
    FREEPORT SULPHUR COMPANY v. THE UNITED STATES
    [No. 220-54.
    Decided July 16, 1958.
    Plaintiff’s motion for rehearing overruled April 15, 1959]
    
      
      Mr. John W. Drye, Jr., for the plaintiff. Mr. John, J. Costello was on the brief.
    
      Mr. Jerome Fink, with whom was Mr. Assistant Attorney General Charles K. Rice, for the defendant. Messrs. James P. Garland and M. Carr Ferguson were on the brief.
   Littleton, Judge,

delivered the opinion of the court:

Plaintiff sues to recover $96,745.08 with interest, representing an alleged overpayment of its corporate income tax for the calendar year 1947. Plaintiff’s claim arises out of the alleged erroneous disallowance by the Commissioner of Internal Revenue of credits against plaintiff’s Federal income tax under the provisions of section 131 (a) and section 131 (f) of the Internal Revenue Code of 1939, covering taxes paid to foreign countries.

On December 4, 1946, and for several years prior thereto, plaintiff, a Delaware corporation, owned 94.32 percent of the outstanding shares of stock of another Delaware corporation, the Cuban-American Manganese Corporation. Cuban-American Manganese Corporation, in turn, owned all the issued and outstanding stock of Cuban Mining Company, a corporation organized and existing under the laws of the Republic of Cuba. On December 4, 1946, Cuban-American was dissolved, and plaintiff, by virtue of its 94.32 percent ownership of the stock of Cuban-American, received 94.32 percent of the outstanding capital stock of the Cuban Mining Company.

Subsequent to the dissolution of Cuban-American, plaintiff purchased additional shares of Cuban Mining stock and by September 20, 1947, plaintiff owned 9,653 17%9o of the 10,000 issued and outstanding shares of the Cuban company.

Because the manganese ore reserves being mined by Cuban Mining were becoming exhausted, plaintiff, as principal stockholder, decided that the company should be dissolved and, accordingly, pursuant to a plan of liquidation, all business activity at Cuban Mining ceased. At that time Cuban Mining had capital of $500,000 and at the same time plaintiff’s capital investment in the Cuban company’s stock was $488,484.50. Likewise, at that time, Cuban Mining had accumulated earnings and profits in the amount of $546,170.64.

In connection with the liquidation and dissolution of Cuban Mining in 1947, plaintiff received two cash distributions in partial redemption of its shares of Cuban Mining Company stock. The first distribution was made on September 29, 1947, in the amount of $30 per share or a total of $289,617.95. The Cuban tax authorities treated this distribution as a dividend paid from the surplus of Cuban Mining, and taxes in the amount of $16,797.84 were withheld by Cuban Mining from the amount otherwise due plaintiff, and were paid to the Republic of Cuba. The net amount of the distribution of September 29, 1947, received by plaintiff after the deduction of the Cuban taxes, was $272,820.11.

In October 1947, by appropriate corporate action, the par value of Cuban Mining Company stock was reduced from $50 a share to $5 per share. On October 31, 1947, plaintiff received its second cash distribution in the process of the liquidation of Cuban Mining, amounting to $45 per share and totaling $434,426.92. The entire amount of this distribution was paid by Cuban Mining to plaintiff inasmuch as under the tax laws of Cuba, this distribution was not regarded as a payment out of the surplus of Cuban Mining, and no current dividend tax was applicable.

The total amount received by plaintiff from the two distributions (not taking into account the Cuban dividend tax withheld on the first distribution) was $724,044.87. As a result of the two distributions, plaintiff received $235,560.37 in excess of its $488,484.50 capital investment in the stock of the Cuban company. In its 1947 Federal income tax return plaintiff treated both distributions as a sale of capital assets through a distribution in complete liquidation of a corporation under section 115 (c) of the Internal Revenue Code of 1939, and therefore also treated the $235,560.37 excess over its tax basis as a long term capital gain for tax purposes. After computing its income taxes on this basis, plaintiff then claimed foreign tax credits as follows: (1) under section 131 (a) of the Code, plaintiff claimed a foreign tax credit for the $16,797.84 dividend tax paid to the Republic of Cuba by Cuban Mining; (2) under section 131 (f) of the Code, plaintiff claimed an additional foreign tax credit in the amount of $40,235.25 for a portion of the Cuban income taxes deemed to have been paid by Cuban Mining on its aggregate accumulated earnings and profits through 1947. The amount of the latter credit was computed on the assumption that the first distribution in the amount of $289,617.95 represented a distribution of accumulated earnings and profits of the Cuban company whereas the balance or other distribution ($434,426.92) had represented a return of tbe original capital of the company which had never been subject to tax.

After auditing plaintiff’s 1948 income tax return, the Commissioner of Internal Revenue determined that the capital gain realized by plaintiff in the two 1947 distributions should be reduced by the amount of the $16,797.84 Cuban dividend tax actually withheld from the first distribution by the Cuban company and paid to the Republic of Cuba. However, the Commissioner disallowed in their entirety both foreign tax credits claimed by plaintiff against its taxable net income for 1947. Accordingly, the Commissioner, over plaintiff’s protest, assessed additional income tax against plaintiff in the amount of $52,833.60 plus accumulated interest thereon of $10,909.05 on August 30, 1951. The assessment was paid in full by plaintiff on August 31,1951.

On December 7, 1951, plaintiff filed a timely claim for refund of income tax for 1947 in the amount of $63,742.65 based on the ground that the foreign tax credits claimed by plaintiff and disallowed by the Commissioner were allowable under the Code. On January 30,1953, plaintiff filed a timely amended claim for refund of income tax for 1947 on the same basis as the original claim except that plaintiff claimed that the entire amount of the accumulated earnings and profits of the Cuban company, i. e., $546,170.64, had been included in the two distributions in 1947 (the two distributions had totaled $724,044.87), rather than the fraction ($289,617.95) of such accumulated earnings and profits which had been claimed in the original claim for refund. As a result of this amendment, the entire Cuban income tax in the amount of $76,194.62 deemed to have been paid by the Cuban company on its total earnings and profits (amounting to $546,170.64) was claimed by plaintiff as a foreign tax credit under section 131 (f) of the Code. The increased foreign tax credit claimed in the amended claim for refund, resulted in an increased refund claim in the amount of $96,745.08, plus interest. (Cuban income tax, plus the 1947 Cuban dividend tax withheld at source.)

On June 13,1952, plaintiff’s original claim for refund was rejected entirely by the Commissioner. No action has been taken by the Commissioner with respect to the amended claim for refund filed on January 30, 1953.

Section 131 of the Internal Revenue Code of 1939 relative to foreign tax credits provides in subsection (a) (1) that domestic corporations shall be credited with any income, war-profits, and excess profits taxes paid or accrued within the taxable year to any foreign country or to any possession of the United States. Subsection (f) (1) of section 131 of the Code provides that a domestic corporation owning the majority of the voting stock of a foreign corporation “from which it receives dividends in any taxable year”, shall be “deemed to have paid the same proportion of any income, war-profits, or excess-profits taxes paid or deemed to be paid by such foreign corporation to any foreign country” upon the accumulated profits of the foreign corporation from which the dividends were paid, which the amount of the dividends bears to the amount of the accumulated profits.

It is plaintiff’s contention that in making the liquidating distributions in 1947 in the total amount of $724,044.87, the Cuban company first distributed the full amount of its accumulated earnings and profits (as of 1947) in the amount of $546,170.60, before redeeming its capital stock; that under the provisions of section 115 (a) of the Code plaintiff had received “dividends” to the extent of the $546,170.60 of earnings and profits available for such purpose, and that under section 115 (b) plaintiff must be “deemed to have paid” the same proportion of income taxes paid or deemed to be paid by the Cuban company upon such accumulated profits from which the dividends or distributions were paid.

If the distributions made to plaintiff in 1947 constituted “dividends”, then plaintiff was entitled to a credit against its capital gains tax for the statutory amount of the Cuban income and dividend taxes paid by its foreign subsidiary, Cuban Mining Company. The term dividends is defined in section 115 of the Internal Revenue Code. As noted by the court in the recent decision in Atlantic City Electric Company v. United States, 142 C. Cls. 519, that section of the Code presents serious problems in interpretation. The issue in that case was whether or not the plaintiff, a public utility company, was entitled to the benefits of the dividend paid credit under section 26 (h) of the Internal Revenue Code of 1939 in connection with certain redemption bonuses paid by the plaintiff to its stockholders upon the retirement of plaintiff’s preferred stock. In that case the court held that although the definition of the word “dividend” in section 115 (a) of the Code was sufficiently broad to make the distribution in suit a dividend for all purposes, including the purpose of the section 26 (h) deduction, the courts had held that section 115 (c) imposed a limitation on that definition where the dividend was a distribution in liquidation and that the payment in the hands of the dis-tributee-shareholder did not have the status of a dividend. In the Atlantia case, the court had to consider the status of a distribution in liquidation from the standpoint of the distributing corporation, and it concluded that such a distribution was not a dividend within the meaning of the dividend paid credit section 26 (h) of the Code.

In the instant case the plaintiff is the distributee-share-holder in receipt of distributions made in liquidation of a foreign corporation in which plaintiff owned nearly all of the issued and outstanding stock. The foreign corporation had a large accumulated surplus of earnings and profits from which it could have paid regular dividends, and the foreign corporation had paid taxes to Cuba on the income which was so accumulated. As in the Atlantia case, supra, we are faced with the decisions of the Supreme Court and other courts that the definition of “dividends” in section 115 (a) is not generally applicable to distributions made in liquidation. Hellmich v. Hellman, 276 U. S. 233; Foster v. United States, 303 U. S. 118. Section 131 (f) of the Code gives no more clue to the congressional intention behind the use of the word “dividends” therein than did the language of section 26 (h) in the Atlantic case. However, the following circumstance may be helpful in ascertaining the intention in the instant case. If the distribution made by the Cuban corporation had been made as an ordinary dividend on the Cuban company’s stock, the plaintiff distributee-share-holder would have had to pay a much higher rate of tax on the whole distribution, to the extent that it was out of earnings and profits, as ordinary income and would have been entitled to the foreign tax credit provided in section 181 (f) of the Code. However, the taxes which plaintiff would have had to pay on such regular dividends as ordinary income, even with the benefit of the foreign tax credit, would have been much more than the capital gains tax payable on the dividend as a liquidating distribution without the benefit of any foreign tax credit. Accordingly, we are of the opinion that Congress did not intend to give a distributee-shareholder of a liquidating foreign corporation both the benefit of the lower capital gains rate admittedly applicable to liquidating dividends under section 115 (c) of the Code, and also the benefit of foreign tax credits provided for in section 131 (f) of the Code.

In view of the above circumstances, and in the light of our holdings in the Atlantic case and in the related case of Idaho Power Company v. United States, 142 C. Cls. 534, we conclude that the distributions to plaintiff in the instant case were not “dividends” within the meaning of section 131 (f) of the Code.

The plaintiff’s petition will be dismissed.

It is so ordered.

Laramore, Judge; Madden, Judge; and Jones, Chief Judge, concur.

Whitaker, Judge,

concurring:

Apparently the Cuban Mining Company did not pay to Cuba any taxes on the distribution of accumulated earnings, except the $16,797.84 credit which has been allowed. Hence, it is not entitled to any further credit for taxes on earnings paid to a foreign country.

ADDENDUM

The plaintiff on August 13, 1958, moved for a rehearing urging that in the court’s opinion of July 16, 1958, it failed to take into consideration the fact that the $16,797.84 collected by the Republic of Cuba on the first distribution made to plaintiff in September 1947 was a foreign tax on income paid by the plaintiff, was allowable as a foreign tax credit, and that plaintiff was therefore entitled to a judgment reflecting such foreign tax credit. As pointed out in the opinion, ante, p. 115, the Commissioner of Internal Revenue did not allow the amount in question as a foreign tax credit but did reduce the capital gain which he determined plaintiff had realized on the two 1947 distributions by the amount of the Cuban dividend tax actually withheld from the first distribution made to the plaintiff. We are of the opinion that plaintiff is correct in its contention that the Commissioner erred in his treatment of the Cuban taxes paid by the plaintiff on the first distribution and that plaintiff was entitled to a foreign tax credit of $16,797.84, less the $4,199.46 by which the Commissioner of Internal Revenue reduced the plaintiff’s capital gains tax, plus a refund of $2,601.31 in interest paid by the plaintiff. The interest in question is that portion of the aggregate interest collected ($10,909.05) that the deficiency of $12,598.38 bears to the entire deficiency of $52,833.60 assessed and collected.

On March 3, 1959, defendant filed its response to plaintiff’s motion stating that on February 27, 1959, subsequent to the filing of plaintiff’s motion for rehearing, the District Director of Internal Revenue, District of Lower Manhattan, New York, pursuant to the authority of the Assistant Attorney General and the Commissioner of Internal Revenue, made allowance of plaintiff’s claim for refund as described in plaintiff’s motion for rehearing in the amount of $15,-199.69, plus accrued statutory interest of $6,808.33. Payment of the refund was scheduled for February 27, 1959, and accordingly the issue presented by plaintiff’s motion for rehearing and amendment of the judgment has become moot. In view of that payment it is unnecessary to amend the conclusion of law, and plaintiff’s motion was therefore denied by order on April 15, 1959, but it has been thought advisable to indicate the court’s agreement with plaintiff’s position on this matter which was not disposed of in the opinion of July 16,1958.

FINDINGS OF FACT

The court, having considered the evidence, the stipulation of the parties, and the briefs and arguments of counsel, makes findings of facts as follows:

1. Plaintiff at all times hereinafter mentioned was and now is a corporation organized and existing under the laws of the State of Delaware, with its office and principal place of business at New York, New York.

2. Cuban-American Manganese Corporation, a corporation organized under the laws of the State of Delaware, was incorporated July 3, 1928. Stock in this corporation was acquired by plaintiff at various dates from 1931 through 1946. Its holdings in the Cuban-American Managanese Corporation on the dates indicated below are as follows:

As of: Percent

12/31/31— ._39.85

12/31/32— _55.42

12/31/33_ __86.19

12/31/34_ _86.19

12/31/35_ _86.19

12/31/36_ _89.84

12/31/37_ _89. 84

12/31/38_ __89.84

12/31/39_ _89. 84

12/31/40_ _89. 84

12/31/41_ _89. 84

12/31/42_ _89. 84

12/31/43_ _90.26

12/31/44_ _92.92

12/31/45— _93.65

As of the date of dissolution of Cuban-American Manganese Corporation on December 4, 1946, plaintiff held 896,05214 shares out of a total of 950,000 shares outstanding or 94.32%.

Cuban Mining Company, a corporation organized under the laws of the Eepublic of Cuba, was incorporated May 15, 1928. In July 1928, Cuban-American Manganese Corporation acquired all of the outstanding stock of the Cuban Mining Company which it continued to hold until December 4,1946.

3. On October 23,1946, a plan of dissolution of the Cuban-American Manganese Corporation was adopted by its shareholders. Subsequently, on November 26, 1946, an amendment thereto was also adopted. A certificate of dissolution was issued by the secretary of state of the State of Delaware on December 2, 1946, and on December 4, 1946, dissolution was completed.

Pursuant to the plan of dissolution, plaintiff received 9,4322%90 of Cuban Mining stock out of a total of 10,000 such shares outstanding. From December 11, 1946, to December 31, 1946, plaintiff purchased an additional 13917%90 shares. From January 1, 1947, to September 20, 1947, plaintiff purchased 8116%90 additional shares, bringing its total stock ownership in the Cuban Mining-Company on September 20,1947, to 9,653177/190 of the 10,000 issued and outstanding shares of stock. Plaintiff did not acquire or dispose of any shares of Cuban Mining Company stock during the balance of the year 1947.

4. On December 31, 1946, the capital of Cuban Mining Company was $500,000, and for Federal income tax purposes its accumulated earnings and profits on that date were $513,581.94. The net earnings and profits of Cuban Mining-Company for 1947 after the deduction of taxes were $32,588.70. Cuban Mining Company was deemed to have paid Cuban income taxes in the amount of $76,195.19 with respect to the aggregate accumulated earnings and profits of $546,170.64.

5. Cuban Mining Company, from the time of its incorporation in 1928 to December 1946, was engaged in the business of mining manganese ore and operating an ore concentration plant in Cuba. In December 1946, Cuban Mining Company exhausted its manganese ore reserves and ceased production of manganese ore. Prior thereto, in anticipation of the exhaustion of these reserves, a study had been undertaken of the possibility of converting the facilities of Cuban Mining Company to the production of Portland cement. During the first part of 1947 the results of this study led plaintiff to the conclusion that the only profitable course to be followed was the dissolution of Cuban Mining Company and the liquidation and distribution of its assets. Such a program was immediately undertaken during 1947.

6. In connection with the carrying out of said liquidation and dissolution, plaintiff received two cash distributions during the year 1947 in partial redemption of its shares of Cuban Mining Company. The first distribution was made September 29, 1947, in the amount of $80 per share or $289,617.95. This distribution was treated under the tax law of the Eepublic of Cuba as a dividend paid from Cuban Mining Company’s surplus and a tax in the amount of $16,797.84 was imposed thereon by Tariff Second, Article 8, of Chapter Sixth of the General Tax on Profits of the Emergency Tax Law of the Eepublic of Cuba, as amended by General Tax Law No. 7, dated April 5,1943, and Section 1, Article First of the Emergency Tax Law of September 8, 1941. A true and correct translation of said tax law of the Eepublic of Cuba is attached hereto as exhibit A and made a part hereof. This tax was withheld from the distribution by Cuban Mining Company and paid over to the Cuban Government. The net amount of the distribution September 29, 1947, received by plaintiff after the deduction of the Cuban tax, was $272,820.11.

7. A second distribution in the process of liquidation of the Cuban Mining Company was made to plaintiff on October 31, 1947. Immediately before this distribution, by appropriate corporate action, the par value of the Cuban Mining Company stock was reduced from $50 to $5 per share. This distribution was in the amount of $45 per share or $434,426.92. This distribution was not treated under the tax law of the Eepublic of Cuba as a dividend paid from Cuban Mining Company’s surplus and was not subject to the dividend tax imposed on the first distribution.

8. On its 1947 Federal income tax return plaintiff treated both distributions referred to above as a sale of a capital asset through a distribution in complete liquidation of a corporation under the provisions of section 115 (c) of the Internal Eevenue Code of 1939. The difference between plaintiff’s tax basis in the Cuban Mining stock ($488,484.50) and the aggregate amount of both distributions plus the dividend tax withheld by Cuban Mining Company from the first distribution ($724,044.87), or $235,560.37, was therefore treated by plaintiff as a long-term capital gain in computing its Federal income tax for 1947. Plaintiff also claimed in this return a foreign tax credit under section 131 (a) of the Internal Revenue Code of 1939, in the amount of $16,797.84 for the dividend tax withheld by Cuban Mining Company from the distribution of September 29, 1947, referred to in paragraph 6 above. An additional foreign tax credit in the amount of $40,235.25 was claimed by plaintiff under section 131 (f) for a portion of the Cuban income taxes deemed to have been paid by the Cuban Mining Company on its aggregate accumulated earnings and profits through 1947. The amount of this credit was computed on the assumption that $289,617.95 of the total gross distribution of $724,044.87 represented a distribution of accumulated earnings and profits of the Cuban Mining Company, and that the balance represented only a return of the original capital of the company which had never been subject to tax.

9. The Commissioner of Internal Revenue, after audit of plaintiff’s 1947 income tax return, determined that the capital gain realized by plaintiff in the 1947 distributions should be reduced by the amount of $16,797.84 representing the Cuban dividend tax withheld from the distribution by Cuban Mining Company. Both foreign tax credits claimed by plaintiff in its return against its taxable net income for that year were disallowed in their entirety. As a result of these adjustments, and over plaintiff’s protest, the Commissioner assessed additional income tax against it in the amount of $52,833.60 plus accumulated interest thereon in the amount of $10,909.05. This assessment was made on or about August 30,1951, and was satisfied in full by plaintiff on August 31, 1951.

10. On or about December 7, 1951, plaintiff filed with the Collector of Internal Revenue, Second District, New York Custom House, New York, New York, a timely claim for refund of income tax for 1947 in the amount of $63,742.65 based on the ground that the foreign tax credits disallowed by the Commissioner of Internal Revenue were properly allowable. Said claim was proper in form.

11. On January 30, 1953, plaintiff filed a timely amended claim for refund of income tax for the calendar year 1947 with the Director of Internal Revenue, Lower Manhattan, New York Custom House, New York, New York. Said claim was made on the same basis as the original claim filed on December 7, 1951, with the exception that plaintiff claimed that the entire amount of the accumulated earnings and profits of Cuban Mining Company in the amount of $546,170.64 were included in the distributions of September 29, 1947, and October 31, 1947, rather than the fraction of the accumulated earnings and profits which had been claimed in the original claim for refund. The result of this amendment to the claim was that the entire Cuban income tax in the amount of $76,194.62 deemed to have been paid by Cuban Mining Company on the accumulated earnings and profits was claimed by plaintiff as a foreign tax credit under section 131 (f) of the Internal Revenue Code of 1939. The increase in the amount of foreign tax credit claimed by plaintiff under section 131 (f) results in an increase in the refund claimed to the sum of $96,745.08, plus interest.

12. On June 13,1952, the original claim for refund filed by plaintiff on December 7, 1951, was rejected m toto by the Commissioner of Internal Revenue.

13. No action has been taken by the Commissioner of Internal Revenue, either in allowing or disallowing the amended claim for refund filed by plaintiff on January 30, 1953.

14. Plaintiff paid Federal income taxes for the calendar year 1947 in an amount in excess of $96,745.08 during the two years immediately preceding January 30,1953.

CONCLUSION OP LAW

Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes as a matter of law that the plaintiff is not entitled to recover, and its petition is dismissed. 
      
       This addendum was prepared! by Judge Littleton- (Bet.), and made a part of the court’s opinion, by order of April 15, 1959, which order likewise overruled plaintiff’s motion for rehearing.
     