Linen Thread Co. v. Comm'r of Internal Revenue

• Decision Date: 28 April 1950
• Docket Number: Docket No. 15790.
• Citation: 14 T.C. 725
• Parties: THE LINEN THREAD COMPANY, LTD., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

14 T.C. 725

THE LINEN THREAD COMPANY, LTD., PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 15790.

Tax Court of the United States.

Promulgated April 28, 1950.

1. Taxpayer, a foreign corporation, has always kept books in its home office in Glasgow, Scotland, on the basis of a fiscal year ending September 30, but from 1937 through 1944 it also kept books in the United States recording its income and expenditures in this country on the basis of a calendar year. It filed U.S. income tax returns from 1925 through 1936 on the basis of a fiscal year ending September 30 in accordance with its books in Scotland, and it filed U.S. income tax returns from 1937 through 1944 on the basis of a calendar year in accordance with its books in the United States. Held, respondent did not err under section 41, Internal Revenue Code, in determining deficiencies for 1941, 1943, and 1944 on the basis of a calendar year.

2. On the facts, held, taxpayer was not engaged in trade or business within the United States in 1943 and 1944 under section 231(b), Internal Revenue Code, as amended by section 160(d) of the Revenue Act of 1942. John P. Lipscomb, Jr., Esq., and Prew Savoy, Esq., for the petitioner.

James C. Maddox, Esq., for the respondent.

Respondent determined deficiencies in income tax as follows:

+-----------------+
                ¦1941¦$163,880.80 ¦
                +----+------------¦
                ¦1943¦152,204.71  ¦
                +----+------------¦
                ¦1944¦108,794.18  ¦
                +-----------------+
                

The issues are: (1) Did respondent err in determining deficiencies for the taxable years 1941, 1943, and 1944 upon the basis of a calendar year and not upon the basis of a fiscal year ending September 30?

(2) Was petitioner ‘engaged in trade or business within the United States ‘ during the taxable years 1943 and 1944 so as to qualify as a resident foreign corporation under section 231(b), Internal Revenue Code, as amended by section 160(d) of the Revenue Act of 1942?

(3) If the answer to (2) is affirmative, did petitioner have any deductions connected with income from sources within the United States during the taxable years 1943 and 1944 so as to be allowable under section 232(a) of the code?

FINDINGS OF FACT.

Petitioner is a corporation, organized and existing under the laws of Scotland, with its principal office and place of business in Glasgow, Scotland. Petitioner is engaged in the manufacture and sale of linen thread and knitting twine. Petitioner itself does not manufacture, but manufactures through seven wholly owned subsidiaries in the United Kingdom. Petitioner also owns all of the authorized and issued capital stock of the Linen Thread Co., a Delaware corporation, with offices and plant in Paterson, New Jersey, and an office in New York City. The purpose of the Linen Thread Co. was to carry on the business of manufacturing and selling linen thread in the United States. Certain threads not made by the Linen Thread Co. were purchased for resale by it from petitioner in Scotland.

From 1937 to the middle of 1944 William J. MacInnis was the resident agent of petitioner in the United States. Under a power of attorney in fact he was authorized to collect dividends and interest for petitioner from the Linen Thread Co., and to remit them to petitioner, and to file Federal and state income tax returns for petitioner and otherwise to represent petitioner in connection with tax matters. He also took care of the other investments petitioner had in this country, consisting of stock in United Shoe Machinery and in American Thread Co. and made a search for further investments. He spent much time investigating new fibers being used in the United States and reporting on them to petitioner in Scotland. He also sent petitioner a regular monthly report on receipts and expenditures. Accounting records were kept in the American office of petitioner under his direction. MacInnis had been connected with petitioner's subsidiary as mill manager and sales manager from 1907 to 1937, when he resigned to work for petitioner. He is a lawyer by profession.

As resident agent for petitioner, MacInnis maintained a one-room office in the Chanin Building, New York City. The room was about 15 by 20 feet and contained a large desk, a typewriter desk, chairs, hat rack, file, safe, telephone, and typewriter. No quarters other than the single office room were used in the United States by petitioner or its resident agent. The investments of petitioner in this country were kept in a safe deposit box in the Central Hanover Bank, New York City.

The office in New York was discontinued in the middle of 1944 and MacInnis resigned as resident agent. In the latter part of 1943 petitioner sought from the State of New York a certificate of authority as a foreign corporation to do business in New York State. In its application petitioner stated:

That the business which it proposes to carry on within the State of New York is as follows:

The sale of all textile fibres and the products thereof, including the sale of flax, hemp, jute, the products thereof, and the products of cotton.

Certificate of authority was refused on account of the similarity between the name ‘The Linen Thread Company, Ltd.‘ and ‘The Linen Thread Company, Inc.,‘ the latter being already qualified to do business in New York State. Therefore the office was moved to Washington, D.C., in the middle of 1944. This latter office consisted of a single room adjoining the law office of Prew Savoy. Petitioner's office in the United States was discontinued in 1946.

On December 20, 1943, petitioner filed application with the Government of the District of Columbia for corporation license to engage in or carry on any business, or to receive income from District sources from that date to the close of the calendar year 1943. Action was not taken upon the application until January 15, 1944. The calendar year 1943 having expired then, the Government of the District of Columbia, with the permission of petitioner, changed the 1943 application to an application for 1944 and issued a license on January 15, 1944, to petitioner for the calendar year 1944.

Beginning in July, 1944, Prew Savoy, who has been employed by petitioner as tax counsel since 1937 to the present time, was the resident agent of petitioner in the United States. He received a power of attorney from petitioner in December 14, 1944. Savoy is a lawyer by profession, and was also engaged in the manufacture of blank books in St. Johns, Quebec, and in bottling Pepsi-Cola in Long Island in 1944.

Other than the resident agent, petitioner had no employees in its office in the United States from 1937 through 1944. It had no salesmen and did no advertising. The resident agent had no instructions to go out and make sales. Stenographic work for the office was handled by a public stenographer or other outside help. Accounting records consisting of a journal, cash book, and ledger, recording receipts and expenditures of the American office and employing an accrual and calendar year basis, were maintained in the office from 1937 through 1946 by an accountant employed by the Linen Thread Co.

Petitioner was to a large extent prohibited from exporting flax, the basis of its product, during 1943 and 1944 because of war restrictions. Two transactions were carried out in 1943 by petitioner through its American office. Marguerite G. Brooks, engaged in a home mail order business in New York City, in which she sold materials with instructions for crocheting, ordered a supply of linen thread for lace making from petitioner in Glasgow. Petitioner, through its secretary, then sent the following letter from its Glasgow office, dated January 23, 1943, to MacInnis, the resident agent in New York:

Some time ago it was suggested, from your side, that in order to extend the scope of your trading it would be advantageous to do any direct business we had with customers in the U.S.A. through your Office. In view of this, our Ref. ‘L‘ Department are sending you to-day a parcel and invoices for Miss Marguerite G. Brooks, and we shall be obliged if you will attend to same and collect payment.

For the purpose of our Exchange Control, it will be necessary for you to send us a remittance through The National Bank of Scotland, Ltd., London, for the value of this shipment.

Under present conditions, trading of this nature will be small, as it is only possible in special cases to export Flax goods.

An invoice from W. & J. Knox, Ltd., Kilbirnie, Scotland, a subsidiary of petitioner, to the Linen Thread Co., Ltd., 122 East 42nd Street, New York, dated January 22, 1943, was received by MacInnis at the New York office. The invoice described the items of merchandise and listed the total price thereof, including postage and insurance and consul's fee, as 25 pounds, 5 shillings, 7 pence. The invoice also carried the notation ‘For handling over to - Marguerite G. Brooks, 108 East 66th Street, New York.‘ Upon notification by the post office in New York that the merchandise had arrived, MacInnis collected the package from the post office and delivered it himself to Marguerite G. Brooks. He received a check from her for $129.54, dated March 5, 1943, and gave her a receipt for it. On March 9 he remitted $102 to petitioner at its bank in Scotland to cover the amount of the invoice.

Petitioner is obliged to take the entire output of its manufacturing subsidiaries in the United Kingdom, one of which is W. & J. Knox, Ltd., in return for which it makes payment for that output. Petitioner then makes sales of this merchandise at its own figure. Sales for abroad are invoiced in the factory name, such as W. & J. Knox, Ltd., as in the Brooks transaction, to preserve the good will of the factory names, but the sales are actually treated on the books of petitioner as sales directly by petitioner.

The only other sale made by petitioner in the United States during 1943 was a sale of three cases of thread, amounting to $655.87, to the Linen Thread Co....