Commissioner of Internal Rev. v. PIEDRAS NEGRAS B. CO.

127 F.2d 260, 29 A.F.T.R. (P-H) 243, 1942 U.S. App. LEXIS 3842

• Court: Court of Appeals for the Fifth Circuit
• Decided: April 3, 1942
• Docket: 10035
• Status: Published

Opinions

HOLMES, Circuit Judge.

The respondent is a corporation organized under the laws of the State of Coahuila, Republic of Mexico, with its principal office and place of business at Piedras Negras, Mexico. Its business is the operation of a radio broadcasting station located at Piedras Negras, just across the Rio Grande from Eagle Pass, Texas. The decisive question presented by this petition for review is whether the respondent, from the operation of its business in 1936 and 1937, derived any income from sources within the United States subject to taxation by the United States.

The taxpayer conducted its affairs in the familiar manner. Its income was derived from the dissemination of advertising over the radio and from the rental of its facilities to customers, referred to as the sale of “radio time.” All of its income-producing contracts were executed in Mexico, and all services required of the taxpayer under the contracts were rendered in Mexico. The company maintained a mailing address at Eagle Pass, Téxas, and used a hotel room there in which it counted and allocated the funds received in the mails each day.

Contracts with advertisers in the United States were handled through an advertising agent, an independent contractor. The majority of the taxpayer’s responses from listeners came from the United States, and ninety-five per cent of its income was from advertisers within the United States. Bank accounts were maintained in Texas and in Mexico. The books and records of the corporation were in Mexico, its only studio was there, and all of the broadcasts by the station originated in Piedras Negras. The broadcasts were equal in volume in all directions, and were heard by listeners in this country and elsewhere.

Section 231(d) of the Revenue Act of 1936, 26 U.S.C.A. Int.Rev.Acts, page 907, provides that the gross income of a foreign corporation includes only the gross income from sources within the United States. If this taxpayer, a foreign corporation, had no income from sources within the United States, no income tax was levied upon it. The Board of Tax Appeals concluded that none of the respondent’s income was derived from sources within the United States, and we agree with that decision.

In Section 119 of the Revenue Act of 1936, 26 U.S.C.A. Int.Rev.Acts, page 876, Congress classified income, as to the source thereof, under six heads.¹ Since the taxpayer’s income was derived exclusively from the operation of its broadcasting facilities located in Mexico, or from the rental of those facilities in Mexico, its income therefrom was either compensation for personal labor or services, or rentals or royalties from property, or both, under the statutory classification. Section 119(a) (3) provides that compensation for personal services performed in the United States shall be treated as income from sources within the United States. By Section 119(c) (3), income from such services performed without the United States is not from sources within the United States. Likewise, rentals from property located without the United States, including rentals or royalties for the use of or for the privilege of using without the United States franchises and other like properties, are considered items of income from sources without the United States. Section 119(c) (4) of the Revenue Act of 1936.

We think the language of the statutes clearly demonstrates the intendment of Congress that the source of income is the situs of the income-producing service. The repeated use of the words within and without the United States denotes a concept of some physical presence, some tangible and visible activity. If income is produced by the transmission of electromagnetic waves that cover a radius of several thousand miles, free of control or regulation by the sender from the moment of generation, the source of that income is the act of transmission. All of respondent’s broadcasting facilities were situated without the United States, and all of the services it rendered in connection¹ with its business were performed in Mexico. None of its income was derived from sources within the United States.²

The order of the Board of Tax Appeals is affirmed.

1 The six classifications are (1) Interest, (2) Dividends, (3) Personal Services, (4) Rentals and Royalties, (5) Sale of Real Property, and (6) Sale of Personal Property.

2 Cf. Commissioner v. East Coast Oil Co., 5 Cir., 85 F.2d 322, certiorari denied 299 U.S. 608, 57 S.Ct. 234, 81 L.Ed. 449; Commissioner v. Hawaiian Philippine Co., 9 Cir., 100 F.2d 988, certiorari denied 307 U.S. 635, 59 S.Ct. 1032, 83 L.Ed. 1517; Helvering v. Stein, 4 Cir., 115 F.2d 468.