Petition for Writ of Certiorari — American Metal Co. v. Commissioner

Supreme Court brief1955

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Text

JUN 13 1955

HAROLD B. WILLEY, Ch

Supreme Court of the United States

Octroszr Term, 1955

THE AMERICAN METAL COMPANY, LIMITED,

Petitioner,

against

COMMISSIONER OF INTERNAL REVENUE,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR

THE SECOND CIRCUIT

Norais Darreu1,

Joun F. Doonre, Jr.,

Rosert MacCrartr,

Attorneys for Petitioner,

48 Wall Street,

New York 5, N. Y.

TAPLE OF CONTENTS

PAGE

Citations to Opinions Below....................... 1

PO. ans as seRLS. a Oa 2

pathname Penne ows 6s ka cckk oi ncaa cde owekne 3

RE SNe dy i Wii. nice bbda aeons ean +

Statutes and Regulations Involved................. 3

A. Proceedings in the Courts Below............. 4

B. Petitioner’s Claims for Credit................ 5

C. The Mexican Tax Structure.................. 6

D. The Court of Appeals’ Analysis of the Pro-

GaSe: TORO. ink bees cs ck orwaanenibaas 8

Reasons for Granting the Writ... ................ il

I. The decision of the Court of Appeals presents

an important question of federal tax law which

has not been but should be settled by this Court,

that is, by what standard should the Courts

determine the types of foreign taxes entitled

to credit as income taxes or taxes in lieu of

Snipteha Camel 562 25 Sonic 11

II. In the decision of an important question of

federal tax law, the Court of Appeals invoked

a body of constitutional precedent in this Court

irrelevant and inappropriate to the interpreta-

tion of the foreign tax credit and in so doing

misinterpreted and misapplied the precedents

in this Court which it invoked................ 16

C24 ST

ii TABLE OF CONTENTS

PAGE

I a a 21

IE aioe cass cvs ba wens 0% 004% Chee vas A-1

Judgment of the Court of Appeals.............. A-1

Opinion of the Yourt of Appeals................ A-3

Findings of Fact and Opinion of the Tax Court... A-18

PIII PI os Vckn ch pamcd anes bok eave HLS He ob B-1

Texts of Statutes and Regulations Involved...... B-1

Citations

Cases:

American Chicle Co. v. United States, 316 U. S.

BR, EO EIGEN AER 2 Sha eT SN 11, 13

Biddle v. Commissioner, 302 U. S. 573........... 11,12

_ Brushaber v. Union Pacific Railroad Co.,240U.8.1 20

Burnet v. Chicago Portrait Co., 285 U.S.1..... 11, 12, 13

Burroughs Adding Mach. Co. v. Terwilliger, 135

FP. (9a) G08: (CO.A; Cth, 1048). ec sec. icc 13, 14

Educational Films Corp. v. Ward, 282 U. 8.379... 17

Ficklen v. Shelby County Taxing District, 145 U. 8.

RP KG RECESS UA AG KERNEN OAS 0 ub WRK OR Can aenn 17

Flint v. Stone Tracy Co., 220 U. S. 107.......... 16, 19

Gentsch v. Goodyear Tire & Rubber Co., 151 F.

ROD Be RA OE, DIB ik viv sds encnin's ea cwece 13

Interstate Pipe Line Co. v. Stone, 337 U.S. 662.... 18

Keasbey & Mattison Co. v. Rothensies, 133 F. (2d)

894 (C.A. 3d, 1943), 320 U.S. 739....... 14, 18, 19, 20

New York & Honduras Rosario Mining Co. v. Com- »

missioner, 168 F. (2d) 745 (C.A. 2d, 1948)....11, 148

TABLE OF CONTENTS

PAGE

Northwestern Mutual Fire Association, 12 T. C.

498, 181 F. (2d) 133 (C.A. Oth; 1000 5, i 14

Opinion of the Justices, 84 N. H. 557, 149 Atl. 321

RERUN 5 vn cah oe ear gek cine ious eae as 14

Pollock v. Farmers’ Loan & Trust Vo., 157 U. S.

7, 16 UV BMS wie 20

Santa Eulalia Mining Co., 2 T. C. 241 (1943), Acq.

tis tn a Baas He EEE OR Beane 6

Society for Savings v. Bowers, 349 U. S. (May 16,

SPORE srt reer puntagh sedans oe 16

Spector Motor Service, Inc. v. O’Connor, 340 U.S.

DE wo siicecciivaiaca weeds cncethet Me 17,18

Spreckels Sugar Refining Co. v. McClain, 192 U. 8.

OOF es 5 eae sn eins che aR 19, 20

Stratton’s Independence v. H owbert, 231 U. S. 399. 9, 16

United States v. Hudson, 299 U. S. 498.......... 14

United States Fidelity & Guaranty Co.,5 B. T. A.

adit nea: MEETE EE RITES ene ee Poke cae: 14

(2d) 249 (C.A. 8th, 1943), cert. den. 320 U.S. 800 14

Statutes:

MOG, Bet, SABIE) 65 sien ns sca oe 2

Corporation Tax Act of 1909

(ae ORAL: FER os akeas utes 11, 17, 19, 21

Internal Revenue Code (1938) :

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WG, ERE sche csc cke coc ae eee eee 4, 16, B-1

UR EPRERT Sins SOU ant coudecsc us 2, 3, B-1

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See.

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TABLE OF CONTENTS

PAGE

Internal Revenue Code (1954):

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5 ES y Co EE ee mean ce ee 2

SIAN Sie ted dotk eel Rikki bbe oc woe 12

RRR EE RC glee RR cle me eats 2

Silver Purchase Act of 1934 (48 Stat. 1178)..... 14

ReeuLations:

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Regulations 111:

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i a B-3

SE INT § Scania: vince econ sees oc ucion B-4

Rvu.ines:

Ba eee, wee OU WE. 6

MISCELLANEOUS:

Commission on Foreign Economie Policy, Report

to the President and Congress (1954)......... 15

Eamdioy;. Mitmew: (Sed edi) oo. 10

Message of President Eisenhower to Congress,

The New York Times, January 11, 1955, p. 16,

WN Bie eS Se ees: 15

Prentice-Hall, Federal Tax Service, 1955, Vol. 1. . 7

Statistics of Inc~me for 1951, Part 2, Corporation

Income Tax Returns (United States Treasury

Department, Internal Revenue Service, Statis-

ties Division)

corer ere ee eee ee ee sees eseeeeeees

IN THE

Supreme Court of the United States

Ocroper Term 1955

No,

THE AMERICAN METAL COMPANY, LIMITED,

Petitioner,

against

COMMISSIONER OF INTERNAL REVENUE,

Respondent.

—_————— rT i

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE

SECOND CIRCUIT

Petitioner prays that a writ of certiorari issue to review

the judgment of the United States Court of Appeals for the

Second Circuit (Chase, Medina and Hincks, JJ.) affirming

the judgment herein of The Tax Court of the United States

(Murdock, J.) determining a deficiency in income tax of

petitioner and its affiliated companies for the calendar

year 1947 of $2,180,517.99.

Citations to Opinions Below

The opinion and findings of the Tax Court (R.* 272a-

286a) are reported in 19 T.C. 870 and are printed in Appen-

dix A** hereto (infra, pp. A-18—A-31). The opinion of the

* References to “Appendix to Brief of Respondent-Petitioner,

The American Metal Company, Limited”, in the Court of

Ap are indicated thus “R.

“7 erences to Appendix A are indicated thus: “infra, p. A- ”.

Court of Appeals, unreported as of the date of the printing

of this petition, is printed in Appendix A hereto (infra, pp.

A-3—A-17).

jurisdicti

The judgment of the Court of Appeals was dated March

15, 1955 and was entered on the same day (infra, pp. A-1—

A-2). The jurisdiction of this Court is invoked under 28

U.S.C., Section 1254(1) and Section 7482(a) of the Internal

Revenue Code of 1954.

Questions Presented

1. Did not the Court of Appeals err in holding that

the Mexican Production Taxes, paid by petitioner’s Mexi-

can mining subsidiary, could not be deemed income taxes

for purposes of the foreign tax credit provisions of Section

131 (a)* of the Internal Revenue Code of 1939, because

such Production Taxes, in the Court’s opinion, were

‘*privilege’’ or ‘‘excise’’ taxes?

2. Did not the Court of Appeals err in holding that

the Mexican Production Taxes, paid by petitioner’s Mexi-

can mining subsidiary, could not be deemed taxes in lieu

of income taxes for purposes of the foreign tax credit

provisions of Section 131 (h)** of the Internal Revenue

Code of 1939, because such Production Taxes, in the Court’s

opinion, were ‘‘privilege’’ or ‘‘excise’’ taxes?

3. Did not the Court of Appeals err in invoking stand-

ard: established by this Court to resolve constitutional

conflicts peculiar to our federal system, erroneously dis-

regarding the intrinsic and economic nature of the Mexican

Production Taxes involved and attempting instead to deter-

mine, without regard to such nature, whether they should

* Section 901 of the Internal Revenue Code of 1954 is substan-

tially unchanged from Section 131 (a).

** Section 903 of the Internal Revenue Code of 1954 is substan-

tially unchanged from Section 131 (h).

—

_ ae

be formally classified as ‘‘excise’’ or ‘‘privilege’’ or income

taxes in the sense of the constitutional precedents in this

Court?

4. Did not the Court of Appeals err in that it misappre-

hended the standards it sought to derive from the decisions

of this Court directed to resolving constitutional conflicts

peculiar to our federal system, and, in consequence, in that

it misapplied such standards in holding that the Mexican

Production Taxes were ‘‘privilege’’ taxes, notwithstanding

that the taxes were not described, considered or treated as

‘‘privilege’’ taxes in Mexico, that payment of the taxes

did not condition the exercise of the supposed taxable

privilege and that a different and co-existing Mexican tax

did condition the exercise of the supposed privilege?

Statutes and Regulations Involved

The following provisions of the Internal Revenue Code

of 1939 are directly involved in these proceedings:

“Sec. 131. Taxes of Foreign Countries and

Possessions of United States

‘“‘(a) AuLowance or Crepit. If the taxpayer chooses

to have the benefits of this section, the tax imposed by

this chapter, except the tax imposed under section 102,

shall be credited with:

“*(1) Citizens and Domestic Corporations. In the

ease of a citizen of the United States and of a do-

mestic corporation, the amount of any income, war-

profits, and excess-profits taxes paid or accrued

during the taxable year to any foreign country or

to any possession of the United States; and

“*(h) Creprr ror Taxes ry Liev or Income, ETC., Taxes.

For the purposes of this section and section 23 (ec) (1),

the term ‘income, war-profits, and excess-profits taxes’

shall include a tax paid in lieu of a tax upon income,

war-profits, or excess-profits otherwise generally imposed

by any foreign country or by any possession of the United

States.”’

All of the pertinent provisions of the Internal Revenue

Code of 1939 and of Title 26 of the Code of Federal Regu-

lations are set forth in Appendix B hereto (imfra, pp.

B-1 - B-5).

Statement

A. Proceedings in the Courts Below

Petitioner, a New York corporation, and its affiliated

companies filed a consolidated income tax return for the

year 1947 with the Collector of Internal Revenue for the

Second District of New York (R. 13a-14a) wherein peti-

tioner claimed credit against its United States income tax

liability, under Sections 31 and 131 of the Internal Rev-

enue Code of 1939, for $4,322,614.22 of taxes paid to

foreign countries. Respondent reduced the credit to

$2,182,673.58, made miscellaneous adjustments to consoli-

dated net income and on September 29, 1950 mailed to

petitioner a notice of his determination of a resulting

deficiency in tax of $2,180,517.99. Petitioner filed a petition

for the redetermination of the asserted deficiency in the

Tax Court on November 28, 1950. Respondent answered the

petition on January 8, 1951 and on March 3, 1953 amended

his answer to assert against petitioner and its affiliated

companies for the year 1947 an additional deficiency of

$208,242.28, based upon a further decrease in the credit

allowed for taxes paid to foreign countries. The total

deficiency asserted by respondent was $2,388,760.27.

A hearing in this proceeding was held by a division of

the Tax Court sitting in New York City, on March 3 and

4, 1952, Judge J. Edgar Murdock presiding. The Tax Court

promulgated its opinion on February 20, 1953 and on Feb-

ruary 26, 1953 entered its decision ordering and deciding

that there was a deficiency in income tax of $2,180,517.99

for the year 1947.

Both the petitioner and the respondent petitioned the

Court of Appeals for the Second Cirenit to review the Tax

Court’s decision. The Court of Appeals heard argument

on November 4, 1954 and rendered its decision and opinion

(Hincks, J.) on March 15, 1955 affirming the decision of

the Tax Court.

B. Petitioner’s Claims for Credit

Throughout the year 1947 petitioner owned more than

98 per cent of the stock of a Mexican corporation named

‘‘Compania Minera de Penoles, S.A.’’ (hereinafter called

‘‘Minera’’) (R. 15a). In August 1947 Minera declared and

paid a taxable dividend of $8,250,000 in United Statee dol-

lars of which petitioner received $8,110,932.50 (R. 15a, 33a-

34a). The dividend of $8,250,000 so paid by Minera effected

a distribution of all the ‘‘accumulated profits’’ of Minera

for the years from 1925 to 1947, plus most of the accumu-

lated profits of 1924 (R. 16a-17a, 13a-34a).

Over the years 1924 through 1947 Minera had paid taxes

with respect to the $8,250,000 of accumulated profits, in the

amounts of $1,810,872.62 under the Mexican **Income Tax

Law”’ (R. 27a-28a, 33a) and $5,568,708.73 in the form-of

‘Production Taxes”’ under the Mexican Mining Tax Law

(R. 17a-24a). The respondent credited petitioner for the

appropriate portion, determined pursuant to Section

131(f), of the taxes Minera had paid under the Mexican

Income Tax Law (R. 16a), but respondent denied petitioner

any credit for the Production Taxes which Minera had paid

under the Mexican Mining Tax Law (R. 16a). The Tax

Court and the Court of Appeals sustained the respondent’s

disallowance of any credit for the Production Taxes.*

Petitioner was thus denied any relief from double taxa-

tion for the most substantial portion of the taxes paid by

Minera to Mexico.

C. The Mexican Tax Structure

Mexico has no inclusive income tax law (R. 219a, 201a,

204a). The Ley Del Impuesto Sobre la Renta, commonly

called the Mexican Income Tax Law, is a schedular tax

which imposes under five completely distinct schedules five

distinct taxes on five types of income distinguished by their

origins (R. 20la). Taxes on personal effort are at the

lowest rates; on pure investment income, at the highest

rates ; and on combined capital and personal effort at inter-

mediate rates (R. 202a). Schedule III, the second of two

schedules taxing investment income, is directed to invest-

ments of capital in concerns requiring governmental per-

mission or authorization, and the tax under this Schedule

is higher than that under Schedule II, which is otherwise

similar (R. 213a).**

* By his amended answer in the Tax Court, respondent contended

that in computing petitioner’s credit based on Minera’s tax pay-

ments to Mexico, a different rate of exchange should be employed

to translate the Mexican tax payments isto dollars than the rate

which petitioner had employed in its return and that, accordingly,

there was an additional deficiency of $208,242.28 (R. 5a-8a).

The Tax Court and the Court of Appeals have both determined

this point in favor of petitioner (infra, pp. A-15—A-17, A-30),

and the present petition does not seek to submit the issue per-

taining to the rate of exchange to this Court.

**The special significance of this schedular tax is that, upon the

holding of the Court of Appeals in the instant action, this tax

would have to be classified as a “privilege” or “excise” tax al-

though it is in fact presently accorded the credit as an income

tax. Santa Eulalia Mining Co., 2 T.C. 241 (1943), Acq. 1946—

1 C.B.4; LT. 3787, 1946—1 C.B.232.

SS TR

The Mexican Income Tax Law taxes income by sources

and taxes each source upon a different basis, taxing some

sources on a net profit basis, others on a gross receipts

or a gross profits basis (R. 170a-172a, 207a, 212a-214a).

If income of a kind described in more than one schedule

is received by the same taxpayer, a separate return is filed

by the taxpayer for each schedule; and neither the income

nor the tax is aggregated from schedule to schedule

(R. 202a-203a).

All of the taxes imposed under the Mexican Income

Tax Law are presently accorded the foreign tax credit.

(See Prentice-Hall, Federal Tax Service, 1955, Vol. 1, p.

5838. )

The Mexican Income Tax Law does not reach all in-

come from whatever sources derived as does our own but

excludes a number of classes of income, some of which are

taxed under distinct laws (R. 203a-204a, 205a)*. Thus, in

Mexico the Mexican Income Tax Law is not the all-inclu-

sive means by which income is taxed, but other taxes also

exist which are addressed to income and profits, and, in

addition, there are income and profits which are not taxed

at all.

The Mexican Production Taxes—the subject of these

proceedings—further exhibit the Mexican fise’s preoccupa-

tion with the source of income and the selectivity of its

imposts. The mining industry is, and has been for many

years, a main source of the national economy of Mexico

(R. 69a). In view of the general attention to the sources

of income, it is entirely natural that this special source of

income and wealth for the individual taxpayer and for the

nation continues to bear a separate tax burden.

* For example, rentals derived from non-commercial property,

income derived from capital gains on the sales of fixed assets

and income from lotteries and gambling are not taxed by the

Mexican Income Tax Law (203a-204a).

The Production Taxes are imposed under the Mining

Tax Laws (R. 14la-142a, Ex. 4-D(7); R. 35a, 57a). In

general, the Mexican Mining Tax Laws have levied three

distinct imposts, an area or surface tax assessed upon the

mining concessions granted by the State to the taxpayer,

fees or charges for governmental services in connection

with mining and the Production Taxes which are declared

in the Tax Laws to be laid upon the production of metals,

metallic compounds and non-metallic ores.

D. The Court of Appeals’ Analysis of the Production Taxes

Given the above-described system of taxation, the Court

of Appeals rejected the notion that ‘‘the presence in the

Mexican tax structure of an income tax law imports that

the Production Tax is not an income tax.’’ (infra, p. A-10)

The Court described the tax thus:

‘*The Mexican Production Tax is stated in the

Mexican Mining Law of 1934 to be one laid ‘on the

production of metals’ and ‘on metal production.’ It

attaches when the ore is extracted from the sub-soil,

irrespective of its sale or its transporation to a

smelter or its further processing. The ores in the

earth under Mexican law were part of the patrimony

of the sovereign and, as taxpayer’s expert testified,

‘The miner takes them out of that deposit and puts

them into the economic current of things, and thereby,

to me, he creates wealth. His creation of wealth is

what, in my opiniva, is subject to the tax.’ ’’ (infra,

pp. A-8—A-9)

The Court considered the point that the Production Tax

was the equivalent of a tax on the proceeds of mining oper-

ations and as such a tax on gruss income rather than on a

return of invested capital, but met this point as it met all

other points urged by petitioner with the assertion that the

tax was ‘‘imposed on the privilege of extracting the ore irre-

spective of the realization of cash proceeds’’ (infra, p.

A-11). Conceding that Stratton’s Independence v. Howbert,

231 U.S. 399, held that the entire proceeds of mining are in-

come and conceding that this seemed to support the point

that extracted ore is income in kind, the Court evaded the

argument by saying that the Stratton case was considering

an excise tax measured by income and concluded that:

‘*By a parity of reasoning, we think the Supreme

Court would hold that the Mexican Production Tax

was an excise tax even though its measure was such

as to reflect, at least approximately, ‘the amount of

benefit presumably derived’ by the taxpayers from

appropriating to themselves a portion of the national

patrimony.’’ (infra, pp. A-11—A-12)

Agreeing that under the statutory scheme of the Pro-

duction Tax the tax rate applicable to the metal severed

varies progressively with the price of the metal in the

market, which obviously affects the miner’s profit, the

Court agreed too that the proofs established a legislative

intent that the contribution of the mining industry to the

national economy should vary with this price factor that

affects the prosperity of the industry generally (infra, p.

A-12). The Court, however, discarding the idea it had

previously noted, that the severed ore was obviously gross

income in kind, treated as significant the fact that the tax

attached even if the miner did not sell the severed ore.

Reverting to its assertion that the tax was a privilege tax,

_ the Court stated that the progressive tax rates therefore

betokened not an income character in the tax but an inten-

tion that the price of the privilege should be proportioned

to the value of its exercise (infra, p. A-12). The Court

similarly dealt with the fact that:

‘*... the Production Taxes provide discounts for

low grade ores, special discounts which recognize the

extraordinary cost of extraction in the case of gold

and silver found in zine concentrates, and temporary

discounts given to new and newly reopened mines

the working of which involve extraordinary ex-

pense.’’ aah pp. A-12—A-13)

It asserted that these too were factors which affected the

value of the privilege and concluded :

‘Their presence in the tax scheme is not so much

indicative of legislative intent to tax the miner’s

profits as of intent to realize, through a privilege

tax, on a natural asset on a basis which at least

approximately reflects its current value.’’ (infra,

p. A-13)

The Court did not deal in detail with the matter of classi-

fying the Production Tax as a tax paid in lieu of a tax

on income, but said:

‘|. the reasoning which has lead [sic] us to

classify the Production Tax as an excise, not an in-

come, tax equally requires the conclusion that it has

not been shown to be a tax ‘in lieu of an income

tax.’ ’’ (infra, pp. A-14—A-15)

The Court thus was evidently satisfied that the Pro-

duction Tax was adjusted to profits. It based its whole

conclusion on the theory that the tax was a ‘‘privilege’’

or ‘‘excise’’ tax simply because the nation which exacted

the tax was the source of the miner’s grant of right to

extract the ore, which before his extraction of it formed a

part of the patrimony of the taxing nation.* The Court

said:

‘<To us that means no more than that the Production

Tax is one levied on the privilege of extracting from

the sub-soil ore belonging to the nation.’’ (infra,

p. A-9)

Having concluded at the very threshold of its inquiry that

the tax was a ‘‘privilege’’ tax or, as the Court later charac-

terized it, an ‘‘excise’’ tax, the Court dispatched every

economic element of the tax which demonstrated that the

tax was in its economic consequence a true income or profits

tax with the statement that such evidence showed only

* Under Mexican law, as in Civil Law countries generally, mineral

wealth in the subsoil remains the property of the nation until

actually mined by the concessionaire. See 1 Lindley, Mines (3rd

ed.) 21.

that the measure of the privilege tax was the value of the

exercise of the privilege.

The Court, therefore, adopted as the determinant of its

decision that often criticized distinction between the subject

of a tax and the measure of a tax which has been worked

out in this Court’s decisions on the Corporation Tax Act

of 1909 and in the cases involving the taxation of inter-

state commerce. With difficulty, we submit, the Court

avoided its own decision in New York & Honduras Rosario

Mining Co. v. Commissioner, 168 F.(2d) 745: the Court,

while admitting that the Surface Tax which each Mexican

miner pays was in fact a privilege tax, said that the fact

that Mexican law imposed one privilege tax, the Surface

Tax, did not import that the Production Tax or other taxes

are not also privilege taxes—a difficult position for it to

espouse in view of the Court’s earlier statements in the

New York & Honduras case (168 F.(2d) at pp. 747-748).

Reasons for Granting the Writ

This Court has never interpreted the expressions ‘‘in-

come taxes’’ and taxes ‘‘in lieu of income taxes’’ as found

in the foreign tax credit provisions of the Internal Revenue

Code.

The foreign tax credit has been before this Court on

certiorari three times, but none of these cases tendered the

present question. ;

Burnet v. Chicago Portrait Co., 285 US.1 (1932) ;

Biddle v. Commissioner, 302 U.S. 573 (1938) ;

American Chicle Co. v. United States, 316 U.S.

450 (1942).

In the Chicago Portrait case, the question for decision

was whether the state of New South Wales in the Common-

wealth of Australia was a ‘‘foreign country’”’ within the

meaning of the statute. It appears that certiorari was

granted because of the importance of the question to the

administration of the revenue law. In holding that the

credit was available for taxes paid to New South Wales,

the Court in an opinion by Mr. Chief Justice Hughes

emphasized the need for liberal construction of the foreign

tax credit provisions to effect the underlying purposes of

mitigating the evil of international double taxation and

facilitating the foreign enterprises of domestic companies.

The second occasion upon which this Court reviewed

the operation of the foreign tax credit was in Biddle v.

Commissioner, 302 U.S. 573, in which certiorari was granted

to resolve a ‘‘conflict of decision, and because of the im-

portance of the question in the administration of the reve-

nue laws.’’ (302 U.S. at p. 578) The question was whether

American stockholders of British corporations could claim

that they were the taxpayers entitled to credit for the

British income tax paid by the British corporations with

respect to the profits they distributed to their Ameri-

ean stockholders merely because the British income tax

laws recognized that the burden of the corporate tax was

borne by the shareholders. The taxes in controversy were

not only disallowed as credits against United States tax, but

were also disallowed as deductions from gross income since

they were not the taxes of the American taxpayers at all.*

double taxation” sanctioned by our own laws, which

imposed tax both upon a corporation and its stockholders (see

302 U.S. at p. 581). Cf. ion 34 of the Internal Revenue Code of

The third and final occasion upon which this Court has

considered the operation of the foreign tax credit was in

American Chicle Co. v. United States, 316 U.S. 450, where

the sole matter in controversy was the proper method of

computing the credit under Section 131(f) for taxes paid

by a foreign subsidiary of a domestic taxpayer. Certiorari

was granted to resolve a conflict of decisions in the lower

courts (see 316 U.S. at p. 452). Again the issue of the

types of foreign taxes for which credit may -be taken was

not considered.

The instant case presents, we believe for the first time,

an appropriate record upon which the Court may render

a decision of fundamental importance to the administration

of the revenue law as to the types of foreign taxes for

which credit may be taken.

Twenty-three years ago this Court, in order to effect the

broad policy objectives of the foreign tax credit, held in

the Chicago Portrait case that the State of New South

Wales, Australia, was a ‘‘foreign country’’, saying:

‘The term ‘foreign country’ is not a technical or

artificial one, andthe sense in which it is used in a

statute must be determined by reference to the pur-

pose of the particular legislation.’’ (285 U.S. at p. 6)

The language of the foreign tax credit has not since been

broadly interpreted in the liberal spirit of this Court’s

decision in the Chicago Portrait case.

The Sixth Circuit in Burroughs Adding Mach. Co. v.

Terwilliger, 135 F. (2d) 608, 610, disregarding the broad

policy approach of the Chicago Portrait case, said:

‘*The ri ht to the credit claimed is a privilege gran ‘anted

by the Government, and hence the statute is to be

strictly construed in favor of the Government.’’*

* Indicative of the confusion in the law is the fact that the same

Court, without citing the Burroughs case, could say two years

later in Gentsch v. Goodyear Tire & Rubber Co., 151 F. (2d)

997, 1000:

“We think, therefore, that the controlling principle of statu-

The Second Circuit, in the New York & Honduras Ros-

ario Mining Co. case (1€8 F. (2d) 745, 747) posited the

question in these cases 2; being:

‘«whether the foreign tax is the substantial equivalent

of an ‘income tax’ as that term is understood in the

United States’’.

Yet in the present case it applied not a test of equivalence

in substance but a requirement of identity in theoretical

form. Keasbey & Mattison Co. v. Rothensies, 133 F. (2d)

894, 892, both voiced the theory of the Burroughs case that

the grant of the credit should be narrowly construed and

adopted the highly theoretical ‘‘privilege’’ tax approach.

Similarly, the Tax Court, in Northwestern Mutual Fire

Association, anticipating the Court below, rejected a Ca-

nadian tax on insurance premiums for credit purposes

on the ground that it was a ‘‘privilege’’ tax* (12 T.C. 498,

505-506), but on appeal to the Ninth Circuit that Court

allowed the credit, treating the Canadian premium tax as

a tax in lieu of an income tax on the ground that a not

dissimilar premium tax existed in the income tax part

of our own Internal Revenue Code (181 F. (2d) 133).**

tory construction is not that which requires special tax

exemptions to be strictly construed, but rather the principle

so often announced as not to require citation, that statutes

must be so construed as to give effect of their general purpose

and to implement the policy of the Congress.”

* Again indicative of the prevalent confusion is the fact that

earlier the Commissioner voluntarily accorded the credit to

the Canadian premium tax as an income tax. See United States

Fidelity & Guaranty Co., 5 B.T.A. 23.

** The variety of “income taxes” embraced in our history of income

taxation is broad and includes the Silver Purchase Tax (Silver

Purchase Act of 1934, 48 Srar. 1178), considered by this

Court in United States v. Hudson, 299 U.S. 498, and the Tax

on Unjust Enrichment (Internal Revenue Code of 1939, Sec-

tions 700-705). See Wilson Milling Co., 1 T.C. 389, affirmed

138 F. (2d) 249, cert. den. 320 U.S. 800.

Cf. Opinion of the Justices, 84 N.H. 557, 558, 149 Atl.

321, 334, considering a proposed tax on the annual increment

in value of standing timber to be in the nature of an income tax.

The intimation is that even a tax imposed in lieu of an

income tax might be required to evince the characteristics

of an income tax.

The importance of preserving to the foreign tax credit

its strongly marked policy characteristic has never been

greater than in this time of encouraging American private

enterprise to make substantial investments abroad.* In the

year 1951 the 2,726 American corporations which claimed

credit for foreign taxes on Form 1118, derived income from

foreign countries (according to their income tax returns)

in the amount of $1,745,529,000; these companies paid

$619,796,000 in foreign taxes for which credit was claimed,

and the amount of the foreign tax credit claimed in re-

spect of such payments was $571,905,000.** 1,033 of the

4,822 corporations returning more than $1,000,000 of income

in 1951 claimed credit for foreign taxes.*** The foreign

tax credit thus affects very large amounts of foreign earn-

ings and a remarkably high percentage of our larger tax-

paying corporations.

The high rate of corporate income tax must make the

credit status of taxes in foreign countries a significant

determinant of private investment in foreign countries.t+

The practical feasibility of embarking on a program of in-

vestment in a foreign country cannot, we submit, be made

to depend on private scrutiny of the tangled web of ad-

judication on the theoretical nature of taxes as privilege

or excise or direct or indirect taxes. A clear policy pro-

nouncement by this Court on the proper interpretation of

the nature of the credit is a pragmatic necessity.

* Message of President Eisenhower to Congress, The New York

Times, January 11, 1955, p. 16, col. 3; Commission on ForEIGN

Economic Ponicy, Report TO THE PRESIDENT AND THE Con-

GREss (1954), p. 16, et seq.

** Statistics of Income for 1951, Part 2, Corporation Income Tax

Returns, p. 24 (United States Treasury Department, Internal

Revenue Service, Statistics Division).

*** Thid, pp. 18, 25.

t+ Commission ON Foreian Economic Pouicy, REPORT To THE

PRESIDENT AND THE Conaress (1954), p. 18.

Il.

In the decision of an important question of federal tax

law, the Court of Appeals invoked a body of constitu-

tional precedent in this Court irrelevant and inappropriate

to the interpretation of the foreign tax credit and in so

doing misinterpreted and misapplied the precedents in this

Court which it invoked.

The Court of Appeals treated an income tax as the

antithesis of a ‘‘privilege’’ or ‘‘excise’’ tax and concluded

that because, in its view, the Production Tax was a privi-

lege or excise tax, it was not an income tax and therefore

could not be accorded credit under Section 131. The Court

relied on the subject and measure concept applied in Flint

v. Stone Tracy Co., 220 U.S. 107, and Stratton’s Independ-

ence v. Howbert, 231 U. S. 399. It considered that the

‘*subject’’ of the tax was the privilege of extracting from

the subsoil ore belonging to the nation. It conceded that

the ‘‘measure’’ of the tax was ‘‘such as to reflect, at least

approximately, the amount of benefit presumably derived

by the taxpayers from appropriating to themselves a por-

tion of the national patrimony’’ and that aspects of the

Production Tax indicated a legislative intention to tax

according to profitability (infra, pp. A-11—A-12). The

Court said that this betokened only an intention that the

price of the privilege granted the miner should ‘‘vary

with the value of the privilege measured both by the loss

of the ore to the state which grants the privilege and the

acquisition of the ore by the miner’’ (infra, p. A-12).

But the legal principles involved in the ‘‘subject’’ and

‘‘measure’’ analysis of taxes are addressed to the existence

of constitutional immunities of particular ‘‘subjects’’ of

tax from all taxation. See Society for Savings v. Bowers,

349 U. S. (May 16, 1955). They were evolved under the con-

stitutional necessity of recognizing immunities from taxa-

tion without permitting the existence of the immunities to

impinge on lawful powers to tax. Thus, for example, a tax,

the economic burden of which was ‘‘measured’’ by a class

of income or receipts immune from tax, would not be invali-

dated if the true ‘‘subject’’ of the tax was a privilege or

activity that the state had general power to tax. Educa-

tional Films Corp. v. Ward, 282 U. 8. 379; Ficklen v. Shelby

County Taxing District, 145 U. 8. 1. But if the “subject’’

taxed was one immune from the general taxing power of

the particular sovereign involved, the mere fact that the

values that ‘‘measured’’ the economic burden of the tax

might themselves have been a proper ‘‘subject’’ of the tax

would not cure the essential vice of the tax. Spector Motor

Service, Inc. v. O’Connor, 340 U. 8. 602. Compare West

Publishing Co. v. McColgan, 328 U. S. 823. So, the United

States having been held powerless to impose a general in-

come tax, this Court, invoking the subject and measure

distinction, sustained the Corporation Tax Act of 1909 as

an excise tax on doing business in corporate form measured

by income—although the United States had not granted and

could not effect forfeiture of the right to do business in

corporate form.

The majority of this Court in the Spector case empha-

sized the purely constitutional significance of the subject

and measure distinction in these words:

‘‘Even though the financial burden on interstate com-

merce mien be the same, the question whether a state

may validly make interstate commerce pay its way

depends first of all upon the constitutional channel

through which it attempts to do so.”’ (340 U.S. at 608)

But this body of law, founded in constitutional necessi-

ties, is characterized by debate and distinction which peti-

tioner respectfully suggests are entirely inappropriate to

the interpretation of the foreign tax credit. Indeed a

minority of this Court have indicated that they are not

prepared to recognize the distinction between subject and

measure even in the constitutional field and have stated

their position to be that it was the ‘‘ ‘privilege’ label that

condemned the tax’’ in the Spector case. Railway Express

Agency v. Virginia, 347 U. 8. 359, 370. And this Court has

divided on the ascertainment of the privilege which is truly

the subject of a particular tax. Interstate Pipe Line Co. v.

Stone, 337 U. S. 662.

The difficult and important problems of principle in-

volved in adjusting the interplay of forces coming into

conflict at the level of constitutional power have nothing in

common with the simple problem of giving effect to the plain

economic policy of a direct grant of relief from double

taxation. The foreign tax credit is oriented to the economic

realities of taxation and the grant should not be frustrated

in achieving the objectives of encouraging foreign invest-

ment and eliminating double taxation by introducing con-

ceptual distinctions irrelevant to the objectives of the

statute.

The Court of Appeals chose to follow the decision of

the Third Circuit in Keasbey ¢ Mattison Co. v. Rothensies,

133 F.(2d) 894* in relying on the ‘‘privilege tax’’ distine-

tion (infra, p. A-10). The Third Circuit stated its authority

for distinguishing a ‘‘ privilege tax’’ from an ‘‘income tax’?

in the Keasbey case in this way:

‘The Supreme Court, without advancing any precise

definition of the term ‘income tax’, has unmistakably

determined that taxes imposed on subjects other than

income, e.g., franchises, privileges, ete., are not in-

come taxes, although measured on the basis of income.

Stratton’s Independence, Ltd. v. Howbert, 231 U.S.

399, 34 S. Ct. 136, 58 L.Ed. 285; McCoach v. Minehill

¢ S. H. R. Co., 228 U.S. 295, 33 S. Ct. 419, 57 L. Ed.

842; Flint v. Stone Tracy Co., 220 U.S. 107, 31 S. Ct.

* The taxpayer’s petition for certiorari was denied in the

Keasbey case (320 U. S. 739). Contrary to the record upon which

the present action is vroffered to the Court, the record in the

Keasbey case consisted of the bare language of the Quebec statute,

furnishing no basis for an appraisal of the operation and economic

burden of the tax. ; ea

342, 55 L. Ed. 389, Ann. Cas. 1912B, 1312; Spreckels

Sugar Refining Co. v. McClain, 192 U.S. 397, 248. Ct.

376, 48 L. Ed. 496; see: Doyle v. Mitchell Bros. Co.,

247 U.S. 179, 183, 38 S. Ct. 467, 62 L. Ed. 1054; United

States v. Whitridge, 231 U.S. 144, 147, 34 S. Ct. 24,

58 L. Ed. 159.’’ (Italics supplied.) (133 F. (2d) at

p. 897)

All the cases cited (except the Spreckels case). arose

under the Corporation Tax Law of 1909 which this Court

thus characterized in Flint v. Stone Tracy Co., 220U.8. 107:

‘‘It is therefore apparent, giving all the words of

the statute effect, that the tax is imposed not upon

the franchises of the corporation irrespective of their

use in business, nor upon the property of the corpora-

tion, but upon the doing of corporate or insurance

business and with respect to the carrying on thereof,

in a sum equivalent to one percentum upon the entire

net income over and above $5,000 received from all

sources during the year; that is, when imposed in

this manner it is a tax upon the doing of business

with the advantages which inhere in the peculiarities

of corporate or joint stock organizations of the

character described.’ (at p. 145-146)

The alien formalism of this language, however neces-

sary to the solution of the constitutional problem then before

the Court, plainly has no place in the administration of the

foreign tax credit.

The conclusion drawn by the Keasbey case from its con-

sideration of the cases it cited was that:

‘“‘The substantive elements of the tax under con-

sideration conform, not to the recognized criteria of

an income tax, but, to the accepted standards of an

excise tax.’’ (133 F.(2d) at p. 898)

And the Court of Appeals in the present case treated the tax

as an ‘‘excise, not an income, tax”? (infra, p. A-14),

An income tax is an excise tax in every instance of its

application except where it falls upon income derived from

property merely by virtue of ownership, as, for example,

upon the interest from bonds or the rents from real estate.

That was the whole point of the decision in Pollock v.

Farmers’ Loan & Trust Co., 157 U. S. 429, 158 U. S. 601,

invalidating the early income tax and of Brushaber v.

Union Pacific Railroad Co., 240 U.S. 1, sustaining the 1913

income tax.

Spreckels Sugar Refining Co. v. McClain, 192 U. 8. 397,

cited in the Keasbey case, emphasized in this language the

excise nature of income taxes:

‘*This general —— has been considered in so

many cases heretofore decided that we do not deem

it necessary to consider it anew upon principle. It

was held in Pacific Insurance Co. v. Soule, 7 Wall.

433, that the income tax imposed by the internal

revenue act of June 30, 1864, amended July 13, 1866,

13 Stat. 223, 14 Stat. 98, on the amounts insured, re-

newed and continued by insurance companies, on the

gross amount of premiums received, on dividends,

undistributed sums and income, was not a direct tax,

but an excise duty or tax within the meaning of the

Constitution; .. .’’ (192 U. S. at pp. 411-412)

The Court explained the Farmers’ Loan & Trust Co. case

in this way:

“*It is said that if regard be had to the decision

in the Income Tax Cases, a different conclusion from

that just stated must be reached. On the contrary,

the precise question here was not intended to be

decided in those cases. For, in the opinion on the

rehearing of the Income Tax Cases the Chief Justice

said: ‘We have considered the act only in respect of

the tax on income derived from real estate, and from

invested personal property, and have not commented

on so much of it as bears on gains or profits from

business, privileges or employments, in view of the

instances in which taxation on business, privileges

or employments has assumed the guise of an excise

tax and been sustained as such.’ 158 U.S. 601.”

(192 U.S. at p. 413)

Thus the Court below fundamentally misconstrued the

decisions it sought to apply in reaching the conclusion that

‘‘excise’’ taxes are the antithesis of ‘“‘income’’ taxes.

The standards appropriate to testing the availability of

the foreign tax credit are those which seek to determine

whether the foreign tax has the fiscal characteristics of an

income tax, that is, that the tax falls upon gross income

in contrast to gross receipts (whether or not deductions

from gross income are also allowed), is generally insus-

ceptible to being passed on to others than the taxpayer,

and is proportioned to capacity to pay, through the use of

a progressive rate structure or otherwise.

The Court of Appeals in adopting the test it did adopt,

and in misapplying that test, rendered a decision of great

importance in the field of federal income taxation and

rendered that decision in a way that is in conflict with

decisions of this Court.

Conclusion

Two of the Courts of Appeals, relying essentially on

this Court’s decisions under the Corporation Tax Act of

1909, have characterized foreign taxes as being ‘‘excise’’

or ‘‘privilege’’ taxes and on that ground have denied them

the foreign tax credit accorded to income taxes. The

necessary effect of the decisions is to restrict the scope

of the credit without reference to the practical measure of

the foreign tax or its entire suitability for credit from

the point of view of the policy of the statute. Profits are

doubly taxed and foreign investment is correspondingly

discouraged whether the foreign tax falls upon profits as

the ‘‘subject’’ of the impost or as the ‘‘measure’’- of

its burden. Under either circumstance income bears a

double tax.

Only review by this Court can furnish ‘authoritative

guidance to the Courts of Appeals and the Tax Court in

the interpretation of the foreign tax credit and restore to

the credit a breadth of meaning adequate to the accom-

plishment of its policy.

Respectfully submitted,

Norris DarreEt1,

Joun F. Doone, Jr.

Rosert MacCrate,

Attorneys for Petitioner.

Sutzivan & CromweEL.,

Of Counsel.

June 13, 1955.

Vat VA RON ae

ae ty Bos

5 gris

vi gh eh ee

DEE EP GR LAE Nes OA Ea COE Yee

UNITED STATES COURT OF APPEALS

Seconp Circuit

At a Stated Term of the United States Court of

Appeals, in and for the Second Circuit, held at

the United States Courthouse in the City of New

York, on the 15th day of March, one thousand

nine hundred and fifty-five.

Fresent:

Hon. Harem B. Cuasz,

Hon. Harotp R. Meprna,

Hon. Carrot, ©. Hincks,

Circuit Judges

—

CoMMISSIONER OF INTERNAL REVENUE,

Petitioner,

Tue American Metat Co.,

Respondent.

Tue American Merat Co.,

Petitioner,

ComMissioNER oF INTERNAL REVENUE,

Respondent.

—"

Appeal from The Tax Court of the United States

A-2

This cause came on to be heard on the transcript of

record from The Tax Court of the United States, and was

argued by counsel.

ON CONSIDERATION WHEREOF, it is now hereby ordered,

adjudged, and decreed that the order of said The Tax Court

of the United States be and it hereby is affirmed.

It is further ordered that a Mandate issue to the said

The Tax Court of the United States in accordance with

this decree.

/s/ A. Danret Fvsaro

Clerk.

A-3

Opini

UNITED STATES COURT OF APPEALS

For tHe Szconp Circurr

No. 29 October Term, 1954

Argued November 4, 1954 Decided March 15, 1955

Docket No. 22907

ia,

CoMMISSIONER oF INTERNAL REvENUE,

Petitioner,

THe American Metan Co., Liurrep,

Respondent.

_—

—

Tre American Merat Co., Lrmrtep,

Petitioner,

ComMIssioNER or InrernaL Revenues,

Respondent.

—

Before Case, Meprna and Hincxs, Circuit Judges.

Petition by taxpayer to review a decision of the Tax

Court of the United States which denied it a credit against

its 1947 United States Income Tax liability for taxes paid

to the Republic of Mexico under that nation’s Mining Tax

Laws. Petition of the Commissioner of Internal Revenue to

review so much of the same decision of the Tax Court as

denied his claim that in computing the amount of the credit

allowable for taxes paid to Mexico the taxes so paid should

be discounted to reflect the peso-dollar rate of exchange

prevailing in the tarable year. 19 T.C. 870. A ffir med.

A-4

Sullivan & Cromwell (Norris Darrell, John F. Dooling,

Jr., Robert MacCrate, of counsel) for The Ameri-

can Metal Company, Limited.

H. Brian Holland, Assistant Attorney General, Ellis N.

Slak, Lee A. Jackson, Melva M. Graney, Special

Assistants to the Attorney General, for the Com-

missioner of Internal Revenue.

Hincxs, Circuit Judge:

The taxpayer whose petition is before us, is a New

York corporation which owns over 98% of the voting stock

of Compania Minera de Penoles, S.A., a Mexican corpora-

tion (hereinafter referred to as ‘‘Minera’’). Minera, from

1924 through 1947, has been in the business of mining, mill-

ing, smelting and refining non-ferrous metals. In 1934, the

smelting and refining operations were carried on by a

Mexican corporate subsidiary of Minera, called Metal-

urgica. In 1947, Minera paid a taxable dividend to its share-

holders in United States money in the amount of $8,250,000.

Of this amount the taxpayer received $8,110,932.50. The

taxpayer filed a consolidated income tax for the year 1947

claiming as credit certain Production Taxes paid by Minera

to the Mexican government from 1924 through 1947. The

Commissioner allowed a credit for taxes paid by Minera

under the Mexican Income Tax Law but refused to allow

any credit for the payment to Mexico of so-called Produc-

tion Taxes as imposed by the Mexican Mining Tax Law.

The taxpayer’s petition presents this question: Were

the Production Taxes paid by Minera under ihe Mexican

Mining Tax Law income taxes or taxes in lieu of income

taxes within the meaning of Section 131(a) (1) or (h) of the

Internal Revenue Code? Only if the question requires an

affirmative answer is the taxpayer entitled to the credit

which it seeks by its pending petition to establish.

In a well reasoned opinion, the Tax Court held that the

Production Taxes in question were not income taxes or

oat

A-45

taxes in lieu of income taxes within the meaning of I. R. C.

Section 131(a)(1) or (h).1 The taxpayer-petitioner now

contends that this holding was erroneous in that the court

failed to find and give effect to facts claimed to be full

established by the evidence as follows:

‘*Mining is in Mexico a main source of the national

economy. Under Mexican law, the mineral wealth of

the nation is the property of the nation and not of the

landowner. The landowner in Mexico has no right

to the minerals under his land nor to explore for

them; only the one who has received a mining con-

cession from the Government can explore for

minerals.

‘While the miner in Mexico derives his right to

mine by Government concession, that concession con-

fers upon him no ownership in metals or minerals in

the earth but only the right to explore for them, and

when he has discovered them to turn them to his own

account or profit by removing them from the sub-

soil. This is so far true that if a mining concession-

naire forfeits or surrenders his mining concesgion,

1. LR.C. Section 131. Taxes or Foreign Countrigs AND Pos-

SESSIONS OF UNITED StarTEs.

(a) Allowance of Credit. If the taxpayer chooses to have the

benefits of this section, the tax imposed by this chapter, except the

tax imposed under section 102, shall be credited with:

(1) Citizens and Domestic Corporations. In the case of a

citizen of the United States and of a domestic corporation, the

amount of any income, war-profits, and excess-profits taxes

paid or accrued during the taxable year to any foreign country

or to any possession of the United States;

es *# *# # @

(h) Credit for Taxes in Lieu of Income, etc., Taxes. For the

purpose of this section and section 23(c) (1), the term “income,

war-profits, and excess-profits taxes” shall include a tax paid in

lieu of a tax upon income, war-profits, or excess-profits otherwise

generally imposed by any foreign country or by any possession of

the United States.

A-6

ore that he has broken and left inside the mine is not

his property but reverts to the Government of Mexico

as its property.

‘*Customarily, the Mexican miner sells his ore to

a smelter or foundry and sells it on the basis of the

current New York price of the recoverable metal

content of the ore less processing, transportation and

commission costs and less the Production Taxes

(which are also based on the New York price). The

New York price is normally determined by world

supply and demand and not by the Production Taxes

nor by the Mexican miner’s costs which vary from

mine to mine between wide extremes.

‘**Commercial ore’ is material, the value of the

recoverable and salable metal of which is such as to

yield more than the costs necessary to get the metals

in available form.

‘*Hence, whether a mine will be opened up at all,

depends upon the estimated value of the salable

metals recoverable from the ore weighed against the

estimated cost of working the particular metal-bear-

ing body, including the cost of the property, of

opening the mine, and of equipping and operating it

and taking into account also the grade of the ore

body, the uniformity of that grade, the size of the

ore body, its location with relation to transportation

facilities, treatment plants and natural land barriers

and the type of mining possible with that ore body.

Existing mines which have been once opened and

worked are not continued in operation unless metal

prices are such as to make operation profitable, and

declines in market prices of metals result in shutting

down mines, while increases in metal prices bring

mines that have been shut down back into operation.

‘*Broadly, price determines whether there is com-

mercial ore in a mine and whether and how long and

A-7

when the mine will operate. The market prices of the

metals occurring in Minera ores varied widely over

the years 1924 to 1947; lead ranged from 3¢ a pound

to 15¢ a pound, zine from 2.55¢ a pound to 10%¢ a

pound, silver from 25.01¢ an ounce to 90.12¢ an ounce,

and copper from 4.91¢ a pound to 22.19¢ a pound.

Mining costs, on the other hand, at any point of time,

vary widely from mine to mine and in particular

vary widely as among the metal mines in Mexico, the

variation depending on the type of ore body and the

feasible rate of mining, among many other factors.

‘*Within a single mine where ore of varying

grades is found, the richest ore will always be mined,

first even in an era of abnormally high prices which

would enable the miners to extract at a profit those

leaner ores in the same mine that could not be mined

at a profit when normal metal prices prevail. Itis a

principle in mining, and a prevalent practice in the

industry, that the miners extract the high grade ores

first and as quickly as they can up to the limit of

their milling capacity and do not in a period of high

prices divert to low grade ores.

‘‘Miners do not, in principle, extract ore at all

when it cannot be disposed of at a profit, unless some

special physical condition makes that imperative and

unless they can afford to store the extracted ore

pending an expected rise in the market price. Nor are

mines generally operated when prices are believed

to be temporarily depressed merely because a narrow

profit margin appears to be possible at those prices,

particularly if the mine is a new one. In such cir-

cumstances, the mine would be shut down until prices

increased. And so, too, as to opening a new mine,

a mine will not be opened up on the basis of a price

level believed to be only temporary, for it takes three

to five years to open a mine. On the other hand,

A-8

metallurgical advances, alone or coupled with price

advances, can give minable character to ore once

passed over as waste.

‘*Since a mine is a wasting asset, the life of which

is exhausted by extraction of the ore, it is basic in

mining that ore will not be removed from the mine

at a loss when prices are low.’’

As to so much of this material not incorporated in the

express findings of the Tax Court, we think it fairly ap-

parent from its opinion that it treated all the facts just

recited as proved and gave due consideration thereto.

However that may be, we will assume for present purposes

that the facts above stated were indeed proved. But even

on that assumption we hold that the decision of the Tax

Court was correct.

The primary objective of Section 131 is to prevent

double taxation and a secondary objective is to encourage

American foreign trade. See Burnet v. Chicago Portrait

Co., 285 U. S. 1. Whether the special and peculiar facts

of a given case comes within the meaning of 131(a)(1) or

(h) is a question to be determined in the light of the estab-

lished and settled policy against double income taxation.

The pertinent cases hold that the determinative question

is ‘‘whether the foreign tax is the substantial equivalent

of an ‘income tax’ as that term is understood in the United

States.’’ See New York & H. Rosario Min. Co. v. Com-

missioner, 2 Cir., 168 F. 2d 745, 747; Biddle v. Commis-

sioner, 302 U.S. 573; Keasbey & Mattison Co. v. Rothensies,

3 Cir., 133 F. 2d 894.

The Mexican Production Tax is stated in the Mexican

Mining Law of 1934 to be one laid ‘‘on the production of

metals’’ and ‘‘on metal production.’’ It attaches when the

ore is extracted from the sub-soil, irrespective of its sale

or its transportation to a smelter or its further processing.

The ores in the earth under Mexican law were part of the

patrimony of the sovereign and, as taxpayer’s expert testi-

A-9

fied, ‘‘The miner takes them out of that deposit and puts

them into the economie current of things, and thereby, to

me, he creates wealth. His creation of wealth is what, in

my opinion, is subject to the tax.’? To us that means no

more than that the Production Tax is one levied on the

privilege of extracting from the sub-soil ore belonging to

the nation.

The taxpayer points, on the one hand, to the Mexican

Mining Law of 1926 which ‘‘restored the ancient work

requirement and made it a condition to the continuance of

the concession * * * while continuing the Surface Tax in

effect,’’ and to the Minin; Law of 1934 which from that

time forward conditioned vhe continuance of the miner’s

“‘concession on the dual requirement of paying the Surface

Tax and working the mine.”’ And, on the other hand, the

taxpayer points to the fact, which we accept as proved,

that the payment of an accrued Production Tax is not a

condition to the continuance of the miner’s concession.

From this it is argued that the Production Tax is not a

privilege tax because the Mexican Mining Law imposes as

the price of the miner’s privilege ‘‘the performance of the

work requirement and the payment of the Surface Tax.’’

We think this argument specious. Forfeiture of the

privilege for non-payment is not the exclusive badge of

a privilege tax. Whether, for present purposes, the Pro-

duction Tax is a privilege tax must depend not upon for-

feiture conditioned on non-payment nor upon the absence

of label in the enacting law,—but upon the nature and

effect of the tax. Flint v. Stone Tracy Co., 220 U. 8. 107.

Indeed the Surface Tax, which is imposed by Chapter II

of the Mining Law and which the taxpayer for purpose of

this argument seems to classify as a privilege tax is not

so labelled. It is based on the area of the concession: for

a concession exceeding one hundred claims it imposes a

tax of only $15 annually per claim, And the ‘work require-

ment,’’ which constitutes the other condition to the con-

A-10

cession, is described by taxpayer’s expert in Mexican law

as the subject-matter of ordinances requiring ‘‘that four

men at least should be employed for a minimum time during

each year working in the mine.’’ The mere fact that the

miner’s concession is thus conditioned on a ‘‘price’’ based

on area and a minimum work requirement does not mean

that the Production Tax, which is based ‘‘on the produc-

tion of metals’ in the ore belonging to the sovereign which

the miner extracts and thereby is allowed to appropriate,

is other than a privilege tax.

In this connection, the taxpayer relies on our decision

in New York & H. Rosario Min. Co. v. Commissioner, 168

F. 2d 745. It is true that in that opinion we thought it ‘‘not

without significance’ that under the Honduras Mining

Code genuine excise taxes, somewhat similar to the Mexican

‘*Surface Tax,’’ were imposed in addition to the ‘‘income

tax’’ also imposed. However, the determinative factor

which lead us to classify ‘ue tax there in question as an

‘*income tax’’, we stated as follows: ‘‘It is not laid on the

value of the minerals mined but on ‘the amount received

from its exports,’ i.e. gross income, less operating expenses

within Honduras and expenses abroad directly applicable

to management of the mines, plus reasonable deductions

for amortization and depletion.’’ The characteristics of the

Production Tax here involved are essentially antithetical

to those of the Honduran income tax. And the fact that ore

belonging to the nation is released to the miner who is

subject to the tax forthwith upon the extraction of the ore,

marks the Mexican Production Tax more clearly and cer-

tainly as a privilege tax than the Quebec tax which was held

to be an excise tax in Keasbey ¢ Mattison Co. v. Rothensies,

3 Cir., 1383 F. 2d 894, cert. den. 320 U.S. 739, which cites

numerous cases which lend still further support to our con-

clusion.

The fact that Mexican law imposes one privilege tax,

the Surface Tax, no more imports that the Production Tax

A-11

or other taxes are not also privilege taxes than the presence

in the Mexican Tax structure of an income tax law imports

that the Production Tax is not an income tax.

Our conclusion is not shaken by the taxpayer’s ingenious

argument that in effect the Production Tax is the equivalent

of a tax on the proceeds of mining operations. The argu-

ment is based upon American cases which hold, for purposes

of domestic taxation, that the proceeds of mining constitute

gross income as distinguished from a return of invested

capital. We think such cases wholly irrelevant to the

problem here presented. For the Mexican Production Tax

is mot imposed on the proceeds of mining. Again it is

necessary to point out that it is imposed on the privilege of

extracting the ore irrespective of the realization of cash

proceeds.

In this connection the taxpayer relies especially on

Stratton’s Independence v. Howbert, 231 U. 8. 399, in which

the court was concerned with our federal Corporation Tax

Law of 1909 which imposed an excise tax on the privilege

of doing business in a corporate capacity, the tax being

measured by the taxpayer’s ‘‘entire net income”’ as defined.

As the taxpayer here points out, the court did indeed hold

that the entire proceeds of mining were income without de-

duction on account of the value of the ore in situ which after

extraction had been converted into proceeds. In this aspect

the case seems to support the argument that extracted ore

is income in kind irrespective of its realization as cash in-

come. But the taxpayer seems to overlook the fact that that

tax, enacted in 1909 prior to the Sixteenth Amendment, was

sustained as an excise tax and not as an income tax over the

contention that in effect it was the ‘‘equivalent to a direct

tax on property, and hence unconstitutional.’’ The court

held that the tax was none the less an excise tax because

Congress, in adopting ‘‘income as the measure of the tax

* * * desired that the excise should be imposed, approxi-

mately at least, with regard to the amount of benefit pre-

A-12

sumably derived by such corporations from the current

operations of the Government.’’ By a parity of reasoning,

we think the Supreme Court would hold that the Mexican

Production Tax was an excise tax even though its measure

was such as to reflect, at least approximately, ‘‘the amount

of benefit presumably derived’’ by the taxpayers from ap-

propriating to themselves a portion of the national patri-

mony. Thus the real thrust of the case is destructive of this

branch of the taxpayer’s argument.

The taxpayer further contends that the Production

Taxes are income taxes ‘‘of a formulary kind.’’ He argues

that the Production Tax is characterized as an income tax

at least in part because of its ‘‘ profit objective’’ as affecting

the mining industry. It is true that under the statutory

scheme the rate of tax applicable to the metal severed varies

progressively with the price of the metal in the world

market. Since obviously the price of the metal affects the

miner’s profit we agree that the proofs establish a legis-

lative intent that the contribution of the mining industry

to the national economy should vary with a factor which

affects the prosperity of the industry generally. Let it be

granted that the state in fixing the tax rates sought to

obtain as much tax income as could be done without killing

the goose that laid the golden egg. Nevertheless, this does

not mean that the Production Tax is one on the profits of

the miner. For as already noted it attaches even if the

individual miner makes no profits,—even if, having severed

the ore, he makes no sales. More truly, we think, this inci-

dent of the tax scheme betokens an intent that the price of

the priviiege granted the miner shall vary with the value

of the privilege measured both by the loss of the ore to the

state which grants the privilege and the acquisition of the

ore by the miner. Merely because the state charges more

for the release of its ore when the value thereof is high

does not mean that the charge is a tax on the miner’s

profits.

A-13

The taxpayer seeks further to buttress this line of argu-

ment by pointing to the fact that the Production Taxes

provide discounts for low grade ores, special discounts

which recognize the extraordinary cost of extraction in the

case of gold and silver found in zine concentrates, and

temporary discounts given to new and newly reopened mines

the working of which involve extraordinary expense. But

these, too, are factors which affect the value of the privilege.

Their presence in the tax scheme is not so much indicative

of legislative intent to tax the miner’s profits as of intent

to realize, through a privilege tax, on a natural asset on a

basis which at least approximately reflects its current value.

Nor has the taxpayer succeeded in demonstrating that

the Production Tax is a ‘‘formulary’’ income tax because

it ‘‘compliments”’ the Mexican Income Tax law. It is true,

as it points out (although in another connection), that the

overall tax scheme of Mexico includes an income tax,—one

which satisfies the American concept of an income tax.

Schedule I of this tax law taxes income derived from capital

and personal effort invested in industry, commerce and

agriculture ; income from personal effort being taxed at the

lowest rate, income from investments at the highest rate,

and income from combined capital and labor at an inter-

mediate rate. The tax under this Schedule is a tax on gross

income less authorized deductions but although applicable

to miners—as are also Schedules II and Il]—allows no

deductions for depletion. Furthermore, we accept as proved

the taxpayer’s assertion that except for mining enterprises

. the tax under Schedule I is imposed at a higher rate on

businesses which require a concession from the state. If on

such facts it had been shown that the impact of the Produe-

tion Tax on miners was substantially the same as the

differential between the income tax on miners and the

income tax on other industries operating under government

concessions or even that the Production Tax was imposed

to equalize this differential in the income tax law, there

would be more room for the conclusion that the Production

A-14

Tax was what taxpayer calls a ‘‘formulary’’ income tax

within the reach of the holding in Seatrain Lines v. Com-

missioner, 46 B. T. A. 1076, which the taxpayer cites to

the point.

But such evidence is lacking here. At most, we have the

conclusion of the taxpayer’s Mexican tax expert that the

special tax rate provided by Schedule I for application to

business operating under government concessions was not

made to apply to businesses enjoying a mining concession

‘because it is deemed that those concerns, mining concerns

pay an additional tax which is complimentary of the income

tax.’’ (Emphasis supplied.) This, we think, wholly in-

adequate to bring the Production Tax within the Seatrain

doctrine even assuming, as we do, that the ‘‘additional

tax’’ to which the expert referred was the Production Tax.

This vague language of the expert, we think, may not be

taken as proof that the Production Tax was substantially

effective or even designed to equalize differentials in the

impact of Mexican laws taxing income or to serve adminis-

trative convenience in the computation of a tax on income.

It is by no means clear to us that by ‘‘complimentary’’ the

taxpayer’s expert meant any more than ‘‘additional’’ or

supplementary. However that may be, such conclusionary

testimony is inadequate to support the taxpayer’s conten-

tion that the Production Tax has the essential character-

istics of our American income tax. Certainly it is vitally

different from the Cuban Tax with which the Seatrain

case was concerned. And Keen v. Commissioner, 15 B. T. A.

1243, which taxpayer also cites to this point, we think in

conflict with the later decision of the Supreme Court in

Biddle v. Commissioner, supra.

What has been said, we think, sufficiently disposes of

taxpayer’s final contention that the Production Tax is at

least one ‘‘paid in lieu of a tax on income’’ within the

meaning of that provision of the Revenue Act of 1942

which is now incorporated in I. R. C. Section 131(h). We

A-15

do not need to decide whether, as taxpayer claims, Regu-

lation 111, Section 29.131-2 is unduly restrictive of the 1942

amendment, the liberalizing objective of which we fully

recognize. For the reasoning which has lead us to classify

the Production Tax as an excise, not an income, tax equally

requires the conclusion that it has not been shown to be

a tax ‘‘in lien of an income tax.’? We so hold.

This brings us to the Commissioner’s petition to re-

view the holding of the Tax Court that the credit to

which the taxpayer was concededly entitled on account of

Minera’s payment of income taxes to Mexico in past years

had not been improperly computed in that, in the com-

putation, said tax payments had not been discounted to

reflect the rate of exchange prevailing in 1947 when

Minera’s dividend was paid to the taxpayer.

The Commissioner takes the position that Section

131(a), which creates the credit, allows it only to the

extent of ‘‘the amount of any income * * * taxes paid * * *

during the taxable year to any foreign country * * *.”” He

contends that in so providing Section 131 creates a statu-

tory presumption that the income taxes paid by Minera

in prior years were paid by the taxpayer in the taxable

year. This, he contends, requires that, in computing the

credit allowable in this case, the taxes paid by Minera to

Mexico in pesos in former years should be discounted to

reflect the rate of exchange prevailing in the taxable year

when the dividend was paid.

I. R. C. 131, which in paragraph (a))(1) authorizes the

credit, contains in paragraph (f)(1) thereof? the formula

2. LR.C. Section 131.

es *#« @® # @

(f) Taxes of foreign subsidiary.

(1) Foreign subsidiary of domestic corporation. For the pur-

pose of this section, a domestic corporation which owns a 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

A-16

for its computation in cases in which a domestic taxpayer

corporation shall have received dividends in any taxable

year from a foreign subsidiary corporation which has paid

income taxes to a foreign country. The formula provides

that the domestic corporation ‘‘shall be deemed to have paid

the same proportion of any income * * * taxes paid * * * by

such foreign corporation * * *, upon or with respect to the

accumulated profits of such foreign corporation from which

such dividends were paid, which the amount of such divi-

dends bears to the amount of such accumulated profits.’’

Paragraph (f) further provides that the dividend paid by

the foreign subsidiary shall be treated ‘‘as having been

paid from the accumulated profits of the preceding year or

years’’ and ‘‘as having been paid from the most recently

accumulated gains, profits, or earnings’’ of the foreign sub-

sidiary. Thus paragraph (f) clearly imports that the allow-

able credit is not restricted to foreign taxes paid by the

subsidiary in the tawable year in which the dividend was

received by the domestic parent. Instead, the credit is

measured by a defined proportion of the foreign income

taxes paid upon ‘‘the accumulated profits of such foreign

corporation from which such dividends were paid.’’ Conse-

quently, foreign income taxes paid in prior years may be

reflected in the allowable credit if they had been imposed on

foreign country or to any possession of the United States, upon

or with respect to the accumulated profits of such foreign corpora-

tion from which such dividends were paid, which the amount of

such dividends bears to the amount of such aceumulated profits.

The term “accumulated profits” when used in this subsection in

reference to a foreign corporation, means the amount of its gains,

profits, or income in excess of the income, war-profits, and excess-

profits taxes imposed upon or with respect to such profits or in-

come; and the Commissioner with the approval of the Secretar.

shall have full power to determine from the accumulated profits o

what year or years such dividends were paid; treating dividends

paid in the first sixty days of any year as having been paid from

the accumulated profits of the preceding year or years (unless to

his satisfaction shown otherwise), and in other respects treating

dividends as having been paid from the most recently accumulated

gains, profits, or earnings.

A-17

the accumulated profits from which the dividend was deemed

to have been paid. We do not understand the ‘Commissioner

to dispute this : his contention is limited, as above indicated,

to the method of computing the credit for the foreign income

taxes paid in prior years.

It seems to us that the gist of the formula of paragraph

(f) is the prescribed relationship between the foreign taa

patd by the foreign subsidiary and its accumulated profits

from which the dividend was paid and upon which the tax

paid was imposed as that relationship existed when the

taxes were paid and the profits were deemed to have been

accumulated ; and that, in the case of a foreign subsidiary

conducting its business in foreign currency for purposes

of computing the credit under Section 131 both these factors

of the relationship must be expressed in terms of the same

currency. If that be done, it will not affect the result whether

the rate of exchange be that prevailing when the foreign

tax was paid and the relevant profits accumulated or that

prevailing when the dividend was paid by the foreign sub-

sidiary to its domestic parent.

However, that problem is not presented here. Minera’s

dividend to the taxpayer was paid in dollars and throughout

all the years involved it conducted its business on the basis

of the American dollar. Not only were its profits accumu-

lated on that basis but also the taxes which it paid to

Mexico. It is true that its tax payments to Mexico were

made in pesos but the pesos used for this purpose, like pesos

expended for other purposes, were obtained by converting

American dollars into pesos at the contemporary rate of

exchange. And such income items as it received in pesos

were similarly converted into dollars and so recorded on its

books. As a result, we fully agree with the Tax Court that

no problem in foreign exchange is presented which requires

solution for the computation of the allowable credit.

We conclude that the Tax Court was right in its decision

of the questions raised by both petitions.

Affirmed.

A-18

Findings of Fact and Opinion

19 T. C. No. 106

THE TAX COURT OF THE UNITED STATES

—<—

Tue American Meta Company, Lim1rep,

Petitioner,

CoMMISSIONER OF INTERNAL REVENUE,

Respondent.

—_—

Docket No. 31547.

Promulgated February 20, 1953.

Crepit ror Forrign Tax—Mexican Mintno Tax Laws—

Propuction Tax—Section 131(a)(1) and (h).—The pro-

duction taxes imposed by the Mexican Mining Tax Laws

do not constitute income taxes or taxes in lieu of income

taxes within the meaning of section 131(a)(1) or (h) of the

Internal Revenue Code.

Crepir ror Foreign Tax—Excuance Rates.—No for-

eign exchange problem arises in ascertaining the amount

of credit for foreign taxes paid by the foreign subsidiary

of a domestic taxpayer where the foreign subsidiary at all

times kept its books so that tax payments, earnings and

dividends were reflected exclusively in the equivalent of

United States currency.

Joun F. Dootie, Jr., Esq., and Ropert MacCrartes,

Esq., for the petitioner.

Conway N. Kircuen, Esq., for the respondent.

The Commissioner determined a deficiency of $2,180,-

517.99 in the income tax of the petitioner based upon a con-

A-19

solidated return for 1947. The petitioner raises but one

issue for decision and that is whether mining production

taxes imposed by the Republic of Mexico constitute income

taxes or taxes in lieu of income taxes within the meaning

of section 131(a)(1) or (h) so as to entitle the petitioner

to the credit provided in section 131(f)(1). The only other

issue for decision is that raised by the Commissioner in

an amended answer in which he claims that any credit

allowed under section 131(f) for income taxes or produc-

tion taxes paid to the Republic of Mexico should be com-

puted by converting the foreign taxes measured in pesos

to American dollars at the rate of exchange existing at the

time of the declaration of the dividend rather than at the

rates of exchange existing at the times when the taxes

were paid. He claims the increase in the deficieacy which

would result.

FINDINGS OF FACT

The petitioner, a New York corporation organized in

1887, filed a consolidated income tax return for 1947 with

the collector of internal revenue for the Second District

of New York. The return reported income of the petitioner

for itself and a number of affiliated companies.

Compania Minera de Penoles, S. A., hereafter referred

to as Minera, was a Mexican corporation organized in 1887.

The petitioner owned a majority of the voting stock of

Minera at all times material hereto. Minera did not join

in the consolidated return.

Minera was engaged in Mexico, directly and through

subsidiaries from 1924 through 1947, in mining ores of

non-ferrous metals and of milling a portion of those ores,

and until March 14, 1934 was also engaged in smelting and

refining non-ferrous metals. Ht also smelted and refined

during the latter period some ores and concentrates which

it purchased. It transferred its smelting and refining op-

erations on March 14, 1934 to a subsidiary Mexican corpo-

A-20

< a

ration herein called Metalurgica. The ores and concen-

trates produced by Minera contained metals not recovered

through the smelting and refining operations but which

passed into ‘‘secondaries.’’ Those secondaries, during the

years 1924 through 1947, were further refined through

treatment at plants of corporations other than Minera

and Metalurgica in order to recover the metals contained

therein.

Minera paid a taxable dividend to its shareholders in

1947 in United States money in the amount of $8,250,000 of

which the share received by the petitioner was $8,110,932.50.

The petitioner included the latter amount in income on the

consolidated return for 1947 and chose to have the bene-

fits of section 131 of the Internal Revenue Code. The

credit claimed in that return (as limited under section

131(b)(1)) was $3,239,458.49. The petitioner claimed that

Minera, during the period January 1, 1924 through 1947,

had paid $3,496,615.43 to the Republic of Mexico under laws

referred to herein as Mexican Income Tax Laws and Mex-

ican Mining Tax Laws which the petitioner should be

deemed to have paid.

The Commissioner, in determining the deficiency, al-

lowed $1,103,292.06 of the credit claimed representing taxes

under the Mexican Income Tax Laws converted from pesos

to American dollars at the rates of exchange applicable

at the time the payments were made. He disallowed the

remainder of $2,136,166.43 which was based upon $2,393,-

323.37 of taxes paid under the Mexican Mining Tax Laws.

The disallowance was made on the ground that the taxes

paid under the latter law were not income taxes or taxes

in lieu of income taxes within the meaning of section 131

of the Internal Revenue Code.

The taxes imposed by the Mexican Mining Tax Laws,

credit for which has been disallowed, were imposed cn the

production of metals and metal compounds by the Mexican

Mining Tax Laws of June 27, 1919, March 4, 1924, July 28,

A-21

1926, April 29, 1927, December 19, 1929, April 27, 1932, and

August 31, 1934. They are referred to herein as production

taxes. Minera properly deducted those production taxes

but was not allowed to deduct for depletion, in comput-

ing its taxable net income for the’various taxable years

from 1924 through 1947 under the Mexican Income Tax

Laws.

The Republic of Mexico owns all mineral in place within

the itcpublic, and all mining of those minerals is through

concessions from the Government. The concessions are

granted without consideration but the Government has at-

tempted to require the concessions to be worked or for-

feited.

The Mexican Mining Tax Laws imposed production

taxes upon the extraction of ore by the miner from the

mineral deposit in Mexico. The products generally had to

be delivered by their holders for payment of the production

tax within 30 days following their production unless they

were to be subjected to further treatment in Mexican

plants, in which case the production tax was payable when

the further processing in Mexico was completed. Payment

of the production tax was due at the time of export if the

product was exported prior to final treatment. The pro-

duction tax was less if the treatment of the mineral was

carried to completion in Mexico than it was if the material

was exported before final treatment. Discounts on produc-

tion taxes were allowed on the lower grade ores and on all

ores mined during the first few years from a new mine or

during the first few years from a reopened mine which had

not been operated during the 10 previous years. The rate

of tax on copper and silver and, after March 20, 1937, on

lead and zine, increased as the price of the metal increased

above a fixed amount on the New York market as deter-

mined monthly by the taxing authorities of the Republic

of Mexico.

The Mexican Mining Tax and Mining Fee Law of

August 30, 1934 in Article 8 imposed a tax on the produc-

A-22

tion in Mexico of metals, metallic compounds for industrial

uses and of non-metallic ores. The tax was on the value

of the metal at rates which were highest on virgin ores and

which declined through the various steps to produce the

refined metal on which the rate was lowest. The rates on

silver, for example, declined in 1 per cent stages from 6

per cent on virgin ores to 3 per cent on refined silver, but

increased 1 per cent for each increase of 5 cents in the

value of silver over 40 cents per troy ounce on the New

York market. Article 13 provided as follows:

The Treasury Department shall fix monthly the

values for the metals and metallic compounds as-

sessed under Article 8, taking the averages of the

market prices in New York and the sight exchange

between the doilar and our domestic currency during

the next previous month, according to the sales rate

of Banco de Mexico.

When the metal or the product does not have

regular quotation in New York, the Treasury Depart-

ment shall determine the commercial or market

value.

The states and territories from which the ores were mined

received a small percentage of the production tax except

in the case of low grade ores. The Federal Government

alone could impose taxes on mining or production of ores

or metal. Failure to pay the production tax did not lead

to forfeiture of the mining concession.

Other Mexican Mining Tax Laws in effect from 1924

through 1947, while not identical with that of August 30,

1934, contained more or less similar provisions.

The Mexican Mining Tax and Mining Fee Law of

August 30, 1934, also imposed taxes on mining concessions

for the exploitation of metallic ores in proportion to the

surface area overlying the mineral deposit.

The Mexican Income Tax Laws, which first went into

effect on January 1, 1924 and continued through 1947 im-

A-23

posed annual income taxes under various schedules and

required a separate return and computation of tax under

each schedule. Schedule I imposed a tax on the net income

of parties, inter alia, who operated an industrial busi-

ness. Minera paid at least pesos 4,046,768.83 under that

schedule during the 24-year period, but it paid no taxes

under that schedule for the years 1930 through 1933, 1935,

1936, and 1938 through 1940. Schedule II imposed a tax on

various kinds of interest, rents, royalties and premiums,

and the total taxes paid by Minera for the 24-year

period under those provisions amounted to at least pesos

1,578,319.26. Schedule II also imposed a tax on ‘profits

distributed or which should be distributed by Mexican

companies of all kinds’’ and Minera paid taxes for the

years 1942 through 1947 under those provisions amount-

ing to at least pesos 1,018,720.93. Schedule III imposed

a tax on ‘‘taxpayers who, normally or occasionally, re-

ceived participations, either in the form of rentals or

otherwise, from the exploitation of the subsoil or con-

cessions granted by the Federal or State Governments

or Municipalities’? and Minera paid taxes for the years

1925 through 1947 under those provisions amounting to

at least pesos 348,013.57. Minera paid an ‘‘Extraordinary

Tax’’ of pes.s 185,443.21 in 1931. The above are the only

provisions of ue Mexican Income Tax Law under which

Minera paid taxes during the 24-year period. The total paid

was pesos 7,395,162.58. Income derived from the investment

of capital in the exploitation of concessions granted by the

Government was taxed at a substantially higher rate than

income derived from capital invested in activities which re-

quired no concession from the Government. There was an

additional rate under Schedule I for income from businesses

operated under a concession from the Government, ‘‘except

banks operating under Federal concessions and mining an

petroleum concessions. ’’

The department of the Ministry of Finance which ad-

ministered the Mexican Income Tax Laws was entirely

nee

A-24

separate from the department of the Ministry of Finance

which administered the Mexican Production Taxes.

The Mexican Production Taxes paid by Minera from

1924 through 1947 were not income taxes or taxes in lieu

of income taxes within the meaning of section 131(a) (1)

or (h).

Minera, during the years 1924 through 1947, received

payment for its products and discharged its obligations

mostly in American dollars. It carried on its banking

mostly in American dollars. The total amounts which it

received in Mexican pesos were insufficient to pay its ex-

penses which it incurred in Mexican pesos and it had to

convert American dollars into pesos in order to meet those

expenses.

The only figures which Minera used in keeping its books

during the years 1924 through 1947 represented ‘‘pesos 2

for 1’’, an artificial unit of currency based upon and related

only to the United States dollar which never changed in

its relative value to the United States dollar, Entries

under that system representing payments or receipts in

American dollars were made by multiplying the number

of dollars by 2 and entering that amount. Entries under

that system representing payments or receipts in pesos

were arrived at by reducing the pesos to American dollars

at the rate of exchange in effect at the time of the payment

or receipt and multiplying the amount in American dollars

by 2.

Its tax returns filed in Mexico were on the basis of

‘“pesos 2 for 1’’ except that the amounts were converted

to pesos, at the then rate of exchange, in the final compu-

tation of the tax.

The dividend here in question was declared on August 4,

1947 by the Board of Directors of Minera who authorized

distribution of 55 pesos 2 for 1 or $27.50 in United States

currency per share.

All facts stipulated are incorporated herein by this

reference.

Murpock, Judge: The petitioner argues that the pro-

ceeds of mining have been regarded traditionally as being

characteristically income and not mere conversions of capi-

tal or returns of cost, and the Mexican ‘‘Production Taxes

have the characteristics of income or profits taxation by

reason of their history, their purpose, their effects and

their technical characteristics, that is to say, the presence

in them of progressive rates of tax, of historical correla-

tion with price and presumed profit, of adjustment of rate

and incidence to costs and profits as manifested in their

scheme of reductions and exemptions, and of directness of

burden on the taxpayer as distinguished from suscepti-

bility to shifting of the burden to others.’’ This foreign

tax, it says, must be tested by its functional characteristics,

its purpose, operation, and effect and not by the extent to

which it mirrors our own scheme of income taxation, if the

credit in question is to carry out the policy of avoiding

double taxation for which it was intended. It deems the

credit proper where the foreign tax has an income base,

even though the base is gross income. It cites a number of

decisions to show that the proceeds of ores mined are gross

income. It concludes that the proceeds of mining are like

interest, dividends, and royalties which have always been

viewed under our income tax thinking as having no capital

content but as being in the nature of the rent, the usufruct,

or the issue of the mining interest so that the tax falling

upon mining proceeds would be the same as the tax falling

on interest, dividends, royalties, or rentals, and would be a

tax on income notwithstanding the absence of provisions

for deductions. It reasons that the production taxes are

not, as stated in LT. 3945, C.B. 1949-1, 88, merely upon the

value of ore produced, and therefore analogous to gross

receipts or sales taxes. The production taxes, it claims,

are not characterized by the fact that they apply percent-

ages to values but are characterized rather by their profits

A-26

objective as shown by the expert testimony, the preambles

of certain of the decrees, and the articulation of the whole

tax scheme with mining profits.

The above, as well as all of the other arguments of the

petitioner and of the respondent contained in their briefs,

have been carefully considered in the light of the stipulated

facts, the testimony. of the witnesses, the decisions cited,

and the provisions of section 131 in reaching the conclusion

that the production taxes may not be regarded as income

taxes or taxes in lieu of income taxes within the meaning

of section 131(a)(1) or (h) so as to entitle the petitioner

to the credit provided in section 131(f)(1). The evidence

does not all point one way by any means and the difficulties

of fully understanding the characteristics and purpose of

this foreign tax are obvious. It is not practical to discuss

every argument that has been made and the facts marshaled

to support it. Nevertheless, some discussion of the peti-

tioner’s argument seems appropriate.

The petitioner cites Court decisions to show that mining

proceeds have always been regarded as gross profits rather

than gross receipts and argues that income taxes may be

imposed upon gross profits. It may be conceded, at least

for the purpose of discussion, that income taxes may be

imposed upon gross profits, but the question here is

whether, under all of the evidence in this case, the Mexican

Production Taxes are to be regarded as invome taxes or

taxes in lieu of income taxes within the mexning of seciion

131(a)(1) or (h).

‘She petitioner relies upon the preambles to several

decrees relating to the production taxes to show that the

Mexican Government intended to impose a tax on income

through the production taxes. The evidentiary value of

the decrees to the petitioner is not undiluted. One of No-

vember 25, 1919 changed the production tax rate on silver

ostensibly because an increase in world prices of the metal

constituted a source of great unearned profit to producers

A-27

which the nation could share without burdening the mining

industry. Another of December 24, 1920 changed the pro-

duction tax rate on silver because of a fall in the value of

silver forcing some mines out of business and the Govern-

ment felt it should permit them to obtain some profits. The

third, dated April 11, 1935, again changed the rate on silver

and recited:

Wueneas, in the measure that silver reaches a

higher price in the world market, the profits of the

mining companies become larger and larger, without

this additional increase of wealth entailing greater

efforts on the part of the operators or an additional

investment of capital, since when the silver reaches

a price which guarantees produetivity of operations

and a reasonable margin of sure profits, subsequent

increases in the sales price constitute super earnings

not in relation to the effort and the capital of the

producer;

Wuereas, the direct ownership of the mineral

deposits, established without discussion from Colo-

nial times in favor of the Crown of Castile and sub-

sequently transferred to the Nation in the form at

present expressly consecrated in Article 27 of the

Federal Constitution, would not really be such direct

ownership, if during the boom times the Nation did

not obtain from the mining proceeds its proper

share, both through its right of ownership and the

authority which said Article 27 confers for “‘regu-

lating the advantage and use of the natural elements

susceptible to appropriation, to permit a fair distri-

bution of the public wealth and to cara for its

preservation’’; and

Wuerras, the taxes on the production of silver

should not be raised any further, while the price of

this product does not rise above 77 pesos per kilo-

gram, but, on the other hand, if the prices rise

A-28

higher, it shall be fully justified to collect a part of

the excess by way of taxes, applying them to pur-

poses which might redound to the immediate benefit

of the Nation; I considered it advisable to issue the

following Decree:

A decree of February 11, 1931 granted some exemptions

after reciting that the mining industry represented the

main support of the national economy and a decline in that

industry would aggravate the depressing exchange situa-

tion. Another dated January 1, 1935 provided that the

rate of production tax on silver and copper would depend

upon the New York prices converted into pesos at current

exchange rates. That was done so that the Mexican Gov-

ernment would not suffer loss of taxes due to the decline of

the exchange value of the pesos. The fact that the rates of

production taxes were lower on refined metals than on

virgin ores was to encourage complete processing in Mexico

and sheds no particular light on the present question. It is

obvious from the decrees, the ‘‘progressive rates’’ and the

testimony, that the Mexican Government, in imposing the

production taxes, gave some consideration to the profit

problems of the miners and the industry, as well as to the

share of the value of the metals which the state should have

as a result of its ownership of the ores in place, neverthe-

less, it did not base the production taxes on profits so as to

make those taxes income taxes. Real estate taxes might

conceivably be reduced during a depression for somewhat

similar reasons without thereby indicating that profits were

the basis of the tax.

The principal argument of the petitioner is that the

production taxes were income taxes and it does not make

an extensive separate argument that they were taxes in

lieu of income taxes. They were in effect before Mexico

imposed any income taxes and they continued to be in effect

thereafter without substantial change. It is not apparent

that any change was made in the production taxes as a

result of the later enactment of the Mexican Income Tax

Laws. There is evidence that under one or more of the

schedules the income taxes on miners were somewhat less

than on other concessionaires of the Government, but that

circumstance is not relied upon and is insufficient to show

that the production taxes were ‘‘taxes in lieu of income

taxes’’ within the meaning of section 131(h). The record

does not justify a finding that the production taxes were

ever intended to be or were taxes in lieu of income taxes.

The production taxes for which credit is claimed were

imposed and paid during the 24 years from 1924 through

1947. Mexican Income Tax Laws were also in effect during

all of those years. The production taxes were in effect

prior to that period but the income taxes were not. The

production taxes paid by Minera during the 24 years

amounted to more than three times the income taxes paid

during that same period. Annual deductions, including

one for the production taxes but none for depletion, were

allowed in computing the net income of Minera for Mexican

income tax purposes, but deductions were not granted

under the Mexican Production Tax Laws. The Republic of

Mexico owned the ore in place, the mining of which gave

rise to the production taxes. The miner paid the Govern-

ment nothing for the minerals mined except as the taxes,

particularly the production taxes, might represent such

payment. The production taxes were payable when the

metals were mined regardless of whether or not they were

subsequently sold and regardless of whether or not any

profit resulted. Minera did not pay income taxes during at

least 9 of the 24 years, due to losses or insufficient income,

but it was required to pay production taxes in each of the

24 years. These are some of the circumstances which have

lec. to the conclusion that thé production taxes were not

income taxes.

A-30

The only other questicn requiring decision is the issue

raised by the respondent. He claims that he erred in allow-

ing a credit based upon payments converted into dollars at

the rate of exchange prevailing at the times when the taxes

were paid. He relies heavily upon the case of Bon Ami Co.,

39 B. T. A. 825, but that case is not in point. There, the

foreign taxpayer kept its books on the basis of the foreign

currency so that the foreign tax paid, the accumulated

earnings, and the ultimate dividend were all in terms of

foreign currency and there was no occasion to reduce any

of them to United States currency until the dividend was

paid and the credit computed. Here the foreign subsidiary

kept its books so that tax payments, earnings, and divi-

dends were currently and exclusively reflected in the equiv-

alent of United States currency as opposed to foreign cur-

rency, and the ‘‘proportionate part’’ of the foreign tax

represented in the dividend can only be determined by ref-

erence to the subsidiary’s books. The exchange rate at the

time the foreign taxes were paid and accounted for was

used to translate those payments into United States cur-

rency for entry in the books at that time. Thus, the ex-

change rate at the date of the dividend had no relation to

the amount of the foreign tax paid, to the accumulated

earnings, or to the dividend paid. The whole account of

Minera had been stated from start to finish in the equiva-

lent of dollars rather than in the equivalent of Mexican

pesos, and no foreign exchange problem arises.

The result of this decision is to leave the parties where

we found them on both issues,

Reviewed by the Court.

Decision will be entered

in accordance with the

notice of deficiency.

THE TAX COURT OF THE UNITED STATES

WASHINGTON

Pursuant to the determination of the Court, as set forth

in its Findings of Fact and Opinion, promulgated February

20, 1953, it is

ORDERED AND pecipep: That there is a deficiency in

income tax of $2,180,517.99 for the year 1947,

Enter:

(Signed) J. E. Murpoox

Judge.

Entered FEB 26 1953

B-1

APPENDIX B

Statutes and Regulations Involved

The pertinent provisions of Section 131 of the Internal

Revenue Code are the following:

“Sec. 131. Taxes of Foreign Countries and

Possessions of United States

“‘(a) AtLowance or Orepir. If the taxpayer chooses

to have the benefits of this section, the tax imposed by

this chapter, except the tax imposed under section 102,

shall be credited with:

“*(1) Citizens and Domestic Corporations. In the

case of a citizen of the United States and of a do-

mestic corporation, the amount of any income, war-

profits, and excess-profits taxes paid or accrued

during the taxable year to any foreign country or

to any possession of the United States; and

“*(b) Luwrr on Creprr. The amount of the credit taken

under this section shall be subject to each of the follow-

ing limitations:

**(1) The amount of the credit in respect of the

tax paid or accrued to any country shall not exceed,

* * * in the case of a corporation, the same propor-

tion of the tax against which such credit is taken,

which the taxpayer’s normal-tax net income from

sources within such country bears to its entire

normal-tax net income for the same taxable year; and

**(2) The total amount of the credit shall not ex-

ceed, * * * in the case of a corporation, the same pro-

portion of the tax against which such credit is taken,

which the taxpayer’s normal-tax net income from

B-2

sources without the United States bears to its entire

normal-tax net income for the same taxable year;

and*

**(f) Taxes or Forzicn Sussipiary.

**(1) Foreign Subsidiary of Domestic Corpora-

tion. For the purposes of this section, a domestic cor-

poration which owns a majority of the voting stock

of a foreign corporation from which it receives divi-

dends 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

or to any possession of the United States, upon or

with respect to the accumulated profits of such

foreign corporation from which such dividends were

paid, which the amount of such dividends bears

to the amount of such accumulated profits. The

term ‘‘accumulated profits’? when used in this sub-

section in reference to a foreign corporation, means

the amount of its gains, profits, or income in excess

of the income, war-profits, and excess-profits taxes

imposed upon or with respect to such profits or in-

come; and the Commissioner with the approval of

the Secretary shall have full power to determine

from the accumulated profits of what year or years

such dividends were paid; treating dividends paid

in the first sixty days of any year as having been

paid from the accumulated profits of the preceding

year or years (unless to his satisfaction shown

otherwise), and in other respects treating dividends

as having been paid from the most recently accu-

mulated gains, profits, or earnings. In the case of

* Section 122(g)(6) of the Revenue Act of 1945 (59 Srar.

570) repealed former subdivision (3) of Section 131(b) but failed

to change the punctuation and direct deletion of the word “and”.

B-3

a foreign corporation, the income, war-profits, and

excess-profits taxes of which are determined on the

basis of an accounting period of less than one year,

the word ‘‘year’’ as used in this subsection shall be

construed to mean such accounting period.

‘*(h) Creprr ror Taxes ry Liev or Income, erc., Taxes.

For the purposes of this section and section 23 (e) (1),

the term ‘‘income, war-profits, and excess-profits taxes’?

shall include a tax paid in lieu of a tax upon income,

war-profits, or excess-profits otherwise generally imposed

by any foreign country or by any possession of the United

States.’’

The pertinent provisions of Title 26 of the Code of

Federal Regulations are as follows:

“Sec. 29.131-1. Analysis of credit for taxes.

‘If the taxpayer chooses to claim a credit for taxes, the

basis of such credit, in the case of a citizen of the United

States, whether resident or nonresident, and in the case

of a domestic corporation, is as follows: (a) The amount

of any income, war-profits, and excess-profits taxes paid

or accrued during the taxable year to any foreign country

or to any possession of the United States; * * * :

‘*If a taxpayer chooses to claim a credit for taxes, such

action will be considered to apply to income, war-profits,

and excess-profits taxes paid to all foreign countries and

possessions of the United States, and no portion of any

such taxes shall be allowed as a deduction from gross

income.’’

7 bal 7

“Sec. 29.131-2. Meaning of terms.

‘“‘The term ‘‘smount of any income, war-profits, and

excess-profits taxes paid or accrued during the taxable

B-4

year’’ means taxes proper (no credit being given for

amounts representing interest or penalties) paid or ac-

crued during the taxable year on behalf of the taxpayer

claiming credit. For the purposes of section 131 and

section 23(¢)(1) the term ‘‘income, war-profits, and ex-

cess-profits taxes’’ includes a tax imposed by statute or

decree by a foreign country or by a possession of the

United States if (a) such country or possession has in

force a general income tax law, (b) the taxpayer claim-

ing the credit would, in the absence of a specific provision

applicable to such taxpayer, be subject to such general

income tax, and (c) such general income tax is not im-

posed upon the taxpayer thus subject to such substituted

tax. For example, the A Corporation does business in the

X country, which imposes an income tax upon substan-

tially a net income base. The ascertainment of net income,

though not the determination of gross income, from sources

in X country is found administratively difficult. The X

country, by decree, provides that corporations circum-

stanced as was the A Corporation would, in lieu of the in-

come tax at the rate of 20 percent otherwise payable, be

subject to tax at the rate of 10 percent upon the amount

of gross income from X country. In accordance with such

decree, the A Corporation paid X country the sum of

$25,000 in 1943 with respect to its tax liability to the X

country for the year 1942. Such amount, subject to the

applicable limitations, is available as a credit to the A

Corporation as foreign income, war-profits, or excess-

profits taxes against the United States tax liability for the

year 1942.’’

“Sec. 29.131-7. Taxes of subsidiary corporations.

‘*(a) Domestic corporation owning a majority of the

stock of a foreign corporation. In the case of a domestic

corporation which owns a majority of the voting stock of

a foreign corporation from which it receives dividends

B-5

in any taxable year, the credit for foreign taxes includes

not only the income, war-profits, and excess-profits taxes

paid or accrued during the taxable year to any foreign

country or to any possession of the United States by

such domestic corporation, but also income, war-profits,

and excess-profits taxes deemed to have been paid de-

termined by taking the same proportion of any income,

war-profits, and excess-profits taxes paid or accrued by

such controlled foreign corporation to any fore'gn

country or to any possession of the United States, upon

or with respect to the accumulated profits of such foreign

corporation from which such dividends were paid, which

the amount of any such dividends received bears to the

amount of such accumulated profits. See, however, the

limitations provided in section 131 (b) and section 29.131-8.

If dividends are received from more than one controlled

foreign corporation, the limitation is to be computed sepa-

rately for the dividends received from each controlled

foreign corporation. If the credit for foreign taxes in-

cludes taxes deemed to have been paid, the taxpayer must

furnish the same information with respect to the taxes

deemed to have been paid as it is required to furnish with

respect to the ‘axes actually paid om accrued by it. Taxes

paid or accrued by a controlled foreign corporation are

deemed to have been paid by the domestic corporation for

purposes of credit only.’’

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.