MARSMAN v. COMMISSIONER OF INTERNAL REVENUE
No. 6535
United States Court of Appeals Fourth Circuit
June 3, 1953
Rehearing Denied July 7, 1953
205 F.2d 335
Argued April 13, 1953.
The second objection in the petition is to that passage in our opinion in which we said that “whether Karahalias did ‘reside’ in Greece during the time he was there, depends upon his intent and that in turn upon the circumstances that may have compelled him to remain.” The argument is that this is contrary to what the Supreme Court said in Savorgnan v. United States, 338 U.S. 491, 504, 505, 70 S.Ct. 292, 299, 94 L.Ed. 287 (1950). In that part of the opinion on which the petition relies the Court said of the Act in question that it “used the terms ‘residence’ and ‘place of general abode’ without mention of the intent of the person concerned. * * * In contrast to such terms as: ‘temporary residence,’ ‘domicile,’ ‘removal, with his family and effects,’ ‘absolute removal’ or ‘permanent residence,’ the new Act used the term ‘residence’ as plainly as possible to denote an objective fact.” Again, “The words ‘place of general abode’ * * * seem to speak for themselves. They relate to the principal dwelling place of a person.” There can of course be no doubt that by all this the Court meant to exclude “intent,” in the sense that that word is a factor in determining domicile. On the other hand, we do not believe that the Court meant to hold that a person‘s “permanent place of abode” must always be determined only by his external conduct, regardless of the purposes of his stay. In the case at bar, if Karahalias went to Greece for a temporary visit that was continued because of his wife‘s illness, until he was forbidden a reentry or was prevented by the war, we do not believe that he automatically lost his citizenship.
The judgment will be reversed and the cause remanded for further proceedings consistent with our first opinion, so far as that has not been modified by the foregoing.
Louise Foster, Special Asst. to the Atty. Gen. (H. Brian Holland, Asst. Atty. Gen., Ellis N. Slack and Helen Goodner, Special Assts. to the Atty. Gen., on the brief), for respondent.
Before PARKER, Chief Judge, and SOPER and DOBIE, Circuit Judges.
SOPER, Circuit Judge.
This petition to review the decision of the Tax Court presents the questions whether Mary A. Marsman, a citizen of
The Tax Court found that Mrs. Marsman was a resident of the United States between September 22, 1940 and December 31, 1941, the tax periods involved herein, and that she was taxable on the undistributed income of La Trafagona for the entire year 1940 rather than for the period from September 22 to December 31, 1940, and that no part of the income taxes paid to the Philippine government in 1941 was available to her as a credit against the United States income taxes due by her for that year.
The evidence on the controlling issues of residence may be summarized as follows: The taxpayer, a native of Scotland, and her present husband, J. H. Marsman, a native of Holland, became residents of the Philippines prior to 1920 and were married there in that year. They were naturalized in the Philippines in 1934 and became citizens of the Commonwealth in 1935 and remained citizens during the taxable period.
During these years each of them controlled large corporate business enterprises through the medium of a wholly owned Philippine holding company, that is, La Trafagona, owned by the taxpayer, and El Emprendedor, owned by her husband. They maintained two large and well furnished houses in the Philippines, one in Manila and another at Baguio, which were adequately staffed and always open for occupation. In 1939 and 1940 they made extensive improvements in these residences and acquired new furnishings for them.
In 1939 they planned to place their daughter Anne in school in England or on the continent of Europe, and on April 28 of that year, the three came to San Francisco partly for this purpose and partly to combine a business trip to the United States with a vacation in Europe. After their arrival Mr. Marsman, whose wide connections kept him well informed of the threat of war, concluded that it was not advisable to take his family to Europe and so he left them in California and flew to Europe on a business trip. He returned to San Francisco in September and shortly thereafter returned to Manila and did not return to the United States until December, 1939.
The husband and wife opened a joint account with a stockbroker in San Francisco in 1939 and Mrs. Marsman also opened such an account in her own name.
When the family first arrived in San Francisco in April, 1939 they took up residence in a hotel, accompanied by several servants. In June, 1939 Marsman bought a house for $30,000 and furnished it for use as a residence by the daughter while in attendance at school, and persons were engaged to care for her and the residence during her parents’ absence. In 1943 the house was sold and another was purchased in Los Altos, California.
The daughter was enrolled in a private school in San Francisco in September, 1939, completed her first year, and left for Manila in July, 1940. Her parents had preceded her in the previous April. They bought a yacht in California for $75,000 in 1940 and engaged a crew to sail the vessel to the Philippines in April.
Mrs. Marsman remained in the United States continuously from September 22, 1940 until 1945. She and her daughter were admitted on the occasion of their first visit in April, 1939 for “a temporary period of six months.” In October, 1939 an extension of the temporary stay was granted for six months. On September 22, 1940, the mother and daughter were admitted for “a temporary period of ten months.” On July 1, 1941 an extension for one year was requested for the reason that conditions abroad were still in an unsettled state; and in 1942, 1943 and 1944 additional extensions were requested and granted because of the war. In 1945 a one year extension was denied. On February 7, 1948 the taxpayer was allowed to enter the United States through Canada as a permanent British immigrant.
Mrs. Marsman denied that she formed the intent to remain in the United States during the taxable period, but there is nevertheless abundant evidence that her extended stay in this country was caused by war conditions and the desire to avoid the danger that would have attended a return to the Philippines. The Marsmans were acquainted with persons of importance in many parts of the world and through their contacts were led to believe that there was grave danger of war in the Orient in 1940. Correspondence between the husband in Manila and the wife in San Francisco in the fall of 1940 and thereafter indicates his fear of war, his acquaintance with the preparations of the United States in the Philippines to meet the emergency, and his satisfaction that his wife was in a safe place. Her letters to him frequently expressed her desire to return to her home, even as late as October, 1941, as well as her sense of obligation to the Marsman employees in the Philippines, but she nevertheless yielded to his wishes and his advice and was herself convinced of the danger, and in October, 1940, advised relatives in Canada to stay away from Manila.
In view of these facts we are of the opinion that the Tax Court was justified in finding that on September 22, 1940 Mrs. Marsman “had a definite intent to remain in the United States until such time as the danger of war in the Orient subsided“; and we do not think that the issuance of certificates for a stay in this country for temporary periods, or the presence of her daughter at school in San Francisco, or the strong desire of the taxpayer to return to her established home in the Philippines as soon as it should become safe for her to do so, are inconsistent with the court‘s conclusion. The case is governed by Treasury Regulations 111 § 29.211-2 where it is laid down that one who comes to the United States for a purpose of such a nature that an extended stay may be necessary for its accomplishment, and to that end makes his home temporarily in the United States, becomes a resident, though it may be his intention at all times to return to his domicile abroad when the purpose for which he came has been consummated or abandoned. The weight to be given to this Regulation in considering a question of residence in the application of the income tax law, was discussed by this court under somewhat similar factual conditions in Commissioner of Internal Revenue v. Nubar, 4 Cir., 185 F.2d 584 (1950), and Commissioner of Internal Revenue v. Patino, 4 Cir., 186 F.2d 962 (1950). We conclude that the taxpayer was taxable as a resident alien during the taxable years.2
We come then to the questions relating to the inclusion of the undistributed net income of La Trafagona in the taxable income of Mrs. Marsman for the year 1940, and her claim to a credit against her United States income tax for 1941 of the amount of the income taxes paid by her to the Philippine government in 1941. The undistributed net income of La Trafagona for the entire year 1940 was $130,357.04, when computed under the provisions relating to “undistributed Supplement P net income” contained in
It is not disputed that La Trafagona meets these requirements both as to the nature of its income and the ownership of its stock. The question is as to the interpretation of Section 337 which specifies the amount of the undistributed Supple-
“(a) General rule. The undistributed Supplement P net income of a foreign personal holding company shall be included in the gross income of the citizens or residents of the United States * * * who are shareholders in such foreign personal holding company (hereinafter called ‘United States shareholders‘) in the manner and to the extent set forth in this Supplement.
“(b) Amount included in gross income. Each United States shareholder, who was a shareholder on the day in the taxable year of the company which was the last day on which a United States group (as defined in section 331(a) (2) existed with respect to the company, shall include in his gross income, as a dividend, for the taxable year in which or with which the taxable year of the company ends, the amount he would have received as a dividend if on such last day there had been distributed by the company, and received by the shareholders, an amount which bears the same ratio to the undistributed Supplement P net income of the company for the taxable year as the portion of such taxable year up to and including such last day bears to the entire taxable year.”
It will be seen that this section requires every “United States shareholder” of a foreign personal holding corporation to include in his gross income certain undistributed net income of the corporation if he was a stockholder on the last day in the tax year when the United States group was in existence. In this case the group consisted of Mrs. Marsman alone and she remained the sole shareholder until the last day of the year, so that she is within the definition of shareholder contained in the statute. As such she is required to include in her gross income the amount she would have received as a dividend up-
We do not think, however, that the statute should be applied literally and without reference to the purpose for which it was admittedly enacted. The provisions of the statute now set out in Sections 331 to 340 of the Internal Revenue Code,
The statute was obviously designed to reach the income of persons who were subject to the tax laws of the United States but were eluding taxation through the foreign holding company device. Accordingly
But Congress did not intend to reach the income of persons, such as alien non-residents, which was not subject to the laws of the United States when it was received by them or by a holding company subject to their control. If that part of the income of Mrs. Marsman, now sought to be taxed, which was earned prior to September 22, 1940, had been received by her instead of by her holding company prior to that date, no one would contend that it was subject to taxation by the United States when she became a resident of this country; and it is not reasonable to suppose that Congress intended that the statute should produce such an unlooked for result. The government‘s answer to this view is that the taxpayer and the holding corporation are separate and distinct entities in the eye of the law, and hence the income of La Trafagona prior to September 22, 1940 was not the taxpayer‘s income, when received, but became such only after she acquired a residence in this country and became subject to the provisions of the statute which converted undistributed income of a holding company into the income of the shareholders as of the last day of the year. We cannot agree with this analysis of the problem, for it not only extends the statute far beyond its announced purpose, but it is inconsistent in itself in that it treats the taxpayer and the corporation as distinct legal persons during the first part of the year but as one and the same person after the taxpayer acquired her residence in the United States. If the government‘s contention is sound, an alien,
A more reasonable approach has been taken by the Tax Court in the analogous situation which occurs when there is a change in the status of a taxpayer during the tax year, as where a taxpayer, who is exempt from income tax at the beginning of the year, loses the exemption in the course of the twelve months. Thus in Economy Savings & Loan Co. v. Com‘r, 6 Cir., 158 F.2d 472 (1946), a building and loan association, which was exempt from taxation because its business was substantially confined to making loans to members, lost its exemption during the year by changing substantially all of its business to lending money to depositors. Although the statute made no specific provision for such a contingency, the court held that the income for the portion of the year prior to the change of business operations was exempt but that the income for the remainder of the year was subject to taxation. See also Royal Highlanders v. C. I. R., 1 T.C. 184 (1942), reversed on other grounds, 8 Cir., 138 F.2d 240 (1943); Reserve Loan Life Ins. Co. of Tex. v. C. I. R., 4 T.C. 732 (1945).
No reason is suggested, other than the insistence upon a literal interpretation of the statute regardless of results, why a similar procedure should not be followed in the pending case. Returns for a fractional part of the tax year are recognized by
This view is in accord with the rule of interpretation enunciated in United States v. Amer. Trucking Ass‘ns, 310 U.S. 534, 543-544, 60 S.Ct. 1059, 1063, 84 L.Ed. 1345 (1940), where the court declined to interpret literally the word “employee” as found in the Motor Carriers Act, because it would place upon the Interstate Commerce Commission, contrary to the settled practice of Congress, the duty of regulating the qualifications of a large number of employees who had nothing to do with safety of operation. The court said, 310 U.S. at pages 543-544, 60 S.Ct. at page 1063:
“There is, of course, no more persuasive evidence of the purpose of a statute than the words by which the legislature undertook to give expression to its wishes. Often these words are sufficient in and of themselves to determine the purpose of the legislation. In such cases we have followed their plain meaning. When that meaning has led to absurd or futile results, however, this Court has looked beyond the words to the purpose of the act. Frequently, however, even when the plain meaning did not produce absurd results but merely an unreasonable one ‘plainly at variance with the policy of the legislation as a whole’ this Court has followed that purpose, rather than the literal words. When aid to construction of the meaning of words, as used in the statute, is available, there certainly can be no ‘rule of law’ which forbids its use, however clear the words may appear on ‘superficial examination.‘”
The last question for decision relates to the right of the taxpayer to a credit against her United States income tax for the year 1941 of the amount of her Philippine income taxes for the years 1938 and 1940, paid by her in 1941. In the last mentioned year, the taxpayer, her husband and daughter, filed joint Philippine income tax returns for the years 1938-41, and paid to the Philippine government 265,812.87 pesos for a deficiency in income tax for the year
The taxpayer bases her claim to the credit upon the literal unambiguous wording of
“Sec. 131(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 or section 450, shall be credited with:
* * * * * *
“(2) Resident of United States.-In the case of a resident of the United States, the amount of any such taxes paid or accrued during the taxable year to any possession of the United States; and * * * *”
“Section 131(b) Limit on Credit.-The amount of the credit taken under this section shall be subject to each of the following limitations:
“(1) The amount of the credit in respect of the tax paid or accrued to any country shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer‘s net income from sources within such country bears to his entire net income, in the case of a taxpayer other than a corporation, * * * *”
The taxpayer contends that the full amount of the Philippine income taxes paid by her in 1941 is available to her as a credit against her United States income tax for that year because the payments fell clearly within the express terms of
The Tax Court denied the credit as to 1938 entirely and allowed the credit as to 1940 only as to such portion of the Philippine income taxes as were allocable to the period between September 22 and December 31, 1940, during which the taxpayer was a resident of the United States. In so doing the Tax Court departed from its insistence upon the literal meaning of the applicable statute which it displayed in interpreting Section 337 of the Internal Revenue Code as shown above, and held that Section 131 should be so construed as to effect the Congressional purpose to allow a credit of taxes paid to other countries so as to lift the burden of double taxation from the shoulders of the taxpayer.
We are in accord with this interpretation. The Supreme Court has held that the primary purpose of the tax credit, which was first authorized by
Other cognate sections of the taxing statutes support this construction of Section 131. It is provided in
The taxpayer relies on the decision of this court in Helvering v. Campbell, 4 Cir., 139 F.2d 865 (1944), where we held that a United States citizen residing in the Philippine Islands was entitled to a credit for the entire Philippine income tax and not merely to a credit for the taxes paid on a portion of the income. But this decision related not to the right to a credit for Philippine taxes paid during the year but to the amount of the credit to be allowed, and we do not regard it as controlling in the present case.
The decision of the Tax Court will be affirmed as to the question of residence and the question of the proper tax credit to be allowed, and will be reversed as to the amount of the undistributed income of La Trafagona to be included in the income of the taxpayer subject to the United States income tax, and the case will be remanded for further proceedings in accordance with this opinion.
Reversed and remanded.
On Petition for Rehearing.
PER CURIAM.
A petition for rehearing has been filed in this case but it presents no question that has not already been fully considered. It is said that our decision is in conflict with our prior decision in Helvering v. Campbell, 139 F.2d 865, 870 (1944). We do not think so. The decision in that case was that deduction of the entire tax paid to the Philippine government for the tax year in question was not to be denied because certain items excluded in computing income under the federal income tax law were not excluded in computing the Philippine tax. The purpose of the exemption, as pointed out in our opinion, was to avoid double taxation; and where income tax has been paid on income for a given year to one of our possessions, it is a fair application of the principle involved to permit deduction of the tax so paid, irrespective of the basis upon which it has been computed, from the federal tax imposed upon income for the same year, since it is the income of the year which is subjected to taxation, not the various items of the income. No such reasoning is applicable, however, with respect to tax payments made within the year only because they were not made when due. If the language used in the Campbell case is broad enough to cover the case at bar, it is too broad and must be deemed limited to the facts of the case there under consideration.
Rehearing denied.