Source: https://supreme.justia.com/cases/federal/us/316/450/
Timestamp: 2019-04-22 20:00:26+00:00

Document:
1. Under § 131(f) of the Revenue Acts of 1936 and 1938, allowing to a domestic corporation, in respect of dividend received from a foreign subsidiary, a tax credit of that proportion of "taxes paid" by the subsidiary which the amount of the dividend bears to the amount of the subsidiary's "accumulated profits" (i.e., its income less taxes thereon), the word "taxes paid" are properly construed as meaning so much of the subsidiary's taxes as are attributable to its "accumulated profits," or the same proportion of the total taxes which the accumulated profits bear to the total profits. P. 316 U. S. 452.
2. A change by the Commissioner of Internal Revenue in the administrative practice, to conform to the plain meaning of the Revenue Act, and operating prospectively, is not precluded by an antecedent administrative interpretation, though of long standing. P. 316 U. S. 454.
94 Ct.Cls. 699, 41 F.Supp. 537, affirmed.
Certiorari, 315 U.S. 793, to review the dismissal of a suit to recover an alleged overpayment of income taxes.
This case involves the application of Section 131(f) of the Revenue Acts of 1936 and 1938, [Footnote 1] which allows a tax credit to domestic corporations in respect of income received from foreign subsidiaries.
subsidiaries paid taxes upon their earnings to the countries of their domicile. In its income tax returns, the petitioner claimed the credit allowed by § 131 for the foreign taxes so paid. The Commissioner of Internal Revenue computed the credit at a less sum than that the petitioner claimed. The petitioner paid the resultant taxes and presented claims for refund, which were rejected. This action was brought in the Court of Claims for asserted overpayments.
"the amount of its gains, profits, or income in excess of the income, war-profits, and excess profits taxes imposed upon or with respect to such profits or income. "
The parties are in agreement as to the fraction to be used in calculating the proportion. The numerator is the dividends received by the parent. The denominator is the "accumulated profits" of the subsidiary. The dispute relates to the multiplicand to which the fraction is to be applied. The petitioner says it is the total foreign taxes paid by the subsidiary. The respondent says it is the taxes paid upon or with respect to the accumulated profits of the subsidiary -- i.e., so much of the taxes as is properly attributed to the accumulated profits, or the same proportion of the total taxes which the accumulated profits bear to the total profits. The Court of Claims so held. [Footnote 5] Since several decisions have gone the other way, [Footnote 6] we granted certiorari. 315 U.S. 793.
If the language of the Revenue Act is to be given effect, the Government's view seems correct. The statute does not purport to allow a credit for a stated proportion of the total foreign taxes paid or the foreign taxes paid "upon or with respect to" total foreign profits, but for taxes paid "upon or with respect to" the subsidiary's "accumulated profits," which, by definition, are its total taxable profits less taxes paid.
tax paid as relates to, or, as the Act says, is paid upon or with respect to, the accumulated profits.
Hence, we think that, under the plain terms of the Act, the Commissioner and the court below were right in limiting the credit by the use as multiplicand of a proportion of the tax paid abroad appropriately reflecting the relation of accumulated profits to total profits of the subsidiary. But the petitioner insists that the legislative history and a long indulged administrative construction require us, in effect, to elide the phrase "upon or with respect to the accumulated profits" of the foreign subsidiary.
Section 240(c) of the Revenue Act of 1918 [Footnote 7] allowed the domestic parent receiving dividends from a foreign subsidiary a credit for the same proportion of the taxes paid by the foreign corporation during the taxable year to any foreign country which the amount of the dividends received by the parent during the taxable year bore to the total taxable income of the subsidiary upon or with respect to which such taxes were paid.
This provision had the same object as § 131 of the Revenue Acts of 1936 and 1938 -- that is, to avoid double taxation. The difficulty with it was that it did not relate the credit to the accumulated profits or surplus of the subsidiary out of which the dividends were paid. Thus, if dividends were paid out of surplus earned in prior years, and it happened that the subsidiary paid no tax to the foreign country in the taxable year in question, the parent could claim no credit whatever. There were other eccentric results flowing from the provision of the Act of 1918.
it was open to and closing up some of the gaps that were in the old provision."
Section 238(e) is substantially the same as § 131(f). The alterations of § 240(c) of the Act of 1918 were made to permit identification of the accumulated profits of each taxable year out of which the dividends might have been paid, and to give credit for a proportion of the subsidiary's taxes attributable to such accumulated profits.
The Chairman of the Senate Finance Committee indicated that the calculation of the proportion of foreign tax paid would be exactly the same as it had been under the 1918 Act. But this would be true only if the dividends were paid in a given year out of the prior year's earnings and taxes were paid in the same year in respect of the same prior year's earnings. The petitioner seeks in this case to apply the proportion provided by the 1918 Act; but this is to ignore the alterations made in that Act in 1921 which have ever since been retained. In Committee hearings and in Congressional Reports with respect to the purpose and effect of the changes wrought by the 1921 Act, there were statements indicating an understanding that the credit was to be proportioned to the dividends made available to the parent in this country.
49 Stat. 1648, 1696, 52 Stat. 447, 506; 26 U.S.C. § 131.
Burnet v. Chicago Portrait Co., 285 U. S. 1.
A foreign corporation of whose voting stock the taxpayer owns a majority.
F. W. Woolworth Co. v. United States, 91 F.2d 973; International Milling Co. v. United States, 89 Ct.Cls. 128, 27 F.Supp. 592; Aluminum Co. of America v. United States, 123 F.2d 615.
C. 18, 40 Stat. 1057, 1082.
C. 136, 42 Stat. 227, 259.
Helvering v. Wilshire Oil Co., 308 U. S. 90; Helvering v. Reynolds, 313 U. S. 428; White v. Winchester Country Club, 315 U. S. 32.

References: § 131
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 § 240
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