*3400 1. A nonresident alien engaged in the business of selling in foreign countries goods purchased in the United States and maintaining in New York City an office for the purchase of such goods did not derive income from a source within the United States under the Revenue Acts of 1916, 1917, 1918, and 1921.
2. On September 9, 1921, the nonresident alien referred to above entered into partnership with the manager of his New York office. Held, that under the Revenue Act of 1921 the manager of the New York office is liable to income tax in respect of his pro rata share of the profits of the partnership, but that the nonresident alien partner is exempt from income tax in respect of his share of the profits of the partnership.
*1102 These proceedings, consolidated for hearing and decision, are for the redetermination of deficiencies in profits tax and income tax as follows:
| R. J. Dorn & Co., Docket No. 18030: | ||
| Year ended March 31, 1917 | $1,007.03 | |
| Year ended March 31, 1918 | 4,241.35 | |
| Estate of Louis Dorn, Docket No. 11218: | ||
| 1920 | 335.50 | |
| 1921 | 4,251.53 | |
| R. J. Dorn, Docket No. 11219: | Tax | Penalty |
| 1920 | $8,134.27 | $2,033.57 |
| 1921 | 11,105.58 | 2,776.40 |
| Rene Dorn, Docket No. 11220: | ||
| 1920 | 5,155.06 | |
| 1921 | 8,208.86 |
*3401 *1103 The assignments of error in the appeal of R. J. Dorn & Co., Docket No. 18030, are that the respondent erred:
(a) In treating the petitioner as a domestic partnership;
(b) In treating all of petitioner's income from the New York office as derived from sources within the United States;
(c) In not computing petitioner's excess-profits tax, if any, under section 209 of the Revenue Act of 1917; and
(d) In not deducting compensation to Rene Dorn and Louis Dorn, on profit-sharing basis, from petitioner's income before determining petitioner's net income.
The assignments of error in the appeal of Estate of Louis Dorn, Docket No. 11218, are that the respondent has erred:
(a) In treating petitioner as a member of a firm of the name of R. J. Dorn & Co.;
(b) In treating petitioner's share of the profits of R. J. Dorn & Co. of New York as taxable income; and
(c) In treating any of the petitioner's income as earned in the United States and as taxable.
The assignments of error in the appeal of R. J. Dorn, Docket No. 11219, are that the respondent erred:
(a) In determining that the taxpayer derived an income from the United States;
(b) In treating petitioner's*3402 profit from the operation of R. J. Dorn & Co., New York office, as the distributable share of a domestic partnership;
(c) In including all of said profit in taxable income; and
(d) In assessing a penalty for failure to file returns against petitioner.
The assignments of error in the appeal of Rene Dorn, Docket No. 11220, are that the respondent erred:
(a) In treating petitioner as a member of the firm of R. J. Dorn & Co. from the period April 1, 1916, to September, 1921;
(b) In treating petitioner as a member of a domestic partnership from September through December, 1921; and
(c) In including petitioner's share of profits of R. J. Dorn & Co. in income of the calendar year in which the fiscal year of R. J. Dorn & Co. ended.
FINDINGS OF FACT.
On August 3, 1914, a partnership was formed in Havana, Cuba, under the firm name of R. J. Dorn & Co. This partnership was composed of R. J. Dorn and three other individuals, none of whom was a brother of R. J. Dorn. On January 4, 1915, one of the partners withdrew from the firm and thereafter R. J. Dorn continued to *1104 operate the business under the same trade name as a sole proprietorship. Under this name R. J. *3403 Dorn & Co. operated an office in Havana, Cuba, and one in Martinique, the office in Martinique being managed by Louis Dorn, a brother of R. J. Dorn.
Although the firm was originally established to conduct a varied business the principal business from the first was the sale in foreign countries of goods purchased in the United States. In order to make purchases at the best advantage a New York office was opened in the fall of 1915 for the purchase of goods to be shipped to foreign purchasers upon orders sent through the Havana office. During the years 1917 to 1921 most of the goods purchased were sold in Martinique through Louis Dorn, the representative of the business in that island. Rene Dorn, another brother of R. J. Dorn, was made manager of the New York office under an agreement by which he was to receive a stipulated salary plus a percentage of the profits of the business. The profits were to be determined monthly, and Rene Dorn, having the custody of the profits could appropriate his share monthly. It was specifically agreed that Rene Dorn should not be liable for any of the losses of the business. Louis Dorn in Martinique likewise received a stipulated salary plus a*3404 percentage of the profits. In July, 1917, the contract of employment of Rene Dorn was reduced to writing. Rene Dorn desired to be admitted to partnership with his brother but R. J. Dorn, who was furnishing the capital for the enterprise, for a long time refused to admit him. His percentage of the profits of the business was increased from year to year and on September 9, 1921, Rene Dorn and R. J. Dorn organized a partnership which thereafter carried on the business under the same name, R. J. Dorn & Co.
From the time that the New York office was opened in 1915, Rene Dorn continued as an employee of R. J. Dorn until he was admitted to partnership. Louis Dorn throughout the taxable years was an employee of R. J. Dorn and a resident of Martinique. He never became a partner of R. J. Dorn & Co. The New York office was continuously operated as a branch of the Havana office.
The New York office was opened and conducted during the taxable years as a purchase office. No goods were bought abroad and sold in the United States. During the early years practically all orders came from points abroad. During the fiscal year ended March 31, 1917, the total sales of the New York office*3405 amounted to $150,097.48, of which sales aggregating $143,304.96 were on orders taken by Louis Dorn in Martinique, and $6,792.52 were on orders received in New York; during the fiscal year ended March 31, 1918, the total sales of the New York office amounted to $223,421.23, of which sales aggregating $182,288.91 were on orders taken by Louis Dorn in Martinique, *1105 $10,338.78 on orders taken by R. J. Dorn in Havana and $30,793.54 were on orders received in New York and Porto Rico; during the fiscal year ended March 31, 1920, the total sales of the New York office amounted to $750,025.55, of which sales aggregating $463,147.86 were on orders taken by Louis Dorn at Martinique, $88,090.89 were on orders taken by R. J. Dorn from Santa Lucia Co., Cuba, $16,605 were on orders from United Railway of Havana, $29,122.25 on orders taken by an agent in Mexico, and $153,059.55 on orders received in New York and Porto Rico; during the fiscal year ended March 31, 1921, the total sales of R. J. Dorn & Co., New York office, were $843,193.56 of which sales aggregating $292,786.31 were on orders secured by Louis Dorn in Martinique, $169,631.57 on orders secured by R. J. Dorn in Havana, $57,239.65*3406 on orders secured by an agent in Mexico, and $323,536.03 on orders received in New York and Porto Rico; during the fiscal period ended December 31, 1921, the total sales were $192,562.42, of which sales aggregating $15,478.05 were on orders secured by Louis Dorn in Martinique, $25,225.82 on orders secured by R. J. Dorn in Havana, $17,291.05 on orders secured by an office in Mexico, $2,764.99 on orders secured by an agent in Mexico, and $131,802.51 on orders received in New York.
Where R. J. Dorn & Co. had a representative, as in Martinique and Cuba, it was the custom to bill the customer direct, ship the goods on open bill of lading and draw a draft on the customer for the amount. Shipments to points where the company had no representative were on order bill of lading attached. The marine insurance was taken in the name of R. J. Dorn & Co. If losses were incurred, they were borne by R. J. Dorn & Co. The accounts were kept in New York. Payment for the purchase of goods was made from New York. When the drafts were drawn on customers they were discounted by the Royal Bank of Canada in New York upon the personal guarantee of R. J. Dorn and limited to the personal amount of his*3407 credit guarantee. If payment was not made upon presentation of draft abroad, it had to be made good by R. J. Dorn & Co. The drafts included cost, insurance, and freight and the consignee paid the interest and collection charge from the time the drafts were discounted until they were paid. The actual payment was made by the consignee upon the arrival of the goods at destination. No stock was carried in New York but goods were bought on specification.
The invested capital of R. J. Dorn, operating as R. J. Dorn & Co. in New York, for the fiscal years ended March 31, 1917, and March 31, 1918, was $1,149.76 and $6,221.49, respectively.
During the fiscal year ended March 31, 1920, Rene Dorn withdrew on his profit-sharing account $10,092.65, of which $8,977.83 was *1106 withdrawn prior to January 1, 1920; during the fiscal year ended March 31, 1921, he withdrew on his profit-sharing account $8,121.56, of which $5,753.01 was withdrawn prior to January 1, 1921. These withdrawals were in addition in his salary.
Rene Dorn, a resident of New York, attended to all tax matters for all the petitioners. After an examination by a representative of the Commissioner's office and*3408 upon advice of such representative that R. J. Dorn & Co., R. J. Dorn, and Louis Dorn were not subject to income tax, Rene Dorn did not thereafter file returns for them.
Under the agreement the partnership entered into on September 9, 1921, the profits of the business were to be divided equally between R. J. Dorn and Rene Dorn after considering as an expense of the partnership 20 per cent of the net profits payable to Louis Dorn for services performed at the Martinique branch.
Respondent has determined deficiencies upon the basis that R. J. Dorn & Co. throughout the taxable years 1917 to 1921, inclusive, was a partnership transacting business in the United States, and that Louis Dorn, R. J. Dorn, and Rene Dorn were members of such partnership. He has accordingly held the partnership liable to excess-profits tax upon gains for the calendar year 1917 and the other petitioners liable to income tax in respect of their shares of profits for other years involved.
OPINION.
SMITH: The petitioners have assigned numerous errors in the determination of these deficiencies but we think that it is necessary for us to pass upon only a few of them. The deficiencies were determined upon*3409 the supposition that R. J. Dorn & Co. was during all of the taxable years 1917 to 1921, inclusive, a partnership. The evidence shows, however, that from 1916 to September 9, 1921, the business conducted under this name was a sole proprietorship owned by R. J. Dorn, a nonresident alien of Havana, Cuba.
The first point which we shall consider is whether R. J. Dorn, conducting business in Havana, Cuba, with an office in New York during the calendar year 1917, was liable to income and excess-profits tax in respect of the income which he derived from that business. Section 1(a) of the Revenue Act of 1916 provides:
* * * and a like tax [2 per centum] shall be levied, assessed, collected, and paid annually upon the entire net income received in the preceding calendar year from all sources within the United States by every individual, a nonresident alien, including interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise.
The Revenue Act of 1917 imposes an excess-profits tax upon individuals in respect of a trade or business of a nonresident individual. *1107 (Section 202, Revenue Act of 1917). The return upon which such tax*3410 shall be made up "in the same manner as is prescribed for income-tax returns under Title I of such Act of September eighth, nineteen hundred and sixteen, as amended by this Act." (Section 211 of the Revenue Act of 1917.)
If R. J. Dorn, conducting business under the name of R. J. Dorn & Co., derived an income from a source within the United States during the year 1917, that income is liable to income and excess-profits tax. It is to be noted, however, that the activity of the New Yorkoffice of R. J. Dorn during 1917 was confined to the purchase in the United States of goods manufactured in the United States upon orders received from abroad and the shipment of such goods to the foreign consignees. We have held that where goods were manufactured abroad by a nonresident alien and sold in this country the entire profit constitutes "gross income from sources within the United States" within the meaning of section 213(c) of the Revenue Act of 1918. . We have also held that where a foreign corporation sells goods at a profit in the United States it derives an income from a source within the United States within the meaning of the statute. *3411 ; . The question as to whether certain foreign corporations and partnerships derived income from sources within the United States under the provisions of the Revenue Act of 1918 was referred by the Secretary of the Treasury to the Attorney General, who, on November 3, 1920, rendered his opinion upon the question propounded. The Revenue Act of 1918 is more specific than the Revenue Acts of 1916 and 1917 with respect to the sources of income of foreign corporations and nonresident alien individuals. Section 213(c) of that Act provides:
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.
*3412 Section 233(b) contains a similar provision with respect to income from sources within the United States of foreign corporations. The Attorney General held in his opinion, 32 Ops.Atty.Gen. 336, that:
No income is derived from the mere manufacture of goods; before there can be income there must be sale; and there is no income from sources within the United States from goods manufactured here unless there is, in the language of section 233(b), both "manufacture and disposition of goods within the United States."
*1108 It was further held that where a partnership organized in England, with principal office at Liverpool, England, maintains a branch office at Dallas, Texas, which does not make any sales in the United States, but buys cotton therein which it ships to the home office in England for disposition, the gross income from such business is not derived from sources within the United States. The facts in the case stated are much the same as those which obtain in the case of R. J. Dorn for 1917. We think it clear that without the sale of the goods purchased by R. J. Dorn, trading as R. J. Dorn & Co., there could have been no income to R. J. Dorn. The purchasers of the*3413 goods were nonresidents; title to the goods purchased remained with R. J. Dorn until they were delivered to the foreign consignee; the money from which the income was derived was received from the foreign consignee. We think that the converse of the situation which was before us in the Birkin case, supra; the ; and , requires us to hold that the income of R. J. Dorn prior to the organization of the partnership of R. J. Dorn & Co., on September 9, 1921, was from a source without the United States and not from a source within the United States. We are, therefore, of the opinion that upon the record it must be held that R. J. Dorn & Co., Louis Dorn, and R. J. Dorn, at least prior to the organization of the partnership on September 9, 1921, are exempt from income-tax in respect of any income derived by them from operations of R. J. Dorn & Co.
Section 217(e) of the Revenue Act of 1921 provides:
Items of gross income, expenses, losses and deductions, other than those specified in subdivisions (a) and (c), shall be allocated or apportioned to sources within or*3414 without the United States under rules and regulations prescribed by the Commissioner with the approval of the Secretary. Where items of gross income are separately allocated to sources within the United States, there shall be deducted (for the purpose of computing the net income therefrom) the expenses, losses and other deductions property apportioned or allocated thereto and a ratable part of other expenses, losses or other deductions which can not definitely be allocated to some item or class of gross income. The remainder, if any, shall be included in full as net income from sources within the United States. In the case of gross income derived from sources partly within and partly without the United States, the net income may first be computed by deducting the expenses, losses or other deductions apportioned or allocated thereto and a ratable part of any expenses, losses or other deductions which can not definitely be allocated to some item or class of gross income; and the portion of such net income attributable to sources within the United States may be determined by processes or formulas of general apportionment prescribed by the Commissioner with the approval of the Secretary. *3415 Gains, profits and income from (1) transportion or other services rendered partly within and partly without the United States, or (2) from the sale of personal property produced (in whole or in part) by the taxpayer within and sold without the United States, or produced (in whole or in part) by the taxpayer without and sold within the United States, shall be treated as derived partly from sources within *1109 and partly from sources without the United States. Gains, profits and income derived from the purchase of personal property within and its sale without the United States or from the purchase of personal property without and its sale within the United States, shall be treated as derived entirely from the country in which sold.
The methods of transacting business after the organization of the partnership were not different from those in existence before that date. Under the specific provisions of the Revenue Act of 1921 the partnership derived no income from a source within the United States inasmuch as its only activity within the United States was the purchase of goods therein for sale abroad.
There remains only to be considered the liability to income tax of Rene*3416 Dorn. He was admittedly a member of the partnership of R. J. Dorn & Co. from September 9 to December 31, 1921. It is not denied that he is liable to income tax in respect of his pro rata share of the profits of the partnership for this period. It is contended, however, on behalf of Rene Dorn, that under his contract with R. J. Dorn he was to receive a stipulated salary and a percentage of the profits monthly prior to September 9, 1921, when he became a partner; that the profits were to be determined monthly, and the profits were available to him monthly; and that the respondent has erred in allocating the profits upon the basis of the fiscal year of March 31, 1920, of R. J. Dorn & Co. The contentions of the petitioner, Rene Dorn, upon this point are sustained, since Rene Dorn was not a member of the partnership for such fiscal year.
Reviewed by the Board.
Judgment will be entered under Rule 50.