Opinion
Docket No. 82467.
1961-09-14
JULES SAMANN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Karl Riemer, Esq., for the petitioner. Joseph N. Ingolia, Esq., for the respondent.
Karl Riemer, Esq., for the petitioner. Joseph N. Ingolia, Esq., for the respondent.
Petitioner, a citizen of Canada and a resident of Switzerland, filed a United States nonresident alien income tax return (Form 1040B) for the taxable year 1954. Petitioner had a ‘permanent establishment’ in the United States until March 15, 1954. Thereafter, and during the remainder of 1954 petitioner received $69,641.77 in royalties from sources within the United States. Held, such royalties are not exempt from taxation under article VIII of the income tax convention between the United States and the Swiss Confederation proclaimed by the President of the United States on October 1, 1951, and section 509.110 of the regulations adopted thereunder. See T.D. 6149, 1955-2 C.B. 814.
ARUNDELL, Judge:
Respondent determined a deficiency in income tax for the calendar year 1954 in the amount of $49,074.75.
The only issue remaining to be decided is whether petitioner, a nonresident alien who had a ‘permanent establishment’ in the United States until March 15, 1954, is taxable on $69,641.77 of royalties from sources within the United States received by him between March 15 and December 31, 1954, or whether such royalties are exempt from taxation under article VIII of the income tax convention between the United States and the Swiss Confederation proclaimed by the President of the United States on October 1, 1951, and section 509.110 of the regulations adopted thereunder.
Respondent conceded at the hearing that the royalties received between March 15 and December 31, 1954, amounted to $69,641.77 instead of the $73,671.88 (a reduction of $4,030.11) determined by him in the notice of deficiency and that effect should be given to this concession in any recomputation to be made under Rule 50.
FINDINGS OF FACT.
Petitioner is an individual and a citizen of Canada. From not later than September 29, 1953, continuously to the present time petitioner has resided in Switzerland, either in Zug, where he resided when the petition herein was filed, or in Zurich. At the present time petitioner resides with his wife and two children at Klosbachstrasse 43, Zurich, Switzerland.
On or about August 15, 1955, petitioner filed a United States nonresident alien income tax return, Form 1040B, for the calendar year 1954, with the director of internal revenue at Baltimore, Maryland. The return was filed on the cash basis, as were previous returns filed by petitioner.
Petitioner was born in Germany. He left Germany in 1934. In September 1939 petitioner was in Canada. He remained in Canada throughout World War II and thereafter until 1948. During his stay in Canada he was naturalized as a Canadian citizen.
Throughout his adult life petitioner has been connected with chemical manufacturing businesses. Early in 1948 he settled in Buffalo, New York, and established a sole proprietorship called Jules Samann Laboratories. In February 1951, petitioner moved the business base of his sole proprietorship to Watertown, New York.
In 1952 petitioner conceived the idea of a special air-freshener for automobiles and he and one Prentice formed a partnership known as the Car-Freshner Company to exploit petitioner's idea. Prentice withdrew from the partnership early in 1953 and, after such withdrawal, petitioner operated the Car-Freshner Company as a sole proprietorship.
In September 1953 petitioner left Watertown, New York, for Switzerland and from that date to this he has been residing in Switzerland. With his departure, the sole proprietorship of Jules Samann Laboratories ceased to exist but the Car-Freshner Company remained in business and remained a sole proprietorship owned and operated by petitioner until March 15, 1954.
On or about March 15, 1954, petitioner caused to be organized, under the laws of the State of New York, a corporation known as the Car-Freshner Corporation. Petitioner transferred to the Car-Freshner Corporation all the assets of the sole proprietorship, Car-Freshner Company, consisting of cash, accounts receivable, inventory, equipment, furniture and fixtures, and minor miscellaneous assets, in exchange for 100 shares of voting stock, being all the authorized and issued stock of the Car-Freshner Corporation. Petitioner retained in himself the ownership of all trademarks, patents, and rights in and to certain secret processes and formulas relating to the manufacture of the automobile air-fresheners and other products manufactured and sold by the Car-Freshner Company and subsequently the Car-Freshner Corporation. Petitioner granted the Car-Freshner Corporation the right to use the aforesaid trademarks, patents, and secret processes and formulas, upon payment to petitioner of certain agreed royalties for said right to use.
During the period March 16, 1954, to December 31, 1954, petitioner received from sources within the United States the amount of $69,641.77, constituting royalties for the right to use certain patents, trademarks, and secret processes and formulas owned by petitioner. Of the royalties so received, the amount of $14,141.77 was received by petitioner from the Car-Freshner Corporation and the balance of $55,500 was received by him from sources other than the Car-Freshner Company or the Car-Freshner Corporation.
In his aforesaid return filed for the calendar year 1954 petitioner disclosed the receipt by him of royalties in the aggregate amount of $69,641.77, as referred to above, but stated that the same were being treated by him as exempt from taxation by the United States by virtue of the provisions of article VIII of the income tax convention between the United States and the Swiss Confederation.
Respondent determined that the aforesaid royalties in the aggregate amount of $69,641.77 were not exempt from taxation as claimed by petitioner, and explained his determination in a statement attached to the deficiency notice thus:
You were a non-resident alien, resident of Switzerland, engaged in trade or business within the United States through a permanent establishment since you owned and operated the Car-Freshner Company at Watertown, N.Y., a sole proprietorship prior to March 15, 1954. Accordingly, you are taxable on royalties received from the United States during the year 1954 as follows * * *
OPINION.
The previously stated issue is a question of law and appears to be one of first impression.