Opinion
Docket No. 6350.
1946-10-31
J. A. C. STEUR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Robert E. Samuels, Esq., and Milton Yanowich, Esq., for the petitioner. James C. Maddox, Esq., for the respondent.
Prior to August 1940 petitioner purchased tobacco for H. Duys & Co., in Holland and the Dutch East Indies, on a commission of 3 per cent of purchases, plus an annual salary of $10,000. In August 1940 petitioner and Duys entered into a new contract providing for the payment of the sum of 3 per cent commission and $10,000 salary, plus a bonus of 25 per cent of the net profit on the sales of tobacco bought by the petitioner and sold by Duys; Duys, however, to have a credit thereon of the amount of the 3 per cent commission on purchases. The amount of net profit— and hence the amount of petitioner's bonus— was to be established after the closing of Duys' books on March 31, 1941. Petitioner was a nonresident alien until March 8, 1941, when he became a resident alien, subject to tax under Regulations 103, section 19.212-1. Held, that the amount of the bonus finally determined to be due to petitioner did not become his income until March 31, 1941, and hence, as a resident alien he was subject to tax thereon. Robert E. Samuels, Esq., and Milton Yanowich, Esq., for the petitioner. James C. Maddox, Esq., for the respondent.
The respondent determined a deficiency in the income tax of J. A. C. Steur for the year 1941 in the amount of $30,983.58.
The only issue now in controversy is whether or not the petitioner is taxable as a resident alien upon income received after his arrival in the United States attributable in part to past services rendered while he was a nonresident alien. Another issue, relating to war losses, was raised in the pleadings, but, since no evidence was introduced relating thereto, we shall regard it as having been abandoned.
FINDINGS OF FACT.
The petitioner, an individual, is a resident alien with address at New York, New York. The return, on the cash basis, for the year in question was filed with the collector of internal revenue for the second district of New York.
The petitioner was born in Holland and during the taxable year was a citizen of that nation.
For some years prior to 1940 the petitioner was engaged in the buying of tobacco in Holland. Prior to 1940 he purchased Sumatra and Java tobacco for H. Duys & Co., of New York, hereinafter called Duys, under an agreement whereby the petitioner was to receive a salary of $10,000 and a commission of 3 per cent on all purchases of tobacco made by him.
Prior to 1940 all tobacco grown in Sumatra and Java was shipped to Holland and there sold under a system of sealed bids known as inscriptions. It was the petitioner's duty to examine the tobacco offered for sale and to submit bids on behalf of Duys.
After the outbreak of the war in September 1939 it became uncertain where and how the Sumatra and Java tobaccos would be marketed. The buyers wished to continue the market in Holland and proposed that sample bales be shipped there from the Dutch East Indies, with the understanding that any tobacco purchased would be shipped directly to the purchaser from the Dutch East Indies. The growers, however, insisted on selling their tobacco in the Dutch East Indies. Consequently, the buyers were forced to go there to make their purchases.
At the insistence of Duys, the petitioner agreed to go to the Dutch East Indies to make purchases of tobacco for that company. He left Holland on July 27, 1939, and arrived in Sumatra on January 15, 1940. He was accompanied by his wife and by one Nienhuys, a vice president of Duys.
After the petitioner's arrival in Sumatra he purchased there for Duys various quantities of Sumatra tobacco of the 1939 crop, both at public inscriptions and by private purchase from the growers. He also went to Java, where he made purchases for Duys from the 1939 crop of that island.
In addition to making the purchases the petitioner also attended to the sampling of the tobacco and the selection and arrangement for its shipment. In connection with his duties the petitioner consulted with Nienhuys and also had frequent communications with Duys, and from time to time he sent to Duys from Sumatra and Java data with respect to the quality, grade, quantity, and price of tobacco purchased by him.
The petitioner completed his services in April 1940, and on April 25 of that year he left the Dutch East Indies on a ship for Genoa, Italy, intending to go by train from that port through France to Holland. The ship was in the Red Sea when news was received that Holland had been invaded by Germany. The ship proceeded to Suez, from which point the petitioner went to Cairo, where he made efforts through the Dutch Ambassador to find some means of getting to Holland. Upon being informed that this was impossible, the petitioner returned on the same ship to the Dutch East Indies. Upon his arrival there the petitioner communicated with Duys to determine whether or not he should purchase more tobacco. He was informed that no further purchases were desired and he and his wife then proceeded to San Francisco, arriving there July 14, 1940. From San Francisco the petitioner and his wife went to Chicago, where they stayed for about twelve days and then proceeded to New York City.
The petitioner's entry into the United States at San Francisco was under a temporary visa issued to him as a nonresident alien.
At the time the petitioner entered the United States he had no intention of becoming a permanent resident, since at that time he did not know where the next crop of tobacco would be sold and he thought he would have to go back to the Dutch East Indies to buy it.
In August 1940 the petitioner prepared a letter addressed to himself for the signature of Duys which, omitting formal parts, reads as follows:
We herewith confirm the agreement between us that we are to pay you a buying commission of 3% for all Sumatra and Java tobaccos we will purchase out of the 1939 crops, plus a bonus of such a sum, that aforesaid commission and such bonus together are equal to 25% of the net profit that we may realize on the tobaccos bought by you. The latter amount to be established after closing our books as per March 31st, 1941. Payments of amounts due you will be made to you during this book year, at our convenience, to Medan or any other place you might designate.
In addition we agree to pay you $10,000.00 as a yearly salary, also to reimburse you for these duties in the Dutch East Indies.
You agree not to buy or sell Sumatra or Java tobaccos for the American and Canadian markets, out of the 1939 crop except for our account. We call your attention to the fact that our profit is made in dollars, hence your commission will be paid in dollars. We are mentioning this in case the dollar should be deflated during the period of this agreement.
Will you kindly signify your acceptance of the above, by affixing your signature below.
The letter was signed on behalf of Duys by Henry M. Duys. The letter was antedated February 2, 1940.
The agreement was not effective on February 2, 1940, and was not confirmatory of any agreement which was in effect on that date. The agreement had its inception and was effective on or about the time it was prepared in August 1940. The petitioner feared that, unless the letter bore a date to the time of the German invasion of Holland, the German agents, if they learned of his whereabouts, would press him for money, using their control of petitioner's children and family in Holland to force their demands.
Subsequent to the petitioner's arrival in the United States it became clear that the next crop of tobacco would not be sold in the Dutch East Indies, but that the portion of the crop suitable for the American trade would be sold in the United States sometime in the spring of 1941. On March 3, 1941, the petitioner went to Canada and on March 8, 1941, reentered the United States as an immigrant.
Duys keeps its books on the basis of a fiscal year ending March 31. On September 30, 1940, an unofficial statement was prepared by Duys showing the results of business transactions during the first six months of that fiscal year. This statement showed that the net profit realized by Duys from April 1, to September 30, 1940, on the sales of Sumatra and Java tobaccos amounted to $311,593.43 and that 25 per cent thereof was $77,898.36. The statement also disclosed that during the same period Duys had made purchases of Sumatra and Java tobacco aggregating $1,176,894.65, 3 per cent of which amounts to $35,306.84.
Based upon this statement, Duys, at the petitioner's request, addressed a letter to the petitioner dated December 13, 1940, in which it was stated that as of the date of the letter there was standing to the credit of the petitioner the sum of approximately $75,000 derived from various transactions and accountings with the petitioner since April 1, 1940.
A personal account was maintained in the petitioner's name on the books of Duys, in which the following entries were made:
+-----------------------------------------------+ ¦1940 ¦ ¦ +-------------------------------------+---------¦ ¦____ ¦ ¦ +-------------------------------------+---------¦ ¦Dec. 31 Salary May 1940 ¦$833.33 ¦ +-------------------------------------+---------¦ ¦“ June “ ¦833.34 ¦ +-------------------------------------+---------¦ ¦“ July “ ¦833.33 ¦ +-------------------------------------+---------¦ ¦“ Aug. “ ¦833.33 ¦ +-------------------------------------+---------¦ ¦“ Sept. “ ¦833.34 ¦ +-------------------------------------+---------¦ ¦“ Oct. “ ¦833.33 ¦ +-------------------------------------+---------¦ ¦“ Nov. “ ¦833.33 ¦ +-------------------------------------+---------¦ ¦“ Dec. “ ¦833.34 ¦ +-------------------------------------+---------¦ ¦Buying Comm. on Sum. & Java Purchases¦46,327.96¦ +-----------------------------------------------+
1941 ____ Jan. 31 Salary Jan. 1941 833.33 Feb. 27 “ Feb. “ 833.33 Mar. 25 “ Mar. “ 833.34 31 Buying Comm. on S & J Purchases 4,527.08 7/35ths of 1751.03 profit in H/D/I. Jt. Acct 350.20 Addtl Buying Comm 56,211.21 116,313.12
The entry of $46,327.96 represented 3 per cent buying commission on purchases of Sumatra and Java tobacco made by the petitioner for Duys as entered in Duys books from April 1 to December 31, 1940. The entry of $4,257.08 represented 3 per cent of purchases of Sumatra and Java tobacco recorded on Duys' books for the period January 1, to March 31, 1941. The entry of $56,211.21 represents the additional amount necessary to make the petitioner's compensation equal to 25 per cent of the net profits realized by Duys on the sale of the tobacco.
The accounting method usually followed by Duys in keeping its books was to enter as a sale the amount of the invoice rendered to its customers, the entry being made as of the date of the billing and not the date of the order, confirmation, or segregation of the tobacco from Duys' own inventory to the special account of the customer. Considerable time often elapsed between the date of such order, confirmation, or segregation and the date of the actual invoice. In keeping its records of the sales of the 1939 crop of Sumatra and Java tobaccos Duys followed this accounting method.
After closing its books for the fiscal year ended March 31, 1941, Duys prepared a statement with respect to its transactions covering the 1939 crop of Sumatra and Java tobaccos. This statement disclosed that the net profit on the sales of such tobacco amounted to $427,184.99 and that 25 per cent of this amount was $106,796.25.
The petitioner filed a Federal income tax return for 1941 to which he attached a statement reading, in part, as follows:
I have not reported nor included in this return nontaxable income of $63,318.49 received or credited to me during the year 1941 by H. Duys & Co., Inc., as this entire amount was paid or credited to me as compensation for service rendered in the year 1940, while in the Dutch East Indies, and as a Dutch Citizen and as a non-resident of the United States.
The respondent determined that $56,211.21 was received by the petitioner subsequent to the date upon which he became a resident alien and was subject to tax.
OPINION.
VAN FOSSAN, Judge:
The respondent bases his inclusion of the $56,211.21 bonus in the petitioner's taxable income on the fact that the petitioner became a resident alien prior to the date on which he received that sum from Duys, pursuant to the contract of August 1940.
The petitioner contends that he possessed a claim against Duys for the amount in controversy, fully accrued, when he was a nonresident alien for services performed entirely by him while abroad, and that, therefore, he was not taxable thereon. He indulges in an elaborate analysis of the taxing statutes relating to the imposition of tax upon aliens, resident and nonresident, and attempts to contract them with the provisions of section 22(a) of the Internal Revenue Code. He then deduces that any income earned by him as a nonresident alien from sources without the United States is not subject to tax and that, if he was a nonresident alien at the time his services were performed for Duys, his exempt status attached when the income was earned and remained exempt after he became a resident alien on March 8, 1941.
The respondent held ‘that the amount of $56,211.21 received from Duys & Co., Inc., in 1941, subsequent to the date on which you (petitioner) became a resident alien, is subject to tax.‘ The petitioner does not contest the fact of receipt, but argues that all of such sum except $13,619.69 was constructively received by him in 1940, prior to the taxable year and before he became a resident alien.
The vital point in this controversy is when the $56,211.21 in dispute became income to the petitioner. It is obvious that all payments made under the prior agreement between Duys and the petitioner, then a Dutch citizen, providing that he should receive an annual salary of $10,000 and be paid a commission of 3 per cent on all purchases of tobacco made by him, were exempt from taxation. They were so treated by the respondent.
Therefore, the record and the contract of August 1940 must be examined critically to determine the petitioner's status as a resident alien and the character of the payments to be made to him under the contract. Prior to its execution the petitioner possessed only his rights to receive the stipulated salary and the 3 per cent commission. The contract created an entirely new situation. A bonus was granted to the petitioner, to be computed on the basis of 25 per cent of the net proceeds realized by Duys on the tobacco purchased by the petitioner. The amount of the bonus was to be established after the close of Duys' books on March 31, 1941. Duys offered to make payments of amounts ‘due‘ to the petitioner, at its convenience (and it might well have added ‘at its risk‘) during the book year of the corporation. The petitioner agreed not to buy or sell Sumatra or Java tobacco in American or Canadian markets out of the 1939 crop except for Duys' account.
The specific provisions of the contract limited the bonus, the income in question, to the amount determined on March 31, 1941. That amount might be based on prior purchases in the Dutch East Indies or purchases made in American or Canadian markets for Duys' account at any time before March 31, 1941. Whatever the source of the tobacco, the bonus was computed on the aggregate sale price of all tobacco sold by that date and the net profit resulting therefrom.
It is too patent for extended discussion that the definite amount of the bonus, and hence the income to the petitioner, could not have been determined before that date. While the prospect for a rising and profitable market might have been excellent in 1940, the market might have collapsed early in 1941, all previous paper profits on which the petitioner could collect his bonus might have been wiped out, and the 25 per cent of Duys' net profit might not have equaled the 3 per cent commission due to the petitioner under the original contract. Likewise, any excess payments which might have been advanced by Duys could have been subject to repayment by the petitioner upon the final computation of net profit.
We note that the petitioner kept his books and made his income tax return on the cash basis. We observe also that certain entries were made in Duys' books showing credits due to the petitioner for salary, buying commission, etc., and also an item called ‘Comm. $56,211.21‘ entered under date of March 31, 1941. These bookkeeping entries confirm our conclusion that the controverted item was not available to the petitioner until March 31, 1941, and hence did not become his income until that date. Then, and not until then, did the sum assume the character of income to the petitioner, and consequently it could not have been taxed to him prior thereto. At that time he was a resident alien and subject to be taxed as such.
In view of our conclusion, we need not discuss the respondent's argument that the petitioner constructively became a resident alien in August 1940, or the petitioner's contentions relating to the alleged different bases of tax applicable to aliens and ‘individuals‘ (under sections 11 and 12, Internal Revenue Code.)
Decision will be entered for the respondent.