## Facts

- Frank Handfield, a Canadian resident and nonresident alien for U.S. tax purposes, manufactured picture postcard products (“Folkards”) in Canada through a sole proprietorship.
- Handfield managed the business from Montreal and visited the United States four times during the fiscal year ending July 31, 1949, for a total of 24 business days.
- Handfield used American News Company, Inc., a U.S. distributor, under a letter agreement granting American News exclusive distribution in mutually agreed U.S. cities.
- The agreement set price points for distributor billing, “trade,” and retail sales, and permitted goods to be fully returnable.
- Handfield agreed to accept returns for credit of unsold cards regardless of condition and to bear shipping costs on shipments and returns.
- American News remitted payment to Handfield by checks sent to Canada; products were shipped from Canada into the United States.
- Handfield employed a U.S. resident, R. H. Hawken, who monitored American News vendors to ensure proper display of the cards in retail racks.
- The Commissioner determined a U.S. income tax deficiency for the fiscal year; Handfield petitioned for redetermination, disputing that he was engaged in a U.S. trade or business and, alternatively, disputing computations and deductions.

## Issues

1. Whether Handfield, a nonresident alien, was engaged in a trade or business within the United States during the fiscal year ending July 31, 1949, due to his distribution arrangement and related U.S. activities.
2. If Handfield was engaged in a U.S. trade or business, what deductions were allowable in computing net income effectively connected with that business.

## Decision

- The Tax Court held that the American News arrangement functioned as a consignment/agency relationship rather than an outright sale to a reseller.
- The court found that Handfield was engaged in a trade or business in the United States through the U.S. selling and distribution activities carried out on his behalf.
- The court sustained the deficiency determination in principle, subject to computational adjustments and allowance of deductions properly connected with the U.S. business.

## Legal Principles

- A purported distributor relationship may be treated as consignment/agency when contractual terms show the manufacturer retains ownership and bears the economic risks of unsold inventory.
- Broad return rights, an obligation to credit unsold goods, and manufacturer control over downstream pricing are strong indicia of consignment rather than completed sales.
- A nonresident alien can be engaged in a U.S. trade or business through activities of U.S.-based agents or representatives performing ongoing sales and market-maintenance functions.
- Once a nonresident alien is engaged in a U.S. trade or business, U.S.-connected business income is subject to U.S. tax, reduced by deductions that are properly allocable to that U.S. business.

## Conclusion

The Tax Court treated the distributor as Handfield’s consignee/agent based on returnability, price controls, and retained inventory risk, and concluded that his U.S. selling and support activities constituted a U.S. trade or business; the resulting U.S.-connected income was taxable with deductions allowed to the extent properly tied to that business.


Handfield v. Comm’r, 23 T.C. 633 (1955)