*3710 1. NONRESIDENT ALIEN. - A nonresident alien individual who, in association with others, derives gains and profits from the sale, within the United States, of merchandise manufactured without the United States is liable to the United States for income tax upon such gains and profits. Richard L. Birkin,5 B.T.A. 402.
2. COST OF GOODS SOLD. - The respondent has accepted the books of account kept on behalf of the petitioner's decedent and his associates at their New York office as showing the cost of goods sold in the United States. Evidence offered on behalf of the petitioner held insufficient to warrant a finding that the cost of such goods was different from the amounts shown upon the books of the New York office.
3. INTEREST. - The items of interest credited and paid to the associated individuals in the instant case held to be none other than a modification of the distributive shares of such associated individuals and as such must be included in the portion of the gains and profits subject to tax as derived from sales of merchandise made within the United States.
*841 Docket No. 8313 complains of an alleged deficiency in income tax for the calendar year 1920, in the amount of $16,107.13, and Docket No. 8314 results from the respondent's rejection of a claim for abatement of income tax for the calendar year 1919, in the amount of $1,967.97. The two actions were consolidated for trial and decision.
FINDINGS OF FACT.
1. The late John W. Billwiller, whose estate is petitioner herein, was during the taxable years a citizen of the Republic of Switzerland and residing at St. Gall, Switzerland.
2. The deficiency letters were mailed on August 27, 1925, and covered the taxable years 1919 and 1920.
3. The petitions herein were filed on October 22, 1925.
4. The taxes in controversy are additional income taxes of the late John W. Billwiller as an individual.
5. the late John W. Billwiller was during the taxable years a member of the partnership of Billwiller Brothers.
*842 6. Charles J. Billwiller and John W. Billwiller entered into an agreement under and by virtue of which Billwiller Brothers existed as a partnership during the fiscal year*3712 ended April 30, 1919.
7. During and throughout the fiscal year ended April 30, 1919, the distributive interest was, J. W. Billwiller, one-third, and C. J. Billwiller, two-thirds.
8. During the fiscal year ended April 30, 1920, and effective for the whole thereof, Marie Billwiller was admitted to membership in the partnership and the respective distributive interest of the partnership as then constituted was, J. W. Billwiller, 45 per cent, C. J. Billwiller, 45 per cent, and Marie Billwiller, 10 per cent.
9 During both the taxable years Billwiller Brothers maintained a sales branch at 315 Fourth Avenue, New York City, its home office and factories being at St. Gall, Switzerland. During the taxable years in controversy, C. J. Billwiller was a resident alien and was in charge of the New York branch of the partnership.
10. The Commissioner of Internal Revenue has computed the net income of Billwiller Brothers from sources within the United States for its fiscal year ended April 30, 1919, to be $181,300.79, and for the fiscal year ended April 30, 1920, $393,858.15, in determining petitioner's distributable share, taxable for said years. Such net income was determined from*3713 the partnership's returns based upon books and records of the United States branch of Billwiller Brothers. The petitioner's distributable share of the aforementioned amounts does not include the additional amounts of $24,707.30 and $24,988.42, hereinafter referred to. In computing the amounts hereinbefore referred to as the net income of Billwiller Brothers from sources within the United States for the years 1919 and 1920, there were allowed as deductions to the partnership the items of $24,707.30 and $24,988.42, for the years 1919 and 1920, respectively, treated by the United States branch of the partnership as interest earned by, credited to, or paid upon the capital account of the petitioner carried on the books of the United States branch of Billwiller Brothers. Similarly, deductions in certain sums were also allowed the partnership for said years on account of the capital account of C. J. Billwiller. The petitioner filed returns for the calendar years 1919 and 1920, and while he included in his return for the year 1919, under item (g), the aforementioned amount of $24,707.30, he did not report in his return for the year 1920 the item of $24,988.42.
11. There has been included*3714 in the net income of the petitioner for the years 1919 and 1920, upon which the deficiencies herein are based, the amounts of $24,707.30 and $24,988.42 for the years, respectively, treated upon the books of the partnership as interest earned by, credited to, or paid upon the capital account of the petitioner carried on the books of the United States branch of Billwiller Brothers.
*843 12. In determining the petitioner's distributive share of the net income of Billwiller Brothers from sources within the United States, the Commissioner has not taken into consideration any gains or losses from the operations of the home office and factories of Billwiller Brothers, the partnership, at St. Gall, Switzerland. The books of the United States branch of the partnership do not reflect any gains or losses of the home office and factories for the taxable years in controversy.
13. The capital accounts as shown by the books of the United States branch of the partnership of Billwiller Brothers were not in equal proportions and were not in the same proportion as the distributive shares of the income.
The foregoing facts are found in accord with an agreed statement of facts to which*3715 was attached a copy of a partnership agreement made under the laws of Switzerland and existing during the period ended April 30, 1919.
For its fiscal year ended April 30, 1919, Billwiller Brothers made and filed with the Collector of Internal Revenue for the Second District of New York a partnership income-tax return which showed information as follows:
| SCHEDULE A. | |||
| Gross income. | |||
| 1. Sales | $2,128,062.22 | ||
| 2. Cost of goods sold | 1,636,858.41 | ||
| $491,203.81 | |||
| 4. Interest on obligation of U.S. | 2,000.00 | ||
| Total | $493,203.81 | ||
| Deductions. | |||
| 13. Ordinary and necessary expenses | $271,543.80 | ||
| 16. Interest | 38,359.22 | ||
| 19. Exhaustion, wear and tear | 9,000.00 | ||
| 318,903.02 | |||
| 26. Net income | 174,300.79 |
| SCHEDULE C. | |||
| Members' shares of income, etc. | |||
| Interest in | Interest on Liberty | Other income. | |
| partnership. | bonds. | ||
| (a) C. J. Billwiller | Two-thirds | $1,333.32 | $114,867.20 |
| (b) J. W. Billwiller | One-third | 666.68 | 57,433.59 |
| 2,000.00 | 172,300.79 |
*844 In the audit of this return the respondent increased the net income to a total of $181,300.79. The reason for the increase is not*3716 shown in the record.
For its fiscal year ended April 30, 1920, Billwiller Brothers made and filed with the Collector of the Second District of New York, a partnership income-tax return showing information as follows (year ended April 30, 1920):
| SCHEDULE A. | |||
| Gross income. | |||
| 1. Sales | $4,047,004.49 | ||
| 2. Cost of goods sold | 3,180,665.49 | ||
| $866,339.00 | |||
| 11. Income from all sources | 32,951.34 | ||
| Total | $899,290.34 | ||
| Deductions. | |||
| 13. Ordinary and necessary expenses | $330,377.08 | ||
| 14. Compensation | 132,000.00 | ||
| 16. Interest | 42,374.88 | ||
| 18. Debts charged off | 680.23 | ||
| Total | 505,432.19 | ||
| 26. Net income | 393,858,15 |
| SCHEDULE C. | ||
| Members' shares of income, etc. | ||
| Interest in partnership. | Income. | |
| (a) John W. Billwiller | 45 per cent | $177,236.17 |
| (b) Charles J. Billwiller | do | 177,236.17 |
| (c) Mary Billwiller (Hotel Biltmore) | 10 per cent | 39,385.81 |
| Total | 393,858.15 |
In the audit of this return the respondent made no change in the net income.
OPINION.
TRUSSELL: The time covered by the two proceedings here under consideration began on May 1, 1918, and ended on April 30, 1920. Any tax liability*3717 incurred by the petitioner's decedent is therefore governed by the provisions of the Revenue Act of 1918, where the gross income of individuals is defined and described in section 213, and that part of said section referring to nonresident aliens is as follows:
*845 (c) In the case of nonresident alien individuals, gross income includes only the gross income from sources within the United States, including interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise, dividends from resident corporations, and including all amounts received (although paid under a contract for the sale of goods or otherwise) representing profits on the manufacture and disposition of goods within the United States.
It has been urged on behalf of the petitioner that the language of the above section, reading: "representing profits on the manufacture and disposition of goods within the United States" can not be lawfully interpreted to lay a tax burden upon petitioner's decedent for the reason that the decedent was not at any time connected with or related to any business of manufacturing goods within the United States. The Board had this question before*3718 it in the case of , where the decision was adverse to petitioner's contention. The reasoning and the decision in that case are controlling here.
It has further been contended on behalf of the petitioner that the items of interest, $24,707.30 and $24,988.42, for the years 1919 and 1920, respectively, charged against the gross sales represented by the books of the business kept in New York, and credited and paid to the petitioner's decedent, are in fact interest upon the said decedent's capital investment in the business of Billwiller Brothers and that no part of such capital investment was employed or used within the United States, and that therefore the said amounts of interest should not be included in any amount of gains and profits derived from business carried on within the United States. The record shows, however, that in each of the periods here under discussion the said amounts of interest were accrued upon the books of the business carried on in New York; that they were deducted from the gross income shown by such books and have not been restored to such gross income. *3719 Interest upon the capital investment of a partner and a partnership business must be paid out of the gains and profits of the business and where the same has been deducted from the gross gains and profits of such business we must conclude that the crediting and payment of such interest to the individual partners is simply a method of modifying the distribution of the net gains and profits which would otherwise prevail. We are, therefore, of the opinion that these amounts of interest must be regarded as a part of the gains and profits derived by the petitioner's decedent from the sale of merchandise within the United States, and that they are properly included in his gross income subject to tax under the Revenue Act of 1918. Compare .
It appears that in determining the tax liability of petitioner's decedent the respondent has accepted the books kept on behalf of *846 the decedent and his associates in the New York office as representing the true cost of the goods sold in the United States, and that such cost represented the manufacturing costs in Switzerland, plus all the necessary overhead, carrying charges, customs' taxes, *3720 and storage, to such time as the same goods were delivered to the New York office. There was received in evidence a typed statement appearing to be a translation of a statement of gains and losses upon the business of these associates at their home office in Switzerland. The record, however, contains substantially no explanation of this statement and upon examination it appears that the statement does not undertake to show manufacturing cost of the goods shipped to and sold in the United States, as distinguished from the manufacturing cost of goods sold in other countries, and so far as we can determine the alleged losses set forth in said statement may have been incurred in sales made in other countries and to have no relation to the manufacturing cost of goods sold in the United States. We are, therefore, of the opinion that this evidence is not of a character to warrant us in making a finding that the costs of the goods sold in the United States are different from the figures found by the respondent upon the books of the New York office representing such cost.
Judgment will be entered for the respondent.