8 T.C. 594 (1947), 5822, National Carbide Corp. v. C.I.R.

Docket Nº:5822, 5823, 5824.
Citation:8 T.C. 594
Opinion Judge:BLACK, Judge:
Party Name:NATIONAL CARBIDE CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. AIR REDUCTION SALES CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. PURE CARBONIC, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Attorney:John A. Wilson, Esq., Willard M. L. Robinson, Esq., and Winfield A. Huppuch, II, Esq., for the petitioners. James C. Maddox, Esq., for the respondent.
Judge Panel:VAN FOSSAN, ARNOLD, and OPPER, JJ., dissent.
Case Date:March 25, 1947
Court:United States Tax Court
 
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Page 594

8 T.C. 594 (1947)

NATIONAL CARBIDE CORPORATION, PETITIONER,

v.

COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

AIR REDUCTION SALES CO., PETITIONER,

v.

COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

PURE CARBONIC, INC., PETITIONER,

v.

COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Nos. 5822, 5823, 5824.

United States Tax Court.

March 25, 1947

Petitioners are wholly owned subsidiaries of a parent corporation organized in 1915. During the taxable year 1938 and for many years prior thereto petitioners operated under separate contracts with the parent to act as the parent's agent in managing, operating, and selling the products from the plants turned over to them by the parent for that purpose. Under these contracts the subsidiaries agreed to credit monthly to the parent all profits accruing from the operation of such plants over and above an amount equal to 6 per cent on their outstanding capital stock, which in the case of each subsidiary was a very nominal amount. The parent agreed to furnish all the necessary working capital and to provide such executive management as might be necessary for the proper conduct of the businesses. Petitioners were operated as branches or divisions of the parent corporation. Held, the income earned under each of these contracts in excess of the 6 per cent of the outstanding capital stock of each subsidiary, respectively, belonged to and was the income of the parent corporation as principal, and was not, therefore, taxable to petitioners. Southern Pac. Co. v. Lowe, 247 U.S. 330, followed. Interstate Transit Lines v. Commissioner, 319 U.S. 590, distinguished.

John A. Wilson, Esq., Willard M. L. Robinson, Esq., and Winfield A. Huppuch, II, Esq., for the petitioners.

James C. Maddox, Esq., for the respondent.

These proceedings, consolidated for hearing, involve deficiencies in income tax and declared value excess profits tax for the taxable year ended December 31, 1938, in amounts as follows:

Petitioner Docket No. Income tax Declared

value excess

profits tax

National Carbide Corporation 5822 $122,285.56 $101,019.08

Air Reduction Sales Co 5823 439,347.98 364,076.24

Pure Carbonic, Inc 5824 21,663.71 17,860.53

The deficiencies in Docket Nos. 5822 and 5823 are due to adjustments to net income as follows:

Docket No. Docket No.

5822 5823

Net income as disclosed by return $300.00 $750.00

Unallowable deductions and additional income: (a) Additional income 881,244.30 3,314,141.10

Total 881,544.30 3,314,891.10

Nontaxable income and additional deductions:

(b) Capital stock tax 4.00 8.00

(c) Expenses of Air Reduction Co 39,214.78 279,914.57

Net income adjusted 842,325.52 3,034,968.53

Page 595 In Docket No. 5922 the respondent, in a statement attached to the deficiency notice, explained adjustments (a) and (c) as follows: (a) and (c) All of your capital stock is owned by Air Reduction Company, Inc., and, on your return, all of your net income in excess of $300.00 was deducted and allocated to the parent company on the theory that you were an agent for said company. It is held that as a corporate entity, operating as such, you are taxable on your separate income. Such expenses as were paid or accrued by Air Reduction Company, Inc., attributable to your operations have been allocated to you under section 45 of the Revenue Act of 1938. In Docket No. 5823 the respondent made an identical explanation of adjustments (a) and (c), except that he mentioned therein $750 instead of $300.00. The deficiencies in Docket No. 5824 are due to adjustments to net income as follows:

Net income as disclosed by return $300.00

Unallowable deductions and additional income:

(a) Additional income 157,595.25

(b) Amortization of contract rights 23,137.02

(c) Legal fees 46,291.50

____________________

Total 227,323.77

Nontaxable income and additional deductions:

(d) Capital stock tax 4.00

(e) Expenses of Air Reduction Co. 77,982.18

____________________

Net income adjusted 149,337.59

In Docket No. 5824 the respondent, in a statement attached to the deficiency notice, explained adjustments (a) and (e) in the same manner as he explained adjustments (a) and (c) in Docket No. 5822. He also explained adjustments (b) and (c), respectively, as follows: (b) This adjustment corresponds with that made in the amended return filed by you and is detailed in the copy of the report furnished you. (c) The payment of $35,000.00 plus legal fees of $11,291.50 or a total of $46,291.50 in connection with the acquisition of 100 shares of capital stock of Braunstein Bros. Carbonic Sales Corporation constitutes a capital expenditure not deductible from income. Petitioners, by appropriate assignments of error, contest all of the above mentioned adjustments in all three dockets except the three small capital stock tax adjustments. FINDINGS OF FACT. Each of the three petitioners is a Delaware corporation, with its principal office at 60 East 42d Street, New York City. The return of each petitioner for the taxable year ended December 31, 1938, was filed with the collector for the third district of New York. All of the capital stock of each petitioner is, and during the taxable Page 596 year and prior thereto was, owned by the Airco Reduction Co., a New York corporation. This latter corporation is sometimes referred to herein as Airco. Petitioners are sometimes referred to herein respectively as Carbide, Sales, and Carbonic. Airco also owned all of the capital stock of Wilson Welder & Metals Co., sometimes referred to herein as Welder. These five corporations are sometimes referred to herein as all the companies. In 1938 Airco was engaged in four major fields of business activity and employed the agency companies in each field as follows: Air Reduction Sales Co.— The manufacture and sale of gaseous constituents of air, principally oxygen and nitrogen, but also the rare gases, argon, neon, zenon, krypton, and helium; acetylene produced by the action of water on calcium carbide and used together with oxygen in the oxyacetylene gas welding and cutting processes; hydrogen produced by the electrolysis of water and used in annealing and welding metals; tools and apparatus for the utilization of these gases; and containers for the transportation of acetylene gas. National Carbide Corporation.— The manufacture and sale of calcium carbide obtained by fusing limestone and coke in an electric furnace, and used by Airco to supply its own requirements for making acetylene gas and, in part, for sale to customers for the manufacture of acetylene. Pure Carbonic, Inc.— The manufacture and sale of carbon dioxide in gaseous and liquid form (carbonic acid gas) and in solid form (dry ice), and apparatus for their utilization and transportation. In liquid and gaseous form carbon dioxide is used primarily in the carbonation of beverages and in solid form as dry ice for refrigeration. Wilson Welder & metals Co. (not a petitioner herein).— The manufacture, assembly, and sale of electric arc welding machines, welding rods, equipment, and supplies. Carbide on page 1 of its return (Form 1120A) for the taxable year reported $300 as its gross and net income, respectively, with the notation ‘ See Schedule 'Q’ attached.‘ This schedule, among other things, stated: NATIONAL CARBIDE CORPORATION THE FOLLOWING IS A STATEMENT OF AGENCY OPERATIONS OF NATIONAL CARBIDE CORPORATION FOR THE YEAR ENDED DECEMBER 31, 1938 National Carbide Corporation, whose entire outstanding capital stock (nominal in amount) is owned by Air Reduction Company, Incorporated, operates exclusively under an agency agreement in the conduct of the business and the holding of certain assets as nominee of Air Reduction Company, Incorporated. This agreement was originated on or about the date of incorporation. For this service the nominee receives $300.00 per annum, representing 6% on its outstanding capital stock. Accordingly, the results of this agency operation are included in the tax return of Air Reduction Company, Incorporated. A copy of the operating Page 597 agreement aforementioned was filed with the U.S. Treasury Department Internal Revenue Service as a part of the Federal Income and Excess-Profits Tax return for the year ended December 31, 1934.

Gross Income

[Here Carbide itemized several items of gross income, totaling $1,430,523.76.]

Total Income $1,430,523.76

Deductions

[Here Carbide itemized several items of deductions such as compensation of officers, rent, repairs, bad debts, taxes, depreciation, selling expense, distribution expense, administration expense, etc., totaling $548,979.46.]

Total Deductions 548,979.46

Book and Taxable Net Income before estimated Federal income tax 881,544.30

Estimated Federal income tax 167,455.92

Net income after estimated Federal income tax 714,088.38

Amount transferred to Air Reduction Company, Incorporated in accordance with agency agreement above 713,788.38

Net amount retained per agreement $300.00

Sales on page 1 of its return (Form 1120A) for the taxable year reported $750 as its gross and net income, respectively, with the notation ‘ See Schedule 'Q’ attached.‘ This schedule follows the same pattern as the one filed by Carbide...

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