W.K. Buckley, Inc. v. Commissoner

        UNITED STATES CIRCUIT COURT OF APPEALS, SECOND CIRCUIT

The Tax Court held that the allowance of credit for foreign taxes is conditioned upon an election which must be indicated in the original return or an amended return filed within the time allowed for the filing of an original return, and that failure so to indicate forfeits any right to a credit under Sec. 131(a). That section, however, was not intended to confer an ordinary tax exemption; it was meant to encourage and facilitate foreign trade, Burnet v. Chicago Portrait Co., 285 U.S. 1, 52 S.Ct. 275, 76 L.Ed. 587, and to eliminate the evils of double taxation, American Chicle Co. v. United States, 316 U.S. 450, 62 S.Ct. 1144, 86 L.Ed. 1591. To achieve these ends, Congress gave the taxpayer the benefit of a choice between the two alternative methods of treating the foreign tax. It seems to us sufficient for the taxpayer to indicate its election when it appears that a tax is due and when, therefore, an election first has significance.

The matter was extensively discussed by the Sixth Circuit in Gentsch v. Goodyear Tire & Rubber Co., 151 F.2d 997, 1001, a closely analogous case. We accept the reasoning of that opinion. There the tax return for 1932, filed in 1933, showed a net loss and made no claim for credit for foreign taxes. Upon audit, the Commissioner determined a deficiency, and the taxpayer, in 1940, filed an amended return claiming such a credit. The court held that the taxpayer could not be said to have exercised its option in its 1933 return. The Commissioner argues that the instant case is distinguishable because here taxpayer filed no amended return, and expressed its election solely in its protest against the Commissioner's 'sixty-day letter.' But in the Goodyear Tire case, the Court said that 'A redetermination of tax liability by the Commissioner is, for practical purposes, an amendment of the taxpayer's return * * * ' With that statement we agree. We believe that the letter of protest asserting an election which was filed shortly after the redetermination, when taken in conjunction with the redetermination itself, may be regarded as the equivalent of an amended return manifesting an election.

Nor do we think its fatal that the taxpayer did not comply with the regulation which requires the filing of form 1118. The purpose of that form is to give the tax officials full information about the foreign taxes. When they obtain that information by their audit, as they did here, compliance with the regulation serves no useful purpose. There are instances in which strict compliance with a regulation is essential to the enforcement of a system of self -assessed income taxes. But 'The function of the regulation is to facilitate research'; ³ and after the officials, having done the research, are in possession of all the requisite information, no practical administrative considerations demand that the form be filed. Angelus Milling Co. v. Commissioner of Internal Revenue, 325 U.S. 293, 65 S.Ct. 1162, 89 L.Ed. 1619, is not apposite; there obvious confusion resulted because of taxpayer's failure to comply, but here there was none. No more in point is Commissioner of Internal Revenue v. Lane-Wells Co., 321 U.S. 219, 64 S.Ct. 511, 88 L.Ed. 684. It dealt with the personal holding company tax, 26 U.S.C.A. Int.Rev.Code, Section 500, and a regulation specifically calling for a separate return supplying the needed information; the Court pointed out that the single return filed failed to show the facts on which personal holding company liability was predicated. Here, in the circumstances, the failure to comport with the regulation was the omission of a mere formality. Perhaps it is sometimes justifiable to discipline young children for infraction of rules which have no practical importance. But we think that Congress did not want to deal with citizens as if they were still in the nursery.

Section 131(a) was intended, we think, to prevent a taxpayer, fully cognizant of the facts when making its return, from subsequently changing its position, but not to hold a taxpayer to a choice made when unaware that its choice had practical consequences. That such was the legislative purpose is emphasized by Sec. 131(d) which does preclude a shift of position by a taxpayer, knowingly electing to claim a credit, as to a cash or accrual basis.

Reversed.

² Sec. 23. 'In computing net income there shall be allowed as deductions: * * *

(c) Taxes generally. * * * Taxes paid or accrued within the taxable year, except- * * *

(2) income, war-profits, and excess-profits taxes imposed by the authority of any foreigncountry or possession of the United States; but this deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have to any extent the benefits of section 131 (relating to credit for taxes of foreign countries and possessions of the United States); * * * .'

Sec. 131(a). 'Allowance of credit. If the taxpayer signifies in his return his desire 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) Citizen and domestic corporation. 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 * * * .'

³ Cardozo, J., in United States v. Memphis Cotton Oil Co., 288 U.S. 62, 71, 53 S.Ct. 278, 281, 77 L.Ed. 619.