## Facts

- Israel Balanovski (80%) and Samuel Bernardo Horenstein (20%) were partners in an Argentine partnership, Compania Argentina de Intercambio Comercial (CADIC), trading in trucks and heavy equipment.
- Balanovski, an Argentine citizen, came to the United States in late 1946 to conduct partnership business and remained for most of 1947, completing extensive transactions that generated approximately $7.76 million in partnership profits.
- CADIC’s transactions involved obtaining offers from U.S. suppliers, relaying them to Horenstein in Argentina, and reselling at a markup to an Argentine government agency (IAPI); upon IAPI’s acceptance, Balanovski accepted the corresponding U.S. supplier offers.
- Payment and documentation were routed through New York: IAPI opened letters of credit in Balanovski’s favor at New York banks; Balanovski assigned portions to suppliers; suppliers drew drafts with commercial invoices billing Balanovski and shipping/warehouse documents issued in the bank’s name for IAPI’s account, with insurance covering delivery F.O.B. New York City.
- Certain suppliers paid “quantity discounts” or commissions to Balanovski as part of the profits from these deals.
- As he prepared to leave the United States, Balanovski filed a departing alien return reporting no U.S.-source income.
- The United States assessed 1947 income taxes and interest against the partners and sued in the Southern District of New York to recover the taxes and foreclose federal tax liens against CADIC funds held in New York bank accounts.
- Defendants were served in Argentina and, additionally, service was made in New York on a person treated as Balanovski’s agent; defendants challenged jurisdiction and service.

## Issues

1. Whether the district court could exercise in personam and/or quasi-in-rem jurisdiction over nonresident alien partners and partnership funds in New York based on the asserted service methods and the location of the bank accounts.
2. Whether CADIC, through Balanovski’s activities in New York, was “engaged in trade or business within the United States” for federal income tax purposes in 1947.
3. Whether the profits (including supplier discounts/commissions) from the 1947 transactions were income from sources within the United States taxable to the partners on their distributive shares.
4. Whether the district court understated the amount recoverable by the United States and improperly excluded portions of the partnership profits from U.S. taxation.

## Decision

- The Second Circuit sustained federal jurisdiction to enforce the tax liabilities and reach CADIC’s New York bank funds.
- The court held that CADIC was engaged in a U.S. trade or business through Balanovski’s substantial, continuous commercial activities in New York during 1947.
- The court held that the partnership profits from the transactions—including relevant discounts and commissions tied to the New York-centered sales and financing—constituted U.S.-source income taxable to the partners.
- On the government’s cross-appeal, the court ruled the district court’s recovery was insufficient and reversed on the United States’ appeal to increase the tax recovery.

## Legal Principles

- A foreign partnership may be “engaged in trade or business within the United States” when a partner’s in-country activities are substantial and constitute core business functions (negotiation/acceptance, execution of sales, control of financing and delivery terms), not merely incidental tasks.
- When a partnership is engaged in a U.S. trade or business, nonresident alien partners may be taxed on their distributive shares of the partnership’s U.S.-source income.
- Source-of-income analysis for trading profits turns on where the profit-producing sales and related commercial acts occur, including the place where title/risk passes and where payment and documents of title are handled.
- Funds held in domestic bank accounts that are partnership property may be subjected to federal tax lien enforcement in an action seeking collection of assessed federal taxes.

## Conclusion

The Second Circuit concluded that CADIC’s 1947 profits were generated through a U.S.-based trading business carried out by a partner operating in New York, making the income U.S.-source and taxable to the nonresident partners; it also approved reaching CADIC’s New York bank funds to satisfy tax liens and increased the government’s recovery on cross-appeal.


United States v. Balanovski, 236 F.2d 298 (2d Cir. 1956)