Opinion
Docket No. 9948.
1949-10-18
ZAREH NUBAR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Henry Mannix, Esq., and Charles K. Rice, Esq., for the petitioner. William F. Evans, Esq., for the respondent.
The petitioner, an alien, was present in the United States continuously from August 1939 until August 1945. He was admitted under a visitor's visa which allowed him a stay of three months, but the time was extended because of difficulties of returning to Europe, and he was allowed to remain until cessation of hostilities in Europe. During the taxable years, large transactions on securities and commodities exchanges in the United States were effected for petitioner by resident brokers. Under the facts, held (1) that petitioner was a nonresident alien, and (2) that he was not engaged in a trade or business within the United States, so that under sections 211(a) and (b) he was not taxable on income from sources outside the United States or in his capital gains from sources within the United States. Henry Mannix, Esq., and Charles K. Rice, Esq., for the petitioner. William F. Evans, Esq., for the respondent.
The Commissioner has determined deficiencies in income tax as follows:
+----------------+ ¦1941¦$55,572.11 ¦ +----+-----------¦ ¦1943¦115,370.40 ¦ +----+-----------¦ ¦1944¦147,277.75 ¦ +----------------+
The year 1942 is not involved in this proceeding because of the provisions of the Current Tax Payment Act of 1943. The amounts of various classes of alleged income are not in dispute. Petitioner concedes that the respondent has correctly adjusted the amounts of certain items of income and of deduction.
The Commissioner has made the determination that the petitioner was a resident alien of the United States during the years 1941 through 1944, subject to Federal income tax upon all income from all sources, whether outside or inside the United States, and has included in gross income gains realized upon sales which were made in the United States of capital assets located in the United States, and certain income from sources outside the United States.
There are two questions for decision: (1) Whether or not the petitioner was a resident alien of the United States during the years 1941 through 1944; and (2) whether or not the petitioner was engaged in trade or business in the United States during the same years. The petitioner contends that he was a nonresident alien, and that, under the provisions of section 211(b) of the Internal Revenue Code, his transactions in securities and commodities futures did not constitute engaging in trade or business in the United States.
The record in this proceeding consists of a stipulation of facts, the testimony of petitioner and several witnesses, and exhibits.
The income tax returns of the petitioner for the years involved in this proceeding were filed with the collector of internal revenue for the district of Maryland.
FINDINGS OF FACT.
The facts which have been stipulated are found as facts, and the stipulation is adopted as part of the findings of fact.
Zareh Nubar is a native citizen of Egypt, of Armenian descent. He was born in Alexandria in 1884. He is a man of great wealth and comes from a family of wealth and distinction. His grandfather, Nubar Pasha Nubar, was a Prime Minister of Egypt, and is regarded as the first great statesman of modern Egypt. Petitioner's father, Boghos Pasha Nubar, was philanthropist and founder of the Armenian General Benevolent Union, a charitable organization devoted to alleviating the suffering of Armenians throughout the world.
The petitioner attended schools in England. He married an English citizen in 1920. Two daughters born of this marriage are living. Petitioner's wife died in 1944. She was in Switzerland at the time of her death.
The petitioner has never practiced any profession or pursued any employment. He received income from his father, and later lived upon and managed his inheritance. He is a man of scholarly interests and pursuits.
The petitioner carried on transactions on the stock exchange in France from time to time, beginning in 1907. He carried on operations on foreign stock exchanges in 1917 and 1924, when he suffered losses. After the death of his father in 1930, his stock exchange transactions involved larger sums. In 1930, or at about the time, he opened accounts in New York with H. Hentz & Co., and with White, Weld & Co. through its Paris subsidiary named Quotations Facilities Corporation. In these accounts, the transactions involved American securities.
Prior to 1920 petitioner visited the following countries: United States in 1910; Turkey, Greece, Egypt, the Sudan, Russia, Norway, Sweden, Germany and England in 1911; Greece and Macedonia in 1914; and Italy in 1920.
Prior to 1915 the petitioner's residence was in Cairo, Egypt, but in 1915 petitioner and his father became residents of Paris. After his marriage, the petitioner leased an apartment in Paris, which he maintained continuously until 1944, when new owners of the property decided to terminate the lease.
In 1930 the petitioner's father gave petitioner's daughters property in Geneva, Switzerland, where a family residence was built which was occupied by petitioner and members of his family during summer periods.
The petitioner was in the United States from August 1, 1939, until August 15, 1945. After spending a short time with his daughters in Geneva he returned to Paris in March 1946, where he lived thereafter, and he is now a resident of Paris. When this proceeding came on for trial, he came to the United States to give his testimony and then departed.
After the petitioner left Paris in 1939, his wife and daughters went to Geneva. During the war they were, at various times, in occupied France, unoccupied France, and Switzerland. During the petitioner's absence from Paris, until sometime in 1944, the petitioner kept his Paris apartment, and paid rent for it regularly.
The petitioner was admitted to the United States on August 1, 1939, prior to the outbreak of war in Europe on September 1, 1939, on a three-month visitor's visa. His purpose in coming to the United States was to see the New York World's Fair, to talk with Dr. Einstein, and to travel in the United States, and later in Central and South America.
Prior to the expiration of his three-month visitor's visa, on November 1, 1939, petitioner applied for an extension of his stay and was granted an additional six months, extending the time of his visit to about April 21, 1940. Thereafter, further extensions were applied for, and the petitioner received two additional stays, which extended his visit until October 21, 1940, and December 31, 1940, respectively. Petitioner did not leave the United States on or after December 31, 1940, and on January 15, 1941, a warrant for his arrest was issued by the Department of Justice, charging that petitioner was in the United States in violation of the immigration laws and was subject to deportation. He was taken into custody and released on a bond which remained in effect until his departure from the United States in August 1945.
After his arrest and release on bond in 1941, the petitioner filed several requests for delay of his hearings before the Immigration Board, which were granted. Finally, on October 23, 1943, he was again taken into custody and was held at Ellis Island. After hearing and review by the Board of Immigration Appeals, it was ordered that the order of deportation should not be entered at that time, but that petitioner would be required to leave the United States at his own expense within ninety days after the termination of hostilities in Europe.
During the deportation hearings in 1943 the petitioner applied for permission to proceed to Canada and to reenter the United State on an immigrant's visa. This application was denied by the Department of State because the petitioner had stated that he desired to rejoin his family in Europe and did not intend to establish permanent residence in the United States.
On forms which the petitioner submitted to the Immigration Service, dated October 23, 1943, he stated that his permanent residence address was in Paris.
On August 15, 1945, the petitioner departed from the United States to go to Switzerland. He remained there with his daughters until March 1946, when he returned to Paris.
When the petitioner came to the United States in 1939, he brought with him only a small amount of clothing. During the period from August 1, 1939, to August 15, 1945, petitioner lived at the Hotel Piccadilly in New York City, a moderate price hotel. He did not retain a room there during the period when he was traveling in the United in 1940. He engaged only a single room at the hotel at weekly rates of from $8.50 to $17.50 a week. It was his custom when he left New York on week ends to check out of the room to which he was assigned and leave his luggage, consisting of one bag, in the check room.
During 1940 and 1941 the petitioner made four unsuccessful applications for a Mexican visitor's visa to visit that country, on April 29, 1940; June 4, 1940; July 15, 1940; and February 17, 1941. In his application for permission to enter Mexico which was made on April 29, 1940, the petitioner stated that he desired to visit archeological ruins and then intended to leave Mexico from Vera Cruz or from Suchiate, if he visited Guatemala. At the same time, he applied to the Egyptian consul at San Francisco for an extension of his passport, stating that he wished to go to Central and South America and that the Mexican Government wanted a validity a year ahead; and that he wished to go to Switzerland via France or Italy. It was petitioner's intention then not to return to the United States if he received admission to Mexico, but to continue on his travels to South America. After the applications to enter Mexico were denied, the petitioner returned to New York City in the summer of 1940, and from there he made his third application for permission to enter Mexico.
Petitioner inquired of the French consulate in the summer of 1940 about returning to France, but was told that he could not return to either occupied or unoccupied France.
Petitioner visited Florida in the early part of 1941, and from Miami made his fourth application on February 17, 1941, to enter Mexico, which was denied. Petitioner returned to New York City in April 1941.
The petitioner applied to the Swiss Consulate in New York City in April 1941, for a Swiss visa, but did not receive it until August, when it was valid for only one month beyond the date of receipt. Petitioner had not been able to secure other necessary visas from either the French, Spanish, or Portuguese Consulates, because they would not issue them. The delays in getting other visas, plus the dangers of war time travel and poor health, made the petitioner abandon his plan to return to Switzerland at that time.
In several requests which the petitioner made for extensions of his visitor's visas, he requested extension of his stay for ‘one year or the end of the war ‘ and stated that he could not return to France or Switzerland on account of the war.
The petitioner frequently expressed his intention and desire of returning to either France or Switzerland to join his family. In applications for extensions of his visitor's visa, he gave his Paris address. He declined to serve as a member of the board of directors of the Armenian General Benevolent Union, with headquarters in the United States, to which he was elected in October 1942, because he was temporarily in the United States and did not wish to undertake any permanent commitments. He told the presiding inspector of the Immigration and Naturalization Service in New York City, during the hearing on deportation in October 1943, that he desired to return to Egypt as soon as the war was over.
In 1941, after consulting a heart specialist, the petitioner learned that he was suffering from a heart condition. In April 1944 he entered a hospital in New York City for observation. At that time his physician advised him to make his will, and was of the opinion that it would be detrimental, if not fatal, for the petitioner to make a trans-Atlantic trip under war time conditions.
The Government of Egypt ended diplomatic relations with the Government of Germany on September 3, 1939; with the Government of Italy on June 12, 1940; and with the Government of Japan on December 9, 1941. It ended diplomatic relations with the Vichy French Government on January 6, 1942. It declared war on Germany and Japan on February 24, 1945. The Anglo-Egyptian Treaty of Alliance was signed at London on August 26, 1936. Under the terms of this treaty, England was allowed, as the ally of Egypt, to maintain armed forces and airplanes in Egypt and was permitted to use Alexandria and Port Said as naval bases and to move her troops over Egyptian territory in the event of war. This treaty was in effect during the period from September 3, 1939, to August 15, 1945.
German armed forces occupied northern and northwestern France, including the city of Paris, in June 1940 and occupied all of France on November 11, 1942.
The petitioner's wife and daughters were in Switzerland at the outbreak of the European war in 1939. They remained in Geneva until shortly after the commencement of the German offensive in May 1940. Fearing that the Germans would also invade Switzerland, they fled ahead of the German Army to Arcachon, France, near Bordeaux. This territory was soon occupied by the German Army. The petitioner's wife and daughters remained in occupied France until early in 1941. At that time the Germans ordered the petitioner's wife to report to German authorities in Bordeaux. Instead, the petitioner's wife, with her daughters, escaped through the woods across the line into unoccupied France and proceeded to Vichy. They remained in Vichy a short time, due to illness of one of the daughters, and thereafter made their way back to Switzerland, arriving in the spring of 1941.
The petitioner occupied his time while the United States in several ways. After his arrival in August 1939, he spent a month intensively visiting the New York World's Fair. During the fall and winter of 1939-1940, he did considerable sightseeing in eastern cities visiting universities and other places of interest. Numerous banquets were given in his honor by various chapters of the Armenian General Benevolent Union. He also spent some time in refreshing his knowledge of mathematics in preparation for an interview with Dr. Einstein.
In February 1940 the petitioner was granted an interview by Dr. Einstein. Shortly thereafter the petitioner left on a trip to the west coast, visiting Niagara Falls, Detroit, Chicago, the Museum of Dinosaurs in Lincoln, Nebraska, and Salt Lake City en route. He reached Los Angeles in April 1940 and remained in California about a month, returning to New York City in July, after two unsuccessful attempts to obtain a visa to visit Mexico. He then went to Florida for the winter. The petitioner returned to New York in April 1941.
During the period from 1941 to 1945, the petitioner occupied much of his time in writing a book based upon his conception of his duty to help prevent future wars. He had no intention of making a profit from the book. He submitted this manuscript, which consisted of 323 typewritten pages, to the Yale and Harvard University Presses in 1945, but they refused to accept it for publication.
The petitioner also traded on American security and commodity exchanges during his stay here.
In June and July of 1938, prior to his coming to this country, he transferred $165,000 to his account with White, Weld & Co. This money was immediately used t0 purchase securities on margin. About three-quarters of the amount purchased was sold two days later, and the remainder liquidated shortly thereafter.
When he arrived here in August 1939, petitioner had brokerage accounts open with White, Weld & Co., with whom he had a credit balance of approximately $202,709, and with H. Hentz & Co., with whom he had a credit balance of approximately $32,000. He also had securities valued at about $100,000 deposited in a custodian account with the Chase National Bank in New York City.
During 1939 and 1940 the petitioner's accounts with his brokers in the United States remained relatively inactive.
From 1941 through 1944, inclusive, the taxable years in question, petitioner's accounts with his brokers were very active. In addition to the accounts with White, Weld & Co. and H. Hentz & Co., he opened accounts with the firm of Merrill, Lynch, Pierce, Fenner & Beane, with Ira Haupt & Co., with Herbert E. Stern & Co., with Thomson & McKinnon, and with Ira Haupt & Co., with Herbert E. Stern & Co., with Thomson & McKinnon, and with W.R.K. Taylor & Co. The largest trading accounts were with White, Weld & Co. and H. Hentz & Co. The transactions which the brokerage accounts reflected were chiefly purchases of stocks and bonds, and sales thereof. A large volume of transactions was handled on margin. In addition, petitioner had special accounts for arbitrage and straddle transactions, and dealings in commodities. The commodities futures accounts were chiefly with White, Weld & Co. and Ira Haupt & Co.
All of the transactions in the various accounts of the petitioner were effected through brokers to whom petitioner gave orders. At White, Weld & Co. the broker who handled the transactions was Nicholas Molodovsky, whom the petitioner had known in Europe, where Molodovsky had been engaged in the brokerage business. Molodovsky came to the United States in 1939. At H. Hentz & Co., the broker who handled the transactions was E. Milo Greene. Both men were personal friends of the petitioner. Greene and Molodovsky telephoned the petitioner almost daily about market conditions when he was in New York City. The petitioner visited the offices of these two firms about once a week when he was in New York City.
When the petitioner came to the United States in August 1939, his total assets in the United States, consisting of securities and cash, had a value of about $334,709.
The following schedule indicates the volume of purchases and sales of stocks and bonds during 1941 through 1944 which were made by brokers for petitioner and the amount of the net capital gains:
+----------------------------------------------------------------------------------------+ ¦Number of transactions ¦Number of securities * ¦Value * ¦ ¦ ¦* ¦ ¦ ¦ ¦ +-------------------------+-------------------------+-------------------------+----------¦ ¦Purchases¦ ¦Sales¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +---------+---------+-----+------+-----+------+-----+------------+------------+----------¦ ¦ ¦ ¦ ¦Stocks¦Bonds¦Stocks¦Bonds¦ ¦ ¦Net ¦ ¦Year ¦Purchases¦Sales¦(shs) ¦(M) ¦(shs) ¦(M) ¦Purchases ¦Sales ¦capital ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦gain ¦ +---------+---------+-----+------+-----+------+-----+------------+------------+----------¦ ¦1941 ¦77 ¦60 ¦24,950¦982 ¦21,400¦534 ¦$317,253.44 ¦$347,643.27 ¦$62,795.05¦ +---------+---------+-----+------+-----+------+-----+------------+------------+----------¦ ¦1942 ¦243 ¦60 ¦26,100¦2,430¦6,200 ¦874 ¦930,508.86 ¦361,160.39 ¦62,281.14 ¦ +---------+---------+-----+------+-----+------+-----+------------+------------+----------¦ ¦1943 ¦185 ¦111 ¦72,200¦1,919¦34,135¦1,114¦1,399,207.44¦990,535.72 ¦229,244.67¦ +---------+---------+-----+------+-----+------+-----+------------+------------+----------¦ ¦1944 ¦125 ¦97 ¦87,801¦1,041¦47,175¦1,569¦1,126,309.18¦1,053,240.62¦209,823.73¦ +----------------------------------------------------------------------------------------+
FN* These figures are only approximated due to the fact that the exhibits are not clear. The number of transactions in each year are not shown clearly by the exhibits and are only estimated in the above schedule.
The petitioner realized capital gains and losses from the transactions in commodities futures as follows:
+-----------------------+ ¦1941 ¦$62,795.05¦ +------------+----------¦ ¦1942 (loss) ¦4,162.86 ¦ +------------+----------¦ ¦1943 ¦2,775.30 ¦ +------------+----------¦ ¦1944 ¦1,660.00 ¦ +-----------------------+
The petitioner executed Treasury Department Form 1044 Alien's Questionnaire, under oath, on August 9, 1945, prior to leaving the United States, in which he stated that his total assets were $100 in cash and $2,496,952 in securities. He stated that his liabilities included a loan of $721,423.53.
The petitioner received dividends and interest during 1941 through 1944, as follows:
+-----------------------------------------+ ¦ ¦Sources within U. S.¦Foreign sources¦ +----+--------------------+---------------¦ ¦1941¦$29,051 ¦$5,069.00 ¦ +----+--------------------+---------------¦ ¦1942¦39,078 ¦8,693.71 ¦ +----+--------------------+---------------¦ ¦1943¦58,203 ¦13,881.05 ¦ +----+--------------------+---------------¦ ¦1944¦66,030 ¦34,506.40 ¦ +-----------------------------------------+
The petitioner was a nonresident alien during the period he was in the United States, and in the years 1941 to 1944, both inclusive.
The petitioner did not have an office or place of business in the United States through which or by the direction of which transactions in commodities were effected. The petitioner's transactions in the United States in stocks, securities, and commodities during the taxable years in question were effected through resident brokers.
The petitioner was not engaged in trade or business in the United States at any time during the taxable years in question.
Subsequent to the filing of the petition in this proceeding, the petitioner, in order to avoid accumulation of interest, paid the deficiencies in income tax, plus interest to February 4, 1946, which the Commissioner has determined in the following amounts:
+-----------------+ ¦1941 ¦$68,678.74 ¦ +-----+-----------¦ ¦1943 ¦128,687.33 ¦ +-----+-----------¦ ¦1944 ¦155,205.53 ¦ +-----+-----------¦ ¦Total¦352,571.60 ¦ +-----------------+
OPINION.
HARRON, Judge:
The questions for decision are (1) whether or not petitioner was a resident alien during the periods in question, and (2) whether or not he was engaged in a trade or business in the United States during the periods in question, so as to be taxable on capital gains and on income from sources outside the United States.
Petitioner contends that he was a nonresident alien within the meaning of section 211(a) of the Internal Revenue Code,
that he was not engaged in any business in the United States during the taxable years 1941 through 1944 inclusive, and that, therefore, he is not taxable on the capital gains which he realized from the transactions which were carried on in the United States in the security and commodity futures markets through brokerage accounts.
Decision will be entered under Rule 50. SEC. 211. TAX ON NONRESIDENT ALIEN INDIVIDUALS (as amended by Revenue Act of 1942.)(a) NO UNITED STATES BUSINESS OR OFFICE. . . .(1) GENERAL RULE . . . .(A) Imposition of Tax.— There shall be levied, collected, and paid for each taxable year, in lieu of the tax imposed by sections 11 and 12, upon the amount received, by every nonresident alien individual not engaged in trade or business within the United States, from sources within the United States as interest (except interest on deposits with persons carrying on the banking business), dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable annual or periodical gains, profits, and income, a tax of 30 per centum of such amount, except that such rate shall be reduced, in the case of a resident of any country in North, Central, or South America, or in the West Indies, or of Newfoundland, to such rate (not less than 5 per centum) as may be provided by treaty with such country.
The respondent has determined that the petitioner was a resident alien during the taxable years and, therefore, that he is taxable on all his net income including capital gains from all sources. Respondent also contends that the petitioner was engaged in a trade or business in the United States and is, therefore, taxable on all his income from sources within the United States.
Whether or not a person is a ‘resident‘ of a country is a question to be determined by all of the facts and circumstances present in each individual case. See J. P. Schumacher, 32 B.T.A. 1242. The intention of an individual is a highly important factor. See Beale, Conflict of Laws, vol. 1, p. 109, sec. 10.3, where the following is stated
* * * The difference between three conceptions, that of sojourn, residence, and domicil (not now including domicil by operation of law) is one purely of intention. To become a sojourner, no intention whatever is necessary, merely the fact of personal existence in the place. For residence there is an intention to live in the place for the time being. For the establishment of domicil the intention must be not merely to live in the place but to make a home there. * * * A residence may continue to exist in spite of a temporary absence from it, although the absence may be long continued. A mere temporary sojourn in the state cannot be taken to be residence. If a man is sojourning in a place, he becomes a resident thereof at the moment of his intending to become a resident, in the same way that a resident becomes domiciled at the moment of forming an intention to fix a home in the place. * * *
The meaning of the term ‘residence‘ in statutes has been the subject of much interpretation. With respect to its meaning in revenue laws, the following observation is made by Beale, supra, p. 111, sec. 10.4, quoting from Barhydt v. Cross, 136 N.W. 525:
* * * This consideration requires that a man should have a residence somewhere, but that he should have one residence only, since otherwise he would bear a double burden. ‘Courts endeavor to construe revenue laws so that each one will share his just burden of taxation; and he should pay his taxes somewhere. Hence it is the universal rule, in construing revenue statutes, that, as a man must have a domicile or taxing residence somewhere, his old residence will be deemed his present one until a new one is acquired. If this were not the rule, a man might escape taxation altogether.‘ It is therefore very generally agreed that the words ‘resident‘ or ‘inhabitant,‘ in statutes referring to taxation, are synonymous with the legal term ‘domiciled‘; and that a man must pay his taxes as a ‘resident‘ at his place of domicil * * *
The pertinent provisions of the statute, sections 211(a) and (b), refer to ‘nonresident‘ aliens, but the term ‘nonresident‘ in the above statutory provisions has been construed to apply to those who are physically present in the United States as well as to those who are not. See Florica Constantinescu, 11 T.C. 37, 42, where we said:
* * * Of course, during all of the time in question she was physically present in the United States, but mere physical presence in a foreign country, even though it is considerably prolonged, is not of itself sufficient to establish residence. Cf. Michael Downs, 7 T.C. 1053; affd., 166 Fed.(2d) 504; certiorari denied, 334 U.S. 832; Arthur J. H. Johnson, 7 T.C. 1040.
Upon consideration of all of the evidence in this proceeding and careful scrutiny of all of the facts and circumstances, it has been found as a fact that the petitioner was a nonresident alien during the taxable years in question, 1941 through 1944.
The petitioner's testimony and that of his witnesses are that the petitioner's intention in coming to the United States was to see the New York World's Fair, to speak with Dr. Einstein, and to travel, first in the United States and then in Central and South America. There is considerable evidence in this proceeding which corroborates the petitioner's testimony that his intent was to be a sojourner, or visitor, in the United States rather than a resident. For example, the petitioner came to the United States with no other possessions than the minimum amount of clothing (‘he traveled light‘), and his living arrangements in a hotel were that of a transient. His family was in Europe, all of his household goods were there in a residence which he maintained and intended to maintain during his entire absence, and all of his personal possessions were in Europe. He had a home in Switzerland, to which he could return. He expressed the intention to various officials, friends, and immigration authorities that he desired to return to Europe to his family as soon as it was possible to do so. The petitioner carried out his intentions with respect to his visit to the United States, as set forth above. He traveled across the United States, visiting many places and endeavored to continue his journey into Mexico, but was unable to do so. War conditions frustrated his efforts to fully carry out his plans to travel in the western hemisphere. Almost all of the affirmative acts of the petitioner confirm his testimony that he did not intend to become a resident of the United States.
It is true that the petitioner remained in the United States after the expiration of extensions of his visitors' permit, and that he was arrested as a violator of the immigration laws on January 15, 1941. However, the fact that he was allowed to remain in the United States from the time of his arrest on January 15, 1941, until the date of his voluntary departure on August 15, 1945, by the immigration officials shows that war time conditions made his return to either France or Switzerland or Egypt either impossible or hazardous. Otherwise, since he was in the custody of the immigration officials, released upon his bond only, they would have executed their duties by either forcible deportation or by refusing to allow him to remain longer, and then to depart voluntarily. Under these circumstances, and upon consideration of the evidence, we are satisfied with the petitioner's testimony that he remained in the United States after January 15, 1941, because of the obstacles which war time conditions put in the way of his leaving this country and going to another one into which he could be admitted. Therefore, it has been found as a fact that the petitioner was a nonresident alien during the taxable years.
The above conclusion is based upon the particular facts of this proceeding, and it is not premised upon any presumption that the limitation of an alien's stay in the United States by the immigration laws is determinative of the alien's status as that of a nonresident. See Florica Constantinescue, supra, p. 41.
There remains to be decided the question of whether or not petitioner, even though he was a nonresident alien individual, was engaged in a trade or business within the United States because extensive speculative transactions in securities and commodity futures were effected by resident brokers for him. We think that section 211(b) of the Internal Revenue Code, which is set forth in the margin,
clearly provides that transactions in the United States in commodities, or in stocks or securities of a kind customarily dealt in on an exchange, if effected through a resident broker, do not constitute carrying on a trade or business.
SEC. 211. TAX ON NONRESIDENT ALIEN INDIVIDUALS.(b) UNITED STATES BUSINESS OR OFFICE.— A nonresident alien individual engaged in trade or business in the United States shall be taxable without regard to the provisions of subsection(a). As used in this section, section 119, section 143, section 144, and section 231, the phrase ‘engaged in trade or business within the United States at any time within the taxable year, but does not include the performance of personal services within the United States at any time within the taxable year, but does not include the performance of personal services for a nonresident alien individual, foreign partnership, or or foreign corporation, not engaged in trade or business within the United States, by a nonresident alien individual temporarily present in the United
Before the Revenue Act of 1936 was enacted, profits realized by a nonresident alien trading on the security or commodity exchanges of the United States were taxable as income derived from sources within the United States. This was changed by section 211 of the Revenue Act of 1936, similar to the present section 211. House Report No. 2475, 74th Cong., 2d sess., to accompany the Revenue Bill of 1936, explains the change (pp. 9-10):
A nonresident (alien) will not be subject to the tax on capital gains, including gains from hedging operations, as at present, it having been found impossible to effectually collect this latter tax. It is believed that this exemption from tax will result in additional revenue from the transfer taxes and from the income tax in the case of persons carrying on the brokerage business. * * * It is believed that the proposed revision of our system of taxing nonresident aliens * * * will be productive of substantial amounts of additional revenue since it replaces a theoretical system impracticable of administration in a great number of cases
Nonresident aliens who are not engaged in trade or business within the United States are subject to a withholding tax at the source imposed upon their gross income from certain enumerated types of income derived from sources within the United States. Capital gains from the sale of securities or commodities on regulated commodity exchanges are not one of the enumerated sources in section 211(a).
Section 211(b), in defining the term ‘engaged in a trade or business within the United States,‘ specifically exempts trading on the security or commodity exchanges through a resident broker, commission agent, or custodian. This is consistent with section 211(a), which does not include gains from such transactions in the enumerated sources subject to the withholding tax. While Congress was concerned primarily with transactions effected by nonresident aliens from abroad through resident brokers, it did not so limit the exemption in section 211(b), nor is there any reference to any such limitation in the committee reports. It is doubtful that Congress would have wanted to discourage travel in the United States by making any differentiation between nonresidents who visited the United States during the taxable year and those who did not. When section 211 was enacted in 1936, conditions under which a person could live in the United States for a considerable length of time and still be classified as a nonresident for tax purposes apparently were not envisaged.
Congress, however, did distinguish in section 211(b) between those nonresident aliens ‘temporarily present in the United States for a period or periods not exceeding a total of ninety days during the taxable year and whose compensation for such service does not exceed in the aggregate $3,000,‘ and those who were here for longer periods in defining ‘engaged in a trade or business within the United States.‘ But no similar distinction was made between nonresident aliens effecting stock or commodity exchange transactions from abroad through a resident broker, commission agent, or custodian, and nonresident aliens physically present in the United States and effecting similar transactions.3
Respondent invites our attention to the case of Fernand C. A. Adda, 10 T.C. 273; affd., 171 Fed.(2d) 457. In that case Adda, a nonresident alien who was not in the United States, had empowered his brother, who resided in the United States, to deal in commodity futures at his own discretion through resident brokers for Adda's account. We held that the petitioner in that proceeding was engaged in a trade or business within the United States and was taxable as a nonresident alien so engaged. Our decision was based on the fact that Adda had not complied with the letter of the statute, that he was effecting his transactions not through a resident broker, but through an agent who was resident in the United States. Analogy was made to section 219 of the Internal Revenue Code, which provides that a nonresident alien individual member of a partnership shall be considered as engaged in a trade or business within the United States if the partnership is so engaged, since each partner is the agent of each other partner within the scope of the partnership business.
The facts in the instant case are different. All transactions were carried on through a resident broker in conformity with the statute and the petitioner in the instant proceeding made all decisions as to the purchase and sale of securities and commodities himself. In the Adda case we pointed out that the resident agent, Adda's brother, was using his own discretion in the operations which he conducted and that Adda was taking advantage of ‘decisions made in the United States by one who is not a resident broker, commission agent, or custodian.‘ This fact was pointed out to show that Adda was engaging, through his agent, in business in the United States. If Adda had made all the decisions from abroad, with the agent a mere conduit to convey them to the broker, the facts would have presented a different question. Such question was not decided in the Adda case; but, without deciding such question here, it is apparent that a strong contention could be made that such transactions would come within the exemption of section 211(b). See Scottish American Investment Co., 12 T.C. 49.
It is clear by virtue of the specific provisions and legislative history of section 211(b) that the activities of the petitioner, despite his physical presence in the United States, were not such as to constitute engaging in a trade or business in the United States within the intendment of section 211(b) of the Internal Revenue Code.
It is held that the respondent erred in including in the petitioner's income for the taxable years income from sources outside the United States; and that he erred in including in the income derived from sources within the United States the capital gains realized from the sales of capital assets.