58 T.C. 464">*464 OPINION

Respondent determined a deficiency in petitioner's income tax in the amount of $ 46,763.71 for the taxable year 1965. The sole issue for decision is whether petitioner is entitled to a foreign tax credit under section 901¹ for the amount of British income tax on interest due from its wholly owned subsidiary and in respect of which tax was paid by the subsidiary and withheld by the subsidiary from its payment to petitioner1972 U.S. Tax Ct. LEXIS 105">*109 pursuant to section 169 of the British Income Tax Act of 1952 (hereinafter sometimes referred to as I.T.A. 1952).

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

Petitioner is a New York corporation having its principal office and place of business in Rochester, N.Y., at the time of filing the petition herein. It filed its return for the taxable year 1965 with the district director of internal revenue, Buffalo, N.Y. Petitioner maintains its books and files its tax returns on the accrual basis of accounting.

Gleason Works, Ltd. (hereinafter referred to as Limited), is a wholly owned subsidiary of petitioner organized under the laws of 58 T.C. 464">*465 Great Britain in 1959 with its principal office and place of business in England.

During 1959, 1960, and 1961, petitioner loaned Limited $ 402,000 by way of cash advances and1972 U.S. Tax Ct. LEXIS 105">*110 sold a substantial amount of equipment to Limited on an open account, the balance of which changed from month to month. Petitioner carried these amounts on its books as accounts receivable which bore interest charges of 4 1/2 percent and 5 1/2 percent. Petitioner did not accrue as income the yearly amounts of interest applicable to the receivables. ²

As of December 31, 1964, Limited owed petitioner $ 221,839.43 for interest on the receivables. Of this amount, Limited, in 1965, paid petitioner the amount of $ 135,876.73, and it withheld the amount of British tax payable on income of $ 221,839.43, pursuant to section 169, I.T.A. 1952, to wit, $ 85,962.70.

On its return for 1965, petitioner reported as interest income the $ 135,876.73 which it received, added to this amount, i.e., "grossed up," the amount of British tax withheld by Limited ($ 85,962.70), and claimed a foreign tax credit in the 1972 U.S. Tax Ct. LEXIS 105">*111 amount of $ 85,962.70 under section 901.

Section 901(b)(1) permits a domestic corporation to claim a foreign tax credit for "the amount of any income, war profits, and excess profits taxes paid or accrued during the taxable year to any foreign country." Section 1.901-2(a), Income Tax Regs., provides:

The term "amount of any income * * * taxes paid or accrued during the taxable year" means taxes proper, paid or accrued during the taxable year on behalf of the taxpayer claiming credit. * * * [Emphasis added.]

Since it is not disputed that the tax in question was properly withheld by Limited from its payment to petitioner, pursuant to I.T.A. 1952, the only question is whether such tax was an income tax paid or accrued during the taxable year by petitioner or on its behalf.

The answer to this question depends upon the effect of section 169, I.T.A. 1952, and the possible contrasting effect of section 170, I.T.A. 1952. Insofar as concerns this case, the former section relates to interest payments "Out of Profits or Gains Already Taxed" and the latter section relates to interest payments "Not Made Out of Profits or Gains Already Taxed." See pp. 473-474 infra. Respondent apparently1972 U.S. Tax Ct. LEXIS 105">*112 concedes that if the interest payments herein had been made pursuant to section 170, I.T.A. 1952, petitioner would have paid the British tax in question and would be entitled to the claimed foreign tax credit. But respondent contends herein that there is a crucial distinction between sections 169 and 170 and that, since it has been 58 T.C. 464">*466 stipulated that the interest payments herein were covered by section 169, petitioner's subsidiary paid the British tax on its own and not petitioner's behalf. Consequently, respondent asserts that petitioner is not entitled to the claimed foreign tax credit. Petitioner contends that the British tax was paid by it or on its behalf and that accordingly the claimed foreign tax credit should be allowed.

Resolution of the issue thus presented depends not only upon an analysis of British tax law but, more importantly, upon a clear understanding of the long and sometimes tortuous history of the operation of the foreign tax credit provisions of the Internal Revenue Code in relation to the British income tax. In our judgment, that understanding is an essential prerequisite to such analysis. See Holmes, The Common Law 37 (1923 ed.): "The history of1972 U.S. Tax Ct. LEXIS 105">*113 what the law has been is necessary to the knowledge of what the law is." Accordingly, we will first review that history in some detail. (For the analysis of British tax law, see pp. 472-479 infra.) In so doing, and in evaluating the impact of that history on our decision herein, we are mindful of the observation of Mr. Justice Holmes that "a page of history is worth a volume of logic." See New York Trust Co. v. Eisner, 256 U.S. 345">256 U.S. 345, 256 U.S. 345">349 (1921).

Our starting point is Biddle v. Commissioner, 302 U.S. 573">302 U.S. 573 (1938). In that case, 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 the portion of the tax it had paid "appropriate" to the dividend pursuant to Rule 20 of the British Income Tax Act of 1918. ³1972 U.S. Tax Ct. LEXIS 105">*115 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 their United States income tax for the 1972 U.S. Tax Ct. LEXIS 105">*114 amount withheld as "income * * * taxes paid or accrued" under section 131(a)(1) of the Revenue Act of 1928 (the predecessor of section 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' 58 T.C. 464">*467 contention. ⁴ The structure of its opinion has a direct bearing upon our analysis of the issue presented to us herein.

1972 U.S. Tax Ct. LEXIS 105">*116 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 in 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 standard tax as having been paid by the recipient of the dividend 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." See Biddle v. Commissioner, 302 U.S. 573">302 U.S. at 578-579; Arundel Corp. v. United States, 102 F. Supp. 1019">102 F. Supp. 1019, 102 F. Supp. 1019">1022 (Ct. Cl. 1952). Compare Commissioner v. American Metal Co., 221 F.2d 134">221 F.2d 134, 221 F.2d 134">137 (C.A. 2, 1955); Keasbey & Mattison Co. v. Rothensies, 133 F.2d 894, 897 (C.A. 3, 1943); F. W. Woolworth Co., 54 T.C. 1233">54 T.C. 1233, 54 T.C. 1233">1260 (1970); Lanman & Kemp-Barclay & Co. of Colombia, 26 T.C. 582">26 T.C. 582, 26 T.C. 582">587 (1956).1972 U.S. Tax Ct. LEXIS 105">*117

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 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 58 T.C. 464">*468 that to allow the claimed credit would extend to stockholders of a British corporation "a privilege not granted to stockholders in our own corporations." ⁵ See 302 U.S. 573">302 U.S. at 581.

1972 U.S. Tax Ct. LEXIS 105">*118 On the basis of the foregoing, the Supreme Court concluded that, although the recipient of the dividend bore the economic burden of the British standard tax, that was not sufficient to justify the conclusion that he should be allowed a credit for that tax. The fact that such economic burden resulted in his being "regarded" under British law as being liable for the tax could not be equated with having the tax imposed on the recipient of the dividend for purposes of our revenue laws. If the British standard tax could have been found to have been thus imposed, the credit would presumably have been allowed, despite the resulting inequality (see footnote 5, supra) between a United States stockholder in a United States corporation and such a stockholder in a United Kingdom corporation. Compare Wisconsin Gas Co. v. United States, 322 U.S. 526">322 U.S. 526 (1944).

The next event after Biddle was the decision of the Board of Tax Appeals in Crawford Music Corporation, 40 B.T.A. 284">40 B.T.A. 284 (1939). The question in that case was whether a foreign tax credit was allowable with respect to the British standard tax attributable to royalties 1972 U.S. Tax Ct. LEXIS 105">*119 on copyrights owned by nonresidents of the United Kingdom. The Board found that, under the British scheme of taxation, the standard tax was imposed upon the recipient of the royalties even though it was actually paid to the Crown by the payor of the royalties and, distinguishing Biddle on that ground, sustained the allowance of the credit.

Four years after Biddle, the Board of Tax Appeals was faced with a case involving a foreign tax credit claimed by a domestic corporation for the British standard tax on patent royalties, which (because payable out of profits) were covered by Rule 19 of the British Income Tax Act of 1918 (the predecessor of section 169, I.T.A. 1952). Trico Products Corporation, 46 B.T.A. 346">46 B.T.A. 346 (1942), affirmed on another issue 58 T.C. 464">*469 137 F.2d 424 (C.A. 2, 1943). ⁶ The Board, believing the Biddle case indistinguishable, denied the taxpayer any credit, on the ground that the British tax had not been imposed upon the taxpayer. It contrasted its prior decision in 40 B.T.A. 284">Crawford Music Corporation, supra, on the ground that the British scheme for taxing royalties on copyrights1972 U.S. Tax Ct. LEXIS 105">*120 not owned by United Kingdom residents differed from that applicable to patent royalties payable out of profits, in that the former were covered by Rule 21 of the British Income Tax Act of 1918 (the predecessor of section 170, I.T.A. 1952).

The next case, Irving Air Chute Co., 1 T.C. 880">1 T.C. 880 (1943), affd. 143 F.2d 256 (C.A. 2, 1944), presented essentially the same facts as the Trico Products case. ⁷ The taxpayer, arguing that the record in Trico Products was incomplete, introduced the texts of numerous British cases and a lengthy deposition upon written interrogatories and cross-interrogatories of an English barrister-at-law who specialized in tax1972 U.S. Tax Ct. LEXIS 105">*121 matters. The court concluded, however, on the authority of Biddle and Trico Products, that no credit could be allowed, the taxpayer having failed to offer a British case to the effect that when the British licensee paid the tax levied upon it without a deduction for royalties, it was accounting as an agent to the Crown for the tax withheld from the recipient under Rule 19 of the British Income Tax Act of 1918. Subsequent cases similarly denied the availability of the foreign tax credit in respect of the British standard tax relating to patent royalties. International Standard Electric Corporation, 1 T.C. 1153">1 T.C. 1153 (1943), affirmed and modified on other issues 144 F.2d 487 (C.A. 2, 1944); O. K. Tool Co., 4 T.C. 539">4 T.C. 539 (1945); Cleveland Graphite Bronze Co., 10 T.C. 974">10 T.C. 974 (1948), affirmed per curiam 177 F.2d 200 (C.A. 6, 1949).

1972 U.S. Tax Ct. LEXIS 105">*122 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 part, that:

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 Kingdom income tax appropriate to such dividend if such 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. 1377, 1384. See also Technical Memorandum of the Treasury Department on the Income Tax Convention, 2 CCH Tax Treaties 8137, 8140.]

Furthermore, article VIII of the convention negated the effect of 1 T.C. 880">Irving Air Chute Co., supra, by providing that royalties derived from 58 T.C. 464">*470 sources within the United Kingdom by a United States resident, who is subject to United States tax on such royalties, would generally be exempt from the United Kingdom income tax on said royalties. 60 Stat. 1377 at 1382. See also Technical Memorandum of the Treasury Department on the Income Tax1972 U.S. Tax Ct. LEXIS 105">*123 Convention, 2 CCH Tax Treaties at 3139.

Article VII of the treaty provided an exemption for interest income similar to that for royalties but specifically excepted from coverage "interest paid by a corporation resident in the United Kingdom to a United States corporation controlling * * * more than 50 percent of the entire voting power in the paying corporation." 60 Stat. at 1382. However, no deemed credit provision comparable to that made applicable to dividends by article XIII was included in respect of royalties or interest not entitled to such exemption.

The convention was amended by a supplementary protocol effective, as respects United States tax, for taxable years beginning on or after January 1, 1956. See [1958] 9 U.S.T. 1329. Article XIII was revised to provide that the recipient of any royalty "shall be deemed to have paid any United Kingdom tax legally deducted from the royalty or other amount by the person by or through whom any payment thereof is made" if the recipient includes the amount of such tax in his gross income. [1958] 9 U.S.T. at 1331. ⁸

1972 U.S. Tax Ct. LEXIS 105">*124 The point to make at this stage of the chronology is that there never was a conscious effort, with respect to creditability, to have one result as to royalty income and another as to interest. There was a problem as to royalty income because of the Irving Air Chute and Trico Products cases, and therefore royalties received the attention. ⁹

Another supplementary protocol came into effect in 1966. See [1966] 17-1 U.S.T. 1254. It made substantial changes in the convention required as a result of extensive revisions in the United Kingdom scheme of taxation. See Statement by Stanley S. Surrey, Assistant Secretary of the Treasury, before the Senate Foreign Relations Subcommittee on Tax Conventions, 2 CCH Tax Treaties at 8167, et seq. Article VII was revised to eliminate the provision denying an exemption in the case of interest payments between certain parent and subsidiary1972 U.S. Tax Ct. LEXIS 105">*125 corporations. See above. Article XIII was again amended to explicitly provide similar treatment for royalties and interest paid on or after April 6, 1966, with respect to the availability of a foreign tax credit.

58 T.C. 464">*471 The Technical Memorandum of the Treasury Department, commenting on the 1966 supplementary protocol to the treaty, indicates that the question involved herein was thought to be still open in 1966, notwithstanding the Biddle case. See 2 CCH Tax Treaties at 8159-8160. ¹⁰

1972 U.S. Tax Ct. LEXIS 105">*126 By way of summary, the foregoing history shows that, commencing in 1945, the disallowance by Biddle of the foreign tax credit with respect to dividends received by a United States taxpayer from a United Kingdom corporation was completely abrogated. At the same time, the effect of Trico Products and Irving Air Chute was largely nullified by the exemption of royalties and interest from the tax by the source country. Then, in 1957, the effect of Trico Products and Irving Air Chute was further modified by treaty to permit a credit for taxes deemed paid in respect of nonexempt royalties paid to a United States taxpayer by a United Kingdom payor and this modification was legislatively confirmed by the enactment of the Technical Amendments Act of 1958, which amended section 905(b) of the Internal Revenue Code. ¹¹ Conceivably, there remained a gap relating to a credit for taxes deemed paid in respect of nonexempt interest. Against the possibility that Biddle "raises some question" as to creditability of the foreign tax in respect of such interest (see footnote 10, supra), this gap was closed in favor of creditability in early 1966.

1972 U.S. Tax Ct. LEXIS 105">*127 The year before us is 1965. Respondent's position here is that the aforementioned potential gap should be closed in favor of noncreditability. Petitioner contends that, in fact, there was no gap and that 58 T.C. 464">*472 neither Biddle nor Trico Products nor Irving Air Chute should be viewed as compelling the result for which respondent contends. Aside from two very early decisions which did not directly come to grips with the problem of interest received by a United States taxpayer from a United Kingdom source, ¹² the precise question has not heretofore been ruled upon by the courts.

1972 U.S. Tax Ct. LEXIS 105">*128 Against the foregoing background, we now turn to an analysis of British law as reflected in I.T.A. 1952. Section 1, I.T.A. 1952, ¹³ imposes an income tax (the rates of which are determined by the annual Finance Acts) on all "property, profits or gains * * * described or comprised" in certain schedules set forth elsewhere in the Act. Schedule D, contained in section 122, I.T.A. 1952, provides, in part, as follows:

Section 122. Schedule D. -- * * *

1. Tax under this Schedule shall be charged in respect of --

(a) the annual profits or gains arising or accruing --

(b) all interest of money, annuities and other annual profits or gains not charged under Schedule A, Schedule B, Schedule C, or Schedule E, and not specifically exempted from tax, [Emphasis added.]