Korfund Co. v. Commissioner

Korfund Corporation (Korfund) (plaintiff) was a New York corporation that made and sold foundation materials, including vibration absorbers and cork plates. The primary concern in this case was a pair of noncompetition agreements by Korfund. A German citizen named Hugo Stoessel owned 925 of the 1,000 shares of stock in Korfund. A German entity, Emil Zorn Aktiengesellschaft (Zorn), was a corporation engaged in similar business, with Stoessel holding much and then later all of Zorn’s stock. Korfund entered into a contract with Zorn in which Zorn agreed not to compete with Korfund in the US or Canada or give any relevant data to a competitor through 1945 as well as provide technical or business advice to Korfund on request. In exchange, Korfund agreed not to furnish materials outside of US or Canada through 1945, except for certain specific Eastern European nations. Zorn was also to receive royalty payments for selling cork plates or vibration absorbers. Korfund also entered into a contract with Stoessel under which Stoessel agreed to be a consultant or adviser to Korfund until the end of 1939 for 10 percent of the net earnings of Korfund. Stoessel agreed not to act for competing businesses. The coming of World War II caused difficulties in both contracts, and disagreements regarding both contracts were ultimately resolved, with Korfund making a small payment to Zorn and Stoessel. A small amount was withheld for payment of withholding taxes, but the Commissioner of Internal Revenue (the commissioner) (defendant) found a deficiency, arguing that the income from sources within the US was taxable and had gone unpaid. Ultimately, Korfund disagreed, asserting that the agreements not to compete were sourced from Germany and, therefore, not taxable. Korfund argued that the income was paid for negative acts—agreement not to do certain actions—and that the individuals lived in Germany when they did not do the prohibited acts. The commissioner argued that had either Zorn or Stoessel breached their contracts, their place of performance would be in the US, so the agreements were sourced from the US and taxable.