## Facts

- Petitioners were U.K. residents treated as nonresident aliens for U.S. income tax purposes and owned shares of Olympic Portland Cement Co., Ltd., a U.K. corporation.
- Olympic was incorporated and managed in the United Kingdom, maintained its offices in London, and conducted corporate meetings there.
- Olympic owned property and conducted business in the United States, generating substantial U.S.-source income that was remitted to the United Kingdom and commingled with other corporate funds.
- Dividends were declared in the United Kingdom and paid to petitioners in the United Kingdom by checks drawn on Olympic’s British bank accounts; petitioners received and cashed the checks in the United Kingdom.
- Olympic did not segregate U.S.-derived earnings for dividend payments; dividends were paid from a pooled fund.
- The Commissioner determined deficiencies, treating the dividends as U.S.-source income under Revenue Act provisions applicable when a foreign corporation derived at least 50% of gross income from U.S. sources over a specified measuring period.
- Petitioners challenged the deficiencies, arguing the dividends were foreign-source because payment occurred abroad from foreign-held funds and, in any event, taxing them violated the Fifth Amendment’s Due Process Clause.

## Issues

1. Whether dividends paid abroad by a foreign corporation to nonresident alien shareholders are treated as U.S.-source income under the Revenue Acts when the corporation met the statutory threshold of deriving at least 50% of gross income from U.S. sources during the relevant period.
2. Whether imposing U.S. income tax on nonresident alien shareholders for such dividends violates the Fifth Amendment Due Process Clause when the dividends were declared, paid, received, and cashed outside the United States.

## Decision

- The Board of Tax Appeals held the dividends were properly treated as income from sources within the United States under the governing Revenue Act provisions and were taxable to the nonresident alien petitioners.
- The Board rejected the due process challenge, concluding the United States had a sufficient jurisdictional basis to tax dividend income connected to U.S. property and business activity.
- The Board sustained the Commissioner’s deficiency determinations.

## Legal Principles

- For federal income tax purposes, “source” may be determined by the cause or origin of the income rather than the place of payment or the location of bank accounts from which a dividend is paid.
- Congress may characterize dividends paid by a foreign corporation as U.S.-source income to nonresident alien shareholders based on an objective statutory test tied to the proportion of the corporation’s gross income derived from U.S. sources over a defined period.
- The commingling of U.S.-derived earnings with foreign funds and the foreign location of dividend declaration and payment do not prevent dividend income from being treated as U.S.-source when the statutory threshold is met.
- Taxing nonresident aliens on dividend income sufficiently connected to U.S. business and property does not violate Fifth Amendment due process solely because the shareholders are abroad and the distribution mechanics occur abroad.

## Conclusion

The Board of Tax Appeals upheld deficiencies taxing nonresident alien shareholders on dividends from a U.K. corporation because the dividends’ tax “source” was tied by statute to the corporation’s U.S.-derived earnings, and the United States could constitutionally tax that U.S.-connected income despite foreign declaration, payment, and receipt.


Forres v. Commissioner, 25 B.T.A. 154 (1932)