy upon income than the tax found to be due the United States upon income derived from its sources, a result that would be accomplished in a vast number of such cases.
It will be observed that subdivision (a) of section 238, *1036 supra, is mandatory in its terms. It states at the very outset that domestic corporations "shall be credited" with a certain proportion of "any *1115 income, war profits, and excess profits taxes paid or accrued" to any foreign countries or to any possessions of the United States. We find nothing of the sort in subdivision (e), however. In fact, except for that portion of the limitation clause provided in that subdivision where it says "the credit allowed to any domestic corporation under this subdivision", we find nothing therein even authorizing a credit at all apart from the grant made in subdivision (a). True, subdivision (e) says that a domestic corporation owning the majority of the voting stock of a foreign corporation "shall be deemed to have paid" a certain proportion of income, war profits, or excess profits taxes paid by its foreign subsidiary, but it does not say, as was said in subdivision (a), that the amounts "shall be credited" to the taxpayer. What subdivision (e) does say, and this we believe to be the keynote to its intention, is that "For purposes of this section" it would be so deemed. What is meant by these words? The only logical meaning that*1037 may be attached to them, it would seem, in the light of all of the other attendant circumstances, particularly in view of the failure of subdivision (e) to expressly grant a credit under that subdivision, is that it refers to subddivision (a), the only granting clause to be found in section 238. This we believe inescapable.
The petitioner contends that articles 611 and 612 of the regulations promulgated under the Revenue Acts of 1924 and 1926 construed subdivisions (a) and (e) of section 238 of those acts as providing for two separate credits and, in effect, that since that construction has stood without change during the reenactment of the same provisions in the later revenue acts until the respondent, in September 1931, issued T. D. 4324, published at page 256 of C. B. X-2, definitely construing the acts otherwise, full force and effect should be given thereto. The first criticism to be made of this contention is that the articles referred to do not, in our opinion, amount to interpretations, indeed, they amount to little more than a restatement of the terms of the statute. Furthermore, admitting the rule that the construction of an ambiguous statute by those charged*1038 with the duty of the execution thereof will be given great weight (United States v. Hill,120 U.S. 169">120 U.S. 169), such rule is inapplicable where there is no ambiguity or where the interpretation placed upon it by the executive officers is incorrect. Swift Co. v. United States,105 U.S. 691">105 U.S. 691. In this connection it is interesting to note the language ofMr. Chief Justice Hughes in Burnet v. Chicago Portrait Co., supra, wherein the construction of certain words used in these same two subdivisions of the act was involved. He said:
The present controversy has arisen under the Treasury Regulations adopted with respect to the Revenue Acts of 1918 and 1921 as to credits. The familiar principle is invoked that great weight is attached to the construction consistently given to a statute by the executive department charged with its administration. *1116 United States v. Jackson,280 U.S. 183">280 U.S. 183, 193, 50 S. Ct. 143">50 S.Ct. 143, 74 L. Ed. 361">74 L.Ed. 361. But the qualification of that principle is as well established as the principle itself. The court is not bound by an administrative construction, and if that construction is not uniform*1039 and consistent, it will be taken into account only to the extent that it is supported by valid reasons. [Citations.] Moreover, ambiguous regulations are of little value in resolving statutory ambiguities. * * *
We are of the opinion, therefore, that the credit provided for in subdivision (e) of section 238, supra, is merely an enlargement of the basic credit allowed in subdivision (a) of that section and is not a separate credit as the petitioner contends.
The petitioner contends, in the alternative, that if both of the credits determined under the provisions of subdivisions (a) and (e) are not separately allowed, then the excess should be apportioned between the taxes paid or accrued as defined by subdivision (a) and a credit for taxes deemed to have been paid as defined by subdivision (e) in proportion to their respective amounts and that portion of the disallowed credit which is apportioned to the taxes paid or accrued under subdivision (a) should be allowed as a deduction from gross income under section 234(a)(3) of the Revenue Acts of 1924 and 1926. We have already had occasion to consider the deductibility 0f that portion of the excess arising under subdivision*1040 (e) of section 238 in W. M. Ritter Lumber Co.,30 B.T.A. 231">30 B.T.A. 231, where we held that such excess was not deductible. The reasons for the conclusion there reached respecting the excess under subdivision (e) are inapplicable to the excess arising under subdivision (a) of that section and for the reason indicated in that case we are of the opinion that to this extent the petitioner's contentions should be sustained. This conclusion coincides with the respondent's T.D. 4324, supra, and with what we understand he is now willing to concede.
Reviewed by the Boare.
Judgment will be entered under Rule 50.