*1048 1. During the taxable year 1931, petitioner owned a majority of the voting stock of a British corporation, from which it received dividends on which a tax was paid to the British Government by the subsidiary corporation. Held, such British tax did not constitute an income tax paid by petitioner "to any foreign country" within the meaning of section 131(a)(1), Revenue Act of 1928, and petitioner is not entitled to credit against its United States tax for the taxable year on account of the British tax deducted from its dividends an amount in excess of that "deemed" to have been paid by petitioner under section 131(f). Biddle v. Commissioner,302 U.S. 573">302 U.S. 573, followed.
2. Held, the limitation of the proviso clause of section 131(f) should be applied separately to that portion of the income tax of each of its foreign subsidiaries which petitioner is "deemed" to have paid. United Shoe Machinery Corporation v. White, 89 Fed.(2d) 363, followed.
*335 *1049 This is a proceeding for the redetermination of a deficiency in income tax for the year 1931 in the amount of $58,566.57. The following issues are raised by the amended pleadings: (1) Whether respondent erred in determining the limitation on the foreign tax credit to which petitioner is entitled under section 131, Revenue Act of 1928, by treating the taxes deducted from dividends received by petitioner from a certain British corporation, a majority of the voting stock of which is owned by petitioner, as taxes paid by the British corporation rather than as taxes paid by petitioner; and (2) whether respondent erred in determining the limitation on the foreign tax credit to which petitioner is entitled under section 131 by applying the limitation of the proviso clause of subdivision (f) of such section separately to that portion of the income taxes of all of petitioner's foreign subsidiaries which under subsection (f), petitioner is "deemed" to have paid, instead of applying the limitation of such proviso clause to the total amount of the taxes "deemed" to have been paid by petitioner through all of its foreign subsidiaries.
FINDINGS OF FACT.
At the hearing the parties filed an*1050 agreed statement of facts, which we here adopt as our findings of fact, as follows:
1. The petitioner, Otis Elevator Company, is a corporation organized under the Laws of the State of New Jersey, which has its principal office at 260 Eleventh Avenue, Borough of Manhattan, City, State and County of New York.
2. Petitioner filed its consolidated federal income tax return on behalf of itself and its domestic subsidiaries for the calendar year 1931, the tax year *336 involved in this proceeding, with the Collector of Internal Revenue for the Third District of New York. Petitioner and its domestic subsidiaries are hereinafter collectively referred to as "Petitioner".
3. Petitioner's books were kept on the accrual basis and its return was filed on that basis.
4. On May 29, 1935, Commissioner mailed to the Petitioner, by registered mail, a letter setting forth the Commissioner's determination that there was a deficiency of $58,566.57 in the income taxes paid by the Petitioner for the year 1931. A copy of said letter is attached to the petition herein, marked Exhibit A, which is hereby incorporated herein and made a part hereof. The following figures in Exhibit "D" *1051 attached to the deficiency notice are in error:
(a) $1,110,653.90, which is there stated to be the dividend paid on 290,000 shares of common stock should read $110,653.90.
(b) $27,651.46 in the last line should read $271,651.46.
5. During the calendar year 1931 the Petitioner derived net income from and sustained losses in and paid income taxes to foreign countries as shown in the following table:
| Net Income or Loss | Foreign Income Tax | |
| Chile | $26,482.19 | $1,375.53 |
| Mexico | 18,135.53 | 782.77 |
| Cuba | (Loss) 6,989.51 | None |
| Brazil | (Loss) 15,831.81 | None |
| Colombia | (Loss) 9,338.28 | None |
| Argentina | 370,031.24 | None |
| Japan | 5,175.76 | None |
| China | 19,479.87 | None |
| France | 67,354.15 | 10,776.66 |
The above listed income paid to France was a tax directly upon Petitioner and paid by it and is separate and apart from the income tax deemed to have been paid by Petitioner under Section 131-(f) of the Revenue Act of 1928. The credit for income taxes deemed to have been paid by Petitioner to France under Section 131-(f) is to be adjusted on account of the amount allowed as a credit for income taxes paid directly to France by Petitioner.
6. Petitioner owned a majority*1052 of the voting stock of Otis-Fensom Elevator Company Limited (a Canadian corporation), of Waygood-Otis, Limited (a New Zealand corporation), and of Ateliers Otis-Pifre (a French corporation), from which it received dividends during the calendar year 1931.
The Commissioner, in applying Section 131-(f) and the limitations thereof, has applied the same separately to the taxes "deemed to have been paid" with respect to each of said foreign corporations.
The following table sets forth the amounts of dividends received by Petitioner during the calendar year 1931 from each of said foreign corporations and the portions of the foreign income taxes paid by said foreign corporations, which, under the provisions of Section 131-(f) of the Revenue Act of 1928, Petitioner is "deemed to have paid":
| Dividends Received by Petitioner | Amounts of Foreign Income Tax "Deemed to Have Been paid" by Petitioner | |
| Otis-Fensom Elevator Company Limited (Canada) | $558,600.00 | * $53,380.42 |
| Waygood-Otis Limited (New Zealand) | 34,146.45 | * 6,650.07 |
| Atelier Otis-Pifre (France) | 67,354.15 | * 10,423.23 |
*1053 *337 7. Throughout the calendar year 1931 Petitioner owned a majority of the voting stock of Waygood-Otis Limited (a British corporation), from which it received dividends during the calendar year 1931. Throughout said calendar year the Petitioner owned the following shares of said British corporation:
33,057 Preference Shares of the Par Value of 1 pound each (Preference shares entitled to dividends at the rate of 6% per annum before any dividends are paid on Ordinary Shares).
277,430 Ordinary Shares of the Par Value of 1 pound each.
8. During the calendar year 1931, Waygood-Otis Limited (a British corporation) paid dividends on its Preference shares as follows:
Jan. 15, 1931 - 3% --- "Less British Income Tax at the rate of 4/6 in the Pound."
July 15, 1931 - 3% --- "Less British Income Tax at the rate of 3/11 in the Pound."
9. During the calendar year 1931, Waygood-Otis Limited (a British corporation) paid dividends on its Ordinary shares as follows:
Mar. 15, 1931 - 17 1/2% --- "Less British Income Tax at the rate of 4/6 in the Pound."
Aug. 15, 1931 - 7 1/2% --- "Less British Income Tax at the rate of 3/11 in the Pound."
10. Petitioner actually received*1054 in cash as its share of the foregoing dividends of Waygood-Otis, Limited (a British corporation) the sum of $271,651.46 after converting the sums received in British Pounds at the rates of exchange prevailing at the time of each distribution.
11. Waygood-Otis Limited, (a British corporation) by communications dated January 15th, March 15th, July 15th and August 15th, 1931, certified to its shareholders at the time of transferring the warrants for the dividends referred to in Paragraphs 8 and 9 hereof, that British Income Taxes on the profits of the Company of which the dividends formed a part, had been or would be paid by the Company to the proper officer for the receipt of taxes. These were duly paid. The British Income Tax "appropriate" to the Petitioner's dividends here involved, if there be any income tax at all on Petitioner with respect to said dividends, aggregated $74,882.21 after converting the same at the rate of exchange prevailing at time of each such dividend distribution.
12. The Commissioner has treated the British Income Tax as a tax imposed upon and paid by Waygood-Otis Limited (a British corporation) and has allowed Petitioner a credit of $32,598.18 under*1055 Section 131-f of the Revenue Act of 1928, for taxes "deemed to have been paid" after applying separately to the dividends received by Petitioner from said Waygood-Otis Limited the limitation of the proviso clause of Section 131-f of said Act.
13. If it be held that Petitioner paid no British Income Tax, except a tax deemed to have been paid under Section 131-f, then the following table sets forth the amount of dividends received by Petitioner from Waygood-Otis Limited (a British corporation) during the calendar year 1931, and the portion of the British Income Tax paid by said Waygood-Otis Limited, which, under the provisions of Section 131-f of the Revenue Act of 1928 Petitioner should be deemed to have paid:
| Amount of Dividends | Amount of British income Tax Deemed to Have Been Paid by Petitioner |
| $271,651.46 | * $74,882.21 |
*338 14. If it be held that Petitioner did not pay any British Income Tax for the*1056 calendar year 1931, except a tax "deemed to have been paid" under Section 131-(f), then the amount of Petitioner's entire net income (computed without the deduction of any income, war-profits or excess-profits taxes, paid by Petitioner) for the calendar year 1931, was $4,840,758.47.
15. If it be held that Petitioner paid British Income Taxes for the calendar year 1931 (apart from taxes "deemed to have been paid" under Section 131-(f)), then the amount of its entire net income for the calendar eyar 1931 (computed without the deduction of any income, war-profits or excess-profits taxes, paid by petitioner) was $4,915,640.68.
16. If it be held that Petitioner paid no British Income Taxes for the calendar year 1931 (except a tax "deemed to have been paid" under Section 131-(f)), then its entire net income from sources without the United States (computed without the deduction of any income, war-profits or excess-profits taxes, paid by Petitioner) was $1,338,879.05. $17. If it be held that Petitioner paid British Income Taxes for the calendar year 1931 (apart from taxes "deemed to have been paid" under Section 131-(f)), then the amount of Petitioner's total net income from sources*1057 without the United States (computed without the deduction of any income, war-profits or excess-profits taxes paid by Petitioner) was $1,413,761.26.
OPINION.
HILL: The first issue raised by the pleadings in this case is whether respondent erred in determining the limitation on the foreign tax credit to which petitioner is entitled under section 131 of the Revenue Act of 1928, 1 by treating the taxes deducted from dividends received by petitioner from a subsidiary British corporation as taxes paid by the British corporation rather than as taxes paid by petitioner. This issue presents the specific question of whether the taxes deducted from the dividends received by petitioner from its British subsidiary constituted income taxes paid by it to a foreign country, within the meaning of the statute.
*1058 Under British law, stockholders in British corporations are required to report as income, in addition to the amount of dividends *339 actually received, amounts which reflect their respective proportions of the tax paid by the corporation on its own profit, thus treating the tax in effect as having been paid by the stockholders. This viewpoint regards the tax as being substantially a part of the dividends distributed to the stockholders and by them paid to the government through the agency of the corporation.
Petitioner contends that it is entitled to credit against its United States income tax the full amount of British tax deducted from the dividends received from its British subsidiary as income tax paid by it to a foreign country, while respondent determined and here contends that petitioner is entitled to a credit equal only to the amount of the British tax "deemed" to have been paid by it under the provisions of subsection (f).
In the cases of Mary Duke Biddle and , the same British tax was involved and the same question presented as in the instant proceeding. We there held that a citizen of the United States*1059 receiving dividends from a British corporation is not entitled under section 131 of the Revenue Act of 1928 to a credit of the amount of the British tax, and that such citizen is not required to include the British tax in gross income as a part of dividends so received.
The Biddle case was taken on review to the United States Circuit Court of Appeals for the Second Circuit, where our decision was affirmed. See . The Elkins case was taken on review to the United States Circuit Court of Appeals for the Third Circuit, where our decision was reversed. See . The Third Circuit followed a prior decision of the same question by the First Circuit in . The Supreme Court granted certiorari, and in an opinion rendered January 10, 1938, , affirmed the Second Circuit in the Biddle case, and reversed the Third Circuit in the Elkins case. On authority of such decision of the Supreme Court, respondent's action on the first issue in the instant proceeding is approved.
The second issue raised by the pleadings in this*1060 case involves the question whether the limitation of the proviso clause of subsection (f) should be applied separately to that portion of the income tax of each of petitioner's foreign subsidiaries which petitioner is "deemed" to have paid, or whether the limitation of such proviso should be applied to the total amount of the taxes "deemed" to have been paid by petitioner through all of its foreign subsidiaries.
This question was considered by the First Circuit, and decided adversely to petitioner's contentions, in While the views of that court respecting *340 the credit of British tax on dividends against the United States income tax were disapproved by the Supreme Court in the Biddle and Elkins cases, we do not think that fact militates against the soundness of the court's reasoning on the separate and unrelated question under consideration here. On that question, the court in its opinion said:
On the third point the plaintiff contends that the limitation on credit under 238(e) should be computed by lumping all dividends from, and all taxes on, its foreign subsidiaries, treating them for*1061 the purposes of credit under this clause as if they constituted a single foreign subsidiary. The short answer to the contention is that the statute plainly contemplates nothing of the sort. It begins, "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," etc. Later the statute refers to "the accumulated profits of such foreign corporations." It is clear that the clause is written with a single foreign subsidiary in mind. If any general aggregation of dividends and taxes with respect to all foreign subsidiaries of a taxpayer who happened to have several had been in mind, as the plaintiff asserts, such an intention would certainly have been indicated in the wording of the section. We think it clear that the section does not have the meaning contended for by the plaintiff.
The statute applicable in the cited case was section 238 of the Revenue Act of 1921, which corresponds to section 131 of the Revenue Act of 1928.
From a careful consideration of the language used in subsection (f), we think the construction contended for by petitioner is not only unwarranted, but, *1062 if consistently applied, would lead to inequitable results not contemplated by Congress.
On the second issue, respondent's determination is approved. In accordance with the facts stipulated by the parties,
Judgment will be entered under Rule 50.
Footnotes
*. These are the amounts "deemed to have been paid" by Petitioner before the application of the limitation of the proviso clause of Section 131-(f) of the Revenue Act of 1928. ↩
*. This is the amount of British Income Taxes which, in the event of the above holdings, should be deemed to have been paid by Petitioner before the application of the limitation of the proviso clause of Section 131-f of the Revenue Act of 1928. ↩
1. SEC. 131. TAXES OF FOREIGN COUNTRIES AND POSSESSIONS OF THE UNITED STATES.
(a) Allowance of credit. - The tax imposed by this title shall be credited with:
(1) CITIZEN AND DOMESTIC CORPORATION. - 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
* * *
(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 (not deductible under section 23(p)) 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 credit allowed to any domestic corporation under this subsection 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. * * *