1949 U.S. Tax Ct. LEXIS 106">*106 Decisions will be entered under Rule 50.
1. Act of Legislature of Philippine Islands barring claims against a decedent's estate not filed with probate court within specified period does not bar claims for income taxes due the United States from residents of Philippine Islands under revenue acts of Congress. The general power delegated by Congress to Philippine Legislature extended only to regulation of domestic affairs and not to matters contravening the revenue acts of the United States.
2. Decision of this Court in a prior proceeding involving estate tax liability is not res judicata in this proceeding involving decedent's income tax liability, where the question of such income tax liability was not raised or decided in the prior proceeding.
3. Stockholders of Philippine corporation are not entitled to credit for purpose of normal tax under section 216 of the Revenue Act of 1918 for dividends received from that corporation when it made all sales of lumber for United States customers in Manila to United States brokers and had no taxable sources of income within the United States.
4. Amount of credit allowable against United States income tax of decedent for taxes paid to1949 U.S. Tax Ct. LEXIS 106">*107 the Philippine Islands in 1919 redetermined.
13 T.C. 214">*215 These proceedings, consolidated for hearing and opinion, involve deficiencies in income taxes as follows:
| Petitioner | Year | Deficiency |
| Estate of B. W. Cadwallader, deceased | 1918 | $ 1,119.88 |
| 1919 | 14,164.96 | |
| 1919 | 12,146.56 | |
| Rose M. Cadwallader | 1936 | 3,518.02 |
Prior to the hearing the parties stipulated that there is no deficiency due from and no overpayment of tax by Rose M. Cadwallader for 1936. That stipulation will be given effect under a Rule 50 decision.
1949 U.S. Tax Ct. LEXIS 106">*108 The issues presented for decision are:
(1) Whether the assessment and collection of the deficiencies involved are barred by section 695 of the Code of Civil Procedure of the Philippine Islands;
(2) Whether the assessment and collection of the deficiencies involved are barred by application of the doctrine of res judicata;
(3) Whether dividends received by the petitioners from the Cadwallader-Gibson Lumber Co. in 1919 are subject to the normal tax for that year; and
(4) Whether the petitioner, the estate of B. W. Cadwallader, deceased, is entitled in the computation of its income tax liability for the years 1918 and 1919 to credits in those years for income taxes paid to the Philippine Islands in the years 1919 and 1920, respectively.
Some of the facts have been stipulated and are so found. The stipulation filed is incorporated herein by reference.
FINDINGS OF FACT.
B. W. Cadwallader, deceased, hereinafter referred to as the decedent, during 1918 and 1919 and all periods material hereto, was a citizen of the United States and a resident of Manila, Philippine Islands. During the year 1918 and until June 7, 1919, the decedent was married to Anna G. Cadwallader. From June 8 to 1949 U.S. Tax Ct. LEXIS 106">*109 June 27, 1919, decedent was unmarried. From June 28, 1919, until he died on November 20, 1936, decedent was married to Rose M. Cadwallader, his executrix, hereinafter referred to as the petitioner.
13 T.C. 214">*216 The decedent filed Philippine income tax returns with the collector of internal revenue at Manila, Philippine Islands, for the years 1917, 1918, and 1919, paying Philippine income taxes as follows:
| Year | Year paid | Amount paid |
| 1917 | 1918 | $ 97.73 |
| 1918 | 1919 | 432.16 |
| 1919 | 1920 | 6,358.40 |
All of the income of the decedent in the years 1918 and 1919 was from sources in the Philippine Islands. The decedent and his wife did not file United States income tax returns for the years 1918 and 1919 until March 29, 1939.
During the years 1917 through 1920 decedent was a stockholder and an active officer of the Cadwallader-Gibson Lumber Co., a Philippine corporation, engaged principally in the business of selling Philippine lumber to purchasers in the United States. The lumber company did not have offices or any sales organization of its own in the United States, but was represented by the brokerage firm of Henry W. Peabody & Co. in New York City. Peabody & Co. procured orders1949 U.S. Tax Ct. LEXIS 106">*110 from American purchasers for Philippine lumber and forwarded them to the lumber company in Manila. If the orders were accepted, the lumber company loaded the lumber aboard ships in Manila and consigned it to Peabody & Co., who paid all freight and insurance expenses from that point to final delivery to the customer in the United States. Peabody & Co. had the lumber measured and delivered to the customer and billed the customer for it. When the customer paid for the lumber, Peabody & Co. deducted its total expenses and its 5 per cent broker's commission and credited the balance to the lumber company's account.
No lumber was ever shipped to Peabody & Co. for future sale or sold directly to Peabody & Co. Lumber was shipped only to fill customers' orders forwarded by Peabody & Co. to the lumber company in Manila. All sales of lumber were made in Manila through brokers located in the United States. The Cadwallader-Gibson Lumber Co. did not do business in the United States in 1919.
The Cadwallader-Gibson Lumber Co. did not file any United States income or profits tax returns and did not pay any United States income or profits taxes in 1919. The amount of $ 51,790.24 was received by1949 U.S. Tax Ct. LEXIS 106">*111 the conjugal partnership of decedent and his wife as dividends from the Cadwallader-Gibson Lumber Co. in 1919.
After decedent's death on November 20, 1936, petition for probate of his estate was filed in the Court of First Instance, Manila, Philippine Islands. Brooke D. Caldwallader was appointed administrator 13 T.C. 214">*217 of the estate of the decedent. Proceedings for the administration of the estate were had in the Philippine Islands. Notice to creditors of the estate, requiring the filing of claims with the committee on claims for the estate, was duly published.
On January 29, 1937, petitioner was appointed executrix of decedent's ancillary estate in the Superior Court of the State of California in the County of Los Angeles. She filed an estate tax return for the estate with the collector of internal revenue for the sixth district of California on February 19, 1938, showing no net estate and no estate tax due. Included in the return was the following statement by petitioner under Exhibit A to schedule F:
(k) The Executrix has been informed that the Government of the United States claims additional income tax to be due on the income from the conjugal partnership for the years 1949 U.S. Tax Ct. LEXIS 106">*112 from 1917 to date in an unknown amount. This liability is not admitted by the Executrix.
On August 7, 1938, respondent mailed to petitioner a notice of deficiency in estate tax. Petitioner appealed to the Board of Tax Appeals, which adjudicated the amount of estate tax due and entered its decision in Estate of Brooke W. Cadwallader, Docket No. 95988, on March 20, 1941. The decision of the Board of Tax Appeals was affirmed by the Circuit Court of Appeals for the Ninth Circuit on April 30, 1942. Commissioner v. Cadwallader, 127 Fed. (2d) 547.
In the proceeding before the Board of Tax Appeals, the issues for adjudication were the domicile of B. W. and Rose M. Cadwallader at the time of the decedent's death, the time of acquisition of property included in the estate, the amount of property contributed to the conjugal partnership by the petitioner, and the correctness of the valuation of the estate for estate tax purposes. No allowance was made for the deduction of any income tax claim against the estate for the years here involved, 1918 and 1919.
After petitioner was appointed executrix of the estate of the decedent she was advised that income1949 U.S. Tax Ct. LEXIS 106">*113 tax returns were required to be filed on behalf of the decedent and herself for the years 1918 to 1936. On March 29, 1939, the petitioner filed income tax returns for years 1918 and 1919 for the decedent and for 1919 for herself with the collector of internal revenue at Baltimore, Maryland. In these income tax returns petitioner set forth all of the income of the decedent for 1918 and 1919 and of herself for 1919, but claimed that no income tax was due for those years.
The deficiencies involved in these proceedings were determined by respondent in connection with those returns on the grounds here put in issue. Deficiency notices were mailed November 25, 1942.
The decedent, during the years 1918 and 1919, and the petitioner, during the year 1919, kept their records and rendered their income tax returns on the basis of cash receipts and disbursements.
13 T.C. 214">*218 OPINION.
The petitioner's first contention is that the assessment and collection of any income tax due on the income of the conjugal partnership of the decedent and the petitioner is barred by the provisions of section 695 of the Code of Civil Procedure of the Philippine Islands. This contention is founded upon the respondent's1949 U.S. Tax Ct. LEXIS 106">*114 failure to file a claim for unpaid income taxes against the decedent's estate in the Court of First Instance in Manila, P. I., when proceedings were had therein for the administration of the estate.
Section 695 of the Code of Civil Procedure of the Philippine Islands, an act of the Philippine Legislature under authority of the Congress of the United States, provides that:
Sec. 695. Claims Not Presented Barred. -- A person having a claim against a deceased person proper to be allowed by the committee, who does not, after publication of the required notice, exhibit his claim to the committee as provided in this chapter, shall be barred from recovering such demand or from pleading the same in offset to any action, except as hereinafter provided.
Petitioner argues that this section of the Code of Civil Procedure of the Philippine Islands is, in fact, an act of the Congress of the United States of a special nature, and that it takes precedence over later acts of legislation of a general nature, in the absence of express repeal or modification in later acts of Congress. Petitioner's argument is based on the premise that the Philippine Code of Civil Procedure was never repealed or 1949 U.S. Tax Ct. LEXIS 106">*115 annulled, although Congress reserved the power to do so. 48 U.S. C. A. 1054. However, legislation of the Philippine Legislature passed within the general legislative power delegated to it by Congress, 48 U.S. C. A. 1041, is not equivalent to an act of Congress merely because Congress failed to exercise its power to annul or repeal the legislation. Springer v. Government of the Philippine Islands, 277 U.S. 189">277 U.S. 189. The power of the Philippine Legislature and the force of its enactments depend upon the intent of the original delegation of power to it by Congress. Berger v. Chase National Bank, 105 Fed. (2d) 1001; affd., 309 U.S. 632">309 U.S. 632. The intent of Congress to delegate general legislative power to the Philippine Legislature to regulate the natural internal affairs of the Islands is apparent from the Jones Act, or Autonomy Act, of 1902, 48 U.S. C. A. 1001, wherein Congress expressed its intent to place in the hands of the people of the Philippines "as large a control of their domestic1949 U.S. Tax Ct. LEXIS 106">*116 affairs as can be given them without, in the meantime, impairing the exercise of the rights of sovereignty by the people of the United States." There was clearly no delegation of power to the Philippine Legislature to enact any legislation in contravention of any act of Congress itself. Certainly, there was no delegation of power to enact special legislation destroying the obligation of taxpayers to pay taxes under the internal revenue laws of the United States.
13 T.C. 214">*219 We conclude that section 695 of the Philippine Code of Civil Procedure can not operate as a bar to the assessment and collection of income taxes due under the revenue acts of the United States, and that it does not bar the assessment and collection of the deficiencies herein determined by the respondent.
Petitioner then contends that the assessment and collection of the deficiencies here involved are barred because the issues in this proceeding were finally determined by the Board of Tax Appeals in Estate of Brooke W. Cadwallader, supra, and affirmed by the Circuit Court of Appeals for the Ninth Circuit, and the judgment in that action is res judicata as to the determination of the issues in this proceeding.
1949 U.S. Tax Ct. LEXIS 106">*117 The judicial doctrine of res judicata was created by the courts to prevent repetitious litigation by the same parties upon the same cause of action after the issues had once been decided on the merits by a court of competent jurisdiction. When final judgment has been entered on the merits in a cause of action, the parties are thereafter bound as to all matters offered or which could have been offered to sustain the claim or demand upon which the cause of action was founded. However, the parties are free to litigate in a later action points which were not in issue in the first proceeding, even though they might have been tendered and decided at that time. Commissioner v. Sunnen, 333 U.S. 591">333 U.S. 591.
In these proceedings the Federal tax involved is the income tax, and not the estate tax as in the prior proceeding; different issues and different years are involved; and the parties are not the same. The fact that the issues here involved might have been raised in the former proceeding is of no consequence, since in fact they were not. The record in the former proceeding fails to disclose any demand made by the respondent for income taxes due or any1949 U.S. Tax Ct. LEXIS 106">*118 allowance or deduction claimed by the petitioner, acting as the executrix of the decedent's estate, for income tax liability. Income tax liability of the decedent was not put in issue, considered, or decided by the Board of Tax Appeals or the Circuit Court of Appeals in the former proceeding. We conclude that the doctrine of res judicata is not applicable to the determination of income tax liability in these proceedings as to either decedent or petitioner. See 333 U.S. 591">Commissioner v. Sunnen, supra.
Petitioner also contends that the dividends which she and decedent received from the Cadwallader-Gibson Lumber Co. in 1919 are not subject to normal tax by reason of the fact that the corporation was engaged in business in the United States and was taxable upon its net income. There is no statutory provision for exempting from income tax the dividends of a corporation whose earnings are subject to corporation income tax. Section 216 of the Revenue Act of 1918 provides for the allowance of a credit for the purpose of the normal tax of dividends 13 T.C. 214">*220 received from corporations taxable upon their net income. Individuals were allowed to credit against1949 U.S. Tax Ct. LEXIS 106">*119 income for the purpose of the normal tax only the amount of dividends received from corporations taxable upon their net income under section 230 of the Act of 1918, as prescribed by sections 232, 233, and 234 of that act.
The evidence adduced with respect to the nature of the corporation's business activities in 1919 shows that it did not do business or derive gross income from sources in the United States in 1919, within the meaning of the Act of 1918. The corporation had no offices or sales organization of its own within the United States and did not solicit business there. Orders for lumber were procured by the import-export brokerage firm of Henry W. Peabody & Co. of New York. The orders were forwarded to the lumber company in Manila, where it either accepted or rejected them as it saw fit. It filled orders by loading the lumber aboard ships in Manila under on-board bills of lading to Peabody & Co. The brokers then took complete charge of the lumber shipment, paying all freight and insurance expenses during shipment and delivery and billing the customer in the United States. When Peabody & Co. received payment for the lumber it deducted all expenses and its commissions and1949 U.S. Tax Ct. LEXIS 106">*120 credited the balance to the lumber company. Lumber was not shipped for future sale or consignment or sold directly to Peabody & Co. but was always shipped to fill purchase orders solicited by and received from the brokers. There is no evidence of any agreements between the lumber company and the brokers which would indicate the existence of any other arrangement for handling lumber or making sales. We conclude that the lumber was sold in Manila and that the lumber company's gross income was derived there. It follows that petitioner and decedent's estate are not entitled to any credit for the purpose of the normal tax of amounts received as dividends from the Cadwallader-Gibson Lumber Co. in 1919. Cf. Compania General de Tabacos de Filipinas v. Collector, 279 U.S. 306">279 U.S. 306; East Coast Oil Co., S. A., 31 B. T. A. 558; affd., 85 Fed. (2d) 322; certiorari denied, 299 U.S. 608">299 U.S. 608; and Ronrico Corporation, 44 B. T. A. 1130.
The final issue is raised only as to the estate of B. W. Cadwallader, deceased. It involves the correctness of the respondent's1949 U.S. Tax Ct. LEXIS 106">*121 allowance of credit for income tax paid to the Philippine Islands in the years 1918 and 1919 in accordance with section 222 (a) (1) of the Revenue Act of 1918. 1 In the income tax returns filed for 1918 and 1919, for decedent and petitioner, credits were claimed in 1918 for taxes paid to 13 T.C. 214">*221 the Philippine Islands in 1919, and in 1919 for taxes paid in 1920. Since decedent and petitioner kept their records and rendered their income tax returns on the basis of cash receipts and disbursements, respondent's disallowance of the credits claimed was clearly correct. Petitioner has not pressed the point on brief, so she must be deemed to have abandoned it.
However, the petitioner1949 U.S. Tax Ct. LEXIS 106">*122 does urge on brief that respondent erred in allowing as a credit against the income tax of the decedent in the year 1919 only $ 419.20 instead of $ 432.16, a difference of $ 12.96. It was stipulated by the parties, and so found, that the correct amount paid in income taxes to the Philippine Islands in 1919 was $ 432.16. Respondent erred in failing to credit this amount in full.
Decisions will be entered under Rule 50.
Footnotes
1. Sec. 222. (a) That the tax computed under Part II of this title shall be credited with:
(1) In the case of a citizen of the United States, the amount of any income, war-profits and excess-profits taxes paid during the taxable year to any foreign country, upon income derived from sources therein, or to any possession of the United States; * * *↩