Porto Rico Consol. Fruit Co. v. Commissioner

PORTO RICO CONSOLIDATED FRUIT CO. ET AL., 1 PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Porto Rico Consol. Fruit Co. v. Commissioner Docket No. 22185. United States Board of Tax Appeals 16 B.T.A. 778; 1929 BTA LEXIS 2511; May 29, 1929, Promulgated *2511 A corporation engaged in raising fruits and other products in Porto Rico, which are sold in the United States, derives income from sources within the United States and does not come within the provisions of section 262 of the Revenue Act of 1921. Willis M. Spaulding, Esq., for the petitioners. J. L. Backstrom, Esq., for the respondent. TRAMMELL *778 This is a proceeding for the redetermination of deficiencies in income tax for 1922 and 1923 in the amounts of $2,958.68 and $1,657.79 respectively. The questions involved are whether the petitioners are entitled (1) to the benefit of section 262 of the Revenue Act of 1921, and (2) whether the respondent has correctly allowed credits for taxes paid to the Government of Porto Rico. FINDINGS OF FACT. The petitioner, Porto Rico Consolidated Fruit Co., is a Delaware corporation, having its principal office in Buffalo, N.Y. The petitioners, Bayview Fruit Co. of Porto Rico, Columbo Tropical Fruit Co., El Prospero Fruit Co. of Porto Rico, Laguna Fruit Co. of Porto Rico, Porto Rico Citrus Fruit Co., Royal Fruit Co. of Porto Rico, Inc., Star Fruit Co. of Porto Rico, and Superior Fruit Co. of Porto*2512 Rico are each New York companies, and have their principal office in the City of Buffalo. The petitioner, the Porto Rico Consolidated Fruit Co., owns all of the stock of the other corporations named, and receives all of its income in the way of dividends from those corporations. It has no income from its own operations. All of the other named corporations are operating corporations engaged in the active business of raising citrus fruit, pineapples, sugar cane and other products in a possession of the United States, namely, Porto Rico. The entire income of the corporations above named, which are so engaged in the raising of such products in Porto Rico, consists of income derived from the sale of such products. Most of its products are sold in the United States, only a small per cent being sold in Porto Rico. The total net income for 1922 was $43,901.88, derived from total sales of $430,870.16, of which sales in the amount of *779 $43,872.67 were made in Porto Rico and the balance of $386,997.39 in New York. The petitioners' net income for 1923 was $32,388.52, which was derived from total sales of $428,921.27, of which sales to the amount of $77,113.26 were made in*2513 Porto Rico and $351,808.01 were made in New York. All of the petitioners' products which are not sold in Porto Rico are turned over to a common carrier at that place for delivery to a commission house in New York City. Upon receipt of the petitioners' products, it sells the same in New York, deducts its commissions and expenses for freight and other incidentals, and forwards the proceeds thereof to the office of the Porto Rico Consolidated Fruit Co. in Buffalo. The entire proceeds are then deposited in a Buffalo bank in the name of that corporation. If products are sold by the commission house at a loss, the corporations are required to make good the loss. As funds are needed by the producing corporations in Porto Rico for expenses of operating the plantations, they are transmitted from the office of the parent corporation, the Porto Rico Consolidated Fruit Co. There is no stated fixed price at which the goods are sold, but they are sold in the ordinary due course, according to the usual and general method of handling products by commission houses. The petitioners filed a consolidated return treating the income from the products sold in the United States as being income derived*2514 from a possession of the United States under the provisions of section 262. The respondent denied that such income was received from a possession of the United States, and held that the petitioners did not meet the requirements of section 262. The Commissioner, in computing the credits allowed for taxes paid to Porto Rico, computed such credits in accordance with article 327 of Regulations 62. In the amended petition this was assigned as error. OPINION. TRAMMELL: The petitioners contend that their entire income is derived from sources without the United States, for the reason that their income is derived from the sale of farm products grown in Porto Rico. The respondent contends that the source of the petitioners' income, which is attributable to the sale of their products in New York, is within the United States, because such products are not reduced to cash until sold by the commission house after the arrival of the products within the United States, and for the further reason that the proceeds are kept within the United States and all of the petitioners' activities other than those relating to the ownership of the land and assets and its farming operations and the expenses*2515 of operating the plantations are within the United States. *780 Section 262 of the Revenue Act of 1921 is as follows: (a) That in the case of citizens of the United States or domestic corporations, satisfying the following conditions, gross income means only gross income from sources within the United States - (1) If 80 per centum or more of the gross income of such citizen or domestic corporation (computed without the benefit of this section) for the three-year period immediately preceding the close of the taxable year (or for such part of such period immediately preceding the close of such taxable year as may be applicable) was derived from sources within a possession of the United States; and (2) If, in the case of such corporation, 50 per centum or more of its gross income (computed without the benefit of this section) for such period or such part thereof was derived from the active conduct of a trade or business within a possession of the United States; or (3) If, in the case of such citizen, 50 per centum or more of his gross income (computed without the benefit of this section) for such period or such part thereof was derived from the active conduct of a trade*2516 or business within a possession of the United States either on his own account or as an employee or agent of another. (b) Notwithstanding the provisions of subdivision (a) there shall be included in gross income all amounts received by such citizens or corporations within the United States, whether derived from sources within or without the United States. (c) As used in this section the term "possession of the United States" does not include the Virgin Islands of the United States. In order to come within the above quoted section, it must be shown that 80 per cent or more of the gross income of the corporation was derived from sources within a possession of the United States. If this is not shown, then section 262 is not applicable. In a number of cases the Board has held that income derived from the sale in the United States of goods manufactured in other countries is income from a source within the United States. See ; ; *2517 , affirmed upon appeal by the ; , and . In view of the foregoing decisions, it is our opinion that the petitioners here do not come within the provisions of section 262. In computing the deficiencies herein, the respondent has computed the credits in accordance with article 327 of Regulations 62. The action of the respondent in computing such credits, including the taxes paid to Porto Rico, is, in our opinion, correct, and is approved. Reviewed by the Board. Judgment will be entered for the respondent. STERNHAGEN concurs in the result. Footnotes 1. Bayview Fruit Co. of Porto Rico, Columbo Tropical Fruit Co., El Prospero Fruit Co. of Porto Rico, Laguna Fruit Co. of Porto Rico, Porto Rico Citrus Fruit Co., Royal Fruit Co. of Porto Rico, Inc., Star Fruit Co. of Porto Rico, and Superior Fruit Co. of Porto Rico. ↩