*194 Decision will be entered for the respondent.
The petitioner, a foreign corporation, had no office or place of business, no employees, factory, or officers in the United States. It had for many years prior to 1940-1941, the taxable years, purchased and had shipped to it in London dental supplies from a company in New York. Due to the war, it became impossible for petitioner to import from the United States, and exchange and shipping restrictions made it not feasible to do so. Thereafter, without formal contract of agency, the New York company shipped direct to petitioner's customers who were in foreign countries, billed them a retail price set by petitioner, received such retail price when remitted, and billed petitioner for a wholesale price, the invoices stating that the dental supplies were sold to petitioner. Petitioner was paid the difference between the wholesale price and retail prices received. No charge was made for the services, which also included securing insurance and export and Treasury licenses. Capital stock tax returns were later in 1943 filed and claim for abatement stated that petitioner had filed returns as soon as it realized capital stock tax returns*195 were required. Petitioner since 1936 had been represented by a partner of a prominent New York firm of accountants. Held, on all the facts that the petitioner was not engaged in trade or business within the United States under sections 231 (b) or 14 (c) of the Internal Revenue Code.
*1010 This case involves deficiencies in income tax of $ 9,747.24 and $ 24,743.95 for the years 1940 and 1941, respectively.
The primary issue presented is, whether the petitioner, a foreign corporation, is a nonresident corporation taxable under section 231 (a) of the Internal Revenue Code, or was engaged in trade or business within the United States within the meaning of section 231 (b) so as to be taxable under section 14 (c) (1).
The petitioner contends that, if it is found that it was engaged in trade or business within the United States during the years in question, it is entitled to a refund of $ 37,750.30 for 1940 and $ 74,875.74 for 1941, in conformity with the claims for income tax refunds it filed for the two years; whereas the respondent*196 argues that, even in case petitioner is held to be engaged in trade or business within the United States, petitioner has not established its tax liability and has no right to deductions because of failure to comply with section 233, and that the record is insufficient to permit allocation of expense claimed.
The petitioner concedes that, if the respondent is sustained in his contention that the petitioner was not engaged in trade or business within the United States, deficiencies are due as set forth in the notice of deficiency.
FINDINGS OF FACT.
The petitioner, Amalgamated Dental Co., Ltd., is a British corporation, with its principal office and place of business in London, England, and for a number of years has been engaged in the business of manufacturing, buying, and selling dental supplies. It had no plant, office, or place of business, officers, or employees in the United States during the taxable years.
Petitioner owned about one-third of the capital stock of the Dentists' Supply Co. of New York (hereinafter referred to as Dentist Supply), *1011 a domestic corporation with an office and place of business in New York, New York, and factories at York and Philadelphia, Pennsylvania. *197 Dentist Supply, for a number of years, has been engaged in the business of manufacturing and selling artificial teeth, and for many years prior to the taxable years here under consideration it sold large quantities of its products to petitioner, which in turn resold the merchandise to its customers throughout the British Empire and the European Continent. The association between the two companies had been of about 40 years standing.
Under an agreement between petitioner and Dentist Supply, petitioner could not sell artificial teeth to customers within the Western Hemisphere, and Dentist Supply could not sell artificial teeth to customers outside the Western Hemisphere, except as to some customers in the Far East and Japan.
During the year 1940 (about May 3), petitioner changed its method in regard to business transacted with Dentist Supply. This change was precipitated primarily and directly because of war conditions, rendering it impossible for petitioner to import teeth from America to resell to customers; petitioner could no longer secure import licenses; also, because of the "blitz" and severe conditions in England, petitioner was unable to ship from the United Kingdom to many*198 old customers, it not being feasible for Dentist Supply to ship to petitioner in London or for the latter to ship to its customers. To overcome this difficulty, petitioner made arrangements with Dentist Supply whereby the latter would ship the merchandise direct to its customers. Under this arrangement, petitioner would forward the orders from its customers to Dentist Supply. In some instances Dentist Supply received orders direct from petitioner's customers. Upon receipt of such orders, Dentist Supply would send them to its factory for preparation. These transactions, as well as the ones that follow, were all arranged in advance under standing instructions from petitioner to Dentist Supply. In case an order was received that was outside the standing instructions, Dentist Supply would contact petitioner for instructions. After the factory had processed the merchandise it was packed and shipped direct to the customer, either by freight or parcel post. Dentist Supply, under the standing instructions, made all the arrangements for shipments, which comprised securing export licenses in certain instances, in some cases Treasury licenses, and shipping space. When it was necessary, *199 insurance was effected on the shipment. Dentist Supply prepared invoices for the merchandise and billed the petitioner at a wholesale price. Such invoices showed the merchandise as "sold to The Amalgamated Dental Company, Ltd., London, England," and delivered *1012 to the named customer. Other invoices were prepared and billed the same merchandise at the retail prices to the customer. These retail prices were controlled by petitioner under either the standing instructions or by special price sheets furnished. These invoices showed the merchandise sold to the customer by Dentist Supply. The customer remitted to Dentist Supply, and the latter would credit the account of the petitioner upon such receipt. A "running account" was kept by Dentist Supply of petitioner's account and remittance was made to petitioner of the difference between the sums received from the customers and the amount charged to petitioner's account. No charges were made to petitioner by Dentist Supply for performing these additional services. Dentist Supply was not liable for the account of any of the customers of petitioner in case the customer did not pay for the goods shipped to him.
Dentist Supply*200 kept the petitioner advised as to all correspondence from the customers of the petitioner and sent the petitioner copies of all letters to such customers. Dentist Supply serviced some ten customers for petitioner during 1940 and about twenty during 1941. The volume of such business amounted to about $ 180,000 and $ 380,000, respectively.
Preliminary income tax returns on Form 1120 for the years 1940 and 1941 were filed by the petitioner on or about March 15, 1942, and completed income tax returns on Form 1120 were filed February 26, 1943. Concurrently with the filing of Form 1120, on February 26, 1943, there were filed excess profits tax returns for each of the years 1940 and 1941 and also capital stock tax returns for 1940, 1941, and 1942. The capital stock tax return for the year ended June 30, 1940, answered "No" to the question: "Was a 1939 capital-stock-tax return filed?" All of petitioner's tax returns mentioned above were signed by William L. Ashbaugh, under a power of attorney given in 1936 by the petitioner for that purpose. Ashbaugh was a partner of a well known firm of public accountants located in New York City. The income tax returns contained certain deductions*201 representing an allocation of the petitioner's total wholesale department expense, administrative expense, British income tax, and British national defense contributions, although there were no schedules attached to the returns showing how the allocations were made. No payment was made with the filing of the above mentioned capital stock tax returns, but by rider request was made that an overpayment of petitioner's income tax payments be applied on the capital stock tax liability. The collector of internal revenue demanded payment of the tax, interest, and penalty for late filing -- which was paid, and claim for abatement was filed for the penalties on April 3, 1943. The claim set forth, in part, that the *1013 delay in filing capital stock tax returns was due to the fact that the petitioner "was not aware that it was classifiable as a resident foreign corporation under the Internal Revenue Code. As soon as taxpayer realized that a return might be required it caused returns to be filed. Under the circumstances taxpayer believes that no penalties should have been asserted and it respectfully requests that penalties should be abated."
On or about April 15, 1943, petitioner, *202 through Dentist Supply, received a thirty-day assessment letter from the Treasury Department, giving notice of a deficiency in regard to petitioner's 1940 income tax. In this letter petitioner was advised that it was taxable as a nonresident foreign corporation under section 231 (a) of the code. The report of the revenue agent was dated February 26, 1943, and shows that he spent seven days on the case.
Claims for refund were filed by petitioner for overpayment of income tax for 1940 in the amount of $ 37,750.30 and for 1941 in the amount of $ 74,875.74. These amounts were in conformity with the income tax returns previously filed. Riders were attached to these claims explaining the grounds on which the claims were based.
A letter from the Treasury Department dated June 16, 1943, and addressed to petitioner, in care of petitioner's accountant in New York, rejected in full the claim for abatement of the penalties on the capital stock tax returns filed on or about April 3, 1943, on the ground that the explanation of delinquency did not constitute reasonable cause and therefore liability was incurred for the penalties.
Expressed in United States dollars, the following schedule shows*203 petitioner's total business for the years 1940 and 1941:
| 1940 | 1941 | |
| Gross income | $ 2,102,981.00 | $ 2,492,157.00 |
| Gross income from wholesale department | 1,207,686.91 | 1,405,773.01 |
| Administrative expense 1 | 158,374.00 | 220,000.00 |
| Wholesale department expense 2 | 481,181.82 | 448,788.84 |
| British taxes 3 | 314,536.00 | 492,754.00 |
OPINION.
Was petitioner "engaged in trade or business within the United States," within the text of sections 231 (b) and 14 (c) of the Internal Revenue Code, or was it a "nonresident corporation," within the language of section 231 (a)? The pertinent sections are *1014 set forth in the margin. 1 Though the above sections cover also*204 a foreign corporation having an office or place of business in the United States, it is not contended that the petitioner had such place of business. The petitioner contends that its position falls under section 231 (b).
*205 The question as to what constitutes doing business is one of fact. Higgins v. Commissioner, 312 U.S. 212">312 U.S. 212. We have reviewed at length the circumstances here involved and we have come to the conclusion that the petitioner was not during the taxable years engaged in trade or business within the United States. For many years prior to the taxable year the petitioner had been merely purchasing dental supplies from Dentist Supply, the corporation in New York. Though upon brief the petitioner makes some attempt to demonstrate that the nature of the petitioner's earlier relation to the American company does not appear, we think, on the contrary, it is very clear that the relation between the two companies was merely that of purchaser and seller until about May 3, 1940. That the petitioner had not regarded itself as subject to the capital stock tax at an ealier date appears from the fact that in its capital stock tax return filed February 26, 1943, it answered "No" to the question as to whether a 1939 capital stock tax return had been filed. This is indication that no business was considered done in the United States. Other evidence is equally convincing.
*206 Change, it is contended by the petitioner, took place in the relations between the petitioner and Dentist Supply about May 3, 1940 -- a change so marked that it engaged the petitioner in business within the United States. The contention is, in substance, that Dentist *1015 Supply became at that time the agent of the petitioner; and such agency is contended for, in effect, because Dentist Supply thereafter, instead of shipping dental supplies to the petitioner in London for resale by the petitioner to its customers (outside the Western Hemisphere, customers to which, by agreement with Dentist Supply, petitioner could not sell), shipped the dental supplies directly to the petitioner's customers, under directions, both general and special, from the petitioner, billed the customer at a retail rate set by the petitioner, billed the petitioner for the wholesale rate, received payment from the customers, and remitted to the petitioner the difference between the two rates. In addition, Dentist Supply arranged for export and Treasury licenses, shipping space, and insurance. No charge was made by it for the services performed. The invoices rendered to the petitioner by Dentist Supply*207 recited that the supplies referred to were "sold to The Amalgamated Dental Company, Ltd., London, England."
The association between the petitioner and Dentist Supply had lasted about forty years. The change in operating methods which petitioner argues constituted agency by Dentist Supply was directly caused by the war in which England, petitioner's domicile, was engaged. The war affected communications and exchange and import licenses. Petitioner could not, as before, obtain import licenses, and could not ship from England to many of its customers over the world. We think all of these facts and conditions highly significant in consideration of the question at hand. In short, considering the long continued relations, on a basis of vendor-vendee, between the two companies, and the interference with the operation of that arrangement, it appears more reasonable to think that the change entailed a mere enforced modification of the previous operation of vendor-vendee relation than to think that, without a definite contract, that relation was changed to one of principal and agent. The lack of a formal expression of a contract of agency is to us significant, and what was done appears*208 not as agency, but as detail in carrying on the previous arrangement in a not greatly different way. Obviously, the fact that under the new arrangement the petitioner shipped the dental supplies directly to petitioner's customers instead of to the petitioner at London, is altogether insufficient to indicate agency as against a status of buyer-seller; for the petitioner could, as purchaser, as simply as if principal, ask for shipment directly to others rather than itself. As to arranging for insurance and export licenses and Treasury licenses, the evidence does not show that Dentist Supply had not previously done the same things; but in any event, such details are such as a vendor might reasonably attend to for its purchaser, and their performance is not convincing that there was a change in the mutual relationship to one of agency. A more serious thought arises with *1016 reference to the activities of Dentist Supply in billing petitioner's customers at the retail price and remitting to the petitioner any amounts received to the extent of the excess over the wholesale price and actual disbursements. On all of the facts involved, however, we think such billing and receipt *209 of money are not sufficient to indicate agency. Though Dentist Supply did bill the customers at rates set by petitioner, it billed the petitioner as a purchaser, for the wholesale price. The bills shown in evidence read "sold toThe Amalgamated Dental Company, Ltd., London, England" (italics supplied), and they were offered as representative examples of the operations. In short, though performing some services for the petitioner because of the exigencies of war, Dentist Supply is affirmatively shown as selling to petitioner the thing involved in the whole transaction, i. e., dental supplies. That bills were sent also directly to the customers is explained, in our opinion, not by a contract of agency, but by the war-enforced necessity of not handling the matter through England because of shipping, lack of import licenses, and exchange restrictions; and we see the billing to the customers as a detail incidental to purchase of dental supplies rather than as proof of sale thereof by petitioner through Dentist Supply. The record does not indicate what contracts or correspondence passed directly between the petitioner and its customers, or whether in most cases the contracts*210 of sale were made by the petitioner itself. But the petitioner, and not Dentist Supply, is shown to be in the position of collector, for Dentist Supply simply remitted any payments voluntarily made by petitioner's customers, with no responsibility for bills not paid by them. Payment was, as above seen, on the face of the bills, made for dental supplies -- not for agency services. No charges were, in fact, made for those things done by Dentist Supply that were not done under the former arrangement. Petitioner says, however, that agency may be gratuitous. That is true, yet the fact that an alleged agency is gratuitously performed has probative effect, logically most particularly where the services may be mere incidents to relation, different from agency and of long standing -- here the relation of purchaser and seller. Moreover, the law of gratuitous agency is summarized in 2 C. J. S. 1043 as follows:
An executory contract of agency requires consideration, but one who gratuitously undertakes to act as agent and enters on the performance of his duties, as such, is bound to complete the undertaking, notwithstanding lack of consideration.
An executory agreement to act as agent*211 for another is ordinarily not binding on either party unless it is based on a sufficient consideration, and mutuality of obligation is essential. * * *
Dentist Supply, then, could not, in our view, have been forced, in the absence of a more definite agreement of agency than here appears, to continue to act as agent. Nothing in the record shows that the *1017 wholesale price charged by Dentist Supply was not subject to change at any time. Thus it is seen that any gratuitous services performed by Dentist Supply were based upon each order or shipment of supplies ordered by petitioner or its customers, and could not have been further commanded, without consideration, by the petitioner -- which in our opinion is indication that such gratuitous services were merely incidental to the sales for which petitioner was billed, because the wartime exigencies in effect required business to be transacted in that way. Petitioner could not import to England at all because it could not obtain import licenses, and in substance could not do it because of shipping conditions; and the financing of the matter was not feasible through England. We see the gratuitous services, in receiving the*212 customers' money, of no financial burden to Dentist Supply (and of course assuring it of collecting its own money), as insufficient to indicate agency. The manager of petitioner's tooth department, on the witness stand, referring to what Dentist Supply had done, said: "* * * the Dentist's Supply Company was willing to render the service for us and has done so until now." This is our view indicates voluntary incidental services, not agency.
Other facts contribute to that conclusion. The petitioner was not shown to be qualified to do business in New York under its law. True, as petitioner suggests, business may be done in fact regardless of legal right, but we find meaning in the dearth of showing of compliance with such legal requirements by an old established institution doing as much "business" as contended for by petitioner. We hesitate to believe that it intentionally violated the New York law, or that, if it had an agent doing its business in New York, it was not advised of so simple a fact as necessity for compliance with state laws. The same is true, and in our opinion even more significant, with respect to the filing of capital stock tax returns for 1940, 1941, and 1942. *213 These were filed February 26, 1943, by its attorney in fact, William L. Ashbaugh, who had been appointed in 1936, and was a partner of a well known firm of public accountants in New York City. On April 3, 1943, there was executed and filed by Ashbaugh for petitioner a claim for abatement of tax to the extent of $ 762.51 penalties for late filing, and the delay in filing was explained as "due to the fact that it [petitioner] was not aware that it was classifiable as a resident foreign corporation under the Internal Revenue Code. As soon as taxpayer realized that a return might be required it caused returns to be filed. Under the circumstances taxpayer believes that no penalties should have been asserted and it respectfully requests that penalties should be abated." We can not consider it reasonable to believe that a company of large affairs, as is petitioner, represented since 1936 by a partner in a prominent firm of public accountants, *1018 did not realize until February 1943 that it was classifiable as a resident foreign corporation and so required to file capital stock tax return, if since May 1940 it had had an agent transacting large amounts of business for it in New*214 York. On the contrary, we see it as wholly reasonable to think that the petitioner did not realize it had any such agent, that it did not consider that there was such agency. Agency is a matter of both intention and fact, but lack of intent is plainly of high importance. The idea of agency appears here as an afterthought, rather than a prearranged status.
Petitioner on brief advances the theory that the respondent is inconsistent in the position taken herein with his attitude taken as to capital stock tax returns. We do not so view the matter. The returns were filed, out of time, and penalties were assessed, and abatement denied. But we see in this no inconsistency such as to affect our conclusion here. The returns contained nothing to indicate any question about tax liability. Estoppel is not pleaded. It is not shown that in insisting on penalties for late filing the Commissioner was determining or considering the question now posed -- whether business was engaged in by the petitioner in the United States. The reception of gift tax returns and collection of gift tax does not preclude a later position by the respondent that there was no reality in the gift. Guaranty Trust Co. v. Commissioner, 98 Fed. (2d) 62.*215
We conclude and hold that the petitioner was not engaged in trade or business within the United States, within the language of sections 231 (b) or 14 (c) of the Internal Revenue Code, but is, within the language of section 231 (a), a nonresident corporation.
Decision will be entered for the respondent.
Footnotes
1. Administrative expenses can not be definitely allocated to any item or class of gross income.↩
2. Wholesale department expenses are allocable to gross income from sales, but can not be definitely allocated to any item or class of gross income from sales either within or without the United States.↩
3. British national defense contribution -- one shilling in the pound on net income, plus British income tax -- 10 shillings in the pound on net income after deducting the British national defense contribution.↩
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 and not having an office or place of business therein, 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 15 per centum of such amount, except that in the case of corporations organized under the laws of a contiguous country 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.
[The rate for 1941 was 27 1/2 percent.]
* * * *
(b) Resident Corporations. -- A foreign corporation engaged in trade or business within the United States or having an office or place of business therein shall be taxable as provided in section 14 (c) (1).
(c) Gross Income. -- In the case of a foreign corporation gross income includes only the gross income from sources within the United States.
SEC. 14. TAX ON SPECIAL CLASSES OF CORPORATIONS.
* * * *
(c) Foreign Corporations. --
(1) In the case of a foreign corporation engaged in trade or business within the United States or having an office or place of business therein, the tax shall be an amount equal to 22 1/10 per centum of the normal-tax net income, regardless of the amount thereof.↩