The opinion of the court was delivered by: PALMIERI
In this action the United States seeks to recover income taxes from Messrs. Balanovski and Horenstein, two nonresident aliens who are residents and citizens of Argentina. The Government has served a notice of levy on two New York banks in which certain funds are now on deposit to the credit of the defendant Balanovski. It wants to enforce this levy and to secure an impersonal judgment against Messrs. Balanovski and Horenstein for the amount of the taxes allegedly due. Defendants deny that any taxes are due, and question whether certain assessments made by the Government are valid and whether this Court has in personam jurisdiction over them.
At all times material to the instant case defendants Balanovski and Horenstein were members of an Argentine partnership, Compania Argentina de Intercambio Comercial (Cadic). Balanovski entered the United States as a nonimmigrant late in 1946 and remained in the United States for a period of some eight months. During his stay in the United States Balanovski purchased trucks and equipment for Cadic from United States suppliers. From some of these suppliers he received, for Cadic, payments called discounts for quantity purchases. The trucks and equipment were sold by Cadic to an agency of the Argentine Government, Instituto Argentino de Promocion del Intercambio (IAPI). It is the sum of (1) the amount paid to Cadic as quantity discounts by United States suppliers and (2) the profits made on the sales to IAPI that the Government seeks to tax.
The facts are not disputed. Cadic was represented by Balanovski during his stay in the United States, and when Balanovski left the United States he gave the defendant Devine a power of attorney to act in his behalf in making contracts and in transacting business with several banks. While in the United States Balanovski located suppliers who had goods to sell and sometimes travelled to various cities to inspect goods offered for sale or purchased by him. After receipt of an offer from a supplier Balanovski would communicate with Horenstein, his partner in Argentina, who would submit an offer to IAPI. If IAPI accepted the offer, Horenstein would notify Balanovski and the latter would accept the supplier's offer. In the meantime IAPI would cause a letter of credit in favor of Balanovski to be opened with a New York bank. Acting under the terms of the letter of credit Balanovski would assign a portion of it, equal to Cadic's purchase price, to the United States supplier. The supplier could then draw on the New York bank against the letter of credit by sight draft for 100% invoice value accompanied by (1) a commercial invoice billing Balanovski, (2) an inspection certificate, (3) a non-negotiable warehouse or dock receipt issued in the name of the New York bank for the account of IAPI's Argentine agent, and (4) an insurance policy covering all risks to the merchandise up to delivery FOB New York City. Then, if the purchase was one on which Cadic was to receive a quantity discount, the supplier would pay Balanovski the amount of the discount.
After the supplier had received payment Balanovski would draw on the New York bank for the unassigned portion of the letter of credit less 1% of the face amount by submitting a sight draft accompanied by (1) a commercial invoice billing IAPI, (2) an undertaking to ship before a certain date, and (3) an insurance policy covering all risks to the merchandise up to delivery FAS United States seaport. The bank would then deliver the non-negotiable warehouse receipt that it had received from the supplier to Balanovski on trust receipt and his undertaking to deliver a full set of shipping documents including a clean on board bill of lading issued to the order of IAPI's Argentine agent with instructions to notify IAPI. It would also notify the warehouse that Balanovski was authorized to withdraw the merchandise. Upon delivery of these shipping documents to the New York bank Balanovski would receive the remaining 1% due under the terms of the letter of credit. Although Balanovski arranged for shipping the goods to Argentina, IAPI paid shipping expenses and made its own arrangement for marine insurance in Argentina. The New York bank would forward the bill of lading, Balanovski's invoice billing IAPI, and the other documents required by the letter of credit (not including the supplier's invoice billing Balanovski) to IAPI's agent in Argentina.
Twenty-four transactions substantially similar to the above pattern took place during 1947. Other transactions took place in that year. They too were substantially similar to the above pattern except that Cadic engaged the services of others to facilitate the acquisition of goods and their shipment to Argentina.
The law provides that the gross income of a nonresident alien individual 'includes only the gross income from sources within the United States.' Int.Rev.Code of 1939, § 212(a), 26 U.S.C.A. § 212(a). Therefore, if the profit that Cadic made on the sales to IAPI and the amount paid to Cadic by United States suppliers as discounts for quantity purchases were not from 'sources within the United States', no tax is due from Messrs. Balanovski and Horenstein.
The Internal Revenue Code of 1939 provided that 'Gains, profits and income derived from the purchase of personal property within and its sale without the United States * * * shall be treated as derived entirely from sources within the country in which sold * * *.' Int.Rev.Code of 1939, § 119(a)(6) and 119(e), 26 U.S.C.A. § 119(a)(6), (e). (Emphasis added.) The defendants argue that the sales to IAPI took place in Argentina and the income derived from those sales was not derived from 'sources within the United States.' The Government takes the position that the sales to IAPI took place within the United States and that the income derived from those sales was derived from 'sources within the United States.'
In support of its position the Government cites several cases which hold or contain dicta to the effect that the country in which title passes to the buyer is the country in which a sale of personal property takes place and the 'source' of the income derived from the sale. The leading case supporting this position is East Coast Oil Co., S.A., 1934, 31 B.T.A. 558, affirmed, 5 Cir., 85 F.2d 322, certiorari denied, Helvering v. East Coast Oil Co., 1936, 299 U.S. 608, 57 S. Ct. 234, 81 L. Ed. 449, in which the Board of Tax Appeals said, '* * * Of course, the place of contract, the place of delivery and of payment, the terms of the agreement, and the extraneous circumstances may each have a bearing. But the ultimate goal of the examination of all such considerations is to ascertain when and where the title to the goods passes from the seller to the buyer. It is then and there a sale is consummated -- when and where property in the goods passes, when and where the incidents of ownership vest in the vendee. Such is the rule, long and firmly established.' 31 B.T.A. at page 560. The reasoning implicit in this language has been followed in later cases. See Elston Co., Ltd., 1940, 42 B.T.A. 208; Ronrico Corp., 1941, 44 B.T.A. 1130; Exolon Co., 1941, 45 B.T.A. 844; G. A. Stafford & Co. v. Pedrick, D.C.S.D.N.Y., 78 F.Supp. 89, aff'd on another ground, 2 Cir., 1948, 171 F.2d 42. And in 1947 the Bureau of Internal Revenue followed the reasoning of the East Coast Oil case and adopted 'the general rule that for the purpose of determining the source of income attributable to the sale of personal property, a sale is consummated at the place where the seller surrenders all his right, title, and interest to the buyer. * * *' See G.C.M. 25131, 1947-2 Cum. Bull. 85.
With deference, I cannot accede to the reasoning of the Board of Tax Appeals in the East Coast Oil case. In my opinion, a rule that determines the source of income attributable to a sale of personal property by the place where title passed to the buyer does not sufficiently protect the interest of the United States in the collection of income taxes on income derived from sources within the United States. Nor does such a rule provide equitable treatment for taxpayers who are engaged in substantially similar transactions.
The unsatisfactory nature of 'the place where title passes test' has been recognized by courts and by the Bureau of Internal Revenue. Thus, in affirming the Board's decision in the East Coast Oil case, the Court of Appeals for the Fifth Circuit did not rely solely on the fact that title passed to the buyer outside the United States. See 5 Cir., 1936, 85 F.2d 322; and Ardbern Co. v. Commissioner, 4 Cir., 1941, 120 F.2d 424. The Bureau of Internal Revenue has also refused to place exclusive reliance on 'the place where title passes test.' G.C.M. 8594, IX-2 Cum. Bull. 354, 358 (1930) states 'the technical rules as to the passing of the property in the goods and the assumption of risk are not determinative of the place of sale and the source of income from the sale of goods * * *.' In yet another G.C.M. from which it appears that title to the goods for commercial law purposes passed to the buyer in Canada, the Bureau ruled that the source of income was the United States. See G.C.M. 13475, XIII-2 Cum.Bull. 223 (1934). And even in the G.C.M. that revokes G.C.M. 8594, supra, and adopts 'the place where title passes test' as a 'general rule' the Bureau states, '* * * In any case in which the sales transaction is arranged in a particular manner for the primary purpose of tax avoidance, the foregoing rules ('place where title passes test') will not be applied. * * * In such cases, all factors of the transaction, such as negotiations, the execution of the agreement, the location of the property, and the place of payment, will be considered, and the sale will be treated as having been consummated at the place where the substance of the sale occurred.' G.C.M. 25131, 1947-2 Cum. Bull. 85; and see Reg. 111, § 29.119-8 (1947).
Understandably, the Bureau was most concerned with the problem of tax avoidance when it provided for an exception to the 'place where title passes test.' While this Court, too, is concerned with the problem of tax avoidance, it is also concerned that taxpayers engaged in substantially similar transactions shall be subjected to similar tax burdens. Therefore, it cannot concur with a rule that (1) would exempt from income taxation the income attributable to a sale of personal property by a nonresident alien seller who was astute enough to arrange that title to the buyer should pass outside the United States and (2) would tax income from a similar transaction by an unwary or ill-advised nonresident alien who allowed title to pass to the buyer within the United States. The burden of income taxation should not depend on the 'witty diversities' of the law which determines when and where title passed to the buyer, but in every case all factors of the transaction should be considered.
In the instant case negotiations leading to the sales by Cadic to IAPI were carried on in Argentina, the contract of sale was signed in Argentina, the buyer was an agency of the Argentine Government, and the ultimate destination of the goods was Argentina. Moreover, although the beneficial ownership of the goods and the risk of loss passed to IAPI in the United States, Cadic had no reason to insist that they should. Indeed, the architecture of the transactions makes it seem probable that IAPI, which was financing Cadic's purchases and paying Cadic in the United States, insisted that beneficial ownership should pass to it in the United States in order to protect itself against the possibility of any fraudulent acts by Cadic and the possible intervening rights of third parties against Cadic. Thus, it appears likely that Cadic is not responsible for the fact that title to the goods passed to IAPI in the United States. Under these circumstances and for the purposes of section 119(e) of the Internal Revenue Code of 1939, the sale from Cadic to IAPI took place in Argentina, and the income derived by Cadic from the sales was not 'from sources within the United States.' It is therefore not subject to taxation by the United States.
I turn now to the question of whether the amount of the 'discounts' for quantity purchases that Cadic received from United States suppliers constitutes income from 'sources within the United States.' The 'discounts' were payments made to Cadic by United States suppliers after the suppliers had received payment equal to the face amount of their invoices billing Cadic. The payments were made in the United States and represented income to Cadic at the time they were paid to its agent, Balanovski. The fact that for the purposes of section 119(e), the sale of the goods purchased from the suppliers took place in Argentina has no bearing on whether the income from these payments was from 'sources within the United States', for Cadic would have realized income on these payments no matter where the goods were sold. In my opinion, the payments to Cadic by United States suppliers whether called 'discounts,' 'rebates,' or 'inducements' constitute 'gross income from sources within the United States.' Int.Rev.Code of 1939, § 212(a); see A.R.R. 265, 1920-3 Cum.Bull. 215; G. A. Stafford & Co. v. Pedrick, 2 Cir., 1948, 171 F.2d 42.
Having determined that Cadic realized 'gross income from sources within the United States,' it becomes necessary to determine whether either Cadic, or Balanovski or Horenstein as individuals, were engaged in trade or business in the United States. If Cadic was engaged in trade or business in the United States then both Balanovski and Horenstein as members of the partnership must be considered as having been so engaged and are taxable under the provisions of section 211(b). See Int.Rev.Code of 1939, §§ 211(b) and 219, 26 U.S.C.A. §§ 211(b), 219. But if Cadic was not engaged in trade or business in the United States, Balanovski and Horenstein are taxable under the provisions of section 211(b) only if they were engaged in trade or business in the United States as individuals. If neither Balanovski nor Horenstein were so engaged then they are exempt ...