Rowan v. Commissioner

J. V. ROWAN, PETITIONER, ET AL., 1v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Rowan v. Commissioner Docket Nos. 99430, 99431, 99433, 99434. United States Board of Tax Appeals 42 B.T.A. 493; 1940 BTA LEXIS 992; August 8, 1940, Promulgated *992 A partnership of which taxpayers were members began business in Mexico in August 1937. The partnership filed its income tax return in the United States on a calendar year basis, as did the petitioners. In March 1938 the partnership filed an income tax return with the Mexican Government covering the 6-month period from August 25, 1937, to February 24, 1938, and paid tax due thereon, and in November 1938 It filed a return for the 12-month period from August 25, 1937, to August 24, 1938, and paid the additional tax due thereon. Held, the income tax assessed by the Mexican Government neither accrued nor was paid in 1937 and petitioners are not, under section 131, Revenue Act of 1936, entitled to a credit against their 1937 income tax for a proportional part of the income tax which accrued and was paid to the Mexican Government during the year 1938. Muckleroy McDonnold, Esq., for the petitioners. Wilford H. Payne, Esq., for the respondent. BLACK *493 The proceedings were consolidated. The Commissioner determined deficiencies in income tax for the year 1937 against petitioners as follows: J. V. Rowan, Docket No. 99430 $651.52 Bertha White Rowan, Docket No. 99431 691.88 Alvin C. Hope, Docket No. 99433 625.49 Consuelo C. Hope, Docket No. 99434 707.25 *993 The several petitions contain assignments of error which raise the same issues as to all the proceedings. Assignment of error (a) alleges that the Commissioner erred in failing to allow to each petitioner a deduction of $286.57 representing one-fourth of the interest payable accrued during the taxable year on a note executed by the partnership of Rowan & Hope. Assignment of error (b) alleges that the Commissioner erred in disallowing to each petitioner $698.84 representing *494 one-fourth of depletion disallowed to the partnership of Rowan & Hope. Assignment of error (c) alleges that the Commissioner erred in not allowing petitioners to credit against their income taxes certain amounts of income taxes which they allege accrued to the Mexican Government for the taxable year 1937 against the partnership of Rowan & Hope. On brief the Commissioner concedes that petitioners have established their right to the deductions for accrued interest claimed in assignment of error (a). In view of the Supreme Court's decision in *994 , petitioners have abandoned assignment of error (b). This leaves for our consideration and decision only the issue raised by assignment of error (c). FINDINGS OF FACT. Petitioners are individuals, residing in San Antonio, Texas. They render their income tax returns and report their respective incomes on the basis of a calendar year. The deficiencies involved here are for the calendar year 1937. J. V. Rowan and Alvin C. Hope own, in equal interests, the partnership of Rowan & Hope, an oil drilling firm, the income from which is community property, so that one-half of the taxable gain of each is reported for tax purposes by their respective wives, Bertha White Rowan and Consuelo C. Hope. The partnership of Rowan & Hope operated in the United States and Mexico, and filed its partnership return in this country on a calendar year basis. During the year 1937 the partnership earned income from sources within the Republic of Mexico amounting to $72,803.48. The partnership suffered a net loss of $30,183.47 from operations within the United States, leaving taxable net income from all sources for the year 1937*995 in the sum of $42,620.01. The operations of the partnership in Mexico began on August 25, 1937. On March 23, 1938, it filed with the Mexican Government a "Provisional Declaration" showing its operations for the period August 25, 1937, to February 24, 1938, on which a tentative income tax in Mexican money was paid, amounting to $3,611.84. A return covering the declaration of the partnership for its taxable period in Mexico, August 25, 1937, to August 24, 1938, was filed and is shown to have been received on November 22, 1938. At the time this return was filed, the partnership of Rowan & Hope paid to the Mexican Government an additional income tax of 5,805.34 pesos, which, reduced to United States dollars, was approximately $1,514. The partnership set up on its books an item of $4,665 as a reserve for income taxes accrued to the Mexican Government for the taxable *495 year ended December 31, 1937. In their individual income tax returns for the calendar year 1937 petitioners claimed credit against their respective tax liabilities for a portion of the tax of the partnership paid to the Government of Mexico as follows: J. V. Rowan $1,000.12 Bertha White Rowan 1,066.87 Alvin C. Hope 942.91 Consuelo C. Hope 1,078.64 *996 Petitioners' claims for credit were disallowed by the Commissioner in his respective deficiency notices, with the following explanation: * * * Section 131(a) of the Revenue Act of 1936 provides for the credit in the case of a citizen of the United States of 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. All the events which fixed the amount of the tax due to the Mexican Government and determined your liability to pay such tax had not occurred at December 31, 1937, the close of your calendar year, and there is insufficient evidence to prove that any portion of the tax was actually paid to the Mexican Government. During the taxable year 1937 the partnership of Rowan & Hope, which was on the accrual basis, gave certain notes to the Houston Oil Field Material Co. for materials and supplies. These obligations were to draw interest at 6 percent, and the interest accrued thereon at December 31, 1937, was in the aggregate amount of $1,146.23. This item of interest was not originally taken by the partnership as a deduction for 1937 but was claimed for the first*997 time after the investigation and report of the Internal Revenue Agent covering the present cases. In amended petitions filed January 30, 1940, pursuant to permission granted at the hearing, each petitioner now claims deduction for one-fourth of the partnership interest item of $1,146.23. OPINION. BLACK: The statute applicable to the only issue which we have to decide in this proceeding is section 131 of the Revenue Act of 1936, the pertinent parts of which are printed in the margin. 1 *998 *496 Petitioners concede that the partnership of Rowan & Hope did not pay to the Government of Mexico any income tax during the year 1937. They contend, however, that there were certain accrued income taxes due the Republic of Mexico by Rowan & Hope at the end of the taxable year 1937. The partnership set up on its books an item of $4,665 as a reserve for income tax accrued to the Mexican Government for the taxable year ended December 31, 1937. The proportions of this amount which each petitioner took as a credit in filing his income tax return for 1937, which credits the Commissioner has disallowed, are shown in our findings of fact. Petitioners do not now claim the full amount of these credits which they took on their income tax returns, but in their brief they have reduced their claims, as shown by the following quotation therefrom: During the year 1937, income taxes payable to Mexico in the amount of $2,490.68 accrued against income earned by the partnership of Rowan and Hope in Mexico. Each petitioner is entitled to credit for income taxes paid to a foreign country in the amount of $622.67, one-fourth of $2,490.68. It is undoubtedly true that, if during the*999 year 1937 any income tax imposed by the Mexican Government accrued against the partnership of Rowan & Hope, the members of the partnership, under section 131, supra, would be entitled to credit for their proportional parts of such accrued income tax. The partnership would not have had to pay the tax during the year 1937. It would be sufficient if the tax accrued against the partnership. The Mexican income tax laws under which the payments made by the partnership of Rowan & Hope in 1938 were assessed were not introduced in evidence. The Board does not take judicial notice of foreign laws. Foreign laws, to be considered by the Board, must be proved. . The Declaracion Provisional (translated Provisional Declaration) filed with the Mexican Government March 24, 1938, and the Impuesto Sobre la Renta Cedula Primera Comercio (translated "Income Tax First *497 Schedule Commerce) filed with the Mexican Government November 22, 1938, were both introduced in evidence. These documents contain certain extracts from Mexican law and regulations. If these be considered sufficient proof of Mexican law, the fact still remains*1000 that none of these show that any income tax accrued against the partnership of Rowan & Hope for the period August 25, 1937, when the partnership began business in Mexico, to December 31, 1937, the end of the calendar year. On the contrary, the evidence of Mexican law shown by these returns, if it be considered evidence, was to the effect that the partnership was required to file for the first 6 months of its operations in Mexico a provisional declaration covering its operations for the 6-month period just closed and pay the tax shown to be due thereon. This petitioner did on March 23, 1938, covering the period August 25, 1937, to February 24, 1938. Also the partnership was required to file a return for the full 12-month period beginning August 25, 1937, and ending August 24, 1938, and pay the tax shown thereon, taking into consideration the tax already paid under the provisional declaration. This it did on November 22, 1938. Thus we see that both taxable periods ended in 1938. So far as the evidence shows, the partnership had no taxable period under Mexican law which began on August 25, 1937, the date it began business and ended December 31, 1937, the end of the calendar year. *1001 Therefore, we can not say that under Mexican law any income tax accrued against the partnership in 1937. Under the income tax law of the United States there is no such thing as imposing an income tax for a taxable period which does not exist. , and cases there cited. We have no evidence that any different rule prevails under Mexican law. Petitioners contend for the right to apportion the tax which accrued at the end of the 6-month period ended February 24, 1938, between the portion of the period which fell in 1937 and the portion which fell in 1938 and take the portion allotted to 1937 as a credit in filing income tax returns for that year. We know of no law, or Board or court decision, which would permit such an apportionment. The statute allows "a credit of the amount of any income, war-profits, and excess-profits taxes which has accrued or has been paid during the taxable year to any foreign country", and that means the whole tax and not a mere portion of it. The facts in the instant case are not like those in *1002 . In that case the munitions tax was levied upon the taxpayer's 1916 income, and the Supreme Court said that it should be accrued as a liability against 1916 income even though it was not assessed and payable until 1917. The gist of the Court's opinion in the Anderson case was that the taxable period was the calendar year 1916 and, *498 therefore, at the end of that year the tax had accrued and was deductible from 1916 income and for no other year, by one which kept its books on an accrual basis. As we have already endeavored to point out, the taxable period of the partnership of Rowan & Hope under Mexican law did not end December 31, 1937. The first period ended February 24, 1938, and the second period ended August 24, 1938. Therefore, both the accrual and payment of income taxes of the partnership to the Mexican Government fell in the year 1938. On this issue we sustain the Commissioner. Our holding in this respect does not mean that petitioners will be deprived of a credit, under section 131 of the Revenue Act of 1936, for the income taxes paid to the Mexican Government by the partnership. It simply means*1003 that they must claim such credit for the year when the taxes were accrued and paid, which was the year 1938. Decision will be entered under Rule 50. Footnotes 1. Proceedings of the following petitioners are consolidated herewith: Bertha White Rowan, Alvin C. Hope, and Consuelo C. Hope. ↩ 1. SEC. 131. TAXES OF FOREIGN COUNTRIES AND POSSESSIONS OF UNITED STATES. (a) ALLOWANCE OF CREDIT. - If the taxpayer signifies in his return his desire to have the benefits of this section, 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 (2) RESIDENT OF UNITED STATES. - In the case of a resident of the United States, the amount of any such taxes paid or accrued during the taxable year to any possession of the United States; and * * * (4) PARTNERSHIPS AND ESTATES. - In the case of any such individual who is a member of a partnership or a beneficiary of an estate or trust, his proportionate share of such taxes of the partnership or the estate or trust paid or accrued during the taxable year to a foreign country or to any possession of the United States, as the case may be. * * * (d) YEAR IN WHICH CREDIT TAKEN. - The credits provided for in this section may, at the option of the taxpayer and irrespective of the method of accounting employed in keeping his books, be taken in the year in which the taxes of the foreign country or the possession of the United States accrued, subject, however, to the conditions prescribed in subsection (c) of this section * * *. (e) PROOF OF CREDITS. - The credits provided in this section shall be allowed only if the taxpayer establishes to the satisfaction of the Commissioner (1) the total amount of income derived from sources without the United States, determined as provided in section 119, (2) the amount of income derived from each country, the tax paid or accrued to which is claimed as a credit under this section, such amount to be determined under rules and regulations prescribed by the Commissioner with the approval of the Secretary, and (3) all other information necessary for the verification and computation of such credits. ↩