Court Opinion

ID: 4625766
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:57:50.594837+00
Date Added: 2024-06-11T07:56:45.633956
License: Public Domain

ELSTON COMPANY, LIMITED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.  GADIAN COMPANY, LIMITED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.  STANART COMPANY, LIMITED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Elston Co. v. CommissionerDocket Nos. 96604, 96605, 96606.United States Board of Tax Appeals42 B.T.A. 208; 1940 BTA LEXIS 1039; June 25, 1940, Promulgated *1039  1.  Petitioners, foreign corporations, realized gains from sales of certain bonds in the taxable year.  Held, that on the evidence, the bonds were sold and delivered to dealers in Canada and that such gains were not gross income from sources within the United States, under section 119 of the Revenue Act of 1934.  2.  Petitioners also realized gains from the redemption of certain other bonds in the taxable year in the United States.  Held, that such gains were gross income from sources within the United States, under section 119 of the Revenue Act of 1934.  Daniel B. Priest, Esq., for the petitioners.  W. Frank Gibbs, Esq., for the respondent.  HARRON *209  In these proceedings, which were consolidated for hearing and decision, respondent determined deficiencies in income tax and in personal holding company surtax for the fiscal year ending April 30, 1935, as follows: PetitionerIncome taxSurtaxElston Co., Ltd$38,739.27$28,788.68Gadian Co., Ltd36,768.3721,272.32Stanart Co., Ltd34,403.3417,598.95The main questions are whether gains realized by petitioners in the taxable year from the sale of certain*1040  bonds and from the redemption of certain other bonds constituted gross income from sources within the United States under section 119 of the Revenue Act of 1934.  FINDINGS OF FACT.  Petitioners Elston Co., Ltd., Gadian Co., Ltd., and Stanart Co., Ltd., are foreign corporations, which were incorporated under the laws of Canada in December 1933.  Petitioners are engaged in the business of buying and selling investment securities for their own accounts.  Since their incorporation, petitioners' only office and place of business has been in Montreal, Canada, and petitioners' officers and stockholders have been nonresident aliens.  Petitioners keep their books on the basis of a fiscal year ending April 30 and on the cash receipts and disbursements basis.  For the fiscal year ended April 30, 1935, petitioners each filed a corporation income and excess profits tax return and a personal holding company surtax return with the collector of internal revenue at Baltimore, Maryland.  On April 30, 1934, petitioners each owned substantial amounts of bonds of United States municipalities, railroads, utilities, and industrial companies, hereinafter referred to as American bonds, and of bonds*1041  of the Imperial Japanese Government, hereinafter referred to as Japanese bonds.  All of the bonds owned by petitioners were held in custodian accounts with Canadian banks in Canada.  During the period from July 16 to September 21, 1934, petitioners each sold certain American bonds to vendees in the United States and realized gain therefrom as follows: Elston Co., Ltd$34,332.18Gadian Co., Ltd30,468.97Stanart Co., Ltd23,124.65These sales of American bonds in the United States were made for the account of each petitioner, in large part, by O'Brien & Williams, a firm of brokers and dealers in securities of Montreal, and in small part, by Laidlaw & Co., a firm of brokers of New York City.  The *210  sales through O'Brien & Williams were made to Wood, Struthers & Co., a firm of brokers and dealers in securities of New York City, and were transacted as follows: From time to time petitioners would instruct O'Brien & Williams to take delivery of certain bonds from the banks in which they were held and to sell the bonds for petitioners' respective accounts.  The bonds would be delivered to O'Brien & Williams by the banks free of counter-value.  O'Brien & *1042  Williams would sell the bonds to Wood, Struthers & Co., receive the proceeds of the sale, and credit petitioners' respective open accounts on the books of O'Brien & Williams with the proceeds of the sale.  These open accounts were closed out on or about September 21, 1934, when payment of the entire credit balance in each petitioner's open account was made by O'Brien & Williams to the respective petitioner.  In connection with these sales O'Brien & Williams charged petitioners a commission of $2.50 per thousand dollar bond; the normal rate of commission was $3 per thousand dollar bond.  On or about September 15, 1934, L. Peter Candler, the president of each petitioner, received instructions from the beneficial owners of petitioners to make a large reduction in petitioners' investments in American bonds.  Candler consulted a member of the firm of O'Brien & Williams as to whether the sales of the American bonds, which were listed on the New York market, could be effected in Canada instead of in the United States, and was advised that O'Brien and Williams were in a position to purchase some of the American bonds for their own account.  Thereafter, Candler also consulted a member of*1043  the firm of Craig, Ballantyne & Co., a firm of brokers and dealers in securities of Montreal, as to whether it would be possible to sell some of the American bonds to that firm, and was advised that Craig, Ballantyne & Co. would be able to purchase some of the American bonds.  During the period from October 30, 1934, to April 30, 1935, inclusive, petitioners each sold certain American bonds in Canada to O'Brien & Williams, Craig, Ballantyne & Co., and the Monetary Bond Corporation, a Canadian corporation organized by O'Brien & Williams to trade in bonds, and realized gain therefrom as follows: Elston Co., Ltd$245,854.83Gadian Co., Ltd233,033.75Stanart Co., Ltd223,906.88The sales which each petitioner made to O'Brien & Williams, Craig, Ballantyne & Co., and the Monetary Bond Corporation, as dealers, during the period from October 30, 1934, to April 30, 1935, were transacted as follows: From time to time petitioner would write one of the above dealers to take certain bonds at current market prices and at the same time would write the bank in which the *211  bonds were held to deliver the bonds to the dealer against payment by accepted check 1 drawn*1044  to the order of the petitioner "as per contracts approved by us." The dealer would instruct Wood, Struthers & Co. to sell the bonds offered by petitioner at approximate market prices for the dealer's own account and to confirm the sale by wire.  Wood, Struthers & Co. would confirm by wire and by notice the purchase from the dealer of some or all of the bonds at a specified price for delivery on a certain date.  In the confirmation notice sent to the dealer, Wood, Struthers & Co. would add to the specified price for the bonds the interest on the bonds from the date of the payment of the last coupon to the settlement date.  The dealer would then compute the price at which it would offer to purchase the bonds from petitioner.  The dealer would convert the net amount to be received in American money from Wood, Struthers & Co. into Canadian money in accordance with the prevailing rate of exchange, and would subtract from the result the amount of a stamp tax due the Province of Quebec on the sale of the bonds from the dealer to Wood, Struthers & Co., the amount of the charges involved in transmitting the bonds to Wood, Struthers & Co., the amount of the interest on the bonds from the date*1045  of the payment of the last coupon to the settlement date stated in the confirmation notice sent by Wood, Struthers & Co., and a profit of $2.50 per thousand dollar bond.  After computing the price at which it would offer to purchase the bonds from petitioner, the dealer would prepare a confirmation notice which was addressed to petitioner and which stated "We confirm that we have this day BOUGHT from you" the particular bonds.  The settlement date stated in the confirmation notice sent to petitioner was the same as the settlement date stated in the confirmation notice sent by Wood, Struthers & Co. to the dealer.  In the confirmation notice sent to petitioner the dealer would add to the price at which it offered to purchase the bonds, the amount of the interest on the bonds from the date of the payment of the last coupon to the settlement date, and would subtract from the result amounts for provincial and Federal tax.  After the confirmation notice to petitioner was prepared, the dealer would have a check drawn payable to the order of petitioner for the net amount to be received by petitioner and have the check accepted by the bank of deposit.  The dealer would take the accepted check*1046  and the confirmation notice to Candler.  Candler would initial a copy of the confirmation notice and have the accepted check endorsed for deposit.  The dealer would present the initialed confirmation notice and the accepted check to the bank in which the bonds were held.  *212  The bank would release the bonds to the dealer and retain the accepted check.  In the case of O'Brien & Williams or the Monetary Bond Corporation, the dealer would hand the bonds to the Bank of Montreal for delivery to Wood, Struthers & Co., would receive a sight draft payable in United States funds issued by the Bank of Montreal in the net amount of the purchase price to be paid by Wood, Struthers & Co., and would guarantee payment to the Bank of Montreal of the net amount of the purchase price by Wood, Struthers & Co.; the dealer would sell or deposit the draft and receive Canadian funds therefor; the Bank of Montreal would deliver the bonds to Wood, Struthers & Co. on the settlement date, and Wood Struthers & Co. would issue a check in the net amount of the purchase price and deliver the check to the Bank of Montreal; thereupon the dealer would be released from its guarantee to the bank of Montreal. *1047  In the case of Craig, Ballantyne & Co., the dealer would, hand the bonds to the Bank of Montreal for delivery to Wood, Struthers & Co., together with a sight draft payable in United States funds in favor of Craig, Ballantyne & Co.; the Bank of Montreal would credit the amount of the draft in Canadian funds to Craig, Ballantyne & Co., and would deliver the bonds to Wood, Struthers & Co. on the settlement date against payment of the amount of the draft.  During the period from January 4 to April 30, 1935, inclusive, petitioners each sold certain Japanese bonds in Canada to the Bank of Montreal, Montreal, and realized gain therefrom as follows: Elston Co., Ltd$10,045.53Gadian Co., Ltd10,066.79Stanart Co., Ltd10,043.04The sales of Japanese bonds were made for the respective accounts of petitioners by the Royal Trust Co., Montreal, as broker, and were transacted as follows: On or about January 4, 1935, the Royal Trust Co. notified the Bank of Montreal that certain Japanese bonds were for sale, and the Bank of Montreal indicated that it expected to be able to purchase*1048  blocks of these bonds.  Thereafter, from time to time the Bank of Montreal would notify the Royal Trust Co. that the Bank of Montreal desired to purchase a certain block of Japanese bonds at specified prices.  The Royal Trust Co. would then write a letter to The Bank of Montreal in which the trust company offered to sell the desired block of Japanese bonds at the prices specified by the Bank of Montreal.  The Bank of Montreal would accept the offer on the letter and would send a notice of confirmation which stated "Confirmation of: - Purchase from the Royal Trust Company." Thereafter, the Bank of Montreal would send Canadian funds in the amount of the net purchase price to the Royal Trust Co., which funds were either forwarded to, or *213  deposited to the credit of, the respective petitioner.  In connection with the sales of the Japanese bonds the Royal Trust Co. charged petitioners a commission.  On May 1, 1934, certain bonds of the New York Central & Hudson River Railroad Co. which were owned by petitioners were redeemed at maturity.  Petitioners each realized gain from the redemption of the bonds as follows: Elston Co., Ltd$16,000Gadian Co., Ltd16,000Stanart Co., Ltd15,000*1049  According to their terms, these bonds were redeemable in United States funds at the office of the obligor's fiscal agent in New York City.  The bonds were held in custodian accounts with the Bank of Montreal and were, in ordinary course, presented by the bank for redemption at the office of the obligor's fiscal agent in New York City; the proceeds were received by the bank in United States funds, converted into Canadian funds, and credited to petitioners' respective accounts with the bank in Canada.  During the taxable year each petitioner incurred ordinary and necessary expenses in the conduct of its business, as follows: Elston Co., Ltd$29,093.65Gadian Co., Ltd27,465.22Stanart Co., Ltd27,160.69None of the petitioners took a deduction for any part of said expenses in its income tax return for the taxable year.  OPINION.  HARRON: The first question is whether the gains realized by petitioners during the taxable year from sales of American and Japanese bonds were gross income from sources within the United States, under section 119 of the Revenue Act of 1934.  As foreign corporations, petitioners were taxable only on gross income from sources within*1050  the United States, under section 231(a) of the Revenue Act of 1934, the provisions of which are set forth in the margin. 2In their income tax returns for the taxable year petitioners reported the gains realized during the taxable year from sales of American and Japanese bonds as gross income from sources without the United States and did not include the gains in taxable gross income.  Respondent determined that the gains were gross income from sources within the United States and included the gains in taxable gross income.  *214  The provisions of section 119 of the Revenue Act of 1934, insofar as they are pertinent to the question here presented, are as follows: SEC. 119.  INCOME FROM SOURCES WITHIN UNITED STATES..  (a) GROSS INCOME FROM SOURCES IN UNITED STATES. - The following items of gross income shall be treated as income from sources within the United States: * * * (6) SALE OF PERSONAL PROPERTY. - For gains, profits, and income from the sale of personal property, see subsection (e). *1051  (e) INCOME FROM SOURCES PARTLY WITHIN AND PARTLY WITHOUT UNITED STATES. - * * * Gains, profits, and income derived from the purchase of personal property within and its sale without the United States or from the purchase of personal property without and its sale within the United States, shall be treated as derived entirely from sources within the country in which sold * * *.  The words "the country in which sold", as used in subsection (e) mean the country in which title to the personal property passes from the vendor to the vendee. ; affd., ; certiorari denied, ; ; . Here, the personal property was ordinary coupon bonds payable to bearer, and title to the bonds passed where the bonds were delivered from the vendors to the vendees. ; ; *1052 ; . Petitioners concede that the bonds which they sold during the period from April 30 to October 30, 1934, inclusive, were sold and delivered to vendees in the United States through O'Brien & Williams and Laidlaw & Co., as brokers, and that the gains realized therefrom were income from sources within the United States.  Therefore, respondent correctly included in each petitioner's taxable gross income for the taxable year the gains realized by it from sales of bonds during the period from April 30 to October 30, 1934, inclusive.  Petitioners contend that the bonds which they sold during the period from October 30, 1934, to April 30, 1935, inclusive, were sold and delivered in Canada to O'Brien & Williams, Craig, Ballantyne & Co., the Monetary Bond Corporation, and the Bank of Montreal, as dealers, and that, thus, the gains realized from the bonds sold during that period were income from sources outside the United States.  On the other hand, respondent contends that the bonds which petitioners sold during that period were sold and delivered to vendees in the United States through O'Brien & Williams, *1053  Craig, Ballantyne & Co., the Monetary Bond Corporation, and the Bank of Montreal, as brokers, and that, thus the gains realized from the bonds sold during that period were income from sources within the United States. Therefore, the basic question is whether the relationship between *215  petitioners, on the one hand, and O'Brien & Williams, Craig, Ballantyne & Co., the Monetary Bond Corporation, and the Bank of Montreal with respect to the sales of bonds during the period from October 30, 1934, to April 30, 1935, inclusive, was that of customer and dealer or that of customer and broker.  There is little dispute as to the facts.  Since the facts underlying the sales of American bonds are somewhat different from the facts underlying the sales of Japanese bonds, the relationship between petitioners and O'Brien & Williams, Craig, Ballantyne & Co., and the Monetary Bond Corporation with respect to the sales of American bonds, and the relationship between petitioners and the Bank of Montreal with respect to the sales of Japanese bonds will be considered separately.  The facts clearly show that with respect to the sales of American bonds during the period from October 30, 1934, to*1054  April 30, 1935, inclusive, the relationship between petitioners, on the one hand, and O'Brien & Williams, the Monetary Bond Corporation, and Craig, Ballantyne & Co., on the other hand, was that of customer and dealer, or, in other words, that of vendor and vendee.  O'Brien & Williams, Craig, Ballantyne & Co., and the Monetary Bond Corporation used the language "we have * * * BOUGHT from you" in the confirmation notices sent to petitioners; they charged no commission to petitioners; and they bought from petitioners at a lower price that that at which they resold to Wood, Struthers & Co.  These particular facts are strong evidence that the relationship was that of customer and dealer, rather than that of customer and broker. 3 Furthermore, the fact that O'Brien & Williams, Craig, Ballantyne & Co., and the Monetary Bond Corporation paid for the bonds by accepted checks before receiving delivery of the bonds from petitioners, and before being paid for the bonds by Wood, Struthers & Co., shows that the relationship was that of customer and dealer.  *1055  The conclusion that the relationship was that of customer and dealer is established conclusively by the testimony of officers of the dealers to the effect that the parties intended that the relationship was to be that of customer and dealer and that after delivery of the bonds to the dealers they understood that the risk of loss was to fall on them and not on petitioners.  In the last analysis, the nature of the relationship is governed by the intention of the parties. 4There is little evidence in the record to support respondent's contention that the relationship between petitioners, on the one hand, and O'Brien & Williams, Craig, Ballantyne & Co., and the Monetary Bond *216  Corporation, on the other hand, was that of customer and broker with respect to the sales of American bonds during the period from October 30, 1934, to April 30, 1935, inclusive.  The mere fact that prior to October 30, 1934, O'Brien & Williams acted as brokers with respect to the sales of the American bonds does not compel the conclusion that subsequent to October 30, 1934, the relationship*1056  of customer and broker continued. 5 Is should be noted that the Monetary Bond Corporation never acted as broker, but always as dealer, and that there is no evidence that Craig, Ballantyne & Co. even acted as brokers for petitioners either prior to or subsequent to October 30, 1934.  Nor does the mere fact that O'Brien & Williams, Craig, Ballantyne & Co., and the Monetary Bond Corporation contracted to resell the bonds before they purchased the bonds from petitioners tend to show that the relationship between petitioners and the dealers was that of customer and broker.  There is no evidence to show that the sales to the dealers were colored by any secret understanding between the parties or that petitioners knowingly were connected in any way with the resales by the dealers to Wood, Struthers & Co.There is little merit to the arguments urged by respondent in support of the contention that the relationship between petitioners, on the one hand, and O'Brien & Williams, Craig, Ballantyne & Co., and the Monetary Bond Corporation, on the other hand, was that of customer and*1057  broker.  Respondent's main argument is that the manner in which each of the dealers computed the price at which it offered to purchase a block of bonds from the respective petitioner shows that the relationship was that of customer and broker.  Respondent points, first, to the fact that each dealer converted into Canadian funds the net amount to be received from Wood, Struthers & Co. for a block of bonds and then subtracted from the result the amount of a stamp tax due the Province of Quebec on the resale of the block of bonds to Wood, Struthers & Co. and the cost of transmitting the block of bonds to Wood, Struthers & Co.  These computations were necessary in order to enable the dealer to offer the respective petitioner a price for the block of bonds at which the dealer could realize a profit, and clearly do not support respondent's contention that the relationship was that of customer and broker.  Respondent points, next, to the fact that the dealer also subtracted from the net amount to be received from Wood, Struthers & Co. for the block of bonds a profit at the rate of $2.50 per thousand dollar bond, which rate of profit was 50 cents less than the normal rate of commission and*1058  was the same as the rate of commission charged by O'Brien & Williams with respect to the sales of bonds from April 30 to October 30, 1934, *217  inclusive.  The mere fact that the dealers' rate of profit was approximately the same as the normal rate of commission and the same as the rate of commission charged by O'Brien & Williams when it acted as broker for petitioners does not warrant an inference that the relationship was that of customer and broker.  See ; . It should be pointed out that the record shows that the dealers each decided that a profit at the rate of $2.50 per thousand dollar bond was a reasonable profit in view of the large quantity of transactions, and that petitioners had no knowledge as to the rate of profit realized by the dealers.  Respondent points with special emphasis to the fact that although petitioners delivered the bonds to, and received payment from, the dealers prior to the settlement date provided in the confirmation notices sent by Wood, Struthers & Co. to the dealers, petitioners received from the dealers the interest on the bonds from the last coupon date up to the settlement*1059  date provided in the confirmation notices sent by Wood, Struthers & Co. to the dealers.  However, the confirmation notices sent by the dealers to petitioners also contained the same settlement date which was contained in the confirmation notices sent by Wood, Struthers & Co. to the dealers, and thus, the fact that petitioners received from the dealers the interest on the bonds from the last coupon date up the settlement date provided in the confirmation notices sent by Wood, Struthers & Co. to the dealers does not give rise, per se, to any inference that the relationship was that of customer and broker.  Likewise, the facts clearly show that with respect to the sales of Japanese bonds during the period from January 4 to April 30, 1935, inclusive, the relationship between petitioners and the Bank of Montreal was that of customer and dealer, or, in other words, that of vendor and vendee.  The Bank of Montreal used the language "Confirmation of: - Purchase from the Royal Trust Company" in the confirmation notices sent to the Royal Trust Co. which acted as petitioners' broker; and though the Royal Trust Co. charged a commission to petitioners, there is no evidence to show that the*1060  Bank of Montreal charged a commission to petitioners. 6 Furthermore, an officer of the Royal Trust Co. testified that it was understood and intended that the relationship between petitioners and the Bank of Montreal was to be that of customer and dealer.  Even if the relationship between petitioners and the Bank of Montreal were that of customer and broker, there is no evidence to show that the Japanese bonds were sold in the United States either in the taxable year or at any other time.  *218  Respondent concedes that there is no direct evidence which tends to show that the relationship between petitioners and the Bank of Montreal was that of customer and broker or that the Japanese bonds were sold by the Bank of Montreal in the United States.  However, respondent points to the fact that the Japanese bonds were not listed on any Montreal exchange and to the fact that the Bank of Montreal paid slightly different prices for lots contained in each block of Japanese bonds purchased from petitioners.  From these facts respondent attempts to draw the inference that the*1061  Bank of Montreal, as broker, sold the Japanese bonds in the United States for petitioners' respective accounts.  The inference is too strained to warrant further consideration.  Since the American and Japanese bonds which petitioners sold during the period from October 30, 1934, to April 30, 1935, inclusive, were sold and delivered to dealers in Canada, the gains realized therefrom were income from sources outside the United States, and respondent erred in including such gains in petitioners' taxable gross income for the taxable year.  The second question is whether the gains realized by petitioners during the taxable year from the redemption of bonds of the New York Central & Hudson River Railroad were gross income from sources within the United States within the meaning of section 119 of the Revenue Act of 1934.  In their income tax returns for the taxable year petitioners reported the gains realized from the redemption of the bonds as gross income from sources outside the United States and did not include the gains in taxable gross income.  Respondent determined that the gains realized from the redemption of the bonds were gross income from sources within the United States and*1062  included the gains in taxable gross income.  Subsection (a) of section 119 provides that the following items of gross income shall be treated as gross income from sources within the United States: (1) Interests; (2) dividends; (3) compensation for personal services; (4) rentals and royalties; (5) gains, profits, and income from the sale of real property; (6) and gains, profits, and income from the sale of personal property.  In subsection (f) of section 119 it is provided that the word "sale" as used in section 119 includes the word "exchange." Subsection (e) of section 119 provides in part that items of gross income other than those specified in subsection (a) shall be allocated or apportioned to sources within or without the United States, under rules and regulations prescribed by the Commissioner with the approval of the Secretary.  Petitioners contend that the gains from the redemption of bonds were not gross income from sources within the United States because gross income from sources within the United States is limited *219  to the six items of gross income specifically mentioned in subsection (a) and because such gains were not gains from the sale or "exchange" of*1063  personal property within the scope of item sixth, subsection (a).  On the other hand, respondent contends that the gains from the redemption of the bonds were gross income from sources within the United States because gross income from sources within the United States is not limited to the six items of gross income specifically mentioned in subsection (a) and because such gains were gains from the "exchange" of personal property, as provided by section 117(f) of the Revenue Act of 1934, the pertinent provisions of which are set forth in the margin. 7Gross income from sources within the United States is not limited to the six items of gross income specifically mentioned in subsection (a).  , in which the Circuit Court stated that the comprehensive language of subsection (e) shows that Congress intended "to cover items of income other than those specifically mentioned*1064  in the previous subsections" and "to include in taxable income all income derived from sources within the United States." Moreover, the Board has held that gains from the redemption of bonds in the United States constitute gross income from sources within the United States.  , in which the Board stated with reference to section 217 of the Revenue Act of 1926, which corresponds to section 119 of the Revenue Act of 1934, in part as follows: Counsel for the petitioner argues, * * * that the profits arising from these transactions are not taxable to the petitioner under the provisions of section 217(a) of the Revenue Act of 1926, which defines income from sources within the United States, but does not include profits such as arose in this case.  However, the provisions of section 217(a) are not an all inclusive definition of income from sources within the United States for the purpose of determining the net income of nonresident alien individuals.  This is apparent from section 217(e), which provides that items of gross income, other than those specified in subdivision (a), shall be allocated or apportioned to sources within or without*1065  the United States, under rules and regulations prescribed by the Commissioner, with the approval of the Secretary.  Subdivision (e) contains also some specific provisions in regard to gains from the purchase and sale of personal property.  When section 217 is read as a whole and the rules and regulations prescribed by the Commissioner with the approval of the Secretary considered, articles 324 and 328 of Regulations 69, it is apparent that the profit from the transactions in question in this case must be considered to be income from sources within the United States.  Since the New York Central & Hudson River Railroad bonds were redeemed in the United States, the De Stuers case is controlling.  *220  Thus, the gains realized from the redemption of the bonds were gross income from sources within the United States, and respondent correctly included such gains in petitioners' taxable gross income for the taxable year.  In view of this conclusion, it is not necessary to pass upon respondent's contention that the gains from the redemption of the bonds were gains from the "exchange" of personal property, as provided in subsection (f) of section 117 of the Revenue Act of 1934. *1066  The final question is whether petitioners are subject to the surtax on personal holding companies imposed by section 351 of the Revenue Act of 1934.  Petitioners filed personal holding company returns for the taxable year.  As the result of the credit of 20 percent of adjusted net income and the credit for dividends paid during the taxable year, which credits are allowed by section 351, the returns each disclosed no undistributed adjusted net income and thus no liability for surtax under section 351. 8 Respondent determined deficiencies in surtax under section 351 as the result of including in petitioners' taxable gross income for the taxable year the gains realized from the sales of American and Japanese bonds and from the redemption of the bonds of the New York Central & Hudson River Railroad Co.  In an amended petition each petitioner alleges that during the taxable year it was a foreign corporation, having no office and transacting no business in the United States, and that during the taxable year all of its stock was owned by nonresident aliens; that Congress did not intend that a foreign corporation whose stock was owned entirely by nonresident aliens was to be subject to*1067  the surtax imposed by section 351; and that, therefore, the Commissioner erred in determining that it was subject to the surtax imposed by section 351.  In view of the conclusion that the gains realized by petitioners from the sales of American and Japanese bonds during the period from October 30, 1934, to April 30, 1935, inclusive, were not income from sources within the United States, it is not necessary to pass upon the question as to whether Congress intended that a foreign corporation *221  whose stock*1068  was owned entirely by nonresident aliens was to be subject to the surtax imposed by section 351.  Even if Congress intended, as respondent contends, that a foreign corporation whose stock was owned entirely by nonresident aliens was to be subject to the surtax imposed by section 351, the credit of 20 percent of adjusted net income and the credit for dividends paid during the taxable year would exceed the adjusted net income of each petitioner, and would result in no undistributed adjusted net income subject to surtax, under section 351, and thus, in no surtax liability.  This was conceded by respondent at the hearing and is pointed out by petitioners in their reply brief.  During the taxable year petitioners each incurred certain ordinary and necessary expenses in the conduct of their businesses, a ratable part of which expenses were deductible under section 232 of the Revenue Act of 1934 and article 119-10 of Regulations 86, the pertinent provisions of which are set forth in the margin. 9 None of the petitioners took a deduction for a ratable part of its expenses in its income tax return for the taxable year.  In determining the deficiencies respondent allowed each petitioner a*1069  deduction for a ratable part of its expenses, and in computing the ratable part of expenses respondent included the gains realized from the sales of the American and Japanese bonds during the period from October 30, 1934, to April 30, 1935, inclusive, as gross income from sources within the United States.  In view of the conclusion that the gains realized from the sale of the American and Japanese bonds during the period from October 30, 1934, to April 30, 1935, inclusive, were not gross income from sources within the United States, the ratable part of expenses allowed each petitioner as a deduction should be recomputed, as requested by respondent in an amended answer and also urged by petitioners in their briefs.  *1070 Decision will be entered under Rule 50.Footnotes1. An accepted check is a certified check.  See Ballantine, Law Dictionary (1930). ↩2. SEC. 231.  GROSS INCOME.  (a) GENERAL RULE. - In the case of a foreign corporation gross income includes only the gross income from sources within the United States. ↩3. See Meyer, The Law of Stockbrokers and Stock Exchanges, 1933 Cumulative Supplement, sec. 43-a, pp. 33-35.  See also Geo. S. Bates and Wm. O. Douglas, Stock "Brokers" As Agents and Dealers, 43 Yale Law Journal, pp. 46, 59-61. ↩4. See Meyer, The Law of Stockbrokers and Stock Exchanges, 1933 Cumulative Supplement, sec. 43-a, p. 35. ↩5. See Meyer, The Law of Stockbrokers and Stock Exchanges, 1933 Cumulative Supplement, sec. 43-a, p. 33. ↩6. See Meyer, The Law of Stockbrokers and Stock Exchanges, 1933 Cumulative Supplement, sec. 43-a, p. 34. ↩7. SEC. 117.  CAPITAL GAINS AND LOSSES.  * * * (f) RETIREMENT OF BONDS, ETC. - For the purposes of this title, amounts received by the holder upon the retirement of bonds * * * shall be considered as amounts received in exchange therefor. ↩8. SEC. 351.  SURTAX ON PERSONAL HOLDING COMPANIES.  (a) IMPOSITION OF TAX. - There shall be levied, collected, and paid, for each taxable year, upon the undistributed adjusted net income of every personal holding company a surtax * * * * * * (b) DEFINITIONS. - As used in this title - * * * (2) The term "undistributed adjusted net income" means the adjusted net income minus the sum of: (A) 20 per centum of the excess of the adjusted net income over the amount of dividends received from personal holding companies which are allowable as a deduction for the purposes of the tax imposed by section 13 or 204; * * * (C) Dividends paid during the taxable year. ↩9. SEC. 232.  DEDUCTIONS.  In the case of a foreign corporation the deductions shall be allowed only if and to the extent that they are connected with income from sources within the United States; and the proper apportionment and allocation of the deductions with respect to sources within and without the United States shall be determined as provided in section 119, under rules and regulations prescribed by the Commissioner with the approval of the Secretary.  ART. 119-10.  Apportionment of deductions.↩ - From the items specified in articles 119-1 to 119-6 as being derived specifically from sources within the United States there shall be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any other expenses, losses, or deductions which can not definitely be allocated to some item or class of gross income.  The remainder shall be included in full as net income from sources within the United States.  The ratable part is based upon the ratio of gross income from sources within the United States to the total gross income.