not to be the victim * * *". It is clear from that opinion, also,
that in Colombian tax philosophy the patrimony tax is regarded as
an indivisible part of the income and excess-profits taxes. But
this does not argue that it is an income tax within the meaning
of Section 131(a).
In Lanman & Kemp-Barclay & Co. of Colombia v. Commissioner,
26 T.C. 582, the Tax Court squarely held that it is not. The court
pointed out that the question whether the tax is an income tax
within the meaning of Section 131(a) must be decided under
criteria established by the Internal Revenue laws of the United
States. Where property is involved, under our law income tax is
imposed only upon realized gains. In its decision that the
Colombian patrimony tax is not an income tax within the meaning
of Section 131(a) the Tax Court was much influenced by the fact
that "the taxpayer's own expert witness testified that it was
possible for a taxpayer to be liable for a patrimony tax in a
year when the taxpayer has no income and is not liable for the
income tax". 26 T.C. 582, 588. No expert testimony is needed on
this point here, because the facts are that in 1946 and 1947 this
Colombian S.R.L. had no income but only loss and yet it paid
patrimony tax during those years.
This fact serves to distinguish the Colombian patrimony tax
from the French tax involved in Keen v. Commissioner, 15 B.T.A.
1243; Hatmaker v. Commissioner, 15 B.T.A. 1044; and Wallace v.
Commissioner, 17 B.T.A. 406. The French income tax law required
that foreign domiciliaries owning one or more residences in
France should pay an income tax on income presumptively fixed at
a sum equal to seven times the rental value of the residences.
The presumption was rebuttable, but apparently only in favor of
the Government. The Board held that the tax so computed was an
income tax within the foreign tax credit provision. It is
stretching the analogy of those cases too far to say that a tax
imposed upon the value of certain assets without reference to
gain and which is payable parallel to and independently of a
general tax on income, is a tax on presumed income.
Nor is it possible to say that it is a tax "in lieu of a tax
upon income * * * otherwise generally imposed * * *" within
Subsection (h) of Section 131. A tax which runs parallel to a tax
upon income generally imposed, is not a tax "in lieu" of the
income tax. (Cf. Regulations 118, 39.131(h)-1(b). Moreover, it is
clear from the report of the Senate Committee which adopted
Subsection (h) (Sen.Rep. No. 1631, 77th Cong.2d Sess. pp.
131-132), cited in the Lanman case, that a tax imposed on capital
without reference to production or sales will not qualify as a
tax in lieu of a tax upon income. Accordingly, I hold that the
Colombian patrimony tax is not an income tax nor a tax in lieu of
a tax upon income within the meaning of Section 131(a), and (h).
The question now remains whether plaintiff may deduct the
patrimony taxes against income under Section 23(c), as "Taxes
paid or accrued within the taxable year". Plaintiff was allowed
such deductions for the years 1946 and 1947 without being
required to report the amount of such taxes as income. Those
deductions cannot now be disputed. In its brief, plaintiff claims
the right to such deduction in 1948. It is not clear whether, in
this claim, plaintiff intends to stand by its original position
that it is required to take the tax into income.
In any event, the problems presented here are not disposed of
either by my holding that the Colombian income and excess-profits
taxes were not "paid" by plaintiff within the meaning of
Subsection (a) of Section 131, or by my holding that it is not
required to take those taxes into income for the year 1948. Both
holdings must be understood in their context which is that
plaintiff does not claim the Colombian income and excess-profits
taxes as deductions under Section 23(c) and that, on the special
facts of this case, those taxes must be deemed to have been paid
subsidiary within the meaning of Subsection (f) of Section 131.
In my view, the questions presented here are controlled by
Subsection (d) of Section 23, which provides:
"The deduction for taxes allowed by subsection (c)
shall be allowed to a corporation in the case of
taxes imposed upon a shareholder of the corporation
upon his interest as a shareholder which are paid by
the corporation without reimbursement from the
shareholder, but in such cases no deduction shall be
allowed the shareholder for the amount of such
The Colombian patrimony tax is clearly a tax "imposed upon a
shareholder * * * upon his interest as a shareholder". It is not
a tax which is laid against dividends (Eastern Gas & Fuel
Associates v. Commissioner, 1 Cir., 128 F.2d 369). It is a tax
which is laid against the shareholder's assets in the
corporation. For a clear understanding of the effect of
Subsection (d) in the situation presented here, it is necessary
to turn to its history.
The provision first appeared in the Revenue Code of 1921
(Section 234(a)(3), 42 Stat. 254-255). It originated as a Senate
amendment to H.R. 8245 (Cong.Rec. 67 Cong. 1st Sess., p. 5814).
The hearings before the Senate Committee on Finance indicate that
the provision was primarily intended to change the result of
certain cases involving state taxes upon bank shares, (Hearings
before the Committee on Finance, 67 Cong. 1st Sess., on H.R.
8245, pp. 250-251). Those cases held that certain state taxes
imposed upon the value of outstanding bank shares, payable by the
banks in the first instance, and recoverable by them from the
dividends accruing on the shares, are taxes imposed upon the
shareholder and not deductible by the banks. Eliot Nat. Bank v.
Gill, D.C., 210 F. 933, affirmed, 1 Cir., 218 F. 600; National
Bank of Commerce in St. Louis v. Allen, D.C., 211 F. 743,
affirmed 8 Cir., 223 F. 472. On the other hand, if the
shareholder desired to take the deduction, he was required to
report the amount of the tax paid as part of his dividend,
Hurley, 6 B.T.A. 695. As the law stood in 1921, the deduction was
not available to the corporation and was meaningless to the
shareholder. Congress in 1921 obviously intended that a tax
assessed upon the ownership interests of shareholders and paid by
the corporation should become an effective deduction at some
point in the corporate tax structure.
The fact remains that Congress gave such deduction to the
corporation. The shareholder benefits, but only indirectly. A
direct deduction by him is retained subject to the same futility
as before. He is given the deduction only if he reimburses the
corporation. If he does not reimburse the corporation he is
denied the deduction and relieved of the requirement that he
report the tax paid on his behalf as income (Reg. 111 29.23(d)
In the present case, this scheme of Subsection (d) has become
partially inoperative. The deduction which is thus conferred on
plaintiff's subsidiary has no meaning. However, I find it
impossible to stretch the plain wording of that provision to
confer a meaningful deduction upon plaintiff. The theory of
constructive reimbursement will not do. It is true that in
Wisconsin Gas & Electric Co. v. United States, 322 U.S. 526, 64
S.Ct. 1106, 88 L.Ed. 1434, the Supreme Court held that a tax
levied upon and deducted from declared dividends was thereby
"reimbursed" by the shareholders to the corporation which paid
it. But that case involved the question whether the deduction is
available to the corporation. Moreover, the court thought that it
did not have to reach the question whether a tax levied on
declared dividends is a tax upon the shareholder's "interest as
shareholder". 322 U.S. 526, 531, 64 S.Ct. 1106, 1109. I note that
in Eastern Gas & Fuel A. v. Commissioner supra, such tax was held
not to be a tax upon the shareholder's
"interest as a shareholder" within the meaning of Subsection (d).
The word "interest", the court observed, means ownership interest
not income interest. 128 F.2d 369, 375.
Clearly, a tax levied upon the shareholder, which is not a tax
upon his interest as a shareholder within Subsection (d), and
which is paid by the corporation, may be deducted by the
shareholder only if he takes the amount of such tax into income.
Since the court in the Wisconsin Gas Co. case did not reach the
question whether the tax before it was a tax which would qualify
for treatment under Subsection (d), it is not possible to
interpret that case as holding that the constructive
reimbursement contemplated there would give the shareholder the
deduction without his being required to take the full amount of
such constructive reimbursement into income.
In any event, the constructive reimbursement theory of that
case does not apply to the present case. The Colombian patrimony
tax for 1948 was not deducted from declared dividends but was
paid out of current profits. The mere fact that a tax which is
paid out of current profits reduces the amount available for
distribution does not constitute "reimbursement" (I.T. 1255 C.B.
I-1, p. 141). Plaintiff has not reimbursed its subsidiary within
the meaning of Subsection (d) either actually or constructively.
I therefore hold that plaintiff is not entitled to a deduction
under Section 23(c), and that it is not required to take the tax
paid in its name into income.
I come to this conclusion with reluctance. The result reached
under Subsection (d), in this case, is precisely the result which
Congress set out to remedy in 1921. I cannot, however, go beyond
the plain wording of that provision and surmise what Congress
would have done if it had thought of this case. I should,
perhaps, add that I find it difficult to reconcile the idea
implicit in Sections 113(a) (15), 113(b)(1)(A) and 24(a)(7)
with the result which I feel bound to reach here under Section
I have been told by Government counsel, on oral argument, that
the Colombian patrimony taxes are not properly chargeable to the
capital account of the Colombian subsidiary under Section 24(a)
(7). Under Section 113(a) (15) and 113(b)(1)(A) it is envisaged
that an adjustment to basis, for such taxes as are properly
charged to a subsidiary's account, will be transmitted to the
parent upon complete liquidation where the parent owns over 80
per cent of the stock of its subsidiary. In the scheme of capital
gains taxation, the adjustment to basis of Section 113(b)(1)(A)
is the logical counterpart of the current deduction of Section
23(c) and vice versa. Although plaintiff owns 95 per cent of the
assets on which the patrimony taxes were paid, and although
plaintiff may ultimately be subject to our capital gains taxes
with respect to such assets, the adjustment to basis is not
available here. Neither is the current deduction.
It can be seen, therefore, that the scheme of Sections 23(c),
23(d), 24(a)(7), 113(b)(1)(A) and 113(a) (15), while
understandable in the purely domestic context, is ill designed to
cope with international situations. This is particularly
disturbing where, as here, the foreign tax on corporate assets is
a heavy one. I respectfully recommend the presentation of this
problem to the Congress. Any attempt on my part to resolve it
would constitute Judicial legislation.
Judgment is entered in favor of defendant and against
plaintiff. The complaint is dismissed at plaintiff's costs.