Scottish American Inv. Co. v. Commissioner , 47 B.T.A. 474 ( 1942 )

THE SCOTTISH AMERICAN INVESTMENT CO., LIMITED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

BRITISH ASSETS TRUST, LIMITED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

SECOND BRITISH ASSETS TRUST, LIMITED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Scottish American Inv. Co. v. Commissioner

Docket Nos. 104249, 104250, 104251, 108440, 108441, 108442.

United States Board of Tax Appeals

47 B.T.A. 474; 1942 BTA LEXIS 684;

August 6, 1942, Promulgated

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">*684 Petitioners, which are foreign investment corporations with large holdings of United States securities, established an office in this country under the charge of a United States citizen designated an "Assistant Secretary" by each of the petitioners. The United States office maintained original records of all of petitioners' transactions in this country, collected dividends on petitioners' United States securities, and sent periodical reports to the home offices of petitioners. The United States office also investigated proposed reorganizations of corporations in which petitioners owned securities and made recommendations to petitioners with respect thereto. The assistant secretary of petitioners disposed of stock rights and scrip and designated the specific certificates of securities to be delivered in the case of sale of securities by petitioners. In addition this office prepared petitioners' United States tax returns and generally took care of petitioners' affairs in the United States. Held, that petitioners maintained an "office or place of business" within the United States and are resident foreign corporations taxable under section 231(b) of the Revenue Acts of 1936">*685 and 1938.

Marion N. Fisher, Esq., for the petitioners.

Harold D. Thomas, Esq., for the respondent.

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ARUNDELL

">*475 The Commissioner determined deficiencies in income tax of the petitioners as follows:

	1936	1937	1938	1939
Scottish American Investment Co., Ltd	$63,031.57	$113,921.68	$67,740.85	$69,054.56
British Assets Trust, Ltd	42,555.98	84,743.68	54,710.09	56,137.81
Second British Assets Trust, Ltd	20,637.22	37,962.61	28,365.47	25,304.20

Petitioners claim overpayments as follows:

	1936	1939
Scottish American Investment Co., Ltd	$38,933.01
British Assets Trust, Ltd	26,319.25	$6,559.44
Second British Assets Trust, Ltd	14,830.14	2,441.33

The sole question before the Board is whether or not petitioners are resident foreign corporations engaged in trade or business in the United States or having an office or place of business in the United States. The proceedings were consolidated for hearing and opinion.

FINDINGS OF FACT.

Petitioner are corporations organized under the laws of Great Britain, with their principal offices in Edinburgh, Scotland. Each of the petitioners">*686 is an investment trust and is engaged in the business of investing the funds of its security holders for the primary purpose of deriving income from investment. Petitioners' returns for the taxable years 1936 and 1937 were filed with the collector of internal revenue for the district of Maryland; their returns for the years 1938 and 1939 were filed with the collector at Newark, New Jersey.

Each of petitioners has large sums invested in securities in the United States. On December 2, 1936, petitioners had the following amounts invested in United States securities:

Scottish American Investment Co., Ltd. (hereinafter referred to as Scottish)	$24,452,752.79
British Assets Trust, Ltd. (hereinafter referred to as British)	14,974,359.67
Second British Assets Trust, Ltd. (hereinafter referred to as Second British	8,457,000.00

The investment of British in United States securities represented over 30 percent of its total investment. The investment of Second British in the United States was in excess of 40 percent of its total investment. The relative investment of Scottish in the United States was proportionately larger than that of the other two petitioners. During">*687 the taxable years each of petitioners owned a large number of different United States securities.

Each of petitioners had a board of directors, which met frequently at its home office in Edinburgh. British and Second British were ">*476 managed, as is customary for investment trusts in England and Scotland, by a firm of secretaries engaged in the business of management.

For some years prior to 1936 Scottish had realized profits in the sales of securities in the United States and had failed to file Federal income tax returns reporting the profit thereon. British companies, such as petitioners, are forbidden to pay dividends out of capital gains or to show such gains in their profit and loss accounts. The accounting firm of Barrow, Wade, Guthrie & Co. of New York City, of which Walter A. Cooper, C.P.A., was a partner, was engaged by Scottish to make a check or audit of its sales of securities and resulting profit over the period of years prior to 1936. As the result of this audit taxes for the years 1927 to 1934, inclusive, in excess of $1,000,000, plus interest of $220,000, were paid by Scottish.

In 1935 F. H. N. Walker, the manager of Scottish, was in the United States">*688 and discussed with Cooper the question of opening an office in the United States for Scottish.

During September and October 1936 Cooper, together with Earl Breeding, an employee of Barrow, Wade, Guthrie & Co., made a trip to England and Scotland, where they visited a number of their firm's clients. They discussed with officials of petitioners the whole problem of opening an office for petitioners in the United States, including the ways in which a United States office might assist petitioners in business transactions and the effect of such an action in view of the Revenue Act of 1936. Cooper and Breeding left England in November 1936 without any decision having been reached by petitioners as to whether or not they would open offices in the United States.

On December 2, 1936, each petitioner appointed Cooper its assistant secretary and, on the same day, cabled its decision to Cooper. British and Second British wrote letters to Cooper dated December 2, 1936, informing him of his appointment and instructing him to proceed with the opening of an office in the United States. Scottish wrote Cooper a letter dated December 3 similar to those which the other petitioners wrote him">*689 under date of December 2, 1936.

Immediately upon receipt of the cables Cooper rented office space, consisting of two rooms on the twenty-sixth floor of the Equitable Building, at 120 Broadway, New York, New York, in which the firm of Barrow, Wade, Guthrie & Co. maintained offices on the twenty-seventh floor. A lease was taken out for each petitioner and a designated part of the office was leased for each petitioner for a specified sum per year. This office had a telephone which was connected with the switchboard in the offices of Barrow, Wade, Guthrie & Co. Petitioners' United States office was established in order to enable petitioners to keep in closer touch with their large United States investments, to do themselves what had formerly been done for them by others, and to gain certain tax advantages.

">*477 Both before and after the opening of the United States office the securities of petitioners were in the custody of J. P. Morgan & Co. and the National City Bank. The securities were registered in the names of nominees. Prior to December 2, 1936, the securities were registered in the names of the bank's regular nominees, each of whom received a single dividend check">*690 on behalf of a number of stockholders. During December 1936 Cooper made arrangements with J. P. Morgan & Co. and the National City Bank to designate for each petitioner a new nominee in whose name were registered only securities of such petitioner. By the end of December 1936 the new nominees had filed dividend mandates with the corporations the securities of which were held by the petitioners, directing payment of dividends and the sending of annual reports, statements, and notices to petitioners at their United States office.

During December 1936 Cooper obtained assistance from Barrow, Wade, Guthrie & Co. in establishing proper accounts for petitioners and in determining the methods of handling the affairs of the petitioners in the United States. The services of several employees of Barrow, Wade, Guthrie & Co. were devoted to the installation of a bookkeeping system and making current records in December 1936. During December 1936 the records of each petitioner were maintained on temporary sheets, copies of which were transmitted to the main offices in Edinburgh. Later the temporary records were written up in final form. The records maintained by the United States office">*691 were the original records of petitioners' transactions, receipts, and disbursements in the United States. All receipts of cash and all disbursements during December 1936, were currently entered in the temporary record. Beginning in December 1936, all expenses of each petitioner in the United States were paid by the United States office.

Throughout the taxable years Cooper rendered services as assistant secretary of petitioners. In addition to Cooper the services of two women were employed full time throughout the taxable years to render stenographic and clerical services. From February 1938 through the taxable year 1939 Henry A. Jeffers, an employee of Barrow, Wade, Guthrie & Co., supervised the activities of the office and spent a total of 1,038 1/2 hours on the affairs of petitioners during that period.

Beginning December 1936, and continuing through 1939, the dividends on United States securities to which each petitioner was entitled were collected by the United States office.

During December 1936 some of the dividends were paid directly to J. P. Morgan & Co., and the National City Bank because the dividends, while payable in the latter part of December, were payable">*692 to stockholders as of a record date prior to filing of mandates by the new nominees. By the end of December most of the dividends were being paid directly to petitioners' United States office.

">*478 Petitioners received the following amounts in dividends from United States securities:

	1936	1937	1938	1939
Scottish	$995,912.76	$1,114,108.97	$730,021.45	$731,180.92
British	673,119.74	823,253.10	548,923.43	570,355.47
Second British	342,598.75	359,289.85	262,292.80	259,735.11

Interest on bonds owned by petitioners continued to be collected by the banks having custody of the securities. Checks for dividends collected by petitioners' United States office were endorsed and deposited by the office in petitioners' bank accounts in the United States. After establishment of the office in the United States in December 1936, J. P. Morgan & Co. did not send notices, annual reports, or proxies to Scottish or British.

Cooper was authorized by each petitioner to look after its interests in the United States. Specifically, he was authorized by each petitioner, as a matter of regular routine, to attend to the following:

(1) The collection">*693 of interest and dividends, and deposit of such income in the company's bank account.

(2) The payment of all local expenses.

(3) The maintenance of records of all United States transactions.

(4) The making of periodical reports (usually once a week) by cable and/or letter on economic, political or other developments in the United States.

(5) The completion and filing of Federal income tax and capital stock tax returns.

Cooper was specifically authorized by each petitioner to draw on its bank account or accounts in the United States in amounts up to $5,000 in any one calendar month, and up to any amount upon the countersignature of a director. The authority of the assistant secretary of each petitioner in the United States was as great as the authority of any director or officer at the main office.

While the office of petitioners was maintained at 120 Broadway, petitioners filed New York State franchise tax returns. Later, petitioners moved this office to New Jersey, where they qualified to do business under the laws of that state. The office of petitioners in New Jersey consisted of a large room with one corner of it partitioned off as a private office. There was">*694 an outside telephone in the office with a New Jersey number and a trunk line to the office of Barrow, Wade, Guthrie & Co.

Each petitioner maintained in its office in the United States a general ledger, a security ledger, a general journal, and a cash book. The general ledgers, security ledgers, and cash books were looseleaf, while the general journals were bound volumes. Each petitioner maintained in its United States office debit and credit vouchers in which all sales and purchases of securities and disbursements of every character were ">*479 entered. The books and records kept for each petitioner in petitioners' United States office constituted full and adequate records of petitioners' security transactions, receipt of income, and all disbursements in the United States.

Copies of cash sheets and journal entries were furnished to the main office of each petitioner monthly by petitioners' United States office. An annual statement was sent to the main office of each petitioner at the end of December of each year by the United States office. Usually the United States office sent a statement of income and disbursements as of December 1 to Edinburgh and brought that statement">*695 up to date at the end of the year by cable so that petitioners might close out their accounts quickly as of the end of the year.

The United States office periodically sent to petitioners' home offices various reports concerning the United States investments, such as annual reports of corporations in which petitioners had invested, and general developments in the United States, including statistical data issued by the Federal Reserve Bank and the New York Times. The United States office investigated reorganization plans of corporations in which petitioners owned securities and made recommendations to petitioners as to what action should be taken by petitioners.

At Cooper's suggestion each of petitioners in June 1937 appointed Breeding as an additional assistant secretary. Breeding was so appointed because of the illness of Cooper, who was required to take a long vacation by his doctor. Breeding's appointment provided for no additional salary.

Petitioners' assistant secretary in the United States had authority to direct nominees to sign proxies and to direct the disposition of stock rights and scrip. He exercised the latter responsibility without consulting the main offices">*696 of petitioners. He had authority to authorize the delivery of specific certificates on sales of securities for each petitioner and exercised such authority without consulting the main offices.

The United States office prepared the United States tax returns of petitioners.

The expenses of the United States office of the petitioners were paid out of the amounts received by Cooper for his salary. Cooper's salary from Scottish was paid directly by that company by check or draft. With respect to British and Second British, Cooper drew his own salary checks on the accounts of those petitioners at the banks. Incidental expenses, such as stationery, office supplies, light, and telephone, were paid by checks drawn by Cooper on petitioners' accounts. The rent for office space was at first paid out of Cooper's salary. Later, at Cooper's request, petitioners assumed the charges for rentals. The amount paid Cooper for salary was subject to adjustment from time to time, depending upon the amount of expenditures incurred in connection ">*480 with his activities. Every partner of Barrow, Wade, Guthrie & Co. who earned outside income was required by the partnership to turn over such">*697 income to the firm. The New York office expenses for petitioners were as follows:

	1936	1937	1938	1939
Scottish	$1,382.78	$7,456.86	$9,391.36	$7,728.39
British	1,310.07	6,918.76	6,060.72	6,193.82
Second British	599.26	2,853.42	2,799.78	2,533.71

Cooper left the firm of Barrow, Wade, Guthrie & Co. on October 31, 1940. Shortly after that time he tendered his resignation as assistant secretary of petitioners, which was accepted by each of petitioners.

OPINION.

ARUNDELL: The only question before us is whether or not petitioners are resident foreign corporations taxable under section 231(b) of the Revenue Acts of 1936 ¹ and 1938. ² Petitioners contend that they were engaged in business in the United States during the taxable years and had an office or place of business here. They maintain that for these reasons they were resident foreign corporations during the taxable years. Respondent argues that petitioners had no real office or place of business in the United States and transacted no business in this country. He argues that petitioners' "office" was engendered solely for tax purposes and had not the substance of a real office. ">*698

A resident foreign corporation is defined in section 231(b) as a foreign corporation engaged in trade or business within the United States or having an office or place of business here. In , the Second Circuit Court of Appeals held that the terms "office" or "place of business" are not "mutually exclusive and though used in the statute in the disjunctive do not necessarily mean that an office may not be a place of business or the latter be but an office. Yet they apparently were not used synonymously">*699 * * *." The court of further placed its stamp of approval on the Commissioner's regulations (art. 231-1(b), Regulations ">*481 101, promulgated under the Revenue Act of 1938), which provide that,

Whether a foreign corporation has an "office or place of business" within the United States depends upon the facts in a particular case. The term "office or place of business," however, implies a place for the regular transaction of business and does not include a place where casual or incidental transactions might be, or are, effected. Other cases that throw light on the question presented are ; affirmed per curiam,, and the Board's opinion in .

With these fundamental concepts in Mind, a brief resume of the facts will be helpful in reaching the conclusion whether or not petitioners have established within the United States an "office or place of business" within the meaning of the statute.

Petitioners are among the very largest of the foreign investment trusts with American holdings. Their investments were made primarily in conservative companies">*700 and they were interested in safety marily in conservative companies and they were interested in safety and an adequate return rather than in capital enhancement. The American investments represented many millions of dollars. It is not questioned that during the taxable years petitioners erer actively engaged in carrying on the business for which they were organized.

Prior to December 1936 these petitioners had an arrangement with J. P. Morgan & Co. and the National City Bank to collect the income from their American securities and to otherwise keep them advised with reference to these securities. While these arrangements appear on the whole to have been satisfactory, there was some dissatisfaction with the failure to receive prompt information about the companies in which petitioners held securities and the Scottish company some time before had been required to pay more than $200,000 interest to the United States Government by reason of its failure to promptly pay certain taxes which it did not realize were due. In order to secure better representation within the United States and because the Revenue Act of 1936 offered certain tax advantages to foreign corporations that established">*701 an office or place of business within the United States, petitioners decided in December of that year to establish such offices and took steps to that end by the designation of Cooper as assistant secretary of each of petitioners. He immediately and within the month rented space and opened offices and started business.

The offices so established by Cooper in behalf of petitioners and maintained through the several years, in our judgment, meet the test of the statute. They were not places for the mere handling of a casual or incidental matter, but in these offices were carried on regularly the various transactions that these offices were established to care for. ">*482 Cooper was in charge and had under his direction two full time employees. Full and adequate records, as detailed in our findings of fact, were kept for each petitioner in the United States offices and it was here that all dividend checks were sent and thereafter deposited, and action on all proxies determined. Petitioners' home offices were kept informed of general developments in the United States and specific reports were made concerning petitioners' United States holdings. Reorganization plans of corporations">*702 in which petitioners owned securities were carefully followed and recommendations were made to the home offices concerning what steps, if any, should be taken to protect petitioners' interests. Stock rights and scrip when received were disposed of by petitioners' American representative without consultation with the home offices.

All United States tax returns of petitioners were prepared by the staff located in the United States. Moreover, the office expenses were not inconsequential. The expenses of Scottish, for example, ranged from a low of $1,382.78 for the short period of operation in December 1936 to a high of $9,391.36 for 1938.

In our opinion, an office handling affairs to this extent must be regarded as real and substantial. It was here that a very large part of the affairs of petitioners in this country were taken care of. What we said in , seems apropos:

* * * Here there is nothing artificial about the office maintained for the trusts. This office was not merely a name or desk space for receiving dividends (see ">*703 ), but an office in the sense of the common everyday conception. It was not established for purposes of compliance with a statute but was maintained in this country because of the administrative necessity of having local supervision of its affairs. Whatever affairs of the trusts were conducted in this country were transacted through that office. * * *

Nor do we think one can take one by one each activity carried on in the American office of these petitioners and argue that each activity is not in and of itself the transaction of business. The collection of dividends and interest by a railroad that had leased its entire property and had ceased to function as such may not constitute the doing of business within the purview of the Revenue Act of 1909, , but it does not follow that the collection of the income of a large investment trust from hundreds of different sources is not to be regarded as the transaction of business. To reason otherwise might well lead to the conclusion that investment trusts are not engaged in carrying on a business.

">*704 Even if it be true that tax considerations prompted the opening of the offices in the United States, it would be of no particular significance. Congress extended the invitation to foreign corporations to establish an office or place of business in this country. So long as the office is not a sham but is a place for the transaction of business, petitioners ">*483 qualify under section 231(b). It should be noted that petitioners by opening offices in this country subjected themselves to the imposition of tax on certain gains on which they would not have been taxed had they been nonresident foreign corporations. See section 231(a) of the Revenue Acts of 1936 and 1938 and Regulations 94 and 101, article 231-2(a). Thus, if the petitioners had extensive capital gains in the taxable years they might well have been required to pay a greater tax by reason of being resident foreign corporations. The fact that the United States office was relatively small and that it was occupied by all three petitioners is not important. The joint occupancy of the office was a logical result of the fact that each of petitioners was engaged in a similar business.

We think petitioners have established">*705 that during the taxable years they had within the United States an office or place of business within the meaning of section 231(b), supra; that the office was used for the regular transaction of business and not as a place where casual or incidental transactions might be, or were, effected. The conclusion reached requires that the year 1936 be accorded the same treatment as the latter years involved herein. The respondent is reversed.

Decisions will be entered under Rule 50.

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Footnotes

• 1. SEC. 231. TAX ON FOREIGN CORPORATIONS.

  * * *

  (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 without regard to the provisions of subsection (a), but the normal tax imposed by section 13 shall be at the rate of 22 per centum instead of at the rates provided in such section. ↩

• 2. (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(e)(1). ↩