*871 1. Petitioner, a nonresident alien individual engaged in the exporting of rugs from Turkey to the United States for sale here through a resident commission merchant, must pay income taxes on the proceeds of the sales for the years 1933, 1934, and 1935. Secs. 211(a), 212(a), and 119(e), Revenue Acts of 1932 and 1934.
2. Section 211 of the Revenue Act of 1936, exempting persons in the situation of petitioner from income tax, has no retroactive application.
3. Penalties for failure to file returns and for negligence must be sustained, the first being mandatory and the taxpayer having offered, as to the second, no proof that the deficiencies were not due to his negligence or intentional disregard of rules and regulations. Revenue Acts of 1932 and 1934, secs. 291 and 293.
*1438 This is a proceeding to redetermine deficiencies in income taxes and penalties in the amounts indicated for the following years:
| Year | Deficiency | 5% penalty | 25% penalty |
| 1933 | $22,327.52 | $1,116.37 | $5,581.88 |
| 1934 | 48,302.54 | 2,415.12 | 12,075.63 |
| 1935 | 3,338.50 | 166.92 | 834.62 |
| 1936 | 33,946.26 | 1,697.31 | 8,486.56 |
| 1937 | 115,166.38 | 5,758.31 | 28,791.59 |
| Jan. 1 to Oct. 24, 1938 | 18,703.94 | ||
| Total | 241,785.14 | 11,154.03 | 55,770.28 |
*872 The 25 percent penalty was imposed pursuant to section 291 of the Revenue Acts of 1932 to 1936, inclusive, for failure to file returns, and the penalty of 5 percent was imposed for negligence in accordance with the provisions of section 293 of the Revenue Acts of 1932 to 1936, inclusive.
Respondent has conceded that petitioner is not liable with respect to the years 1936 and 1937 and the period from January 1 to October 24, 1938. The issue is whether petitioner, a nonresident alien individual engaged in the exporting of rugs from Istanbul, Turkey, to the United States for sale on consignment, is taxable in respect of the proceeds of such sales which were transmitted to him by his resident commission merchant. The facts were stipulated and are found accordingly.
FINDINGS OF FACT.
Petitioner is a resident of Istanbul, Turkey, where he has resided continuously for the past 30 years, and is a citizen of the Kingdom of Italy. From 1921 to 1938 petitioner was an exporter of rugs and raw fur skins from Turkey to various parts of the world. During that period, petitioner shipped rugs and furs to the United States and all shipments made by him to this country were on consignment*873 to H. H. Issacoulian, Inc. (hereinafter referred to as the commission merchant), of New York City, for sale by the latter company. From the sales made by the commission merchant, that corporation subtracted commissions of 7 percent on rugs and 4 percent on furs and remitted to petitioner the proceeds of the sales, less its commissions and expenses. It received no other remuneration. Until the time of the sale of the rugs shipped by petitioner to the commission merchant, the rugs remained the property of petitioner.
The commission merchant is a domestic corporation, with its place of business in New York City, and it is engaged there in the importation and sale of rugs and furs. All merchandise received by it from petitioner was delivered through the United States Customs at the port of New York on the consignment form of invoices as *1439 provided by the United States Customs laws. The commission merchant entered the goods in the Customs as consigned merchandise, with petitioner's name appearing as consignor. But it paid the duties on the consigned merchandise and it warehoused such merchandise in its own name.
The commission merchant sold the merchandise consigned*874 from petitioner as its own merchandise in its own name in the same manner as it sold merchandise owned by it. It handled all the sales and fixed the prices without consultation with petitioner. Petitioner exercised no control over sales made by the commission merchant. The latter transferred title to purchasers, invoiced sales, and collected the price from the purchasers in its own name and never in the name of petitioner.
H. H. Issacoulian is president of the commission merchant and is a brother-in-law of petitioner. Petitioner has never had an office or place of business in the United States, has never had his name on any office door or entrance to the place of business of the commission merchant, and has made only one visit to the United States in all his life, to wit, in 1938. Following that visit he returned to Turkey and was there at the date of the commencement of this proceeding.
Petitioner's relationship with the commission merchant during the entire period 1921 to 1938 was that of consignor-consignee. Petitioner has never had an interest in the commission merchant as an officer, director, or stockholder or in any other capacity. No written agreement has ever*875 existed between the commission merchant and the petitioner with respect to the consignment of merchandise by the petitioner to the former. Petitioner never was in an employer-employee relationship with anyone in the United States and has never paid wages or salaries to anyone in this country. Petitioner filed no returns for any of the years here involved. The returns were prepared and filed on behalf of petitioner by respondent, under section 3612 of the Internal Revenue Code.
OPINION.
LEECH: Respondent has conceded that petitioner is not taxable in respect of income for the years 1936 and 1937 and for the period January 1 to October 24, 1938. The only issue submitted is, then, whether petitioner, a nonresident alien individual, is taxable upon income received during 1933, 1934, and 1935 from the sale of rugs on consignment through a commission merchant located within the United States, where such rugs were purchased by buyers here.
The reason for respondent's concession as to 1936 and 1937 and part of 1938 is that, in section 211 of the Revenue Act of 1936, Congress, *1440 convinced of the impracticability of the system for taxing nonresident aliens, created a*876 new taxing scheme for such persons. Report of Committee on Finance (S. Rept. No. 2156, 74th Cong., 2d sess.). The essence of the new scheme was that nonresident alien individuals having no office or place of business in this country should be taxed at a rate of 10 percent on their income from United States sources in so far as that income consisted of interest, dividends, salaries, rents, etc., "or other fixed or determinable annual or periodical gains, profit and income"; and that nonresident aliens engaged in trade or business or having a place of business here should be taxed like everyone else. "Engaged in trade or business within the United States" was defined, however, so as not to "include the effecting of transactions within the United States in stocks, securities or commodities through a resident broker, commission agent or custodian."
In other words, from 1936 onward, persons in the situation of petitioner were exempt from Federal income tax.
Petitioner, arguing from respondent's concession and relying wholly on *877 Union Internationale De Placements v. Hoey, 96 Fed.(2d) 591, takes the position that section 211, especially section 211(b) of the Revenue Act of 1936, is a mere clarification of existing law and that he is to be similarly exempted as to 1933, 1934, and 1935.
The Report of the Committee on Finance, supra, after adverting to the unsatisfactory system for taxing nonresident aliens, does recommend "amendments to section 211(b) of the House Bill which are intended to clarify the meaning of the phrase 'engaged in trade or business in the United States'." The Circuit Court of Appeals for the Second Circuit, in Union Internationale De Placements v. Hoey, supra, relies on that committee report to support its holding that a foreign corporation, situated similarly to petitioner, is not liable for capital stock tax for the years 1933 to 1935, inclusive. But, right or wrong, that conclusion is not decisive of the present issue.
Petitioner's tax liability for the years 1933 to 1935, inclusive, is governed primarily, of course, by the Revenue Acts of 1932 and 1934. Section 211(a) of the Revenue Act of 1932 reads as follows: "In the case of a nonresident*878 alien individual who is not a resident of a contiguous country, the normal tax shall be 8 per centum of the amount of the net income in excess of the credits against net income allowed to such individual." Section 212(a) provides: "In the case of a nonresident alien individual gross income includes only the gross income from sources within the United States." Section 211(a) of the Revenue Act of 1934 is worded identically with section 212(a) of the Revenue Act of 1932. The two acts define "gross income *1441 from sources within the United States" in the same terms, in section 119(e), of which the pertinent part is as follows:
* * * Gains, profits and income derived from the purchase of personal property within and its sale without the United States or from the purchase of personal property without and its sale within the United States, shall be treated as derived entirely from sources within the country in which sold * * *. [Emphasis supplied.]
The sales of petitioner's personal property, to wit, rugs, upon the gain from which the contested deficiencies and penalties arose, took place in this country. That is the stipulation, and the law. New York Personal Property*879 Law, § 99 (Uniform Sales Act, § 18); 4 Williston on Contracts, §§ 1035-6. As to those transactions, petitioner is thus precisely within the terms of the statute and, in 1933, 1934, and 1935, derived income from sources within the United States, upon which he must pay the taxes and penalties claimed for those years.
There is nothing, either in Union Internationale De Placements v. Hoey, supra, or in the legislative history of the Revenue Act of 1936 to disturb this conclusion. In the case cited, the court ruled that the capital stock tax there sought to be imposed upon a nonresident corporation was an excise tax upon the privilege of doing business. The carrying on of business in the United States was hence an essential prerequisite to that taxpayer's liability. But we know of no authority for the proposition that, prior to 1936, a nonresident alien individual had to be engaged in business here in order to be taxed. Indeed, all the implications of the authorities are to the contrary. See Askania Werke A.G.,33 B.T.A. 875">33 B.T.A. 875; reversed on other grounds, *880 96 Fed.(2d) 717; Aktieselskabet Det Ostasiatiske Kompagni,19 B.T.A. 294">19 B.T.A. 294; Hubert de Stuers,26 B.T.A. 201">26 B.T.A. 201. So far as the legislative history of section 211 of the Revenue Act of 1936 is concerned, it is plain to us, and we have already held, that that section made a clean break with existing law. Zander & Cia, Ltd.,42 B.T.A. 50">42 B.T.A. 50. 1 That being so, even assuming the constitutionality of a retroactive statute, it would require convincing evidence of Congressional intention of retroactive application to support petitioner's position. Lynch v. Turrish,247 U.S. 221">247 U.S. 221; Hassett v. Welch,303 U.S. 303">303 U.S. 303. Such evidence is wholly absent her.
Petitioner argues on brief that "not a shred of authority exists" for the position we take here. In making this contention he has overlooked the express, unmistakable, unambiguous language of the Revenue Acts of 1932 and 1934.
*1442 The penalty for failure to file returns, in the amount of 25 percent of the*881 tax due, is mandatory where no return is filed by the taxpayer, and respondent's action in imposing it for 1933, 1934, and 1935 is sustained. We also sustain his imposition of the 5 percent negligence penalty for those three years, petitioner having offered no proof to show that he was not negligent in his tax conduct or that he did not intentionally disregard rules and regulations.
As to the years 1933, 1934, and 1935, decision will be entered for respondent. As to the years 1936 and 1937 and the period January 1 to October 24, 1938, decision will be entered for petitioner.
Estate of Isaac Fish. 1
Docket No. 96527. Promulgated June 28, 1940.
OPPER, dissenting: Presumably the sole distinction from such cases as Mary Ryerson Frost,38 B.T.A. 1402">38 B.T.A. 1402, and Everett D. Graff,40 B.T.A. 919">40 B.T.A. 919, is the application here of section 166 rather than 167. If these sections are to be treated as inconsistent so as to justify an opposite result from similar facts, in spite of intimations to the contrary (see e.g. Mary Ryerson Frost, supra, 1404; see also Ray "The Income Tax on Short Term*882 and Revocable Trusts," 53 Harvard Law Review, 1322, 1338), this seems an appropriate occasion for giving that concept expression.
LEECH agrees with this dissent.