## Facts

- U.S. citizen taxpayers owned shares in British corporations and received cash dividends in 1929 and 1931.
- Under British law, the corporations paid a “standard” income tax on corporate profits.
- When distributing dividends, a corporation could deduct an amount of tax “appropriate” to the dividend and issued a certificate stating the gross dividend, the tax amount “appropriate,” and the net paid to the shareholder.
- Shareholders were generally not liable for British tax on dividends unless subject to a British surtax; the certificate served to compute surtax and potential refunds.
- On their U.S. returns, taxpayers treated the “appropriate” tax amounts as (1) foreign income taxes “paid or accrued” eligible for a credit under § 131(a)(1) of the Revenue Act of 1928, or alternatively (2) deductible foreign income taxes under § 23(c)(2).
- The Commissioner disallowed the credit (and related deduction claims), and the dispute reached the Supreme Court.

## Issues

1. Whether amounts shown on British dividend certificates as tax “appropriate” to dividends are “income taxes paid or accrued” by U.S. shareholders to a foreign country, creditable under § 131(a) of the Revenue Act of 1928.
2. If not creditable, whether those amounts are deductible by shareholders under § 23(c)(2) as foreign “income taxes imposed” by a foreign country.

## Decision

- The Court held that the “appropriate” tax amounts were not foreign income taxes “paid” by the shareholders within § 131(a) and therefore were not creditable.
- The Court held that the same amounts were not deductible by the shareholders under § 23(c)(2) because the tax was not “imposed” on them.
- The Court stated that the meaning of “income taxes paid” in the federal statute is determined by U.S. revenue law, not by foreign labels or characterization.
- The Court gave little weight to informal departmental rulings not promulgated by the Secretary and rejected reliance on reenactment where statutory meaning was treated as clear.

## Legal Principles

- For the foreign tax credit, whether a taxpayer “paid” a foreign income tax is determined under U.S. law by identifying the person on whom the foreign law imposes legal liability for the tax.
- A shareholder cannot claim a U.S. foreign tax credit for a foreign income tax legally imposed on and paid by the distributing corporation, even if the foreign system attributes a notional tax amount to dividends.
- For the foreign tax deduction, an amount is deductible only if the foreign income tax is legally “imposed” on the taxpayer seeking the deduction.
- Informal administrative interpretations carry limited interpretive force, and statutory reenactment does not validate an administrative view contrary to a statute’s clear meaning.

## Conclusion

The Court denied both credits and deductions for British corporate taxes allocated to dividends because the legal incidence of the British standard tax fell on the corporation, not the U.S. shareholder, and U.S. law controls the meaning of “taxes paid” and “taxes imposed” for federal foreign tax relief.


Biddle v. Comm’r, 302 U.S. 573 (1938)