19 T.C. 879">*879 The Commissioner determined a deficiency of $ 2,180,517.99 in the income tax of the petitioner based upon a consolidated return for 1947. The petitioner raises but one issue for decision and that is whether mining production taxes imposed by the Republic of Mexico constitute income taxes or taxes in lieu of income taxes within the meaning of section 131 (a) (1) or (h) so as to entitle the petitioner to the credit provided in section 131 (f) (1). The only other issue for decision is that raised by the Commissioner in an amended answer in which he claims that any credit allowed under section 131 (f) for income taxes or production taxes paid to the Republic of Mexico should be computed by converting the foreign taxes measured in pesos to American dollars at the rate of exchange existing at the time of the declaration of the dividend rather than at the rates of exchange existing at the times when the taxes were paid. He claims the increase in the deficiency which would result.

19 T.C. 879">*880 FINDINGS OF FACT.

The petitioner, a New York corporation organized in 1887, filed a consolidated income tax return for 1947 with the1953 U.S. Tax Ct. LEXIS 236">*238 collector of internal revenue for the second district of New York. The return reported income of the petitioner for itself and a number of affiliated companies.

Compania Minera de Penoles, S. A., hereafter referred to as Minera, was a Mexican corporation organized in 1887. The petitioner owned a majority of the voting stock of Minera at all times material hereto. Minera did not join in the consolidated return.

Minera was engaged in Mexico, directly and through subsidiaries from 1924 through 1947, in mining ores of nonferrous metals and of milling a portion of those ores, and until March 14, 1934, was also engaged in smelting and refining nonferrous metals. It also smelted and refined during the latter period some ores and concentrates which it purchased. It transferred its smelting and refining operations on March 14, 1934, to a subsidiary Mexican corporation herein called Metalurgica. The ores and concentrates produced by Minera contained metals not recovered through the smelting and refining operations but which passed into "secondaries." Those secondaries, during the years 1924 through 1947, were further refined through treatment at plants of corporations other than Minera1953 U.S. Tax Ct. LEXIS 236">*239 and Metalurgica in order to recover the metals contained therein.

Minera paid a taxable dividend to its shareholders in 1947 in United States money in the amount of $ 8,250,000 of which the share received by the petitioner was $ 8,110,932.50. The petitioner included the latter amount in income on the consolidated return for 1947 and chose to have the benefits of section 131 of the Internal Revenue Code. The credit claimed in that return (as limited under section 131 (b) (1)) was $ 3,239,458.49. The petitioner claimed that Minera, during the period January 1, 1924 through 1947, had paid $ 3,496,615.43 to the Republic of Mexico under laws referred to herein as Mexican Income Tax Laws and Mexican Mining Tax Laws which the petitioner should be deemed to have paid.

The Commissioner, in determining the deficiency, allowed $ 1,103,292.06 of the credit claimed representing taxes under the Mexican Income Tax Laws converted from pesos to American dollars at the rates of exchange applicable at the time the payments were made. He disallowed the remainder of $ 2,136,166.43 which was based upon $ 2,393,323.37 of taxes paid under the Mexican Mining Tax Laws. The disallowance was made on the1953 U.S. Tax Ct. LEXIS 236">*240 ground that the taxes paid under the latter law were not income taxes or taxes in lieu of income taxes within the meaning of section 131 of the Internal Revenue Code.

The taxes imposed by the Mexican Mining Tax Laws, credit for which has been disallowed, were imposed on the production of metals 19 T.C. 879">*881 and metal compounds by the Mexican Mining Tax Laws of June 27, 1919, March 4, 1924, July 28, 1926, April 29, 1927, December 19, 1929, April 27, 1932, and August 31, 1934. They are referred to herein as production taxes. Minera properly deducted those production taxes but was not allowed to deduct for depletion, in computing its taxable net income for the various taxable years from 1924 through 1947 under the Mexican Income Tax Laws.

The Republic of Mexico owns all minerals in place within the Republic, and all mining of those minerals is through concessions from the Government. The concessions are granted without consideration but the Government has attempted to require the concessions to be worked or forfeited.

The Mexican Mining Tax Laws imposed production taxes upon the extraction of ore by the miner from the mineral deposit in Mexico. The products generally had to be delivered1953 U.S. Tax Ct. LEXIS 236">*241 by their holders for payment of the production tax within 30 days following their production unless they were to be subjected to further treatment in Mexican plants, in which case the production tax was payable when the further processing in Mexico was completed. Payment of the production tax was due at the time of export if the product was exported prior to final treatment. The production tax was less if the treatment of the material was carried to completion in Mexico than it was if the material was exported before final treatment. Discounts on production taxes were allowed on the lower grade ores and on all ores mined during the first few years from a new mine or during the first few years from a reopened mine which had not been operated during the 10 previous years. The rate of tax on copper and silver and, after March 20, 1937, on lead and zinc, increased as the price of the metal increased above a fixed amount on the New York market as determined monthly by the taxing authorities of the Republic of Mexico.

The Mexican Mining Tax and Mining Fee Law of August 30, 1934, in Article 8 imposed a tax on the production in Mexico of metals, metallic compounds for industrial uses, 1953 U.S. Tax Ct. LEXIS 236">*242 and of nonmetallic ores. The tax was on the value of the metal at rates which were highest on virgin ores and which declined through the various steps to produce the refined metal on which the rate was lowest. The rates on silver, for example, declined in 1 per cent stages from 6 per cent on virgin ores to 3 per cent on refined silver, but increased 1 per cent for each increase of 5 cents in the value of silver over 40 cents per troy ounce on the New York market. Article 13 provided as follows:

The Treasury Department shall fix monthly the values for the metals and metallic compounds assessed under Article 8, taking the averages of the market prices in New York and the sight exchange between the dollar and our domestic currency during the next previous month, according to the sales rate of Banco de Mexico.

19 T.C. 879">*882 When the metal or the product does not have regular quotation in New York, the Treasury Department shall determine the commercial or market value.

The states and territories from which the ores were mined received a small percentage of the production tax except in the case of low grade ores. The Federal Government alone could impose taxes on mining or production of1953 U.S. Tax Ct. LEXIS 236">*243 ores or metal. Failure to pay the production tax did not lead to forfeiture of the mining concession.

Other Mexican Mining Tax Laws in effect from 1924 through 1947, while not identical with that of August 30, 1934, contained more or less similar provisions.

The Mexican Mining Tax and Mining Fee Law of August 30, 1934, also imposed taxes on mining concessions for the exploitation of metallic ores in proportion to the surface area overlying the mineral deposit.

The Mexican Income Tax Laws, which first went into effect on January 1, 1924, and continued through 1947 imposed annual income taxes under various schedules and required a separate return and computation of tax under each schedule. Schedule I imposed a tax on the net income of parties, inter alia, who operated an industrial business. Minera paid at least pesos 4,046,768.83 under that schedule during the 24-year period, but it paid no taxes under that schedule for the years 1930 through 1933, 1935, 1936, and 1938 through 1940. Schedule II imposed a tax on various kinds of interest, rents, royalties and premiums, and the total taxes paid by Minera for the 24-year period under those provisions amounted to at least pesos1953 U.S. Tax Ct. LEXIS 236">*244 1,578,319.26. Schedule II also imposed a tax on "profits distributed or which should be distributed by Mexican companies of all kinds" and Minera paid taxes for the years 1942 through 1947 under those provisions amounting to at least pesos 1,018,720.93. Schedule III imposed a tax on "taxpayers who, normally or occasionally, received 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" and Minera paid taxes for the years 1925 through 1947 under those provisions amounting to at least pesos 348,013.57. Minera paid an "Extraordinary Tax" of pesos 185,443.21 in 1931. The above are the only provisions of the Mexican Income Tax Law under which Minera paid taxes during the 24-year period. The total paid was pesos 7,395,162.58. Income derived from the investment of capital in the exploitation of concessions granted by the Government was taxed at a substantially higher rate than income derived from capital invested in activities which required no concession from the Government. There was an additional rate under Schedule I for income from businesses operated under1953 U.S. Tax Ct. LEXIS 236">*245 a concession from the Government, "except banks operating under Federal concessions and mining and petroleum concessions."

19 T.C. 879">*883 The department of the Ministry of Finance which administered the Mexican Income Tax Laws was entirely separate from the department of the Ministry of Finance which administered the Mexican Production Taxes.

The Mexican Production Taxes paid by Minera from 1924 through 1947 were not income taxes or taxes in lieu of income taxes within the meaning of section 131 (a) (1) or (h).

Minera, during the years 1924 through 1947, received payment for its products and discharged its obligations mostly in American dollars. It carried on its banking mostly in American dollars. The total amounts which it received in Mexican pesos were insufficient to pay its expenses which it incurred in Mexican pesos and it had to convert American dollars into pesos in order to meet those expenses.

The only figures which Minera used in keeping its books during the years 1924 through 1947 represented "pesos 2 for 1", an artificial unit of currency based upon and related only to the United States dollar which never changed in its relative value to the United States dollar. Entries1953 U.S. Tax Ct. LEXIS 236">*246 under that system representing payments or receipts in American dollars were made by multiplying the number of dollars by 2 and entering that amount. Entries under that system representing payments or receipts in pesos were arrived at by reducing the pesos to American dollars at the rate of exchange in effect at the time of the payment or receipt and multiplying the amount in American dollars by 2.

Its tax returns filed in Mexico were on the basis of "pesos 2 for 1" except that the amounts were converted to pesos, at the then rate of exchange, in the final computation of the tax.

The dividend here in question was declared on August 4, 1947, by the Board of Directors of Minera who authorized distribution of 55 pesos 2 for 1 or $ 27.50 in United States currency per share.

All facts stipulated are incorporated herein by this reference.

OPINION.

The petitioner argues that the proceeds of mining have been regarded traditionally as being characteristically income and not mere conversions of capital or returns of cost, and the Mexican "Production Taxes have the characteristics of income or profits taxation by reason of their history, their purpose, their effects and their technical characteristics, 1953 U.S. Tax Ct. LEXIS 236">*247 that is to say, the presence in them of progressive rates of tax of historical correlation with price and presumed profit, of adjustment of rate and incidence to costs and profits as manifested in their scheme of reductions and exemptions, and of directness of burden on the taxpayer as distinguished from susceptibility to shifting of the burden to others." This foreign tax, it says, must be tested by its functional characteristics, its purpose, operation, and effect 19 T.C. 879">*884 and not by the extent to which it mirrors our own scheme of income taxation, if the credit in question is to carry out the policy of avoiding double taxation for which it was intended. It deems the credit proper where the foreign tax has an income base, even though the base is gross income. It cites a number of decisions to show that the proceeds of ores mined are gross income. It concludes that the proceeds of mining are like interest, dividends, and royalties which have always been viewed under our income tax thinking as having no capital content but as being in the nature of the rent, the usufruct, or the issue of the mining interest so that the tax falling upon mining proceeds would be the same as the 1953 U.S. Tax Ct. LEXIS 236">*248 tax falling on interest, dividends, royalties, or rentals, and would be a tax on income notwithstanding the absence of provisions for deductions. It reasons that the production taxes are not, as stated in I. T. 3945, 1949-1, C. B. 88, merely upon the value of ore produced, and therefore analogous to gross receipts or sales taxes. The production taxes, it claims, are not characterized by the fact that they apply percentages to values but are characterized rather by their profits objective as shown by the expert testimony, the preambles of certain of the decrees, and the articulation of the whole tax scheme with mining profits.

The above, as well as all of the other arguments of the petitioner and of the respondent contained in their briefs, have been carefully considered in the light of the stipulated facts, the testimony of the witnesses, the decisions cited, and the provisions of section 131 in reaching the conclusion that the production taxes may not be regarded as income taxes or taxes in lieu of income taxes within the meaning of section 131 (a) (1) or (h) so as to entitle the petitioner to the credit provided in section 131 (f) (1). The evidence does not all point one way by1953 U.S. Tax Ct. LEXIS 236">*249 any means and the difficulties of fully understanding the characteristics and purpose of this foreign tax are obvious. It is not practical to discuss every argument that has been made and the facts marshaled to support it. Nevertheless, some discussion of the petitioner's argument seems appropriate.

The petitioner cites court decisions to show that mining proceeds have always been regarded as gross profits rather than gross receipts and argues that income taxes may be imposed upon gross profits. It may be conceded, at least for the purpose of discussion, that income taxes may be imposed upon gross profits, but the question here is whether, under all of the evidence in this case, the Mexican Production Taxes are to be regarded as income taxes or taxes in lieu of income taxes within the meaning of section 131 (a) (1) or (h).

The petitioner relies upon the preambles to several decrees relating to the production taxes to show that the Mexican Government intended to impose a tax on income through the production taxes. The evidentiary value of the decrees to the petitioner is not undiluted. One 19 T.C. 879">*885 of November 25, 1919, changed the production tax rate on silver ostensibly because1953 U.S. Tax Ct. LEXIS 236">*250 an increase in world prices of the metal constituted a source of great unearned profit to producers which the nation could share without burdening the mining industry. Another of December 24, 1920, changed the production tax rate on silver because of a fall in the value of silver forcing some mines out of business and the Government felt it should permit them to obtain some profits. The third, dated April 11, 1935, again changed the rate on silver and recited:

WHEREAS, in the measure that silver reaches a higher price in the world market, the profits of the mining companies become larger and larger, without this additional increase of wealth entailing greater efforts on the part of the operators or an additional investment of capital, since when the silver reaches a price which guarantees productivity of operations and a reasonable margin of sure profits, subsequent increases in the sales price constitute super earnings not in relation to the effort and the capital of the producer;

WHEREAS, the direct ownership of the mineral deposits, established without discussion from Colonial times in favor of the Crown of Castile and subsequently transferred to the Nation in the form at present1953 U.S. Tax Ct. LEXIS 236">*251 expressly consecrated in Article 27 of the Federal Constitution, would not really be such direct ownership, if during the boom times the Nation did not obtain from the mining proceeds its proper share, both through its right of ownership and the authority which said Article 27 confers for "regulating the advantage and use of the natural elements susceptible to appropriation, to permit a fair distribution of the public wealth and to care for its preservation"; and

WHEREAS, the taxes on the production of silver should not be raised any further, while the price of this product does not rise above 77 pesos per kilogram, but, on the other hand, if the prices rise higher, it shall be fully justified to collect a part of the excess by way of taxes, applying them to purposes which might redound to the immediate benefit of the Nation; I considered it advisable to issue the following Decree:

A decree of February 11, 1931, granted some exemptions after reciting that the mining industry represented the main support of the national economy and a decline in that industry would aggravate the depressing exchange situation. Another dated January 1, 1935, provided that the rate of production tax on1953 U.S. Tax Ct. LEXIS 236">*252 silver and copper would depend upon the New York prices converted into pesos at current exchange rates. That was done so that the Mexican Government would not suffer loss of taxes due to the decline of the exchange value of the pesos. The fact that the rates of production taxes were lower on refined metals than on virgin ores was to encourage complete processing in Mexico and sheds no particular light on the present question. It is obvious from the decrees, the "progressive rates" and the testimony, that the Mexican Government, in imposing the production taxes, gave some consideration to the profit problems of the miners and the industry, as well as to the share of the value of the metals which the state should have as a result of its ownership of the ores in place, nevertheless, it did not base the production taxes on profits so as to make those taxes income taxes. Real estate taxes might conceivably 19 T.C. 879">*886 be reduced during a depression for somewhat similar reasons without thereby indicating that profits were the basis of the tax.

The principal argument of the petitioner is that the production taxes were income taxes and it does not make an extensive separate argument that1953 U.S. Tax Ct. LEXIS 236">*253 they were taxes in lieu of income taxes. They were in effect before Mexico imposed any income taxes and they continued to be in effect thereafter without substantial change. It is not apparent that any change was made in the production taxes as a result of the later enactment of the Mexican Income Tax Laws. There is evidence that under one or more of the schedules the income taxes on miners were somewhat less than on other concessionaires of the Government, but that circumstance is not relied upon and is insufficient to show that the production taxes were "taxes in lieu of income taxes" within the meaning of section 131 (h). The record does not justify a finding that the production taxes were ever intended to be or were taxes in lieu of income taxes.

The production taxes for which credit is claimed were imposed and paid during the 24 years from 1924 through 1947. Mexican Income Tax Laws were also in effect during all of those years. The production taxes were in effect prior to that period but the income taxes were not. The production taxes paid by Minera during the 24 years amounted to more than three times the income taxes paid during that same period. Annual deductions, 1953 U.S. Tax Ct. LEXIS 236">*254 including one for the production taxes but none for depletion, were allowed in computing the net income of Minera for Mexican income tax purposes, but deductions were not granted under the Mexican Production Tax Laws. The Republic of Mexico owned the ore in place, the mining of which gave rise to the production taxes. The miner paid the Government nothing for the minerals mined except as the taxes, particularly the production taxes, might represent such payment. The production taxes were payable when the metals were mined regardless of whether or not they were subsequently sold and regardless of whether or not any profit resulted. Minera did not pay income taxes during at least 9 of the 24 years, due to losses or insufficient income, but it was required to pay production taxes in each of the 24 years. These are some of the circumstances which have led to the conclusion that the production taxes were not income taxes.

The only other question requiring decision is the issue raised by the respondent. He claims that he erred in allowing a credit based upon payments converted into dollars at the rate of exchange prevailing at the times when the taxes were paid. He relies heavily 1953 U.S. Tax Ct. LEXIS 236">*255 upon the case of Bon Ami Co., 39 B. T. A. 825, but that case is not in point. There, the foreign taxpayer kept its books on the basis of the foreign currency so that the foreign tax paid, the accumulated earnings, and the ultimate dividend were all in terms of foreign currency and there 19 T.C. 879">*887 was no occasion to reduce any of them to United States currency until the dividend was paid and the credit computed. Here the foreign subsidiary kept its books so that tax payments, earnings, and dividends were currently and exclusively reflected in the equivalent of United States currency as opposed to foreign currency, and the "proportionate part" of the foreign tax represented in the dividend can only be determined by reference to the subsidiary's books. The exchange rate at the time the foreign taxes were paid and accounted for was used to translate those payments into United States currency for entry in the books at that time. Thus, the exchange rate at the date of the dividend had no relation to the amount of foreign tax paid, to the accumulated earnings, or to the dividend paid. The whole account of Minera had been stated from start to finish in the1953 U.S. Tax Ct. LEXIS 236">*256 equivalent of dollars rather than in the equivalent of Mexican pesos, and no foreign exchange problem arises.

The result of this decision is to leave the parties where we found them on both issues.

Decision will be entered in accordance with the notice of deficiency.