SCOTTISH AMERICAN INVESTMENT CO., LIMITED v. COMMISSIONER OF INTERNAL REVENUE, Docket No. 104249
| Citation | 47 BTA 474 |
| Decision Date | 06 August 1942 |
| Docket Number | 104250,104251,108440,108442.,Docket No. 104249,108441 |
| Parties | THE SCOTTISH AMERICAN INVESTMENT CO., LIMITED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. BRITISH ASSETS TRUST, LIMITED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. SECOND BRITISH ASSETS TRUST, LIMITED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Marion N. Fisher, Esq., for the petitioners.
Harold D. Thomas, Esq., for the respondent.
The Commissioner determined deficiencies in income tax of the petitioners as follows:
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| 1936 | 1937 | 1938 | 1939
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Scottish American Investment Co., Ltd _____ | $63,031.57 | $113,921.68 | $67,740.85 | $69,054.56
British Assets Trust, Ltd _________________ | 42,555.98 | 84,743.68 | 54,710.09 | 56,137.81
Second British Assets Trust, Ltd __________ | 20,637.22 | 37,962.61 | 28,365.47 | 25,304.20
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Petitioners claim overpayments as follows:
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| 1936 | 1939
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Scottish American Investment Co., Ltd __________________________ | $38,933.01 | ____________
British Assets Trust, Ltd ______________________________________ | 26,319.25 | $6,559.44
Second British Assets Trust, Ltd _______________________________ | 14,830.14 | 2,441.33
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The sole question before the Board is whether or not petitioners are resident foreign corporations engaged in trade or business in the United States or having an office or place of business in the United States. The proceedings were consolidated for hearing and opinion.
FINDINGS OF FACT.
Petitioners are corporations organized under the laws of Great Britain, with their principal offices in Edinburgh, Scotland. Each of the petitioners is an investment trust and is engaged in the business of investing the funds of its security holders for the primary purpose of deriving income from investment. Petitioners' returns for the taxable years 1936 and 1937 were filed with the collector of internal revenue for the district of Maryland; their returns for the years 1938 and 1939 were filed with the collector at Newark, New Jersey.
Each of petitioners has large sums invested in securities in the United States. On December 2, 1936, petitioners had the following amounts invested in United States securities:
Scottish American Investment Co., Ltd. (hereinafter referred
to as Scottish) __________________________________________________ $24,452,752.79
British Assets Trust, Ltd. (hereinafter referred to as British) ____ 14,974,359.67
Second British Assets Trust, Ltd. (hereinafter referred to as
Second British) __________________________________________________ 8,457,000.00
The investment of British in United States securities represented over 30 percent of its total investment. The investment of Second British in the United States was in excess of 40 percent of its total investment. The relative investment of Scottish in the United States was proportionately larger than that of the other two petitioners. During the taxable years each of petitioners owned a large number of different United States securities.
Each of petitioners had a board of directors, which met frequently at its home office in Edinburgh. British and Second British were managed, as is customary for investment trusts in England and Scotland, by a firm of secretaries engaged in the business of management.
For some years prior to 1936 Scottish had realized profits in the sales of securities in the United States and had failed to file Federal income tax returns reporting the profit thereon. British companies, such as petitioners, are forbidden to pay dividends out of capital gains or to show such gains in their profit and loss accounts. The accounting firm of Barrow, Wade, Guthrie & Co. of New York City, of which Walter A. Cooper, C. P. A., was a partner, was engaged by Scottish to make a check or audit of its sales of securities and resulting profit over the period of years prior to 1936. As the result of this audit taxes for the years 1927 to 1934, inclusive, in excess of $1,000,000, plus interest of $220,000, were paid by Scottish.
In 1935 F. H. N. Walker, the manager of Scottish, was in the United States and discussed with Cooper the question of opening an office in the United States for Scottish.
During September and October 1936 Cooper, together with Earl Breeding, an employee of Barrow, Wade, Guthrie & Co., made a trip to England and Scotland, where they visited a number of their firm's clients. They discussed with officials of petitioners the whole problem of opening an office for petitioners in the United States, including the ways in which a United States office might assist petitioners in business transactions and the effect of such an action in view of the Revenue Act of 1936. Cooper and Breeding left England in November 1936 without any decision having been reached by petitioners as to whether or not they would open offices in the United States.
On December 2, 1936, each petitioner appointed Cooper its assistant secretary and, on the same day, cabled its decision to Cooper. British and Second British wrote letters to Cooper dated December 2, 1936, informing him of his appointment and instructing him to proceed with the opening of an office in the United States. Scottish wrote Cooper a letter dated December 3 similar to those which the other petitioners wrote him under date of December 2, 1936.
Immediately upon receipt of the cables Cooper rented office space, consisting of two rooms on the twenty-sixth floor of the Equitable Building, at 120 Broadway, New York, New York, in which the firm of Barrow, Wade, Guthrie & Co. maintained offices on the twenty-seventh floor. A lease was taken out for each petitioner and a designated part of the office was leased for each petitioner for a specified sum per year. This office had a telephone which was connected with the switchboard in the offices of Barrow, Wade, Guthrie & Co. Petitioners' United States office was established in order to enable petitioners to keep in closer touch with their large United States investments, to do themselves what had formerly been done for them by others, and to gain certain tax advantages.
Both before and after the opening of the United States office the securities of petitioners were in the custody of J. P. Morgan & Co. and the National City Bank. The securities were registered in the names of nominees. Prior to December 2, 1936, the securities were registered in the names of the bank's regular nominees, each of whom received a single dividend check on behalf of a number of stockholders. During December 1936 Cooper made arrangements with J. P. Morgan & Co. and the National City Bank to designate for each petitioner a new nominee in whose name were registered only securities of such petitioner. By the end of December 1936 the new nominees had filed dividend mandates with the corporations the securities of which were held by the petitioners, directing payment of dividends and the sending of annual reports, statements, and notices to petitioners at their United States office.
During December 1936 Cooper obtained assistance from Barrow, Wade, Guthrie & Co. in establishing proper accounts for petitioners and in determining the methods of handling the affairs of the petitioners in the United States. The services of several employees of Barrow, Wade, Guthrie & Co. were devoted to the installation of a bookkeeping system and making current records in December 1936. During December 1936 the records of each petitioner were maintained on temporary sheets, copies of which were transmitted to the main offices in Edinburgh. Later the temporary records were written up in final form. The records maintained by the United States office were the original records of petitioners' transactions, receipts, and disbursements in the United States. All receipts of cash and all disbursements during December 1936, were currently entered in the temporary record. Beginning in December 1936, all expenses of each petitioner in the United States were paid by the United States office.
Throughout the taxable years Cooper rendered services as assistant secretary of petitioners. In addition to Cooper the services of two women were employed full time throughout the taxable years to render stenographic and clerical services. From February 1938 through the taxable year 1939 Henry A. Jeffers, an employee of Barrow, Wade, Guthrie & Co., supervised the activities of the office and spent a total of 1,038½ hours on the affairs of petitioners during that period.
Beginning December 1936, and continuing through 1939, the dividends on United States securities to which each petitioner was entitled were collected by the United States office.
During December 1936 some of the dividends were paid directly to J. P. Morgan & Co., and the National City Bank because the dividends, while payable in the latter part of December, were payable to stockholders as of a record date prior to filing of mandates by the new nominees. By the end of December most of the dividends were being paid directly to petitioners' United States office.
Petitioners received the following amounts in dividends from United States securities:
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