Continental Trading, Inc. v. Commissioner of Internal Revenue

Continental Trading, Inc. (Continental) (plaintiff) was a Panamanian corporation based in Mexico City. Continental filed an income-tax return in the United States in 1948, 1949, and 1950. Continental claimed in the returns that it was a resident foreign corporation engaged in trade or business in the United States. However, the Commissioner of Internal Revenue (the commissioner) (defendant) determined that Continental was not engaged in trade or business within the United States, which meant that Continental was subject to higher tax liability. The commissioner determined a deficiency in Continental’s tax returns for 1948, 1949, and 1950. Continental challenged the deficiency in tax court. The evidence before the tax court indicated that (1) Continental had a United States address in Nevada; (2) Continental qualified as a foreign corporation from 1948 to 1951; (3) Continental had no paid employees in the United States from 1948 through 1950; (4) Continental had no books of account in the United States but had bank records pertaining to various financial transactions in the United States; (5) Continental’s only United States assets were shares of stock in two companies and the balances of two bank accounts; (6) Continental’s primary activities in the United States between 1948 and 1950 included collecting stock dividends, paying principal and interest on outstanding loans, and engaging in financial transactions such as borrowing and transferring money, which Continental characterized on its tax returns as “investment”; (7) Continental bought and sold one carload of milk fat in the United States in 1948; (8) Continental purchased equipment for a Mexican company for which Continental was reimbursed without profit in 1950; and (9) Continental ordered and bought tin milk cans for another company owned by Continental’s president in 1948, 1949, and 1950. The tax court agreed with the commissioner that Continental had not been engaged in trade or business in the United States. The tax court noted that Continental’s primary activities in the United States during the relevant years concerned investment management, which did not constitute engagement in trade or business in the United States for tax purposes. The tax court further noted that Continental’s milk-fat, equipment, and milk-can transactions were isolated, had no business purpose, and were thus insufficient to constitute engaging in trade or business in the United States. Continental appealed.