The opinion
Matthews,
dissenting: I agree with so much of the majority opinion as holds that the petitioner is a citizen of Newfoundland, but dissent from that portion of the opinion which denies petitioner the right to a credit for taxes paid to Great Britain.
Under all of the revenue acts, from 1913 to date, citizens of the United States and resident aliens have been subject to tax on total income from all sources and have been granted the same deductions and personal exemptions. When the Revenue Act of 1918 first introduced into the income tax system the principle of allowing a credit for taxes paid to foreign countries, the credit allowed was the amount of taxes paid to foreign countries on income from sources therein, and in the case of an alien resident of the United States the credit was limited to the amount of any income taxes paid to the country of *458 which such alien was a citizen or subject, upon income derived from sources therein, but only if such country allowed a similar credit to citizens of the United States residing in such country. The effect of the 1918 credit for tax provision was in many instances to wipe out all tax liability due to the United States, notwithstanding the fact that such taxpayers had income from sources within the United States. This was because the rates imposed by foreign countries were higher than rates imposed by the United States. Consequently, a change was made in the 1921 Act which based the credit on the amount of any income and profits taxes paid to any foreign country, whether on incmne from sources therein or not, but limited the credit to an amount not in excess of the same proportion of the tax due the United States against which the credit was claimed, which the foreign net income bore to total net income. This limitation in the credit provision had the effect of relieving American citizens of only the amount of the United States tax on foreign income, or so much of such tax as was equal to the foreign tax paid. It did not relieve Americans of paying taxes to the United States on income from United States sources. An alien resident of the United States was granted the same credit for taxes paid to foreign countries as was allowed to a citizen if the country of which the alien was a citizen or subject, in imposing such taxes, allowed a similar credit to citizens of the United States residing therein. The same provision was contained in the Revenue Acts of 1924,1926, and 1928, with only slight changes not material to the question in issue.
The amount of the credit allowable to a resident alien under the provisions of section 222 (a) (3) can not be determined without taking into consideration paragraph (a) (5). Reading these two subsections together, it is clear that any income or profits taxes paid to any foreign country, regardless of the source of the income on which such taxes are computed, form the basis in determining the amount of credit allowable, such credit being limited to an amount not in excess of the same proportion of the tax due the United States against which the credit is claimed, which foreign net income is- to total net income.
Under the credit provision, in so far as it is granted to a resident alien on the basis of a similar credit being granted by the country of which such alien is a citizen or subject, the United States is primarily interested in obtaining an exemption of United States income from foreign income taxes imposed on such income received by the citizens or residents of the foreign country. The United States has the primary right to income tax on income from United States sources, whether it goes to a citizen, resident, or nonresident alien. The right of the Government to tax the nonresident citizen on his *459 income from sources without the United States is based solely on his relation to the Government of the United States, and the right to tax the resident alien on his income from sources without the United States is based on the right to demand that all residents bear their share of the necessary expenses of government. In the case of the citizen and resident alien, the United States recognizes the primary right of the foreign government to tax income from sources therein and accordingly grants a credit, which, in effect, relieves the American taxpayer, whether a citizen or resident alien, of United States taxes on such foreign income. Secondarily, the purpose of the provision is to secure relief to United States citizens residing in foreign countries from paying income tax to the country of residence on income from sources in another foreign country which has also taxed such income. The nonresident alien must look to the country of residence for any relief from double taxation on income from United States sources.
Article 385 of Regulations 62, issued in February, 1922, under the 1921 Act, entitled “ Countries which do or do not satisfy the similar credit requirement,” as well as the corresponding article in the regulations issued under the 1924,1926 and 1928 Acts, have all contained Newfoundland in the “ incomplete list of countries which satisfy the similar credit requirement of section 222 (a) (3), * * * either by allowing to citizens of the United States residing in such countries a credit for the amount of income taxes paid to the United States, or in imposing such taxes, by exempting from taxation the incomes received from sources within the United States by citizens residing in such countries.” This same article, in all the regulations, also contains an incomplete list of the countries which do not satisfy the similar credit requirement, and further provides: “A resident of the United States, who is a citizen or subject of any country in the first list, is entitled, for the purpose of the total tax due the United States for 1921 [1924, 1926, and 1928, in regulations under later acts] and subsequent years, to a credit for the amount of any income, war profits, and excess profits taxes paid or accrued during the taxable year to any foreign country. If he is a citizen or subject of any country in the second list, he is not entitled to such credit. If he is a citizen or subject of a country which is in either list, then to secure the desired credit, he must prove to the satisfaction of the Commissioner that his country satisfies the similar credit requirement of the statute.”
The only difference between the article in the regulations issued under the 1921 Act and that in regulations issued under later acts is that more countries were added to each list in the later regulations.
*460 Petitioner came to the trial of this case relying on the provision of the regulations that Newfoundland was a country which satisfied the similar credit requirement, and that income taxes paid by a citizen of Newfoundland residing in the United States to any foreign country could be used as a basis for the credit. In my opinion, the Commissioner, by the statement made in the latter part of the article in question, has in substance said that any citizen of a country named in the first list need not introduce any evidence to show what the taxing statutes of his country provide.
The effect of the majority decision is to hold that, inasmuch as Newfoundland allows a credit for taxes paid to the United States, or exempts income from sources within the United States when received by a citizen of the United States residing in Newfoundland, therefore, Newfoundland taxes an American citizen residing therein on income from sources in Great Britain. I do not think this conclusion can or should be drawn from the first sentence of article 385.
I agree with the majority opinion that the credit which a foreign country must grant to United States citizens residing therein must be similar to the credit which the United States grants to its citizens wherever resident. If Newfoundland, in imposing income and profits taxes on its residents, (1) requires total income from all sources to bo reported and, by means of deductions of foreign income or credits against Newfoundland tax of foreign taxes paid on foreign income, collects a tax only on income from Newfoundland sources, or, (2) imposes such taxes only on income from sources in Newfoundland, it certainly meets the similar credit requirement of section 222 (a) (3). And it would be true not only that Newfoundland allows “ citizens of the United States residing in such country a credit for the amount of income taxes paid to the United States, or in imposing such taxes exempts from taxation the income received from sources in the United States by citizens residing therein,” but would also be true that Newfoundland allows a credit for taxes paid to all foreign countries or exempts from tax income from all foreign countries.
It is wholly improbable that any country would, in its general income tax statutes, refer to citizens of the United States, resident therein, or income from sources in the United States, or taxes paid to the United States, or refer to any foreign country by name. In our income tax statutes we carefully refrain from so doing. We refer to aliens and classify them as resident and nonresident; to income as from sources within and without the United States, and classify income from without the United States as from sources within possessions of the United States and from sources within foreign countries. In the credit provision here under consideration, the reference is to income taxes paid to any foreign country and the *461 credit is allowed to a resident alien who is a citizen of any foreign country which grants a similar credit to United States citizens residing therein. Because of the numerous treaties with foreign countries to which the United States is a party, and also for the purpose of classification, this Government does not, in its taxing statutes, name certain countries to whose citizens it grants exemptions and credits. The same compelling reasons would prevent other countries from naming the United States in their income tax laws. I think, therefore, that it is safe to assume that the statutes of Newfoundland do not refer in terms to citizens of the United States residing in Newfoundland, or to income taxes paid to the United States, or to income from sources within the United States, but that such statutes may refer to residents and resident aliens, income from foreign countries, or income taxes paid to foreign countries. In other words, the statutes of Newfoundland may well be assumed to be of broader application than the first sentence of article 385 indicates.
One of the foreign countries which is listed in the first sentence of article 385 as satisfying the similar credit requirement is The Netherlands. It is of interest to note that M. Sinninghe Damsté, Director-General of Direct Taxation, Customs and Excise of The Netherlands, in Memorandum F. 35, published by the League of Nations, points out that The Netherlands has sought to obviate double taxation in the following manner: The tax charged on the total income, including income derived from- abroad, is first calculated, then the tax which would be due on the income from abroad, if it were taken alone. This second sum is then deducted from the first. The actual rate of taxation abroad is not taken into consideration.
The Commissioner must have had before him the provisions of The Netherlands law when he added that country to the list of the countries which satisfy the similar credit requirement, “ either by allowing citizens of the United States residing therein a credit for taxes paid to the United States, or in imposing such taxes by exempting from taxation the incomes received from sources within the United States.” From the provisions of a statute which classifies income from sources without The Netherlands as income from abroad and which allows a credit equivalent to The Netherlands tax on such income, the Commissioner has only stated in his regulation the application of the law to the credit for taxes paid the United States or to United States income. The Netherlands statute is broader than the application made by the Commissioner. And it may well be that the Newfoundland statute is also broader than the application made in the regulations.
*462 The petitioner had only a small income from Newfoundland sources and paid a very small tax there. Whether by means of a deduction of foreign income or credits for foreign taxes paid, or because the Newfoundland statute only taxes income from Newfoundland sources when paid to nonresidents, the petitioner, under the Newfoundland statute, in effect paid taxes to Newfoundland only on Newfoundland income. Citizens of the United States, wherever residing, under the letter of the law pay taxes to the United States on total net income from all sources, but where the foreign income is taxed at rates equal to or higher than our rates, citizens of the United States in effect pay tax to the United States only on United States income.
The basis for disallowing the credit for taxes claimed by the taxpayer was stated in the notice of deficiency in each case to be that petitioner was not entitled to any credit for taxes paid to foreign countries, inasmuch as it was held that he was a citizen of Great Britain and under article 385 of the Regulations Great Britain is one of the countries which does not satisfy the similar credit requirement of section 222 (a) (3)). Petitioner alleged that the Commissioner was in error in determining that he was a citizen of Great Britain, and further alleged that he was a citizen of Newfoundland.
In his brief, for the first time, the respondent takes the position that neither one of the methods in the first sentence of article 385 meets the similar credit requirement of the statute, and, therefore, petitioner is not entitled to the credits claimed, even though he is held to be a citizen of Newfoundland. At the hearing, counsel for respondent stated that he was willing to stipulate that article 385 was the Commissioner’s regulation and that he was bound by it, but was unwilling to stipulate what it meant. The parties then entered into a stipulation in the exact language of the first sentence of article 385 of Regulations 65 and 69. The Board takes judicial notice of the regulations, and the same article in a subsequent sentence unequivocally says: “A citizen of a country in the first list is entitled to a credit for income taxes paid to any foreign country.” In the light of counsel’s statement that the Commissioner was bound by his regulations and in view of the fact that such regulations unequivocally grant a citizen of Newfoundland the credit for taxes paid to any foreign country, I think it wholly unfair for the respondent to have raised the question in his brief as to the sufficiency of either method mentioned in the first sentence of article 385 to meet the similar credit requirement. For ten years the Commissioner, under four revenue acts, has been settling tax liabilities of resident aliens who prove that they are citizens of the countries listed in the first sentence of article 385, by allowing such resident aliens a credit *463 for taxes paid to any foreign country. This petitioner proved that he was a citizen of Newfoundland. The time for the Commissioner to have repudiated his regulation, if that is what he is trying to do in his brief, wTas prior to or at the hearing, and the petitioner should be given the opportunity to show whether the taxing statutes of Newfoundland grant a similar credit to aliens residing therein.