*2388 INCOME OF FOREIGN CORPORATION. - The petitioner, a Japanese banking institution with its principal office in Japan, maintained an agency in New York during the year 1919, where it kept on deposit a supply of capital. It its Japanese offices it contracted with its customers for the extension of credit, either under the form of letters of credit or under authorization by letter or cable, by means of which its Japanese customers purchased goods in the United States. The resident sellers, acting upon the letters of credit or other authorization, drew drafts against the Japanese buyers. The New York agency cashed or purchased these drafts. The New York agency also, upon its own initiative, purchased drafts drawn by residents of the United States against Japanese buyers of merchandise. All these drafts were forwarded to the main office of the petitioner in Japan, where they were collected, together with interest or other form of compensation for the credit extended. Held that the interest or other form of compensation so collected in Japan was not income from sources within the United States.
*480 This appeal is from the determination of a deficiency in income and profits taxes for 1919 amounting to $5,908.12.
The petitioner alleges error in that (1) interest in the amount of $143,091.50 credited to the New York agency and United States branch offices of the petitioner was included in taxable income, *481 whereas such credits are claimed to be merely intercompany items and, furthermore, they are claimed to be not income from sources within the United States, (2) the determination of the excess-profits tax under section 328 of the Revenue Act of 1918 is invalid and arbitrary, without uniformity, discriminatory, and otherwise unconstitutional.
Upon motion duly made and granted the hearing was limited as provided in Rule 62(a).
FINDINGS OF FACT.
The petitioner is a foreign banking corporation, incorporated under the laws of the Empire of Japan, having its principal office at Osaka, but with an agency at New York and branch offices at San Francisco and Seattle.
The necessary cash capital was supplied to the agency and branch offices by the home office of the petitioner*2390 in Japan, and it was replenished from time to time when depleted by the transactions had.
One form of the business activity of the New York agency was the cashing and/or purchase in the United States for the full face value thereof of drafts or bills of exchange drawn against Japanese business firms or individuals, purchasers of goods to be shipped from the United States. These drafts were either presented by the drawers at some designated agency or branch of the petitioner in the United States by virtue of a letter of credit or by authorization by letter or cablegram.
In another class of transactions the New York agency purchased drafts upon its own initiative and at least some of these drafts were accompanied by guarantees in writing by the drawers assuming full responsibility for the payment of the drafts in event the drawees failed to honor them.
Upon acquisition, all the drafts with their accompanying papers, bills of lading, etc., were forwarded to the appropriate office of the petitioner in Japan, where presentation to the drawees was made and payments both of principal and interest collected when due. Ordinarily, the drafts were payable in 90 days after presentation, *2391 although in some cases they were due after shorter periods, and a few were payable at sight. With respect to the drafts cashed by the New York agency upon presentation of letter of credit from Japan or on authority of direct authorization by letter or cablegram, a credit was immediately made on the books to the account of the New York agency for the amount paid for the draft, together with interest thereon at agreed rates which approximated the market interest rates and at an average time consumed in transmission. This time had *482 been found to average 30 days and, for convenience, the interest credits were computed upon an arbitrary basis of 30 days. These credits were made and were allowed to remain undisturbed without reference to subsequent developments relative to the payment or nonpayment of the drafts.
With reference to the drafts acquired upon the initiative of the New York agency, these were drawn bearing upon their face provision for the payment of interest, and the entire amount of interest collected in Japan was credited to the account of the New York agency.
The drafts cashed by the New York agency upon the initiative of the Japanese offices did not bear*2392 interest but it was customary for the drawees to pay either interest upon the amount of the draft or some other form of commission or other compensation for the services rendered.
Where drafts presented with letters of credit departed in some particular from the authorization, it was customary for the New York agency to secure from the drawee whatever guarantee was temporarily required under the circumstances pending approval by the Japanese office of the variance. After the draft was approved by the Japanese office the drawers then released.
During the taxable year the New York agents of the petitioner were credited interest upon drafts cashed and/or purchased as follows:
| On drafts cashed upon presentation of letters of credit | $44,843.13 |
| On drafts cashed by authorization of cablegram or letter | 21,343.13 |
| On drafts cashed upon the initiative of the agency | 10,934.89 |
| Total | 77,121.15 |
In the return filed by the petitioner for the taxable year gross income from sources within the United States in the amount of $315,266.35 was reported, and in addition gross income described in the return as follows was claimed to be nontaxable.
| Interest on interest bills: | |
| New York | $77,126.15 |
| San Francisco | 40,626.11 |
| Seattle | 25,339.24 |
| 143,091.50 |
*2393 Due to the amount of statutory deductions claimed in the return, a loss of $159,622.07 was reported.
*483 In determining the deficiency the respondent computed net income and the taxes as follows:
| Net loss reported | $159,622.07 | |
| Add: | ||
| Nontaxable income included in gross income | 5,525.00 | |
| Deduction allowed for Home Office expense | 13,092.62 | |
| 178,239.69 | ||
| Deduct: | ||
| Deduction disallowed for depreciation of bonds | $6,512.50 | |
| Deduction of interest revised | 57,591.41 | |
| 64,103.91 | ||
| Deficit | 114,135.78 | |
| Amount disallowed, of income from interest claimed | ||
| to be nontaxable | 143,091.50 | |
| Adjusted net income | 28,955.72 | |
| Profits tax based upon a comparison with a group of | ||
| representative concerns under section 328 | 3,347.28 | |
| Income tax at 10 per cent | 2,560.84 | |
| Tax liability | 5,908.12 |
OPINION.
TRUSSELL: The hearing was limited under Rule 62(a). The sole issue in this case at this time is a question of gross income. An amount of $143,091.50 attributed in the return to "interest on interest bills" and claimed to be nontaxable, has been included in taxable income by the respondent, thus determining a deficiency. While disputing*2394 the action of the respondent with reference to all of the amount of $143,091.50, the petitioner elected at the hearing to adduce evidence only with reference to the transactions of the New York agency, comprising a little over one-half of the disputed amount.
So far as material here, the Revenue Act of 1918 provides at section 233(b) as follows:
In the case of a foreign corporation gross income includes only the gross income from sources within the United States, including the interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise, 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.
With respect to the transactions initiated by the Japanese offices, the evidence shows that the drawees effected credit arrangements with the Japanese offices whereby the necessary credit was loaned to them to make the purchases they desired to make in the United States. In return for the credit facilities and the loans, the drawees paid income to the petitioner in the form*2395 of interest and/or commissions. We think that the foreign source of this income would be so obvious as to merit no discussion were it not for the fact that the drafts were cashed in the United States by the petitioner. This *484 gives rise to the argument of the respondent that the income was from capital employed within the United States. In such cases as , and , we decided that the source of interest paid by foreign governments upon their obligations was the foreign government which paid it, and this was so even though the funds loaned were out of capital which was required to be kept within the United States by the laws governing a State Insurance Department. See also . All of these transactions were initiated in Japan with Japanese tradesmen and all the interest or other form of compensation for credit was paid by the same Japanese tradesmen to the offices of the petitioner in Japan.
In respect to the transactions herein the New York agency purchased drafts drawn*2396 in the United States and forwarded them to Japan for collection. The evidence shows that these drafts were uniformly written, drawing interest; that they were forwarded to the head office of the petitioner in Japan, then presented for collection, and the drawees, Japanese tradesmen, then paid principal and interest to the offices of the petitioner in Japan. In , we held that with respect to goods purchased within the United States and sold without the United States at a profit the income was from a source without the United States. The same reasoning applies with equal force to the purchase of commercial paper in the United States but collected with interest in a foreign country. The income is from a foreign source.
The crediting of interest upon these transactions to the New York agency and the remittance of the amount to that agency is a matter only of bookkeeping on the part of the petitioner and amounts simply to a replenishing of the capital supplied to the New York agency.
We, therefore, decide that the deficiency should be recomputed excluding from income the amount of $77,121.15 attributable to income from sources without*2397 the United States.
Decision will be rendered or further proceedings had pursuant to Rule 62(b), (c) and (d).