336 U.S. 422 (1949), 151, National Carbide Corp. v. Commissioner

Docket Nº:No. 151
Citation:336 U.S. 422, 69 S.Ct. 726, 93 L.Ed. 779
Party Name:National Carbide Corp. v. Commissioner
Case Date:March 28, 1949
Court:United States Supreme Court

Page 422

336 U.S. 422 (1949)

69 S.Ct. 726, 93 L.Ed. 779

National Carbide Corp.



No. 151

United States Supreme Court

March 28, 1949

Argued January 6, 1949




1. Petitioners were wholly owned subsidiaries of a parent corporation which utilized them as operating companies in the manufacture and sale of products. They operated strictly in accord with contracts with the parent which provided, inter alia, that the subsidiaries were employed as agents of the parent, that the parent would furnish working capital, and that all profits in excess of six percent on their capitalization (which was nominal) would be paid to the parent. Title to the assets utilized by the subsidiaries was held by them, and advances by the parent of working capital were shown on the books of the subsidiaries as accounts payable to the parent.

Held: for purposes of federal income and excess profits taxes for the year 1938, income earned by the subsidiaries and paid over to the parent corporation was taxable to the subsidiaries, and not only to the parent corporation. Pp. 424-439.

2. A corporation formed or operated for business purposes must share the tax burden despite substantial identity, in practical operation, with its owner. Complete ownership of the corporation, and the control primarily dependent upon such ownership, are no longer of significance in determining taxability. P. 429.

3. So far as the basis for the result reached in Southern Pacific Co. v. Lowe, 247 U.S. 330, was the close relationship between corporations because of complete ownership and control of one by the other, that basis has been repudiated by subsequent decisions of this Court. Moline Properties, Inc. v. Commissioner, 319 U.S. 436; Burnet v. Commonwealth Improvement Co., 287 U.S. 415. Pp. 428-430.

4. Ownership of a corporation and the control incident thereto can have no different tax consequences when clothed in the garb of agency than when worn as a removable corporate veil. P. 430.

Page 423

5. So far as control is concerned, there is no difference in principle between that exercised by the parent over the subsidiaries in this case and that exercised by the sole stockholder of the corporation in the case of Moline Properties, Inc. v. Commissioner, supra. Pp. 433-434.

6. It makes no difference in this case that financing of the subsidiaries was carried out by means of book indebtednesses in lieu of increased book value of the subsidiaries' stock. Pp. 434-435.

7. That the contracts required the subsidiaries to pay to the parent all but a nominal amount of the profits does not make them "agency" contracts within the meaning of the decisions of this Court. Pp. 435-436.

8. While a corporation which performs the usual functions of an agent for its owner-principal may handle the latter's property and income without being taxable therefor, these subsidiaries are not true agents of, or trustees for, their parent. Pp. 437-439.

9. Where a corporation chooses to avoid the burdens of principalship by utilizing subsidiary corporations to conduct certain business activities, it cannot escape the tax consequence of that choice, no matter how bona fide its motives or longstanding its arrangements. Pp. 438-439.

167 F.2d 304, affirmed.

The Commissioner assessed against each of the petitioners deficiencies in income tax and declared value excess profits tax for 1938. The Tax Court determined that there were no deficiencies. 8 T.C. 594. The Court of Appeals reversed. 167 F.2d 304. This Court granted certiorari. 335 U.S. 810. Affirmed, p. 439.

Page 424

VINSON, J., lead opinion

MR. CHIEF JUSTICE VINSON delivered the opinion of the Court.

Petitioners are three wholly owned subsidiaries of Air Reduction Corporation (Airco). They seek a determination of the question whether deficiencies in income and declared value excess profits taxes for the year 1938 found by the Commissioner of Internal Revenue are properly chargeable to them. Their contention is that they are corporate agents of Airco, that the income from their operations is income of Airco, and that income and excess profits taxes must be determined on that basis.

[69 S.Ct. 728] By a series of combinations and dissolutions of previously acquired subsidiary companies, Airco had, prior to 1938, reduced the number of its subsidiaries to four. All operated strictly in accordance with contracts with Airco.1 The subsidiaries were utilized by Airco as operating

Page 425

companies in the four major fields of operation in which it was engaged. Air Reduction Sales Company carried on the manufacture and sale of the gaseous constituents of air; National Carbide Corporation, the manufacture and sale of calcium carbide; Pure Carbonic, Inc., the manufacture and sale of carbon dioxide, and Wilson Welder & Metals Co., the manufacture and sale of welding machines, equipment and supplies.2

The contracts between Airco and its subsidiaries provided, in substance, that the latter were employed as agents to manage and operate plants designed for the production of the products assigned to each, and as agents to sell the output of the plants. Airco was to furnish working capital, executive management, and office facilities for its subsidiaries. They, in turn, agreed to pay Airco all profits in excess of six percent on their outstanding capital stock, which, in each case, was nominal in amount.3 Title to the assets utilized by the subsidiaries was held by them, and amounts advanced by Airco for the purchase of assets and working capital were shown on the books of the subsidiaries as accounts payable to Airco. The value of the assets of each company thus approximated the amount owed to Airco. No interest ran on these accounts.

Page 426

Airco and its subsidiaries were organized horizontally into six overriding divisions: corporate, operations, sales, financial, distribution, and research. Officers heading each division were, in turn, officers of the subsidiaries. Top officials of Airco held similar positions in the subsidiary companies. Directors of the subsidiaries met only to ratify the actions of the directors and officers of Airco.

Airco considered the profits turned over to it by the subsidiaries pursuant to the contracts as its own income, and reported it as such. Petitioners reported as income [69 S.Ct. 729] only the six percent return on capital that each was entitled to retain. Similarly, in declaring the value of their capital stock for declared value excess profits tax purposes, the subsidiaries reported only the nominal amounts at which the stock was carried on the books of each. The Commissioner notified petitioners of substantial income and excess profits tax deficiencies in their 1938 returns, having taken the position that they are taxable on the income turned over to Airco as well as the nominal amounts retained. The Tax Court held, however, that the income from petitioners' operations in excess of six percent of their capital stock was income and property of Airco. 8 T.C. 594. Three judges dissented. The Court of Appeals for the Second Circuit reversed. 167 F.2d 304. We granted the petition for a writ of certiorari, 335 U.S. 810, because of this conflict of opinion and the disagreement between courts as to the continuing vitality of Southern Pacific Co. v. Lowe, 1918, 247 U.S. 330.

Petitioners' contention is, in substance, that our decision in Moline Properties, Inc. v. Commissioner, 319 U.S. 436 (1943), which held that the tax laws require taxation of the corporate entity if it engages in "business activity," expressly excepted the situation in which the corporation is the agent of its owner; that Southern Pacific Co. v.

Page 427

Lowe, supra, defines the content of "agency" for tax purposes, and that, as the Tax Court found, this Court's characterization of the relationship between the corporations in the Southern Pacific case is "aptly descriptive" of the relationship between Airco and petitioners. It must follow, according to petitioners, that income received by them and transmitted to Airco is taxable only to Airco.

Respondent does not quarrel with the first and third propositions. The collision occurs at the second. The issue as presented by petitioners is therefore whether the principal-agent relationship described in the Southern Pacific case -- and the similar arrangement between Airco and petitioners -- contains the "usual incidents of an agency relationship," as that phrase was used in Moline Properties, Inc. v. Commissioner, supra.

Petitioners' contention that the Southern Pacific case established a concept of agency that has survived our later decisions may be dealt with rather summarily. That case treated income earned by a wholly owned subsidiary before March 1, 1913, the effective date of the Income Tax Act of 1913, as having accrued to its parent prior to that date despite the fact that the actual transfer of funds by declaration of dividends occurred subsequent thereto. The theory of the case was that the two corporations could be treated as identical, for the purposes of the 1913 Act, because of the complete domination and control exercised by the parent over its subsidiary.

By this decision, this Court is said to have "looked beyond the corporate form,"4 and "ignored the separate entity of a corporation."5 Whatever the dialectics employed,

Page 428

courts and commentators have agreed that parent and subsidiary were treated as one corporation for the purposes of the taxes there in question; transfer of earnings to the parent was merely "a paper transaction." The Southern Pacific case did not, and did not purport to rest on any principle of agency. The only...

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