Opinion
No. 42647.
December 7, 1936.
John L. McMaster, of New York City, for plaintiff.
Guy Patten, of Washington, D.C. and Robert H. Jackson, Asst. Atty. Gen. (Tolbert, Ewen Patterson, of New York City, on the brief), for the United States.
Before BOOTH, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.
Action by Charles H. Hubbard against the United States.
Petition dismissed.
The court, upon a stipulation of the facts and the evidence, makes the following special findings of fact:
1. Plaintiff is a citizen of the United States and temporarily a resident of London, England. During the year 1927 plaintiff was married and living with his wife and had three children under the age of eighteen years who received their sole support from him.
2. On July 20, 1928, plaintiff filed his individual income tax return for the year 1927, on the cash receipts and disbursements basis, disclosing therein a net income of $153,284.65 and an income tax of $29,529.14, against which plaintiff claimed a credit for foreign taxes accrued of $17,429.16, leaving a net tax $12,099.98 to be paid to the United States. Accompanying the tax return and filed therewith was a claim for credit on form 1116, showing the amount of $43,047.85 as taxes accrued to Great Britain. Said tax was on income also taxable in the United States. The balance of such foreign taxes not claimed as a credit amounting to $25,618.69 was deducted from said income of $153,284.65, leaving a net income after deduction of foreign taxes of $127,665.96, upon which plaintiff paid a tax of $12,099.98 to the collector of internal revenue at Baltimore, Md., on July 20, 1928. Said tax has been covered into the Treasury of the United States.
3. Plaintiff's net taxable income for 1927 before deduction of taxes paid to foreign countries was and has been determined by the Commissioner of Internal Revenue to be the sum of $181,114.22, of which .540799, or $97,946.54, was derived from sources without the United States, and $83,167.68 was derived from sources within the United States. Included in such net income were dividends on stocks of domestic corporations amounting to $38,646.89. All of said sum of $97,946.54, except $241.42, is dividends of foreign corporations. Of said sum, $78,843.22 was actually paid to plaintiff; the remainder, $19,103.31, represents income taxes appropriate to said dividends which was paid by such corporations to Great Britain.
In addition to the foregoing, plaintiff received in 1927 salary for personal services performed in Great Britain amounting to £33,402.10, equivalent to $163,004.20, and the Commissioner of Internal Revenue has determined that plaintiff was for more than six months during 1927 a bona fide nonresident of the United States within the meaning of section 213(b)(14) of the Revenue Act of 1926 ( 44 Stat. 23, 26), and that such salary should not be included in gross income subject to American tax. No part of said salary was included in gross income in the tax return.
4. During the year 1927 taxes accrued against plaintiff to Great Britain upon his taxable income, other than said salary derived from Great Britain, in the amount of £8,916.04, equivalent to $43,439.98. This amount is decreased by $48.22 (the tax paid on bank interest and allowed by defendant for the year 1928), leaving $43,391.76. In addition thereto income taxes amounting to £6,450.1.5, equivalent to $31,476.35, and additional income tax known as supertax of £ 8,193.7.6, equivalent to $39,987.71, making a total of $71,460.06, accrued to Great Britain upon plaintiff's salary for 1927.
5. On April 16, 1929, plaintiff duly filed a claim for the refund of $5,718.67 on account of income taxes paid for the year 1927, and thereafter filed amendments to said claim on May 30, 1930, and January 19, 1931. In the refund claim and the amendments thereto, the grounds upon which the over-assessment and overpayments were claimed were stated to be that plaintiff's surtax was overstated, and that credit for foreign taxes was understated, and that plaintiff's income tax liability should be adjusted as follows:
Computation of Tentative Tax
Net income without deduction of foreign taxes ........................................ $181,114.22 Less dividends ...................... $38,646.89 Personal exemption .................. 4,700.00 ---------- 43,346.89 ----------- Balance subject to normal tax .............. $137,767.33 Tax ............................................ 34,551.21 Less: Earned income credit .................... 1.13 ----------- Balance of tax .............................. $ 34,550.08 Amount of tentative tax liability as a credit .540799 x $34,550.08 .................. $ 18,684.65 British tax on salary applicable to credit ..... $ 71,460.06 Balance of foreign taxes deductible from gross income ................................ $ 43,391.76
Computation of Tax
Total income above ............................. $181,114.22 Less foreign taxes deductible .................. 43,391.76 ----------- Net Income subject to surtax ................ $137,722.46 Less dividends and personal exemption .......... 43,346.89 ----------- Balance subject to normal tax .............. $ 94,375.57
Normal tax on $4,000.00 at 1 1/2% ............. 60.00 Normal tax on 4,000.00 at 3% ................. 120.00 Normal tax on 89,375.57 at 5% ................. 4,318.78 ---------- ----------- $94,375.57 $ 4,498.78 Surtax on $137,722.46 ....................... 19,201.49 ----------- Total tax .................................. $ 23,703.27 Less: Credit for foreign taxes ... $18,684.65 Earned income credit ............... 1.13 ---------- 18,685.78 ----------- Net tax liability .......................... $ 5,017.49
Attached to the refund claim and amendments thereto were claims for credit for foreign taxes accrued on form 1116, in which, among other claims, it was claimed that the foreign taxes on plaintiff's salary should be first applied to the credit and that the other foreign taxes should be deducted from his gross income.
6. Thereafter, upon audit and review of plaintiff's income tax return and his tax liability for the year 1927, the Commissioner of Internal Revenue found and determined a deficiency tax against plaintiff for the year 1927 in the amount of $1,617.11, and by his letter dated February 26, 1931, notified plaintiff hereof.
By a letter dated February 26, 1931, the Commissioner of Internal Revenue notified plaintiff that said claims for refund would be rejected. On June 18, 1931, plaintiff paid the deficiency tax so assessed of $1,617.11, with interest thereon, amounting to $313.10, making a total payment of $1,930.21. The claims for refund were rejected on a schedule dated June 19, 1931, and plaintiff was notified thereof by letter of the same date.
7. On October 23, 1931, plaintiff filed a claim for the refund of said deficiency tax and interest thereon, in the amount of $1,930.21, for the year 1927. In his said claim for refund, plaintiff restated the grounds set forth in said prior refund claims, and requested that the Commissioner of Internal Revenue reopen said prior claims for refund and reconsider his action thereon.
Thereafter, the Commissioner of Internal Revenue did reopen and reconsider the claims for refund and redetermined plaintiff's tax liability and found an over-assessment in favor of plaintiff for the year 1927 of $4,341.53, which over-assessment so found, with interest thereon amounting to $478.60, was refunded to plaintiff by credit on income tax assessed against plaintiff for another year.
The Commissioner of Internal Revenue disallowed the balance of plaintiff's claims for refund on May 6, 1932.
In his final determination of plaintiff's income tax liability for the year 1927, the Commissioner of Internal Revenue determined the same as follows:
Computation of Tentative Tax
Total income from all sources (without deduction for foreign taxes) .................. $181,114.22
Less:
Dividends ....................... $38,646.89 Personal exemption .............. 4,700.00 ---------- 43,346.89 ----------- Balance subject to normal tax .............. 137,767.33 =========== Normal tax at 1 1/2% on $4,000.00 .............. 60.00 Normal tax at 3% on $4,000.00 .................. 120.00 Normal tax at 5% on $129,767.33 ................ 6,488.37 Surtax on $181,114.22 .......................... 27,882.84 ----------- Total tax ................................. 34,551.21 =========== Less. Earned income credit on $5,000.00 earned income ........................... 1.13 ----------- Balance of tax ............................. 34,550.08 Total foreign tax .............................. 43,439.98 Less: Tax on bank interest allowed when paid in 1928 ............................ 48.22 ----------- Foreign taxes to be applied for 1927 ...... 43,391.76 United States tax, $34,550.08 x .540709 ........ 118,684.65 ----------- Balance deduction from income .............. 224,707.11
Credit.
Deduction.
Computation of Tax
Total income from all sources .................. $181,114.22 Less: Foreign tax deduction .................... 24,707.11 ----------- Net income adjusted ....................... 156,407.11
Less:
Dividends ........................ $38,648.89 Personal exemption ............... 4,700.00 ---------- 43,346.89 ----------- Balance subject to normal tax .............. 113,060.22 =========== Normal tax at 1 1/2 on $4,000.00 ............... 60.00 Normal tax at 3% on $4,000.00 .................. 120.00 Normal tax at 5% on $105,060.22 ................ 5,253.01 Surtax on $156,407.11 .......................... 22,941.43 ----------- Total tax ................................. 28,374.44
Less:
Credit on $5,000.00 earned income $1.13 Foreign tax credit ............... 18,685.78 ---------- 18,685.78 ----------- Tax liability .............................. 9,688.66
The plaintiff, a citizen of the United States, was a temporary resident of the city of London, England, during the taxable year 1927. The plaintiff's federal income tax return for the year, filed on July 20, 1928, disclosed a net income of $153,284.65, arising from sources both within and without the United States, all of which was taxable in the United States. Claim for credit of $43,047.85 taxes accrued to Great Britain on the income arising in that country accompanied the return of which amount $17,429.16 was claimed as a credit against the taxes shown to be due on the return, and the balance of $25,618.69 was taken as a deduction from income, leaving a tax liability of $12,099.98, which was paid by the plaintiff.
Subsequently, an additional assessment of $1,617.11 was made against plaintiff on the return, with interest thereon, amounting in all to $1,930.21, which was also paid.
The plaintiff's net taxable income for 1927, before deduction of foreign taxes, was determined by the Commissioner of Internal Revenue to be the sum of $181,114.22, of which .540799, or $97,946.54, was derived from sources without the United States and $83,167.68 was derived from sources within the United States. In computing the tax liability, the Commissioner gave the plaintiff credit for the full amount of the foreign tax accruing to Great Britain on income arising in that country, $43,391.76, by the deduction of $24,707.11 from net income, and a credit of $18,684.65 against the tax itself.
In addition to the income reported by plaintiff in his tax return for 1927, he received a salary for personal services performed in Great Britain during the year amounting to $163,004.20, upon which a tax accrued to Great Britain in the amount of $71,460.06. Under section 213(b)(14) of the Revenue Act of 1926 ( 43 Stat. 23, 26), the amount of this salary was exempt from taxation and for that reason was not included by him in the gross income reported, nor was any claim made by him at the time for credit in respect to the foreign taxes paid on such salary. Subsequently, however, in a claim for refund, as amended, plaintiff sought to obtain a benefit of such taxes in the computation of the foreign tax credit to which he was entitled. It was urged that the foreign taxes on the plaintiff's salary should be first applied to the credit provided in section 222(a)(1)(5) of the Revenue Act of 1926 ( 44 Stat. 36), and that the other foreign taxes paid by plaintiff should be deducted from his gross income under section 214(a)(3) of the same act ( 44 Stat. 26). The Commissioner of Internal Revenue disallowed this part of the plaintiff's claim for refund and ruled that the taxes paid to a foreign country by a citizen of the United States upon income excluded from gross income under section 213(b)(14), might not be claimed as a credit under section 222, nor as a deduction under section 214 of the Revenue Act of 1926.
"Sec. 213. For the purposes of this title, except as otherwise provided in section 233. * * *
"(b) The term `gross income' does not include the following items, which shall be exempt from taxationunder this title. * * *
"(14) In the case of an individual citizen of the United States, a bona fide nonresident of the United States for more than six months during the taxable year, amounts received from sources without the United States if such amounts constitute earned income as defined in section 209; but such individual shall not be allowed as a deduction from his gross income any deductions properly allocable to or chargeable against amounts excluded from gross income under this paragraph."
"Sec. 209. (a) For the purposes of this section —
"(1) The term `earned income' means wages, salaries, * * * received as compensation for personal services actually rendered."
The plaintiff in this suit renews the contentions made by him before the Commissioner in the disallowed claim for refund, and says that the questions involved are:
(1) Is an American citizen residing abroad, whose income includes salary earned abroad which is exempt from the United States tax, entitled to credit for the foreign taxes on the exempt salary if he has other taxable foreign income which may be used as a basis for the computation of the credit?
(2) If so, may he require that the foreign income taxes on the exempt salary, which are not allowable deductions, be applied to the credit and that the foreign income taxes on the foreign taxable income be deducted from his gross income?
The provisions of the Revenue Act of 1926 relied upon by plaintiff are:
"Sec. 214. (a) In computing net income there shall be allowed as deductions: * * *
"(3) Taxes paid or accrued within the taxable year except * * * (B) so much of the income, war-profits, and excess-profits taxes, imposed by the authority of any foreign country * * * as is allowed as a credit under section 222. * * *
"Sec. 222. (a) The tax computed under Parts I and 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 or accrued during the taxable year to any foreign country. * * *
"(5) The above credits shall not be allowed in the case of a citizen entitled to the benefits of section 262; and in no other case shall the amount of credit taken under this subdivision 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 tax any part of which may be allowed to him as a credit by this section), 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) from sources without the United States bears to his entire net income (computed without such deduction) for the same taxable year."
The primary design of the provisions carried in the various revenue acts permitting taxpayers to credit taxes paid or accrued to foreign countries during the taxable year against their domestic taxes was to mitigate the evils of double taxation. Burnet v. Chicago Portrait Company, 285 U.S. 1, 52 S.Ct. 275, 76 L.Ed. 587. Double taxation exists only when the same income is taxed both in the foreign country and in the United States. Plaintiff's salary in Great Britain on which a tax of $71,460.06 accrued to that country was exempt from taxation in the United States and constituted no part of the net income upon which his taxes in this country were computed. He paid taxes upon the salary in Great Britain alone; hence there is no case of double taxation presented. The plaintiff, as we have seen, has already been given the full credit he is entitled to receive in the way of credit against his domestic taxes of foreign taxes paid or accrued to Great Britain on all income arising in that country upon which taxes were also imposed in this country.
The action of the Commissioner of Internal Revenue in disallowing plaintiff's claim for refund was correct. The plaintiff is not entitled to recover, and the petition will be dismissed. It is so ordered.