The opinion of the court was delivered by: TENNEY
This is an action for refund of income tax withheld pursuant to section 1442 of the Internal Revenue Code of 1954, 68A Stat. 358 (amended Nov. 13, 1966). Jurisdiction is founded upon 28 U.S.C. [*] 1346(a)(1). The action was timely instituted and is a case of first impression. Plaintiffs and defendant have all moved for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure and have filed herein a joint statement pursuant to Rule 9(G) of the General Rules of this court, setting forth the material facts as to which there is no genuine issue to be tried. It seems clear that the only issue is one of law and that summary judgment is the appropriate remedy. A brief recital of the underlying facts, however, is necessary and may prove helpful.
During the period in question (1954-1958), plaintiffs Societe Financiere de Transports et d'Entreprises Industrielles (SOFINA), S.A. (hereinafter called "Sofina") and Societe pour la Finance et l'Electricite, S.A. (hereinafter called "Solec") were foreign corporations not engaged in a trade or business within the United States. Sofina was a Belgian corporation while Solec was a corporation organized under the laws of Luxembourg.
Solec and Sofina were the beneficial owners of the majority of stock in three United States corporations: American Intercontinental Trade Service Company (AMITAS), Inc. (hereinafter called "Amitas"), Sulectra, Inc. (hereinafter called "Sulectra"), and Belgian Services Corporation (hereinafter called "BSC"). This stock was registered in the name of Newman & Company (hereinafter called "Newman"), a domestic partnership which acted as nominee for Solec and Sofina.
At various times during the period 1954-1958, Amitas, Sulectra and BSC distributed appreciated securities in unrelated corporations to their corporate stockholders. Newman, in accordance with the provisions of section 1442 of the Internal Revenue Code of 1954, withheld tax at the appropriate rate on each dividend. However, the amount of tax withheld was computed based on the adjusted basis of the property distributed, i.e., $1,137,318.55. Upon audit, the Internal Revenue Service determined a deficiency (subsequently assessed) on the ground that Newman should have computed the withholding tax based on the fair market value of the appreciated securities at the time of distribution, i.e., $2,572,941.16.
Section 1442 provides for withholding of tax at a rate of 30 per cent (or less, if so provided by treaty) on items of income earned in the United States by foreign corporations not engaged in trade or business within the United States.
While sections 1442 and 1441 relate to the withholding of the tax, it is section 881 which imposes the tax on such corporations.
§ 881 [68A Stat. 282 (amended Nov. 13, 1966)]. Tax on foreign corporations not engaged in business in United States.
In the case of every foreign corporation not engaged in trade or business within the United States, there is hereby imposed for each taxable year, in lieu of the taxes imposed by section 11, a tax of 30 percent of the amount received from sources within the United States as interest (except interest on deposits with persons carrying on the banking business), dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable annual or periodical gains, profits, and income (including amounts described in section 631(b) and (c) which are considered to be gains from the sale or exchange of capital assets).
§ 1442 [68A Stat. 358 (amended Nov. 13, 1966)]. Withholding of tax on foreign corporations.
In the case of foreign corporations subject to taxation under this subtitle not engaged in trade or business within the United States, there shall be deducted and withheld at the source in the same manner and on the same items of income as is provided in section 1441 or section 1451 a tax equal to 30 percent thereof; except that, in the case of interest described in section 1451 (relating to tax-free covenant bonds), the deduction and withholding shall be at the rate specified therein.
Section 1441, defining the items of income on which withholding is to apply, reads as follows:
§ 1441 [68A Stat. 357 (amended Nov. 13, 1966)]. Withholding of tax on nonresident aliens.
Except as otherwise provided in subsection (c), all persons, in whatever capacity acting (including lessees or mortgagors of real or personal property, fiduciaries, employers, and all officers and employees of the United States) having the control, receipt, custody, disposal, or payment of any of the items of income specified in subsection (b) (to the extent that any of such items constitutes gross income from sources within the United States), of any nonresident alien individual, or of any partnership not engaged in trade or business within the United States and composed in whole or in part of nonresident aliens, shall (except in the cases provided for in section 1451 and except as otherwise provided in regulations prescribed by the Secretary or his delegate under section 874) deduct and withhold from such items a tax equal to 30 percent thereof.
The items of income referred to in subsection (a) are interest (except interest on deposits with persons carrying on the banking business paid to persons not engaged in business in the United States), dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable annual or periodical gains, profits, and income, and amounts described in section 402(a)(2), section 403(a)(2), section 631(b) and (c), and section 1235, which are considered to be gains from the sale or exchange of capital assets.
Were the question limited to the interpretation of §§ 881, 1441 and 1442, little difficulty would be encountered, 881 imposing the tax and 1441 and 1442 encompassing the collection by means of withholding. The difficulty is that § 301, relating, among other things, to distributions of property by a corporation to a corporate distributee, permits the corporate distributee to treat as income either the fair market value of the property received or the adjusted cost basis of the distributing corporation, whichever is lower, whereas the withholding provision of § 1442 as defined by § 1441 would compel treatment of such a distribution as being made to a non-resident alien (rather than to a corporate distributee) and require withholding on the basis of the fair market value.
§ 301, which, together with § 881, forms part of Chapter I of the Revenue Act of 1954, provides as follows:
§ 301 [68A Stat. 84 (amended Nov. 13, 1966)]. Distributions of Property.
Except as otherwise provided in this chapter, a distribution of property (as defined in section 317(a)) made by a corporation to a shareholder with respect to its stock shall be treated in the manner provided in subsection (c).
For purposes of this section, the amount of any distribution shall be -
(A) Noncorporate distributees.
If the shareholder is not a corporation, the amount of money received, plus the fair market value of ...