Askania Werke A. G. v. Commissioner

ASKANIA WERKE A.G., PETITIONER. v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Askania Werke A. G. v. Commissioner Docket No. 58546. United States Board of Tax Appeals 33 B.T.A. 875; 1936 BTA LEXIS 815; January 7, 1936, Promulgated *815 1. The petitioner, a German corporation, through an American representative, sold merchandise to American purchasers. Held, that the sales, being made f.o.b. Houston, Texas, were made in the United States and that the petitioner is taxable on income derived therefrom. Held, further, that the petitioner has failed to show that respondent's computation of net income is erroneous. 2. Respondent's determination of a 25 percent penalty for failure to file returns for years 1926 and 1927 is sustained. H. A. Mihills, C.P.A., for the petitioner. John H. Pigg, Esq., John W. Smith, Esq., and H. S. Fessenden, Esq., for the respondent. TURNER *876 This proceeding involves deficiencies in income tax for the years 1926, 1927, and 1928 in the aggregate amount of $5,953.21 and delinquency penalties for the years 1926 and 1927 totaling $832.64. Petitioner contends that it is a foreign corporation and did no business in the United States during the years in question and for that reason is not subject to Federal income tax nor liable for the penalties determined by the respondent. It is further contended that, even though it is liable to*816 Federal income tax, the method adopted by the respondent in determining its net income is erroneous. FINDINGS OF FACT. The petitioner is a German corporation, with its offices located at Kaiseralle 87/88, Berlin, Germany, and it engaged in manufacturing and selling scientific instruments and apparatus. During the taxable years the petitioner maintained on office in Houston, Texas, which was in charge of G. Stubbe, who negotiated sales of petitioner's products. These sales were made largely to operating oil concerns. After a discussion of equipment desired with a prospective purchaser, Stubbe would submit by cable to the factory in Germany the name of the purchaser, a description of the desired merchandise, and an inquiry as to when such merchandise could be furnished. A reply, usually received in the same manner, indicated the availability of the merchandise and the terms of payment, and if the purchaser was satisfied, the order was cabled back to the factory. This order was then confirmed by the factory in writing, which confirmation was transmitted to Stubbe in the United States, and by him transmitted to the purchaser. Ordinarily he attached to the confirmation a printed*817 statement termed "CONDITIONS OF SALE (Where an erection is not included)", which among other things, stated that goods would be shipped f.o.b. Hamburg and insurance from that port to destination should be covered by the purchaser. It also stated that the property passed to the purchaser as soon as the goods left the factory, and finally that the contract should be construed and should operate as a German contract and in conformity with German law. At times, however, copies of the statement above mentioned were not transmitted to purchasers until receipt and transmission of the invoices. In the case of the first few transactions in 1926, the invoices disclosed itemized charges for duty, freight, insurance, and other expense items incident to the transportation of the merchandise from Germany. Subsequently, however, the invoice would show a single amount as the price of the goods and a statement in these words: "This price is quoted f.o.b. Houston, Texas." Upon shipment of the goods the petitioner forwarded to Stubbe from Germany the invoice covering the merchandise shipped. This invoice was usually *877 in German and was made out in the name of the purchaser. It described*818 the merchandise, the date of shipment and the name of the steamer by which the merchandise was shipped. Upon receipt thereof, Stubbe would rewrite the invoice, using a form which would show his office address in Houston. Where the original invoice was in German a translation would be made into English. No other change would be made and the invoice so copied would be transmitted to the purchaser. Stubbe would pay the duty on the merchandise and all other costs incident to transportation. He would make collections for the goods delivered in accordance with the terms of invoice. These collections were deposited in an account which he maintained in Houston. From this account he paid his own salary or commissions, the expenses of his office, the duties on the merchandise, and other costs just mentioned above. From time to time he would transmit substantially all of the money on hand to the home office in Germany. The price shown on an invoice was the same as the sum of the price of the article in Germany, transportation costs, import duty, and insurance. No books of account were kept in the United States other than a cash book kept by Stubbe showing receipts and disbursements, *819 including the amounts transmitted to Germany. In 1929 the petitioner organized an American corporation to handle the business carried on in prior years in the manner previously described. At or about that time a suggestion was made to Stubbe by some unnamed individual, not a revenue agent, that an income tax return covering the business for the preceding year should be filed. Acting upon this suggestion, Stubbe, on his own initiative, prepared and filed a return in the name of the petitioner, showing a total tax on income derived from sales in the United States in the amount of $344.56 for the year 1928. Subsequently, at the instigation of a revenue agent, similar returns were filed by Stubbe for the years 1926 and 1927. In determining the deficiencies herein involved, the respondent in the absence of books and records showing the profits on the sales herein computed net income on the basis of gross sales, treating 10 percent thereof as net income, the 10 percent rate being the average for foreign corporations doing business of a like or similar nature within the United States. OPINION. TURNER: Our first inquiry is necessarily directed to a determination of the source*820 of the income derived from the sales outlined in our findings of fact. If the sales were made in the United States, there is no question but that the income, if any, derived therefrom is *878 subject, under sections 233(b) and 217(e) of the Revenue Act of 1926 and sections 231(a) and 119(e) of the Revenue Act of 1928, to the Federal income tax. The petitioner contends that the sales were made in Germany by what are known as c.i.f. contracts. We have previously held that under contracts of that nature, title passes and the sale takes place at the point of shipment, when the seller has loaded the goods on the carrier, secured the insurance, and forwarded to the purchaser the proper shipping documents. . In support of his contention that we have such sales in this case, the petitioner points to the terms previously recited from the conditions of sale. Attention is also called to the fact that the price quoted to the purchaser in the invoice is in the same amount as the total of the retail price in Germany, transportation costs, insurance, and import duty. It is also insisted that the billing and shipping of the goods*821 in the name of the purchaser are significant. While these elements are ordinarily present in a sale made under c.i.f. contract, they are not necessarily conclusive, and in our opinion, other facts appearing in the instant case prevent us from concluding that we have such contracts here. The petitioner failed to produce copies of any of the sales contracts. Neither did it offer any copies of the so-called letters of confirmation. Under the circumstances, we must determine the nature of the sales contracts on the basis of such facts as we have. If it had been shown that the conditions of sale were made a part of each contract and the things done were in harmony with the conditions stated therein, we would readily conclude that the contracts were of the nature contended for by the petitioner. The facts as shown by the record are quite different, however, in many important respects. While it does appear that the conditions of sale were transmitted to the purchaser, we have no information whatever as to the importance of these conditions as reflected by the letters of confirmation or the written contracts, if any were executed, and we do know that in numerous cases a statement*822 of conditions was not sent with the letter of confirmation but with the invoice. The invoices on their face negatived any idea that the sales were made under c.i.f. contracts. They specifically stated that the price quoted was f.o.b. Houston, Texas. Furthermore, the invoices did not indicate in any manner whatever that insurance, freight, or import duties were computed separately in making up the f.o.b. prices shown on the invoices. It is also noticeable that there is nothing to indicate that the usual bill of lading or the essential and necessary policy of insurance accompanied the invoice. The nature of the sale is determined by what was finally done and not by conditions which may have appeared in preliminary writings but *879 not adhered to. . It is our opinion, on the facts as they appear in the record, that delivery of the goods and transfer of title occurred in Houston, Texas. Having determined that the sales in question were made in the United States, it is now necessary to consider and dispose of the petitioner's alternative contention with reference to the computation of income. The only books and*823 records kept by Stubbe in the Houston office or by the petitioner in the United States were the cash books showing receipts and disbursements and amounts transmitted to the petitioner's home office in Germany. The respondent found it impossible to make a determination of the petitioner's profits from the sales in the United States from these records and determined the net income to the petitioner therefrom to be 10 percent of the gross sales, the percentage being arrived at on the basis of average profits realized by other foreign corporations engaged in like or similar transactions. The only proof offered at the hearing in refutation of the respondent's determination consisted of certain balance sheets of the petitioner covering its entire financial condition at the beginning and end of the taxable years. We have nothing further. Nothing was offered which gives any indication of the amount of profits, if any, realized by the petitioner from the sales made in the United States. Under the circumstances, the method followed by the respondent in determining the petitioner's net income appears to us to be proper and reasonable, in the absence of proof on the part of the petitioner*824 showing that it was erroneous. The remaining question involves the determination of the penalties for failure to file income tax returns. A return for the year 1928 was voluntarily filed by Stubbe in the name of the petitioner corporation. Similar returns for the other two years were filed by him at the instigation of a revenue agent, but subsequent to the filing of the return for 1928. The petitioner denies responsibility for any of these returns, contending that it never at any time filed returns for any of these years for the reason that it was under no obligation to do so. The respondent has determined penalties for the years 1926 and 1927 and has made no claim that a penalty should be imposed for 1928. Under section 3176 of the Revised Statutes, as amended by section 1103 of the Revenue Act of 1926, it is provided that in the case of failure to make and file a return within the time prescribed by law the Commissioner of Internal Revenue shall add 25 percent of the amount of the tax; provided, however, that if a return is afterwards filed and it is shown that the failure to file was due to reasonable cause and not to willful neglect, no such addition shall be made to the*825 tax. In this case the petitioner has denied that the returns filed were its returns, and on its own argument the exception *880 provided by statute which might relieve it of the imposition of the penalties does not apply. Accordingly the determination by the respondent is sustained. Judgment will be entered for the respondent.