Porto Rico Telephone Co. v. Descartes
Porto Rico Telephone Co. v. Descartes
Opinion of the Court
delivered the opinion of the Court.
Porto Rico Telephone Company, hereinafter referred to as Rico Telco, is a corporation organized under the laws of Delaware. It has an office in San Juan and is authorized to do business in Puerto Rico where it is engaged in the operation of a telephone service as a public utility. International Telephone and Telegraph Corporation, hereinafter referred to as ITT, is a corporation organized under the laws of Mary
In 1940 Rico Telco declared and paid to its stockholders two dividends of $54,000 each. Rico Telco paid $53,829 of each of these dividends to ITT and $171 to various individual stockholders. During 1940-44 Rico Telco made certain payments of interest to ITT and to International Standard Electric Corporation, a wholly-owned subsidiary of ITT and hereinafter referred to as ISEC. The latter is a corporation organized under the laws of Delaware. It has no office or place of business in Puerto Rico.
In 1948 the then Treasurer notified Rico Telco of income tax deficiencies because the latter as withholding agent had not retained and paid a tax on the foregoing dividends and interest payments as income of the recipients from sources within Puerto Rico. Rico Telco has appealed from the judgment of the Superior Court affirming these deficiencies.
Two questions are presented by the problem of the dividends paid by Rico Telco in 1940. The first is whether any “substantive” provisions of our Income Tax Act imposed a tax on ITT for the dividends it received in 1940 from Rico Telco. If this question is answered in the affirmative, the second question arises: whether any “administrative” provisions of our Act required Rico Telco to withhold at the source from the dividends it paid to ITT in 1940 the tax thereon owed by ITT.
First — Liability of ITT for tax herein.
Dividends are specifically listed as coming within the definition of “gross income” found in § 15 (a) of the Act. Dividends to a nonresident from a foreign corporation are
Rico Telco concedes (1) that it is a foreign corporation under the definitions set forth in § 2(a) (4) and (5) of the Act, and (2) that it derived more than 50% of its income from sources within Puerto Rico during the three-year statutory period, as required by § 19(a) (2) (B). Under these circumstances — in view of the provision in § 31 (b) that the
The first argument of the appellant contrary to this conclusion, as we understand it, is in substance as follows: The phrase in § 31(a) which we have italicized in transcribing § 31(a) in footnote 2 — “subject to the tax imposed by section 28” — must also be read into § 31(b). Unless § 31(b) is so read, the Legislature would be attempting to tax corporations all over the world which have no relation to Puerto Rico. Furthermore, if § 31 (b) does not include this phrase, foreign corporations would be subject to no tax whatsoever as they are not taxed under any section other than § 28. Consequently — reading § 31 (b) as including the phrase “subject to the tax imposed by section 28” — we must then determine what foreign corporations are subject to the tax imposed by § 28. As of 1940 the only foreign corporations which the Legislature intended to tax were those foreign corporations, such as Rico Telco, having an office and doing business in Puerto Rico.
We cannot agree with this argument. Admittedly, § 28 is couched in language which seems to indicate that a tax as such is thereby imposed. But the primary purpose of § 28 is to fix the rate of the corporate and partnership tax. This is clear not only from the plain language of § 28 but also from its legislative history: the only substantial changes made by the Legislature in § 28 through the years have been
Bearing in mind that § 28 primarily fixes the rate of taxation and that other sections of the Act — such as § § 15(a), 19(a)(2)(B), and 81(b) — determine which foreign corporations must pay the tax and what portion of their income is taxed, we see no point in the argument of Rico Telco that § 81 (b) must be read as though it contained the phrase “. . . subject to the tax imposed by section 28 . . . .” Construing § 28 as establishing the rate of corporate taxation, we readily agree that it must be read together with both § § 31(a) and 31(b). In that sense, both § 31(a) and § 31(b) are “subject” to § 28; that is to say, the rate of taxation fixed in § 28 applies whenever gross income, as defined in § § 31(a) and 31(b), is taxed. And this is true despite the fact that the phrase “... subject to the tax imposed by section 28 . . is found in § 31(a) and is missing from § 31 (b). In fact, this is so clear that if the said phrase had been omitted from § 31 (a) as well as from § 31 (b), we would have nevertheless read it into both § 31(a) and § 31 (b) — or stated another way, together with — § 28 in the sense we have construed § 28.
It should be added that even if we read § 31 (b) as including the phrase “. . . subject to the tax imposed by section 28 . . .”, we could not conclude therefrom that as of 1940 the
We find the other grounds which the appellant advances in support of its contention that in 1940 our Act did not impose a tax on the dividends it received from Rico Telco in 1940 equally untenable. However, we believe it more appropriate to discuss them in connection with the administrative provisions relating to withholding.
Our conclusion is that ITT was required to pay taxes on the income it received attributable to Puerto Rico, including the dividends it received in 1940 from Rico Telco, less any credits or deductions provided in the Act. See footnote 4.
We note as a preliminary matter that this is a different question from the liability of ITT as a matter of : substantive law for the tax involved herein. The withholding .provisions of the Act do not impose taxes. Their sole purpose is administrative in that they provide for collection at the '.source through the withholding agent of taxes imposed on the ultimate recipient of the net income by other sections of the Act. And such withholding provisions are not given a retroactive effect in view of the fact that a withholding agent cannot be required to withhold from income which he has already distributed to the ultimate recipient. Central Aguirre v. Tax Court, 64 P.R.R. 257, 263-64.
Rico Telco contends that there was no administrative provision in the Act during 1940 which required Rico Telco to withhold at the source and to pay on behalf of ITT a withholding tax on the dividends Rico Telco distributed to ITT in 1940. We cannot agree. On the contrary, under Section 22 (a), as amended by § 4 of Act No. 2, Laws of Puerto Rico, 1939, Special Session, one who paid a dividend during 1940 to a nonresident individual not a citizen of Puerto Rico was required to withhold therefrom “. . . the normal and additional . . tax fixed by the Act.
Prior to 1939 there was no specific mention of dividends in § 22(a). See § 6 of Act No. 102, Laws of Puerto Rico,
We reject this as a tortuous and unwarranted construction of § 22 (a) as it read after being amended by § 4 of Act No. 2 of 1939. When the Legislature inserted the word “dividends” in § 22 (a) by § 4 of Act No. 2, it clearly intended to make dividends subject to the withholding provisions of § 22 (a). We find no basis for the appellant’s contention that in the context of § 22(a) “dividends” means something different than “income”. Section 22(a) begins by listing the items to which its withholding provisions apply. This list ends with the catch-all phrase “. . . and other fixed or determinable annual or periodical profits or income . . .”. (Italics ours.) The use of the word “other” in the catch-all phrase shows that the Legislature considered the specifically listed items — including dividends — as “income” within the meaning of § 22(a). In addition, § 22(a) concludes by providing for withholding “... from such annual or periodical gains, profits or income . . .”. (Italics ours.) Clearly, the word “such” covers both the specific list of items, which includes dividends, as well as “. . . other fixed . . . income”. It follows that under § 22 (a), as amended by § 4 of Act No. 2 of 1939, Rico Telco was required to withhold the tax from the dividends it paid to ITT during 1940.
The appellant argues that the Legislature used the Federal Act as a model and that under the latter prior to
The appellant also argues that § 22(a), as amended by $ 4 of Act No. 2 of 1939, does not apply here as “the dividends paid by Porto Rico Telephone Company are not ‘dividends ... of any non-resident’, but dividends of a resident foreign corporation.” But in referring to “dividends ... of any nonresident ...” § 22(a) is obviously referring to the dividends of the recipient, not of the distributor. Here the recipient is ITT. And as already noted, § 35, as amended by § 6 of Act No. 2 of 1939, provides for withholding in the same manner as provided in § 22 for income from sources within Puerto Rico which is paid to a foreign corporation like ITT which has no office and does not engage in business in Puerto Rico.
We turn at this point to the three arguments appellant makes which involve both the substantive provisions and the administrative withholding provisions of the Act. See footnote 7. The first of these arguments is that, according to Rico Telco, § 32(a) (6) (B) of the Act and Article 276 of the Regulations support its view that only foreign corporations having an office or doing business in Puerto Rico were subject to our income tax in 1940. Section 32(a) (6) (B), under the heading “Deductions Allowed Corporations and Partnerships”, provided that, in computing their net income,.
The appellant argues that if ITT had in fact been subject to taxation under § 28, it could have deducted the full amount of the dividends it received from Rico Telco; that its net income from Puerto Rican sources would have then been “nil”; that such an “absurd” result could not have been intended by the Legislature; and that the latter therefore could not have intended to require foreign corporations like ITT — which do not have offices or do business in Puerto Rico — to pay taxes on dividends received from sources within Puerto Rico.
We disagree. By virtue of § § 19(f), 37(a), 39(a) of the Act and Article 199 of the Regulations, ITT — a foreign corporation with income from sources within Puerto Rico— was required to make a return (37a) .. stating specifically the items of its gross income and the deductions and credits allowed by this title.” (Italics ours.)
The second of these two arguments — which is closely related to the first argument — is that ITT was not subject to taxation under § 28 in 1940 because it could allegedly deduct the full amount of the dividends it received from Rico Telco in 1940 under § 32 (a) (6) (B) as it read at the time, making its net income from Puerto Rican sources “nil”. But the fact that one source of income to a foreign corporation may have been deductible under § 32 as it read in 1940 did not thereby exempt it from liability under other applicable sections at the rate provided in § 28. Indeed, the appellant could not have placed much credence in this contention: in 1940 Rico Telco withheld and paid to the Treasurer taxes owed by ITT on the management fees of $47,937.72 paid in that year by Rico Telco to ITT.
According to the appellant, ITT . . became, for the first time, a taxpayer with respect to dividends received from Puerto Rico, and Porto Rico Telephone Company became a withholding agent for that purpose . . .”, by virtue of the amendment of § 22 (a) by § 12 of Act No. 81 of 1941 whereby for the first time the word “dividends” was inserted in the latter portion of § 22(a) between “gains” and “profits” in the phrase “such annual or periodical gains, dividends, profits or income ..See footnote 9. Again we disagree. In the first place, § 22(a) plays no role on the question of the substantive liability of ITT for the tax herein; as we have seen, that substantive liability existed in 1989 under other sections of the Act. Secondly, even as to the administrative withholding provision, for reasons already stated, § 22 (a), as amended by § 4 of Act No. 2 of 1939, already provided for withholding in the ease of dividends; the insertion therein of the word “dividends” in the place indicated, although it removed any possible doubt on this question, was unnecessary. Cf. Ballester v. Court of Tax Appeals, supra, 476.
The appellant relies on Central Aguirre v. Tax Court,
In the Aguirre case we held that the Legislature did not intend for the amendment of § 22(a) by § 12 of Act No. 31 of 1941 to apply retroactively to 1940 income. But that question was in fact not involved in the Aguirre case. We discussed it because we were under the erroneous impression that during 1940 the applicable statute was § 22(a), as amended by § 6 of Act No. 102, Laws of Puerto Rico, 1936. But, for the reasons already stated, § 22(a), as amended by of Act No. 2 of 1939, required withholding from dividends paid in 1940. Consequently, no problem as to retroactive application of the withholding provision was really involved in the Aguirre case since the 1939 withholding provision, specifically covering dividends, was in effect throughout 1940. We adhere to the general proposition that the Legislature did not intend for the 1939 and 1941 withholding provisions to apply retroactively to income already paid by the withholding agent to the recipient. See footnote 8. But insofar as it holds that § 22 (a) as it read in 1940 did not require withholding as to dividends, the Aguirre case is expressly overruled.
The result we have reached makes it unnecessary to decide what effect § 1 of Act No. 54, Laws of Puerto Rico, 1945, has on this case.
*865 “If a withholding agent . . . may have failed or may fail to comply, in any year on and after January 1, 1940 . . . with any of the provisions of Section 22 or of Section 35 of the Income Tax Act (Act No. 74 of 1925), as subsequently amended, by failing to withhold at its source the taxable tax [sic] on income remitted by him or by it to nonresidents who are not citizens of Puerto Rico, or to corporations or partnerships not operating a business in Puerto Rico or not having any office in the Island, thus failing to pay the corresponding tax, he or it shall be obligated by this Act to comply with the provisions of Section 22 or of Section 35, as the case may be, withholding from the first*866 payment of income that he or it may have to make, after the date of effectiveness of this Act, or from subsequent payments, should the first one not suffice, the amount of the unpaid tax, whenever said first payment or subsequent payments have to be made to the same individual or to the same corporation or partnership with respect to whom or to which the original retention of the tax was not made, as provided in Section 22 or in Section 35 of the said Income Tax Act.”
We also note that if Act No. 54 were interpreted to cover the instant case, it would not mean that a retroactive tax on 1940 income was being imposed in 1945 — five years after the taxable event. Rather it would simply mean that a valid tax having been imposed in 1941 on 1940 income, the withholding agent was being required in 1945 to retain and pay to the Treasurer from future payments of income to the recipient the tax which as a substantive matter the latter owed but failed to pay in X94X.
For the reasons stated, the Superior Court did not err in
p*H 5 — i
During 1940-44 Rico Telco made certain payments of interest to ITT and ISEC.
The appellant argues that Puerto Rico has “no jurisdiction to tax”
(a) — The facts.
The indebtedness upon which interest payments were made by Eico Telco to ITT originated in three ways.
A third method occasionally used was for ITT to make cash advances in New York for the account of Rico Telco for such purposes as paying salaries for services being rendered in New York for Rico Telco, travelling expenses to Puerto Rico, and for other business expenses of Rico Telco.
The record or evidence of the above loans — both for principal and interest — took the form of “debit and credit advices” sent by ITT from New York to Rico Telco in Puerto Rico. Payments were made to ITT for these loans and interest by checks drawn by Rico Telco on its account in a New York bank. The funds in that account came from three sources: (1) principally, from deposits by ITT when Rico Telco requested it; (2) funds transferred by Rico Telco from Puerto Rico to New York; (3) loans to Rico Telco by various New York banks.
The interest paid to ISEC arose from the following: Rico Telco made all of its purchases of materials and equipment —other than purchases in Puerto Rico — through ISEC as its purchasing agent. Rico Telco would make payments to ISEC from time to time depending on its financial situation. The indebtedness of Rico Telco to ISEC was carried in an open account on which interest was paid at 6%. The interest charges — as well as the charges for purchases — were recorded in the form of monthly “debit and credit advices” sent by ISEC from New York to Rico Telco in Puerto Rico. Upon receipt of these debit and credit advices, Rico Telco entered
(b) — The case-law.
The appellant relies, among other cases, on Domenech v. United Porto Rican Sugar Co., 62 P. 2d 552 (C. A. 1, 1932), cert. denied, 289 U.S. 739.
The Court of Appeals held that the Maryland banks and corporations could not be required to pay the Puerto Rican income tax on interest collected from the debtors, the Puerto Rican corporations. The Court said at p. 555: . . The question then is whether the Legislature of Puerto Rico had jurisdiction and authority to levy an income tax upon nonresident creditor corporations which had no place of business in Puerto Rico and did no business there through agents or otherwise. The answer to the question is so self-evident that the mere statement of the proposition is its own answer. The Legislature of Puerto Rico is without authority or jurisdiction to impose a tax upon nonresident corporations measured by income earned or to be earned upon transactions entered into
We cannot agree that the holding and language of thejf Court of Appeals in the United Porto Rican Sugar Co. case { ¡automatically answers the problem presented herein. Wej • ''must decide this case in the light of its peculiar facts. Moreover, we must apply thereto as best we can cases decided by the Supreme Court of the United States after the decision of the United Porto Rican Sugar Co. case.
The test in cases of this nature was perhaps stated best in Wisconsin v. J. C. Penny Co., supra, 444-45: “... ‘Taxable event/ ‘Jurisdiction to tax/ ‘business situs/ ‘extraterritoriality/ are all compendious ways of implying the impotence of state power because state power has nothing on which to operate. These tags are not instruments of adjudication but statements of result in applying the sole constitutional test for a case like the present one. That test_is whether property
The Supreme Court has restated this formula in different ways in such cases as Curry v. McCanless, 307 U. S. 357; State Tax Comm’n v. Aldrich, supra; Harvester Co. v. Dept. of Taxation, supra, 441-44; Braniff Airways v. Nebraska Board, 347 U. S. 590, 600-01;
(c) — Application of the Supreme Court cases to the facts herein.
When the Court of Appeals decided the United Porto Rican Sugar Co. case in 1932, it did not have the benefit of the later Supreme Court cases emphasizing in the context of the facts of those cases the rule that the states may levy a tax if it is related to “. . . protection, opportunities and benefits given 'by the state.” 311 U. S. at 444. We recognize, however,^ 'that even under the latter rule the Court of Appeals mighty ; conceivably have held under the facts in the United Porto Rican Sugar Co. case that “the minimal connections” between’
1 This is not a case where a Puerto Rican corporation onf lits own initiative obtained a loan in New York at arm’s length! 'from a wholly unrelated corporation which has no ties with* Puerto Rico. First, ITT, the ultimate taxpayer here, owns 99,84% of the stock of Rico Telco, the debtor. Second, as shown by Exhibit A and other evidence in the record, ITT has a management contract with Rico Telco under which its fees are apparently a specific percentage of the receipts of Rico Telco. Third, and perhaps most important, the annual budget of Rico Telco — including the borrowing of money on which the largest portion of the interest herein was to be paid — could not become effective until ITT approved it. The net effect of this budget arrangement was that ITT, the creditor — and not Rico Telco, the debtor — made the decision whether the debtor should make any effort to obtain a loan, the proceeds of which were to be used almost entirely in
The foregoing represent in our judgment a sufficient array 'of contacts and ties between the transactions resulting in the payment of interest to ITT and Puerto Rico to justify the exaction by the Commonwealth of an income tax on such interest so far as due process is concerned. There are various details in the record which illustrate how the concatenation
The Vice President and Comptroller of ITT replied on October 27, 1944 as follows: “We have given considerable thought to the matter of borrowing funds in Puerto Rico, as outlined in your letter of October 20th. This is only temporary financing and from an I.T.T. System point of view it is very minor. Such financing would only temporarily reduce the amount of advances from ITT and from a System viewpoint would increase the overall interest charges as we have excess funds in New York bearing little or no interest. Therefore, we see no good reason for borrowing these short-term funds locally. Instead, we should be looking forward to additional long-term financing if and when, after the conversion of the automatic exchange at San Juan and Santurce, the earnings will support such loans.”
We thus see from these letters, introduced in evidence by the appellant itself, that Rico Telco wished to borrow money locally in order (1) to pay a lower rate of interest and (2)
We think it is also worth noting that since 1940 Rico Telco has voluntarily withheld the income tax payable by ITT on ; the management fees Rico Telco pays to ITT. See Exhibit A. j There is nothing in the record disclosing the nature of the' services rendered by ITT to Rico Telco for these management fees nor the place or places where they are performed. However, it is difficult to visualize how such services could be performed without any contacts whatsoever — either by services rendered by ITT personnel or otherwise — by ITT with Puerto Rico. Certainly — in view of the fact that Rico Telcc withheld and paid on behalf of ITT our income tax on the management fees for such services — both Rico Telco and ITT
Finally, in appraising the nature of the contacts of ITT \ with Puerto Rico, it is pertinent to point out that the ap- j pellant concedes that since 1941 Rico Telco has validly with-! held and paid to the Secretary of the Treasury the income tax imposed on the dividends paid to ITT by Rico Telco. I Indeed, the individual nonresident stockholders involved in the Postley case did not challenge on due process grounds the power of Puerto Rico to impose a tax on dividends paid
We think the same reasoning may be applied to the other loans which ITT made to Rico Telco (1) in addition to the budgetary requirements, for various business purposes and (2) as cash advances in New York for salaries and other ^ business expenses for the account of Rico Telco. All the loans were a part of the pattern which ITT used to control and aid Rico Telco in the management and conduct of the latter’s business as a public utility operating exclusively in
We see no reason for treating the interest payments to ISEC differently. As in the case of ITT, we do not reach the question which would be presented if ISEC were an independent purchasing agent dealing at arm’s length with Rico Telco and charging it 6% on an open account. Here ITT, owning 99.84% of the stock of Rico Telco, also owned all the stock of ISEC. As we have seen, the budget which ITT finally approved produced the purchases by ISEC which in turn resulted in the interest herein. Also, once more the evidence of the indebtedness — the debit and credit advices —were sent from New York and were located in Puerto Rico. For substantially the same reasons already set forth as to interest paid to ITT, we find no valid due process objection to the income taxes imposed on the interest paid by Rico Telco to ISEC.
V" In view of the result we have reached, we need not de- ( I termine whether the power of Puerto Rico to impose income ( taxes is tested by the constitutional limitations which apply \ to a State of the Union, or whether its power in this field, '
HH b — I
Section 58(a) of the Income Tax Act provides for a 5% penalty “if any part of any deficiency is due to negligence, or intentional disregard of rules and regulations but without intent to defraud . . The trial court, without giving any reasons therefor, upheld the imposition of 5% penalties, amounting to $2,272.54, because the appellant
We agree that these penalties should not have been imposed in this case. As for the penalty for failure to withhold the tax on the 1940 dividends, this Court as already noted held in Central Aguirre v. Tax Court, supra, that an entity in the same situation as the appellant was not required to withhold the said tax. It is true that the Central Aguirre case had not yet been decided when the appellant was faced with this problem, and that in Part I we have overruled that portion of the Central Aguirre case. But in 1940-41 this was a new and complicated problem; indeed, this is demonstrated by the fact that this Court erred in the Central Aguirre case in attempting to solve it. In substantially the same way, Rico Telco felt justified by the United Porto Rican Sugar Co. case in not withholding the tax on the interest, and a number of the Supreme Court cases on which we have relied in Part II were decided after Rico Telco made the returns in question. For these reasons, we cannot agree that the deficiency in this case was “, . . due to negligence, or intentional disregard of rules and regulations . . 10 Mertens, supra § 55.25, pp. 50-55; Hoffman, Intentional Disregard of Rules and Regulations, 28 Taxes 111; Lilly v. Com’r of Int. Rev., 14 T.C. 1066, 1086-87; Heffelfinger v. Com’r of Int. Rev., 32 B.T.A. 1232; see Spies v. United States, 317 U.S. 492, 496-97.
The judgment of the Superior Court will be modified to eliminate the 5% penalties. As thus modified, the judgment will be affirmed.
To enable it to appeal to this Court, Rico Telco paid the Treasurer the sum of $74,207.83, the total amount in controversy here. Of this amount, $26,997.43 was paid in connection with the 1940 dividends. The breakdown of this sum of $26,997.43 is as follows:
Dividends Paid by Rico Telco Deficiencies 5% in 1940 Penalty to 6% Interest 12/26/52 Total at
To ITT: $107, 658 $15, 475. 84 $773. 79 $10, 706. 69 $26, 956. 32
To others: 342 23. 60 1.18 16. 33 41.11
$108, 000 $15, 499. 44 $774. 97 $10, 723. 02 $26, 997. 43
The remaining portion of the sum of $74,207.83 — $29,963.70 in connection with interest paid to ITT and $17,246.70 resulting from interest paid to ISEC — is broken down as follows:
Interest Paid 6% by Rico Telco Deficiencies 5% Interest Total at to ITT Penalty to 12/26/52 issue
1940. $17,801.60 $2,558.98 $127.95 $1,770.38 $4,457.31
1941. 12,460.03 2,096.02 104.80 1,324.33 3,525.15
1942. 15,830.67 3,155.01 157.75 1,804.14 5,116.90
1943. 16,278.52 3,506.02 175.30 1,794.50 5,475.82
1944. 34,468.54 7,583.08 379.15 3,426.29 11,388.52
$96, 839. 36 $18, 899.11 $944. 95 $10,119. 64 $29, 963. 70
1940. $4, 326. 71 $621. 96 $31.10 $430. 29 $1, 083. 35
1942. 7,394.17 1, 478. 83 73. 94 845. 64 2, 398.41
1943. 24,642.03 5, 350. 85 267. 54 2, 738. 74 8, 357.13
1944. 16,367.34 3, 600. 81 180. 04 1, 626. 96 5, 407. 81
$52, 730. 25 $11, 052. 45 $552. 62 $5, 641. 63 $17, 246. 70
We thus see that on the following items Rico Telco was reqhired to pay the Treasurer the following total sums for deficiencies, penalties, and interest:
ITEM TOTAL
Dividends paid by Rico Telco to ITT and others. $26, 997. 43
Interest paid by Rico Telco to ITT. $29, 963. 70
Interest paid by Rico Telco to ISEC. $17,246.70
$74, 207. 83
Taking the total amounts of the deficiencies, penalties, and interest for the above three items in the respective years, they read as follows:
Deficiencies 5% Penalty Interest Total
1040. $18,680.38 $934.02 $12,923.69 $32,538.09
1941. 2,096.02 104,80 1,324.33 3,525.15
1942. 4,633.84 231.69 2,649.78 7,515.31
1943. 8,856.87 442.84 4,533.24 13,832.95
1944. 11,183.89 559.19 5,053.25 16,796.33
$45, 451. 00 $2, 272. 54 $26, 484. 29 $74, 207. 83
Section 19(a) (2) (B), as amended by § 3 of Act No. 18 of June 3, 1927, reads in part as follows:
“Section 19.— (a) In the case of a nonresident individual not a citizen of Puerto Rico the following items of gross income shall be treated as income from sources within Puerto Rico:
• “(2) The amounts received as partnership profits or dividends . . . (B) from a foreign corporation, except when less than fifty (50) per centum of the gross income of such foreign corporation for the three-year period ending with the close of its taxable year preceding the declaration of such dividends . . . was derived from sources within Puerto Rico, as determined under the provisions of this section.”
Section 31 — 13 L.P.R.A. § 735 — defines the gross income of corporations as follows:
“ (a) In the case of a corporation . . . subject to the tax imposed by section 28 the term ‘gross income’ means the gross income as defined in sections 15 and 19 . . •
“(b) In the case of a foreign corporation, gross income means only gross income from sources within Puerto Rico, determined ... in the manner provided in section 19.” (Italics ours.)
Section 28, as amended by § 5 of Act No. 2 of 1939, provides as follows:
“There shall be levied, collected, and paid for each taxable year on the net income of every corporation or partnership a tax of 14.375 per cent on the net income in excess of the credits provided for in Section 34.”
We discuss hereinafter (1) the duty of ITT to make a return in which it might claim deductions for such dividends under § 32(a) (6) (B); (2) the retroactive elimination as of January 1, 1940 of such deductions as a matter of substantive law by Act No. 31 of 1941; and (3) the retroactive increase in 1941, effective January 1, 1940, of the rate of taxation of foreign corporations from 14.375% to 19% by the amendment of § 28 contained in Act No. 31 of 1941.
Section 28 of Act No. 74, Laws of Puerto Rico, 1925; Section 5 of Act No. 2, Laws of Puerto Rico, 1939, Special Session; Section 14 of Act No. 31, Laws of Puerto Rico, 1941; Section 4 of Act No. 23, Laws of Puerto Rico, 1941, Special Session; Section 8 of Act No. 20, Laws of Puerto Rico, 1942, Second and Third Special Sessions; Section 1 of Act No. 88, Laws of Puerto Rico, 1945; Section 1 of Act No. 317, Laws of Puerto Rico, 1949, retroactive to July 1, 1945; 13 L.P.R.A. 5 731.
Section 35 is primarily an administrative withholding provision, which we discuss in the Second section of this Part of the opinion. However, it is worth noting at this point that, in providing for the withholding of a tax of 14.375 percent on income from sources within Puerto Rico of foreign corporations which have no office and do no business here, § 35 supports our conclusion that the income of foreign corporations from sources within Puerto Rico — as defined in § § 15(a), 19(a)(2)(B), and 31(b) — was subject to a tax thereon in 1940, despite the fact that such foreign corporations, as in the case of ITT, did no business in Puerto Rico and had no office here.
These other grounds are (1) that § 32(a)(6)(B) — providing for a deduction in favor of corporations for the dividends as there defined which the corporation receives — shows that only foreign corporations having an office or doing business in Puerto Rico were subject to our income tax in 1940; (2) that ITT was not subject to taxation under § 28 in 1940 because under § 32(a) (6) (B) it could allegedly deduct the full amount of the dividends it received from Rico Telco in 1940, making its net income from Puerto Rican sources “nil”; and (3) that the Legislature did not intend to impose a tax on the dividends in question because it did not require in § 22(a), as amended by Act No. 2 of 1939, withholding at the source of a tax on dividends paid to a foreign corporation not doing business in Puerto Rico.
In a subsequent portion of this opinion we expressly overrule some phases of our holding in the Aguirre case. See footnotes 16 and 12. However, we adhere to that part of the opinion at pp. 263-4 in which we decide that the withholding provisions of our Act do not have a retroactive effect. On the other hand, as hereafter noted, we leave open the question of the effect of í 1 of Act No. 54 of 1945 on Rico Telco as a withholding agent, see footnote 21.
Section 22(a), as amended by § 4 of Act No. 2 of 1939, read as follows:
“All persons, in whatever capacity acting, including lessees or mortgagors of real or personal property, fiduciaries, employers, and all officers and employees of The People of Puerto Rico having the control, receipt, custody, disposal, or payment of interest, rent, salaries, wages, commissions, premiums, annuities, compensations, remunera*855 tions, emoluments, or other gains, dividends, participation in partnership profits, and other fixed or determinable annual or periodical profits or income, of any nonresident individual not a citizen of Puerto. Rico, shall (except as otherwise provided in regulations prescribed by the Treasurer under Section 19) deduct and withhold from such annual or periodical gains, profits or income, the normal and additional tax fixed by this Act; . . (Italics ours.)
Section 14 of Act No. 31, Laws of Puerto Rico, 1941, amended § 28, retroactive to January 1, 1940, by increasing the tax on foreign corporations from 14.375% to 19%. As a matter of substantive law, this retroactive increase of the tax due from ITT on the income ITT received as dividends from Rico Telco in 1940 and 1941 was valid. Ballester v. Court of Tax Appeals, 61 P.R.R. 460, 484-88, affirmed in Ballester-Ripoll v. Court of Tax Appeals, 142 F. 2d 11 (C. A. 1, 1944), cert. denied 323 U. S. 723; Central Aguirre v. Tax Court, supra, p. 262.
However, whether the retroactive increase for which ITT was liable as a matter of substantive law can be collected from Rico Telco as withholding agent presents a different problem. To coordinate with the amendment of § 28 increasing the rate of taxation, § 35 — the administrative withholding provision — was also amended by § 17 of Act No. 31 of 1941 to provide for-withholding at the source of 19% instead of 14.375%. But this withholding provision is applied prospectively, not retroactively, see footnote 8. Indeed, the Treasurer makes no contention to the contrary in this case: In 1948 the Treasurer notified Rico Telco of the deficiency on dividends paid by Rico Telco to ITT in 1940 and that portion of the dividends paid in 1941 prior to April 12, 1941 at the 14.375% rather than the 19% rate. Since no effort was made in this case to collect the difference between a 14.375% tax and a 19% tax on the said dividends, we make no comment on the effect of § 1 of Act No. 54 of 1945 on this portion of the deficiency, see footnote 21.
From 1925 when the Act was first passed until 1941 when Act No. 31, Laws of Puerto Rico, 1941, was approved, § 19(f) read as follows:
“A nonresident individual not a citizen of Puerto Rico shall receive the benefit of the deductions and credits allowed in this title only by filing or causing to be filed with the Treasurer a true and accurate return of his total income received from all sources in Puerto Rico, in the manner prescribed in this title, including therein all the information which the Treasurer may deem necessary for the calculation of such deductions and credits.”
Section 11 of Act No. 31 of 1941 added to § 19(f) some Provided clauses of a substantive nature which are not pertinent here. See 13 L.P.R.A. $ 698(f).
Section 37(a), 13 L.P.R.A. § 740, provided from the inception of the Act that “Every corporation or partnership subject to taxation under this title shall make a return, stating specifically the items of its gross income and the deductions and credits allowed by this title. ... If any foreign corporation has no office or place of business in Puerto Rico, but has an
Section 39(a), 13 L.P.R.A. § 741, likewise since the inception of the-Act, has provided the following:
“Returns of corporations or partnerships shall be made at the. same time as is provided in subdivision (a) of Section 27, except that in the case of foreign corporations not having any office or place of' business in Puerto Rico returns shall be made at the same time as. provided in section 27 in the case of a nonresident individual not a. citizen of Puerto Rico.”
Article 199 of the Regulations provides in part that “Unless a nonresident individual not a citizen of Puerto Rico, a foreign corporation, or a citizen of Puerto Rico or domestic corporation shall file or cause to be filed with the collector, a true and accurate return of income from sources within Puerto Rico, regardless of amount, the tax shall be collected on the basis of the gross income (not the net income) from sources within Puerto Rico-”
In the Aguirre case at p. 262 we treated the right to claim a deduction for dividends in effect as an exemption. This was erroneous.
Cf. Postley v. Secretary of the Treasury, 75 P.R.R. 822, where the nonresident taxpayer in a suit for refund — not the withholding agent— successfully assailed discriminatory taxation under the privileges and immunities clause.
Since the record contains no returns by ITT or Rico Telco or any indication of whether they operated on fiscal or calendar years, it is not clear whether the retroactive elimination of the right of ITT to deduct dividends it received in 1940 was enacted on a date — April 12, 1941 — prior to the date by which under §§ 39 (a) and 27 (a) of the Act ITT was required to file its return for its 1940 income from sources within Puerto Rico. In any event, § 26 of Act No. 31 of 1941 required the filing of corrected return reflecting the retroactive tax liabilities resulting from Act No. 31.
According to Exhibit A, in 1940 Rico Telco withheld and paid to the Treasurer $6,891.05 as taxes owed by ITT — at the rate of 14.375% then provided in $ 28 on the management fees of $47,937.72 paid in that year by Rico Telco to ITT. However, the amended complaint alleges and the
In its brief the appellant argues that, in referring to Act No. 102 of 1936 at p. 260 of the Aguirre case, we made merely a “typographical or clerical” error and that we were really interpreting 5 22(a) as amended by § 4 of Act No. 2 of 1939 in that case. We disagree. Our summary of § 22 (a) at p. 260 of the Aguirre case significantly leaves out the word “dividends” which was not in the 1936 version of § 22(a) but did appear for the first time in the 1939 version. Also, in the Aguirre case we gave great importance to the language of § 22(a), as it read in 1936, by quoting it at p. 260 and italicizing the portion thereof which excepted from the withholding requirement dividends which were allowed as a credit under § 18(a). But the exception in question was specifically eliminated from § 22(a) by § 4 of Act No. 2 of 1939.
We find nothing in Próspero Fruit Co. v. Tax Court, 64 P.R.R. 631, cited by the appellant, which indicates that in deciding the Aguirre ease we relied on the 1939 rather than the 1936 version of § 22(a). The short of the matter is that in the Aguirre case we overlooked the applicable 1939 version of § 22(a) and mistakenly applied to a case involving a 1940 tax the 1936 version of § 22(a).
The Tax Court in its opinion in the Aguirre case cited Act No. 2 of 1939. Central Aguirre Sugar Co. v. Treasurer, 1 D.T.C. 348, 352-3. But instead of undertaking to determine the effect of Act No. 2 on § 22(a), the Tax Court relied on § 81 (b) of the Act. Central Aguirre Sugar Co. v. Treasurer, supra, pp. 359-61. Neither party cited Act No. 2 in Ms brief in this court. Nor did the Treasurer move for reconsideration of our opinion and decision in the Aguirre case in which we overlooked Act No. 2 of 1939.
On the contrary, at p. 8 of his brief in this Court in the Aguirre ease counsel for the Treasurer made the following incorrect admission: “It is true that at the time the petitioner paid the dividends to Central Aguirre Associates it was not required to withhold anything as the said dividends were not at that date subject to such a tax by the statute then in effect.” The Treasurer relied on § 81 (b) of the Act on which as we have seen the Tax Court likewise based its decision. We adhere to our view stated at p. 264 of the Agvñrre case that § 81(b) is inapplicable.
Section 22(d), reenacted as § 22(f) by § 6 of Act No. 102, Laws of Puerto Rico, 1936, reads as follows: “If any tax required under this section to be deducted and withheld is paid by the recipient of the income, it shall not be recollected from the withholding agent; nor in cases in which the tax is so paid shall any penalty be imposed upon or collected from the recipient of the income or the withholding agent for failure to return or pay the same, unless such failure was fraudulent and for the purpose of evading payment.”
Article 216 of the Regulations reads as follows: “Returns of Income from which Tax Withheld — The entire amount of the income from which the tax was withheld shall be included in gross income without deduction for such payment of the tax. But any tax actually so withheld shall be credited against the total tax as computed in the taxpayer’s return. See article 69. If the tax is paid by the recipient of the income or by the withholding agent it shall not be re-collected from the other, regardless of the original liability therefor, and in such event no penalty will be assorted against either person for failure to return or pay the tax where no fraud or purpose to evade payment is involved.”
We are not to be understood as indicating that in the Aguirre case both the domestic corporation and the Associates complied with the requirements of the Act as to returns. The domestic corporation, which had filed a return prior to approval of Act No. 31 of 1941, filed a corrected return on August 11, 1941, as required by 5 26 of Act No. 31, see footnote 14; it paid no tax on the ground that as the withholding agent it was not liable therefor since the Associates had no net income subject to taxation under the Act as it read at the time the domestic corporation paid the dividends to the Associates. On the other hand, the Associates, although it made a return on January 14, 1941, apparently filed no corrected return, as required by § 26. Even if it had done so and had challenged the validity of (1) the retroactive elimination of the credits or deductions for dividends, (2) the retroactive increase of the rate of taxation, and (3) the higher rate of taxation for foreign as against domestic entities provided in Act No. 31 of 1941, it would not have prevailed. Cases cited in footnote 10; South Porto Rico Sugar Co. v. Buscaglia, 154 F. 2d 96 (C. A. 1, 1946).
Article 211 reads as follows: “Withholding Tax at Source — In general, withholding is required (a-) of a tax of 6 per cent in the case of fixed or determinable annual or periodical income payable to a nonresident individual not a citizen of Puerto Rico or to a partnership not engaged in trade or business within Puerto Rico and not having any office or place of business therein, and composed in whole or in part of nonresident individuals not citizens of Puerto Rico, except (1) dividends of a class allowed as a credit by subdivision (a) of section 18; (6) of a tax of 12% per cent in the case of fixed or determinable annual or periodical income (with the exceptions just stated) payable to a foreign corporation or partnership not engaged in trade or business within Puerto Rico and not having any office or place of business therein (section 35).”
Article 212 reads in part as follows: “Fixed or Determinable Annual or Periodical Income. — Only fixed or determinable annual or periodical income is subject to withholding. Among such income, giving an idea of the general character of income intended, the statute specifies interest, rent, salaries, wages, premiums, annuities, compensations, remunerations, and emoluments. But other kinds of income may be included, as for instance, royalties.”
The Income Tax Regulations have been reprinted but, so far as we are aware, there has been no general revision thereof — or any changes in Articles 211 and 212 — since the Regulations were originally approved in 1926.
Section 1 of Act No. 54 reads in part as follows:
We also deem it appropriate to repeat our language in the Aguirre ease at p. 285: “Whether the Treasurer of Puerto Rico may, under the laws now in force, subject or affect in any way the dividends which the Central Aguirre Sugar Company may now or hereafter hold or control for payment to Central Aguirre Associates, and whether said Treasury may, under our procedural laws, subject or bind to the payment of unsatisfied taxes the shares of stock held by Central Aguirre Associates in the Central Aguirre Sugar Company, are questions not involved in this proceeding and which we will therefore pass without expressing any opinion thereon.”
The appellant concedes and we agree that the problem of withholding by Rico Telco of a tax of $41.11 on dividends of $342 paid by Rico Telco to its other stockholders in 1940, see footnote 1, is governed by similar considerations. We therefore need not examine that point in detail.
The question of penalties for failure to withhold the tax on the 1940 dividends is discussed in Bart III of this opinion.
The details of such payments are found in the second paragraph of footnote 1.
We reject, for the same reasons given in the First Section of Part I of this opinion, appellant’s argument that under § 31 of the Act Rico Telco was not required to withhold the tax on the interest involved herein. Once that contention is out of the way, it is clear that Rico Telco was required to withhold the tax on such interest under § § 15 and 19, provided there are no valid constitutional objections thereto.
We agree that Rico Telco has standing to contest the deficiencies in this case. Valdés v. Secretary of the Treasury, 78 P.R.R. 551, 558; Harvester Co. v. Dept. of Taxation, 322 U. S. 435, 440.
The phrase “jurisdiction to tax” “. . . obscures rather than enlightens, for it only states a result and does not analyze the Constitutional problem.” Mr. Justice Frankfurter, concurring in State Tax Comm’n v. Aldrich, 316 U. S. 174 at 183. To the same effect, Wisconsin v. J. C. Penny Co., 311 U. S. 435, 444, quoted infra. But cf. footnote 35.
Prior to the effective date in 1952 of the Constitution of the Commonwealth of Puerto Rico, our statutes were required to meet the test of Federal due process. The same rule holds true today. Mora v. Mejías, 206 F. 2d 377, 382 (C. A. 1, 1953); People v. Fournier, 77 P.R.R. 208, 243, footnote 6; Figueroa v. People of Puerto Rico, 232 F. 2d 615, 619 (C. A. 1, 1956); A. Roig, Sucrs. v. Sugar Board, 77 P.R.R. 324, 328, footnote 5, affirmed in 235 F. 2d 347 (C. A. 1, 1956), cert. denied, 352 U. S. 928.
The testimony introduced by the appellant does not show the exact amount of the loans for each of the different purposes for which they were made. See footnote 44.
For the most part, such “deficits” were apparently caused by construction activities.
Theoretically, this arrangement should have enabled Rico Telco to pay for its purchases of materials and equipment promptly. However, apparently either because the estimates of expenditures were too low or because of unexpected additional costs, as hereinafter noted, Rico Telco also paid interest on its current account with ISEC whenever the latter made such purchases for Rico Telco in the United States.
In addition, Rico Telco obtained occasional loans from banks in Puerto Rico subject to approval by ITT.
To the same effect, Porto Rico Fertilizer Co. v. Sancho, 98 F. 2d 398 (C. A. 1, 1938).
The Court of Appeals held alternatively that the “debt or credit” involved therein (p. 555) “. . . had no situs in Puerto Rico. Its situs was in Maryland, outside the jurisdiction of Puerto Rico ... . The question of the taxable situs of a debt has been put to rest by the recent decision of the United States Supreme Court in Farmers’ Loan & Trust Co. Minnesota, 280 U. S. 204 . . .”. This alternative holding no longer seems to have any validity. State Tax Comm’n v. Aldrich, supra; 1 Freund et al., Constitutional Law 567. Cf. Piacentini v. Buscaglia, Treas., 59 P.R.R. 764. In any event, whatever the validity of the point as to the situs of the “debt or credit” involved in a loan of money may be in other situations involving other facts and other types of taxes—cf. John Hancock Mutual Life Insurance Co. v. Neill and The Union Central Life Insurance Co. v. Neill, ... P. 2d ... (Idaho, February 8, 1957), 25 U.S.L.W. 2390-91, and cases cited; Sancho v. Humacao Shipping Corporation, 108 F. 2d 157, 159-60 (C. A. 1, 1939); 8 Mertens, Law of Federal Income Taxation, § 45.29, p. 295; State v. Gay, 46 So. 2d 165 (Fla., 1950); Carpenter, Jurisdiction over Debts for the Purpose of Administration, Garnishment, and Taxation, 31 Harv. L. Rev. 905, 918-31; Lowndes, Spurious Conceptions of the Constitutional Law of Taxation, 47 Harv. L. Rev. 628 — we see no purpose in engaging in that kind of dialectical exercise here or in discussing some of our old cases cited by appellant. (For a partial explanation of some of our earlier cases as to taxation of “credits”, see Sucn. Pedro Giusti, Inc. v. Tax Court, 70 P.R.R. 109, 127-31.) It is enough to say that the formula evolved in recent Supreme Court cases dictates the result here-See text of opinion preceding footnote 36.
The Braniff case involved the validity of an apportioned ad valorem state tax. No issue as to apportionment is presented here. See Harvester Co. v. Dept. of Taxation, supra, 442; Southwestern Gas & Electric Co. v. Oklahoma Tax Com’n, 253 P. 2d 549 (Okla., 1953); Mayoral, Algunos Comentarios en Torno a Cierto Aspecto de los Sistemas Contributivos Estatales, XVI Revista del Colegio de Abogados 43; Magill, Allocation of Income by Corporate Contract, 44 Harv. L. Rev. 935; Huston, Allocation of Corporate Net Income for Purposes of Taxation, 26 Ill. L. Rev. 725; Silverstein, Problems of Apportionment in Taxation of Multistate Business, 4 Tax L. Rev. 207; Hellerstein, State and Local Taxation 274; Hellerstein, State Franchise Taxation of Interstate Businesses, 4 Tax. L. Rev. 95; 1 Freund et al, Constitutional Law 645. Nor does the appellant contend that any question as to the commerce clause is involved in this case. Compare Soltero v. Descartes, 192 F. 2d 755, 759 (C. A. 1, 1951); Buscaglia v. Ballester, 162 F. 2d 805, 806 (C. A. 1, 1947), cert. denied, 332 U. S. 816; Porto Rico Telephone Co. v. Tax Court, 68 P.R.R. 144, 151, with Mora v. Mejías, supra, p. 387, footnote 6.
We are concerned here only with the due process clause. A tax may meet due process objections even though it might not be valid under the commerce clause. Mr. Justice Rutledge pointed this out in his concurring opinion in Harvester Co. v. Dept. of Treasury, 322 U. S. 340 at 353: “ ‘Due process’ and ‘commerce clause’ conceptions are not always sharply separable in dealing with these problems. Cf. e. g., Western Union Telegraph Co. v. Kansas, 216 U. S. 1. To some extent they overlap. If there is a want of due process to sustain the tax, by that fact alone any burden the tax imposes on the commerce among the states becomes ‘undue’. But, though overlapping, the two conceptions are not identical. There may be more than sufficient factual connections, with economic a/nd legal effects, between the transaction and the taxing state to sustain the tax as against due process objections. Yet it may fall because of its burdening effect upon the
In examining the argument that a tax statute is violative of due process, we must hear in mind that the taxpayer has “. . . the burden . . . to negative every conceivable basis which might support it.” South Porto Rico Sugar Co. v. Buscaglia, supra, 100; Rivera v. Buscaglia, 146 F. 2d 461, 465 (C. A. 1, 1944); Buscaglia, Treasurer v. Tax Court; Pérez Vahamonde, 68 P.R.R. 322, 337, approved in Buscaglia v. Ahumada, 171 F. 2d 775 (C. A. 1, 1949); Postley v. Secretary of the Treasury, supra, 830-31. (While these cases involved contentions of discriminatory taxation rather than “jurisdiction to tax”, we think the same burden applies in the latter situation.)
The Miller case reverts to the phrase “jurisdiction to tax”. Cf. footnote 26. But the Miller case does not represent a departure from the concepts (1) that state taxation is not limited by territorial boundaries per se and (2) that there must be, however, some connection between the State and the object of the tax. On the first point, the Court adhered to expressions in its previous cases when it indicated that (pp. 342-43) “. . . visible territorial boundaries do not always establish the limits of a state’s taxing power or jurisdiction. ... If there is some jurisdictional fact or event to serve as a conductor, the reach of the state’s taxing power may be carried to objects of taxation beyond its borders. When it has the taxpayer within its power or jurisdiction, it may sometimes, through him, reach his extraterritorial income or transactions. On the other hand, if it has jurisdiction of his taxable property or transactions, it may sometimes, through these, reach the nonresident.” (Italics ours.) As to the second point, it said at pp. 344-45: “. . . due process requires some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax.” (Italics ours.)
By a 5-4 vote, the Court held that under the facts involved in the Miller case, it violated due process for Maryland to require a Delaware merchant to pay a use tax — collected by seizing his truck when it was driven into Maryland — for sales made of merchandise in Delaware to Maryland residents. So far as we are aware, the Miller case is the only instance in which the Supreme Court has invalidated a use tax on grounds of due process. The Supreme Court, 1953 Term, 68 Harv. L. Rev. 96, 130;
Wood, Due Process of Law, 1932-49, Chapter V, p. 341 et seq., contains an excellent discussion of the Supreme Court cases in this field decided during the indicated period. And see Freund et al., Constitutional Law 566; Hellerstein, State and Local Taxation, 468 et seq.; Hartman, State Taxation of Interstate Commerce, pp. 46, 80 et seq.
For a recent State case discussing this problem in detail and citing other State cases, see John Hancock Mutual Life Insurance Co. v. Neill and The Union Central Life Insurance Co. v. Neill, supra. We are advised that a petition for rehearing is pending in this case.
As in many due process cases, the formula evolved by the Supreme Court is one of degree. Porto Rico Telephone Co. v. Tax Court, supra, 159. Accordingly, there are cases which fall on either side of the line. Each case must therefore be decided on its own facts. At times it is difficult to determine into which category a particular case fits; indeed, the Justices of the Supreme Court are rarely unanimous on this question. But as presently noted, we think the result required by the facts of this case under the said formula is clear.
We realize that even when the parties deal at arm’s length, the final decision as to the making of a loan rests with the potential creditor. But here there was something more. Rico Telco, a subsidiary corporation, could not even make the decision to seek a loan — no matter who the creditor might be — without the specific approval of its parent corporation, in view of the requirement that Rico Telco’s annual budget was subject to approval by ITT.
This point is also relevant as to the tax on interest paid to ISEC, discussed hereinafter. While the record is silent as to the charges made by ISEC to Rico Telco for acting as its purchasing agent, we think it is fair to infer that this service was not rendered gratis. Certainly this is not negatived in the record.
In the concluding paragraph of its brief appellant prays that we hold that Puerto Rico is precluded from imposing the tax herein “. . . unless there are within Puerto Rígo tangible and concrete evidence of such indebtedness such as bonds or promissory notes or bank deposits requiring the sanction and protection of the laws of Puerto Rico to permit their transfer.”
Section 32(a) (2) of the Income Tax Act was amended by Act No. 31, Laws of Puerto Rico, 1941, to provide that interest shall not be deductible in computing the net income of a corporation “when payable . . . between two corporations when one of them owns or controls more than fifty (50) per cent of the outstanding stock of the other corporation.” See Buscaglia, Treas. v. Tax Court; Rullán, 67 P.R.R. 548, affirmed in 168 F. 2d 401 (C. A. 1, 1948); Community of the Heirs of Fajardo v. Tax Court, 73 P.R.R. 499, 504-08.
It may be conceded that the details of its operations in Puerto' Rico were executed by Rico Telco. But we think that under all the circumstances — certainly as to the loans herein, made largely for construction purposes and requiring ITT’s specific approval in the annual budgets — overall policy for Rico Telco was controlled by ITT. In coming to this conclusion, we do not undertake to say that ITT was doing business in Puerto Rico in the sense in which that phrase is used in other contexts. Cf. Internat. Shoe Co. v. Washington, 326 U. S. 310; Elliot & Sons Co. v. Nuodex Products Co., 243 F.2d 116 (C. A. 1, March 26, 1957); People v. South Porto Rico Sugar Co., 56 P.R.R. 633. Our holding on this phase of the ease is confined to the “jurisdiction to tax” point based on the due process clause raised by the appellant.
In the Postley case nonresident individual stockholders successfully attacked under the privileges and immunities clause the discriminatory rates of income taxation to which such dividends were subjected; they were required to pay our income tax thereon at the same rate at which residents were taxed. 75 P.R.R. at 845.
We also note that if Rico Telco paid dividends to its parent corporation, such payments were not deductible in calculating the income tax imposed by our Income Tax Act on Rico Telco; on the other hand, interest payments by Rico Telco to ITT were deductible until this was prohibited by Act No. 31 of 1941, which was retroactive to January 1, 1940. See footnote 40.
See footnote 28.
Cf. Rojo vda. de Goicoehea v. Tax Court, decided by a Per Curiam opinion on March 3, 1954; González v. Secreteury of the Treasury, 75 P.R.R. 864.
In Treichler v. Wisconsin, 338 U. S. 251, the Court pointed out at pp. 256-57: “A state is not equipped with the implements of power and diplomacy without its boundaries which are at the root of the Federal Government’s undoubted right to measure its tax upon foreign property. United States v. Bennett, 232 U. S. 299 (1914); see Burnet v. Brooks, 288 U. S. 378 (1933). And if the state has afforded nothing for which it can ask return, its taxing statute offends against that due process of law it is our duty to enforce.” The Court added in footnote 4 at p. 257: “Of course we have refused to be governed by this consideration when so to do would have placed a premium upon the avoidance of all state taxes.”
Fides, A. G. v. Commissioner of Internal Revenue, 137 F. 2d 731, 735 (C. A. 4, 1943), cert. denied, 320 U. S. 797, the only ease cited by the Secretary of the Treasury, is distinguishable. There the question of the failure to file a return in time -was involved. And see Community of the Heirs of Fajardo v. Tax Court, supra, pp. 502-04.
Case-law data current through December 31, 2025. Source: CourtListener bulk data.