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The only criterion for imposing the tax on nonresident aliens is that the "source" of the income to be taxed must be within the United States. The "source" of income in this connection is not necessarily the payor, but may be the property or the services from which the particular income is derived as indicated in I.R.C. § 119.
Plaintiff foreigner entered into a contract with a Swiss company to market and sell a synthetic vitamin that he invented. Under the contract, the plaintiff foreigner received a percentage of the net proceeds of sales. Thereafter, the Swiss company entered into a contract with an American company whereby the American company was granted exclusive use of the scientific developments. The American corporation withheld and paid United States income taxes on the plaintiff foreigner’s behalf. The plaintiff foreigner filed suit against the government to recover federal income taxes which he alleged were erroneously and illegally assessed and collected from him for the years 1941 to 1946. The plaintiff foreigner argued that payments made to him by an American corporation were for services performed outside of the United States and therefore did not provide a basis for the imposition of a United States income tax.
Did the payments made by the American corporation to the plaintiff foreigner constitute income to the individual from sources within the United States for the purposes of the income tax imposed by § 211 (a) ( 1) (A) of the Internal Revenue Code of 1939?
The court entered judgment in favor of the foreigner. The court reasoned that the Swiss company was the owner of the commercial rights in the foreigner's discovery, and the foreigner's only interest in the vitamin sales arose out of its contractual relationship with the Swiss company. As such, all payments under the Swiss participation contracts to the foreigner were payments of compensation for services rendered in Switzerland, and were not taxable.