1930 BTA LEXIS 1989">*1989 1. A net loss for a period ended July 31, 1919, there being no income for the year ended July 31, 1920, may not be deducted in computing taxable income for the year ended July 31, 1921.
2. Under the Revenue Act of 1921, expenditures made by a foreign corporation in conducting its business are deductible in computing its taxable income from sources within the United States only when allocable to the production of income from sources within the United States or where a ratable part of general expenditures is apportioned to income from sources within the United States. Where the Commissioner has not allowed the deduction of such expenditures, the burden is on the petitioner to establish that they are deductible in computing income from sources within the United States, and is not met by showing merely that such expenditures were made.
3. Demand loans made to concerns which are not in the business of receiving deposits are not deposits within the meaning of section 217(a)(1)(A) of the Revenue Act of 1921.
4. Evidence held to establish that petitioner, a foreign corporation, had an office and place of business within the United States.
5. Petitioner, a foreign corporation1930 BTA LEXIS 1989">*1990 with an office within the United States, sustained large losses during the taxable year. For two previous years it had no income from sources within the United States. For the taxable year it had income from sources within the United States which exceeded the deductions therefrom. In the belief that it had no taxable income because of its losses, its officers failed to file a return within the time fixed by the revenue act, but subsequently, without demand or suggestion from the taxing authorities, voluntarily filed a return which disclosed its income from sources within the United States. Held, not liable to penalty of 25 per cent of the tax imposed by section 3176 of the Revised Statues for willful neglect to file a return.
20 B.T.A. 980">*981 Respondent has determined a deficiency in income tax against petitioner for the fiscal year ended July 31, 1921, in the amount of $4,556.66 and also a penalty of $1,139.17 under section 3176 of the Revised Statutes as amended by section 1311 of the Revenue1930 BTA LEXIS 1989">*1991 Act of 1921. It is alleged that respondent erred (1) in determining that interest received from sources within the United States for the period January 1, 1921, to and including July 31, 1921, is subject to income tax; (2) in imposing the penalty; (3) in failing to allow offsetting deductions against income which may be held taxable; and (4) in refusing to permit the deduction of the amount of $73,697.57 as a net loss sustained in the taxable year ended July 31, 1919.
FINDINGS OF FACT.
The petitioner is a corporation organized and existing under the laws of Porto Rico, with its principal place of business at Fajardo, Porto Rico. It was incorporated in February, 1919.
In March, 1919, petitioner took over all the assets of Fajardo Sugar Co., a New York corporation, and in consideration thereof assumed and agreed to pay all the debts and obligations of that corporation. Under Act No. 80 of Porto Rico, approved June 26, 1919, said New York corporation became liable for Porto Rican taxes upon its 1918 income in the amount of $74,697.57. Such taxes were paid either by the New York corporation or by the petitioner subsequent to 1918. Petitioner had no income from sources within1930 BTA LEXIS 1989">*1992 the United States during the fiscal years ended July 31, 1919, and July 31, 1920.
Petitioner is and was engaged in the production of sugar cane and the manufacture of raw sugar therefrom in the island of Porto Rico. All petitioner's tangible property is situated in Porto Rico, where all its growing and manufacturing of sugar is done and its books of account are kept. It has a local resident manager in Porto Rico who superintends its activities there.
L. W. & P. Armstrong, a partnership, was from the date of the petitioner's organization and during the fiscal year ended July 31, 20 B.T.A. 980">*982 1921, the agent, fiscal and otherwise, of the petitioner. This firm had an office in New York City and one of its members was petitioner's president and another was its secretary, assistant treasurer and during part of the time assistant to the president. Both were directors on petitioner's board. On its letterheads petitioner gave the same address as its "New York Office." At this office its directors held monthly meetings unless adjourned because of sickness of a director or for other cause. Eight of its directors resided in New York City or its vicinity. Petitioner had a bank account1930 BTA LEXIS 1989">*1993 in New York City, which was comparatively small except when deposits were made for the purpose of paying dividends. In that office petitioner's income-tax returns were finally prepared and verified, and then filed with the collector of internal revenue in New York City. Reports were received at this office from Porto Rico and filed and from these, reports were prepared for the president and the directors. The petitioner had correspondence files and a safe at this office.
Petitioner made a large amount of money during 1920 which left on hand a large surplus which its officers and agent had to invest. banks paid a little more. It was determined by petitioner's agent banks paid a little more. It was determined by petitioner's agent and its officers in its New York office to put its surplus, or a part of it, out on demand loans. During the fiscal year ended July 31, 1921, petitioner received interest of $39,958.34 on advances made to West India Sugar Finance Corporation and interest of $99,291.67 on advances made to B. H. Howell, Son & Co. Petitioner during the fiscal year in question bought and sold acceptances through its New York office and in doing so made income in the1930 BTA LEXIS 1989">*1994 amount of $6,814.06. It paid interest of $61,135.88 to L. W. & P. Armstrong.
B. H. Howell, Son & Co. was, up to 1923, a partnership which was engaged in the business of buying and selling sugar in its own name or on commission. The partnership was the fiscal and financial agent for sugar companies and financed such companies by advancing or arranging for the funds necessary to produce the crop, satisfying themselves from the proceeds of its sale. For that purpose it borrowed and loaned money. This constituted a large part of the business of the partnership during the years in question and during 1921 it did a business of over $100,000,000. The partnership had no warehouses and sugar purchased and not sold was stored in the warehouses of others.
The business of L. W. & P. Armstrong was of the same character as that of B. H. Howell, Son & Co. and it did an annual business of about $20,000,000.
The business of the West India Finance Corporation, a Connecticut corporation, was of the same character as that of B. H. Howell, 20 B.T.A. 980">*983 Son & Co. and that of L. W. & P. Armstrong. By its articles of incorporation it was empowered to buy and sell sugar on its own account and, 1930 BTA LEXIS 1989">*1995 as agent for others, to engage in the manufacture of sugar, molasses, rum and other products of sugar in the islands of the West Indies, to import and export these articles, to build and operate steamships and other classes of vessels, to build, purchase or operate warehouses and wharves, and to improve, dredge and make suitable for navigation waters contiguous to same, and to acquire and take over property of others. Its authorized capital stock is $1,500,000. Its articles of incorporation contain the following provisions:
To loan moneys to the owners of sugar estates, or to firms, corporations or individuals engaged in the production, sale or dealing in sugar and to take security for such advances by pledge or mortgage of sugars, or the pledge or mortgage of or lien upon growing crops of sugar canes, or any other form of security. To sell sugars upon commission deducting from the proceeds of such sugars the amount of the advances made thereon and to do all things incidental or necessary thereto. To act as commission merchants in the purchase of supplies for sugar estates, or corporations, or individuals, or firms engaged in the manufacture of sugar, or dealing therein, and1930 BTA LEXIS 1989">*1996 generally to buy, sell and deal, both wholesale and retail, in all manner of goods, wares and merchandise. To advance to farmers, planters and agriculturists moneys and credits to assist them in the manufacture or growing of their crops, or for other purposes, secured by a mortgage on their future crops or in any other manner which the Board of Directors may determine.
* * *
To loan money on mortgage secured on real property and purchase the real property so mortgaged whenever necessary for the collection of the sums loaned thereon.
To hold, purchase or otherwise acquire, and to sell, assign, transfer, mortgage, pledge or otherwise dispose of the shares of the capital stock and the bonds, debentures, promissory notes, collateral mortgages, crop liens or any other form of security or evidence of indebtedness of other corporations, and while the holder thereof to exercise all rights and privileges of ownership, including the right to vote thereon and to issue in exchange therefor its own stock, bonds and other obligations, if necessary or advisable, in the opinion of its Board of Directors.
To borrow from banks, trust companies, or other financial institutions, or partnerships, 1930 BTA LEXIS 1989">*1997 corporations, or individuals, such moneys as may be deemed necessary or advisable in the judgment of the Board of Directors to enable it to finance and advance moneys to sugar estates, corporations, partnerships, or individuals engaged in the manufacture or dealing in sugar, or to any other corporations, firms, or individuals and to pledge as security for such advances its own evidence of indebtedness and the evidence of indebtedness, bonds, mortgages, crop liens, or any other form of security which it may receive from such estates, partnerships, or individuals, engaged in the manufacture of sugar and growing of sugar canes or otherwise as security for such loans to it.
20 B.T.A. 980">*984 Petitioner, on September 6, 1923, filed its return for the fiscal year ended July 31, 1921, and included as income from sources within the United States the amount of $39,361.61, computed as follows:
| Interest on advances to West India Sugar Finance Corporation | $39,958.34 |
| Interest on advances to B. H. Howell, Son & Co | 99,291.67 |
| 139,250.01 | |
| Less interest paid to L. W. & P. Armstrong | 61,135.88 |
| Net interest received on advances for fiscal year | 78,114.13 |
| 5/12 of this amount to cover period from August 1 to December 31, 1920 | 32,547.55 |
| Interest on acceptances | 6,814.06 |
| Taxable income | 39,361.61 |
1930 BTA LEXIS 1989">*1998 In its return it recited that it had suffered losses from sources without the United States in the amount of $771,881.30 and that it had received nontaxable income from sources within the United States as interest on United States Treasury certificates. In its return it computed the tax upon the basis of net income of $39,361.61 and paid the tax thereon under protest. Respondent has added to gross income $45,566.58 (the difference between $78,114.13 and $32,547.55). He has also asserted a penalty of 25 per cent in the amount of $1,139.17 for failure to file the return on time. Petitioner's officer who had charge of making and filing its income-tax return was of the opinion that since petitioner had suffered a heavy loss during the fiscal year it was not called upon to file an income-tax return for that year. He subsequently discovered treasury decisions to the effect that a return should be made, and, without demand or suggestion from the collector or other Federal tax officer, he prepared and filed for petitioner the income-tax return above referred to.
OPINION.
PHILLIPS: Since petitioner's fiscal year began in 1920 and ended July 31, 1921, ite income for that year is1930 BTA LEXIS 1989">*1999 taxable in the manner provided by section 205(a) of the Revenue Act of 1921 which, so far as pertinent here, reads as follows:
That if a taxpayer makes return for a fiscal year beginning in 1920 and ending in 1921, his tax under this title for the taxable year 1921 shall be the sum of: (1) the same proportion of a tax for the entire period computed under Title II of the Revenue Act of 1918 at the rates for the calendar year 1920 which the portion of such period falling within the calendar year 1920 is of the entire period, and (2) the same proportion of a tax for the entire period computed under this title at the rates for the calendar year 1921, which the portion of such period failing within the calendar year 1921 is of the entire period.
In determining the issues involved in this proceeding we must have reference to both the 1918 and 1921 Acts.
20 B.T.A. 980">*985 One of the errors assigned in the petition is that a net loss of $73,697.57 was sustained by petitioner in the fiscal year ended July 31, 1919, which it was entitled to deduct from its income for the year ended July 31, 1921. No mention is made in petitioner's brief with respect to this assignment of error and we might1930 BTA LEXIS 1989">*2000 be justified in assuming that it had been abandoned. There was, however, considerable proof introduced with respect to this issue and we proceed to discuss it. Assuming that there was a net loss for the period ended July 31, 1919, which could have been deducted from the income for the year ended July 31, 1920, under the provisions of section 204 of the Revenue Act of 1918, there is no provision in that act for carrying such net loss forward into the following fiscal year ended July 31, 1921. For this reason, if for no other, the claim of the petitioner would be denied so far as it relates to the computation of income and tax under the 1918 Act. See also ; , and cases there cited. Section 204 of the Revenue Act of 1921, dealing with net losses under that act, provides for their deduction only where sustained in a taxable year beginning after December 31, 1920, whereby it clearly appears that the facts in this case do not bring it within that section.
Furthermore, the evidence fails to show that any net loss was sustained by the petitioner during the fiscal year1930 BTA LEXIS 1989">*2001 ended July 31, 1919. Briefly summarized, the evidence shows that the petitioner in February, 1919, took over the assets and assumed the liability of a corporation of the same name incorporated under the laws of the State of New York. Under an act approved June 26, 1919, the New York corporation became liable to Porto Rico for income tax of $73,697.57. Such tax was subsequently paid either by petitioner or the predecessor company. The petitioner had no income from sources within the United States for the fiscal year ended July 31, 1919. There is no showing with respect to its income from sources outside the United States. Its claim therefore must necessarily rest upon the theory that this tax was deductible in computing its net income. This would be contrary to the express provisions of section 234(a)(3)(e) of the 1918 Act.
Petitioner asserts that it suffered a loss of $660,453.08 in its total business for the year ended July 31, 1921; that its gross income was $3,755,751.45, of which $146,064.07 has been held to be from sources within the United States; that it had expenses of $4,416,204.53, of which $61,135.88 has been allocated against United States income as interest paid1930 BTA LEXIS 1989">*2002 therein; that the remaining expense can not be allocated to any class of income and should be apportioned between income from sources within and without the United States; that the portion 20 B.T.A. 980">*986 so allocated against United States income should be allowed as a deduction against income from sources within the United States and that the result will be no taxable income. In section 234(b) of the Revenue Act of 1921 it is provided that the deductions allowed in subdivision (a) shall be allowed to a foreign corporation only "if and to the extent that they are connected with income from sources within the United States." It further provides that the proper apportionment and allocation of the deductions with respect to income within and without the United States shall be determined as provided in section 217 under rules and regulations to be prescribed. Under section 217 and the regulations it is prescribed, in effect, that deductions shall, so far as possible, be allocated to income from sources within and sources without the United States and any deductions which can not be so allocated shall be apportioned pro rata. The contention made by petitioner is sound if no allocation can1930 BTA LEXIS 1989">*2003 be made of the expenses other than those allocated to income from sources within the United States. The fact in the present case, however, is that the evidence submitted by petitioner establishes that substantially all, if not all, of the expenses which it seeks to apportion must, under the revenue acts and the regulations of the Commissioner issued thereunder, be allocated to the income produced outside the United States. The only description of such expenses which has been furnished is contained in exhibit 9 as follows:
| Operating charges: | |
| Cost of cane, including freight | $2,906,208.85 |
| Producing and manufacturing costs and selling, general and administrative expenses | 1,291,952.01 |
| Interest paid | 63,710.98 |
| Provision for depreciation | 100,060.17 |
| Provision for anticipated increased cost of replacement | 54,272.52 |
| 4,416,204.53 |
The Commissioner has allowed the interest to be deducted. The description of the remaining expenses leads to the conclusion that they were properly chargeable against operations outside the United States. Certainly petitioner has not sustained the burden of showing what amounts are to be so charged and what amounts should be apportioned1930 BTA LEXIS 1989">*2004 ratably because not attributable directly to the production of income from either of the two sources. The growing, buying, manufacturing and selling of petitioner's sugar having all occurred outside the United States, we can see no basis for the assumption made by its counsel that no part of these expenses is to be allocated to the production of income from sources without the United States and that they must all be apportioned.
20 B.T.A. 980">*987 It is clear that Congress intended to tax foreign corporations upon their net income from sources within the United States computed as provided in the statute and without regard to gain or loss upon operations elsewhere. The computation of income having been made in accordance with the statute, it is properly subject to tax.
We come next to consider the questions raised with respect to interest arising from loans made in the United States. Section 233(b) of the Revenue Act of 1918 provides:
(b) In the case of a foreign corporation gross income includes only the gross income from sources within the United States, including the interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise, dividends1930 BTA LEXIS 1989">*2005 from resident corporations, and including all amounts received (although paid under a contract for the sale of goods or otherwise) representing profits on the manufacture and disposition of goods within the United States.
It is clear that under this provision of the act petitioner's income from loans and trade acceptances is to be included in income for the purpose of computing the tax under the Revenue Act of 1918. This is conceded. The provisions of the Revenue Act of 1921 are different. Under sections 233(b) and 217(a) the gross income of a foreign corporation is to include among other things:
(1) Interest on bonds, notes or other interest-bearing obligations of residents, corporate or otherwise, not including (A) interest on deposits with persons carrying on the banking business paid to persons not engaged in business within the United States and not having an office or place of business therein, * * *
Petitioner does not question that income derived from the purchase and sale of trade acceptances is a part of its gross income within this section, but urges that the interest received upon loans to B. H. Howell, Son & Co. and West India Sugar Finance Corporation was interest1930 BTA LEXIS 1989">*2006 on deposits with persons carrying on the banking business within the United States and therefore not to be included in its gross income.
While some of the functions of the Howell Co. and the Finance Corporation resemble those performed by banks (; ), it appears that these functions are more or less incidental to the general sugar business in which they are engaged. What is more to the point, there is no evidence in the record which indicates that either of these companies is or was engaged in the business of receiving deposits. Cf. . The testimony is to the effect that the Howell Co. borrowed and loaned large amounts of money in connection with its general sugar business. The articles of the West India Finance Corporation empower 20 B.T.A. 980">*988 it to borrow from banks or other financial institutions or from partnerships, corporations or individuals in order to enable it to finance sugar manufacturers or dealers or other corporations, individuals or firms. These are limits within which these companies1930 BTA LEXIS 1989">*2007 may acquire the use of the money of others.
The difference between accepting deposits and borrowing money is so distinct that the authority of national bank officers to borrow money in behalf of the bank has been the subject of perious consideration by the Supreme Court. See ; ;. While the status of debtor and creditor is created in both the case of a loan and of deposit, the obligations are quite different. Thus an interest-bearing deposit made by a guardian has been held to be neither an investment nor a loan. ; . So where a school district treasurer deposited school funds in a bank, it was held that he had not loaned public money, an act condemned by statute unless the loan had received the approval of certain officers. ; 1930 BTA LEXIS 1989">*2008 .
While the record is none too clear as to the precise method of operation followed by petitioner's debtors, it would indicate that they operated much as do other factors in the same and other businesses who, by contract, secure the right to sell, on a commission basis, the goods produced and as a part of the contract engage to finance or act as agents in financing the goods produced. Their income arises from commissions on the sale; the financing and other services rendered are incidental. They are not engaged in the business of receiving deposits, discounting commercial paper or issuing notes which circulate as money. They are neither prepared nor required to repay these loans in the same manner in which a bank cashes a check or draft upon a deposit account. The difference between a banking deposit and a demand loan is so well known as not to require discussion. Also, it may be accepted as a general proposition that anyone may borrow money upon either time or demand loans, while the authority to receive deposits is strictly limited under our Federal and State laws. The petitioner carried these obligations upon its books as "demand loans" and the evidence1930 BTA LEXIS 1989">*2009 indicates that the term was properly used. The statute excepts only interest on "deposits." On the record we are of opinion that these debtors were not carrying on the banking business and also that these obligations were loans and not deposits.
Another condition to this exemption is that the interest must be paid to an individual or corporation "not engaged in business 20 B.T.A. 980">*989 within the United States and not having an office or place of business therein." Without discussing whether petitioner was engaged in business within the United States, within the broad meaning of that term, it is sufficient to point out that in our opinion it did have an office or place of business in New York City, and that this was also the office of its general agent. In this office its board of directors met monthly and from it that board and the officers conducted and managed the general affairs and policy of the company; there its president and secretary and assistant treasurer had their offices; there it received reports of the operation of its properties in Porto Rico, kept its correspondence files and a safe, and prepared reports for its directors; there the loans on which the interest in1930 BTA LEXIS 1989">*2010 question was paid were negotiated; there it declared and paid its dividends; there the income-tax returns were whipped into shape, signed and verified; and there it bought and sold acceptances which resulted in the income returned. It had a banking account in a New York bank out of which its dividends were paid. Its letterheads specified this address as its "New York Office." It seems immaterial that the rooms occupied were those of the partnership which was its agent; they were none the less used by petitioner as an office for the transaction of its business as distinguished from the business conducted by the partnership. It is our opinion that petitioner has not brought its income from interest on demand loans within the statutory exception and that such income is subject to income tax.
In view of the cause of petitioner's failure to file its income-tax return within the proper period and of the further facts that it was later filed at its own instance and without request or demand from any one and that the return filed has been accepted by respondent as true as to the amounts of income, we are of the opinion that petitioner has not been guilty of willful neglect of its obligation1930 BTA LEXIS 1989">*2011 and that no penalty should be imposed.
Decision will be entered under Rule 50.