167 F.2d 304 (2nd Cir. 1948), 161, C.I.R. v. National Carbide Corp.

Docket Nº:161-163, 20749-20751.
Citation:167 F.2d 304
Party Name:COMMISSIONER OF INTERNAL REVENUE v. NATIONAL CARBIDE CORPORATION. SAME v. AIR REDUCTION SALES CO. SAME v. PURE CARBONIC. Inc.
Case Date:March 31, 1948
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit
 
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Page 304

167 F.2d 304 (2nd Cir. 1948)

COMMISSIONER OF INTERNAL REVENUE

v.

NATIONAL CARBIDE CORPORATION.

SAME

v.

AIR REDUCTION SALES CO.

SAME

v.

PURE CARBONIC. Inc.

Nos. 161-163, 20749-20751.

United States Court of Appeals, Second Circuit.

March 31, 1948

Hilbert P. Zarky, of Washington D.C., and Theron Lamar Caudle, Asst. Atty. Gen., Sewall Key, Lee A. Jackson, and George A. Stinson, Sp. Assts. to Atty. Gen., for petitioner.

John A. Wilson, of New York City (Shearman & Sterling & Wright and Harry W. Forbes, all of New York City, Raymond N. Beebe of Washington, D.C., and Willard M. L. Robinson, of New York City, of counsel), for respondents.

Before L. HAND, SWAN and FRANK, Circuit Judges.

L. HAND, Circuit Judge.

This case comes before us upon three petitions of the Commissioner to review orders of the Tax Court en banc, which expunged deficiencies in income, and declared value excess profits taxes assessed against the taxpayers. The Commissioner had assessed each of the three companies in question upon the theory that they had

Page 305

received incomes during the year 1938; but the Tax Court held that 'they were operated as branches or divisions' of their parent-the Air Reduction Company, Inc., of New York- and that for this reason their net income was taxable against it and not against them. This is the only issue involved, and the facts as found by the Tax Court were in substance as follows.

All the shares of each of the companies, as well as of a fourth not here involved, were owned by the Air Reduction Company, Inc., which we shall speak of as 'Airco, ' and which was engaged in four major fields of manufacture, in each of which it made use of one of the subsidiaries. One- Air Reduction Sales Company- extracted and sold the constituents of air; another- National Carbide Corporation- made and sold calcium carbide; a third- Pure Carbonic, Inc.- made carbonic acid gas which it sold in gaseous, liquid and solid forms; the fourth, manufactured electric welding machines and the like. We need not speak of the series of combinations, dissolutions and associations by which 'Airco' became the owner of the shares of the subsidiaries, because before 1938 the legal relations between them had been so simplified that each was operating under separate contracts, which were no nearly alike that one will serve as a pattern for all. The substance was as follows. The parent employed the subsidiary 'as its agent to manage and operate * * * all plants for the production' of the products assigned to that particular subsidiary, and for the 'manufacture of apparatus and containers' to transport the products; and it also employed the subsidiary 'as its agent to market and sell * * * the output of all such plants.' It agreed to give the subsidiary 'the use of all cylinders, containers, motor trucks, equipment, and shipping facilities which it now owns or may hereafter acquire * * * to supply such working capital' as the subsidiary might need; ' * * * to provide such executive management * * * and office accommodation and facilities as may be necessary for the proper conduct' of its business. In return, the subsidiary agreed 'to manage and operate * * * said plants, * * * to maintain the same in first class condition, * * * to distribute, market and sell the product manufactured, * * * to collect all * * * proceeds resulting therefrom, * * * to credit monthly on its books to Airco all profits * * * above an amount equal to six per cent (6%) per annum on its outstanding capital stock, which said amount it is hereby authorized to deduct and retain, and it hereby agrees to accept as full compensation for its services, ' and 'to pay over to Airco upon demand, any profits becoming due.' The accounts were kept strictly on this basis; 'Airco' furnished all the assets held or used by the subsidiaries, and paid for them out of its own treasury; the officers of each subsidiary were officers of 'Airco'; and the directors were directors of 'Airco, ' and never met except formally to ratify what had been done by the officers or directors of 'Airco.' One general main office in New York was maintained for all, and the direction and management of each was immediately conducted by 'Airco.' Upon this evidence the Tax Court found that the subsidiaries were merely 'the corporate agents of Airco and were operated as incorporated branches or divisions of Airco'; and that 'the income from the operations of petitioners which is in excess of six per cent of petitioners' outstanding capital stock belonged to and was the income and property of Airco as principal.' Upon this finding it held that the case fell within the decision of the Supreme Court in Southern Pac. Co. v. Lowe, 1 and our decision in Munson S. S. Line v. Commissioner, 2 and expunged the assessments. Three judges dissented.

The question when a...

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