Appeal from the District Court of the United States for the Eastern District of Pennsylvania; William H. Kirkpatrick, Judge.
Before MARIS and JONES, Circuit Judges, and SMITH, District Judge.
This was a suit against the Collector of Internal Revenue for the recovery of income and excess-profits taxes alleged to have been unlawfully collected under the Revenue Act of 1936. The court below entered judgment in favor of the defendant and against the plaintiff. The case is here on an appeal from the said judgment. The sole question presented for determination is whether a tax paid to the Province of Quebec, under the facts hereinafter summarized, was an "income tax" within the meaning of Section 131(a)(1) of the said Act, 26 U.S.C.A. Int. Rev. Acts, page 880 so as to entitle the taxpayer to a credit against income taxes for the taxable year in question, the fiscal year ending March 31, 1937. The question appears to be one of novel impression.
The taxpayer, a corporation of the Commonwealth of Pennsylvania, owned and operated asbestos mines (quarries) in the Province of Quebec, and, as required by the Quebec Mining Act (15 Geo. V, Ch. 37) and the Amendments thereof, the pertinent provisions of which are recited in the footnote,*fn1 paid to the said Province in the said fiscal year a tax in the amount of $10,072.26. The taxpayer, as required by the Revenue Act of 1936, filed its income and excess-profits tax return for the said fiscal year, and therein applied the tax paid the Province of Quebec as a credit against the income taxes due and payable for the said year.The Commissioner of Internal Revenue, upon an examination of the return and a determination of the income and excess profits taxes due and payable, disallowed the tax paid the Province of Quebec as a credit against income and excess profits taxes, allowed it as a deduction from gross income, and accordingly assessed a deficiency, which was paid. The taxpayer duly filed with the Collector of Internal Revenue a claim for refund which the Commissioner of Internal Revenue disallowed. This sut followed.
The pertinent provisions of Section 131(a)(1) of the Internal Revenue Act of 1936, upon which the asserted right to a credit rests, read as follows:
" § 131. Taxes of Foreign Countries and Possessions of United States
"(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 title 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; and"
It is conceded that in the application of the statute the criteria prescribed by our revenue laws are determinative of the meaning of the term "income taxes" as used therein. Biddle v. Commissioner of Internal Revenue, 302 U.S. 573, 58 S. Ct. 379, 82 L. Ed. 431. Cf. Burnet v. Harmel, 287 U.S. 103, 110, 53 S. Ct. 74, 77 L. Ed. 199.
It necessarily follows that a tax paid a foreign country is not an income tax within the meaning of Section 131(a)(1) of the Act unless it conforms in its substantive elements to the criteria established under our revenue laws. These commonly accepted criteria, although not defined in the statute, may be easily ascertained. It is clear from a reading of the Act, as well as the revenue acts which preceded it, and the cases interpretive of its provisions, that an income tax is a direct tax upon income as therein defined. Brushaber v. Union Pacific R. Co., 240 U.S. 1, 36 S. Ct. 236, 60 L. Ed. 493, L.R.A. 1917D, 414, Ann. Cas. 1917B, 713; Eisner v. Macomber, 252 U.S. 189, 40 S. Ct. 189, 64 L. Ed. 521, 9 A.L.R. 1570; and, other cases hereinafter cited. The defined concept of income has been uniformly restricted to a gain realized or a profit derived from capital, labor, or both. Section 22(a) of the Internal Revenue Act of 1936, 26 U.S.C.A. Int. Rev. Acts, page 825; Helvering v. Bruun, 309 U.S. 461, 60 S. Ct. 631, 84 L. Ed. 864; United States v. Safety Car Heating Co., 297 U.S. 88, 56 S. Ct. 353, 80 L. Ed. 500; Douglas v. Willcuts, 296 U.S. 1, 56 S. Ct. 59, 80 L. Ed. 3, 101 A.L.R. 391; United States v. Kirby Lumber Co., 284 U.S. 1, 52 S. Ct. 4, 76 L. Ed. 131; Burnet v. Wells, 289 U.S. 670, 53 S. Ct. 761, 77 L. Ed. 1439; Corliss v. Bowers, 281 U.S. 376, 50 S. Ct. 336, 74 L. Ed. 916; Miles v. Safe Deposit & Trust Co., 259 U.S. 247, 42 S. Ct. 483, 66 L. Ed. 923; Eisner v. Macomber, supra; Lynch v. Hornby, 247 U.S. 339, 38 S. Ct. 543, 62 L. Ed. 1149; Southern Pac. Co. v. Lowe, 247 U.S. 330, 38 S. Ct. 540, 62 L. Ed. 1142; MacLaughlin v. Harr, 3 Cir., 99 F.2d 638. It seems logical to conclude that any tax, if it is to qualify as a tax on income within the meaning of Section 131(a)(1), is subject to the same basic restrictions. 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, etc., are not income 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. 342, 55 L. Ed. 389, Ann. Cas. 1912B, 1312; Spreckels Sugar Refining Co. v. McClain, 192 U.S. 397, 24 S. 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. These criteria are determinative of the nature of the tax in question.
It is the opinion of the Court that the tax imposed by the Quebec Mining Act is not an income tax within the meaning of Section 131(a)(1) of the Revenue Act of 1936. The term "income taxes" as used therein is not sufficiently broad to embrace the tax in question. The Quebec Mining Act is not free from ambiguity; there are clauses which, when considered apart from their context, may occasion conflicting views. However, when the statute is considered in its entirety, as it must be, and the nature of the tax is thus ascertained, it seems apparent that the tax, although designated therein as a tax on "annual profits," is in reality a tax upon the mining privilege measured on the basis of "gross value" of the output determined under a prescribed fromula, less allowable deductions. It is significant that the allowable deductions are restricted to the costs actually incurred in the mining operation and nothing more. The expenses incident to the general conduct of the business, as distinguished from the costs incurred in the mining operation, are not deductible. It is clear that the mining privilege is the subject of the tax and the value of the output the basis of the levy, independent of either realization of gain or derivation of profit. Cf. Hope Natural Gas Co. v. Hall, 274 U.S. 284, 47 S. Ct. 639, 71 L. Ed. 1049; Oliver Iron Mining Co. v. Lord et al., 262 U.S. 172, 43 S. Ct. 526, 67 L. Ed. 929.The substantive elements of the tax under consideration conform, not to the recognized criteria of an income tax, but, to the accepted standards of an excise tax.
Section 131 of the Revenue Act of 1936 has been amended by Section 158 of the Revenue Act of 1942, approved October 21, 1942, 26 U.S.C.A. Int. Rev. Acts. The amendment, although not applicable in the instant case, is not without significance. The pertinent and significant provisions of the amendment*fn2 extend the applicability of the said section so as to include "a tax paid in lieu of a tax upon income." If any doubt existed as to the limited application of the prior act this subsequent enactment would seem to remove it. The subsequent enactment, although not conclusive, is at least presumptive evidence that Congress recognized that the prior act was of limited application. Higgins v. Smith, 308 U.S. 473, 480, 60 S. Ct. 355, 84 L. Ed. 406; First National Bank v. Missouri, 263 U.S. 640, 658, 44 S. Ct. 213, 68 L. Ed. 486; Swigart v. Baker, 229 U.S. 187, 33 S. Ct. 645, 57 L. Ed. 1143; Cotonificio Bustese, S.A. v. Morgenthau, 74 App.D.C. 13, 121 F.2d 884, 888; Mackay et al. v. Commissioner of Internal Revenue, 2 Cir., 94 F.2d 558, 561; Walker v. United States, 8 Cir., 83 F.2d 103, 106; Felin v. Kyle, D.C., 22 F.Supp. 556, 559, affirmed 3 Cir., 102 F.2d 349.
The privilege accorded the taxpayer under Section 131(a)(1) of the Act is an exemption from taxation to the extent of the tax paid the foreign country. It is well established that exemption from taxation is dependent upon legislative grace, and where, as here, the taxpayer seeks to avail himself of such exemption, he must bring himself within the statutory provisions upon which he relies. New colonial Ice Co. v. Helvering, 292 U.S. 435, 54 S. Ct. 788, 78 L. Ed. 1348; Ozark Chemical Co. v. Jones, 10 Cir., 125 F.2d 1; Hirsch et al. v. Commissioner of Internal Revenue, 9 Cir., 124 F.2d 24; Commissioner of Internal Revenue v. Upjohn's Estate et al., 6 Cir., 124 F.2d 73; A. Giurlani & Bro., Inc., v. Commissioner of Internal Revenue, 9 Cir., 119 F.2d 852. The statute invoked must be strictly construed and may not be extended by implication beyond the clear import of its language. United States v. Stewart, 311 U.S. 60, ...