Donroy, Ltd. v. United States

• Decision Date: 02 April 1962
• Docket Number: No. 17463.,17463.
• Citation: 301 F.2d 200
• Parties: DONROY, LTD., Dostrey, Ltd., Lacancal, Ltd., and Transpat, Ltd., Appellants, v. UNITED STATES of America, Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

301 F.2d 200 (1962)

DONROY, LTD., Dostrey, Ltd., Lacancal, Ltd., and Transpat, Ltd., Appellants, v. UNITED STATES of America, Appellee.

No. 17463.

United States Court of Appeals Ninth Circuit.

April 2, 1962.

Valentine Brookes, Paul E. Anderson, and Richard A. Wilson, San Francisco, Cal., for appellants.

Louis F. Oberdorfer, Asst. Atty., Gen., Lee A. Jackson, Joseph Kovner and Gilbert E. Andrews, Attys., Department of Justice, Washington, D. C., and Cecil F. Poole, U. S. Atty., and Richard L. Carico, Asst. U. S. Atty., San Francisco, Cal., for appellee.

Before HAMLIN and BROWNING, Circuit Judges, and MURRAY, District Judge.

HAMLIN, Circuit Judge.

Appellants herein, Donroy, Ltd., Dostrey, Ltd., Lacancal, Ltd. and Transpat, Ltd., four Canadian corporations, filed separate actions in the District Court for the Northern District of California, Southern Division, against the United States seeking refunds of income taxes assessed against appellants for the years 1955 and 1956 and paid by appellants.¹ The United States filed counterclaims in the actions filed by Donroy, Ltd. and Lacancal, Ltd., claiming additional income taxes for 1956. Upon the motion of the United States the district court ordered that the four actions be consolidated. Thereafter, appellants filed motions for summary judgment and the United States, appellee herein, filed a motion for summary judgment on both the complaint and the counterclaim. The district court denied appellants' motions for summary judgment and granted the appellee's motion for summary judgment. Notice of appeal was timely filed in this court. The jurisdiction of this court is founded upon 28 U.S.C.A. § 1291.

The record shows that in March, 1953, a certificate of limited partnership under the name of Security Products was filed in San Francisco showing one general partner and three limited partners. Two of those limited partners — Transpat, Ltd. and Dostrey, Ltd. — are appellants herein. This certificate shows that the three limited partners are collectively entitled to 90% of the net profits of the partnership, Transpat and Dostrey each being entitled to 38.09% thereof. An amendment to the certificate of partnership filed in November 1954, provides:

The character of the business is dealing in beverages, both alcoholic and non-alcoholic, and other products, and the purchase, improvement, leasing, rental, operation, sale and otherwise dealing in real property, and engaging in the transportation business; and also to render merchandising and accounting advice and services and financial assistance to persons engaged in such businesses.

In April, 1953, a certificate of the formation of a limited partnership under the name of Western United Company was filed in San Francisco showing one general partner and nine limited partners. Collectively, the limited partners were entitled to 83% of the profits of the business. Two of said limited partners, Lacancal, Ltd., and Donroy, Ltd., are appellants herein and each was declared to be entitled to 20% of the profits of the limited partnership. An amendment to this certificate of partnership was similarly filed in November, 1954, setting out the character of the business in the same language as hereinabove set out in reference to Security Products.

The record further shows that the office of each of these limited partnerships, Security Products and Western United Company, was 2444 San Bruno Avenue, San Francisco. On each of the income tax returns filed by each of the appellants the address given thereon was 2444 San Bruno Avenue, San Francisco, California. The minutes of each appellant corporation contained a statement that "the principal office for the transaction of the business of the company outside of the Dominion of Canada is hereby fixed at 2444 San Bruno Avenue, San Francisco, California."

Dostrey, Ltd., made a "Request for Ruling" addressed to the Commissioner of Internal Revenue apparently on behalf of each of the four appellant corporations which contained, inter alia, the following statement:

The corporation maintains an office address at 2444 San Bruno Avenue, San Francisco, in compliance with Chapter 3 of the Corporations Code of California. Such compliance is necessitated under the Federal and California Liquor Control laws by the following facts:

The business of Security Products required it to comply with the provisions of the Federal Alcohol Administration Act, 27 U.S.C. 203(c), which provides that persons engaged in the business of purchasing distilled spirits, wine or malt beverages, at wholesale, for resale, must obtain a basic permit from the Secretary of the Treasury. Such permit is issued only where operations under it will not be in violation of the laws of the state concerned (27 U.S.C. 204(a) (2)).

Under the Business and Professions Code of California, Section 23021, Security Products is a "wholesaler." Under Section 23378 and Section 23379, it exercises the rights of a "licensee," and under Section 23300 it must have a license.

As a matter of administrative procedure, although without expressed statutory basis, licenses will not be issued to limited partnerships with corporate limited partners unless all such corporate limited partners are qualified for the transaction of intrastate business under Chapter 3 of the Corporations Code of California, mentioned above. This administrative practice is adhered to regardless of whether the limited partner takes an active part in the business of the partnership.

In a written opinion District Judge Sweigert ably discussed and resolved the issues involved, and we adopt the following pertinent parts thereof.²

The question of law is whether a Canadian corporation, which is a limited partner in a California limited partnership has a permanent establishment in the United States within the meaning of Article XI of the Tax Convention with Canada. (56 Stat. 1399, 1402 (1942)).

That Tax Convention, effective January 1, 1941, provides:

"The rate of income tax imposed by one of the contracting States, in respect of income (other than earned income) derived from sources therein upon individuals residing in, or corporations organized under the laws of, the other contracting State, and not having a permanent establishment in the former state, shall not exceed fifteen per cent for each taxable year.

* * * * * *

"As used in this convention: * * the term `permanent establishment\' includes branches, mines and oil wells, farms, timber lands, plantations, factories, workshops, warehouses, offices, agencies and other fixed places of business of an enterprise, but does not include a subsidiary corporation. The use of substantial equipment or machinery within one of the contracting states at any time in any taxable year by an enterprise of the other contracting state shall constitute a permanent establishment of such enterprise in the former state for such taxable year.

"When an enterprise of one of the contracting parties carries on business in the other contracting state through an employee or agent established there, who has general authority to contract for his employer or principal or has a stock of merchandise from which he regularly fills orders which he receives, such enterprise shall be deemed to have a permanent establishment in the latter state.

"The fact that an enterprise of one of the contracting parties has business dealings in the other contracting state through a commission agent, broker or other independent agent or maintains therein an office used solely for the purchase of merchandise shall not be held to mean that such enterprise has a permanent enterprise in the latter state."

It will be noted that the statute expressly provides that the term "permanent establishment" does not include (a) a subsidiary corporation (b) doing business through a commission agent, broker or other independent agent (c) an office maintained solely for the purchase of merchandise.

It has been held, accordingly, that a resident of Switzerland who owned certain United States rental property which he merely managed and operated through local real estate agents, although to that extent engaged in business here, did not have a permanent establishment in the United States within the meaning of the similar Swiss Tax Convention. Inez de Amodio (1960) * * * 34 T.C. 894 (No. 92, CCH, 12/24, 315). The tax court held quite properly, that neither the real estate itself nor the real estate office of his brokers constituted a permanent establishment because the Convention expressly excepts business dealings through a broker or independent agent.³

By express provision of the statute, the term "permanent establishment" does include carrying on business through an established employee or agent, who has general authority to contract for his employer or principal or has a stock of merchandise from which he regularly fills orders.

Accordingly, it has been held that a partner in a general partnership has a permanent establishment within the meaning of the Convention. W. C. Johnston (1955) 24 T.C. 920.⁴

Plaintiff contends that a limited partner in a California limited partnership, as distinguished from a general partner, should not be held to have a permanent establishment in the United States. A limited partner, argues plaintiff, unlike a general partner, is not in the position of one who carries on an enterprise through an agent who has general authority to contract for him because under California law, a limited partner may not himself, control the conduct of the partnership business which must be left to the control of the general partners.

This is true to the extent that the Uniform Limited Partnership Act provides that "a limited partner shall not become liable as a general partner unless, in addition to the exercise of his rights and powers as a limited partner, he takes part in the control of the business." UPA Sec. 7; Cal.Corp.Code, Sec. 15507.

Further, plaintiff argues, a general partner...