Tonopah & Tidewater Railroad Co., Ltd. v. COMMISSIONER OF INTERNAL REVENUE, Docket No. 90482.

• Citation: 39 BTA 1043
• Decision Date: 25 May 1939
• Docket Number: Docket No. 90482.
• Court: U.S. Board of Tax Appeals
• Parties: TONOPAH & TIDEWATER RAILROAD COMPANY, LIMITED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

39 B.T.A. 1043 (1939)

TONOPAH & TIDEWATER RAILROAD COMPANY, LIMITED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 90482.

Board of Tax Appeals.

Promulgated May 25, 1939.

H. W. Stelle, Esq., for the petitioner.

Frank Gibbs, Esq., for the respondent.

This proceeding is for the redetermination of a deficiency in income tax for the year 1936 in the amount of $3,606.25. It involves the question of liability of a domestic corporation to withhold tax on income of nonresident alien persons and foreign corporations from sources within the United States.

FINDINGS OF FACT.

The facts were all stipulated and are as follows:

The petitioner is a corporation, organized under the laws of the State of New Jersey, and has its principal office at No. 510 West Sixth Street, Los Angeles, California.

It operates a railroad running between Beatty, Nevada, and Crucero, California, a section of the United States sparsely populated, but which at one time had considerable freight in connection with the operation of gold and silver mines in its territory, for which purpose the railroad was originally constructed.

For the calendar years 1924 through 1936, petitioner on its Federal income tax return showed net losses as follows:

                ---------------------------
                      Year    |   Amount
                --------------|------------
                1924 ________ | $132,990.13
                1925 ________ |  129,855.00
                1926 ________ |   74,582.17
                1927 ________ |  168,779.65
                1928 ________ |  230,861.15
                1929 ________ | $356,790.28
                1930 ________ |  240,382.88
                1931 ________ |  255,514.21
                1932 ________ |  215,354.15
                1933 ________ |  236,587.54
                1934 ________ | $222,965.10
                1935 ________ |  198,038.09
                1936 ________ |  239,704.92
                ---------------------------
                

No substantial changes in these amounts have been made by the Bureau of Internal Revenue. For the same years interest on funded debt has accrued as follows:

                ----------------------------
                      Year     | Interest on
                               | funded debt
                ---------------|------------
                1924 _________ | $151,052.35
                1925 _________ |  163,144.14
                1926 _________ |  163,930.86
                1927 _________ |  164,024.21
                1928 _________ |  164,142.19
                1929 _________ | $163,687.50
                1930 _________ |  163,984.37
                1931 _________ |  144,690.11
                1932 _________ |  118,178.65
                1933 _________ |  148,609.36
                1934 _________ | $168,256.27
                1935 _________ |  167,443.36
                1936 _________ |  167,938.49
                ----------------------------
                

The entire stock of the petitioner amounting to $100,000, is held by Borax Consolidated Ltd., a corporation organized under the laws of England, whose principal office is in London, England. For the years above noted, advances and repayments by Borax Consolidated Ltd. to the petitioner were made as follows:

                -------------------------------------------------
                              |                    |  Remittance
                              | Cash advances      |  to London
                      Year    | Borax Consolidated |  a/c Borax
                              |    Ltd.            | Consolidated
                              |                    |     Ltd
                --------------|--------------------|-------------
                1924 ________ |   $91,379.63       |   $20,323.13
                1925 ________ |   143,095.00       |    49,998.96
                1926 ________ |   149,803.34       | ____________
                1927 ________ |   153,999.34       | ____________
                1928 ________ |   250,824.41       | ____________
                1929 ________ |   204,890.01       | ____________
                1930 ________ |   257,369.75       | ____________
                1931 ________ |   271,380.46       | ____________
                1932 ________ |  $208,016.28       | ____________
                1933 ________ |   225,630.99       | ____________
                1934 ________ |   262,602.08       | ____________
                1935 ________ |   225,043.77       | ____________
                1936 ________ |   247,345.33       | ____________
                1937 ________ |   248,373.94       | ____________
                              |____________________|_____________
                   Total ____ | 2,939,754.33       |   $70,322.09
                -------------------------------------------------
                

Petitioner on January 1, 1936, had outstanding certain obligations known as second mortgage redeemable 5 percent sterling bonds, dated January 24, 1907, and due July 1, 1960. While these bonds did not contain a tax-free covenant clause, since 1921, as a result of an action instituted by the bondholders in the courts of England, the full rate of alien tax has been assumed by the petitioner for the holders of these bonds.

These bonds are guaranteed as to principal and interest by Borax Consolidated Ltd. Because of the substantial losses which petitioner has suffered as above noted for the past several years and specifically in 1936, the petitioner was unable to pay from its own funds interest on the said second mortgage bonds, and such interest was actually paid by Borax Consolidated Ltd. from funds on deposit in London, England, and is included in the figures shown above designated "Advances."

An analysis of this interest disbursement shows that $36,721.62 was paid on behalf of nonresident alien individuals and $7,123.77 was disbursed to nonresident corporations. The withholding taxes on these amounts of interest should the petitioner be liable for the payment of said tax would be $3,606.25.

On December 31, 1936, the petitioner had a net deficit of $3,946,850.93.

On its books of account Borax Consolidated Ltd. charged the amount of interest paid on the said second mortgage bonds during 1936 to expense.

OPINION.

HILL:

The sole question presented for determination is whether the interest paid to nonresident alien individuals and foreign corporations under the circumstances detailed in the stipulated facts was income from sources within the United States, taxable under sections 143 and 144 of the Revenue Act of 1936. If the interest so paid was such...