Santa Eulalia Mining Co. v. Comm.

Decision will be entered under Rule 50.

Nathan Moran, Esq., for the petitioner. Arthur L. Murray, Esq., for the respondent.

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The respondent has determined deficiencies in petitioner's income tax for 1937 and 1938 in the respective amounts of 5,196.23 and 5,020.72. Petitioner alleges that it has overpaid its 1937 tax by the amount of 65.88 and that it is liable for only 366.75 of the 1938 deficiency.

The only question for decision is whether certain taxes which petitioner paid during the taxable years to the Mexican Government were

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income taxes, for which a credit against tax is allowable under section 131 of the Revenue Acts of 1936 and 1938, or excise taxes for which a deduction from gross income is allowable under section 23 (c). Some of the facts have been stipulated. FINDINGS OF FACT.

Petitioner is a California corporation organized in 1895. Its principal place of business is San Francisco. It filed income tax returns for 1937 and 1938 with the collector of internal revenue for the first district of California.

During 1937 and 1938 petitioner was the owner of mining properties located in the State of Chihuahua, Republic of Mexico, which constituted its sole source of revenue, except for a small amount which it received as interest on bank deposits in the United States. Those mining properties were operated during 1937 and 1938 by a Mexican corporation, Compania Industrial El Potosi, S. A., hereinafter referred to as El Potosi, under a mining contract entered into with petitioner on August 7, 1936. The contract provided that "as consideration for the right of extraction of the ores in question" El Potosi would pay royalties to the petitioner on the basis of the value of the ores extracted at the rate of 75 cents United States currency per metric ton when the value of the ore was 5 per ton or less, 17 1/2 percent when the value was in excess of 5 per ton but not over 7, and 20 percent when the value exceeded 7 per ton. El Potosi agreed to forward the ores, when mined, to its mill at Chihuahua for refinement and to sell the products according to contracts governing the sale of its own ores.

El Potosi made monthly reports to petitioner, as required by their contract, showing the tonnage and value of crude ores extracted and the amount of net royalties due petitioner. In determining the amount of these net royalties deductions were made for the cost of freight and switching charges, the cost of "treating" the ores, and also for a "production" tax which was paid at the source to the Mexican Government. After those deductions an additional 10 percent of the remainder, amounting to 7,034.90 in 1937 and 6,112.39 in 1938, was withheld for taxes due the Mexican Government. This 10 percent tax is the tax in controversy in this proceeding. It was levied under articles 26 and 27, third schedule, of a statute called "Ley del Impuesto sobre la Renta." The material parts of this statute, as set forth in a translation submitted in evidence by stipulation, are as follows: Chapter I, General Provisions, article 1, reads as follows: Article 1. The following are liable for payment of income tax: I. -- * * *

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II. -- Foreigners domiciled in the Republic or abroad whose income or profits are derived from sources of wealth within national territory or business transactions effected therein. Chapter IV, third schedule, articles 26 and 27, reads in part: Article 26. The following are included under this Schedule:

I. -- Taxpayers who, normally or occasionally, receive participations, either in the form of rentals or otherwise, from the exploitation of the subsoil or concessions granted by the Federal or State Governments or Municipalities.

An exception is made in the case of taxpayers whose income consists of a participation in the profits of the exploiting concern.

II. -- Taxpayers who contribute, alienate or otherwise transfer complete or partial ownership of a concession granted by the Federation, a State or a Municipality, or the rights derived therefrom.

III. -- Taxpayers who perform these same operations with rights to exploitation of the subsoil.

Article 27. -- Income included under Section I of the preceding article shall be computed in its entirety; * * * * * * *

The tax payable on the total yearly income of the taxpayer shall be calculated in the manner laid down in the regulations; but in all cases -- and likewise in accordance with the regulations -- the proportional 10 per cent rate established in this tariff on the taxable income must be paid in advance, at the time of its receipt.

There are five general divisions or schedules of this statute. The first levies a tax on commerce, industry, and agriculture; the second on finance, investment, moving pictures, and rentals; the third on exploitation of natural resources, minerals, petroleum, and public utilities; the fourth on salaries, wages, commissions, and pensions; and the fifth on professional men, artists, writers, bullfighters, pugilists, and football players. There is a normal tax rate of 2 percent on the first division, 6 percent on the second, 10 percent on the third, and 1.3 percent on the fourth and fifth. There is also a surtax imposed on each division at accelerated rates of from one-tenth of 1 percent to 10.3 percent.

Petitioner made tax returns to the Mexican Government for 1937 and 1938 in which it reported the royalties received from El Potosi and showed the amount of the tax withheld by El Potosi and paid for its account. It is stipulated that these amounts, 7,034.90 in 1937 and 6,112.39 in 1938, were paid to the Mexican Government by the petitioner as taxes. Petitioner claimed a credit for these taxes in its United States tax returns.

Under its system of taxation the Mexican Government in 1937 and 1938 imposed the following taxes upon the mining industry:

(1) A production tax on the value of the metallic content of the ore, which was withheld by the smelter or refiner upon completion of the treatment of the ore.

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(2) A land tax based on the surface area of the mining claims held, which was paid by the holder.

(3) An absenteeism tax on the export of funds other than those destined for the purchase of commodities for import into Mexico.

(4) An export tax levied on all minerals produced based upon arbitrary values placed on the minerals from time to time by the Mexican Government.

(5) The tax levied under the statute "Ley del Impuesto sobre la Renta."

The taxes which petitioner paid to the Mexican Government under the statute "Ley del Impuesto sobre la Renta" were income taxes within the meaning of section 131 of the Revenue Acts of 1936 and 1938. OPINION

Petitioner contends that the taxes which it paid to the Mexican Government under the statute "Ley del Impuesto sobre la Renta" were income taxes for which it is entitled to a credit under section 131 of the Revenue Acts of 1936 and 1938. It so signified in its return. Section 131, which is the same in both the 1936 and 1938 acts, reads in material part as follows:

SEC. 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; * * *

The respondent's contention is that the amounts in question were not paid as income taxes within the meaning of section 131 above but as excise taxes for which a deduction from gross income is allowable under section 23 (c).

The respondent relies strongly upon Keasbey & Mattison Co. v. Rothensies (C. C. A., 3d Cir.), 133 Fed. (2d) 894. That case involved a tax paid to the Province of Quebec, Dominion of Canada, under the Quebec Mining Act. The court held that the tax was not an income tax but an excise tax imposed upon the privilege of mining, although measured by the gross value of the output. The court found upon considering the statute under which the tax was levied in its entirety, and applying the criteria of our own laws (see Biddle v. Commissioner, 302 U.S. 573), that:

* * * 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.

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Necessarily our question here must be determined upon a consideration of the particular statute under which the Mexican tax was levied. It is apparent from the context of that statute, a translation of which is set out above, that the tax was intended as an income tax, according to the concepts of its creators. For instance, it is provided in article 1 that: The following are liable for payment of income tax: * * * *

II. -- Foreigners domiciled in the Republic or abroad whose income or profits are derived from sources of wealth within national territory * * *

Article 26 brings within the range of the tax taxpayers who receive "participations, either in the form of rentals or otherwise, from the exploitation of the subsoil." Article 27 provides that "Income included under Section I of the preceding article shall be computed in its entirety" and refers to "The tax payable on the total yearly income of the taxpayer." (Emphasis supplied.)

Thus, we have a tax which is repeatedly referred to in the levying statute as an income tax and which is computed on the basis of the petitioner's gross revenue from its mining properties. Although the method of determining the tax does not conform strictly to that by which income taxes are computed under our own laws, we do not think that that determines the nature of the tax.

The respondent argues that since the income upon which the tax was computed was the gross amount due the petitioner under its contract with El Potosi rather than the net income from that source as it would be computed under our own laws, the tax was imposed on the "privilege of receiving rentals or royalties" rather than on income.

A similar contention of the respondent's was rejected in Seatrain Lines, Inc., 46 B. T. A. 1076, where we held, on facts no more favorable to the taxpayer than those in the instant case, that a tax imposed by the Republic of Cuba on gross income obtained for freight and passengers shipped in national ports of Cuba was an income tax rather than an excise tax as the Commissioner contended. We pointed out in that case, citing Deputy v. duPont, 308 U.S. 488, and New Colonial Ice Co. v. Helvering, 292 U.S. 435, that the allowance of deductions from gross income in computing an income tax is a matter of legislative grace and that it is within the province of Congress to impose an income tax upon gross income under the Sixteenth Amendment to the Constitution. See also Havana Electric Railway, Light & Power Co., 34 B. T. A. 782, and Herbert Ide Keen, 15 B. T. A. 1243.

Actually, however, some of the expenses of producing the income due the petitioner, upon which the 10 percent tax under consideration was paid, including a production tax paid to the Mexican Government, were deducted by El Potosi.

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We are of the opinion that the taxes which the petitioner paid to the Mexican Government under the statute "Ley del Impuesto sobre la Renta" were income taxes and that petitioner is entitled to a credit under section 131 in 1937 and 1938.

Decision will be entered under Rule 50. FPEN