Strong v. Willcuts

                UNITED STATES DISTRICT COURT, DISTRICT

The court having considered the files, records and proceedings herein and the arguments of counsel, makes the following

Findings of Fact

I. Plaintiff, Albert W. Strong, was at all times herein mentioned a citizen of the State of Minnesota with residence in the city of Minneapolis, county of Hennepin, state and district of Minnesota, and within the Collection District of Minnesota.

II. That at all times herein mentioned, the defendant, Levi M. Willcuts, was the duly appointed and acting Collector of Internal Revenue for the District of Minnesota.

III. For each of the years beginning January 1, 1923, and continuing through December 31, 1928, the plaintiff, Albert W. Strong, filed individual income tax returns upon the cash receipts and disbursements basis and claimed therein credit for foreign taxes actually paid in the respective years.

IV. On March 16, 1930, Albert W. Strong filed an original individual income tax return for the calendar year 1929 with the defendant upon the cash receipts and disbursement basis, disclosing a total tax liability of $9,149.87, which amount was paid in quarterly installments on March 17, 1930, June 17, 1930, September 17, 1930, and November 20, 1930. Of the total amount of net income of $75,548.80 as reported on said return, $62,040.25 was received by plaintiff as representing Canadian income. The amount of $222.61 reported on said return represented income tax which was paid to a foreign country, to-wit, the Dominion of Canada.

V. Prior to May 30, 1930, the Dominion of Canada had not taxed as income dividends of Canadian corporations received by persons residing outside of Canada. On that date the Canadian government enacted a law making subject to income tax dividends of Canadian corporations received by a person residing outside of Canada and said law was made retroactive and applicable to the 1929 taxation period.

IV. Plaintiff had no knowledge of the contemplated passage of this taxing act nor did he have any knowledge or information with relation to the enacting of this law by the Canadian government until sometime in the summer of 1930 when plaintiff received notice of the enactment of this law, at which time the Canadian government requested certain data of plaintiff regarding dividends received by him during the year 1929 from Canadian corporations.

VII. Being without knowledge of the contemplated taxing legislation and the Canadian government never having taxed such dividends before, plaintiff did not accrue on his books or set up any reserve to pay such taxes during the year 1929. The amount of income tax which the plaintiff paid to the Canadian government for the period 1923 to 1929 did not vary a great deal in amount, that is, it was always around $220.00 a year.

VIII. That on October 16, 1930, plaintiff received a notice of assessment from the Canadian government of a tax on dividends received by him from Canadian corporations during the year 1929 of $7,474.24, with a demand for payment. Plaintiff paid said amount to the Dominion of Canada in November of 1930.

IX. On November 15, 1930, plaintiff filed a revised individual income tax return for the calendar year 1929 disclosing a total amount of net income of $75,548.80. The total amount of Canadian income received by plaintiff as shown by said return was $62,040.25, and the amount of income tax paid to a foreign country as reported thereon was $7,696.68. The income as reported on the original and revised returns was from sources in the Dominion of Canada and consisted of salary for services rendered outside of the Dominion of Danada by plaintiff in his capacity as President of the Strong-Stott Manufacturing Company. Ltd., a Canadian corporation having its factory and place of business in Winnipeg, Province of Manitoba, in said Dominion of Canada, as well as royalties on certain patent rights exercised by said corporation and interest on advances made to it from time to time by plaintiff, together with dividends and corporate shares owned by him in said company.

X. On November 20, 1930, the plaintiff filed with the Collector of Internal Revenue a claim for refund in the amount of $7,474.24 for the calendar year of 1929, contending as a ground for said claim that he "now elected to change his basis from the cash receipts and disbursements basis to the accrual basis."

XI. That on October 21, 1931, the Commissioner of Internal Revenue by letter rejected said claim, and on January 8, 1932, a formal disallowance of said claim by the Commissioner of Internal Revenue was made.

The Court makes the following

Conclusions of Law

1. That the tax in question was legally imposed, assessed, and collected by the defendant.

2. That plaintiff elected to file his original return for 1929 on the cash receipts and disbursements basis and is bound by such election.

3. That the dividend tax of $7,474.24 paid to the Canadian government in November, 1930, did not accrue in the year 1929, and hence said tax could not be taken as a credit on the 1929 return.

4. That plaintiff's alleged cause of action be and the same hereby is dismissed, and that defendant have and recover judgment herein.

Memorandum

NORDBYE, D. J.:

The facts are not in dispute. At the time plaintiff made his 1929 return, he was unaware of any contemplated retroactive legislation by the Canadian government. He paid three installments on his income taxes, and then on November 15, 1930, after having paid the dividend tax to the Canadian government, he attempted to amend his 1929 return to change the accounting basis, so far as the Canadian dividend of $7,696.68 was concerned, from the cash basis to the accrual basis. That is, the taxpayer was of the opinion that, in that the Canadian act was passed on May 30, 1930, and by its terms retroactive so as to cover the year 1929, the liability for this dividend tax therefore accrued in the year 1929. In this amended return, he sought to take credit for the $7,696.68 which was paid to the Canadian government, and asked for a refund accordingly. The Commissioner of Internal Revenue denied plaintiff the right to amend and to take said credit. Plaintiff then filed a claim for refund in which he set forth that he elected to file his 1929 return on the accrual basis rather than the cash basis, stating (Exhibit B):

     That he now elects to deduct the taxes paid to the Dominion of

The Government raises the defense, first, that plaintiff has for some years, including 1929, made his returns on the cash basis, and therefore without the consent of the Commissioner, cannot change to the accrual basis after the time to file his return has expired; second, that the Canadian dividend tax did not accrue until 1930, and therefore could not be taken as a credit on the 1929 return, either on the cash or accrual basis.

Plaintiff relies on the provisions of Section 131(d) (26 USCA 131(d)) of the Revenue Act of 1928, which provides:

Year in Which Credit Taken. The credits provided for in this section may, at the option of the taxpayer and irrespective of the method of accounting employed in keeping his books, be taken in the year in which the taxes of the foreign country or the possession of the United States accrued, subject, however, to the conditions prescribed in subsection (c) of this section. If the taxpayer elects to take such credits in the year in which the taxes of the foreign country or the possession of the United States accrued, the credits for all subsequent years shall be taken upon the same basis, and no portion of any such taxes shall be allowed as a deduction in the same or any succeeding year.

It seems reasonably clear that, under that subdivision, plaintiff could have elected to take credit for the Canadian taxes on the accrual basis, even though in other years he had taken credit for such taxes on the cash basis. Thus, when he made out his tax return on March 15, 1930, if he had been aware of the income tax imposed by the Canadian government on dividends, and if this tax had actually accrued in 1929, it would seem that he should be permitted to take credit for all his Canadian taxes on such basis. Presumably, if he had elected to take such credits on the accrual basis, then all credits for subsequent years must be taken on the same basis. It should be observed that when plaintiff made out his return on March 15, 1930, he continued to take credit for the Canadian tax of some $222.00 on the cash basis. Unquestionably, this amounted to an election with reference to the method by which credit should be taken for the year 1929 for taxes paid to a foreign government. Plaintiff insists that,notwithstanding such election, he should be permitted to make a change after filing his 1929 return. He urges that Section 131(d) should be construed liberally and broadly, and that his election, if it be termed such, was made when he was unaware of the impending retroactive Canadian legislation, and that a hardship would result if the credit for the Canadian dividend tax cannot be taken for the same year that the dividend was included in the United States tax return as income.

The effect of this retroactive legislation may be most unfortunate for the plaintiff by reason of the unusually large dividend that was received by him during the year 1929, but such circumstances should not militate against the well recognized principle that when a taxpayer has once made an election and obtained the benefits of the cash basis' method of making a return on his local and foreign credits, and the Government having accepted the 1929 return which credits the then known Canadian tax on the cash basis, the rights of the parties became fixed, and under such circumstances the taxpayer cannot shift to the accrual basis for the sole purpose of reducing taxation. If the taxpayer desires, presumably he may change to the accrual basis in his 1930 return, but his election was made as to the method by which credit should be taken for foreign taxes when he filed his 1929 return. Plaintiff nevertheless insists that unless he can take credit for the 1929 Canadian tax in his 1929 return, he will be subjected to an unusual burden and hardship that was not contemplated by the law. There is no provision in the act that seeks to insure to the taxpayer his right to credit a foreign tax during the same year the income from such foreign source is included in the United States return. In the instant case, it may be advantageous for the taxpayer to do so, but in other years it might be more advantageous for the taxpayer to defer the credit to another year.

Section 131(d) of the Revenue Act does not differentiate between a foreign salary tax and a dividend tax. It merely refers to taxes paid to a foreign government. In referring to the election to be made by the taxpayer, the act must have contemplated that the election would be made when the return was filed. There is no basis for the assumption that the taxpayer can shift his position after the filing of his return, if later developments might in his opinion be more advantageous to him. The authorities amply sustain the Commissioner's refusal to permit the amendment and to allow the refund.Rose v. Grant, 39 Fed. (2d) 338; Levi Strauss Realty Co. v. United States, 41 Fed. (2d) 55; Lucas v. St. Louis National Baseball Club, 42 Fed. (2d) 984; Radiant Glass Company v. Burnet, 54 Fed. (2d) 718; Moran v. Commissioner of Internal Revenue, 67 Fed. (2d) 601;Ambridge Furniture Company v. Heiner, (D. C. W. D. Pa.), decided October 25, 1935.

But there is another and even more formidable obstacle to a recovery herein. Plaintiff's position that the dividend tax accrued in 1929 cannot be sustained. It is admitted that plaintiff had no knowledge or information that the dividend tax was to be levied on non-residents until some time in the month of June, 1930. It is further conceded that no reserve had been set up in the year 1929 on plaintiff's books to meet this tax. There was no policy on the part of the Canadian government with reference to taxes that could have forewarned plaintiff as to this contingent liability and enable him to properly set up a reserve to meet it. It was unanticipated and unforeseen. It must be plain, therefore, that no liability for this tax, contingent or otherwise, came into existence during the year 1929. True, the basis for the levy was the dividends paid to the plaintiff during 1929, but no liability existed during that year.

There is no necessary relation between the basis for the levy, and the time of the accrual of the tax. Whether computed on a property assessment or a state income tax return, the tax did not accrue until it became a liability of the taxpayer.Ed. Schuster & Co. v. Williams, 283 Fed. 115, 116.

One may commit a tort or perform some act that results in a breach of contract and the liability for damages may not accrue until years afterwards, in absence of some act by the taxpayer to reflect such liability in his bookkeeping system or otherwise. Russell-Miller Milling Co. v. Helvering, 69 Fed. (2d) 392, is clearly distinguishable. There, the element of contingency was lacking, and not only did theevents occur which fixed the liability for the tax, but it also determined the amount of the tax. The receipt by the plaintiff in the instant case of some$7,696.68 by way of dividends in the year 1929 gives rise to no liability during the year 1929 by way of any taxes to the Canadian government. Not only had that calendar year expired, but it was well into the year 1930 before any liability for a dividend tax came into existence. It was the legislation of 1930 that determined the liability of the plaintiff, not the payment of the dividend to him in 1929. The undisputed circumstances of this case impel the finding that the position of the Government must be sustained.

The following cases are helpful: Famous Machine Co. v. United States, 282 U. S. 375; United States v. Woodward, 256 U. S. 632; United States v. Anderson, 269 U. S. 422.

Let this memorandum be made a part of the foregoing findings of fact and conclusions of law.