Scottish American Inv. Co. v. Commissioner
12 T.C. 49, 1949 U.S. Tax Ct. LEXIS 290 (1949)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
A foreign corporation whose major investment and policy decisions are made abroad is not "engaged in trade or business within the United States" for tax purposes merely by maintaining a U.S. office that performs only routine, clerical, and incidental functions.
Facts:
- The petitioners were foreign investment trusts organized and operated in Scotland.
- The trusts invested a significant portion of their capital in American securities.
- All major policy decisions, including the purchase and sale of securities, were made by the trusts' directors and secretaries at their home offices in Scotland.
- Orders for security transactions were transmitted directly from Scotland to resident brokers in the United States.
- The trusts maintained an office in Jersey City, USA, which was staffed by an assistant secretary.
- The Jersey City office's activities included collecting dividends and interest, maintaining records, forwarding published financial information to Scotland, preparing tax returns, and handling routine corporate proxies.
Procedural Posture:
- In a prior proceeding for earlier tax years, the petitioners' case was heard by the U.S. Tax Court, which held they had an "office or place of business" in the United States.
- Due to different filing locations, appeals were taken to both the Third and Fourth Circuit Courts of Appeals.
- The Fourth Circuit affirmed the Tax Court, while the Third Circuit reversed it.
- The U.S. Supreme Court reviewed both appellate decisions, affirming the Fourth Circuit and reversing the Third Circuit, thereby holding that the petitioners did have an "office or place of business" in the U.S.
- The Supreme Court explicitly declined to rule on whether the petitioners were "engaged in trade or business" in the U.S.
- For the subsequent tax years of 1942 and 1943, under a new law that eliminated the "office or place of business" test, the Commissioner of Internal Revenue determined tax deficiencies against the petitioners.
- The petitioners challenged the Commissioner's determination in the United States Tax Court.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does a foreign investment trust engage in trade or business within the United States when its U.S. office's activities are confined to routine and clerical tasks, while all substantive investment and policy decisions are made in its foreign home office?
Opinions:
Majority - Kern, J.
No. A foreign investment trust does not engage in trade or business within the United States under these circumstances. The court reasoned that the real business of the trusts—the cooperative management of capital and the making of profit-generating investment decisions—occurred entirely in Scotland. The activities of the American office were merely clerical, routine, and adjunct to the principal business. The court emphasized that the quality and character of the U.S. activities, not their volume, are determinative. The legislative history of the 1942 amendment to Section 231(b) also supported this conclusion, as Congress intended to narrow the definition and prevent foreign corporations from gaining resident tax status simply by maintaining a physical office without conducting substantial business.
Dissenting - Opper, J.
Yes. The trust was engaged in trade or business in the United States. The dissent argues that the majority's conclusion contradicts a prior Supreme Court decision involving the same taxpayer and facts. In that case, the Supreme Court described the U.S. office's activities as performing "vital functions" and being used for the "regular transaction of business." The dissent contends that if the company was transacting business in a U.S. office for the purposes of the prior case, it is logically impossible to conclude that it is not now engaged in business within the United States.
Analysis:
This decision establishes a qualitative standard for determining whether a foreign corporation is "engaged in trade or business" in the United States. It clarifies that the location of core, discretionary, profit-generating activities is paramount, rather than the location of voluminous but ministerial support functions. The ruling reinforces Congress's intent to base tax status on the substance of a company's U.S. economic engagement, not merely its physical presence. This precedent makes it more difficult for foreign investment vehicles to claim resident tax status by offshoring only their administrative tasks to a U.S. office.
