## Facts

- Piedras Negras Broadcasting Co. was a Mexican corporation operating a radio broadcasting station in Piedras Negras, Mexico, across the border from Eagle Pass, Texas.
- The company earned revenue by disseminating advertising and renting broadcasting facilities (“selling radio time”).
- All income-producing contracts were executed in Mexico, and all services required under the contracts were performed in Mexico.
- Broadcasts originated from the station’s Mexican facilities and were heard in the United States and elsewhere.
- Most listener responses came from the United States, and approximately 95% of revenue came from advertisers located in the United States.
- The company maintained a mailing address in Eagle Pass, Texas, and used a hotel room there to receive, count, and allocate mailed payments.
- U.S. advertising business was handled through an advertising agent characterized as an independent contractor.
- The company maintained bank accounts in Texas and Mexico, but kept its books and records and its only studio in Mexico.
- The Commissioner asserted deficiencies in income and excess profits taxes for 1936–1937, claiming the company had “income from sources within the United States.”

## Issues

1. Whether a foreign corporation’s advertising revenue constitutes “income from sources within the United States” when contracts and broadcasting services occur in Mexico but advertisers and listeners are primarily in the United States.
2. Whether limited U.S. contacts (mailing address, hotel room for payment processing, U.S. bank account, and an independent agent) establish U.S.-source income under the Revenue Act of 1936.

## Decision

- The Fifth Circuit affirmed the Board of Tax Appeals’ decision for the taxpayer.
- The court held that none of the company’s 1936–1937 broadcasting income was from sources within the United States under the Revenue Act of 1936.
- The court treated the relevant source inquiry as tied to where the income-producing services were performed and where the income-producing facilities were located and used.
- The court concluded that U.S. audience reach, U.S. advertisers, and ancillary U.S. administrative activities did not convert the income into U.S.-source income.

## Legal Principles

- For foreign corporations, U.S. taxation under the Revenue Act of 1936 applies only to “gross income from sources within the United States.”
- In determining source under statutory categories such as compensation for services and rentals/royalties, the source generally turns on where the services are performed and where the relevant property or facilities are located and used.
- Customer location, payor location, and economic effects in the United States do not by themselves establish U.S.-source income when the income-producing activities and facilities are located and operated abroad.
- Incidental U.S. contacts (payment collection logistics, banking arrangements, and use of an independent agent) are insufficient, without more, to recharacterize foreign-performed broadcasting activities as a U.S.-source business for source-of-income purposes.

## Conclusion

The court held that the Mexican broadcaster’s advertising and “radio time” revenue was foreign-source because its contracts and broadcasting operations were carried out in Mexico, and its limited U.S. connections and U.S.-based advertisers and listeners did not make the income taxable as U.S.-source income for 1936–1937.


Commissioner v. Piedras Negras Broad. Co., 127 F.2d 260 (5th Cir. 1942)