Branch v. Commissioner , 38 B.T.A. 1139 ( 1938 )

W. E. BRANCH, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Branch v. Commissioner

Docket Nos. 88893, 89584.

United States Board of Tax Appeals

38 B.T.A. 1139; 1938 BTA LEXIS 779;

Promulgated November 15, 1938, Promulgated

---

During the years 1933, 1934, and 1935 the petitioner, a citizen of the United States and a resident of Eagle Pass, Texas, was president of the Piedras Negras Broadcasting Co., which owned and operated a radio broadcasting station in Mexico. The Mexican company had an office in and carried on business in the United States during the years in question. During those years the petitioner did not have the receipt, control, or custody of any funds belonging to the Mexican corporation. Held, that the petitioner is not liable to tax for any of the years in question as a withholding agent of the Mexican corporation.

Robert Ash, Esq., and Frank G. Rodgers, C.P.A., for the petitioner.

Frank T. Horner, Esq., and Edward C. Adams, Esq., for the respondent.

---

SMITH

These proceedings, consolidated for hearing, involve deficiencies in income tax due from the Piedras Negras Broadcasting Co. of Piedras Negras, Coah., Mexico, determined to be due from the petitioner as withholding agent for the years 1933, 1934, and 1935 as follows:

Docket No.	Year	Deficiency	Delinquency penalty
88893	1933	$4,099.47	$1,024.87
88893	1934	10,461.67	2,615.42
89584	1935	4,538.21	1,134.55

FINDINGS OF FACT.

During the years 1933, 1934, and 1935 the petitioner was a resident of Eagle Pass, Texas, and a citizen of the United States. His wife during these years was Martha E. Branch, who lived with the petitioner in Eagle Pass, Texas.

Since 1921 the petitioner has been engaged as an engineer, designing, constructing, and installing radio broadcasting equipment. He has built a number of stations in the United States and several in Mexico.

Petitioner first became interested in a radio station at Piedras Negras, Coah., Mexico, about 1932. About November 1932 a Mexican corporation, Cia Radiofusora de Piedras Negras de Mexico, S.A., was organized. The English equivalent of the corporate name is "Piedras Negras Broadcasting Co., Inc." During the years 1933, 1934, and 1935 the petitioner was president and owned 39 percent of the capital stock of the corporation. His wife owned 10 percent of the stock, and the balance was owned by C. N. Bres, his son, Alfonso Bres, and his son-in-law, all Mexicans.

Under petitioner's direction the corporation, in the latter part of 1932, erected a broadcasting transmitter and studio equipment in Piedras Negras, Mexico. The station had call letters XEPN. Test programs were first put on the air in December 1932. During 1933, 1934, and 1935 the station was broadcasting general programs. By law at least 25 percent of the programs had to be in Spanish and this requirement was always met. Part of the programs originated in the studio in Mexico and part in the remote control studio in the Eagle Hotel, Eagle Pass, Texas. The remote control studio was owned by the Eagle Hotel. At the time the remote control studio was established there was no law requiring permits. Later, however, Congress provided that studios must be licensed by a commission now known as the Federal Communications Commission. This commission denied a permit to the Eagle Hotel for the maintenance of a studio in Eagle Pass and the remote control studio was discontinued in 1936.

In or about 1933 the petitioner registered the name of Radio Service Co. with the Texan authorities. He represented himself and his wife as the owners of the Radio Service Co. In fact, Radio Service Co. was another name for the Piedras Negras Broadcasting Co.

Bank accounts were opened in the First National Bank of Eagle Pass in the following names:

Radio Service Co.

Cia. Radiofusora de Piedras Negras, S.A.

Piedras Negras Broadcasting Co.

Rio Grande Broadcasting Co.

XEPN Advertising Agency.

A bank account was opened in the Eagle Pass branch of the Biguaro Banking Co. in the name of Cia. Radiofusora de Piedras Negras, S.A.

In spite of the difference in names, all of the accounts were really the accounts of the Piedras Negras Broadcasting Co. and the money in them belonged to that company.

In each account it was required that all checks should bear the signature of both an American and a Mexican stockholder, that is, of W. E. Branch or Martha E. Branch, and of C. M. Bres or A. L. Bres. Because of this provision the petitioner never withdrew any money from the banks without the counter-signature of either C. M. Bres or A. L. Bres.

The original deposit of $12,500, made when the "XEPN Advertising Agency" bank account was opened November 14, 1932, represented a check belonging to the petitioner and was part of his contribution to the capital of the Piedras Negras Broadcasting Co. The petitioner, individually, had no bank account in Eagle Pass.

The Piedras Negras Broadcasting Co. had two antennas in Mexico which operated on different frequencies and would sometimes carry the same program simultaneously. The stations during 1933, 1934, and 1935 had call letters XEPN and XELO. When the stations were erected it was expected they would be heard in the United States and this expectation has been realized. Most of the advertisers using the station were citizens of the United States and most of the responses from listeners came from the United States. Typical Mexican advertisers were Mochizano Breweries and National Railways of Mexico. Listener responses, in addition to coming from all states in the United States, came from Canada, islands in the Atlantic and Pacific, and several of the republics of South America. The company's stations did not have directional antennas, so that the impulses or waves went out from the broadcasting stations in practically equal force in all directions.

Contracts for "time" on the company's stations were made in writing. Some of the contracts were in the name of the Piedras Negras Broadcasting Co. and some in the name of Radio Service Co. Some of the contracts with advertisers in the name of Piedras Negras Broadcasting Co. and Radio Service Co. were signed by W. E. Branch and some by either C. M. Bres or A. L. Bres. The name Radio Service Co. was not mentioned over the air and letters from listeners were not addressed to the Radio Service Co. Mail would be sent to the advertiser, care of XEPN, Eagle Pass, and the listener would not know the name of the company that was broadcasting, nor the person with whom the advertiser made the contract. Payment for "time" was usually contingent upon the replies received, with the station receiving a certain percentage of the money received in the mail, or so much per inquiry, although some contracts were for specified sums of money for "time."

After mail was received at the post office in Eagle Pass it was taken to the mail room in the basement of the Eagle Hotel, in Eagle Pass. The mail was first sorted by states to show the coverage and a record made. It was then separated according to the advertisers and opened in the presence of a representative of the advertiser. All of the mail was handled by employees of the Piedras Negras Broadcasting Co. If money was to be divided an employee of the Piedras Negras Broadcasting Co. took whatever belonged to it and deposited it in one of the several bank accounts mentioned above. The petitioner, personally, did not have possession of the money received at any time and did not make any deposits, aside from the initial deposit of $12,500 made in the account of the XEPN Advertising Agency.

The petitioner devoted his entire time to the business of the broadcasting company. C. M. Bres was a custom broker, sold gasoline, oils, fruits, vegetables, manufactured ice, and distributed beer, as well as being active in the broadcasting company. He supervised all of the programs that were broadcast in the Spanish language. The petitioner supervised all of the programs in the English language. Some of the broadcasts were made from the studio at Piedras Negras and some from the studio at the Eagle Hotel in Eagle Pass.

There was an agreement between the petitioner and C. M. Bres that the profits, if any, should be distributed 70 percent to W. E. Branch and 30 percent to C. M. Bres. Up to the present time there has been no division of the profits.

The expenses of the corporation were paid by check drawn upon the several banking accounts. Every check had to be signed as above indicated by the petitioner or, in his absence, Martha E. Branch, and by C. M. Bres or, in his absence, A. L. Bres. Expenses incurred by either Bres or by the petitioner were paid as other expenses of the Piedras Negras Broadcasting Co. When the petitioner desired money for living expenses the money was advanced to him on checks drawn as above indicated and charged against his account on the books of the broadcasting company. The same was true of advances made to either C. M. Bres or A. L. Bres.

The petitioner did not file withholding returns for the years 1933, 1934, and 1935. On February 4, 1937, the respondent issued a notice of deficiency for 1933 and 1934, determining deficiencies for 1933 and 1934 as set out above. The petitioner has appealed to the Board, Docket No. 88893, denying liability.

In August 1936 the respondent, as a result of a withholding return, form 1042, prepared in accordance with section 3176 of the Revised Statutes, assessed against the petitioner a tax of $6,767.77, plus a penalty of $1,691.94 for 1935. No appeal was taken to the Board from the determination of that deficiency. On June 5, 1937, the respondent issued the notice of deficiency for 1935, from which appeal has been taken in Docket No. 89584, showing a further deficiency of $4,538.21, plus a penalty of $1,134.55.

OPINION.

SMITH: The question presented to the Board by these proceedings is whether the petitioner is liable as a withholding agent for the years 1933, 1934, and 1935 in respect of amounts of money received by the Piedras Negras Broadcasting Co. The petitioner denies liability upon two grounds - first, that the Piedras Negras Broadcasting Co. is a foreign corporation which transacted business in the United States and had an office or place of business therein during the taxable years, and, second, that the petitioner during the years 1933, 1934, and 1935 did not have the "control, receipt, custody, disposal" of any funds belonging to the Piedras Negras Broadcasting Co.

It should be noted that the petitioner's income tax liability is not involved in these proceedings. It is his liability as a withholding agent of the Piedras Negras Broadcasting Co. which is in issue.

The deficiencies are claimed to be due as a result of withholding tax returns, form 1042, prepared by the respondent under the provisions of section 3176 of the Revised Statutes. Thus, for 1933 the respondent determined that the petitioner was liable as a withholding agent upon $29,814.32 received by the Piedras Negras Broadcasting Co. in that year, and for 1934 and 1935 upon $76,084.85 and $49,220.17 similarly received. The returns were prepared by D. U. Emmert, deputy collector. With respect to the preparation of the returns, D. U. Emmert testified as follows:

Q. Where did you get the information showing the amounts that you used?

A. The amounts that I used thereon were secured from work papers in the possession of the other attorney of record in this case, Mr. F. G. Rogers, in his office in San Antonio, upon his representation that they were transcriptions of the records of the Piedras Negras Broadcasting Company made prior to their destruction by fire.

Q. And these figures were taken from the records of the Piedras Negras Broadcasting Company?

A. That I don't know, sir. Q. Well, from the work sheets?

A. I said it was stated to me by this Mr. F. G. Rogers that those figures were taken from the records of the Piedras Negras Broadcasting Company.

Q. And you assumed that they were the correct figures of the Piedras Negras Broadcasting Company, did you not?

A. That is correct.

Q. Did you check any work sheets or any other papers, or any kind of papers?

* * *

A. I did not.

Pertinent provisions of the Revenue Act of 1932 are as follows:

SEC. 143. WITHHOLDING OF TAX AT SOURCE.

* * *

(b) NONRESIDENT ALIENS. - All persons, in whatever capacity acting, including lessees or mortgagors of real or personal property, fiduciaries, employers, and all officers and employees of the United States, having the control, receipt, custody, disposal, or payment of interest * * * rent, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable annual or periodical gains, profits, and income, of any nonresident alien individual, or of any partnership not engaged in trade or business within the United States and not having any office or place of business therein and composed in whole or in part of nonresident aliens, (other than income received as dividends of the class allowed as a credit by section 25(a)) shall (except in the cases provided for in subsection (a) of this section and except as otherwise provided in regulations prescribed by the Commissioner under section 215) deduct and withhold from such annual or periodical gains, profits, and income a tax equal to 8 per centum thereof; * * *

(c) RETURN AND PAYMENT. - Every person required to deduct and withhold any tax under this section shall make return thereof on or before March 15 of each year and shall on or before June 15, in lieu of the time prescribed in section 56, pay the tax to the official of the United States Government authorized to receive it. * * *

SEC. 144. PAYMENT OF CORPORATION INCOME TAX AT SOURCE.

In the case of foreign corporations subject to taxation under this title not engaged in trade or business within the United States and not having any office or place of business therein, there shall be deducted and withheld at the source in the same manner and upon the same items of income as is provided in section 143 a tax equal to 12 per centum thereof in respect of all payments of income made before the enactment of this Act, and equal to 13 3/4 per centum thereof in respect of all payments of income made after the enactment of this Act, and such tax shall be returned and paid in the same manner and subject to the same conditions as provided in that section: * * *

The corresponding provisions of the Revenue Act of 1934 are substantially similar.

The respondent has filed no brief in this case and the Board is not informed as to what his contentions are in the light of the evidence in these proceedings. From the testimony of D. U. Emmert it is clear that the respondent made no determination whatever that the petitioner was ever in the control, receipt, or custody of the funds which he found had been received by the Piedras Negras Broadcasting Co. So far as anything is shown to the contrary the entries shown on the books of that company may have been received entirely from broadcasts made in Mexico. No showing is made that the petitioner ever had the control or custody of any of the funds received by the Piedras Negras Broadcasting Co.

From a consideration of all of the evidence, the Board is of the opinion that the contentions of the petitioner must be sustained upon either or both of the grounds upon which he is relying.

The evidence shows that during the years 1933, 1934, and 1935 programs were broadcast over the two stations of a Mexican corporation either in Mexico or at the Eagle Hotel in Eagle Pass. All of the mail received in response to those broadcasts was received at the Eagle Hotel. Employees of the Mexican corporation opened the mail and deposited the money in the bank accounts. In the light of this evidence the Board can not doubt but that the Mexican corporation was doing business in the United States during the years 1933, 1934, and 1935 and that it had an office at the Eagle Hotel in Eagle Pass, Texas. If the Mexican corporation had any gain from the transaction of that business it is subject to tax. But the petitioner, even though he was president of the Mexican corporation, was not subject to tax as a withholding agent.

The evidence further shows that the petitioner never had the receipt, control, or custody of funds belonging to the Mexican corporation. Payments for advertising were received by employees of the Piedras Negras Broadcasting Co. in Eagle Pass, Texas. The petitioner did not handle these funds personally. They were deposited in the bank by the employees of the Mexican corporation and were not subject to withdrawal by the petitioner except upon a check jointly signed by him and a Mexican stockholder or officer of the corporation. In such circumstances we think it plain that the withholding provisions of the Revenue Acts of 1932 and 1934 do not apply to this petitioner.

The respondent has not determined any deficiency against the Piedras Negras Broadcasting Co. Accordingly, it is not necessary for the Board to determine whether that company had any liability to income tax in respect of business transacted in the United States.

Judgments of no deficiency will be entered.