Van Iderstine v. Commissioner

ROBERT VAN IDERSTINE, TRUSTEE FOR ALF L. WHIST, A NONRESIDENT ALIEN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. ROBERT VAN IDERSTINE, AGENT FOR ALF L. WHIST, A NONRESIDENT ALIEN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. ROBERT VAN IDERSTINE, ALLEGED TRUSTEE FOR ANDREAS RENDTORFF, AND ANDREAS RENDTORFF, A NONRESIDENT ALIEN, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Van Iderstine v. Commissioner Docket Nos. 27292, 28766, 28775. United States Board of Tax Appeals 24 B.T.A. 291; 1931 BTA LEXIS 1660; October 7, 1931, Promulgated *1660 1. The determination of deficiencies against petitioner, the resident manager of insurance agencies doing business in the United States, in respect of shares of income of such agencies distributable to nonresident alien individuals having substantial interest therein, is approved for lack of evidence that petitioner was not acting as their individual representative in receiving and distributing the income and that he was not required to withhold and pay tax and make a withholding return. 2. The filing by the petitioner of a personal service corporation return for one of such agencies and fiduciary returns covering the business done by the others, disclosing the shares of the income distributable to such aliens, did not discharge his duty to file withholding returns, and hence the imposition of penalties for delinquency was proper and the proposed tax assessments are not barred by the statute of limitations. 3. The amounts received by the nonresident aliens in this case are held, upon the evidence, to be distributions to them of their distributive shares of income from businesses carried on by the several agencies in the United States, and not salaries or compensation*1661 for services and reimbursement of expenses. 4. Assuming that the corporation operating one of the agencies in question is a personal service corporation, the nonresident alien stockholders would nevertheless be taxable on their distributive shares of its income, since the income is the income of a domestic corporation. LeRoy B. Iserman, Esq., for the petitioners. J. O. Rhyne, Esq., for the respondent. STERNHAGEN *292 The respondent determined deficiencies in income tax and penalties as follows: Taxpayer, per deficiency letter Docket Year Deficiency Penalty No. in tax [1920] $4,971.47 $1,242.87 Robert Van Iderstine, Trustee for 27292 [1921] 3,154.25 788.56 Alfred L. Whist, Nonresident Alien Robert Van Iderstine, Agent, Alf 28766 [1919] 3,873.74 968.43 Whist, Nonresident Alien [1918] 680.90 170.23 Robert Van Iderstine, Agent, 28775 [1919] 529.49 132.37 Andreas Rendtorff, Nonresident Alien The three proceedings, which were consolidated, result from the action of the respondent in taxing Van Iderstine on the distributive shares of Whist for 1919 and 1920 and Rendtorff for*1662 1918 and 1919 of the net income of the International Fire & Marine Agency Corporation for those years, and in taxing Van Iderstine on Whist's share of the income for 1920 and 1921 from the operation of certain other reinsurance agencies. The issues are: (1) Whether Van Iderstine was a withholding agent for Whist and Rendtorff in respect of any of the income sought to be taxed to him by the respondent; (2) whether the income so taxed constitutes income of Whist and Rendtorff from sources within the United States; (3) whether the imposition of penalties for failure to file returns was proper; and (4) whether the proposed taxes are barred by the statute of limitations. *293 FINDINGS OF FACT. Robert Van Iderstine is an individual and a resident of New York, N.Y., and from 1918 to 1921, inclusive, was engaged there in the insurance business, specializing in reinsurance and acting as the local representative of foreign reinsurance corporations. Andreas Rendtorff is, and during those years was, a subject of Great Britain, residing in London, England. Alf L. Whist is, and during those years was, a subject of Norway, residing in Oslo in that country. In 1914 and 1915 there*1663 existed in the United States a demand for additional insurance and reinsurance facilities, which was brought about by the increase in the volume of business and the withdrawal of the German reinsurance companies by reason of war conditions. Van Iderstine was then engaged in the practice of law and represented numerous insurance companies and brokers. Whist and Rendtorff were his clients, whom he had known for some years. They were connected with and had financial interests in some of the important reinsurance companies in Europe, and were in a position to induce them to enter the business in the United States. Van Iderstine suggested to Whist and Rendtorff that they induce these companies to engage in the business of reinsurance in the United States, through agencies to be operated by Van Iderstine. Whist and Rendtorff thereafter cooperated with Van Iderstine in establishing an international reinsurance business. On October 9, 1915, Van Iderstine organized the International Fire & Marine Agency Corporation, under the laws of the State of New York, to operate as the representative in the United States of foreign reinsurance companies. He was president of the corporation and*1664 managed its affairs. During 1918 and 1919 the stockholders and the interests owned by each were as follows: Per cent Robert Van Iderstine [30] Willcox, Peck & Hughes [20] Andreas Rendtorff [10] Alf L. Whist [40] Van Iderstine acquired the 40 per cent interest of Whist sometime during 1920, and during that year the interests of the other stockholders remained the same. Except for minor items, such as interest, all of the income of the International Corporation was derived from overriding commissions earned under so-called reinsurance treaties, or contracts, negotiated by it as agent of its foreign principals with other foreign insurance companies. The treaties covered risks in all parts of the world, including the United States. *294 The International Corporation filed returns as a personal service corporation and was granted such classification by the respondent for the years 1918 to 1921, inclusive. It filed its return for 1919 on March 15, 1920. In an amended return for that year, it reported the distributive shares of its income for 1919 to be $28,215.70 for Whist and $7,053.92 for Rendtorff. Upon audit of its returns for 1918, 1919, and 1920, *1665 the respondent determined the shares of its profit attributable to Whist and Rendtorff to be as follows: Year Whist Rendtorff [1918] $6,506.38 [1919] $28,779.70 7,194.92 [1920] 1,590.49 In 1920 and 1921 Van Iderstine was the United States manager for two Norwegian reinsurance companies - the Norwegian Globe Insurance Company, Ltd., and the Norwegian Assurance Union, Ltd. These agencies were procured for him through Whist. The income from these agencies, and the agency for the General Casualty Insurance Company, hereinafter mentioned, was derived from overriding commissions under treaties negotiated, and the agencies were operated in the same way as the International. In or about 1921 the Norwegian Globe Insurance Company was reorganized as an American corporation, known as the General Casualty Insurance Company. Van Iderstine was made president. He received a salary and commissions from this company. Van Iderstine filed fiduciary returns for 1920 on March 14, 1921, and for 1921 on June 7, 1922, covering the operation of the agency of the Norwegian Globe Insurance Company, disclosing Whist's distributive share of the net income for 1920 to be $19,193.15, *1666 and his proportionate share of the loss for 1921 to be $2,972.05. He also filed a similar return for 1921 on May 15, 1922, covering the operation of the agency of the Norwegian Assurance Union, Ltd., disclosing Whist's distributive share of the net income to be $1,546.53. Upon audit of these returns, and a similar return relating to the agency of the Norwegian Assurance Union for 1920, the respondent determined the shares of Whist to be as follows: Company [1921] Norwegian Globe Insurance $31,592.90 1 $9,921.19 Company Norweigan Assurance Union 562.15 1,546.53 He also determined from the records of his office that Whist received from the General Casualty Insurance Company in 1921, *295 through "Robert Van Iderstine Special Account." $24,554.89, and a salary from that company of $9,000. During the years 1918 to 1921 Whist and Rendtorff procurred for the International Corporation agencies of foreign reinsurance companies, brought it in contact with direct-writing European companies, and negotiated treaties with them. All of this was performed in England and countries in Europe. They made occasional trips to the United*1667 States for conferences with Van Iderstine and his American associates and to acquaint themselves with conditions here. The services rendered by Whist to the agencies other than International Corporation were of the same character. Whist traveled extensively and spent substantial amounts for traveling expenses and entertainment. He also had investments in various Russian and Norwegian reinsurance companies, for the purpose of controlling them, some of which eventually resulted in a total loss to him. In addition to the agencies actually procured, Whist partially completed negotiations for agencies of other companies in Russia, Norway and France, but the appointments were frustrated by reason of war conditions, the Russian revolution, and problems of exchange. No income-tax returns were filed by or for Whist or Rendtorff for the taxable years in question. Pursuant to section 3176, Revised Statutes, the respondent caused returns to be filed, disclosing tax liability based on their shares of the income from the International and other agencies, as found by him upon reaudit of the returns and examination of his records, and determined the deficiencies in question, to which he*1668 added a 25 per cent penalty for "delinquency." The notices of deficiency in Docket Nos. 28766 and 28775 were sent under date of March 26, 1927, and were addressed to "Robert Van Iderstine, Agent, Alf Whist, Nonresident Alien," and "Robert Van Iderstine, Agent, Andreas Rendtorff, Nonresident Alien." The notice of deficiency in Docket No. 27292 was sent under date of February 26, 1927, and was addressed to "Robert Van Iderstine, Trustee, for Alfred L. Whist, Nonresident Alien." OPINION. STERNHAGEN: The petitioner assails the respondent's determination on numerous grounds, none of which is, in our opinion, sufficiently strong to establish error. Whist and Rendtorff were nonresident aliens with substantial interests in the several insurance businesses conducted in the United States. Van Iderstine was the resident manager of these enterprises and, as postulated by the Commissioner, apparently acted also as their individual representative, receiving and distributing to them their distributive shares of the income. He was required by the Revenue Act of 1926, section 221, to withhold and pay tax and to make a withholding return. He *296 neither made the return nor paid the*1669 tax. The respondent therefore determined the deficiencies to be due from him and added penalties. We are of opinion he acted correctly. The failure to file returns also prevents the application of any limitation period. Revenue Act of 1926, sec. 277. The filing by Van Iderstine of returns for the International Corporation and, as fiduciary, for the special accounts of the business done in respect of the other foreign companies, did not discharge his duty to file withholding returns for Whist and Rendtorff and does not control the limitation period or the penalties. . It is argued that the amounts received by Whist and Rendtorff from all of the several sources were salaries or compensation for services and reimbursement of expenses, and that since the services were performed abroad, the income is not derived from sources within the United States and hence, to a nonresident alien, is not taxable. We are of opinion, however, from the evidence, that the amounts were neither salary or compensation nor reimbursement of expenses. The evidence indicates that they were distributions to nonresident aliens of their distributive*1670 shares of the income from the several businesses carried on in the United States by the International and the Norwegian agencies, and, as such, taxable to the distributees and to their resident withholding agent. The performance by them of services abroad in behalf of these enterprises does not establish that they were to receive salaries therefor or to be compensated otherwise than by their shares in the profits resulting from the success of the business. It is argued that, since International was classified under section 200 as a personal service corporation, its income is taxable as partnership income and that these nonresident aliens are therefore not taxable on their distributive shares. Assuming that the corporation is a personal service corporation, the income, however, is still the income of the domestic corporation, although taxable not directly to the corporation but to the shareholders or their withholding agent. Judgment will be entered for the respondent. Footnotes 1. Loss. ↩