Berliner Handels-Gesellschaft v. United States

                    UNITED STATES COURT OF CLAIMS

The court made special findings of fact as follows.

1. The plaintiff, Berliner Handels-Gesellschaft, is a banking firm organized under the laws of Germany July 2, 1856, and is an independent legal entity.

There are two classes of persons in the firm, to wit: shareholders and managers. The shareholders' contributions of capital are evidenced by certificates of stock and the liability of the shareholders is limited to the stipulated value of the shares. The managers, who, in a stock corporation, would be the managing committee, are liable with their entire property for the liabilities of the company. This liability arises only in the event of the company's bankruptcy. It is secondary to that of the company. During all times relevant hereto, the managers were determined by an administrative board. The administrative board occupied a relationship to the managers of the firm analagous to that between the board of directors of an American corporation and its officers.

The firm was authorized to do a general banking, commercial, and industrial business and to establish branches, subsidiaries, and agencies.

2. On April 24, June 6, and August 24, 1931, in accordance with demands made upon the plaintiff by the Commissioner of Internal Revenue, the plaintiff filed with him at Washington, D. C., under protest, various statements concerning its income for the calendar years 1909, 1910, 1911, and 1912, and for the first two months of 1913.

3. March 8, 1932, the Commissioner addressed a 30-day letter to the plaintiff in which it was notified that its corporation excise tax liability for the taxable period comprising the years 1909, 1910, 1911, and 1912 and the first two months of 1913 disclosed that taxes and penalties were due from it for such period in the following amounts:

 Year             Net income               Deficiency         Penalty

                                  1909           1910           1911

 Year            Tax           Penalty         Interest        Total

 Year:                                                 Amount claimed

     The Berliner Handels-Gesellschaft, during the year 1909, was a

No part of the amount thus claimed and rejected has been refunded.

8. During the taxable period involved herein the plaintiff received income from business transacted and capital invested within the United States in the manner described in this and succeeding findings.

Plaintiff maintained accounts with stock-brokerage houses in the city of New York, certain of which also did a private banking business. To or through these houses plaintiff made loansand from or through them borrowed money. The interest paid or received thereon was as follows:

                                        Received                Paid

The total major borrowings, outstanding during the periods indicated, varied in the following amounts:

 September 18, 1911, to October 17, 1911                   $ 1,000,000

Plaintiff, jointly with Kuhn, Loeb & Co., purchased shares of railway stock on a basis of 40% of the purchase price to be paid by Kuhn, Loeb & Co. and 60% by the plaintiff. In this transaction plaintiff contributed $ 2,312,000.

Plaintiff entered into joint accounts with Hallgarten & Co. for the purpose of dealing in an aggregate of $ 1,274,000 face amount of New York City 4 1/4% bonds, whereby each participated equally in gains or losses.

Plaintiff also acted, jointly with others in a banking group, as readjustment and syndicate managers in the union of two Mexican railway companies, profits, losses, commissions, and participations in proportion agreed upon. In this venture plaintiff was represented by Hallgarten & Co. as its agent.

10. A large part of plaintiff's transactions in the United States consisted of participation in syndicates underwriting the issuance of new securities. These syndicates were formed by banking houses and at their invitation were participated in by the plaintiff. In some cases plaintiff was a member of the syndicate, in others it participated indirectly under a syndicate member. The amount of plaintiff's participation, or subparticipation as the case is, with description of the security, follows:

                                                        Plaintiff's

12. Plaintiff maintained no office or other place of business in the United States, its territories, or possessions, and it did not have therein a general agent.

Its purchases and sales of securities, or their disposition otherwise, the collection and deposit of interest and dividends, the safekeeping of securities, its banking and brokerage business were handled by banks or brokerage houses in New York City whose organizations were independent of plaintiff's, and beyond ordinary banking and brokerage business plaintiff's New York City correspondents had no authority to manage its business affairs. No contracts affecting business in the United States were signed by plaintiff except in Berlin, and no purchases or sales of securities were made without specific instructions from the plaintiff in Berlin.

During the taxable period Hallgarten & Co. acted as plaintiff's principal foreign correspondent in its banking business. A limited partner of Hallgarten & Co. was Carl Fuerstenberg, who was also one of the managers of the plaintiff. At no relevant time was Carl Fuerstenberg in the United States. A stepson of Carl Fuerstenberg, Ludwig Treitel, was a general partner of Hallgarten & Co.

Carl Fuerstenberg's contribution to the capital account of Hallgarten & Co. was paid by the plaintiff and his share in the profits of Hallgarten & Co. went to the plaintiff.

Other banks acted as plaintiff's foreign correspondents, transfers from one to the other were made by the plaintiff, and collections and payments for the account of plaintiff's customers were effected through them.

Plaintiff did some limited advertising in the United States as a German banking house and in the advertisements gave Berlin as its address.

13. The average annual income received by plaintiff from business transacted and capital invested within the United States in the manner heretofore described during the taxable period involved averaged approximately seven and one-half percent of the total average net profits of the plaintiff during the years in question.

The court decided that the plaintiff was not entitled to recover.

Plaintiff brings this action to recover excise taxes levied on this foreign corporation by the Commissioner of Internal Revenue on the income of plaintiff derived from engaging in business in the United States during the years 1909, 1910, 1911, 1912, and the first two months of 1913, under Section 38 of the Tariff Act of 1909 (36 Stat. 11, 112), which reads as follows:

     That every corporation, joint-stock company or association,

The real question presented is, under the facts of this case: Was the plaintiff "engaged in business" within the meaning of the foregoing statute and therefore subject to the excise tax for engaging in business in this country? The Commissioner of Internal Revenue found that plaintiff was subject to the tax and denied the claim for refund.

A capital-stock tax is a tax upon the privilege of doing business in a corporate capacity and is based on income derived from operating as a corporation whereas an income tax is based on the receipt of income however derived. Flint v. Stone Tracy Company, 220 U.S. 107.

The phrase "engaged in business" is a most comprehensive term and embraces everything which a corporation may be engaged in for profit. When a corporation is organized for the purpose of profit-making activities, and engages in such activities, it is subject to the capital-stock tax. It is not denied that plaintiff engaged in numerous and sundry activities in the pursuit of profit and gain, and if it were a domestic corporation there could be no question that it was subject to the tax.

Plaintiff did not engage in a single activity nor did it engage in sporadic activities, but, on the contrary, during the years in question its activities were continuous and involved large sums of money and numerous and sundry transactions, all of which were for the purpose of gain and profit. Plaintiff did not maintain an office or place of business in the United States, its territories, or possessions, and did not have a general agent in this country. All of its purchases and sales or other disposition of securities, its collections, and deposits of interest and dividends, and the safekeeping of securities were handled by bankers, and brokerage and investment houses in New York City. No purchases, sales, or other disposition of such securities were made without special instructions from the bank in Berlin. Plaintiff maintained accounts in various stock brokerage houses in the City of New York, several of which did a private banking business. Plaintiff loaned moneys to these firms and at times borrowed from or through them, paying and receiving interest. It maintained purchasing accounts and gave its orders for purchases and sales of securities. It purchased stock on joint account with another firm and in these transactions contributed over two million dollars. Plaintiff entered into a joint account with another firm for the purpose of dealing in New York City bonds. It acted jointly with others in a banking group, as readjustment and syndicate managers, in the union of two Mexican railway companies, participating in the profits, losses, and commissions. It participated in syndicates underwriting the issuance of new securities upon the invitation of banking and investment houses which formed these syndicates. Plaintiff advertised in this country for business, giving its home address in Berlin. It purchased and paid for, out of its own funds, a limited partnership for one of its officers in Hallgarten & Company, but the profits earned by Hallgarten & Company, to which this limited partner was entitled, were not paid to the limited partner, but all of these profits were paid directly to plaintiff.

A corporation cannot enter into a partnership and therefore it was necessary to name one of its officers as a partner but, as a matter of fact, and what actually occurred was, plaintiff provided the funds with which this partnership was purchased and received all the profits earned by this partner who was an officer of plaintiff. In substance, plaintiff was the real partner but, in form, the officer of plaintiff was named as the partner. Hallgarten & Company received and paid interest, loaned money, entered into joint accounts for dealing in New York City bonds, acted jointly with other banking groups as readjustment and syndicate managers in the union of two Mexican railwaycompanies and participated in the profits, losses, and commissions, in the proportions agreed upon, and kept on deposit securities for plaintiff's account.

It is apparent from these many profit-making activities through Hallgarten & Company and the varied nature of these transactions that this company, in which plaintiff's officer held a limited partnership, was the one through which plaintiff chiefly conducted its business.

Plaintiff's sole contention is that, having no place of business in the United States and no office or agent in this country, it is immaterial what amount of business it may do through several bankers, brokerage and investment houses or otherwise, and it is not "engaged in business" because there is no one in this country on whom process may issue. An examination of the statute shows that there is no difference made between a domestic and a foreign corporation which would give the latter a distinct advantage over the former because of the fact it did not maintain an office or agent or have a place of business in this country.

We feel that the intention of Congress in levying this tax was to require a corporation engaged in business to pay for the privilege, irrespective of the fact of whether or not it maintained a place of business or had an office or agent in this country. It comes down to a question of the amount of business done. A single activity would not constitute "engaging in business." Emery, Bird, Thayer Realty Co., 237 U.S. 28, 35.

But we have no such case here. It is admitted that during the four years and two months in question plaintiff was continuously engaged in business activities of various sorts involving millions of dollars and numerous and frequent transactions with many firms and banks.

Plaintiff mainly relies on the case of Union Internationale de Placementsv. Hoey, 96 Fed. (2d) 591. The opinion was written by Circuit Judge Martin Manton and although the term "engaged in business" is most comprehensive for taxation purposes, nevertheless, he holds it is essential that a foreign corporation have a place of business or a branch office or an agent or representative in this country on whom process can be served, no matter how numerous and continuous its activities in seeking gain and profit and how large and multifarious its investments, to subject it to an excise tax levied on foreign corporations for the privilege of doing business. We do not feel that this is sine-qua-nonical. The activities of the plaintiff in the instant case differ so widely from those in the case decided by Judge Manton that there is no parallel.

It has been held that each case should stand on its own facts. In Von Baumbach v. Sargent Land Company, 242 U.S. 503, 516, in dealing with former cases, the Supreme Court said:

* * * The fair test to be derived from a consideration of all of them

There is not before us the question of service of process in order to gain jurisdiction over plaintiff, but the right to collect the excise tax based on the privilege to corporations to engage in business for the purpose of gain or profit.

We feel that the facts clearly show that the continuous and active participation in numerous and frequent transactions and various business undertakings constituted being "engaged in business," as defined by the statute, and therefore, the plaintiff can not recover and its petition is dismissed. It is so ordered.