Fides v. Commissioner

FIDES, A. G., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Fides v. Commissioner Docket No. 102738. United States Board of Tax Appeals 47 B.T.A. 280; 1942 BTA LEXIS 709; July 7, 1942, Promulgated *709 1. A foreign personal holding company, with income from sources within the United States, is within the meaning of the term "any corporation", as used in section 351(b)(1) of the Revenue Act of 1936 and is subject to surtax imposed under subsection 351(a) of that act, even though all of its stockholders are nonresident aliens. 2. In the absence of reasonable cause for a tardy filing of its personal holding company return for 1936, the imposition of a delinquency penalty is approved. Revenue Act of 1936, secs. 291 and 351(c). 3. Since neither that return nor its contents are in evidence, respondent's denial of credits and deductions in computing petitioner's income from sources within the United States for the purposes of the surtax is approved. Revenue Act of 1936, secs. 233 and 351(c). Robert T. Woodruff, Esq., for the petitioner. L. A. Spalding, Esq., for the respondent. LEECH *280 Respondent has determined a deficiency in personal holding company surtax in the sum of $9,427.71 and a 25 percent delinquency penalty of $2,356.93 for the calendar year 1936, under sections 351 and 291 of the Revenue Act of 1936. 1 The issues are (a) *710 whether *281 petitioner, a foreign corporation, having no place of business in the United States, is liable for surtax as a personal holding company and, if so, (b) whether the computation of the tax by respondent is correct in his application of section 233 of the Revenue Act of 1936 2 in refusing to allow deductions or credits in determining its net income for purposes of computing the surtax. *711 FINDINGS OF FACT. The stipulated facts are as follows: 1. The petitioner is a nonresident foreign corporation. During the year 1936 it was not engaged in trade or business within the United States nor did it have an office or place of business therein. It was incorporated in the year 1911 under the Laws of the Canton of Schaffhausen, Switzerland. Approximately fifteen years ago, it acquired a portfolio of American securities and since that time it has held and owned American securities and received the income therefrom consisting of dividends and interest. Its activities in the United States during the year 1936 and for many years prior thereto consisted only in effecting transactions in the United States in stocks and securities through a resident broker or custodian and in receiving the income from the securities held. 2. The petitioner files its Federal income tax returns on the basis of cash receipts and disbursements. 3. The authorized stock of the petitioner consists of 1,000,000 Swiss Francs consisting of 400 shares of the par value of 2500 Swiss Francs each. During the last half of the taxable year 1936 more than 50% in value of its outstanding stock was*712 owned directly or indirectly by or for not more than five individuals. All of the stockholders of the petitioner during the entire year 1936 and at all times prior thereto were nonresident alien individuals not engaged in trade or business within the United States and not having an office or a place of business therein. *282 4. The gross income from sources within the United States for the three-year period ending December 31, 1935 was 28.54% of the total gross income of the petitioner from all sources for such period. 5. During the calendar year 1936 the gross income of the petitioner from sources within the United States was $66,504.53 (the gross income for 1936 as shown by the notice of deficiency was $69,554.53 which has been revised by the deductions therefrom of $3,050.00 representing dividends paid by Creole Petroleum Corporation, which the respondent now concedes to be income from sources without the United States.) During the calendar year 1936 the gross income of the petitioner from sources without the United States was $57,303.11. All of the petitioner's gross income consisted of interest and dividends. 6. During the calendar year 1936 the petitioner*713 declared and paid in Switzerland a dividend of 100,000 Swiss Francs, which, for the purpose of this proceeding, were equivalent at the time of such payment to $28,041.25. 7. During the calendar year 1936 the petitioner paid Federal Income Tax withheld at the source in the amount of $2,586.04. In the notice of deficiency the respondent in determining the adjusted net income of the petitioner allowed a deduction on account of Federal Income Taxes paid of $2,695.42. It is conceded by both the petitioner and the respondent that the petitioner is entitled to a deduction of the Federal Income Taxes paid in the amount of $2,586.04 in determining its adjusted net income. 8. During the calendar year 1936 the petitioner paid interest in respect of indebtedness incurred within the United States to the creditors located therein in the sum of $831.02. In determining the deficiency herein, no deduction was allowed on account of such payment. 9. During the calendar year 1936 the petitioner also paid out the following sums for the purposes indicated: Custodian fees $3,567.43 Accounting fees 2,106.47 Legal fees 990.44 Traveling 144.60 Delivery and Clearance fees 18.00 Bank charges, Cables, Safe Deposit, Rent, etc 391.40 Federal and State Stock Transfer stamps 1,525.57 8,743.91 *714 The respondent in determining the deficiency herein allowed no deduction in respect of any of these expenditures. Such expenditures were made in respect of income of the petitioner from sources both within and without the United States. In addition to the facts thus stipulated, it is alleged in the petition and admitted in the answer that petitioner filed, under protest, a personal holding company return for 1936 on January 3, 1940, with the collector of internal revenue at Baltimore, Maryland. Respondent denied petitioner the benefit of deductions or credits in computing its net income subject to the surtax on the ground that the return filed did not include the information necessary for their calculation as required by section 233 of the Revenue Act of 1936. OPINION. LEECH: Petitioner contends that it is not subject to the provisions of section 351 of the Revenue Act of 1936, supra, because of the fact *283 that all of its stockholders are nonresident aliens who would not be subject to surtax by the United States on any dividend distributions made to them by petitioner. It is argued that the intent and purpose of Congress in the enactment of that section*715 was to force distributions of earnings by personal holding companies so that surtax might be laid upon and collected from such distributions upon their receipt by the stockholders. Upon this premise it is urged that the application of this section to a corporation whose stockholders are not subject to surtax is to extend the meaning of the section beyond the Congressional intent. Petitioner admits that it is within the definition of a personal holding company, as set out in subsection 351(b)(1), supra, because (1) its earnings are of the character there specified and (2) more than 50 percent of its capital stock was owned during the described period by not more than five individuals. It is obvious, concededly so, that petitioner is included in the unrestricted purview of "any corporation" as provided by that subsection. In short, petitioner in effect admits it is within the taxed class if the language of the statute is controlling. It is urged, however, that in order to stay within the manifest purpose and policy of the legislation, as established by its history, the term "any corporation" must be construed to mean "any corporation whose stockholders would be subject to*716 surtax on distributed corporate earnings." It is contended that the ascertainment of the Congressional intent by reference to the history and purpose of the legislation which points to this construction, is justified by reason of the injustice and hardship of a literal application of the statute. Such application places on a foreign corporation, which could have no purpose in its organization or operation of avoiding surtax upon its nonresident foreign stockholders, a burden greater than that imposed on one organized and operated for that purpose. It is undoubtedly true that the literal application of section 351 in the present situation is harsh. Despite that harshness we do not feel justified, in view of the plain and unambiguous language of that section, to restrict its meaning. As the Supreme Court announced in Caminetti v. United States,242 U.S. 470, 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 *717 Phanor J. Eder,47 B.T.A. 235. Moreover, although the question has not been presented upon similar facts before, we have had occasion to consider the propriety of a literal application of section 351, supra, in the face of an attack upon the ground of harshness of result. In each such instance we refused to restrict the construction of "any corporation." Thus, in *284 O'Sullivan Rubber Co.,42 B.T.A. 721, we held that section 351 included a dissolved corporation in process of liquidation. In affirming the decision, the Court of Appeals for the Second Circuit said (120 Fed.(2d) 845): Being a corporation for the purpose of Title I, petitioner is also one for the purpose of Title IA, which imposed the personal holding company surtax in issue here. Section 351 refers to "any corporation" and by section 351(b)(4) this term "shall have the same meaning as when used in Title I." Petitioner does not suggest, nor can we find, any justification in the language for exempting it under Title IA without also exempting it under Title I. Our decisions in *718 Foley Securities Corporation,38 B.T.A. 1036 (affd., C.C.A., 8th Cir., 106 Fed.(2d) 731), and Porto Rico Coal Co.,44 B.T.A. 221 (affd., C.C.A., 2d Cir., 126 Fed.(2d) 213), approved the literal application of this statute despite the harshness of the result. So, in the last cited case a foreign corporation was held to be a personal holding company under the definition of the statute and subject to the provisions of that section with respect to its income from sources within the United States although, by reason of losses incurred in its foreign business, it sustained a net operating loss for that year and had no net current income to distribute. In support of its position petitioner cites T.D. 4791, C.B. 1938-1, p. 83, amending Regulations 94 to accord with changes effected in the 1936 Act by the Revenue Act of 1937. However, the cited change in the regulations is expressly there made effective only for years subsequent to 1936. The basis for that amendment was subsection 352(b) of Title IA of the Revenue Act of 1937, which changed, as of that year, the definition of personal holding companies to include*719 within those companies excepted from surtax a foreign personal holding company situated as was the petitioner here. That subsection reads: (b) EXCEPTIONS. - The term "personal holding company" does not include * * * or, except with respect to a taxable year ending on or before the date of the enactment of the Revenue Act of 1937, a foreign personal holding company, as defined in section 331. 3 [Footnote ours.] *285 The Revenue Act of 1937 was enacted August 26, 1937. Clearly the quoted provision, in so far at least as it affects petitioner, was new legislation affecting only taxable years beginning on and after that date, and may not be applied retroactively. Schwab v. Doyle,258 U.S. 529; Smietanka v. First Trust & Savings Bank,257 U.S. 602. *720 In the light of the above cited decisions and the unambiguous language of subsection 351(b)(1), we must and do hold the petitioner liable to the contested surtax as a personal holding company under section 351(a) of the Revenue Act of 1936. In view of that conclusion, supplemented by the facts that the required return was not filed until long after the expiration of the period fixed by the act and the absence of evidence of reasonable cause for the delay, respondent is sustained in the imposition of a delinquency penalty of 25 percent. Revenue Act of 1936, secs. 291 and 351(c). Likewise, we approve respondent's action in denying deductions and credits in computing petitioner's net income from sources within the United States for purposes of the surtax. Revenue Act of 1936, secs. 233 and 351(c). Respondent has determined that the belated return did not contain the information required by section 233, supra. Neither is that return in evidence nor is there other proof indicating error in respondent's determination that such return was thus faulty. Cf. *721 Taylor Securities, Inc.,40 B.T.A. 696. Since the stipulation provides that certain corrections be made in the computation of net income for purposes of the surtax, Decision will be entered under Rule 50. Footnotes 1. SEC. 351. SURTAX ON PERSONAL HOLDING COMPANIES. (a) IMPOSITION OF TAX. - There shall be levied, collected, and paid, for each taxable year (in addition to the taxes imposed by Title I), upon the undistributed adjusted net income of every personal holding company a surtax equal to the sum of the following: * * * (b) DEFINITIONS. - As used in this title - (1) The term "personal holding company" means any corporation (other than a corporation exempt from taxation under section 101, and other than a bank, as defined in section 104, and other than a life-insurance company or surety company) if - (A) at least 80 per centum of its gross income for the taxable year is derived from royalties, dividends, interest, annuities, and (except in the case of regular dealers in stock or securities) gains from the sale of stock or securities, and (B) at any time during the last half of the taxable year more than 50 per centum in value of its outstanding stock is owned, directly or indirectly, by or for not more than five individuals. * * * SEC. 291. FAILURE TO FILE RETURN. In case of any failure to make and file return required by this title, within the time prescribed by law or prescribed by the Commissioner in pursuance of law, unless it is shown that such failure is due to reasonable cause and not due to willful neglect, there shall be added to the tax: 5 per centum if the failure is for not more than thirty days with an additional 5 per centum for each additional thirty days, or fraction thereof during which such failure continues, not exceeding 25 per centum in the aggregate. The amount so added to any tax shall be collected at the same time and in the same manner and as a part of the tax unless the tax has been paid before the discovery of the neglect, in which case the amount so added shall be collected in the same manner as the tax. The amount added to the tax under this section shall be in lieu of the 25 per centum addition to the tax provided in section 3176 of the Revised Statutes, as amended. ↩ 2. SEC. 233. ALLOWANCE OF DEDUCTIONS AND CREDITS. A foreign corporation shall receive the benefit of the deductions and credits allowed to it in this title only by filing or causing to be filed with the collector a true and accurate return of its total income received from all sources in the United States, in the manner prescribed in this title; including therein all the information which the Commissioner may deem necessary for the calculation of such deductions and credits. ↩ 3. SUPPLEMENT P - FOREIGN PERSONAL HOLDING COMPANIES SEC. 331. DEFINITION OF FOREIGN PERSONAL HOLDING COMPANY. (a) GENERAL RULE. - For the purposes of this title and of Title IA the term "foreign personal holding company" means any foreign corporation if - (1) GROSS INCOME REQUIREMENT. - At least 60 per centum of its gross income (as defined in section 334(a)) for the taxable year is foreign personal holding company with defined in section 332; but if the corporation is a foreign personal holding company with respect to any taxable year, then, for each subsequent taxable year, the minimum percentage shall be 50 per centum in lieu of 60 per centum, until a taxable year during the whole of which the stock ownership required by paragraph (2) does not exist, or until the expiration of three consecutive taxable years in each of which less than 50 per centum of the gross income is foreign personal holding company income. For the purposes of this paragraph there shall be included in the gross income the amount includible therein as a dividend by reason of the application of section 334(c)(2); and (2) STOCK OWNERSHIP REQUIREMENT. - At any time during the taxable year more than 50 per centum in value of its outstanding stock is owned, directly, by or for not more than five individuals who are citizens or residents of the United States, hereinafter called "United States group". (b) EXCEPTIONS. - The term "foreign personal holding company" does not include a corporation exempt from taxation under section 101. ↩