National Carbide Corporation v. Commissioner of Internal Revenue Air Reduction Sales Co v. Commissioner of Internal Revenue Pure Carbonic v. Commissioner of Internal Revenue 153

• Decision Date: 28 March 1949
• Docket Number: Nos. 151,152,s. 151
• Citation: 10 A.L.R.2d 566,336 U.S. 422,93 L.Ed. 779,69 S.Ct. 726
• Parties: NATIONAL CARBIDE CORPORATION v. COMMISSIONER OF INTERNAL REVENUE. AIR REDUCTION SALES CO. v. COMMISSIONER OF INTERNAL REVENUE. PURE CARBONIC, Inc. v. COMMISSIONER OF INTERNAL REVENUE. , and 153
• Court: U.S. Supreme Court

336 U.S. 422

69 S.Ct. 726

93 L.Ed. 779

NATIONAL CARBIDE CORPORATION

v COMMISSIONER OF INTERNAL REVENUE.

AIR REDUCTION SALES CO.

v. COMMISSIONER OF INTERNAL REVENUE.

PURE CARBONIC, Inc.

v. COMMISSIONER OF INTERNAL REVENUE.

Nos. 151, 152, and 153.

Argued Jan. 6, 1949.

Decided March 28, 1949.

Mr. Erwin N. Griswold, of Cambridge, Mass., for petitioners.

Mr. Hilbert P. Zarky, of Washington, D.C., for respondent.

[Argument of Counsel from page 423 intentionally omitted] 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.

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 oper- ating 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.

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 only the six per cent 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 per cent 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, 69 S.Ct. 44, 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, 38 S.Ct. 540, 62 L.Ed. 1142.

Petitioners' contention is, in substance, that our decision in Moline Properties, Inc., v. Commissioner of Internal Revenue, 1943, 319 U.S. 436, 63 S.Ct. 1132, 1135, 87 L.Ed. 1499, 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 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 roperties, 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 em- ployed, 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.' (247 U.S. 330, 38 S.Ct. 543) The Southern Pacific case did not, and did not purport to rest on any principle of agency. The only reference to the subsidiary (Central Pacific) as an agent is made in this context:

'* * * the Central Pacific and the Southern Pacific were in substance identical because of the complete ownership and control which the latter possessed over the former, as stockholder and in other capacities. While the two companies were separate legal entities, yet in fact, and for all practical purposes they were merged, the former being but a part of the latter, acting merely as its agent and subject in all things to its proper direction and control.' 247 U.S. at page 337, 38 S.Ct. at page 542, 62 L.Ed. 1142. It is thus clear beyond doubt that the subsidiary was not referred to as an agent of the parent in the usual or technical sense. 'Agency' and 'practical identity,' as those words are used in the Southern Pacific case, are unquestionably opposite sides of the same coin.⁶ The close relationship between corporations because of com- plete ownership and control of one by the other was the basis for the result reached, whatever its articulation.

That basis has been repudiated by subsequent decisions of this Court. Whatever the vitality of Southern Pacific Co. v. Lowe on its special facts, we have held that 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—the important ingredients of the Southern Pacific case—are no longer of significance in determining taxability. Moline Properties, Inc., v. Commissioner, supra; Burnet v. Commonwealth Improvement Co., 1932, 287 U.S. 415, 53 S.Ct. 198, 77 L.Ed. 399.⁷

In both of the cases last cited, the agency argument now urged upon us was made and rejected. In both cases, Southern Pacific Co. v. Lowe, supra, was relied upon by the taxpayers. In both, we found that the contention that the corporation was the agent of its owner was simply the argument that the subsidiary had no corporate identity distinct from its stockholders in a different form. It is true that petitioners here do not ask that they be ignored completely for tax purposes. They are willing to pay taxes on the nominal amounts they retain as Airco's 'agents.' But this fact serves to emphasize the inapplicability of the Southern Pacific case, upon which they rely. There, as in Commonwealth Improvement Co. and Moline Properties cases, the decision turned upon the question whether the corporate entity was or was not to be completely ignored for tax purposes. If the Central Pacific had been accorded any tax status in the Southern Pacific case, it unquestionably would have been taxed on the entire income it received. In fact, it was so taxed upon all income received after March 1, 1913; only income received prior thereto was considered income of the parent directly.⁸

We think, therefore, that petitioners' argument is without merit because based on an erroneous interpretation of Southern Pacific Co. v. Lowe, supra. The agency argument, to quote the opinion in Moline Properties, 'is basically the same argument of identity in a different form * * * the question of agency or not depends upon the same legal issues as does the question of identity previously discussed.'⁹ Ownership of a corporation and the control incident thereto can have no different tax...