*1540 Amounts accrued under an agreement with the People's Commissariat of Foreign Trade of the Union of Soviet Socialist Republics have not been shown to be deductible as taxes or as ordinary and necessary expenses.
*327 The Commissioner determined the following deficiencies in income-tax liability:
| Taxpayer | Docket No. | Period | Amount |
| Products Exchange Corporation | 31749 | an. 1 to Apr. 30, 1924 | $112.60 |
| Amtorg Trading Corporation | 31750 | Apr. 30 to Dec. 31, 1924 | 3,706.45 |
| Do | 31750 | Calendar year 1925 | 33,191.26 |
There is but one issue, namely, the question of the deductibility in each taxable period of a certain amount representing a portion of profits payable to the Peoples Commissariat of Foreign Trade of the Union of Soviet Socialist Republics (otherwise known as NKVT). The facts were presented by a stipulation, which is as follows:
FIRST: The petitioner is a New York corporation and was formed on May 27, 1924, by the consolidation of Products Exchange Corp. and Arcos-America, *328 Inc. Exhibits A, B and C attached*1541 hereto and made a part hereof are true copies of the certificate of incorporation of Products Exchange Corporation, the certificate of incorporation of Arcos-America, Inc. and the certificate of consolidation by which the petitioner was formed respectively.
SECOND: From the date of issue thereof in May and June, 1924, up to and including December 31, 1925, 8,922 shares of the outstanding stock of petitioner were held by several individuals in trust for The Bank of Foreign Trade of the Union of Soviet Socialist Republics. The remaining 1,078 shares, from the date of issue thereof in May and June, 1924, up to and including December 31, 1925, stood in the name of and were owned by Arcos, Ltd., a British corporation. Exhibit D attached hereto and made a part hereof is a correct list of stockholders of petitioner during the aforesaid period and Exhibits E and F attached hereto and made a part hereof are affidavits reciting the facts as to the stock held in trust for The Bank of Foreign Trade of the Union of Soviet Socialist Republics.
THIRD: During the years 1924 and 1925 the majority of the stock of the Bank of Foreign Trade of the Union of Soviet Socialist Republics was owned*1542 by the State Bank of the U.S.S.R. and the People's Commissariat of Foreign Trade of the U.S.S.R., both governmental organizations. The balance of the stock during the same period was owned (a) by various trusts and syndicates, (b) by cooperative societies and (c) by "mixed" companies. The trusts and syndicates mentioned in (a) above were organized under the laws of the government of the U.S.S.R. subsequently to the time when the various industries and trades were nationalized for the purpose of conducting these various trades and businesses. The government of the U.S.S.R. exercises a supervisory and regulatory power over the activities of these trusts and syndicates and they are subject to the same taxes on their activities as any other enterprises; these syndicates and trusts carry on business as independent entities, enter into contracts, buy raw materials and sell the finished goods, etc. The profits of these organizations are in part returned to the workers in form of bonuses or benefits; in part used for expansion; in part paid over to the government of the U.S.S.R.; and in part set apart as surplus. Under the laws of the U.S.S.R. these organizations are not branches or agencies*1543 of the Government and the Government is not responsible for the payment or performance of the debts or obligations of these organizations or for the conduct of their business. The cooperative societies mentioned in (b) above include both societies for the purchase of goods for the members and societies collecting and marketing goods supplied by the members. The greater part of the capital of these cooperative societies is supplied by the members themselves and the rest loaned to them by the Government. These societies pay interest to the Government on the amounts loaned them and are also subject to taxation. All of these societies are organized in conformity with true cooperative principles and the surplus is distributed among the members in proportion to their purchases or supply of goods or carried to the collective reserve fund. All members have equal rights of voting. The "mixed" companies mentioned in (c) above are organizations with limited liability, part of the capital of which is supplied by the trusts and syndicates mentioned in (a) above and part by private or foreign capital. These organizations are also subject to the supervisory and regulatory power of the government*1544 of the U.S.S.R. and to taxes on their activities. The profits of the "mixed" companies are divided as provided in the agreement constituting the "mixed" company, usually in proportion to the capital supplied. All of the stock of Arcos, Ltd., during the years 1924 and 1925 stood in the name of individuals who held such stock in trust for organizations of the types specified in (a), (b) and (c) above.
*329 FOURTH: During the years 1924 and 1925 the principal business of the petitioner (and of its predecessor, Products Exchange Corporation) was the importing of goods from the Union of Soviet Socialist Republics (Russia) for sale on commission in the United States and the purchase of goods in the United States for export to the Union of Soviet Socialist Republics.
FIFTH: Exhibit G attached hereto and made a part hereof is a correct English translation of the decree or resolution, dated June 26, 1924, by which the petitioner was granted the right to conduct commercial operations in territory of the Union of Soviet Socialist Republics for a period of three years.
SIXTH: To carry out such rights an agreement was entered into between petitioner and the People's Commissariat*1545 of Foreign Trade of the Union of Soviet Socialist Republics (otherwise known as NKVT) whereby NKVT agreed to furnish to the petitioner, commencing July 1, 1924 and up to July 1, 1927 (a) licenses for the export of goods from the Union of Soviet Socialist Republics for the purpose of sale on commission in North and South America; and (b) licenses for the import into the Union of Soviet Socialist Republics of goods from North and South America. The petitioner agreed to pay to NKVT an annual remuneration of 50% of the net profits realized from operations connected with the carrying out of the agreement, if such net profits did not exceed $100,000 in any year, and 60% of such net profits if in excess of $100,000. Exhibit H attached hereto and made a part hereof is a correct English translation of such agreement.
SEVENTH: In 1923 the Council of People's Commissars had made a decree granting similar privileges to Products Exchange Corporation upon condition that the latter "deduct monthly in favor of NKVT for transactions made through NKVT or Gostorg 50% of compensation received by it." Exhibit I attached hereto and made a part hereof is a correct English translation of such decree.
*1546 EIGHTH: The liability accrued under the aforesaid decree and agreement respectively was as follows:
| January 1 to April 30, 1924 (Products Exchange Corporation) | $725.75 |
| May 1, 1924 to December 31, 1924 | 40,065.85 |
| Calendar Year 1925 | 224,106.37 |
In its return for the period ending December 31, 1924, the petitioner deducted $29,065.85 of the amount accrued up to that time, and in its return for the year ending December 31, 1925, the petitioner deducted the sum of $235,106.37, representing the entire amount accrued in 1925 together with $11,000 accrued in 1924, but not claimed as a deduction in the return for that period. In March, 1926, petitioner paid the sum of $199,781.38 which represented the entire amount accrued through April 30, 1925, which was the end of its fiscal year.
NINTH: The books of Products Exchange Corporation and of the petitioner were kept on an accrual basis.
TENTH: The laws of the Union of Soviet Socialist Republics purported to confer on the Chief Concessions Committee of the Council of Peoples Commissars and/or the Peoples Commissariat of Foreign Trade, authority over matters relating to foreign trade, including preliminary approval*1547 or qualification of parties desiring to institute trade relations, and the making of license agreements prescribing the terms and conditions under which the particular trade relations desired might be carried on.
ELEVENTH: The purpose of this stipulation is merely to set forth the agreement of the parties as to the correctness of the amounts mentioned and the *330 circumstances under which the liability therefor, alleged by the petitioner, accrued and/or was paid. Neither the execution hereof nor the use herein of words such as "decree", "right", "liability", "law", or any other word or words shall be deemed an admission by the respondent that such amounts were "taxes" within the meaning of the Federal Revenue Acts, or as a recognition by the respondent of the validity of any tax or charge purported to be levied by the Union of Soviet Socialist Republics or any of its agencies.
Exhibit G is as follows:
EXTRACT from the Minutes #78 of the meeting of the Chief Concessions Committee at the SNK
Heard
about
IV. Registration of Amtorg for the purpose of granting it the rights to conduct commercial operations on the territory of U.S.S.R.dated June 26th, 1924*1548
Resolved
IV. a/ that the Amtorg be registered for the period of 3 years.
b/ that simultaneously with the publication of the registration of the Amtorg it be published that the "Prodeksko" Company in America is liquidated as an independent enterprise and becomes a component part of Amtorg.
Extract Correct: (signed)
Copy Correct:
Secretary of the Concessions Dept. (NIKOLOVA)
(signed)
SEAL
Exhibit H is as follows:
U.S.S.R.
People's Commissariat of Foreign
Trade.
November 28, 1924.
#14285
MOSCOW
Ilyinka 14.
The People's Commissariat of Foreign Trade of the Union of Soviet Socialist Republics, as represented by the Acting People's Commissar of Foreign Trade, Moisei Ilyitch FRUMKIN, hereinafter called NKVT, as party of the first part, and the American firm acting under the name of AMTORG TRADING CORPORATION, as represented by its Chairman of the Board of Directors, Isaya Yakovlevitch HOORGIN, as party of the second part, have entered into the following agreement, to wit:
1.
To carry out the rights accorded to AMTORG by the resolution of the Chief Concessions Committee of the Council of People's Commissars of the Union of Sov. Soc. Republics, *1549 passed on June 26, 1924, the NKVT undertakes to furnish AMTORG, commencing July 1st, nineteen hundred and twenty four, up to July first, nineteen hundred and twenty seven:
a) Licenses for the export of all kinds of released for export raw materials, semi-finished products and manufactured goods prepared and *331 purchased and accepted on commission by AMTORG for the purpose of selling these in North and South America.
b) Licenses for the import into the Union of S.S.R. from North and South America for the sale on the domestic markets of the Union of all kinds of raw materials, semi-finished products and manufactured goods, machines, etc., permitted to be imported into the U.S.S.R.
2.
In consideration of the privileges granted by NKVT to AMTORG in accordance with this Agreement, AMTORG undertakes to pay to NKVT an annual remuneration based on the net profits realized by AMTORG from operations connected with the carrying out of this agreement, to wit:
a) If the net profits realized by AMTORG during any one fiscal year will not exceed one hundred thousand U.S. dollars, AMTORG undertakes to pay NKVT out of this net profit for the given fiscal year fifty (50) percent;
*1550 b) But if the amount of net profits realized by AMTORG during any one fiscal year will exceed one hundred thousand U.S. dollars, then AMTORG undertakes to pay to NKVT sixty (60) percent of the total amount of net profits realized by AMTORG during that fiscal year.
3.
All accounting with NKVT, in accordance with par. 2 hereof, AMTORG is to effect in Moscow, in Dollars, within a month after AMTORG draws up its balance sheet for the given fiscal year.
NOTE: The annual balance sheets of AMTORG are drawn up within 3 months after the end of each fiscal year.
4.
All disputes arising out of this Agreement between NKVT and AMTORG are to be settled in the courts of Moscow.
5.
The original Agreement is kept in the files of NKVT in USSR, and a certified copy is handed to AMTORG.
6.
The addresses for communication between the parties are as follows:
1. NKVT - Moscow, Ilyinka 14
2. AMTORG - Moscow, Kuznetski Most 14.
AMTORG TRADING CORPORATION
Chairman of Board of Directors
(HOORGIN)
People's Commissariat for
Foreign Trade
Acting People's Commissar (FRUMKIN)
Exhibit I is as follows:
DECREE OF COUNCIL OF PEOPLE'S COMMISSARS
With respect to*1551 admission of the Corporation Prodeksko, organized in the United States of North America, referred to in abbreviated form as *332 "Prodeksko", to conducting of operations on the territory of R.S.F.S.R. The Council of People's Commissars decreed that:
1. "Prodeksko" shall have the right:
a/ To open branches in Petrograd, Moscow, Kharkoff, Novorossisk, Tashkent.
b/ To accept, from state institutions, cooperative organizations and private individuals, orders for purchase and sale of merchandise in America, as well as assume representation of organizations, institutions of RSFSR on the American Market, and of American firms on the market of RSFSR, with special permission in each individual case from NKVT (People's Commissariat of Foreign and Domestic Trade).
2. The Corporation "Prodeksko" shall, in its activities, on the territory of RSFSR, abide by all laws and regulations of the Government of RSFSR, now in force as well as those which may be issued, pertaining to the activity of the said Corporation, and also by the laws and regulations of the Government of RSFSR pertaining to state supervision of the activities of the commercial-industrial enterprises, protection*1552 of laborers and employees engaged therein, registration, taxation and public accountability thereof.
3. The amount of compensation fixed by "Prodeksko" for orders executed with sanction of the NKVT shall be determined by Prodeksko upon agreement with NKVT. Said agreement may be either a general one for all orders or a special one entered in each individual case.
4. "Prodeksko" shall:
a/ Deduct monthly, in favor of NKVT, for transactions made through NKVT or Gostorg, 50% of compensation received by it.
b/ Submit all its books and transactions for revision by NKVT.
5. Permission to conduct operations on the territory of RSFSR may be revoked by the Government of RSFSR:
a/ In case the United States will in any respect violate the principle of reciprocity with reference to similar Russian Corporations.
b/ In case the Corporation "Prodeksko" will violate all conditions on which it is permitted to conduct operations in RSFSR, or transgress the purposes for which it is organized.
c/ In case the Government will find the activities of the Corporation as not in conformity with the interests of RSFSR.
Moscow, Kremlin
8/V-23
Acting Chairman of the Council of People's*1553 Commissars (signed) L. KAMENEV
Manager of the Council of People's Commissars (signed) N. GORBUN
Secretary of the Council of People's Commissars (signed) L. FATIEVA
OPINION.
MURDOCK: The petitioner first contends that the items in question are deductible as "taxes." The word "tax" is generally understood in this country to mean an involuntary charge imposed by legislative authority for public purposes. ; ; ; ; ; . See other cases cited in Words and Phrases under "Tax." It is exclusively of statutory origin. ; . We look, therefore, for some law imposing taxes in the amounts of the items in controversy. The laws of a foreign country must be proved. This rule is certainly no less true of the laws of a government which has not been recognized by the Government of the United States. The evidence relating*1554 to this subject is the statement in the stipulation that:
The laws of the Union of Soviet Socialist Republics purported to confer on the Chief Concessions Committee of the Council of Peoples Commissars and/or the Peoples Commissariat of Foreign Trade, authority over matters relating to foreign trade, including preliminary approval or qualification of parties desiring to institute trade relations, and the making of license agreements prescribing the terms and conditions under which the particular trade relations desired might be carried on. [Italics ours.]
In addition we have the decree and the agreement. But this is not enough to enable us to find that the items in question were taxes imposed by any government in Russia. Furthermore, some of the amounts were paid or accrued under an "agreement" between the petitioner and the Peoples Commissariat of Foreign Trade of the Union of Soviet Socialist Republics. Tax burdens and contractual liabilities are very different things. A tax is compulsory, an exaction of sovereignty rather than something derived from an agreement, although the amount of tax is sometimes fixed by agreement. *1555 ; ; ; . The facts in evidence fail to sustain the contention of the petitioner that the items in question are taxes deductible under section 234(a)(3).
The petitioner contends, in the alternative, that it is entitled to a deduction for each period under section 234(a)(1), which provides that in computing the net income subject to the tax there shall be allowed as deductions all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. It has been stipulated that the books of the Products Exchange Corporation and of the petitioner were kept on an accrual basis. Therefore, the amount which the petitioner might be entitled to deduct under this provision is the amount of expense incurred in each period rather than the amount paid. As we understand paragraph "eighth" of the stipulation, the correct amount of the liability incurred under the decree and agreement for the respective periods was as follows:
| January 1 to April 30, 1924 | $725.75 |
| May 1, 1924 to Dec. 31, 1924 | 40,065.85 |
| Calendar year 1925 | 224,106.37 |
*1556 *334 For the first period the Commissioner disallowed a deduction of $725.75 described as Russian taxes, and added the amount to income, with the explanation that the evidence submitted to him indicated that the item was a distribution of profits. For the next period a deduction of $29,065.85, described as Russian Government taxes, was disallowed and added to income, with the same explanation as was given for the previous period. For the calendar year 1925 a deduction of $224,106.37 described as accrued license tax, Russian Government, and also one of $11,000 described as 1924 Russian Government tax adjustment, were disallowed and added to income with the same explanation as for 1924. The errors assigned by the petitioner are that the Commissioner erred in disallowing the deductions claimed. The respondent concedes that the petitioner and its predecessor were carrying on a business and that the accrued amounts were "incurred" during the taxable years in question, but he contends that the amounts incurred in each year were not ordinary and necessary expenses.
There is no direct statement in the stipulation that an agreement such as was entered into was a prerequisite*1557 to the conduct of the petitioner's business in Russia, nor is there a direct statement that such an agreement was the ordinary thing required of those engaged in such business. Apparently, the petitioner feels that the necessary inference from the facts stipulated is that it had to enter into this agreement and agree to pay at least this amount or stay out of Russia. The proof of important facts should not be left to inference. Where parties having divergent interests deal at arm's length, an inference may arise that each did his best to secure a fair bargain. But that is not the situation before us. Here the stipulation shows that the Union of Soviet Socialist Republics was indirectly the principal owner of the petitioner, and perhaps it made little difference, either to the corporation or to the U.S.S.R., what portion of the profits went directly under the agreement to the U.S.S.R. Thus, despite the fact of the agreement, we are not satisfied of the necessity for it. Other facts demonstrate the uncertainty of the proof as to whether or not the expenditures were ordinary and necessary. For instance, the agreement is dated November 28, 1924, but seems to have been retroactive*1558 to July 1, 1924, whereas the accruals by the petitioner are for a period beginning May 1, 1924. Thus, the petitioner seems to have carried on a considerable portion of its 1924 trade in Russia before it entered into the contract on November 28, 1924. Another example is the presence in the stipulation of the words "purported to" and "and/or." Responsibility for a sufficiently clear and adequate stipulation of the facts rests upon the moving party, in this case the petitioner. In view of the *335 uncertainty of the circumstances under which the contract was entered into, we are unable to hold that the amounts claimed were ordinary and necessary expenses deductible under section 234(a)(1).
Judgment will be entered for the respondent.