China United Lamp Co. v. Commissioner

CHINA UNITED LAMP COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. China United Lamp Co. v. Commissioner Docket No. 82050. United States Board of Tax Appeals 38 B.T.A. 111; 1938 BTA LEXIS 914; July 19, 1938, Promulgated *914 Petitioner is a corporation organized under the China Trade Act, 1922, as amended February 26, 1925. After making certain deductions petitioner reported net income in the amount of $7,826.25 in respect of which it computed income tax in the amount of $1,076.11. In conformity with provisions of the China Trade Act petitioner, prior to the date for the filing of its return, declared a "special" tax saving dividend and pursuant thereto distributed an amount equal to the tax computed, and accordingly reported no tax due. At the same time petitioner also declared and paid a 10 percent "general" dividend. The respondent disallowed some of the deductions claimed and thus increased petitioner's tax liability. He allowed a credit in the amount of the "special" dividend paid and determined a deficiency equal to the remainder. Held, that petitioner is entitled to a credit against the tax imposed in an amount equal to the "special" tax saving dividend paid, but is not entitled to any credit by reason of the "general" dividend. J. B. Allman, Esq., for the petitioner. G. W. Brooks, Esq., for the respondent. TURNER *112 This proceeding was brought*915 to redetermine a deficiency in income tax for the year 1932 in the amount of $2,702.17. The only issue presented for our determination is whether petitioner, under the China Trade Act, 1922, is entitled, under the facts shown, to a credit against net income of an amount equal to its net income derived from sources within China. FINDINGS OF FACT. The petitioner was organized in July 1932, under the China Trade Act, 1922, as amended February 26, 1925. Its office and principal place of business is at Shanghai, China. It is engaged in the business of buying and selling electric lamps. It filed its income tax return with the collector of internal revenue at Baltimore, Maryland. On March 9, 1933, petitioner's stockholders met at the office of the company in Shanghai, China, for the purpose of accepting the president's and treasurer's report on the operations of the company and its financial condition for the year ending December 31, 1932, and "to approve the balance sheet and statement of profit and loss for the year 1932; to declare a special dividend in lieu of income tax and a general dividend." At that meeting the following resolutions were adopted: RESOLVED: That this*916 Corporation declare and pay a special dividend out of its net profits for the year 1932 in favor of all stockholders of record on the 31st day of December, 1932, who were resident in China, the United States or the possessions of the United States or who were individual citizens of the United States or China, equal to the proportion and amount of income tax which the Corporation would otherwise have to pay under the United States Income Tax Laws, and that such dividend be distributed to or for the benefit of said stockholders in proportion to the par value of the shares of stock of the corporation owned by each. RESOLVED FURTHER: That this Corporation declare and pay an additional general dividend of 10% out of its surplus and undistributed net profits for the year 1932, to or for the benefit of all stockholders of record on the 31st day of December, 1932. On March 14, 1933, petitioner filed its annual report (in accordance with section 12 A of the China Trade Act, 1922) with the Registrar, representing the United States Department of Commerce in China, and attached thereto (1) waiver of notice of annual meeting of stockholders; (2) statement of profit and loss, showing selling*917 profit in the amount of 368,610.26 taels, general expenses 93,468.55 taels, income debits and credits 246,638.58 taels, interest 617.81 taels, and net profit in the amount of 29,120.94 taels; and (3) statement showing distribution of profits, as follows: Profit in accordance with Balance Sheet as per 31st. December 1932 * W 29,120.94 13 3/4% tax saving dividend: Shareholder Address Nationality No. of Shares Amount China General Edison Co., Inc. 140 Robison Road, Shanghai. American [696] 1,857.91 Philips China Co 41 Szechuen Road, Shanghai. Dutch [281] 750.11 Mr. E. Roesler 1363 Rue Lafayette, Shanghai. German [522] 1,393.44 Mr. H. E. Page 140 Robison Road, Shanghai. American [1] 2.67 ** 4,004.13 10% ordinary dividend: Shareholder Address Nationality No. of Shares Amount China General Edison Co., Inc. 140 Robison Road, Shanghai. American [696] 6,960.00 Philips China Co 41 Szechuen Road, Shanghai. Dutch [281] 2,810.00 Mr. E. Roesler 1363 Rue Lafayette, Shanghai. German [522] 5,220.00 Mr. H. E. Page 140 Robison Rd., Shanghai. American [1] 10.00 15,000.00 19,004.13 To be carried forward to 1933. W 10,116.81 *918 *113 Pursuant to the above resolutions, the dividends were paid by petitioner to its four stockholders by four checks drawn on March 10, 1933. On June 8, 1933, the respondent received a certificate from the Department of Commerce, Washington, D.C., relating to petitioner's distribution of a tax saving dividend, reading as follows: In accordance with Section 261, subdivision (b), of the Revenue Act of 1932, I hereby certify that the CHINA UNITED LAMP COMPANY, FEDERAL INC. U.S.A., A corporation organized under the China Trade Act of 1922 as amended, has distributed a special dividend to persons resident in China, the United States, or possessions of the United States, and individual citizens of the United States or China wherever resident, as provided in the above section as follows: PART ONE Name and Address Nationality Number of shares owned Special Dividend Paid in Taels currency China General Edison Co., Inc., Shanghai American [696] 1,857.91 Philips China Co., Shanghai Dutch [281] 750.11 Mr. E. Roesler, Shanghai German [522] 1,393.44 Mr. H. E. Page, Shanghai American [1] 2.67 Total 1,500 4,004.13 *919 at ex. 26 7/8 equals Gold $1,076.11 None of the above stockholders are naturalized Americans. Part Two That the amount of the special dividend was in addition to all other amounts paid to the recipients thereof by reason of their interest in the corporation. Part Three That the amount of the special dividend was distributed to the recipients in proportion to the par value of the shares of stock of the corporation owned by each. *114 Part Four The total capital stock outstanding of this corporation as of December 31, 1932, consisted of Fifteen Hundred (1500) shares of One Hundred (100) Taels each, all of common class - therefore there was no special apportionment of this special dividend. There are no other shareholders than those listed in Part One of this certificate. In its income tax return filed on April 8, 1933, petitioner reported net income in the amount of 29,120.94 taels, or converted at 26 7/8 to the dollar, $7,826.25. Income tax computed on income in that amount at the regular domestic corporation rate (13 3/4 percent), amounted to $1,076.11, but on account of being a corporation organized under the China Trade Act petitioner claimed a special*920 credit in the amount of 4,004.13 taels, or $1,076.11, the amount of its special dividend, and reported no tax due. Upon audit of petitioner's return the respondent disallowed certain deductions claimed and shown on the return as follows: Taels 1. Donations 32.40 2. Organization expense 2,166.44 3. Reserve for quantity rebate 10,293.49 4. Reserve for price reduction 50,000.00 5. Reserve for obsolescence, pilferage and breakage 2,500.00 6. Reserve for employees' home leave 7,500.00 72,492.33 Upon restoration of the above items petitioner's net income was increased to 101,613.27 taels, upon which the respondent computed the regular corporation tax to be 13,971.82 taels. He allowed a credit of 4,004.13 taels, the amount of the special dividend paid, and assessed a deficiency in the amount of 9,967.69 taels, which, converted into dollars at the rate of $0.271093 (I.T. 2673, C.B. XII-1, p. 51) is $2,702.17. OPINION. TURNER: Counsel for petitioner argues on brief that respondent erred in disallowing the deductions referred to in our findings of fact. He states that the deductions were denied pursuant to respondent's regulations dealing*921 with domestic corporations and argues that such regulations are not applicable to corporations organized under the China Trade Act. He states that business conditions and methods of doing business in China are different, that such corporations should be set apart and dealt with as a special class, and argues that Congress did not intend that the same regulations should be applicable in determining its net income. An examination of the amended petition shows that petitioner did not make a clear and concise allegation of error in respect of the deductions disallowed by the respondent and there was no evidence *115 offered at the hearing relative thereto. A fair interpretation of the petition leads to the conclusion that petitioner did not intend to raise any such issue, and the Board and the courts have held in numerous cases that our jurisdiction is limited to issues raised by the pleadings. North American Coal Corporation,28 B.T.A. 807; and Hanby v. Commissioner, 67 Fed.(2d) 125. In any event, however, petitioner's position is clearly in conflict with the provisions of the China Trade Act, 1922, as amended, which provides under the*922 title dealing with "Federal taxation", as follows: SEC. 25. That section 2 of the Revenue Act of 1921 is amended by adding at the end thereof a new paragraph to read as follows: "(12) A corporation organized under the China Trade Act, 1922, shall, for the purposes of this Act, be considered a domestic corporation." [See also sec. 1111(a), (4), Revenue Act of 1932.] Article 1151 of Regulations 77, promulgated pursuant to the Revenue Act of 1932, provides as follows: ART. 1151. Income of China Trade Act corporations. - The items of gross income to be included in the return of a corporation organized under the China Trade Act and the deductions allowable are the same as in the case of other domestic corporations. The petitioner's principal contention is that, after respondent recomputed its net income by restoring the items mentioned above, he erred in failing "to allow the entire dividend paid to the stockholders by this corporation as a tax credit against the tax that would otherwise have been imposed upon the corporation." In other words, the petitioner contends that the amount of the tax imposed should have been diminished by reason of the "general" dividend as*923 well as the "special" dividend. On this point the statute is plain and unambiguous. Section 261 of the Revenue Act of 1932 1 (sec. 245, China Trade *116 Act, 1922) provides that for the purpose of the tax imposed there shall be allowed, in the case of corporations organized under the China Trade Act, a credit against net income of an amount equal to the net income derived from sources within China, provided that in no case shall the amount of the tax diminished by reason of such credit exceed the amount of the special dividend certified under subsection (b) of this section. Subsection (b), "Special Dividend", provides that such credit shall not be allowed unless the Secretary of Commerce has certified to the respondent the amount which, during the year ending on the date fixed by law for filing the return, the corporation has distributed as a special dividend to or for the benefit of its stockholders, and that such special dividend was in addition to all other amounts distributed to its stockholders. *924 There is no dispute as to the amount actually distributed by petitioner under its special dividend, and there is no dispute as to the correctness of the certificate issued by the Department of Commerce. Petitioner implies that its contention is not strictly in keeping with the letter of the statute, but counsel argues on brief that the resolution adopted by its stockholders relating to the special dividend was "elastic" in that its officers were authorized to pay a special dividend in an amount equal "to the amount of income tax which the corporation would otherwise have to pay", and that if the general dividend can not be allowed as a tax saving dividend without certification from the Secretary of Commerce, "then this petitioner should be allowed to amend its income tax return in accordance with the Treasury findings with respect to the net income, and then amend same as to the payment of the tax saving dividend." There would be no basis in law or fact for the amendment of the return as to the payment of the tax saving dividend. The respondent's determination herein allows to the peititoner as a credit the full amount of the special tax saving dividend actually paid by the petitioner*925 and certified by the Secretary of Commerce as having been paid. By the provisions of the statute the allowance of the credit by the respondent is dependent upon the certification by the Secretary of Commerce of the payment of the special tax saving dividend and the Secretary of Commerce is authorized to certify to the Commissioner only "the amount which, during the year ending on the date fixed by law for filing the return, the corporation has distributed as a special dividend." The admitted facts are that the petitioner distributed as a special dividend only the amount of $1,076.11 and there is no provision of law which would permit the certification by the Secretary of Commerce, or the allowance as a credit by the Commissioner of Internal Revenue, of any amount in excess of the amount actually paid as such special dividend. *117 The provisions of the statute are plain and unambiguous. The debates in the Senate relating to the conference report on the House Bill (Congressional Record, September 13, 1922, vol. 62, part 12, p. 12433) indicate that Congress intended a "carefully guarded tax exemption." While we realize that it was possible for petitioner to have arranged*926 its affairs so as to have been completely exempt from income tax, the test is what was done rather than what could or should have been done. United States v. Phellis,257 U.S. 156. As the Supreme Court said in Weiss v. Stearn,265 U.S. 242, "Questions of taxation must be determined by viewing what was actually done, rather than the declared purpose of the participants * * *." Counsel for petitioner implies on brief that petitioner has been caught in a "legal net" throught no fault of its own, but we find nothing in the statute or in the regulations which would prevent such a corporation from including in its special dividend an amount sufficient to cover deficiencies arising from the disallowance of doubtful deductions. After having failed to do so, petitioner asks that it be permitted to rearrange its affairs so as to escape the predicament in which it finds itself, but, as we have already pointed out, such action is not permitted by the statute. Decision will be entered for the respondent. Footnotes *. U.S.A. $7,826.25 at the rate of exchange 26 7/8 prevailing at 31st. December 1932. ↩ **. 13 3/4% of W 29,120.94 - U.S.A. $ - at the rate of exchange 26 7/8 - prevailing at 31st. December 1932. ↩ 1. SEC. 261. CREDIT AGAINST NET INCOME. (a) ALLOWANCE OF CREDIT. - For the purpose only of the tax imposed by section 13 there shall be allowed, in the case of a corporation organized under the China Trade Act, 1922, in addition to the credit provided in section 26, a credit against the net income of an amount equal to the proportion of the net income derived from sources within China (determined in a similar manner to that provided in section 119) which the par value of the shares of stock of the corporation owned on the last day of the taxable year by (1) persons resident in China, the United States, or possessions of the United States, and (2) individual citizens of the United States or China wherever resident, bears to the par value of the whole number of shares of stock of the corporation outstanding on such date: Provided, That in no case shall the amount by which the tax imposed by section 13 is diminished by reason of such credit exceed the amount of the special dividend certified under subsection (b) of this section. (b) SPECIAL DIVIDEND. - Such credit shall not be allowed unless the Secretary of Commerce has certified to the Commissioner - (1) The amount which, during the year ending on the date fixed by law for filing the return, the corporation has distributed as a special dividend to or for the benefit of such persons as on the last day of the taxable year were resident in China, the United States, or possessions of the United States, or were individual citizens of the United States or China, and owned shares of stock of the corporation; (2) That such special dividend was in addition to all other amounts, payable or to be payable to such persons or for their benefit, by reason of their interest in the corporation; * * * * * * ↩