
    THE TORRINGTON COMPANY v. THE UNITED STATES
    [No. 147-52.
    Decided March 6, 1957]
    
      
      Mr. Samuel S. Dermis 3d., for the plaintiff. Messrs. Hale and Dorr were on the briefs.
    
      Mr. Rufus E. Stetson, Jr., with whom was Mr. Assistcmt Attorney General Charles K. Rice, for the defendant. Messrs. Andrew F. Oehmcmn and H. S. Fessenden were on the brief.
   LittletoN, Judge,

delivered the opinion of the court:

The plaintiff, a Maine corporation, seeks to recover a refund of income and excess profits taxes paid for the fiscal year ended June 30, 1942. The sole issue to be decided by this court is whether, under § 127 of the Internal Revenue Code of 1939, the amount of a war loss must be deducted from a taxpayer’s income from sources without the United States for the purpose of determining the limit on the credit against United States taxes for taxes paid or accrued to a foreign country imposed by §§ 131 (b) (2) and 729 (d) (2) of the Code.

During the fiscal year ended June 30, 1942, plaintiff was the owner of all the capital stock of subsidiary corporations in Canada, England and Germany. Upon the outbreak of war between the United States and Germany plaintiff’s German subsidiary, together with all its assets, was seized by the German Government. As a result of this seizure it is undisputed that plaintiff was deemed to have suffered a war loss in the amount of $46,568.83 for the fiscal year 1942 under the provisions of § 127. During the same fiscal year 1942, plaintiff realized income from dividends on its capital stock in its English and Canadian subsidiaries. Plaintiff claimed and received credit against its United States taxes a portion of the amount of the foreign taxes considered withheld on the dividends received from its English and Canadian subsidiaries. It is the computation of the limit on the foreign tax credit to which plaintiff is entitled that is now in issue.

In preparing its income and excess profits tax returns for the fiscal year 1942, plaintiff elected to compute its foreign tax credits with respect to the income and surtax under the provisions of § 131. Section 729 (a) made the provisions of § 131 also applicable to the excess profits tax imposed by Subchapter E of Chapter 2, Internal Eevenue Code of 1939. Section 131 (b) (2), as amended by § 216 (b), Eevenue Act of 1939, 53 Stat. 876, provided the following limitation on the foreign tax credit allowable under § 131:

(2) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer’s net income from sources without the United States bears to his entire net income, in the case of a taxpayer other than a corporation, or to the normal-tax net income, in the case of a corporation, for the same taxable year.

A similar limitation was placed on the allowable foreign tax credit against excess profits taxes by §729 (d) (2). Since the same method of computing the limit on foreign tax credits provided by § 131 (b) (2) is applicable to § 729 (d) (2), we will confine most of our discussion to §131 (b) (2)._ _

_ In arriving at net income from sources without the United States plaintiff did not deduct from its foreign gross income the amount of the § 127 war loss. This resulted in a higher net income from foreign sources and a corresponding increase in the amount of total credit available under the formula provided for in § 131 (b) (2), since the proportion of foreign net income to total net income would be higher. It is not specifically stated in the record that plaintiff deducted the § 127 war loss from its gross income from all sources to arrive at total net income, but it is apparent that this was in fact done.

Subsequent to the filing of its income and excess profits tax return for the fiscal year 1942, the Commissioner of Internal Eevenue conducted an audit of the plaintiff’s tax return for that year. Pursuant to this audit, the Commissioner issued a notice of deficiency which contained various adjustments, one of which was a recomputation of the limit on the total foreign tax credit available to the plaintiff. The Commissioner determined that plaintiff, in computing its net income from sources without the United States, for the purpose of the foreign tax credits and limitations thereon, must deduct from gross foreign income the amount of the § 127 war loss. This action of the Commissioner reduced the available foreign tax credit against the excess profits tax by $11,481.74 and the foreign tax credit against the income and surtax by $10,981.69. These amounts, together with the statutory interest due on deficiencies, were paid or satisfied by the plaintiff and it now seeks a refund. Therefore, the only issue for decision by this court is whether the Commissioner was correct in deducting from plaintiff’s income from sources without the United States the $46,568.83 representing the § 127 war loss. We think that the Commissioner was correct for the reasons stated hereinafter.

Section 119 (d) of the Internal Revenue Code, which defines what is to be considered as net income from sources without the United States, reads as follows:

(d) Net Income From Sources Without United States. — From the items of gross income specified in subsection (c) of this section there shall be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto, and a ratable part of any expenses, losses, or other deductions which can not definitely be allocated to some item or class of gross income. The remainder, if any, shall be treated in full as net income from sources without the United States.

It is apparent from a reading of this subsection that if we hold a § 127 war loss is a loss within the meaning of § 119 (d) it must be deducted from gross income from sources without the United States in order to arrive at the correct net income from such sources. Plaintiff argues that § 127 war losses were not intended to be deducted from gross income without the United States for the purposes of determining the net income pursuant to § 119(d). It premises its argument on the fact that § 119 (d) was enacted first in 1921, long before the war-loss section and as such could not have been intended to include such losses. Plaintiff also states that because § 119 (d) requires that its losses be properly apportioned or allocated, or a ratable part of losses which can not definitely be allocated to some class of income be deducted from income earned without the United States, then only those losses arising from operations that normally produce income are cognizable by the statute. Therefore, plaintiff contends, a war loss, not being a loss arising out of an operation calculated to produce income, should not be deductible.

We do not think that plaintiff is correct in these contentions. In enacting the war-loss section Congress had before it all of the provisions of the Internal Bevenue Code and could have very easily provided that a § 127 war loss would not be considered a loss under § 119 (d). That it failed to do so seems to us to manifest a clear intent that war losses were not to be distinguished from the other losses that were to be taken as deductions in order to arrive at the net income from sources without the United States. Even more pur-suasive is the fact that § 127 states:

§ 127 War Losses
(a) Gases in which loss deemed sustained, a/nd time deemed sustained. For the purposes of this chapter — * * *

The clear and unambiguous meaning of the words, “For the purposes of this chapter” is that for all purposes of the chapter, unless otherwise restricted, a war loss shall be accorded the same treatment as any other loss. Section 119 (d) being a subsection of the same chapter of the Code as § 127, the losses contemplated by § 119 (d) must necessarily include a war loss under § 127. Further, we do not feel that § 119 (d) losses are restricted to losses from the kind of operations which normally produce income, or cause losses, as contended by plaintiff. Losses for the purposes of taxation have included many kinds and types of business and personal reverses. It requires no stretch of legal contemplation to include losses arising from the seizure of business property by a foreign belligerent. This might well be termed a loss due to the risk of doing business in a foreign country and which was calculated to produce income. This seems little different from any other business venture that may or may not have profitable results.

Plaintiff further contends that § 127 was intended as a relief statute and that to hold, as we do, that war losses must be deducted under § 119 (d), would greatly diminish the relief intended by Congress. Plaintiff says this is true because of the fact that a reduction in net income from sources without the United States, in the amount of the $46,568.83 war loss, reduces its total allowable credit under §§ 131 (b) (2) and 729 (d) (2) by $22,413.88, which is between 45 and 50 percent of the war loss itself. If the total United States income and excess profits taxes for the year involved were 45 percent of total corporation income then plaintiff would have actually been penalized by deducting the § 127 war loss under § 119 (d) since the reduction in tax credit would be higher than the current United States taxes on the amount to be excluded from income from sources without the United States. The fallacy in this argument is apparent when we realize that § 127 was added to the Revenue Code in 1942, well after the extremely high war profits taxes were enacted and the result suggested by plaintiff was unlikely to occur. Plaintiff did in fact receive a benefit by being able to write off as a loss against income from all sources the value of its German subsidiary. The fact that it had to also deduct that same loss from its total foreign gross income may have reduced some of the benefit plaintiff would have liked to receive is not of such persuasive weight as to require that we incorporate into § 119 (d) a meaning not apparent from a reading of the clear and unambiguous wording of the statute. It is also true that in the case of recoveries of war losses there is no provision in § 119 (c) [defining gross income from sources without the United States] for including the amount of such recoveries in the foreign gross income, while § 127 specifically requires that they be included in gross income from all sources. This court said recently in DuPont v. United States, ante, p. 191, “the courts cannot rewrite the statutes to the advantage of the Government.” This principle is equally applicable in the case of a taxpayer.

Section 119 (d) requires us to hold that war losses under § 127 must be deducted from gross income from sources without the United States in arriving at the correct net income from such sources. The Commissioner was correct in deducting such loss in computing the limit on the total foreign tax credit allowable to plaintiff under §§ 131 (b) (2) and 729 (d) (2). Plaintiff’s petition is therefore dismissed.

It is so ordered.

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

FINDINGS OF FACT

The court makes findings of fact, based upon the stipulation of the parties, and the briefs and argument of counsel, as follows:

1. Plaintiff, The Torrington Company, is a corporation duly organized under the laws of the State of Maine and is a resident and citizen of that State.

2. During the fiscal year ended June 30,1942, plaintiff was the owner of all the capital stock of a number of subsidiary corporations. Such subsidiary corporations included those organized under the laws of Canada, England and Germany. Plaintiff received dividends on its capital stock in the Canadian and English subsidiaries during the 1942 fiscal year.

3. Upon the outbreak of war between Germany and the United States, the plaintiff’s German subsidiary and the assets thereof were seized by the German Government. As a result of seizure plaintiff was deemed to have sustained a loss on foreign investments in the amount of $46,568.83 for the fiscal year ended June 30, 1942, under the provisions of section 127 of the Internal Eevenue Code of 1939.

4. During the fiscal year ended June 30, 1942, plaintiff received no income of any kind from its German subsidiary.

5. In its income and excess profits tax returns filed for the fiscal year ended June 30, 1942, plaintiff elected to compute its foreign tax credit under the provisions of section 131 of the Internal Eevenue Code for taxes paid to Great Britain and Canada with respect to its net income from these conn-tries. It had no income of any kind from any other foreign countries. Plaintiff filed its original income and excess profits tax return on September 15, 1942, for the fiscal year ended June 30, 1942. On December 10, 1942, plaintiff filed amended income and excess profits tax returns for the fiscal year ended June 30, 1942, and on June 11, 1943, filed second amended income and excess profits tax returns for that year. The normal income tax liability disclosed on these returns and duly paid was as follows:

Original — Acc’t. No. Sept. 410503-$1,129,336.75
Amended — Aee’t. No. Dec. 410400- 775.33
Total_ 1,130,112.08
Credit, See. 3806 (b)_ 40,938.28
Tentative allowance_ 1,202.64
- 42,140.92
Net assessment_ 1, 087,971.16
The excess profits tax liability disclosed on these returns and duly paid was as follows:
Original — Acc’t. No. Sept. 400041_$1,314,961.24
Amended — Acc’t. No. Dec. 400200_ 3,733.68
■Total_ 1,318,694.92
Credit, Sec. 3806 (b)_$197,080,93
Tentative allowance_ 5, 787. 02
- 202, 867.95
Net assessment_ 1,115,826.97
Unpaid amount_ 2,950.97
Excess profits tax actually paid_ 1,112,876.00

6. On July 12, 1945, May 12, 1947, and April 28, 1948, plaintiff filed consents extending the limitation period to June 30, 1949, for assessment of any income, excess profits, or war-profits taxes determined by the Commissioner to be due and owing for the fiscal year ended June 30, 1942.

7. Under date of October 1, 1948, the Commissioner of Internal Revenue issued a notice of deficiency for the fiscal year ended June 30, 1942, containing various adjustments, including a reduction in the foreign tax credit claimed by plaintiff for foreign taxes considered withheld on dividends received from its English and Canadian subsidiaries. In the notice of deficiency, the Commissioner of Internal Revenue allowed plaintiff a deduction as a war loss deemed to have been sustained under section 127 of the Internal Revenue Code of 1939 with respect to its German subsidiary in the amount claimed, namely, $46,568.83.

8.The deficiency notice disclosed a deficiency of $33,914.51 in normal income tax for the fiscal year ended June 30, 1942, and an overassessment of excess profits tax of $14,205.35. The deficiency in normal income tax was assessed on March 11, 1949, together with interest thereon of $13,450.88. On July 13, 1949, $1,709.92 of the assessment was abated. The assessment was satisfied as follows:

May 28, 1949 Cash payment_$30,975.78
Apr. 1,1949 Credit of overpayment of excess profits tax for year June 30, 1942- 11,254.38
Apr. 29,1949 Cash payment_ 110. 78
May 3,1949 Cash payment- 3,314. 53
July 13,1949 Abated_ 1,709.92
Total_ 47,365.39

Of the overassessment of excess profits tax of $14,205.35, it was ascertained that $2,950.97 had never been paid by plaintiff so that part of the overassessment was abated and the balance of $11,254.38 was credited against the deficiency in normal income tax and interest.

9. In computing the limit of the amount of credit pursuant to the provisions of section 131 (b) (2) of the Internal Revenue Code, the plaintiff did not take into account as a deduction against income received from Great Britain and Canada the amount of the loss incurred with respect to the German subsidiary.

10. In the deficiency notice, the Commissioner of Internal Revenue determined that the loss deemed to have been sustained with respect to plaintiff’s German subsidiary seized by the German Government must be deducted from income received from sources without the United States, namely, England and Canada, in computing plaintiff’s foreign tax credit. The foreign tax credit claimed by plaintiff and that allowed by the Commissioner of Internal Revenue for federal income and excess profits tax purposes is as follows:

Excess Income taxes profits taxes
Foreign credit per taxpayer_$83,466.33 $87, 665.98
Credit per Commissioner_ 72, 534. 64 76,184.24
Reduction in credit- 10,931. 69 11, 481. 74
Total reduction in credit-$22,413.43

11. The Commissioner’s computation of plaintiff’s foreign tax credit for the fiscal year ended June 30, 1942, as shown in the deficiency notice, is as follows:

COMPUTATION OP FOREIGN Tax CREDIT FOR NORMAL AND Surtax

Foreign income:
England- $40,250. 00
Canada- 315,315.32
355, 565.32
Deduct: Foreign loss_ 46, 568. 83
Net income from Foreign sources_ 308,996.49
Less: Amount of excess profits tax applicable to above income:
308, 006. 49 — Net foreign income 4, 777,073. 50 — E. P. net income 1,177,805. 62 — E. P. Tax= 76,184.24
Normal tax net income from foreign sources_ 232, 812.25

A. Foreign Tax Credit for Normal and Swrtax

Limitation on credit — Section 131 (b) (2) of Code:

232,812.25 — Above 3,833,692.55 — Normal tax net income X 1,194,420.31 — Normal and surtax= $72,534. 64
Allowable credit for normal and surtax_ 72, 534.64

B. Foreign Tax Credit for Excess Profits Tax

Limitation on credit under Section 729 (d) (2) of Code applies:

308,996.49 — Net foreign income 4,777,073.50 — E. P. net income X 1,177,805.62 — E. P. tax= $76,184.24 Allowable credit_ 76,184.24

12. The computation of the foreign tax credit for the fiscal year ended June 30, 1942, according to plaintiff’s theory, is as follows:

Dividend income — Canadian subsidiary-$315, 315.32
Dividend income — English subsidiary- 40,250.00
Total income from foreign sources_ 355,565.32
Doss from investment in wholly owned German subsidiary - 46, 568. 83
Foreign tax actually paid to Canada by Canadian subsidiary — FY 6/30/42_ 427,927.93
Tax attributable to dividends received by plaintiff from Canadian subsidiary ($427,927.93 X45.7263)- 195,675.61
Foreign tax actually paid to England by English subsidiary — FY 6/30/42_ 140, 644.87
Tax attributable to dividends received by plaintiff from English subsidiary ($140,644.87X34.899)_ 49,083.65

COMPUTATION OP LIMITATION ON CREDIT

A. Credit Against Excess Profits Tax

Net income from foreign sources_ 355,565,32 w E. P. net income from all soures_ 4, 777,073.50 X 1,177,805.62 — E. P. tax=$87,665.98
Foreign tax credit against E. P. taxes_$87, 665,98

B. Credit Against Income Tax

Net income from foreign sources_ 355, 565. 32
Dess: Foreign tax credit against E. P. taxes- 87,665.98
Balance applicable to income tax_ 267, 899.34
Normal tax net income_ 267, 899.34 ^ 3, 833,692. 55
1,194.420.31 — total normal and surtax=$83,466. 33 Foreign tax credit against normal and surtax- 83,466.33

13. On June 22, 1949, plaintiff filed a claim for refund of normal and surtax in the amount of $10,931.45 and, on the same date, a claim for refund of excess profits tax in the amount of $11,482.43. Both claims for refund were based 'upon the same assertion that in computing the allowable foreign tax credit its foreign income should not be reduced by the loss deemed to have been sustained on investment in its German subsidiary. Under date of April 4,1950, plaintiff was notified by registered mail of the disallowance in full of these two claims for refund.

CONCLUSION OE 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 plaintiff is not entitled to recover, and the petition is therefore dismissed. 
      
       Subsection (c) defines what items are to be considered as gross income from sources without the United States.
     