Lanman & Kemp-Barclay & Co. of Colombia v. Commissioner

Lanman & Kemp-Barclay & Co. of Colombia, Petitioner, v. Commissioner of Internal Revenue, Respondent Lanman & Kemp-Barclay & Co. of Colombia v. Commissioner Docket No. 53169 United States Tax Court 26 T.C. 582; 1956 U.S. Tax Ct. LEXIS 154; June 19, 1956, Filed *154 Decision will be entered under Rule 50. The Republic of Colombia imposed a tax in 1947 upon a United States corporation doing business in that country, which tax was deemed under Colombian law to be single and indivisible although composed of a tax based upon the corporation's income and the deductions allowable therefrom and a tax upon patrimony which was based upon the corporation's assets and liabilities. Held, under the criteria of the internal revenue laws of the United States, which are controlling on the classification of the foreign levy, the patrimony tax was neither an income tax nor a tax in lieu of a tax on income within the meaning of section 131 of the Internal Revenue Code of 1939 so as to qualify as a foreign tax credit. George J. Schaefer, Esq., for the petitioner. Charles M. Greenspan, Esq., for the respondent. Kern, Judge. KERN *582 The Commissioner determined a deficiency in the petitioner's income tax for the calendar year 1947 in the amount of $ 3,313.90. Subsequent to the filing of the original petition to contest this determination and in which it claimed a refund for an overpayment of income tax for that year in the amount of $ 264.19, the petitioner paid the deficiency with interest in the aggregate amount of $ 4,560.48. The only issue for decision is whether or not the patrimony tax (and the 35 per cent surcharge thereon) imposed by the Republic of Colombia upon the petitioner in 1947 was an income tax or a tax in lieu of a tax upon income within the meaning of section 131 of the Internal Revenue*156 Code of 1939. FINDINGS OF FACT. The petitioner is a Delaware corporation having its principal office in New York, New York. It filed its Federal income tax return for the calendar year 1947 with the collector of internal revenue for the second district of New York. The petitioner is a wholly owned subsidiary of Lanman & Kemp-Barclay & Co., Inc., a domestic corporation. Its business, which consists *583 of manufacturing proprietary pharmaceutical preparations, is carried on in the Republic of Colombia, and it derives its income entirely from operations within that country. In 1947 the basic internal revenue law of the Republic of Colombia provided for a tax composed of three major elements. These were a tax on income, a tax on patrimony, and an excess profits tax. The amounts of these taxes were subject to additional surcharges not here in issue. Briefly summarized, the pertinent provisions of the Colombian tax law in 1947 were as follows: The income tax sections provide that taxable income is the gross income of the taxpayer less the deductions permitted by law. Gross income is defined to include "gains, benefits, and incomes coming from salaries, wages or compensations*157 for personal services of any kind and paid in any form" derived from professions, occupations, commerce, or sales, and also rent, interest, dividends, and income from any sources. Certain items and enterprises are specifically excluded from the income tax, and deductions are allowed for ordinary expenses incurred in the conduct of a taxable business such as for compensation and also for interest payments, bad debts, charitable contributions, and depreciation. Deductions are not allowed for such items as personal and family expenditures and for capital improvements. Article 64 of the Colombian tax law provides in pertinent parts as follows: Article 64 -- Imposition and Determination of Patrimony Tax. Be there established an annual tax, complementary and accessory to the tax on income, on the patrimony possessed within the country, on December 31 of the preceding year, for any natural or legal person, native or foreigners subject to the tax on income in Colombia, a tax which shall be assessed by means of sworn declarations of the taxpayers, in the same diligence, on occasion of the assessment, demand, and collection of the tax on income, and in accordance with the regulation which*158 the Executive decrees. Consequently, and for all legal effects, the tax on income, the additional one on profits and the complementary one on patrimony shall be considered one and indivisible. It is understood that persons who do not have taxable income, but do possess patrimony, must pay the additional assessment which this law establishes. Taxable patrimony includes both movables and immovables as defined in the Civil Code, but is to be reduced by debts and by investments in corporations and limited partnerships which pay their own patrimony tax. Among the items specifically excluded from the tax on patrimony are compensation for personal services, sickness and accident benefits, pensions, personal furniture, property of charitable organizations, and investments in the mining, coffee, and banana industries. Taxable patrimony is defined by Article 74, which reads in part as follows: *584 Article 74 -- * * * The taxable patrimony is constituted by the difference between the rights or duties appreciable in money which a taxpayer may have, on one part, and the debts which burden these rights, plus the capital which the law exempts from tax and the other initial exemptions which*159 it authorizes on the other part. The Colombian tax law specifies the manner in which the various categories of properties included in the taxpayer's patrimony are to be valued. Article 76 covers real property, movable property in general, merchandise, expected profits, machinery, tools, furniture and materials, vehicles, and commercial paper. The taxable income and patrimony of a taxpayer are determined by designated officials from declarations made by the taxpayer and from "any other trustworthy information." No excess profits tax was paid by the petitioner to Colombia in 1947. On October 7, 1938, the Supreme Court of Justice of the Republic of Colombia held in two cases, respectively, involving the Colombian Petroleum Company and the South American Gulf Oil Company, both Delaware corporations, that provisions in their contracts with the Government of Colombia, whereby they were exempt from all taxes except the national stamp taxes and the income tax, did not prevent the imposition of the subsequently enacted patrimony tax which was determined to be merely a supplement and addition to the income tax. The patrimony tax, the excess profits tax, and the income tax were held to be*160 an indivisible whole. The Colombian income tax was already in effect when it was supplemented in 1935 by the patrimony tax and the excess profits tax. The purpose in enacting the latter two taxes was to round out the income tax and to make the Colombian tax system more fair and equitable by imposing a greater tax on those who had a greater ability to pay as represented both by income above a certain amount and by capital, whether or not such capital was then being productively employed. The patrimony tax is based upon the presumption that every piece of property has a certain productive ability and the failure of the owner to achieve a return therefrom cannot deprive the state of its right to receive a revenue from this potential. Thus, the state is deemed entitled to a tax on the increment in value of unproductive property appreciating in value because of its location in a developing urban area. The patrimony tax and excess profits tax are, therefore, considered under Colombian law as merely modalities or variations of the income tax. It is possible under the Colombian tax law that a patrimony tax may be due even though the taxpayer has no income or revenue and pays no income*161 tax. *585 The petitioner filed a single tax return for 1947 with the Colombian authorities, in which it separately reported both its assets and liabilities for the purpose of the patrimony tax, and its income and deductions for the purpose of the income tax. The report of the tax authorities rendered upon an examination of this return set forth the adjusted figures separately in a single document and the petitioner's tax was computed and assessed in another document, as follows: 1 Income Tax Gross income P 561,540.29 Deductions 435,668.07 Exemptions Net taxable income P 125,872.22 P 12,111.53 Property tax: Gross property P 995,926.93 Debts P 127,790.92 Exemptions 13,417.79 141,208.71 Taxable property P 854,718.22 5,717.18 Excess profits tax: Profits subject to the excess profits tax Excess profits taxable Total P 17,828.71 Plus: 35 per cent of the increase in the tariff rates 6,205.05 20 per cent increase in connection with the excess profits tax 1/2 per cent Article 25, Law 85 of 1946 579.36 Total P 24,613.12 *162 The foregoing taxes were assessed and paid by the petitioner in Colombian pesos on September 14, 1948, the dollar equivalent thereof being the sum of $ 14,024.57. In its United States income tax return for 1947, petitioner claimed a foreign tax credit of $ 13,760.38 on account of taxes accrued for that year to the Republic of Colombia. In a claim for a refund filed on May 2, 1949, the petitioner sought an additional credit of $ 264.19 or a total foreign tax credit of $ 14,024.57. The respondent determined a deficiency in the petitioner's income tax for 1947 in the amount of $ 3,313.90. The statement accompanying the notice of deficiency reads, in part, as follows: It is held that that portion of the foreign tax credit claimed by you which represents the Colombian Patrimony tax does not qualify as a foreign tax credit under the applicable provisions of the Internal Revenue Code. The portion of the taxes accrued to the Republic of Colombia, which is not allowable as a credit against the tax liability has been allowed as a deduction from net income reported. *586 Total taxes accrued to Colombia -- 24,613.12 pesos at $ 1.755 or $ 14,024.57 Portion attributable to income tax and allowed as a credit 9,316.56 Balance allowed as a deduction $ 4,708.01 *163 The components of the sum of $ 4,708.01 disallowed as a foreign tax credit, both in pesos and in dollars converted at an exchange rate of 1.755 pesos to the dollar, are as follows: Pesos Dollars Patrimony tax 5,717.18 $ 3,257.67 35 per cent surcharge on above (minus credit of 100 pesos) 1,966.01 1,120.22 1/2 per cent under Law 85 of 1946 579.36 330.12 Total 8,262.55 $ 4,708.01 The respondent has conceded that the sum of 579.36 pesos or $ 330.12, representing the tax of one-half per cent under Law 85 of 1946, is allowable as a credit under section 131 rather than as a deduction. The stipulation of facts and the exhibits annexed thereto are incorporated herein by this reference. OPINION. The sole issue for decision is whether the Colombian patrimony tax of $ 3,257.67 (and the 35 per cent surcharge thereon of $ 1,120.22), accrued by the petitioner in 1947, is an income tax or a tax in lieu of a tax on income within the meaning of section 131 2 of the Internal Revenue Code of 1939 so as to qualify these amounts as foreign tax credits. *164 The petitioner bases its principal argument for the allowance of the credit on the contention that under the laws of the Republic of Colombia, the tax paid to that country was "a single tax, not divisible into separate parts," that it was "predominantly an income tax," and hence the entire amount paid qualifies for the credit under section 131 (a). It points to the following indicia as support for its position on the classification of the tax: Article 64 of the Colombian tax law imposing the patrimony tax states that the income, patrimony, and excess profits taxes "shall be considered one and indivisible"; the *587 judicial and administrative interpretations of the statute have construed the three levies as an indivisible whole, as only modalities or variations of the income tax; all information for the computation of the three-part tax and the surcharges thereon is submitted in a single report; the three levies are combined into one total which is reduced by the amount of an exemption before the surcharges are computed; and references in the Colombian law are to a single tax resulting from the combination of the three levies and the surcharges and not to separate taxes. It *165 is clear that under the law of the Republic of Colombia the patrimony tax is deemed to be a supplement to and indivisible from the income tax. It appears from the opinions of the Supreme Court of Justice that this characterization results not from mere administrative convenience in handling three taxes through one return, but from a fiscal policy based on the theory that the income tax, in order to be an equitable revenue system, requires a tax on capital to more fairly distribute the burdens among the nation's taxpayers and to prevent the state from being penalized if a property owner, through negligence or for some other reason, fails to realize the inherent productive potential of his property. However, it is well settled that the determination of whether or not a foreign levy qualifies as an income tax within the meaning of section 131 (a) is to be made not upon the characterization of the foreign law, but under the criteria established by the internal revenue laws of the United States. Biddle v. Commissioner, 302 U.S. 573; Keasbey & Mattison Co. v. Rothensies, (C. A. 3, 1943) 133 F. 2d 894, certiorari denied*166 320 U.S. 739; L. Helena Wilson, 7 T.C. 1469. In other words, "the determinative question is whether the foreign tax is the substantial equivalent of an income tax as the term is understood in the United States." Commissioner v. American Metal Co., (C. A. 2, 1955) 221 F. 2d 134. The doctrine that only those increases in value of property which are actually realized by the owner constitute taxable income is basic to the income tax system of the United States. See Commissioner v. Glenshaw Glass Co., 348 U.S. 426; United States v. Kirby Lumber Co., 284 U.S. 1; and Keasbey & Mattison Co. v. Rothensies, supra, in which the court said: "The defined concept of income has been uniformly restricted to a gain realized or a profit derived from capital, labor, or both." The Colombian income tax separately considered provides for the taxation of net income and its substantial equivalence to our own income tax has been recognized by the respondent in the instant case. The patrimony tax separately considered*167 is really a tax on property and results in a levy upon the net value of the taxpayer's assets which will include any unrealized appreciation of such *588 value. It is computed separately from the income tax from information respecting the taxpayer's assets and liabilities and does not give effect to items of income and expense. The petitioner's own expert witness testified that it is possible for a taxpayer to be liable for a patrimony tax in a year when the taxpayer has no revenue and is not liable for the income tax, and such testimony is in accord with the language of Article 64. The computation of the patrimony tax and the computation of the surcharge thereon are not so integrated with the income tax itself as to create any problem of allocating the total tax paid to Colombia. We are not bound by the classification of the patrimony tax under Colombian law as part of the income tax. L. Helena Wilson, supra.After careful consideration of the Colombian tax law, it is our conclusion that there is no substantial equivalent to the patrimony tax under our income tax system, and that this part of the Colombian tax is not an income tax within the*168 meaning of section 131 (a). The petitioner cites Helvering v. Campbell, (C. A. 4, 1944) 139 F.2d 865, and Rev. Rul. 56-511956-1 C. B. 320, for the proposition that for the purpose of section 131 the classification of a single tax will be governed by its predominant character and argues that the tax in issue herein was predominantly an income tax. The authorities cited by the petitioner do not involve the allowance of a credit for a separately computed tax not based on income and are clearly distinguishable. Furthermore, the petitioner's classification of the Colombian tax as a single tax predominantly income in character depends on the characterization of the Colombian law which we have held above is not controlling. The petitioner's final argument is that the patrimony tax is at least a tax in lieu of a tax on income within the meaning of section 131 (h). The legislative purpose in enacting this subsection in 1942 is expressed in the report of the Senate Committee on Finance, S. Rept. No. 1631, 77th Cong., 2d Sess., pp. 131-132, as follows: Your committee believes further amendments should be made in*169 section 131. Under that section as it now stands, a credit is allowed against United States tax for income, war profits or excess profits taxes paid or accrued to any foreign country or to any possession of the United States. In the interpretation of the term income tax, the Commissioner, the Board, and the courts have consistently adhered to a concept of income tax rather closely related to our own, and if such foreign tax was not imposed upon a basis corresponding approximately to net income it was not recognized as a basis for such credit. Thus if a foreign country in imposing income taxation authorized, for reasons growing out of the administrative difficulties of determining net income or taxable basis within that country, a United States domestic corporation doing business in such country to pay a tax in lieu of such income tax but measured, for example, by gross income, gross sales or a number of units produced *589 within the country, such tax has not heretofore been recognized as a basis for a credit. Your committee has deemed it desirable to extend the scope of this section. Accordingly, subsection (f) of section 160 provides that the term "income, war profits *170 and excess profits taxes" shall, for the purposes of sections 131 and 23 (c) (1), include a tax paid by a domestic taxpayer in lieu of the tax upon income, war profits and excess profits taxes which would otherwise be imposed upon such taxpayer by any foreign country or by any possession of the United States. The limitation upon the amount of the credit will, of course, continue to apply, so that it will be allowed only if and to the extent the taxpayer has net income from sources within the foreign country or from sources without the United States, as the case may be. Regulations 111, section 29.131-2, applicable to 1947, provide, in part, as follows: For the purposes of section 131 and section 23 (c) (1) the term "income, war-profits, and excess-profits taxes" includes a tax imposed by statute or decree by a foreign country or by a possession of the United States if (a) such country or possession has in force a general income tax law, (b) the taxpayer claiming the credit would, in the absence of a specific provision applicable to such taxpayer, be subject to such general income tax, and (c) such general income tax is not imposed upon the taxpayer thus subject to such*171 substituted tax. For example, the A Corporation does business in the X country, which imposes an income tax upon substantially a net income base. The ascertainment of net income, though not the determination of gross income, from sources in X country is found administratively difficult. The X country, by decree, provides that corporations circumstanced as was the A Corporation would, in lieu of the income tax at the rate of 20 percent otherwise payable, be subject to tax at the rate of 10 percent upon the amount of gross income from X country. In accordance with such decree, the A Corporation paid X country the sum of $ 25,000 in 1943 with respect to its tax liability to the X country for the year 1942. Such amount, subject to the applicable limitations, is available as a credit to the A Corporation as foreign income, war-profits, or excess-profits taxes against the United States tax liability for the year 1942. * * * The Committee Report and the regulations indicate that the substituted tax must be related to income or to the taxpayer's productive output. There is nothing in either to indicate that a property tax that has no relation to the taxpayer's income or production was*172 to be deemed such a substitute. The petitioner was subject to and paid the Colombian income tax in 1947, and has been granted a credit under section 131 (a) for the amount of such tax. The patrimony tax, which we have construed to be a property tax, was imposed not as a substitute for but as a supplement to the Colombian income tax and no deduction is allowable for the amount of such tax against the Colombian income tax. Therefore, the patrimony tax does not qualify as a tax in lieu of a tax on income within the meaning of section 131 (h). See Compania Embotelladora Coca-Cola v. United States, (Ct. Cl. 1956) 139 F. Supp. 953. Decision will be entered under Rule 50. Footnotes 1. Amounts are in Colombian pesos.↩ 2. SEC. 131. TAXES OF FOREIGN COUNTRIES AND POSSESSIONS OF UNITED STATES. (a) Allowance of Credit. -- If the taxpayer chooses to have the benefits of this section, the tax imposed by this chapter, except the tax imposed under section 102 and except the additional tax imposed for the taxable year under the provisions of section 127 (c) (3), shall be credited with: (1) Citizens and domestic corporations. -- 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; * * * * (h) Credit for Taxes in Lieu of Income, Etc., Taxes. -- For the purposes of this section and section 23 (c) (1)↩, the term "income, war-profits, and excess-profits taxes" shall include a tax paid in lieu of a tax upon income, war-profits, or excess-profits otherwise generally imposed by any foreign country or by any possession of the United States.