Ronrico Corp. v. Commissioner

RONRICO CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Ronrico Corp. v. Commissioner Docket No. 103859. United States Board of Tax Appeals 44 B.T.A. 1130; 1941 BTA LEXIS 1224; July 31, 1941, Promulgated *1224 Petitioner, a Puerto Rican corporation engaged in the manufacture of rum, in the taxable year 1935 entered into an exclusive marketing agreement with a New York distributor under which it sold 66 shipments of rum. Held, gross income from such sales did not arise within the United States but in Puerto Rico, where the sales were completed. Douglas D. Felix, Esq., for the petitioner. F. L. Van Haaften, Esq., for the respondent. ARUNDELL *1130 In this proceeding the petitioner seeks redetermination of deficiencies in income and excess profits taxes for the calendar year 1935 in the *1131 respective sums of $4,492.97 and $1,633.81, which arise in large part from the respondent's determination that the petitioner realized income from sources within the United States during 1935 from the sale of its products to a domestic distributor. The respondent added a 25 percent delinquency penalty in the amount of $1,531.69 for failure of the petitioner to file a return within the time allowed by law. Two issues are raised here: (1) Whether the petitioner realized income from sources within the United States during 1935 from its dealings with*1225 McKesson & Robbins, Inc., and (2) if it did, whether the petitioner is liable for excess profits tax, in any event, within the terms of section 701 and 702 of the Revenue Act of 1934. No separate contest is made of the delinquency penalty. Certain additional issues raised in the petition have been settled by agreement of the parties. The facts have been stipulated in part and as stipulated are adopted as our findings. The material portion of them is set out hereinafter with our other findings of fact. FINDINGS OF FACT. The petitioner is a corporation organized on April 12, 1935, under the laws of Puerto Rico, with its principal office in San Juan. It engaged in the production of rum marketed under the name "Ronrico", operating a distillery in Arecibo, Puerto Rico. At some time prior to August 6, 1935, the petitioner, being desirous of selling its rum in continental United States, sought to find a distributor for its products in this country which would be financially dependable and would undertake the exclusive distribution of petitioner's product on a national scale. One of petitioner's officers was sent to New York to negotiate such an arrangement and reached an*1226 oral agreement with McKesson & Robbins, Inc., which was subsequently ratified at a board of directors' meeting in Puerto Rico, for the sale of its products to that concern for the trial marketing of Ronrico rum in New York City and Miami, Florida. The petitioner persuaded McKesson & Robbins, Inc., that a great deal could be done in this country to cultivate the use of rum as a warm weather drink and agreed to assist in its promotion through an advertising and educational campaign and through the establishment of offices in the United States to carry on this work. The first office was established at the time of the oral agreement in Miami, Florida. The first shipment of Ronrico rum to the United States was made under the oral agreement with McKesson & Robbins, Inc., on Argust 6, 1935. On September 30, 1935, a written agreement was executed by the petitioner and McKesson & Robbins, Inc., superseding the oral agreement described above. This written agreement designated McKesson & *1132 Robbins, Inc., as the petitioner's "sole and exclusive sales agent and distributor" for its Ronrico rum in the United States, the petitioner agreeing not to sell its products to any other*1227 purchaser in this country. The distributor was permitted to appoint subdistributors and agreed to give its best efforts to the sale of Ronrico rum, refraining from promoting or distributing any other Puerto Rican rum except in such cases where its customers requested other brands. The petitioner agreed to "assist you to promote the sale of Ronrico rum and will aid and assist you, through our sales force, in building up good will among your customers for the sale of the same" and agreed to furnish free samples when requested by the distributor. McKesson & Robbins, Inc., agreed to purchase petitioner's rum at designated prices which included freight and insurance charges from Puerto Rico to any Atlantic seaport or Gulf port within the United States designated by the distributor. It was provided that "prices are c.i.f. all Atlantic seaboard and Gulf ports served directly from Puerto Rico. All other ports equivalent of delivery to Atlantic ports allowed." Resale prices to subdistributors were specified, and these were "prices f.o.b. New York City or when imported direct c.i.f. all Atlantic Seaboard and Gulf ports, served directly from Puerto Rico." Provision was made for the readjustment*1228 of the price to the distributor to reflect changes in Federal taxes on the product, and prices at which Ronrico was to be sold to subdistributors and wholesalers were fixed. The contract term was for five years. A further written agreement between the petitioner and McKesson & Robbins, Inc., was entered into on November 1, 1935, the provisions of which were substantially similar to those of the agreement of September 30, except that the distributor was given permission to market "Bebida" rum under the terms of an outstanding contract, and provision was made for the contribution by each of the parties of 25 cents per case of Ronrico rum sold to the distributor to be used for advertising controlled jointly by the two contributors. The term of the contract was extended to twenty years. Sixty-six shipments of Ronrico rum, including the first on August 6, were made by the petitioner to McKesson & Robbins, Inc., under the contracts detailed above within the calendar year 1935, at an aggregate sale price of $323,047.05. All of these shipments were made by common carrier from San Juan to ports within the United States designated by McKesson & Robbins, Inc. The procedure followed*1229 in each case was as follows: Orders were sent by the purchaser to petitioner's San Juan office. The petitioner withdrew from its bonded warehouse in Puerto Rico a sufficient quantity of rum to fill the particular order, paid the excise tax thereon, and then bottled and labeled it and packed the bottles in cartons ready for shipping *1133 The cartons were delivered by the petitioner to the steamship designated by McKesson & Robbins, Inc. The petitioner then prepared a negotiable bill of lading which was presented to the steamship company and accepted. The bills of lading in every instance, except two covering sales aggregating $19,260.25 were made to the "order of shipper", with directions to notify McKesson & Robbins, Inc., or its subdistributors, dependent on the destination shown. In the two exceptions the bills of lading were drawn to the order of the consignee. Petitioner prepaid the freight in each instance and secured, at its cost and in its name, marine insurance covering the shipment. The petitioner also prepared an invoice showing prices which covered insurance and freight and drew a draft in each case for the amount of the invoice on McKesson & Robbins, Inc.*1230 The draft, duly endorsed, together with the original and one nonnegotiable copy of the bill of lading, the invoice, the insurance policy, also endorsed, were thereupon presented to the Chase National Bank in San Juan for either discount or collection, and were forwarded by air mail by that bank to its New York office for collection. At this time also petitioner sent by air mail to the purchaser a notice of the shipment and two nonnegotiable copies of the bill of lading. In each instance McKesson & Robbins, Inc., paid the draft thus drawn on it, regardless of the expected time of delivery or receipt of the rum shipped. In those instances where the draft was discounted in San Juan a credit in the amount of the discounted draft was entered to petitioner's account, subject to recourse by the bank in case of nonpayment. Free samples were included in the shipments when requested by the distributor. The petitioner, after September 30, 1935, established offices for promotional and educational purposes in New York City, Chicago, and San Francisco in addition to the office maintained in Miami. At the latter office statistics of all sales were kept and copies of all orders were sent*1231 there for such purpose. While none of these offices were allowed to accept orders for the petitioner, they solicited orders for Ronrico rum from wholesalers on behalf of McKesson & Robbins, Inc. No sales were made in 1935 to any person in the United States other than to McKesson & Robbins, Inc. The petitioner had six directors during the taxable year, three of whom resided in Puerto Rico and three within the United States. It was not authorized to do business in any state in this country. OPINION. ARUNDELL: The parties have agreed that $19,660.94 preproduction expenses claimed as a deduction by petitioner are not deductible, and that "other expenses" of $2,095.25 and directors' compensation of *1134 $3,309 claimed by petitioner as deductions are deductible. In the event our decision is that petitioner received income from sources within the United States, these two last named expenses are to be allocated in accordance with the allocation made in the deficiency notice herein. The principal issue in this case is whether the petitioner, a foreign corporation, had gross income from sources within the United States during the taxable year on which it is taxable under*1232 sections 231(a) and 119 of the Revenue Act of 1934. The respondent proposes to tax petitioner on its revenues from the sale of its Ronrico rum to McKesson & Robbins, Inc., alleging that the sales from which the income arose were made in the United States. Both parties seem agreed that the place of the sale indicates the geographical source of the income, . Thus the narrow point of contest is: Where, viewing the contracts, orders, and conduct of the parties thereunder, did the sales of petitioner's rum take place? At the outset, we may discard as without significance the circumstance that negotiations leading to, and the execution of, the agreements, transpired in this country. No sale was effected by these transactions; they were merely preliminary to the actual sales and are important only in that the substance of the contracts governed the conduct of the parties in their more significant dealings. These contracts employ terms of well recognized commercial usage and provide for c.i.f. sales. By this term it is understood that the seller shall place the goods to be sold aboard a common carrier, prepay the freight, *1233 procure proper insurance on the goods, deliver the bill of lading to the buyer, and collect a lump price which includes freight and insurance costs which the seller has paid. Under such contracts title to the goods and the risk involved pass to the buyer at the point of shipment provided the shipper has complied with the requirements set out. ; Williston on Sales (2d ed. 1924), sec. 280c; . The buyer is obligated thereupon to pay the agreed price when the documents are delivered to him in proper form, even though they arrive before the goods. ; ; . Sales under the agreement in the instant case followed the c.i.f. pattern provided. Orders were transmitted by the purchaser to the petitioner in Puerto Rico indicating the quantity of rum desired, the point of destination and, in most instances, the vessel to be used in shipment. The petitioner in filling these orders*1234 appropriated to them rum which was kept in bulk, and it bottled, packed, and shipped the quantity ordered. It procured the necessary shipping documents *1135 and insurance and forwarded these to the purchaser. The sale was thereupon consummated. The petitioner had then completed its performance of the contract of sale and was entitled without more to be paid by the purchaser. The final acts essential to the sale - the shipment of the goods and the forwarding of the documents - thus took place in Puerto Rico, and it was there that we must regard the sale as made. The present case, so far considered, is largely similar to ; affd., . There the taxpayer, a Mexican corporation, sold oil under c.i.f. contracts for shipment and use in the United States. We held that since the sales were completed in Mexico the profits therefrom were not from sources within the United States. It is there stated: * * * These sales were made under c.i.f. contracts (often judicially defined); that is, contracts in which the agreed price includes cost of goods, insurance upon them during transit, and the freight*1235 from point of shipment. Under such contracts, the seller has performed his part when he has loaded the goods on the carrier, secured the insurance, and forwarded to the purchaser the proper shipping documents. At that time, and at the place of shipment, title passes to the purchaser; thereafter the goods, and the risks, are his. The record shows that petitioner fully performed in Mexico all its obligations under these contracts. It follows that property in the oil passed in Mexico to the purchasers, and the sales were there made. Consequently, the profits from those sales, made without the United States, are not subject to the tax respondent seeks to impose. An added circumstance in the present case requires some mention. The bills of lading and insurance policies in all save two of the sales here in question, unlike those in the strict c.i.f. transaction, were made out in the name of the shipper or to his order, thereby leaving in him, after shipment, title to the goods which otherwise would have passed then. Strictly considered, therefore, title to petitioner's rum did not pass in these transactions until the delivery of the bills of lading to the buyer in the United States. *1236 It is well recognized that where this method of dealing is followed only for the purpose of giving some security to the seller, it does not prevent the passage of beneficial ownership and risk in the goods to the buyer at the point of shipment. ; ; ; ; ; ; ; ; ; Williston on Sales (2d ed. 1924), sec. 280 c-e. In the present case the agreements provided for c.i.f. sales. The documents were discounted, forwarded and paid by the purchaser, usually before the arrival of the goods. These circumstances indicate that the parties did not intend to accomplish a sale of the goods at the point of destination. The ownership was the purchaser's from and after the *1136 time of shipment and payment was made, not at the time of the arrival of the goods but earlier, when the documents were received. *1237 Cf. ; . Considering these facts it must be concluded that the parties did not intend, by taking the documents in the shipper's name, to change the time when ownership customarily passes, and accordingly the conclusion which we have reached above is not altered. Accordingly, our holding on the issue stated must be for the petitioner. As the petitioner made no sales to anyone in the United States other than to McKesson & Robbins, Inc., it follows that it had no income from sources within the United States. Accordingly, an alternative issue as to liability for excess profits tax need not be decided. Decision will be entered for the petitioner.