Winterbottom Book Cloth Co. v. Commissioner

THE WINTERBOTTOM BOOK CLOTH COMPANY, LIMITED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Winterbottom Book Cloth Co. v. Commissioner Docket No. 97416. United States Board of Tax Appeals 43 B.T.A. 572; 1941 BTA LEXIS 1485; February 12, 1941, Promulgated *1485 Petitioner, a foreign corporation having no office or place of business in the United States and not engaged in business here, received dividends in 1936 from a wholly owned domestic corporation. After the dividends had been paid, Congress enacted the Revenue Act of 1936 which increased the rate of tax on foreign corporations such as petitioner. Held, that petitioner is liable for the tax on such dividends, pursuant to section 231(a) of the Revenue Act of 1936, notwithstanding the provisions of section 144 (b) of the act. William A. Graham, Esq., for the petitioner. W. Frank Gibbs, Esq., for the respondent. VAN FOSSAN *572 Respondent determined a deficiency in income tax for the year 1936 in the sum of $15,045. The single issue before the Board is whether a foreign corporation not engaged in business in the United States and having no office or place of business in the United States is liable for the tax imposed by section 231(a) of the Revenue Act of 1936, on dividends received during the taxable year but prior to the enactment of the Revenue Act of 1936. *573 FINDINGS OF FACT. The facts were stipulated substantially*1486 as follows: Petitioner is a foreign corporation, organized under the laws of Great Britain, with its principal office located at 12 Newton Street, Manchester 1, Manchester, England. During the calendar year 1936, petitioner had no office or place of business in the United States of America, and it was not engaged in any trade or business therein. During the calendar year 1936, and for some years prior thereto, petitioner was the owner of the entire outstanding and issued capital stock of the Arkwright Finishing Co., a corporation organized and existing under the laws of the State of Rhode Island, United States of America, with principal office and place of business located in the city of Providence, State of Rhode Island. The certificates evidencing the shares of capital stock of the Arkwright Finishing Co. have, at all times since shortly after issuance, been in the actual or physical custody of petitioner at its offices in Manchester, England. During the calendar year 1936 and prior to July 2, 1936, the Arkwright Finishing Co. duly declared and paid certain dividends on its capital stock. During the month of March 1936 petitioner was paid and received as a dividend from*1487 the Arkwright Finishing Co. the sum of $102,000, and during the month of June 1936 petitioner received another dividend from the Arkwright Finishing Co. in the amount of $75,000. With respect to these dividends, aggregating $177,000, the Arkwright Finishing Co. withheld and paid to the Federal collector of internal revenue, Baltimore, Maryland, a tax of $2,655. On June 8, 1937, petitioner filed with the Federal collector of internal revenue, Baltimore, Maryland, a nonresident foreign corporation income tax return for the calendar year 1936 (Treasury Department Form 1120NB) wherein the dividends aggregating $177,000 received by the petitioner from the Arkwright Finishing Co., Providence, Rhode Island, were reported as the gross amount of income and a total tax liability of $2,655, representing the amount of tax withheld at source. Respondent, in his audit of the return filed by petitioner, has determined that the income reported by petitioner on that return is subject to a total tax liability of $17,700 under section 231(a) of the Revenue Act of 1936. On January 4, 1939, respondent advised petitioner of its liability and determined a deficiency of $15,045, the difference between*1488 the liability determined by the Commissioner under section 231(a) of the Revenue Act of 1936 and $2,655, the amount of tax withheld and paid by the Arkwright Finishing Co. *574 OPINION. VAN FOSSAN: The purpose of the revenue acts is to raise money for the support of government. By section 231(a) of the Revenue Act of 1936 1 Congress intended to provide that amounts received by every foreign corporation, not engaged in trade or business within the United States and not having an office or place of business therein, from sources within the United States as interest and dividends and from various other categories should be taxed for the year 1936 at the rates therein provided. Section 1 of the act provides that the provisions of Title I (which covers income tax and includes section 231(a)) "shall apply only to taxable years beginning after December 31, 1935." Clearly the act applies to any taxable year beginning thereafter. Petitioner was on the calendar year basis. Thus the act in terms covered any designated income received by it in 1936. Albeit, the act was not approved until June 22, 1936, there is nothing unusual in the fact that the provisions of the act and its*1489 taxing scope dated back to the beginning of the year 1936. It seems clear to us that petitioner corporation was explicitly within the intendment of section 231(a). *1490 Petitioner places chief reliance on the argument, developed at length, that under decided cases the United States is without jurisdiction to impose a tax in personam and under the facts is impotent to impose a tax in rem. These principles, in their application to the present case, are not as formidable to us as apparently they are to petitioner. The statute purports to tax this foreign corporation. The Commissioner of Internal Revenue has determined that it owes additional taxes by virtue of section 231 of the Revenue Act of 1936. There is no question that the petitioner actually received the income in controversy from sources in the United States. The prayer of the taxpayer's petition is as follows: "Wherefore the petitioner prays that this Board may hear this proceeding and determine that the alleged deficiency in the amount of Fifteen Thousand Forty Five Dollars ($15,045) is not legally collectible and that the legal contentions of the taxpayer be sustained." *575 The Board of Tax Appeals is an independent agency in the executive branch of the Government. Although it has judicial powers, it also has certain specific duties and functions. In *1491 , it was stated: Section 907(b) of the Revenue Act of 1924, as amended by section 1000 of the Revenue Act of 1926, makes it the duty of the Board to make a decision in each case before it. It contemplates a decision on the merits except where the proceeding is dismissed, in which case the Board is required to enter a decision that the deficiency is the amount determined by the Commissioner. * * * When, however, we read the provisions of the Act as a whole, it seems clear to us that either party has the right to insist that the Board shall enter an order redetermining the deficiency, either on the merits or on default. The Board is not concerned with the difficulties that may beset the Commissioner in collecting a deficiency in tax after redetermination. Our primary function is to determine the correct deficiency, if any, leaving to the Commissioner the enforcement or collection thereof. Here petitioner filed a return and Commissioner, on audit, determined a deficiency. Petitioner filed a petition invoking our jurisdiction. The Commissioner duly answered. The proceeding came on for hearing and was submitted*1492 on stipulated facts, admitting receipt of the dividends in question. In this posture of the proceeding it seems clear to us that our first duty is to redetermine the deficiency. This we do by holding that the Revenue Act of 1936 applied to any income received after December 31, 1935, and that, accordingly, it applied to the two dividends received by petitioner. Petitioner also stresses the argument that under the facts here present, i.e., the payment of the dividends prior to July 2, 1936, (that being the tenth day after the enactment of the Revenue Act of 1936) and the transmission of the dividends abroad, the United States is impotent under section 144 2 to enforce collection. Wherefore, the tenor of its prayer above quoted. In our opinion, petitioner's counsel overlooks certain basic considerations. Section 144 is not a taxlevying *576 section but a tax-collecting section. The provisions for withholding income at the source were inserted to facilitate and implement collection. Section 231 levies a tax on foreign corporations receiving income from sources within the United States in 1936 and sectiom 144 provides a convenient and practical means of collecting the*1493 same. It is not exclusive of any other means of collection available to the Commissioner. *1494 The reason behind section 144(b) is obvious. It was intended by this section to release the withholding agent from liability for failing to withhold at the new rate income due a foreign corporation during the period prior to 10 days after the enactment of the act. The injustice of a contrary provision requires neither demonstration nor example. But this provision for the protection of the withholding agent was not a limitation of the provisions of section 231, which levied the tax on the foreign corporation itself. Petitioner was liable for the tax on all amounts received from the specified sources during the entire year, irrespective of the release of the withholding agent. Respondent's regulation (art. 235-2, Regulations 94), that the foreign corporation "shall pay the balance of the tax shown to be due" is fair and reasonably interprets the Congressional mind. Reviewed by the Board. Decision will be entered for the respondent. LEECH concurs only in the result. Footnotes 1. SEC. 231. TAX ON FOREIGN CORPORATIONS. (a) NONRESIDENT CORPORATIONS. - There shall be levied, collected, and paid for each taxable year, in lieu of the tax imposed by sections 13 and 14, upon the amount received by every foreign corporation not engaged in trade or business within the United States and not having an office or place of business therein, from sources within the United States as interest (except interest on deposits with persons carrying on the banking business), dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable annual or periodical gains, profits, and income, a tax of 15 per centum of such amount, except that in the case of dividends the rate shall be 10 per centum, and except that in the case of corporations organized under the laws of a contiguous country such rate of 10 per centum with respect to dividends shall be reduced to such rate (not less than 5 per centum) as may be provided by treaty with such country. ↩ 2. SEC. 144. PAYMENT OF CORPORATION INCOME TAX AT SOURCE. (a) GENERAL RULE. - In the case of foreign corporation subject to taxation under this title not engaged in trade or business within the United States and not having any office or place of business therein, there shall be deducted and withheld at the source in the same manner and upon the same items of income as is provided in section 143 a tax equal to 15 per centum thereof, except that in the case of dividends the rate shall be 10 per centum, and except that in the case of corporations organized under the laws of a contiguous country such rate of 10 per centum with respect to dividends shall be reduced to such rate (not less than 5 per centum) as may be provided by treaty with such country; and such tax shall be returned and paid in the same manner and subject to the same conditions as provided in that section; Provided, That in the case of interest described in subsection (a) of that section (relating to tax-free covenant bonds) the deduction and withholding shall be at the rate specified in such subsection. (b) WITHHOLDING BEFORE ENACTMENT OF ACT. - Notwithstanding the provisions of subsection (a), the deduction and withholding for any period prior to the tenth day after the date of the enactment of this Act shall be upon the items of income and at the rates prescribed in section 144 of the Revenue Act of 1934, as amended, in lieu of the items and rates prescribed in such subsection. ↩