Eder v. Commissioner

PHANOR J. EDER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. VIOLET L. EDER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. JAMES P. EDER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Eder v. Commissioner Docket Nos. 106016-106018. United States Board of Tax Appeals 47 B.T.A. 235; 1942 BTA LEXIS 715; June 30, 1942, Promulgated *715 The portion of the undistributed supplement P net income of a foreign personal holding company, as measured by subsection (b) of section 337 of the Revenue Act of 1938, is properly included in the gross income of the petitioners, shareholders therein, residents of the United States, for Federal income tax purposes, under section 337, subsection (a), despite restrictions preventing the legal transfer to the United States, if it had been actually distributed. Richard W. Wilson, Esq., for the petitioners. Loren P. Oakes, Esq., for the respondent. LEECH *235 These consolidated proceedings involve contested income tax deficiencies for the year 1938 as follows: Petitioner Docket No. Amount Phanor J. Eder 106016 $2,168.82 Violet L. Eder 106017 2,708.80 James P. Eder 106018 2,326.72 The sole issue is whether certain foreign exchange restrictions in effect in Colombia, South America, during 1938, except petitioners, shareholders of a foreign personal holding company, organized and existing in Colombia, from the provisions of section 337 of the Revenue Act of 1938, requiring such shareholders to include in their gross*716 income for Federal income tax purposes the undistributed supplement P net income of such a company. FINDINGS OF FACT. The petitioner, Phanor J. Eder, is a lawyer whose office address is 74 Trinity Place, New York, New York. The petitioners, Violet L. Eder and James P. Eder, are his wife and son, whose address is 29 Washington Square Wert, New York, New York. All of these petitioners filed their 1938 income tax returns with the collector of internal revenue for the second district of New York. The Colombian Investment Company, S.A. (hereinafter called the Colombian Co.), was formed in 1936 under the laws of the Republic of Colombia, and was a successor to a Colombian holding company which had existed since 1926. *236 The Colombian Co. was a principal stockholder in a sugar company called "Ingenio Manuelita." It also had a stock interest in a brick company, some securities, and other minor interests. Each of the above three petitioners owned 25 percent of the stock of the Colombian Co. The remaining 25 percent of the stock was owned by Linda Eder, a daughter of the above Phanor J. Eder. Each of the above three petitioners attached to his 1938 income tax return*717 a rider entitled "STATEMENT RE FOREIGN PERSONAL HOLDING COMPANY (FILED IN ACCORDANCE WITH SECTION 337(d) OF REVENUE ACT OF 1938)." On each of the above riders it was reported that "gross income, deductions and credits, * * * Supplement P net income and Undistributed Supplement P net income of said corporation for 1938" were as follows: Gross income: Colombian pesos Dividends 177,260.16 Interest 383.33 177,643.49 Deductions: Salaries 5,420.00 Taxes 1,810.29 Interest paid 1,514.77 Traveling expenses 887.30 Miscellaneous expenses 106.15 Contributions 1,000.00 10,738.51 Supplement P net income 166,904.98 Less: Dividends paid credit 58,296.60 Undistributed supplement P net income 108,608.38 The above deduction of 1,000 pesos for "contributions" was disallowed by the Commissioner, with the result that the above "Undistributed Supplement P net income" was increased from 108,608.38 pesos to 109,608.38 pesos, which adjustment, amounting to 1,000 pesos, has not been disputed by petitioners. After making the foregoing adjustment, the Commissioner, among other matters, made the following determination, which is set forth*718 on page 2 of each explanatory statement attached to the deficiency notices herein: In re: Phanor J. Eder, Docket No. 106016, et al. Total undistributed Supplement P net income of Colombian Investment Company, S.A., in pesos 109,608.38 Value of above in U.S. dollars at 57.06 per peso $62,542.54 Amount taxable to you (25% of $62,542.54) $15,635.64 The Colombian Co. was a foreign personal holding company throughout the taxable year within the meaning of section 331 of the *237 Revenue Act of 1938. Of the supplement P net income of the Colombian Co. for the year 1938, amounting to 167,904.98 pesos, the Colombian Co. distributed to its stockholders 58,296.60 pesos and claimed a "dividends paid credit", which the Commissioner allowed in determining undistributed supplement P net income of the Colombian Co. for 1938, which is the basis for the present contested deficiencies. Remittances covering distributions from the Colombian Co. during the year 1938 to the United States stockholders were sent to the petitioner, Phanor J. Eder, who retained $2,400, his salary for services rendered the company during that year, and distributed the balance equally among*719 the shareholders, including himself. When these remittances from the Colombian Co. were made, there were Colombian taxes in the amount of 11 percent deductible therefrom on the transfer, in addition to small commissions and postage. No such taxes were paid upon the undistributed supplement P net income of the Colombian co. The net amount of these remittances, which excluded the above mentioned taxes, commissions, and postage, was reported proportionately by the three petitioners in their respective income tax returns for 1938 in terms of dollars and cents and the respondent has not questioned their action in excluding from income that portion of the distribution used in the payment of such taxes and expenses. Each of the petitioners was on the cash basis during the taxable year. For some time before and until March or April of 1938 no earnings, profits, or other moneys of the Colombian Co. could legally be transferred outside the boundaries of Colombia because of the prohibitions imposed by the exchange control laws and regulations of that country. In March or April of 1938, by virtue of a decree modifying the prior existing exchange control laws and regulations, the*720 Colombian Co. could transfer abroad its funds in amounts not exceeding $1,000 per month. This decree was in force through the rest of the year 1938. Upon its promulgation, petitioner Phanor J. Eder's Colombian representative applied for and received the permit necessary under the decree to remit $1,000 per month from the Colombian Co. to its stockholders in the United States. For the nine months of 1938 from April to December, inclusive, the Colombian Co. remitted to Phanor J. Eder, as above detailed, a net amount of $1,000 per month, the cost of which distribution to the company, including taxes, commissions, and postage as above set out, aggregated 17,833.67 pesos, which distribution was a part of the total distributions by the Colombian Co. to its stockholders in 1938 of 58,296.60 pesos. In the computation of the contested deficiencies, respondent determined the undistributed supplement P net income of the Colombian *238 Co. by converting pesos into United States dollars by using a ratio of 57.06 cents per peso, which petitioners concede was the proper exchange rate. Phanor J. Eder is a member of the firm of Hardin, Hess & Eder and specializes in Latin American*721 and early Colombian law. This firm has its principal office in New York, New York, with a branch office in Mexico City. Since 1910, about one-half of his time has been spent on Latin American affairs and about one-third on Colombian matters. During the year 1938 he was away from New York City about two months, most of that time in Colombia. In 1940 he spent about two and one-half months in Colombia, and in years prior thereto, about three weeks or a month out of each year in Colombia. There was no law of the Republic of Colombia during 1938 forbidding the spending or investment of pesos within the boundary of that republic. OPINION. LEECH: The petitioners attack the contested determination only on the ground that section 337 of the Revenue Act of 1938, 1 under which that determination was made, is not applicable here. *722 *239 They argue from the legislative history of supplement P of that act, of which section 337 is a part, that the Congressional intent was that the tax be imposed only upon "a comparatively few wealthy individuals" who "voluntarily and willfully" avoided or evaded their income taxes by the use of foreign personal holding companies, and that the tax was therefore wrongfully laid upon them, since they were neither wealthy nor were they voluntarily or willfully using the Colombian Co. to avoid or evade such taxes. We disagree with that construction of the act. It may be admitted that such use of foreign personal holding companies was the inspiration for this legislation. But neither supplement P, generally, nor the clear and unambiguous language of section 337, supra, specifically indicates in any way that the intention or finanacial status of the taxpayer should affect the imposition of the tax in the slightest degree. Cf. . In these circumstances, as the Supreme Court said in *723 , that language "* * * must be taken as the final expression of legislative intent and * * * [is] not to be added to or subtracted from by considerations drawn from titles or designating names or reports accompanying their introduction, or from any extraneous source." See also . Petitioners next contend that the disputed tax is imposed upon the theory of "constructive receipt" of the taxed "assumed distributions" by the taxpayer shareholders and that, since petitioner shareholders in the United States could not have transferred from the Republic of Colombia during 1938 any distributions from the Colombian Co. in excess of those that were so transferred and received, because of the exchange restrictions in effect during that year in the Republic of Colombia, they did not constructively receive the assumed distributions of undistributed earnings of that company upon which the deficiencies are based. This contention is likewise unsound and for the same fundamental reasons. Pesos could have been distributed legally to or for the account*724 of the petitioners in Colombia and those pesos could have been invested legally there. The Colombian Co. did distribute to and petitioners actually received in 1938 in United States dollars and paid income taxes on such distributions in excess of the amounts permitted by the exchange laws and regulations then in force in the Republic of Colombia. However, we pass those circumstances, as well as consideration of subsections 337(e) and (f), supra. Congress believed foreign personal holdind companies were being used by United States taxpayers to avoid or evade their income taxes and that it could not tax such companies. Report of Ways and Means *240 Committee, H. Rept. No. 1546, 75th Cong., 1st sess. By section 337 of supplement P of the Revenue Act of 1938 it therefore proceeded to tax the "assumed distribution" of dividends by those companies in the hands of their United States stockholders. See Report of Ways and Means Committee, supra. The power to permit or deny the legal distribution of the funds of those foreign companies was plainly in the hands of the foreign governments under the jurisdiction of which such companies existed. *725 It certainly may not be presumed that Congress did not know of this power and the then existing exchange restrictions upon which petitioners rely. See Introduction to the Report of the U.S. Tariff Commission to the Ways and Means Committee of the House of Representatives, 1934. In enacting section 115(c)(2) of the same revenue act with which we are here concerned, Congress expressly provided for an exception based upon the laws of a foreign country. But, in enacting section 337, supra, and supplement P, in which that section is included, legal transfer to the United States of its distributed earnings by the foreign personal holding company was not made a condition precedent to the laying of the tax. Nothing there appears remotely suggesting that foreign laws or regulations may affect the imposition of the tax. See . Cf. . It is difficult to believe that such legislation would have been proposed or passed if it had been believed by Congress or those suggesting the legislation that such a tax could be imposed under the well recognized and simple*726 doctrine of "constructive receipt." In fact, if the existence of foreign laws or regulations restricting the transfer of dividends to the United States by foreign personal holding companies had been made a condition precedent to the laying of taxes under section 337, supra, the admitted purpose of the legislation would have been largely indirectly defeated. Assumed distribution, even when actual distribution was legally impossible, has been held to properly support other income taxes. So, the distributive share of a partner in the income of a partnership neither distributed nor legally distributable was held to have been properly taxed to a partner under section 218(a) of the Revenue Act of 1918. . See also ; affd., . , involving the taxability to a United States taxpayer of his "blocked" German marks in Germany, *727 , and other cases upon which petitioners rely, are not in point. They were all decided squarely under the doctrine of "constructive receipt" and are not premised upon any specific legislation, as are the present deficiencies. Decision will be entered for the respondent. Footnotes 1. SEC. 337. CORPORATION INCOME TAXED TO UNITED STATES SHAREHOLDERS. (a) GENERAL RULE. - The undistributed Supplement P net income of a foreign personal holding company shall be included in the gross income of the citizens or residents of the United States, domestic corporations, domestic partnerships, and estates or trusts (other than estates or trusts the gross income of which under this title includes only income from sources within the United States), who are shareholders in such foreign personal holding company (hereinafter called "United States shareholders") in the manner and to the extent set forth in this Supplement. (b) AMOUNT INCLUDED IN GROSS INCOME. - Each United States shareholder, who was a shareholder on the day in the taxable year of the company which was the last day on which a United States group (as defined in section 331(a)(2)) existed with respect to the company, shall include in his gross income, as a dividend, for the taxable year in which or with which the taxable year of the company ends, the amount he would have received as a dividend if on such last day there had been distributed by the company, and received by the shareholders, an amount which bears the same ratio to the undistributed Supplement P net income of the company for the taxable year as the portion of such taxable year up to and including such last day bears to the entire taxable year. * * * (e) EFFECT ON CAPITAL ACCOUNT OF FOREIGN PERSONAL HOLDING COMPANY. - An amount which bears the same ratio to the undistributed Supplement P net income of the foreign personal holding company for its taxable year as the portion of such taxable year up to and including the last day on which a United States group existed with respect to the company bears to the entire taxable year, shall, for the purpose of determining the effect of distributions in subsequent taxable years by the corporation, be considered as paid-in surplus or as a contribution to capital and the accumulated earnings and profits as of the close of the taxable year shall be correspondingly reduced, if such amount or any portion thereof is required to be included as a dividend, directly or incirectly, in the gross income of United States shareholders. (f) BASIS OF STOCK IN HANDS OF SHAREHOLDERS. - The amount required to be included in the gross income of a United States shareholder under subsection (b) shall, for the purpose of adjusting the basis of his stock with respect to which the distribution would have been made (if it had been made), be treated as having been reinvested by the shareholder as a contribution to the capital of the corporation; but only to the extent to which such amount is included in his gross income in his return, increased or decreased by any adjustment of such amount in the last determination of the shareholder's tax liability, made before the expiration of seven years after the date prescribed by law for filing the return. ↩