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Commissioner of Internal Revenue v. Scottish American Inv.Co. Ltd.

April 6, 1944

COMMISSIONER OF INTERNAL REVENUE
v.
SCOTTISH AMERICAN INV.CO., LIMITED; SAME V. BRITISH ASSETS TRUST, LIMITED; SAME V. SECOND BRITISH ASSETS TRUST, LIMITED.



On Petitions to Review Decisions of the Tax Court of the United States.

Author: Mclaughlin

Before JONES, GOODRICH, and McLAUGHLIN, Circuit Judges.

McLAUGHLIN, Circuit Judge.

These are companion cases and were argued together. The respondent companies are British corporations. The question is: Whether they were engaged in trade or business or had an office or place of business within the United States in the taxable years 1938 and 1939 so as to qualify within the meaning of Section 231(b) of the Revenue Act of 1938 and of the Internal Revenue Code, 26 U.S.C.A. Int. Rev. Code, § 231(b), as resident foreign corporations. The section reads:

"(b) Resident corporations. - A foreign corporation engaged in trade or business within the United States or having an office or place of business therein shall be taxable as provided in section 14(e)(1)."

Treasury Regulations 101, Article 231 - 1, with respect to the above section, is as follows:

"As used in section 231, section 119, section 143, section 144, and section 211, the phrase 'engaged in trade or business within the United States' includes the performance of personal services within the United States at any time within the taxable year. Such phrase does not include the effecting of transactions in the United States in stocks, securities, or commodities (including hedging transactions) through a resident broker, commission agent, or custodian.

"Whether a foreign corporation has an 'office or place of business' within the United States depends upon the facts in a particular case. The term 'office or place of business,' however, implies a place for the regular transaction of business and does not include a place where casual or incidental transactions might be, or are, effected."

The corresponding Revenue Act section and Treasury Regulations for 1939 are substantially the same.

The problem here presented is one of law, namely, whether on the facts these companies are entitled to be classified as resident foreign corporations under the Internal Revenue Code. See Dobson v. Commissioner, 320 U.S. 489, 64 S. Ct. 239.

The three corporations are of the same type and admittedly, investment trusts. The Board found each of them "is engaged in the business of investing the funds of its security holders for the primary purpose of deriving income from investment." The home offices of the companies are in Edinburgh, Scotland. Up to 1936, they had made no pretense of either doing business in, or having an office in, this country. All three of them had then and have now, heavy holdings in United States securities. Prior to 1936, Scottish had made profits in the sales of such securities here. The question of income taxes arose and that company engaged the accounting firm of Barrow, Wade, Guthrie & Company of New York City, to make an audit. Following the audit, Scottish paid taxes for the years 1927 to 1934 inclusive, in excess of a million dollars, plus interest of $220,000. Thereafter there were various discussions among the three companies as to the establishment of a United States office. On December 2, 1936, they appointed Walter A. Cooper, C.P.A., of New York, a partner in the above named accounting firm, as assistant secretary of all three companies. Cooper, acting for the companies, immediately obtained two rooms in the New York building where his accounting firm had offices, and on the next floor below. Each taxpayer had a separate lease for part of the two rooms. There was a telephone there which went through the accountants' switchboard. Cooper continued his partnership with the accounting firm. It is conceded that every partner of that concern who earned outside income was required by the partnership to turn over such income to the firm. Cooper left Barrow, Wade, Guthrie & Company on October 31, 1940. Shortly thereafter, he resigned as assistant secretary of the taxpayers. Employees of the accountants were active in the installation of a bookkeeping system, and making current records, in December 1936. From February 1938 through 1939 Henry A. Jeffers, an employee of Barrow, Wade, Guthrie and Company, supervised the activities of the office.

The office eventually was moved to New Jersey. There it consisted of one large room with a corner partitioned off as a private office. There were two telephones, one directly to the accounting firm and one outside line. The Tax Board found that the taxpayers established this United States office, in part at least, "to gain certain tax advantages." Eventually that office collected and deposited dividends on stocks owned by the companies in the United States, maintained full bookkeeping records re transactions in the United States, transmitted to the home offices in Scotland corporate data and information regarding developments in this country, including statistics from the Federal Reserve Bank and the New York Times, prepared income tax returns and paid local office expenses.

Prior to the opening of the office, the actual purchases and sales of the taxpayers' United States securities had been made by brokers and the custodian banks. The securities themselves had always been in the possession of J. P. Morgan & Co. and the National City Bank, for the taxpayers. These identical conditions continued after the opening of the office. The only part the office had to do with purchases and sales was the recording of such transactions after notification that they had been accomplished. Such transactions by the brokers and the banks do not constitute engaging "in trade or business within the United States" being specifically excluded by Section 211(b) of the Revenue Act of 1938, 26 U.S.C.A. Int. Rev. Code, § 211(b), which reads:

"Such phrase (engaged in trade or business within the United States) does not include the effecting of transactions in the United States in stocks, securities, or commodities through a ...


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