Carding Gill, Ltd. v. Commissioner

CARDING GILL LIMITED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Carding Gill, Ltd. v. Commissioner Docket No. 90406. United States Board of Tax Appeals 38 B.T.A. 669; 1938 BTA LEXIS 841; September 29, 1938, Promulgated *841 Petitioner, a foreign corporation, held taxable on the profit from security sales in the United States; held, further, not entitled to deductions for discount on the issuance of its own bonds in the absence of proof of the value of property received in exchange. David A. Buckley, Jr., Esq., and Harvey L. Rabbitt, Esq., for the petitioner. F. S. Gettle, Esq., for the respondent. OPPER *669 This proceeding involves income tax deficiencies and penalties for the years 1929 and 1930 in the following amounts: Year Deficiency Penalty [1929] $5,948.78 1,487.20 [1930] 510.92 127.73 The facts as stipulated by the perties are found as follows: FINDINGS OF FACT. 1. The petitioner is a corporation organized under the laws of the Cominion of Canada on May 31, 1927, with its office in Montreal, Quebec, Canada. 2. The petitioner filed a Federal income tax return for the taxable year 1929 with the collector of internal revenue at Baltimore, maryland, on January 19, 1935. The petitioner had income from sources within the United States for the year 1929 as follows: Interest, $1,301.31; profit from sale of stocks*842 of domestic corporations, $44,232.16; dividends on stock of domestic corporations, $10,506.25. 506.25. The total gross income for 1929 is $56,039.72. 3. The deductions, exclusive of bond discount claimed applicable to the year 1929, are dividends $10,506.25 and general expenses of $1,221.84 applicable to United States income. 4. The percentage of income from sources within the United States to income from all sources for the year 1929 is 35.89 percent. 5. The petitioner filed a Federal income tax return for the year 1930 with the collector of internal revenue, Baltimore, on January 19, 1935. The gross income of the petitioner for 1930 is as follows: Interest, $968.83; profit on sale of stock of domestic corporations, $4,322.40; dividends on stock of domestic corporations, $13,413.92. The total gross income for 1930 is $18,705.15. 6. The deductions for the year 1930 exclusive of bond discount claimed are dividends $13,413.92 and general expenses $608.55 applicable to United States income. *670 7. The percentage of income from sources within the United States to income from all sources for the year 1930 is 15.82 percent. 8. The petitioner in September*843 1927 issued noninterest bearing general debentures in the principal sum of $4,050,000, bearing date of September 1, 1927, maturing December 31, 1940, which were sold to Haes & Sons, London, England, the consideration being 1,400 ordinary shares of par value of pound 1 each and pound 720,000 principal amount of debentures of the Invincible Trust Co., Ltd., a Canadian corporation. The shares of stock and debentures received in exchange were valued by the petitioner at $2,025,000. In January 1929 noninterest bearing general debentures in the amount of $350,000, maturing December 31, 1940, were issued in consideration of $8,943.86 in cash and securities having a claimed value of $166,056.14, or a total of $175,000. In November 1929 an additional amount of $180,000 of noninterest bearing general debentures, maturing December 31, 1940, were issued in consideration of securities claimed to have a market value of $90,000. The securities received were reflected in the petitioner's balance sheet submitted to the Bureau of Internal Revenue at the values stated above. 9. In its Federal income tax return for 1929 the petitioner deducted $72,259.69 representing the portion of the amortization*844 of bond discount on its debentures attributable to the gross income from sources within the United States. For the year 1930 the petitioner deducted the amount of $37,631.07 for discount claimed on its bonds referred to in the preceding paragraph. The return for the year 1929 indicated a loss of $17,948.06. The return for the year 1930 indicated a loss of $32,948.39. 10. The Commissioner disallowed the discount claimed on bonds and determined a net income for the year 1929 in the amount of $54,311.63 and a net income for the year 193o in the amount of $4,682.68. 11. During each of the years 1928 and 1929 the petitioner redeemed $100,000 of its debentures and in the year 1930 it redeemed $200,000 of such bonds. 12. The petitioner's 1929 Federal income tax return was due on June 15, 1930, and its 1930 Federal income tax return was due on June 15, 1931. The returns were filed on January 19, 1935, upon notice from the Treasury Department that returns should be filed by the petitioner. 13. The petitioner under date of December 16, 1936, filed a consent extending the period of limitation upon the assessment of income and profits tax for the years 1929 and 1930 to June 30, 1937. *845 A notice of deficiency covering the years 1929 and 1930 was mailed to the petitioner on May 26, 1937. *671 OPINION. OPPER: The three issues in this proceeding, while interrelated, may be stated separately: First, whether petitioner, being a foreign corporation, is subject to tax upon its income from the sale of securities in the United States; second, whether it is entitled to deductions for amortization of bond discount more than equal to any income from sources within the United States; and, third, whether it is subject to the 25 percent additional tax for delinquency in the filing of its return. On the first question, petitioner urges that section 119(a) of the Revenue Act of 1928 1 does not have the effect of including within petitioner's taxable income profits from securities admittedly sold by it in the United States during the taxable years. In this contention it seems to us petitioner overlooks the provisions of section 119(e), which reads in part as follows: (e) Income from sources partly within and partly without United States. - Items of gross income, expenses, losses and deductions, other than those specified in subsections (a) and (c) of this section, *846 shall be allocated or apportioned to sources within or without the United States, under rules and regulations (B) from a foreign corporation unless less than 50 centum of the gross income of *672 prescribed by the Commissioner with the approval of the Secretary. * * * 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 sources within the county in which sold * * *. *847 It is true the statute contains no express reference to personal property both purchased and sold within the United States. Gains therefrom, however, are obviously items of gross income, and are consequently to be treated, under specific legislative direction, by regulation. . Cf. . The applicable provision of Regulations 74 2 makes the place of sale the test; and it is conceded on petitioner's brief that the securities involved were sold in the United States. In any event, the place of purchase is not specified and the stipulation includes the profit from security sales among the items of petitioner's "income from sources within the United States", a phrasing which we must regard as including such evidentiary facts as may be requisite to bring it within that description. It may be that this question is not properly before us on the pleadings, since petitioner returned the profit from sales as gross income for each year and neither in the petition nor at the hearing was the point specifically raised; but for the reasons stated we conclude that petitioner can not in any event*848 be sustained on this branch of its claim. The deduction for amortization of bond discount is sought on the ground that petitioner issued its bonds for a consideration worth less than their face value. Unless this be the fact, petitioner can not succeed, and of it there is no proof. Nothing appears in the stipulation except petitioner's arbitrary valuation of the property received, and no evidence was introduced apart from the stipulation. Petitioner contends that we may presume an obligation to be worth par in the absence of contrary evidence, citing ; ; and . Even if we do so, and without attempting to decide the point, the case is not improved. In only one instance is the par value given, and then it is in terms of pounds sterling. The "principal amount" of debentures received in that instance is stated to be pound 720,000. If we convert*849 this at the rate of $4.86 (the transaction took place in 1927) the result is $3,499,200, a figure greatly in excess of the $2,025,000 claimed by petitioner. But that is not all. Petitioner received in addition 1,400 "ordinary shares" of a par value of pound 1 each. And certainly there is no presumption that shares of stock are worth only par. ; . The *673 case thus rests exclusively on petitioner's claim unsupported by any evidence whatsoever, and this will not suffice. . Petitioner has not sustained a burden of proof of which its counsel was well aware, and the result of which was specifically indicated at the hearing. A similar disposition is required with respect to the third question. Imposition of the delinquency tax for failure to file a return within the time prescribed by law is mandatory unless "it is shown that the failure to file it was due to reasonable cause and not due to willful neglect." 3 No cause whatsoever nor any attendant circumstances are in evidence. The sole reference*850 in the stipulation to the delinquent filing is a statement that the returns were filed "upon notice from the Treasury Department." It is suggested that petitioner, being a foreign corporation without officers or place of business in the United States, may be considered thereby to have sufficient "reasonable cause" for failure to file. Whether these facts alone, unaccompanied by some supporting statement or evidence relating them to the failure to file, would ever be sufficient we need not now determine. Certainly none of the cases cited by petitioner go so far. ; ; ; . But here all that is shown is that petitioner is a foreign corporation, and whether it has officers or a place of business within the United States is a matter it has officers or the record. We are unable to conclude that petitioner has even attempted to make any such showing of reasonable cause as is required to avoid imposition upon it of the 25 percent delinquency tax. *851 Reviewed by the Board. Decision will be entered for the respondent. Footnotes 1. SEC. 119. INCOME FROM SOURCES WITHIN UNITED STATES. (a) Gross income from sources in United States. - The following items of gross income shall be treated as income from sources within the United States: (1) INTEREST. - Interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise, not including - (A) interest on deposits with persons carrying on the banking business paid to persons not engaged in business within the United States and not having an office or place of business therein, or (B) interest received from a resident alien individual, a resident foreign corporation, or a domestic corporation, when it is shown to the satisfaction of the Commissioner that less than 20 per centum of the gross income of such resident payor or domestic corporation has been derived from sources within the United States, as determined under the provisions of this section, for the three-year period ending with the close of the taxable year of such payor preceding the payment of such interest, or for such part of such period as may be applicable, or (C) income derived by a foreign central bank of issue from bankers' acceptances; (2) DIVIDENDS. - The amount received as dividends - (A) from a domestic corporation other than a corporation entitled to the benefits of section 251, and other than a corporation less than 20 per centum of whose gross income is shown to the satisfaction of the Commissioner to have been derived from sources within the United States, as determined under the provisions of this section, for the three-year period ending with the close of the taxable year of such corporation preceding the declaration of such dividends (or for such part of such period as the corporation has been in existence), or (B) from a foreign corporation unless than 50 centum of the gross income of such foreign corporation for the three-year period ending with the close of its taxable year preceding the declaration of such dividends (or for such part of such peiod as the corporation has been in existence) was derived from sources within the United States as determined under the provisions of this section; (3) PERSONAL SERVICES. - Compensation for labor or personal services performed in the United States; (4) RENTALS AND ROYALTIES. - Rentals or royalties from property located in the United States or from any interest in such property, including rentals or royalties for the use of or for the privilege of using in the United States, patents, copyrights, secret processes and formulas, good will, trade-marks, trade brands, franchises, and other like property; and (5) SALE OF REAL PROPERTY. - Gains, profits, and income from the sale of real property located in the United States. ↩ 2. ART. 678. Sale of personal property.↩ - Income derived from the purchase and sale of personal property shall be treated as derived entirely from the country in which sold * * *. 3. SEC. 291. FAILURE TO FILE RETURN. [Revenue Act of 1928.] In case of any failure to make and file a return required by this title, within the time prescribed by law or prescribed by the Commissioner in pursuance of law, 25 per centum of the tax shall be added to the tax, except that when a return is filed after such time and it is shown that the failure to file it was due to reasonable cause and not due to willful neglect no such addition shall be made to the tax. * * * ↩