61 F. Supp. 1013 (1945) | Cited 0 times | D. Massachusetts | August 2, 1945

This is an action for the recovery of income taxes for the year 1938 paid by the plaintiff to the defendant on June 16, 1941, together with interest thereon. The question presented is whether, in calculating the proportion of a foreign subsidiary's income tax which a domestic parent corporation may claim as a credit for foreign taxes paid, the dividends received by the parent and the subsidiary's accumulated profits from which they were paid, should include income which was free from foreign taxes. The applicable statutory provisions are found in Section 131 of the Revenue Act of 1938, 52 Stat. 447, 26 U.S.C.A.Int.Rev.Acts page 1068. 1" All of the essential facts have been stipulated

The plaintiff, United Fruit Company, the domestic parent, is a New Jersey corporation which owns all of the stock of a British corporation, Elders & Fyffes, Ltd. (hereinafter referred to as the subsidiary). In the year 1938 the foreign subsidiary had a taxable income under the laws of Great Britain of $ 397,475.09 on which it paid income taxes aggregating $ 100,931.24. In addition, it derived a profit of $ 76,476.71 from casual capital gains not included in taxable income under British law. 2" The Bureau of Internal Revenue adjusted the foreign subsidiary's income to a United States income tax basis and determined that the total profits of the foreign subsidiary for 1938 were $ 434,879.49, including the $ 76,476.71 of capital gains. After deduction of the income tax paid to Great Britain, $ 100,931.24, there remained a profit of the foreign subsidiary amounting to $ 333,948.25

During 1938 the plaintiff received from its subsidiary dividends aggregating $ 1,421,500, of which $ 331,200.03 was determined by the Revenue Agent to have been paid out of the subsidiary's profits of 1938. The remainder of the dividend was determined to have been paid out of profits for the years 1937 and 1919. In 1938 the plaintiff had a total taxable income of $ 9,270,629.88, including the entire dividend received from the foreign subsidiary. On this basis the plaintiff filed a tax return on June 15, 1939, indicating a total tax liability of $ 986,641.21 against which a foreign tax credit of $ 350,678.38 was claimed, reducing its net income tax liability, as shown by the return, to $ 635,962.83. This sum was paid during 1939.

On June 16, 1941, the Commissioner of Internal Revenue made a deficiency assessment against the plaintiff which resulted in the payment on that date by plaintiff to the defendant of the sum of $ 20,967.02. Among the items on account of which the assessment was made was an increase of $ 8,150.17 due to the disallowance of a portion of the credit claimed because of payment of foreign income taxes by plaintiff's subsidiary. The disallowance was due to the exclusion of the $ 76,476.71 in untaxed foreign profits from the ratios prescribed by statute to determine the fair share of its subsidiary's taxes to which plaintiff was entitled as a credit against dividends received from the subsidiary.

Claim for refund was duly made by the plaintiff and denied by the defendant. This suit involves only the item of $ 8,150.17 disallowed as credit for foreign taxes paid together with interest thereon.

Section 131(f) of the Revenue Act of 1938, supra, which authorizes the credit to the parent corporation for foreign taxes paid by the subsidiary from which it received its dividends, sets forth the following method to determine the fair share of the tax for which the parent may claim credit: (1) The foreign tax credit which the parent may claim is limited to that proportion of the tax paid by the subsidiary upon its accumulated profits which the dividends received bear to the amount of such accumulated profits. Reducing this restriction to a mathematical formula, the proportion of the foreign tax deemed to have been paid is determined by the following equation: Dividendsreceived Tax deemedby parent Foreign tax to have/////////-- x paid by = been paidAccumulated subsidiary by parentprofits ofsubsidiary

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