58 T.C. 909">*909 Respondent determined deficiencies1972 U.S. Tax Ct. LEXIS 67">*70 in petitioner's income tax for the taxable years 1961 and 1962 in the amounts of $ 65,272 and $ 354,020, respectively. The sole issue involved is the amount of the dividend that should be utilized as the numerator of the first fraction applicable in calculating the foreign tax credit to which petitioner is entitled under section 902(a). ¹

OPINION

All of the facts have been stipulated. The stipulation of facts, together with the exhibits attached thereto, is incorporated herein by this reference.

Petitioner is a domestic corporation with its principal office in Niagara Falls, N.Y., at the time of filing the petition herein. It filed its Federal income tax returns for the taxable years 1961 and 1962 on 58 T.C. 909">*910 the accrual basis with the district director of internal revenue, Buffalo, N.Y.

Petitioner is engaged directly and through subsidiaries in the manufacture and sale of a diversified1972 U.S. Tax Ct. LEXIS 67">*71 line of abrasive materials and machines, refractory materials, and other nonmetallic materials as well as pollution control equipment.

In 1961 and 1962, petitioner owned all of the outstanding stock of Carborundum Co., Ltd. (hereinafter referred to as CCL), and British Resistor Co., Ltd. (hereinafter referred to as BRC), corporations organized under the laws of, and resident in, the United Kingdom. During the years in issue, CCL and BRC (hereinafter collectively referred to as the U.K. subsidaries) had gains, profits, and income (hereinafter referred to as total profits) as follows:

In 1961 and 1962, the U.K. subsidaries were subject in the United Kingdom to an income tax at the standard rate (hereinafter referred to as the standard tax), which is imposed upon both individual and corporate taxpayers, and a profits tax, which is imposed only on corporate profits. Both the standard tax and the profits tax were imposed on the U.K. subsidiaries' total profits for the taxable year without deduction of any dividend declared from those earnings; neither tax was deductible in computing the other.

During the taxable 1972 U.S. Tax Ct. LEXIS 67">*72 years involved, a United Kingdom resident corporation could declare dividends either "with deduction of standard tax" or "free of standard tax." When a dividend was declared "with deduction of standard tax," the corporation computed the standard tax payable on that portion of the total profits equal to the declared amount of the dividend and paid the balance of the declared amount to the shareholder. When a dividend was declared "free of standard tax," the amount declared as a dividend was distributed to the shareholder.

The U.K. subsidiaries in 1961 and 1962 paid the following standard and profits taxes to the United Kingdom:

The standard and profits taxes paid by the U.K. subsidiaries to the United Kingdom in 1961 and 1962 constitute "income, war profits, or 58 T.C. 909">*911 excess profits taxes" within the meaning of that phrase as used in sections 901 through 905 and also constitute "United Kingdom tax" as defined by article I of the income tax convention between the United States and the United Kingdom (hereinafter sometimes referred1972 U.S. Tax Ct. LEXIS 67">*73 to as the convention).

During 1961 and 1962, petitioner received dividends "free of standard tax" from its U.K. subsidiaries and elected to treat the standard tax appropriate to such dividends in accordance with article XIII(1) of the convention by including in its gross income the amount of the standard tax appropriate to the dividends and claiming a direct foreign tax credit therefor on its Federal income tax returns for those years pursuant to the provisions of section 901. The phrase "United Kingdom tax appropriate to such dividend" as used in article XIII(1) of the convention means the standard tax appropriate to the dividend.

The amount of the dividends distributed to the petitioner, the standard tax appropriate to such dividends, and the "grossed-up" dividends were as follows:

In addition to the direct credit for the amount of the standard tax appropriate1972 U.S. Tax Ct. LEXIS 67">*74 to the dividend, petitioner, for 1961 and 1962, also claimed an indirect credit pursuant to the provisions of section 902(a) for the income, war profits, and excess profits taxes paid by the U.K. subsidiaries on or with respect to the accumulated profits out of which the dividends were paid.

The question before us involves the computation of the indirect foreign tax credit to which petitioner is entitled under section 902(a) with respect to the United Kingdom profits taxes paid by its U.K. subsidiaries. For the years involved herein, the formula for computing the indirect credit under section 902(a) is governed by American Chicle Co. v. United States, 316 U.S. 450">316 U.S. 450 (1942), and is as follows:

58 T.C. 909">*912 The "accumulated profits" terms cancel out and the single fraction which may be used to determine what portion of a foreign tax is creditable is dividends over total profits.

The dispute herein requires a determination of what should1972 U.S. Tax Ct. LEXIS 67">*75 be included in dividends in the first fraction of the foregoing formula. The issue is one of first impression.

Much of the background material which underpins our resolution of this issue is set forth at length in our recent opinion in Gleason Works, 58 T.C. 464">58 T.C. 464 (1972). Nevertheless, in the interests of a self-contained opinion, which will fully reflect the considerations involved in this case, we will repeat portions of that opinion. As in Gleason Works, our starting point is Biddle v. Commissioner, 302 U.S. 573">302 U.S. 573 (1938).

In Biddle, the British standard tax had been levied on a United Kingdom corporation's "profits or gains." The corporation then paid a dividend to United States taxpayers and withheld therefrom ² the portion of the tax it had paid or was liable to pay "appropriate" to the dividend pursuant to rule 20 of the British Income Tax Act of 1918. ³1972 U.S. Tax Ct. LEXIS 67">*77 The United States taxpayers claimed the right to report, as income for United States income tax purposes, the gross amount of the dividend (i.e., the amount received plus the amount withheld) and to take credit (up to the statutory limit) against their1972 U.S. Tax Ct. LEXIS 67">*76 United States income tax for the amount of tax withheld as "income * * * taxes paid or accrued" under section 131(a)(1) of the Revenue Act of 1928 (the predecessor of sec. 901(b)(1)). The Commissioner asserted that the British standard tax had been imposed on the British corporation, not the United States taxpayers, and that the latter were entitled to report for Federal income tax purposes merely the actual amount received without any credit for the amount withheld. The Supreme Court rejected the taxpayers' contention. ⁴ The structure of 58 T.C. 909">*913 its opinion has a direct bearing upon our analysis of the issue presented herein.

First, the Supreme Court established the principle that the determination as to whether a foreign income tax had been "paid or accrued" within the meaning of the Federal taxing statute was to be made in1972 U.S. Tax Ct. LEXIS 67">*78 accordance with the criteria established by our own revenue laws and court decisions and not by "a shifting standard * * * adopted by reference to foreign characterizations and classifications of tax legislation." Hence, the fact that British law "regarded" the tax appropriate to the dividend as having been paid by the stockholder-recipient was "not conclusive" but at most "a factor to be considered in deciding whether the stockholder pays the tax within the meaning of our own statute." 302 U.S. 573">Biddle v. Commissioner, supra at 578-579.

Next, the Supreme Court examined the operation of the British income tax law as far as the standard tax appropriate to dividends was concerned. It concluded that the tax was legally imposed on the corporation and that the stockholder merely suffered the economic burden of the tax by virtue of the provision of the British law permitting the corporation to withhold the amount of the tax appropriate to the dividend which would otherwise have been paid to the stockholder.

Finally, the Supreme Court pointed out that, although a stockholder in a United States corporation ultimately bears the economic burden of the income taxes 1972 U.S. Tax Ct. LEXIS 67">*79 paid by the corporation, our revenue laws give no recognition to that fact. Both the corporation and the stockholder are required to pay their respective taxes and our revenue laws "have never treated the stockholder for any purpose as paying the tax collected from the corporation." On this basis, the Court concluded that to allow the claimed credit would extend to stockholders of a British corporation "a privilege not granted to stockholders in our own corporations." 302 U.S. 573">Biddle v. Commissioner, supra at 581. See 58 T.C. 464">Gleason Works, supra at 468, fn. 5.

In 1946, the result in Biddle was changed by the United States-United Kingdom Income Tax Convention, effective, as respects United States tax, for taxable years beginning on or after January 1, 1945. Article XIII of that convention provided, in pertinent part, that:

ARTICLE XIII

(1) Subject to section 131 of the United States Internal Revenue Code as in effect on the first day of January, 1945, United Kingdom tax shall be allowed as a credit against United States tax. For this purpose, the recipient of a dividend paid by a corporation which is a resident of the United Kingdom1972 U.S. Tax Ct. LEXIS 67">*80 shall be deemed to have paid the United Kingdom income tax appropriate to such dividend if such 58 T.C. 909">*914 recipient elects to include in his gross income for the purposes of United States tax the amount of such United Kingdom income tax. [60 Stat. 1384.]

Colin F. Stam, chief of staff of the Joint Committee on Internal Revenue Taxation, in explanation of article XIII(1) to a subcommittee of the Senate Foreign Relations Committee, stated:

[The convention] makes another important change over existing law which will further benefit American citizens. There was a case that went up to the Supreme Court, the Biddle case, in which it was held that the tax collected or paid by a British corporation is not a tax on the shareholder but a tax on the corporation itself, and that, therefore, an American shareholder who was a stockholder in a British corporation was not entitled to any credit for the tax paid by the British corporation to the British treasury.

This convention overrules that decision by providing that the American shareholder may elect to treat such a tax as his tax and thereby secure credit for the British corporate tax. All of the shareholders do not have to elect1972 U.S. Tax Ct. LEXIS 67">*81 under convention, but any one shareholder can elect to include the amount of the British tax on his gross income. * * *

* * * *

* * * The British have a system in which tax is levied on the corporation and the tax is paid into the British treasury; then, when the British corporation later declares a dividend to its shareholders, the corporation recoups from that dividend the amount of the tax which it has paid into the treasury. In other words, if the British corporation was going to declare a dividend of $ 100,000, 50 percent of that $ 100,000 would be retained by the corporation because it had paid the 50 percent tax to the British treasury. The shareholder will actually receive only $ 50,000, but he must report the entire gross dividend of $ 100,000 in his return. And he will get a tax credit of $ 50,000. The British surtax does not start until $ 8,000. The Shareholder incudes the whole $ 100,000 dividend, gets credit for the normal tax but not the surtax.

* * * The convention adopts the British concept and allows the shareholder to get the credit. ⁵

[Hearings on Conventions with Great Britain and Northern Ireland Respecting Income and Estate Taxes before a 1972 U.S. Tax Ct. LEXIS 67">*82 Subcommittee of the Senate Foreign Relations Committee, 79th Cong., 1st Sess., pp. 70-71 (1945), reprinted in 2 Legislative History of United States Tax Conventions 2636-2637 (1962). Emphasis added.]

Article XIII was amended by a supplementary protocol, effective, as regards United States tax, for taxable years beginning on or after January 1, 1956, reading, in pertinent part, as follows:

ARTICLE XIII

(1) Subject to Sections 901 to 905 of the United States Internal Revenue Code as in effect on the 1st day of January 1956, United Kingdom tax shall be allowed as a credit against United States tax. For this purpose

58 T.C. 909">*915 (a) the recipient of a dividend paid by a corporation which is a resident of the United Kingdom shall be deemed to have paid the United Kingdom1972 U.S. Tax Ct. LEXIS 67">*83 tax appropriate to such dividend * * *

* * *

if the recipient of the dividend * * * elects to include in his gross income for the purposes of United States tax the amount of such United Kingdom income tax. [[1958] 9 U.S.T. 1331.]

It is against the foregoing background that we turn to a consideration of the contentions of the parties.

Petitioner elected to employ article XIII(1). It claims that, having taken into income the amount of the dividend received plus the standard tax appropriate thereto, its election operates throughout sections 901 to 905 and this "gross dividend" is the amount which properly constitutes the numerator of the fraction to be utilized in computing the indirect credits at issue herein. Pointing to decisions of this Court that a dividend for purposes of section 902 should have the same meaning as it does for section 316 ( Central Aguirre Sugar Co., 24 T.C. 630">24 T.C. 630, 24 T.C. 630">637 (1955); cf. National Carbon Co., 2 T.C. 57">2 T.C. 57 (1943)), petitioner, in essence, adopts in paraphrase the literary observation that a "[rose] is a rose is a rose is a rose" (Stein, G., "Sacred Emily," Geography and Plays 187 (1922)).

Respondent1972 U.S. Tax Ct. LEXIS 67">*84 accords article XIII(1) a narrow reading. His position is that the numerator should consist of only the amounts which petitioner actually received. He argues that the effect of an election under article XIII(1) is limited to the computation of the direct foreign tax credit under section 901 and that the convention does not turn what was previously held to be a tax on the United Kingdom corporation into a withholding tax imposed on the shareholders.

In support of his contention, respondent seeks to draw a distinction based upon the fact that petitioner was not required to pay the standard tax "appropriate to [the] dividend" but merely elected so to do. This contention overlooks the critical fact that, in the absence of an election, petitioner would have only had to include the amount, net or "free" of the standard tax in its United States income. 302 U.S. 573">Biddle v. Commissioner, supra. Such treatment, in substance, is the same as including the "gross dividend," i.e., the amount received plus the standard tax, and then deducting the standard tax. Thus, for the purpose of this case, by virtue of article XIII(1) of the convention, petitioner is in1972 U.S. Tax Ct. LEXIS 67">*85 the same position as any other taxpayer who is given an election between a deduction and a credit in respect of foreign income taxes paid by it or on its behalf. Secs. 164(a)(3), 275(a)(4), and 901.

If petitioner had actually received the amount of the "gross dividend" and then had paid the standard tax directly, it could hardly be argued that that amount would not be the numerator in the American 58 T.C. 909">*916 Chicle formula. And the same result would obtain if that tax had been imposed upon petitioner but withheld from the amount of the dividend otherwise payable and remitted by the British subsidiaries as collecting agents. Cf. Wisconsin Gas Co. v. United States, 322 U.S. 526">322 U.S. 526 (1944); 58 T.C. 464">Gleason Works, supra.By its election, petitioner turned the standard tax into an amount withheld on its behalf. Cf. National Cash Register Co. v. United States, 400 F.2d 820">400 F.2d 820 (C.A. 6, 1968). In attempting to equate the word "dividends," as used in section 902(a) and the numerator of the American Chicle formula with the amount actually received, respondent ignores the true nature, as far as 1972 U.S. Tax Ct. LEXIS 67">*86 this petitioner is concerned, of the standard tax which was paid in respect of that amount. In this connection, we are constrained to observe that respondent's position is diametrically opposed to the position taken by him in situations, too numerous to describe, with respect to taxing one person on payments made by another for his benefit.

Adoption of the position advanced by respondent would also appear to create an anomaly with respect to the meaning of the terms "dividends" and "accumulated profits" in the section 902(a) formula. Having included the British standard tax appropriate to the dividend in its gross income, in accordance with article XIII(1), petitioner is "deemed to have paid" the tax. If the petitioner is thus deemed to be the taxpayer, it would seem that the United Kingdom subsidiaries cannot be treated as the taxpayers for purposes of section 902(a). ⁶1972 U.S. Tax Ct. LEXIS 67">*88 400 F.2d 820">National Cash Register Co. v. United States, supra.If the subsidiaries are not the taxpayers, the British standard tax should not be subtracted from the "total profits" of those corporations in computing their "accumulated profits" under section 902(c). If the tax is not subtracted1972 U.S. Tax Ct. LEXIS 67">*87 in computing "accumulated profits," it should not be subtracted in computing "dividends" for purposes of calculating the section 902 credit, since a hypothetical distribution of all of said accumulated profits should produce an equivalent amount of dividends. See Owens, The Foreign Tax Credit 373 (1961). In making these observations, we are aware of the complex definitional problems which can arise under section 902, particularly in reference to the term "accumulated profits," ⁷ and recognize that we need not delineate the precise 58 T.C. 909">*917 meaning of that term because the American Chicle formula has the effect of removing it from the computation involved herein.

Contrary to respondent's contention, the legislative history of the changes made in section 902 by the Revenue Act of 1962 (changes which are concededly inapplicable to the years before us) do not support his position herein. That history makes it clear that Congress was intentionally making a substantive change in the law relating to the indirect foreign tax credit. H. Rept. No. 1447, 87th Cong., 2d Sess., p. A79 (1962); S. Rept. No. 1881, 87th Cong., 2d Sess., p. 222 (1962). But, beyond this, the thrust of the amendments made by that Act indicates that they were predicated upon the basic proposition that the amount of the indirect foreign tax credit should be increased where the amount of the foreign taxes is taken into income by the domestic parent. ⁸

1972 U.S. Tax Ct. LEXIS 67">*89 Finally, neither 316 U.S. 450">American Chicle Co. v. United States, supra, nor 400 F.2d 820">National Cash Register Co. v. United States, supra, provides respondent with any sustenance. In American Chicle, the taxpayer was seeking a direct credit for an amount which the Supreme Court held was not properly includable in United States income. In National Cash Register, the amount of the standard tax for which an indirect credit was sought was also not includable in United States income under article XIII of the convention and the Sixth Circuit Court of Appeals held that article XIII did not permit a splitting of the use of the standard tax. The reasoning in both cases implies that the absence of includability was a highly significant consideration. ⁹

1972 U.S. Tax Ct. LEXIS 67">*90 The pivotal fact in this case is that the gross amount is taxed in the United States and, therefore, whether the foreign tax is remitted directly by the recipient or indirectly through collection at the source should not affect the section 902(a) computation. To treat the two situations differently in computing the foreign tax credit would have but one result, frustration of the purposes of section 902. Cf. 24 T.C. 630">Central Aguirre Sugar Co., supra; 2 T.C. 57">National Carbon Co., supra.Since the purpose of the section 902(a) calculation is to provide a credit for that portion of the foreign tax imposed on income taxed in the United States and the gross amount of the dividend is so taxed, the amount 58 T.C. 909">*918 used in the numerator of the computational formula should be the gross dividend. See United Dyewood Corporation v. Bowers, 44 F.2d 399, 402 (S.D.N.Y. 1930), affirmed without discussion of this point, 56 F.2d 603 (C.A. 2, 1932); cf. 316 U.S. 450">American Chicle Co. v. United States, supra at 452. See also Owens, The Foreign Tax Credit 111-112 (1961). 1972 U.S. Tax Ct. LEXIS 67">*91 Although such treatment will produce a greater indirect credit for the profits tax than would be the case had petitioner not elected to employ article XIII(1), such a result is perfectly harmonious with the objectives of section 902(a) because a larger portion of the foreign income on which the profits tax was imposed has become taxable in the United States, and, therefore, a larger portion of said tax should be creditable. ¹⁰ See Owens, The Foreign Tax Credit 372-373 (1961).

To reflect certain concessions made by petitioner,

Decision will be entered under Rule 50.