Decisions will be entered under Rule 50.
1. Where individual petitioners at all times acted as agents or representatives of certain corporations existing or to be formed, they were not liable personally or in their individual capacity for income arising from the bargain purchase of stock of one corporation by a second corporation.
2. Under the Tax Convention and Protocol between the United States and Canada, where a Canadian corporation did not engage in trade or business within the United States and did not have a "permanent establishment" therein, such corporation is not liable to the United States for taxes on the income of such corporation from its industrial or commercial profits.
*127 These proceedings involve deficiencies in tax and additions to the tax as follows:
| Additions to tax | ||
| Year | Deficiency | under sec. 291, |
| I. R. C. 1939 | ||
| Consolidated Premium Iron Ores Limited, Docket No. 47893 | ||
| Income tax | ||
| 1943 | $ 3,052.27 | $ 763.07 |
| 1944 | 10,737.71 | 2,684.43 |
| 1945 | 31,539.91 | 7,884.98 |
| 1946 | 95,784.43 | 23,946.11 |
| 1947 | 53,205.92 | 13,301.48 |
| 1948 | 23,693.44 | 5,923.36 |
| 1949 | 42,578.06 | 10,644.51 |
| Declared value | ||
| excess-profits tax | ||
| 1943 | $ 289,091.71 | $ 72,272.93 |
| 1944 | 731.60 | 182.90 |
| 1945 | 10,960.16 | 2,740.04 |
| Excess profits tax | ||
| 1943 | $ 1,517,745.34 | $ 379,436.34 |
| Wm. R. Daley and F. Cassie Daley, Docket No. 54352 | ||
| Income tax | ||
| 1943 | $ 388,283.19 | |
| Cyrus S. Eaton, Docket No. 54396 | ||
| Income tax | ||
| 1943 | $ 1,572,234.79 |
*213 *128 Petitioner Consolidated Premium Iron Ores Limited, a Canadian corporation, acquired 1,437,500 shares of common stock of Steep Rock Iron Mines Limited, a Canadian corporation, in 1943 at 1 cent per share, pursuant to the terms of a contract entered into between the two corporations on January 15, 1943. Respondent determined, under date of January 23, 1953, that Consolidated Premium Iron Ores Limited was permitted to purchase the stock at a nominal price as compensation for services rendered in the United States and that, in 1943, it received for such services, the sum of $ 2,386,250, being the difference between the fair market value of $ 1.67 (Canadian) per share for the stock on the date of purchase and the cost of 1 cent per share.
Petitioners William R. Daley and Cyrus S. Eaton participated in the negotiations which resulted in the execution of the contract of January 15, 1943. They and members of their respective families, and relatives, beneficially owned all of the stock of Consolidated Premium Iron Ores Limited from September 1943 until after December 31, 1949. Under date of June 1, 1954, respondent, "to protect the revenue," determined the deficiencies as to the individuals, *214 including 80 per cent of the amount charged as income to Consolidated Premium Iron Ores Limited in the income of Eaton and 20 per cent in the income of Daley, in each case under section 22 (a), Internal Revenue Code of 1939, as compensation for alleged promotional and financial services rendered by them to Steep Rock Iron Mines Limited, thereby ignoring the existence of the corporate entity of petitioner Premium.
Respondent contends on brief that the alleged bargain purchase of stock, as just outlined, was for promotional services rendered by Daley and Eaton to Steep Rock Iron Mines Limited and that the amount as computed by him was income to them in 1943 or, in the alternative, that it is taxable to Premium as income derived from sources within the United States. Aside from the above issue and the question of the value of the stock, should such question be reached for decision, all of the other issues relate to Consolidated Premium Iron Ores Limited. They are:
Whether Consolidated Premium Iron Ores Limited was a resident foreign corporation engaged in trade or business within the United States, under the provisions of section 231 (b), 1939 Code, and had a "permanent establishment" *215 in the United States within the meaning of the United States-Canadian Tax Convention, and, if so --
(1) The amount of its income from sources within the United States from --
(a) The alleged bargain purchase of 1,437,500 shares of stock of Steep Rock Iron Mines Limited,
*129 (b) Commissions earned on the sale of iron ore under the contract of January 15, 1943,
(c) Capital gains,
(d) Interest, if any, on a loan of 45,000 shares of common stock of Steep Rock Iron Mines Limited to Otis & Co., and
(2) (a) Whether it complied with the provisions of section 233, 1939 Code, for the filing of returns and is entitled to the benefit of deductions and credits and, if so,
(b) Whether proof was made of the amount of the deductions.
A further question involving Consolidated Premium Iron Ores Limited is whether the additions to tax for failure to file timely income, declared value excess-profits, and excess profits tax returns were properly imposed.
If it be held that Eaton and Daley, throughout the transactions here involved, acted as agents or representatives of Otis or of Premium and not personally or in their individual capacity, such holding disposes of the individual liability of Eaton and Daley. If *216 it be held further that petitioner Premium was not engaged in trade or business within the United States, or did not have a "permanent establishment" in the United States under the Tax Convention and Protocol between the United States and Canada, such holding disposes of all issues as to Premium except the interest item, and possibly additions to the tax for the tardy filing of Premium's tax returns.
FINDINGS OF FACT.
Petitioner Cyrus S. Eaton, hereinafter referred to as Eaton, and petitioner Wm. R. Daley, hereinafter referred to as Daley, are citizens of the United States and at all times important had offices in the Cleveland, Ohio, suite of Otis & Co., a Delaware corporation, hereinafter referred to as Otis, at 2000 Terminal Tower in that city. Eaton filed his return and Daley and petitioner F. Cassie Daley, his wife, filed their joint return, each for the taxable year 1943, with the then collector of internal revenue for the eighteenth district of Ohio.
Petitioner Consolidated Premium Iron Ores Limited, hereinafter referred to as Premium, was organized under the laws of the Province of Ontario, Canada, as a Private Company on November 14, 1942, with a capital stock consisting of *217 20,000 shares of preferred stock, par value $ 10 each, and 10,000 shares of common stock of no par value. Premium was converted into a Public Company on April 18, 1944.
Premium was organized by Thomas M. Mungovan, hereinafter referred to as Mungovan, a barrister and solicitor of the Supreme Court of Ontario, at the request of Arthur W. Carr and Daley. Mungovan was empowered to designate the officers and directors of Premium. *130 He assumed the presidency and named himself a director. Two relatives who were employees of Mungovan were named as the other officers and directors. The office of Mungovan was 80 King Street, West, Toronto, Ontario, which was also the Canadian office of Premium.
All of the common stock of Premium (the only voting stock) was beneficially owned by Eaton and his children and his brothers and sisters, and by Daley and his brother or sister and his wife and children from September 1943 until after December 31, 1949. Of the total amount of $ 10,000 paid for the stock, about 10 per cent thereof was paid on December 8, 1942, and the remainder on September 28, 1943. Two thousand eight hundred and fifty shares of the preferred stock were issued and paid for at par from *218 December 8, 1942, through February 12, 1943. The preferred stock was redeemed in May 1945.
Otis was engaged in and carried on business as an underwriter and distributor of securities, a dealer in securities, and an investment company. It has offices throughout the United States. Daley was president and he and Eaton were substantial stockholders of Otis. Other members of the Daley and Eaton families held substantial proportions of the stock of Otis. Of the Otis stock outstanding from January 1, 1941, to December 31, 1949, the Daley family held about 21 per cent prior to January 1, 1946, and approximately 30 per cent thereafter, and the Eaton family, about 56 per cent.
Steep Rock Iron Mines Limited, 25 King Street, West, Toronto, hereinafter referred to as Steep Rock, was incorporated under the laws of the Province of Ontario on February 24, 1939. It owns about 7,000 acres in the Steep Rock Lake area, near Atikokan, Ontario, containing large bodies of high-grade iron ore. Three large deposits of ore had been discovered in the tract prior to 1940 but were all under the waters of Steep Rock Lake.
Until 1943 the financing of Steep Rock had been mostly of a private nature. Some funds *219 necessary for Steep Rock were provided by Arthur W. Carr, hereinafter referred to as Carr, and Transcontinental Resources, of which Carr was president. In June 1939, public offering of 375,000 shares of common stock of Steep Rock was made and these shares were sold by F. J. Crawford & Co., a Toronto investment and brokerage firm, at a price of $ 1 per share, subject to a commission of 2 1/2 cents per share.
The primary problem of Steep Rock after its organization was to secure funds for development of the mine, which was an undertaking of great magnitude. The development involved the diversion of a river which emptied into Steep Rock Lake, pumping out the lake, estimated to contain about 100 billion gallons of water, removing the mud from the bottom of the lake, the building of a powerline for a *131 distance of 125 miles, building a railway spur line and loading docks, and the installation of a plant capable of handling 2 million tons of ore a year. The management of Steep Rock believed that because of the high quality of the ore and other factors, selling the product would not be a serious problem to solve. The desire of Steep Rock was to acquire funds necessary for development without *220 giving up control of the property.
In 1940 some of the problems confronting Steep Rock, including financing, were discussed by Joseph Errington, president of Steep Rock until his death in the fall of 1941, and Major General Donald Hogarth, then executive vice president and president after the death of Errington, hereinafter referred to as Hogarth, with Robert O. Sweezey, a consulting engineer connected with securities firms, including Sweezey Securities Limited, an engineering and investment banking firm of Montreal, Canada. Promptly thereafter, Sweezey contacted Eaton and discussed the Steep Rock project with him and Daley, as representatives of Otis, and others representing steel companies at a meeting held in Cleveland, Ohio, with the idea of having Otis join Sweezey Securities Limited in some plan to finance the development of the properties of Steep Rock.
Eaton and Daley believed that the subject was worthy of consideration and as a result, Sweezey made an appointment for Eaton to discuss the matter with Errington and Hogarth in Toronto. Consideration of the matter thereafter among Daley, Eaton, and officials of Otis led to the conclusion that a public offering of securities of *221 Steep Rock by Otis was not justified at that time in the light of developments, and Eaton so advised Steep Rock. With the consent of Steep Rock, Eaton then took the matter up with Cleveland-Cliffs Iron Company, hereinafter referred to as Cleveland-Cliffs. Promptly thereafter, Steep Rock gave Cleveland-Cliffs permission to use its personnel to make an investigation of the project with the understanding that Cleveland-Cliffs would give Steep Rock the benefit of the investigation. About this time Sweezey ceased active participation in the venture.
Cleveland-Cliffs, organized about 1850, prior to and during the taxable years was engaged in the merchandising of iron ore with its principal office in Cleveland, Ohio. It acted as sales agent for mining companies and bought ore for sale by mines in which it did or did not have an interest. It did a very extensive business and is the largest merchant of iron ore in the United States. All of its stock was owned by the Cliffs Corporation, of which Eaton was a director. Eaton had been for many years prior to 1941 associated with Cleveland-Cliffs.
In the late summer of 1941, Cleveland-Cliffs concluded that it would consider a plan for developing *222 the property of Steep Rock. Representatives of the two corporations and Daley, Eaton, and Sweezey *132 held a meeting to discuss the matter of compensation to Otis and Sweezey for the part they had played in the negotiations. No conclusion was reached on the amount of the compensation, but it was decided that Steep Rock would deal only with Sweezey Securities Limited and that the latter and Otis would negotiate on a division of the compensation between them. In October 1941, Eaton informed the president of Cleveland-Cliffs that if Steep Rock and Cleveland-Cliffs reached an agreement, he would feel that he was entitled to compensation from Steep Rock for having directed it to Cleveland-Cliffs. In November 1941, it was agreed that if a transaction was concluded between Cleveland-Cliffs and Steep Rock, that Sweezey Securities Limited would receive 200,000 shares of Steep Rock stock, of which Otis would receive about one-half. Sweezey and Steep Rock also agreed that if a deal between it and Cleveland-Cliffs did not materialize, but arrangements were entered into with Otis for financing the project, that Sweezey Securities Limited would receive 100,000 shares for its service. There was *223 no agreement at that time for compensating Eaton and Daley as distinguished from the compensation to Otis.
Protracted negotiations were carried on thereafter to the middle of 1942 between Cleveland-Cliffs and Steep Rock in regard to the project. The negotiations contemplated the leasing of the property of Steep Rock by Cleveland-Cliffs on a royalty basis under which Cleveland-Cliffs would provide all financing, technical skill, management, and sales effort necessary to bring the property into substantial production and to sell the ore produced. The negotiations were terminated by Steep Rock on June 30, 1942, after being informed by Cleveland-Cliffs that it would not participate for less than 60 per cent of the profits.
Promptly after the termination of the negotiations between Cleveland-Cliffs and Steep Rock, Eaton, at the request of Sweezey, went to Toronto to confer with Hogarth, then president of Steep Rock, and other officers of Steep Rock, and thereafter Eaton discussed the matter with officers of Otis. On July 13, 1942, Eaton wrote a letter to Hogarth reading as follows:
This letter will confirm our arrangement for the financing and development of Steep Rock Iron Mines Ltd. properties *224 and the sale and distribution of the iron ore taken therefrom.
I will undertake to provide the financing up to $ 7,500,000 for the development of the Company's properties, the terms and conditions to be mutually agreed upon between us.
I will devote such time and effort as may be necessary to assist in developing a complete program for the exploitation of the Company's properties and particularly, in collaboration with you, to carry on negotiations with governmental, railroad and utility officials for satisfactory contracts for power and transportation and for such other assistance as may be desirable.
*133 You and I will work out a plan for the operation of the properties and the sale of the ore through the medium of a sales agency or such other means as we may deem in the best interest of the Company.
You designate me to provide the financing for the development of the properties on such terms and conditions as may be approved by you and the Board of Directors of Steep Rock Iron Mines Ltd.
If this letter properly states our arrangement, kindly confirm in the space provided at the close of the carbon copy of this letter.
The terms of the letter were accepted by Hogarth on behalf of Steep Rock. *225 In the above arrangemet, Eaton was acting as a representative of Otis.
On July 20, 1942, Hogarth and Eaton signed a memorandum supplementing the letter of July 13, 1942. The memorandum provided for the issuance by Steep Rock of $ 7,500,000 of first mortgage bonds at the price of 90 per cent of par value. Other provisions of the memorandum read as follows:
Mr. C. S. Eaton will arrange for power lines and for transportation of the ore by rail and water; provide contracts for the sale of iron ore; co-operate with General Hogarth and the new Board in the selection of additional personnel for the management, in the purchase of machinery and equipment, and the letting of construction contracts. Mr. Eaton will provide purchasers for the bonds. For these services and the services during the past two years in providing without cost to the Company exhaustive hydraulic and mining engineering reports and data on diversion of the Seine River and pumping of Steep Rock Lake, and the mining of the ore; reports and data of geologists relative to the quality and quantity of ore; studies and surveys by experts for marketing the ore and for providing financial plans and reports, the Company will issue *226 upon Mr. C. S. Eaton's order, upon receipt of the proceeds of the bonds, 1,875,000 shares of its common stock.
The following matters are to be performed:
(1) Arrange satisfactory freight rate with the Canadian National Railway and secure contract for spur, docks, loading facilities and equipment.
(2) Formal action by Ontario relating to $ 600,000 deposit, and construction of power transmission line.
(3) Negotiate contracts for sale of iron ore.
(4) Secure approval of Foreign Exchange Control Board of all financial steps outlined above, including payment to Underwriters in U. S. funds of their portion of underwriting fees in connection with sale of bonds in Canada.
(5) Agreement with Commissioner of Income Tax relating to taxes payable by Company.
(6) Secure authority for diversion of river and pumping out lake.
(7) Convert licenses of occupation into patents.
(8) Increase the authorized Capital Stock of Steep Rock to 6,000,000 shares.
(9) It is contemplated that a board of nine directors will be elected, five of whom will be selected by General Hogarth and four by Mr. C. S. Eaton, the entire Board to be approved by both parties.
Eaton and Hogarth discussed, on July 20, 1942, the consideration *227 which might have to be paid to steel companies to obtain adequate *134 contracts at suitable prices and in sufficient quantities to protect the bond issue; the probable extent of any enticements which must be offered to prominent individuals to accept a position on the board of directors of Steep Rock; the matter of compensation for sales and for the financing group. The discussions indicated that an additional 125,000 shares of Steep Rock would be sufficient to effect the most satisfactory sales agreement and for the other purposes. In the above matters, Eaton acted as a representative of Otis or of a sales company to be formed.
Eaton and Steep Rock were of the opinion that if the sales agency should be a profitable organization, it should be a Canadian agency or company and pay taxes in Canada. Most of the steel companies buy their requirements of iron ore from a sales company, rarely from the producer. Contacts with steel companies are an important factor in the sale of iron ore. Steep Rock did not have such contacts. Between July 20, 1942, and August 31, 1942, Hogarth and Eaton agreed that a Canadian sales company would be formed to act as sales agent and/or purchaser of Steep *228 Rock ore for a period of 10 years, the sales agency to be exclusive, subject to the fulfillment of the conditions of the agreement and payment of the usual commission on sales; make sufficient sales adequately to maintain and repay the bond issue; and cause the sales company to provide adequate financing to bring Steep Rock into production as outlined in the memorandum of July 20, 1942. Premium was formed to serve as the sales agency or selling company. It was understood from the beginning of the negotiations that Steep Rock would arrange for the sales company to have shares of the stock.
In consonance with the above program, Eaton had entered into negotiations with officials of the Canadian Government and the Province of Ontario respecting the erection of powerlines, railway transportation facilities, a reduction of freight rates, authority for diversion of the river which emptied into the lake, the erection of terminals on Lake Superior, and matters of taxation. Until these problems were solved, there could have been no successful public financing of Steep Rock bonds.
The Legislative Assembly of the Province of Ontario ratified, effective July 27, 1942, an agreement entered into *229 on April 10, 1942, between Steep Rock and the Hydro-Electric Power Commission of Ontario for the construction by the latter of an electric powerline from Port Arthur, Ontario, to Steep Rock Lake and, in February 1943, the legislature undertook to finance the cost of the powerline and to waive the customary deposit, which action resulted in a saving to Steep Rock of a capital outlay of about $ 1,600,000; on September 18, 1942, the Governor General of the Dominion of Canada approved a *135 recommendation of the Committee of the Privy Council to assist the Steep Rock development by reducing freight rates, which reduction had a present worth to Steep Rock of about $ 1,000,000, and paying the cost of construction of a spur railway line to the ore property and of an ore dock at Port Arthur at a cost of $ 2,500,000.
As of September 8, 1942, it was contemplated that the sales company (Premium) would purchase from Steep Rock $ 7,500,000 of its first mortgage bonds and 2,000,000 shares of its common stock for $ 7,500,000 United States funds, less 10 per cent, and that the sales company would sell the bonds to an American banking group headed by Otis for $ 7,405,000 and sell 1,125,000 shares of the *230 stock for $ 11,250. Of the bonds, $ 1,500,000 face amount were to be sold in Canada and the remainder in the United States.
Prior to September 8, 1942, the Foreign Exchange Board of Canada declined to authorize the sale of any of the bonds in Canada because of the substantial amount the Canadian Government was advancing in connection with the Steep Rock project and its desire to sell war bonds. The feasibility of the sale of all of the bonds in the United States was questioned by Otis, but Steep Rock and Eaton agreed that all of the bonds would be approved for sale in the United States. Consideration of the problem by Otis developed a belief that funds could be obtainable from the Reconstruction Finance Corporation, hereinafter referred to as the R. F. C.
On September 22, 1942, Eaton received oral assurance from the War Production Board, hereinafter referred to as the W. P. B., that Steep Rock could, upon application, receive top priorities for the project. On September 26, 1942, Eaton wrote a letter to Jesse H. Jones, Secretary of Commerce, stating that he represented "a big Canadian mine in the Lake Superior region" and inquired whether R. F. C. would make a first mortgage loan *231 of $ 5,000,000 to Steep Rock for the project, provided he and his associates furnished $ 2,000,000 by way of debentures and stock, to which Jones replied on October 13, 1942, that the R. F. C. would give consideration to an application provided the W. P. B. approved the project as vital to the war effort.
Thereafter, extensive discussions and negotiations took place between officials of Steep Rock and the R. F. C. and W. P. B. in regard to a loan, and Otis and Steep Rock were engaged in the preparation of a registration statement to be filed with the Securities and Exchange Commission, hereinafter referred to as the S. E. C., for the issuance of $ 2,250,000 of debentures. It was necessary to harmonize the terms and conditions of the mortgage and debenture issue. Otis was very active in the preparation of the registration statement. Daley spent some time in Washington in an endeavor to coordinate the activities of the S. E. C. and the R. F. C., and Eaton was called upon *136 on occasion for assistance. Eaton kept in close touch with the general developments of the negotiations with the R. F. C. and the W. P. B., but the major part of the negotiations and the details of the proposed loan *232 were handled by officers and other representatives of Steep Rock.
On December 4, 1942, the W. P. B. made its favorable recommendation to R. F. C. on the loan, and on December 8, 1942, Steep Rock filed a formal application with R. F. C. for a loan in the amount of $ 5,000,000. On December 19, 1942, the R. F. C. sent a letter of commitment to Steep Rock advising it that the requested loan would be made, based upon the representations made in its application.
On December 5, 1942, Otis agreed to purchase from Steep Rock $ 2,250,000 of its debenture bonds and 562,500 shares of its common stock for a total of $ 2,025,000, subject to the approval by the R. F. C. of the application made by Steep Rock to borrow $ 5,000,000.
On February 3, 1943, and February 18, 1943, the Executive Committee of the R. F. C. adopted resolutions authorizing a $ 5,000,000 first mortgage 4 per cent loan to Steep Rock, pursuant to which resolutions the full loan was subsequently made to Steep Rock.
The R. F. C. loan was subject to certain conditions and subjected Steep Rock to numerous controls. Among the conditions imposed was that the Dominion of Canada construct a loading dock at Port Arthur at a cost of about $ *233 2,500,000; construct a spur railway line to the property; reduce freight rates; that the Province of Ontario construct an electric transmission line from Port Arthur to the mine at a cost of $ 1,600,000; and that no part of the proceeds of the loan be expended until not less than $ 2,025,000 derived from the sale of debenture bonds was spent in connection with the project.
Pursuant to an underwriting agreement entered into on February 18, 1943, in March 1943, Otis purchased the bonds and stock from Steep Rock for the total agreed amount, which was at the rate of $ 900 per unit, consisting of $ 1,000 of debentures and 250 shares of capital stock. On March 15, 1943, Otis and associated dealers made a public offering of the securities. The offering was $ 1,000 per unit, consisting of $ 1,000 face amount of debentures and 200 shares of stock. Otis and the associated dealers retained as profit the difference of $ 225,000 between cost and selling price, plus 112,500 shares of stock. Otis paid Steep Rock for the bonds before the end of March 1943, although 6 months were required to dispose of all of the bonds. The underwriting and sale of the securities was a very profitable operation for *234 Otis.
During the late summer and fall of 1942, work was being done with respect to the registration with the S. E. C. of a proposed bond issue for sale in the United States. Originally a registration statement was *137 tentatively drafted on the basis of a $ 10,000,000 first mortgage bond issue, of which $ 7,500,000 was to be offered for issue to the public. The registration statement filed with the S. E. C. on December 9, 1942, related to the sale of $ 2,250,000 of sinking fund debentures and voting trust certificates for 562,500 shares of Steep Rock stock. Otis was designated in the statement as the principal underwriter. The statement, after amendments, became effective March 13, 1943.
The usual method of selling iron ore is through sales agencies from which steel companies make their purchases, generally under long-term contracts. The sales agencies generally have numerous sources of supply to enable them to make delivery of the required quantity and quality of ore at the right time. A single mine is not usually in a position to give such assurances to a buyer. Most sales agencies own stock in the mining corporations which mine the iron ore they have for sale.
On January 15, 1943, *235 Steep Rock and Premium entered into an agreement, hereinafter referred to as the sales contract. The sales contract, among other things:
1. Appointed Premium exclusive sales agent for Steep Rock for a period of 10 years after the receipt by Steep Rock of an engineer's certificate that it could reasonably mine and ship 1,000,000 tons of ore per year, for which Premium was to provide firm purchasing contracts at going prices for the delivery of not less than 10,000,000 tons during such period and of which not less than 50,000 tons should be for delivery in each year.
2. Provided that if by March 1 of each year, Premium had not sold the entire quantity of ore which Steep Rock advised would be available for sale during the ensuing shipping season, Steep Rock should be entitled to sell the balance of such ore remaining unsold.
3. Obligated Premium to handle all arrangements for rail and water transportation of the ore to market at going prices or less and provide customary cargo insurance at prevailing rates.
4. Obligated Premium to make all collections on sales and after deducting certain specified charges, including its commission on sales, to remit the proceeds monthly to Steep Rock, subject *236 to the right of Steep Rock to terminate the power and rights at the end of each shipping season or not later than December 31 of any year.
5. Provided for the payment to Premium of a commission of 2 per cent on all sales whether the sales were made by Steep Rock or Premium.
6. Obligated Premium to purchase from Steep Rock 1,437,500 shares of its capital stock at a cash price of 1 cent per share. (This commitment gave rise to the principal question in this controversy.)
*138 7. Provided that in the event the proceeds of the sale of Steep Rock's debentures in the amount of $ 2,250,000 and the first mortgage in the amount of $ 5,000,000 were insufficient to bring the ore deposits to commercial production, Premium, on demand of Steep Rock, would advance to Steep Rock for the completion of the work a sum in Canadian funds not exceeding $ 1,000,000, and as security for the promise, Premium agreed to pledge 800,000 shares of Steep Rock, subject to a right to substitute collateral of equal value in cash if Steep Rock did not object 5 days' notice in a court, provided that Steep Rock would not be prejudiced thereby.
8. Required that during the life of the contract, Premium should maintain a net worth *237 of not less than $ 500,000, or if its net worth should be less than that amount, to retain, unencumbered, ownership of not less than 500,000 shares of Steep Rock stock.
The nominal price of 1 cent per share for the stock was fixed by Mungovan in consultation with Steep Rock without discussion with, or instructions from, Eaton or Daley. There was no bargaining on the price. The amount was determined primarily for conveyancing and accounting purposes.
The 2 per cent sales commission was equivalent to about 10.2 cents per ton based upon 1942 prices, f. o. b. Lake Erie ports.
Cleveland-Cliffs estimated in January 1942, during the course of its investigation of the property of Steep Rock, that administration and selling expenses of Steep Rock would be 10 cents per ton. Independent mining engineers and geologists estimated that selling expenses would be about 5.5 cents per ton. Steep Rock disclosed in the registration statement it filed with the S. E. C. that the sales contract increased such estimated selling expenses about 6 cents per ton based upon a price of $ 5.10 per ton. The report of the independent engineers dated November 1, 1942, and included in the prospectus for the debenture *238 bonds, contained statements to the effect that the high quality of the Steep Rock ore would give it a ready market and that it would probably sell at premium prices.
The sales contract had the effect of leaving Steep Rock in control of its own operations and management, which would not have been the result if the then final proposal of Cleveland-Cliffs had been accepted by Steep Rock. It also assured the benefit of having Eaton's connections in the steel industry.
On January 23, 1943, Steep Rock notified the R. F. C. that an exclusive sales agreement had been entered into with Premium, and that it provided for the sale to Premium at a "nominal price" of 1,437,500 shares of its stock and that the stock ownership would give it an equity of about 25 per cent in the earnings of Steep Rock. The agreement *139 of Premium to purchase the stock at 1 cent per share was included in the prospectus for the debenture bond issue.
On February 22, 1943, Steep Rock authorized the issuance of 1,437,500 shares of its common stock in the name of Premium and 562,500 shares in the name of Otis. The certificates were deposited with the trustees of the voting trust established for shares of common stock of Steep *239 Rock and voting trust certificates were issued in exchange for the shares. The voting trust certificates for the 1,437,500 shares were thereafter delivered to or upon the order of Premium, pursuant to the provisions of the sales contract, and certificates for 562,500 shares were thereafter delivered to or upon the order of Otis, pursuant to the underwriting agreement of February 18, 1943.
There was an understanding at some time among the interested parties that Carr was entitled to the right to sell Steep Rock ore when it was produced, and it was at all times agreed that the selling agency should be a Canadian corporation. It subsequently developed that it was not practicable for Carr to acquire the selling agency and that it would be necessary to make some adjustment with him for his claim. It was tentatively decided that he should have a 35 per cent interest in the sales agency and that Sweezey Securities Limited should have a 7 per cent interest for the claims it was asserting. About December 1, 1942, it was agreed that Eaton and Daley should have a controlling interest in the sales agency. At that time all of the interested parties agreed that for his claim against Steep Rock *240 for services, Carr should receive a portion of the 1,437,500 shares of stock to be delivered to Premium under the sales contract. The number of shares finally agreed upon was 430,000 with the understanding that Carr would assume the obligation of Steep Rock to Sweezey Securities Limited for shares of its stock as compensation for the services Sweezey had performed in bringing the parties together. Sweezey Securities Limited agreed to the arrangement and on December 7, 1942, released Steep Rock of all claims against it for stock.
About May 1, 1943, Premium, to satisfy all of the claims of Carr for foregoing the agency contract for Steep Rock ore, authorized the issuance of 455,000 shares of its stock to him for 1 cent per share with the provision that he sell 25,000 shares of the stock to Transcontinental Resources Limited, a Canadian mining investment corporation, of which Carr was president, at the same price to satisfy an obligation incurred by Premium to Carr about March 18, 1943, and with the further provision that Carr would deposit or cause to be deposited 200,000 shares of the stock as part security for the obligation of Premium to advance, on demand, $ 1,000,000 to Steep Rock *241 under the sales contract. Thereafter, Premium delivered the stock to Carr *140 and he transferred 80,000 shares to Sweezey Securities Limited. As part of the same transaction, Carr agreed to purchase $ 400,000 face amount of Steep Rock 5 1/2 per cent debenture bonds with a bonus of 100,000 shares of its stock, for $ 400,000 (Canadian).
Pursuant to provisions of the sales contract, Premium pledged voting trust certificates for 800,000 shares of common stock of Steep Rock with the Guaranty Trust Company of Canada under an agreement entered into on May 31, 1943. Of the 800,000 shares so pledged, 200,000 were beneficially owned by Transcontinental Resources Limited. In accordance with an agreement entered into with Premium on May 29, 1943, Transcontinental agreed to deposit certificates for 200,000 shares as part of the 800,000 shares Premium was obligated to deposit in trust as security for the advance of $ 1,000,000.
On December 29, 1944, Premium purchased from Steep Rock 267,000 shares of its stock for $ 600,750 and in January or February 1945, 160,000 shares for $ 400,000. The purchases of stock were accepted by Steep Rock as a fulfillment of the obligation assumed by Premium in the *242 sales contract to advance to Steep Rock under certain prescribed conditions not less than $ 1,000,000. Thereafter, Steep Rock released the shares which had been pledged with the Guaranty Trust Company of Canada and the shares were returned to Premium and Transcontinental.
Thereafter, Premium sold substantially all of the stock as follows:
| Date | Shares | Proceeds | Purchasers |
| Dec. 29, 1944 | 100,000 | $ 225,000 | Transcontinental Rescources, Ltd. |
| Dec. 29, 1944 | 131,000 | 294,750 | Various United States citizens. |
| Jan. 26, 1945 | 32,000 | 80,000 | Bank of Nova Scotia. |
| Jan. 26, 1945 | 80,000 | 187,500 | Milner Ross & Co. |
| Jan. 30 to Mar. 1, 1945 | 80,000 | 187,500 | Pitfield & Co. |
| Total | 423,000 | 974,750 |
In consideration of the purchase by Transcontinental, Premium assigned to it a right to receive 20 per cent of the commissions paid to Premium by Steep Rock under the sales contract. The participation rights thus acquired by Transcontinental were assigned by it, on May 30, 1947, to Hogarth, who was then president of Steep Rock, for $ 50,000.
About May 27, 1943, and November 26, 1943, Daley acquired from Premium, at a cost of 1 cent per share, 185,000 and 50,000 shares, respectively, of common stock of Steep Rock.
The resolution of the directors of Premium *243 adopted May 21, 1943, authorizing the sale of 185,000 shares, reads, in part, as follows:
*141 The Chairman reported that pursuant to prior agreements, he had completed the sale to W. R. Daley of 185,000 shares of Steep Rock Iron Mines Limited at 1 cent per share. He stated that 55,000 of the said shares were to go to Mr. A. W. Carr at the same price as that paid to the Company by Mr. Daley. Further, that part of the shares would be employed to compensate for money advances and other assistance rendered and to be rendered on behalf of the Company in the U. S. A., and the balance would be placed, at a cost not exceeding that paid by Mr. Daley, in the hands of persons and firms who would be helpful to the Company particularly in establishing in the U. S. A. a market for Steep Rock ores.
The resolution authorizing the sale of 50,000 shares recites that the chairman of the board informed the directors present that he had arranged the transaction with Daley on May 19, 1943, and that the issuance of the shares had not been included in the resolution of May 21, 1943, due to oversight.
Of the 185,000 shares, 55,000 shares were transferred to Carr or his nominee or nominees at cost to Daley. Of *244 the remaining block of 130,000 shares, a total of 127,740 shares were transferred by Daley in 1943 and 1945 without consideration, or for 1 cent per share, to the following persons:
| 1943 | |
| Name | Shares |
| George E. Allen | 10,000 |
| Dorothy Bachman | 6,250 |
| A. Louise Daley | 2,000 |
| F. Cassie Daley | 5,800 |
| Kathleen Daley | 1,375 |
| Clara M. Eager | 2,000 |
| Cyrus S. Eaton, Jr | 7,690 |
| Cyrus S. Eaton as guardian for: | |
| Anna B. Eaton | 5,375 |
| Augusta F. Eaton | 5,375 |
| MacPherson Eaton | 5,375 |
| Cyrus S. Eaton | 4,000 |
| Charles A. Eaton | 10,000 |
| Margaret G. Eaton | 5,375 |
| Nell & J. G. Gosling | 10,000 |
| N. B. Griffin | 1,000 |
| R. W. Higgins | 2,500 |
| R. T. Hisey | 1,000 |
| Helen C. Hulme | 1,250 |
| Helen H. Hulme | 1,250 |
| W. B. Joyce | 10,000 |
| F. A. LeFevre | 6,250 |
| Margaret F. Nye | 2,500 |
| Roger A. Selby | 16,250 |
| Cecile B. Seiberling | 4,125 |
| 1945 | |
| W. R. Van Slyke | 1,000 |
*142 Of the block of 50,000, 44,400 shares were transferred by Daley in 1943, 1944, 1946, and 1948 on the same terms, as follows:
| Year | Name | Shares |
| 1943 | Max Barber | 15,000 |
| 1944 | Jane Daley | 2,300 |
| Investors Trust | 20,000 | |
| W. R. Burwell | 2,500 | |
| 1946 | W. R. Van Slyke | 1,500 |
| Frances B. Van Slyke | 1,500 | |
| J. Mulrooney | 100 | |
| 1948 | L. P. Van Slyke | 500 |
| W. R. Van Slyke, Jr | 500 | |
| Frances B. Van Slyke | 500 |
The remaining 5,640 shares were held by Daley on November 5, 1949.
The shares delivered to some of the individuals were transferred *245 to them at the nominal price of 1 cent per share for the help they had rendered or were expected to render the Steep Rock project.
At various times from the latter part of 1942 to April 1944, Daley and Eaton communicated with steel companies concerning the quality of Steep Rock ore and arranged for tests of the ore. The travel and other expenses of Eaton and Daley were paid by Otis.
Eaton has been a director and chairman of the board of directors of Steep Rock since May 1, 1943, and Daley has been a director of Steep Rock since October 4, 1944. Eaton agreed before August 31, 1942, to accept the offices.
About February 1944, Steep Rock entered into negotiations with Cleveland-Cliffs for the sale to it of ore when it would be available for sale. Cleveland-Cliffs was practically the only company in North America at that time which had iron ore required for open-hearth production of steel. The Steep Rock mine had such ore. Eaton actively participated in the discussions as chairman of the board of Steep Rock, as a stockholder of Premium, and as a director of the Cliffs Corporation, the parent corporation of Cleveland-Cliffs, and as a stockholder in Otis. Eaton desired to obtain a sales *246 agreement as favorable as possible to Steep Rock. Daley also participated in some of the discussions. Cleveland-Cliffs informed Daley that it did not wish to introduce the ore to the market and assume the risk during the early years without entering into a long-term contract. The negotiations resulted in a contract entered into on May 27, 1944, as of April 27, 1944, between Steep Rock and Cleveland-Cliffs for a term ending on December 31, 1957.
The preamble of the agreement recites, among other things, that Steep Rock had appointed Premium its exclusive sales agent "and as its agent to negotiate this contract;" that "Premium on behalf of Steep Rock has approached Cliffs in connection with" commitments *143 to purchase certain tonnages of ore from Steep Rock; irrevocable options on ore; serving Steep Rock in an advisory capacity and on lake transportation of ore purchased by Cliffs under the agreement.
Pursuant to terms of the agreement, Cleveland-Cliffs agreed to purchase all of the ore transported by Steep Rock to upper lake docks during the navigation season in 1944, but not in excess of certain specified amounts, and 500,000 tons each year thereafter for the remaining term of the contract; *247 with an irrevocable option to purchase an additional 1,000,000 tons each year beginning with the year 1946. Cleveland-Cliffs agreed to serve Steep Rock in an advisory capacity for a fee of 5 cents per ton of ore shipped, but not less than $ 25,000 or more than $ 100,000 per year plus certain specified expenses incurred by Cleveland-Cliffs in carrying out the duties. The contract was approved by Premium by an endorsement thereon signed by Daley in Cleveland, Ohio, as attorney in fact. Daley so signed the contract on specific authority obtained from Mungovan, president of Premium, by telephone. Premium also agreed to the contract by terms of an agreement entered into with Steep Rock as of April 27, 1944, and bound itself to remain liable under the sales contract to December 31, 1957. The preamble of the contract between Steep Rock and Premium recites that "Premium has negotiated the sale of a substantial part of the anticipated production of Steep Rock to The Cleveland-Cliffs Iron Company * * *."
All of the ore produced and sold by Steep Rock to the close of 1949 was sold to Cleveland-Cliffs pursuant to the terms of the agreement of April 27, 1944, except for 4,265 tons in 1946 which *248 reached the docks too late for transportation down the lakes and were sold by Steep Rock for delivery by rail at Duluth. The commissions payable to Premium on sales made during the years 1944 to 1949, inclusive, were as follows:
| Year | Tons | Commissions |
| 1944 | 16,693 | $ 1,760.45 |
| 1945 | 504,772 | 55,681.01 |
| 1946 | 830,409 | 88,484.14 |
| 1947 | 1,206,246 | 137,298.14 |
| 1948 | 686,091 | 58,488.51 |
| 1949 | 1,132,690 | 120,049.18 |
| Total | 4,376,901 | 461,761.43 |
The R. F. C. and the S. E. C. were informed in late 1942 or early 1943 that Premium would be the selling agent for Steep Rock ore. On January 18, 1943, Premium filed with the secretary of state of Ohio an application, signed on December 18, 1942, for a permanent license to do business in the State of Ohio. The application recited that the corporation expected to begin transacting business in Ohio about *144 January 2, 1943; that the purpose of the corporation was to buy, sell, trade, and deal in iron ores; and that Daley was its agent for service of process. The license so applied for was issued on the same date and remained in effect until August 14, 1950, on which date it was surrendered. Thereafter, Premium filed with the secretary of state, annual statements in each of the years 1944 to 1949, *249 inclusive, in each of which is reported that it had no assets in Ohio, that it had not transacted any business in Ohio during the previous year, and that its Ohio office was located at 2000 Terminal Tower, Cleveland, Ohio.
During 1943 and part of 1944, Premium did some "missionary work" in the United States with the view of obtaining commitments from steel companies to purchase Steep Rock ore when the mine got into production. No organization was formed to perform the work and no organization was ever formed to sell ore in the United States.
A recitation appears in the minutes of a meeting held by the directors of Cleveland-Cliffs on March 15, 1944, that the president reported that he had been discussing with Eaton of "Premium Iron Ores, Ltd.," the possibility of entering into a contract with Steep Rock for the purchase of iron ore from its mines.
On April 12, 1944, Eaton wrote a letter to Hogarth in which he stated, among other things, that since July 1, 1942, he had been active in introducing Steep Rock ore to the iron ore and steel industries; that he had discussed Steep Rock ore with all of the steel companies in the United States and Canada and had been in communication with important *250 English iron ore users and with six important American iron ore merchants, including Cleveland-Cliffs; that Premium could associate with itself, on an agency basis, one of the iron ore merchants, three of which were anxious to establish such a relationship; that substantial tonnages of the ore could be sold outright to Cleveland-Cliffs, which had offered to purchase the entire output in 1944 and to purchase tonnage up to 1,500,000 tons a year as soon as the mine could produce that quantity; and he recommended that the offer of Cleveland-Cliffs be accepted.
On April 19, 1944, the president of Cleveland-Cliffs reported to the directors that progress was being made in negotiations with representatives of Premium and Steep Rock. The minutes of a meeting of the executive committee of the directors of Cleveland-Cliffs held on April 27, 1944, contained a statement that the president reported that for several months the officers of Cleveland-Cliffs had been conferring with representatives of Premium and Steep Rock concerning a contract for the purchase of Steep Rock ore.
On April 25, 1944, the directors of Premium adopted a resolution reading, in part, as follows:
*145 The arrangements heretofore *251 made for the location of the Company's chief place of business in Ohio at Room 2000 Terminal Tower, Cleveland, were approved. No arrangement as to expense of said office was completed at this time. * * *
On August 28, 1944, Daley wrote a letter to the R. F. C. requesting its approval of changes in the sales contract. The letter was written on stationery containing a printed letterhead as follows:
2000 Terminal Tower
Cleveland 13, Ohio
The letter was signed "PREMIUM IRON ORES LIMITED, By: Wm. R. Daley." Two other letters written by Daley in 1944 on the same subject were on paper containing the same printed heading.
Otis performed services for Steep Rock in the United States, one of which was expediting delivery of critical material, and sought reimbursement from Steep Rock for its actual expenses. The R. F. C. declined to approve the expenditures by Steep Rock. Premium was then requested to make the payment, but it could not do so without approval of the Canadian Foreign Exchange Control Board.
In November 1944, the Royal Bank of Canada submitted an application of Premium to the Foreign Exchange Control Board of Canada to use $ 10,000 for the purpose of opening an account with the Central *252 National Bank, Cleveland, Ohio, to pay expenses in the United States in connection with the maintenance of an office in Cleveland, including rent, clerical help, traveling expenses, and engineering and consulting fees. Additional information was requested by the Board for consideration of the application. The additional information requested by the Board was supplied by Daley on December 11, 1944, in a letter addressed to Mungovan, in which he said: That the Cleveland address of Premium was 2000 Terminal Tower, Cleveland 13, Ohio; that the office was operated by Eaton and Daley with clerical help; that all of the funds in the past for the operation of the office had been supplied by Otis, which was controlled by Eaton and Daley; that no approximation could be made of expenses incurred in the United States to date because no allocation of rent, clerical help, stenographic services, or time employed by Eaton and Daley had been made; that a fair allocation over the past 2 years would run into many thousands of dollars; that expenses had been incurred introducing the iron ore to the consuming trade and in establishing a market for the ore; that "Our idea for the next three months and *253 perhaps for all of 1945 is to continue to operate the Premium sales offices through Otis & Co. until such time as we have taken on full time sales representatives and a full time accounting department. This will not be necessary until Steep Rock is in full production"; that Premium has the obligation of selling all ore not taken by Cleveland-Cliffs; that *146 Premium has been responsible for establishing the price for Steep Rock ore and that no price even approaching the price which it will receive from Cleveland-Cliffs for certain grades of lump ore would have been received except through its efforts; that this work would have to be continued throughout the life of the sales contract and that reimbursement to Eaton and Daley to December 31, 1944, be limited to an aggregate of $ 5,000. The letter contained the following printed heading:
2000 Terminal Tower
Cleveland 13, Ohio
The Control Board authorized disbursement of a specific amount for expenses incurred and $ 300 per month for future like expenses.
Financial statements of Premium disclosed "rent and services" of the Cleveland office as follows:
| Year | Amount |
| 1943 | 1*254 $ 5,500.00 |
| 1944 | |
| 1945 | 3,985.56 |
| 1946 | 3,600.00 |
| 1947 | 3,600.00 |
| 1948 | 3,600.00 |
| 1949 | 3,600.00 |
Payment of the expenses was made by a series of checks payable to Otis, beginning with a $ 7,215.06 check dated May 8, 1945. The payments were credited to miscellaneous income on the books of Otis.
The operating expenses of Premium before taxes for the years 1944 to 1949, inclusive, were as follows:
| Year | Amount |
| 1944 | $ 6,256.72 |
| 1945 | 20,485.00 |
| 1946 | 29,510.73 |
| 1947 | $ 46,400.81 |
| 1948 | 31,367.88 |
| 1949 | 42,002.05 |
The books of account of Premium which were kept in Toronto, Canada, disclose amounts incurred in 1944, 1946, 1947, 1948, and 1949 for traveling by Daley, Eaton, or Otis.
Except for $ 300 paid to an accountant in 1945, Premium paid no compensation to employees, including officers, during the years 1943 to 1949, inclusive.
No sales office was formed by Premium in the United States for the sale of Steep Rock ore because Cleveland-Cliffs purchased, with the exception above shown, all of the ore produced by Steep Rock.
The traveling expenses incurred by Daley to the early part of 1943 on trips to Canada to make contact with officers of Steep Rock were paid by Otis and Otis was not reimbursed therefor.
*147 Aside from authority to approve the contract of April 27, 1944, between Steep Rock *255 and Cleveland-Cliffs, as attorney in fact, Premium never expressly authorized Daley or Eaton to perform any acts for it in the United States. As stockholders of Premium, Daley and Eaton were always interested in the affairs of Premium and, as such, furthered the interest of Premium without express authority of its president or directors.
Excluding securities purchased for Premium by Otis, Premium never had any assets, or a bank account or kept any books or had employees in the United States. The name of Premium did not appear on the door of any office or in a telephone directory in the United States.
In all of the negotiations and activities respecting the Steep Rock project, Eaton and Daley acted as representatives or agents either of Otis or of Premium and not personally or in their capacity as individuals.
Petitioner Premium never had a "permanent establishment" in the United States, within the meaning of that term as employed in the Tax Convention and Protocol between the United States and Canada and was never engaged in trade or business in the United States.
Premium was advised by Daley and Mungovan, both experienced and competent lawyers, that it was not obliged to file tax returns *256 in the United States. It filed no returns for the years 1943 through 1949 within those taxable years. It filed tax returns for all such years on August 9, 1951. The delay in filing the tax returns of Premium was due to reasonable cause and not to willful neglect.
OPINION.
It is at once evident on the statement of the issues in these cases that respondent has taken two utterly inconsistent positions in his determinations. If Premium was liable for taxes on the bargain purchase of 1,437,500 shares of Steep Rock stock at 1 cent per share, as respondent originally held, the individual petitioners cannot also be liable -- and vice versa. Confronted with this situation at the hearing, counsel for respondent elected to rely primarily on the individual liability of Eaton and Daley, the liability of the corporation being regarded as an alternative contention, an "anchor to windward" as it were. Petitioners contend that neither party is here liable -- as to the individuals, Eaton and Daley, because they did not buy or receive the stock, made no assignment of the stock, and never acted in their individual capacity; and Premium, because it never engaged in trade or business in the United States*257 and, if it earned income in the transaction, it is freed of tax liability to the United States by the Canadian-American tax treaty. We address ourselves first to the liability of the individuals.
*148 Respondent's holding that Eaton and Daley earned compensatory income for their activity in promoting and financing Steep Rock and were liable in their individual capacity is predicated on his other contentions that Eaton and Daley acted as individuals throughout the entire transaction, that the excess in value of the Steep Rock stock was constructively received by Eaton and Daley as compensation for services rendered, was by them constructively assigned to Premium, that the corporate entity of Premium is to be wholly disregarded and the income, if any, is to be attributed to Eaton and Daley, individually. Respondent cites, as authority, Lucas v. Earl, 281 U.S. 111">281 U.S. 111; Helvering v. Horst, 311 U.S. 112">311 U.S. 112; and Helvering v. Eubank, 311 U.S. 122">311 U.S. 122.
Petitioners contend that such a ruling constitutes a radical distortion and unwarranted extension of the cited cases; that Eaton and Daley neither bought nor received the stock either directly or indirectly; that the stock was never assigned by them to Premium *258 either directly or constructively; and that Eaton and Daley acted at all times in their representative capacity and contemplated the realization of profits in the shape of dividends to be received in their capacity as stockholders in Otis and Premium.
We have found as a fact that in all their dealings and negotiations involved in the Steep Rock transaction, Eaton and Daley acted solely as agents and representatives of Otis or of Premium and not personally or in their capacity as individuals. Thus it is that the income, if any was earned in the bargain purchase of the shares of Steep Rock stock, was earned by Otis or by Premium.
Undoubtedly, Eaton and Daley performed valuable services for Premium and Steep Rock. It is also beyond question that they were impelled by the profit motive in the entire transaction -- but so were Otis and Premium and so was Cleveland-Cliffs. It is one thing to be so motivated and another thing to realize a profit in a personal capacity.
Where a corporation acting through its officers or agents carries a business transaction to a successful and profitable fruition, prima facie the corporation earns the profit. Such is the usual posture in corporate dealings, *259 and normally the corporation, and not the officers or agents or stockholders, is taxable on such profits. It is only in unusual cases and under special, distinguishing circumstances that the tax incidence o'erleaps the corporate structure and fixes upon the officers or agents or stockholders. We find no such distinguishing or unusual circumstances here.
True it is, that Eaton and Daley were active and aggressive in prosecuting the organization of Premium and financing the Steep Rock project. At times they wrote letters on behalf of the corporation in personal form, but this is not an exceptional or controlling fact. The use of the personal pronoun by a corporate officer or representative in *149 speaking of commitments or obligations of the corporation must be read in the light of the individual's practice and in keeping with the context of the immediate undertaking. When the instant record is so read, the true imputation is clear.
It is axiomatic that tax liability depends upon what in fact is done, not what might have been done. Eaton and Daley were businessmen with wide experience and strong and aggressive personalities. Undoubtedly they were aware of the nature, rights, and liabilities *260 incident to corporate procedure. It is not too much to assume that they were conscious of the advantages taxwise of corporate as distinguished from individual liability. In the present day, one of the first considerations to be taken into account in almost any business deal is the incidence of taxes and the relative advantages taxwise of one procedure as against another. Nor is a taxpayer to be penalized for electing the legal or legitimate procedure that carries the least tax liability.
On examination of the sales contract between Premium and Steep Rock, it is at once evident that it was based on real and valuable considerations. The obligations which Premium assumed were important and vital to the development of the Steep Rock project. By no stretch of the imagination can the corporate entity of Premium be discounted as inconsequential or as anything else than an important party to the entire active program. Under the terms of the contract, Premium agreed to purchase the 1,437,500 shares of Steep Rock stock at 1 cent per share. It also undertook full responsibility as the sales agent for all the ore mined by Steep Rock; agreed to handle all the arrangements for the transportation *261 of the ore and provide cargo insurance; was to be responsible for all collections on sales; agreed to advance $ 1,000,000 to Steep Rock in certain contingencies and to pledge 800,000 shares of Steep Rock stock as collateral; to maintain a net worth of $ 500,000 or to retain unencumbered, ownership of 500,000 shares of Steep Rock stock.
As above noted, we have found as a fact based upon the entire record that throughout the entire time and in all phases of the transaction, Eaton and Daley were acting as the representatives and agents of Otis and of Premium. The corollary of this finding is that in respect of any tax liability, if any exists, Otis and Premium were the taxable parties, not Eaton and Daley. Herbert v. Riddell, 103 F. Supp. 369">103 F. Supp. 369; Pat O'Brien, 25 T. C. 376. The cases cited by the respondent, when properly read, do not suggest a contrary conclusion.
Addressing ourselves to the tax liability of Premium, petitioner contends that it is immune to taxation by the United States for two principal reasons: (1) That it is a foreign corporation and did not, in fact, engage in trade or business in the United States, and (2) that *150 it is a Canadian corporation without a "permanent establishment" *262 in the United States, being accordingly shielded from the taxing authorities of the United States by the express terms of the Tax Convention and Protocol between the United States and Canada. Either reason if sustained would result in a decision for petitioner Premium as to this issue. We believe petitioner is on sound ground in both contentions.
Section 231 (b), Internal Revenue Code of 1939, as amended by the Revenue Act of 1942, provides that "[a] foreign corporation engaged in trade or business within the United States shall be taxable * * *."
The key clause in this provision is "engaged in trade or business." If the foreign corporation is not engaged in trade or business in the United States, it is taxable only on interest, dividends, rents, and certain other named items under the provisions of section 231 (a) (1), Internal Revenue Code of 1939, as amended. 1*263 We have found as a fact on the record that Premium was not engaged in trade or business in the United States. Lewellyn v. Pittsburgh, B. & L. E. R. Co., 222 F. 177">222 F. 177; European Naval Stores Co., S. A., 11 T. C. 127; Linen Thread Co., Ltd., 14 T. C. 725.
That the tax treaty or Tax Convention and Protocol between the United States and Canada stands as a bar to any tax liability of Premium is very clear. By the express terms of the treaty, the tax liability of a Canadian corporation depends upon whether or not that corporation has a "permanent *264 establishment" in the United States. T. D. 5206, 1943 C. B. 526-528, 531-532, 535. 2*265 *266 *267 We have found as a fact that Premium did not have a permanent establishment in the *151 United States. This conclusive fact is very readily apparent on a study of the record.
Premium had no real office in the United States; no officers, directors, or employees here; no bank account or books of account; no telephone listing; its name did not appear on any door or office; it had no employee or agent established here who had "general authority to contract for his employer or principal," such authorized agent being one of the definitive tests of a "permanent establishment" under the treaty.
The term "permanent establishment" and the term "engaged in trade or business" both imply a place for carrying on a trade or business in the United States. Although the two terms are not synonymous, both relate to the same concept and imply the same general conditions. Thus it is that the observation of the court in Lewellyn v. Pittsburgh, B. & L. E. R. Co., supra, and the tests there laid down are pertinent here. The court in that *268 case stated:
*152 Therefore the expression "engaged in business" means the same thing as "carrying on business," and the latter expression has the same meaning as "doing business." The three expressions, either separately or connectedly, convey the idea of progression, continuity, or sustained activity. "Engaged in business" means occupied in business; employed in business. "Carrying on business" does not mean the performance of a single disconnected business act. It means conducting, prosecuting, and continuing business by performing progressively all the acts normally incident thereto, and likewise the expression "doing business," when employed as descriptive of an occupation, conveys the idea of business being done, not from time to time, but all the time. * * *
The respondent contends, in effect, that the procuring of a license from the State of Ohio and the printing of a letterhead with the same address as Otis & Co., coupled with certain isolated acts of Eaton and Daley, demonstrate that petitioner had a "permanent establishment" in the United States. The fact is that petitioner made returns to the State of Ohio each year, stating that it had not done any business under the license *269 in that year and, ultimately, surrendered the license. It is also clear that there was no agent or officer at such address authorized to do business for petitioner; that the only specific act of importance done by Daley at such office was the signing of the contract on behalf of Premium, when, recognizing that he had no authority to sign, he obtained from the Toronto office, by telephone, specific authority to execute such contract. The term "permanent establishment" normally interpreted suggests something more substantial than a license, a letterhead, and isolated activities. It implies the existence of an office, staffed and capable of carrying on the day-to-day business of the corporation and its use for such purpose, or it suggests the existence of a plant or facilities equipped to carry on the ordinary routine of such business activity. The descriptive word "permanent" in the characterization "permanent establishment" is vital in analyzing the treaty provisions. It is the antithesis of temporary or tentative. It indicates permanence and stability.
Numerous alternative plans were considered by the several parties which never matured into a definite program. Undoubtedly at *270 one stage in the development of the program it was suggested and contemplated that Premium would develop a real establishment in Ohio, but this part of the plan was never implemented. The occasional use of a letterhead showing the Cleveland office of Otis & Co., is not sufficient. Necessary activities were handled through Otis & Co., with no special office or organization attributable to Premium. Premium paid Otis & Co. for "rent and services" of a Cleveland office, but the Commissioner does not argue strenuously that Premium really had any employees there. The services were actually performed for Steep Rock and reimbursement was originally sought from it. The payment by Premium for services actually not rendered to it does not *153 establish an office of Premium in Cleveland. Under the facts we cannot find that petitioner had a "permanent establishment" in the United States.
Since Premium had no "permanent establishment" in the United States, to the extent that its income comes within the treaty, such income is free of taxation by the United States.
By the above holdings, we have disposed of all of the issues in these cases excepting a minor dispute as to the taxability of Premium *271 for certain interest arising out of the loan of 45,000 shares of Steep Rock stock during each of the years 1944 through 1949. This item is not included in the tax-exemptive provisions of the Tax Convention. The record, however, as to this item is not sufficiently clear to justify an adequate findings of fact. Since the burden of proof in respect of the item rests on petitioner Premium, that corporation must bear the onus of failure of proof.
Respondent held that Premium should be penalized by an addition to the tax for tardy filing of its tax returns. The record shows that Premium was advised by competent experienced counsel that it had no tax liability to the United States and owed no duty to file returns. The considerations raised in this case well illustrate the difficulties involved in Premium's tax situation. Petitioner's delay in filing its tax returns was due to reasonable cause and not to willful neglect.
Decisions will be entered under Rule 50.
Footnotes
*. Proceedings of the following petitioners are consolidated herewith: Wm. R. Daley and F. Cassie Daley, Docket No. 54352, and Cyrus S. Eaton, Docket No. 54396.↩
1. Paid in 1945 for 1943 and 1944.
1. SEC. 231. TAX ON FOREIGN CORPORATIONS.
(a) Nonresident Corporations. --
(1) Imposition of tax. -- There shall be levied, collected, and paid for each taxable year, in lieu of the tax imposed by sections 13 and 14, upon the amount received by every foreign corporation not engaged in trade or business within the United States 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, a tax of 30 per centum of such amount, except that in the case of corporations organized under the laws of any country in North, Central, or South America, or in the West Indies, or of Newfoundland such rate with respect to dividends shall be reduced to such rate (not less than 5 per centum) as may be provided by treaty with such country.↩
2. Section 7.20. Introductory. -- * * *
Article I.
An enterprise of one of the contracting States is not subject to taxation by the other contracting State in respect of its industrial and commercial profits except in respect of such profits allocable in accordance with the articles of this convention to its permanent establishment in the latter State.
* * * *
Article II.
For the purposes of this convention, the term "industrial and commercial profits" shall not include income in the form of rentals and royalties, interest, dividends, management charges, or gains derived from the sale or exchange of capital assets.
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Article III.
1. If an enterprise of one of the contracting States has a permanent establishment in the other State, there shall be attributed to such permanent establishment the net industrial and commercial profit which it might be expected to derive if it were an independent enterprise engaged in the same or similar activities under the same or similar conditions. * * *
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Article VIII.
Gains derived in one of the contracting States from the sale or exchange of capital assets by a resident or a corporation or other entity of the other contracting State shall be exempt from taxation in the former State, provided such resident or corporation or other entity has no permanent establishment in the former State.
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PROTOCOL.
3. * * * (f) the term "permanent establishment" includes * * * offices, agencies and other fixed places of business of an enterprise, but does not include a subsidiary corporation.
When an enterprise of one of the contracting States carries on business in the other contracting State through an employee or agent established there, who has general authority to contract for his employer or principal * * * such enterprise shall be deemed to have a permanent establishment in the latter State.
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Pursuant to section 62 of the Internal Revenue Code, Article XVIII of the convention, and other provisions of the internal revenue laws, the following regulations are hereby prescribed and all regulations inconsistent herewith are modified accordingly:
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Sec. 7.23. Scope of Convention With Respect to Determination of "Industrial and Commercial Profits" of a Nonresident Alien Individual, Resident of Canada, or of a Canadian Corporation or Other Entity Carrying on a Canadian Enterprise in the United States. -- (a) General. -- Article 1 of the convention adopts the principle that an enterprise of one of the contracting States shall not be taxable in the other contracting State in respect of its industrial and commercial profits unless it has a permanent establishment in the latter State. Hence, a Canadian enterprise is subject to United States tax upon its industrial and commercial profits to the extent of such profits from sources within the United States only if it has a permanent establishment within the United States. From the standpoint of Federal income taxation, the article has application only to a Canadian enterprise and to the industrial and commercial income thereof from sources within the United States. It has no application, for example, to compensation for labor or personal services performed in the United States nor to income derived from real property located in the United States nor to any interest in such property, including rentals and royalties therefrom, nor to gains from the sale or disposition thereof, nor to dividends and interest. Such enumerated items of income, to the extent covered by the convention, are treated separately elsewhere in these regulations and are subject to the rules laid down in the sections having specific reference to the respective items of income. * * *