## Facts

- Paul Karrer, a Swiss citizen and University of Zurich chemistry professor, lived and worked in Switzerland and was not engaged in a U.S. trade or business during the years in question.
- Beginning in 1934, Karrer performed vitamin-related research with financial support from a Swiss corporation, F. Hoffmann-La Roche & Co. Ltd. (Basle).
- Under Swiss law, the parties’ correspondence created a “special employment” arrangement under which Basle owned patents arising from Karrer’s research and agreed to pay Karrer a percentage of sales proceeds (5% for vitamin B-2 and 3% for vitamin E).
- Basle later granted a U.S. affiliate, Hoffmann-La Roche, Inc. (Nutley), exclusive rights to use Basle’s processes in the United States.
- To satisfy U.S. patent formalities, Karrer applied for U.S. patents at Basle’s request and expense and assigned them to Nutley before issuance; the patents issued to Nutley.
- Nutley paid Karrer amounts calculated by the percentages in the Basle-Karrer arrangement and recorded the payments as “royalties.”
- For 1941–1945, Nutley paid approximately $200,000 in U.S. income taxes on Karrer’s behalf on these payments.
- Karrer filed a refund action seeking $201,504.88 in taxes assessed and collected for 1941–1946, contending the payments were not taxable U.S.-source income to a nonresident alien.

## Issues

1. Whether payments made by a U.S. corporation to a nonresident alien, computed as a percentage of U.S. sales and connected to U.S. patent filings, constituted “income from sources within the United States” taxable under I.R.C. § 211(a)(1)(A) (1939).
2. Whether the payments were properly characterized as U.S.-source royalties for the use of U.S. patents/processes or as foreign-source compensation for services performed abroad.

## Decision

- The Court of Claims entered judgment for Karrer.
- The court held the payments were not “income from sources within the United States” within § 211(a)(1)(A).
- The court characterized the payments as compensation for research services performed in Switzerland, not royalties for the use of U.S. income-producing property.
- As a result, the taxes assessed and collected on the payments were refundable.

## Legal Principles

- For nonresident aliens, federal income tax under § 211(a)(1)(A) (1939) applies only to specified categories of income from sources within the United States.
- Income characterized as compensation for services is generally sourced to the place where the services are performed.
- Royalty income is generally sourced to the place where the underlying property is used, but characterization depends on the substance of the parties’ relationship and rights, not merely labels in accounting records or formal patent-filing mechanics.
- Where applicable foreign law and the parties’ arrangement establish an employment/service relationship and foreign ownership of resulting industrial property, payments tied to U.S. sales may remain foreign-source service compensation even if routed through a U.S. payer and associated with U.S. patents.

## Conclusion

The Court of Claims held that payments to a Swiss researcher, though measured by U.S. sales and paid by a U.S. affiliate, were foreign-source compensation for services performed abroad rather than U.S.-source royalties; therefore, the United States could not tax the payments to the nonresident alien under § 211(a)(1)(A), and a refund was awarded.


Karrer v. United States, 152 F. Supp. 66 (Ct. Cl. 1957)