Untermyer v. Commissioner , 24 B.T.A. 906 ( 1931 )

EDWARD D. UNTERMYER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Untermyer v. Commissioner

Docket No. 18836.

United States Board of Tax Appeals

24 B.T.A. 906; 1931 BTA LEXIS 1578;

November 24, 1931, Promulgated

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1. INCOME - DIVIDENDS FROM FOREIGN CORPORATION. Petitioner, an American citizen, received in 1922, a distribution as a stockholder in a Canadian corporation, all the property of which was located in that country and income earned therein. Held, that the accumulated "earnings or profits" of such corporation within the purview of section 201 of the Revenue Act of 1921 are those accumulated portions of its gross income for each year representing earnings and profits in the sense in which those terms are used in that act, and not those lesser portions taxed as earnings or profits of the corporation under the laws of Canada.

2. Id. A stock dividend distributed by a Canadian corporation and charged against earned surplus as a distribution thereof, because taxable to stockholders under the laws of that country in similar manner to a cash dividend, held not to have effected a distribution of earnings within contemplation of the taxing laws of this country. Held, further, that the amount thereof was properly restored to corporate surplus by the Commissioner for the purpose of determining to what extent a cash dividend subsequently distributed to a citizen of this country represented accumulated corporate earnings and profits within contemplation of section 201 of the Revenue Act of 1921.

Eugene Untermyer, Esq., Charles S. Guggenheimer, Esq., Louis Marshall, Esq., Louis Malthaner, Esq., and Henry Brach, Esq., for the petitioner.

J. Arthur Adams, Esq., and Frank A. Surine, Esq., for the respondent.

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SMITH

This is a proceeding for a redetermination of a deficiency in income tax for 1922 determined by the respondent in the amount of $5,555.08.

The petitioner claims that the Commissioner, in determining the deficiency, has included in income the entire amount, $42,000, of a distribution to the petitioner during the taxable year by the Premier Mining Company, Limited, a Canadian mining corporation, whereas only 49.56 per cent thereof, or $20,815.20, is a distribution of earnings or profits of the corporation, and 50.44 per cent, or $21,184.80 is a distribution of capital, being paid out of the depletion reserve.

FINDINGS OF FACT.

The facts are all determined by stipulation of the parties reading as follows:

1. The petitioner during the taxable year 1922 was and is at the time of filing this stipulation with the Board a citizen of the United States and an inhabitant of the State of New York. He filed his income tax return for the year 1922 with the Collector of Internal Revenue, Second District of New York.

2. Under date of June 5, 1926, the respondent mailed to the petitioner a deficiency letter in which a deficiency is shown for the year 1922 of $5,555.08. On July 24, 1926, the petitioner filed a petition with the United States Board of Tax Appeals, and alleged that the Respondent had erred in his determination of the said deficiency.

3. The petitioner was, during the year 1922 a stockholder of the Premier Gold Mining Company, Limited, hereinafter called "Premier," a foreign mining corporation, which was organized, February 12, 1919, under the laws of the Province of British Columbia of the Dominion of Canada. The business of said corporation was the owning and operating of gold and silver mines and during the period from date of organization up to and including the calendar year 1922 did no business in the United States, owned no property in the United States and received no income from sources within the United States.

4. The petitioner received during the year 1922 $42,000.00 from the Premier as a distribution based on the percentage of the total outstanding capital stock of said corporation which was owned by the petitioner. The petitioner in his income tax return for the year 1922 reported $20,815.20 of said $42,000.00 as representing a taxable dividend received from a foreign corporation, and treated in said return the balance of the said $42,000.00 income or $21,184.80 as not subject to income tax pursuant to advice received by the petitioner from Premier, on the ground that said $21,184.80 was paid from a fund which was set aside by said corporation as representing an amount allowed by the tax authorities of the Dominion of Canada as a deduction, for the purpose of determining the amount of said corporation's income subject to income tax under the laws of the Dominion of Canada, as depletion. The Dominion of Canada in determining the income of the Premier, subject to its income tax law, allowed said corporation as a deduction from its income as depletion of its gold and silver mines for the years 1919, 1920, 1921 and 1922, 50% of the net operating profits, after allowance for depreciation.

5. At the time the Canadian tax authorities determined the amount to be allowed the Premier as a deduction from its income from the date of incorporation to the year 1922, inclusive, as depletion in determining the income of the Premier subject to income tax under the Canadian laws, the tax authorities had before it an appraisal prepared by H. A. Guess, Vice-President of the Premier, a person who was qualified to make an appraisal of the properties of the Premier, showing an appraised value of certain mining property of the Premier as of August 1, 1921 and December 31, 1921. See Exhibit "A."

6. On November 21, 1921, the Premier declared a stock dividend of $300,000.00 and said stock was distributed during 1921 to its stockholders on the basis of the percentage of stock owned by each.

7. If the amount of depletion allowed by the Canadian tax authorities as a deduction from income in determining the income of the Premier subject to the income tax laws of the Canadian government from date the Premier was incorporated to 1922, inclusive, should be deducted from income received by the Premier in determining the true surplus available for the payment of dividends to the stockholders of the Premier, who are citizens of, and reside in, the United States, and said surplus should be further reduced by the amount of a stock dividend paid by the Premier to its stockholders in 1921, then only 52.03% or $21,852.60 of the $42,000.00 received by the petitioner from the Premier during 1922 is taxable as a dividend received from a foreign corporation and that the balance of said $42,000.00 or $20,147.40 is non-taxable.

8. If the amount of depletion allowed by the Canadian tax authorities as a deduction from income in determining the income of the Premier subject to the income tax laws of the Canadian government from date the Premier was incorporated to 1922, inclusive, should be deducted from income received by the Premier in determining the true surplus available for the payment of dividends to the stockholders of the Premier, who are citizens of, and reside in, the United States, and said surplus should not be reduced by the amount of a stock dividend paid by the Premier to its stockholders in 1921, then only 64.042% or $26,897.64 of the $42,000.00 received by the petitioner from the Premier during 1922 is taxable as a dividend received from a foreign corporation and that the balance of said $42,000.00 or $15,102.36 is non-taxable.

9. If the depletion sustained is based upon actual cost of the gold and silver mines to the Premier, then the true earned surplus of the Premier, at all times during the entire calendar year 1922, was in excess of each and every distribution made by the Premier to its stockholders during the year 1922.

10. If depletion is computed from the date the Premier was incorporated up to and including the year 1922 in accordance with the provisions of the Revenue Acts of 1918 and 1921 had the premier been a domestic corporation, then the true earned surplus of the Premier at all times during the entire calendar year 1922 was in excess of each and every distribution made by the Premier to its stockholders during the year 1922.

11. It is stipulated and agreed, in the event the Board should find, and in that event only, that in determining the true earned surplus of the Premier, available for distribution to its stockholders, who are citizens of, and reside in, the United States, the amount allowed Premier by the Dominion of Canada as a deduction from its income for 1919, 1920, 1921 and 1922, as depletion for the purpose of determining its income subject to income tax under the Canadian laws should be deducted from its earned surplus, and that the amount of a stock dividend paid during 1921 should be deducted from earned surplus, the Board may also find that only 52.03% or $21,852.60 of the $42,000.00, received by the petitioner from the Premier during 1922, is taxable as a dividend received from a foreign corporation, and that the balance of said $42,000.00 or $20,147.40 is non-taxable.

12. It is stipulated and agreed, in the event the Board should find, and in that event only, that in determining the true earned surplus of the Premier, available for distribution to its stockholders, who are citizens of, and reside in, the United States, the amount allowed Premier by the Dominion of Canada as a deduction from its income for 1919, 1920, 1921, and 1922, as depletion for the purpose of determining its income subject to income tax under the Canadian laws should be deducted from its earned surplus, and that the amount of a stock dividend paid during 1921 should not be deducted from earned surplus, the Board may also find that only 64.042% of said $42,000.00 received by the petitioner in 1922 from the Premier, or $26,897.64, is taxable as a dividend received from a foreign corporation and that the balance or $15,102.36 is non-taxable.

13. It is stipulated and agreed that in the event the Board should find, and in that event only, that in determining the true earned surplus of the Premier, available for distribution to its stockholders, who are citizens of, and reside in, the United States, that only an amount representing the actual cost to Premier of the gold and silver mined by Premier should be the basis for determining the amount of the depletion which should be deducted from income in arriving at the earned income available for distribution to the Premier's stockholders, who are citizens of, and reside in, the United States, the Board may also find that the petitioner received $42,000.00 in 1922 from the Premier, representing a dividend received from a foreign corporation.

14. It is stipulated and agreed that in the event the Board should find, and in that event only, that in determining the true earned surplus of the Premier, available for distribution to its stockholders, who are citizens of, and reside in, the United States, that only an amount representing the depletion sustained as computed in accordance with the provisions of the Revenue Acts of 1918 and 1921 had the Premier been a domestic corporation, should be the basis for determining the amount of the depletion which should be deducted from income in arriving at the earned income available for distribution to Premier's stockholders, who are citizens of, and reside in, the United States, the Board may also find that the petitioner received $42,000.00 in 1922 from the Premier representing a dividend received from a foreign corporation.

Exhibit A referred to in the stipulation is an analytical calculation of the extent of the ore reserves and a computation of the present worth of the expected net profits over and above certain accepted costs of production. The valuation is based upon a value of $20 per ounce for gold and of 65 cents per ounce for silver; the productive life of the mine is assumed to be six years for shipping ores and 10 years for milling ores and the rate of discount used is 7 per cent, together with 4 per cent on the sinking fund reinvestment. The calculations are summarized in the report as follows: Total expected profits $21,482,977; present cash value thereof $15,661,393; total ore reserves of all classes 713,250 tons.

OPINION.

SMITH: The Revenue Act of 1921 includes in income dividends received and provides:

SEC. 201. (a) That the term "dividend" when used in this title (except in paragraph (10) of subdivision (a) of section 234 and paragraph (4) of subdivision (a) of section 245) means any distribution made by a corporation to its shareholders or members, whether in cash or in other property, out of its earnings or profits accumulated since February 28, 1913, except a distribution made by a personal service corporation out of earnings or profits accumulated since December 31, 1917, and prior to January 1, 1922.

(b) For the purposes of this Act every distribution is made out of earnings or profits, and from the most recently accumulated earnings or profits, to the extent of such earnings or profits accumulated since February 28, 1913; but any earnings or profits accumulated or increase in value of property accrued prior to March 1, 1913, may be distributed exempt from the tax, after the earnings and profits accumulated since February 28, 1913, have been distributed. If any such tax-free distribution has been made the distributee shall not be allowed as a deduction from gross income any loss sustained from the sale or other disposition of his stock or shares unless, and then only to the extent that, the basis provided in section 202 exceeds the sum of (1) the amount realized from the sale or other disposition of such stock or shares; and (2) the aggregate amount of such distributions received by him thereon.

It is petitioner's contention that the surplus accumulated by the Canadian corporation and available for distribution in dividends was, in the year of this distribution, insufficient to cover the payment made and accordingly a portion of such distribution was paid out of a depletion reserve representing 50 per cent of its net income for each year since organization, and to that extent did not represent a dividend taxable to him.

The Canadian corporation here in question was incorporated in 1919, and all of its income was derived subsequent to 1913, and there is no issue in respect to the time during which corporate earnings were accumulated.

Petitioner's contention is based upon the provisions of the Canadian income-tax law, which governs the tax liability of the corporation in question. It appears that under this law, stock dividends are treated for purposes of tax in the same manner as cash dividends. It further appears that under the Canadian law the allowance for depletion made to a corporation engaged in mining is not one based upon the cost of the property or one computed on discovery value, as under the income-tax laws of this country, but is an allowance granted by the Minister of Finance, determined in amount at his discretion, and that it is customary to grant an allowance of 50 per cent of the net income after deduction of depreciation.

A stock dividend of $300,000 was distributed in the year preceding the taxable year here in question, and petitioner contends that such distribution reduced the corporate surplus by this amount. It further appears that from the time of its organization through the calendar year here involved the corporation was allowed, as a deduction from its income for depletion, 50 per cent of its net operating income after allowance of depreciation.

It is petitioner's insistence that because the corporation is subject to Canadian law we must accept, in determining the corporate surplus available for dividend distribution, the amount of surplus shown upon the corporate books and give full effect to the reductions effected by the stock dividend distribution and by the depletion allowances granted by the Canadian Minister of Finance. It is insisted that, the corporation being subject to Canadian law alone, we must accept the determination of net income as computed and set up on the corporate books in accordance with allowances and requirements of the taxing laws of that country, as a failure to do so would be in violation of the rule of comity.

We do not think that the authorities cited by counsel for petitioner are controlling. We can not see that the doctrine of comity is here involved. We are called upon to make no determination as to the corporation. The effect of our decision is in no way reflected in the corporate business or affairs. Our purpose is solely to determine what portion of a payment made to an American citizen by this corporation, received by him, and in which the corporation has now no interest, is subject to tax by this Government under the provisions of its laws. The subject matter of the controversy here is the distribution made by the corporation to a citizen of this country, but the question does not arise until after that distribution is effected, and the corporation no longer has any right or interest in the funds. It appears to us to be a wholly unjustified application of the rule of comity to hold that the character of this payment, in the hands of this recipient, an American citizen, is to be determined by application of the Canadian taxing act, merely because the source of the income was in that country.

Petitioner contends that the accumulated and undistributed profits representing the corporate account of existing surplus should be accepted as it stands upon the books, but asks, in the event that the adjustment made by reason of the payment of the stock dividend be disregarded and this amount be restored to surplus, that the depletion reserve as set up be recognized as recovered capital and the deficiency be redetermined by elimination from petitioner's gross income of that portion of the dividend distributed to him from such reserve. It is insisted that an adverse decision upon the question of the reduction of accumulated profits by payment of a stock dividend does not decide the question in respect to the depletion reserve.

With this contention we can not agree. It appears to us that a decision upon each of these issues is determined by the same question - whether, in determining the character of dividend distributions made by a foreign corporation to a citizen of the United States to ascertain the tax thereon due under the provisions of our laws, we should accept the corporate account of accumulated earnings, as correctly computed for purposes of the taxing laws of the foreign country, or recompute such account to show corporate earnings in the sense in which that term is used in the applicable revenue law of this country by which the tax is imposed. If petitioner is correct in his contention that the reserve for depletion set up under the Canadian Act must be accepted for the purposes of the determination here to be made, we think it must follow that the surplus account as computed under that act must also be accepted.

In this connection we must bear in mind that the stock dividend distributed to petitioner did not represent income under the provisions of our laws, as it did not in fact effect a distribution of corporate earnings. ; ; ; ; . To accept petitioner's theory would be to permit him to receive distributions of stock representing the capitalization of all corporate earnings and then to receive distributions of cash to the full extent of his capital investment exempt from tax as a return of capital.

The respondent, in determining to what extent the distribution here in question is taxable under the American Act, has readjusted, for this purpose alone, corporate earnings by elimination of the reduction effected by the $300,000 stock dividend paid, and by inclusion of the amount represented by the excess of the allowance for depletion made by the Minister of Finance of the Dominion of Canada over the depletion allowance based upon cost of the property and allowable under the taxing laws of this country.

Under the applicable revenue act of this country, an American citizen is taxable upon amounts distributed to him by a corporation which represent earnings accumulated by it subsequent to February 28, 1913. For purposes of that act, we think the terms "earnings" and "profits" are to be construed in the sense in which there used. It has been repeatedly held that in construing the Federal taxing acts the terms used are to be considered with the meaning intended by Congress in their use and not changed or modified by provisions of law of the local jurisdiction. Cf. ; ; ; ; . This rule applies with equal force in case of a foreign corporation in respect to the laws of its domicile.

The depletion reserve in question represents an allowance granted the corporation under the laws of its domicile of a portion of its income exempt from tax, but a portion of this tax-exempt allowance represents corporate earnings in the sense in which that term is used in the taxing act of this country, and, when such earnings are distributed to a stockholder who is a citizen of this country, their character in his hands and for purposes of tax by this Government, is to be determined under the provisions of its laws.

The allowances granted by Canadian law to the corporation are for the purpose only of ascertaining the amount of the exaction by that country from the corporation for purposes of that Government. The provisions of that law can not, we think, be invoked as a basis for determination or in limitation of a liability for tax under the laws of this country in the situation shown here to exist. The action of the Commissioner is approved.

Reviewed by the Board.

Judgment will be entered for the respondent.