Gulf Oil Corp. v. Comm'r of Internal Revenue, Docket No. 22499-82.

Decision Date26 August 1986
Docket NumberDocket No. 22499-82.
Citation87 T.C. 548,87 T.C. No. 30
PartiesGULF OIL CORPORATION, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
CourtU.S. Tax Court

OPINION TEXT STARTS HERE

Afran, a wholly owned foreign subsidiary of P, in the normal course of business, chartered several tanker vessels to Gulftankers, another wholly owned foreign subsidiary of P. Charter hire rates between Afran and Gulftankers were established at the beginning of each year based upon estimates of the rate that would be charged in an arm's-length transaction. In 1975, P decided to consolidate its foreign marine operations. As a result, P caused Gulftankers to transfer all of its operating assets to Afran in exchange for a payment obligation from Afran before liquidating into P effective December 29, 1975. In January 1976, but prior to the close of the books for the taxable year 1975, the charter hire rate between Afran and Gulftankers was retroactively reduced by $8.8 million. This adjustment increased the net amount of the obligation given by Afran in return for the assets of Gulftankers. This obligation passed to P in the liquidation of Gulftankers and was satisfied by Afran in 1976. HELD: P received a constructive dividend as a result of the adjustment of the charter hire rates between its two foreign subsidiaries, Afran and Gulftankers.

Maritima, a Spanish subsidiary of P, agreed to sell an incomplete tanker with a cost of $53.2 million to Petronor, a 40-percent owned Spanish subsidiary of P, for the equivalent of $62.2 million. Petronor agreed to pay $7 million of Maritima's profit to Gulftankers in the form of increased freight rates for crude oil deliveries made to Petronor. Maritima received no consideration for agreeing to this arrangement. The $7 million profit was transferred to Afran as part of its purchase of all of the assets of Gulftankers. As a result of the liquidation of Gulftankers, P received the $7 million profit on the sale of the tanker when Afran subsequently satisfied its obligations incurred on the purchase of the assets of Gulftankers. HELD: P received a constructive dividend as a result of the diversion of the profit from the sale of the tanker to Gulftankers.

During the taxable years in issue, P and all of its domestic and foreign subsidiaries maintained a centralized cash management accounting system. All intercompany payables and receivables were recorded in the system and were ultimately reduced to a single balance either due from or owing to P by each of its subsidiaries. For periods in excess of one year, the balances in two of these accounts reflected a net payable from P to two of its foreign controlled subsidiaries. HELD: The payable balances in the cash management system constituted ‘an obligation of a United States person‘ within the meaning of section 956(b)(1)(C). HELD FURTHER: Increases in the payable balances owed by P to two foreign controlled subsidiaries represent earnings of a controlled foreign corporation invested in United States property at the close of the taxable year 1974 and dividend income to P. Secs. 951(a)(1)(B), 956(a)(1), I.R.C. 1954. J. Waddy Bullion, Emily A. Parker, Sean T. Crimmins, Buford P. Berry, J. Y. Robb III, and Margaret S. Alford, for the petitioner.

Joel V. Williamson and Joseph R. Goeke, for the respondent.

GOFFE, JUDGE:

The Commissioner determined deficiencies in petitioner's Federal income tax for the taxable year 1974 in the amount of $80,813,428 and for the taxable year 1975 in the amount of $166,316,320. Petitioner and respondent, by motion granted on November 10, 1983, agreed that certain issues would be severed and tried at a special trial session, which was held at Dallas, Texas.

One of the group of issues tried was designated by the parties as ‘Constructive Dividends and Payables.‘ This group requires the resolution of three issues: (1) did the retroactive adjustment of marine charter hire rates between two subsidiaries of Gulf result in a constructive dividend to Gulf; (2) did the diversion of a portion of the profit from the sale of an oil tanker ship by one subsidiary to another subsidiary by means of an increase in the marine freight rate charged by the second subsidiary to the buyer of the tanker result in a constructive dividend to Gulf; and (3) do the uncollected balances owed by Gulf to two of its foreign subsidiaries at the end of the taxable year 1974 constitute investment in United States property within the meaning of section 956, 1 resulting in dividend income to petitioner?

FINDINGS OF FACT

Some of the facts have been stipulated. The stipulation of facts and accompanying exhibits are so found and incorporated by this reference.

Gulf Oil Corporation (hereinafter referred to as petitioner or Gulf) is a corporation organized under the laws of the Commonwealth of Pennsylvania with its principal office in Pittsburgh, Pennsylvania. During the taxable years at issue, Gulf and certain of its subsidiary corporations constituted an ‘affiliated group‘ as that term is defined in section 1504. Petitioner, directly and through its foreign subsidiaries and affiliates, is engaged in world-wide exploration, development, production, purchase, transportation, and marketing of petroleum products. Petitioner maintained its books of account for the taxable years in issue on the accrual method of accounting using the calendar year as its taxable year. Gulf, as the common parent of an affiliated group of corporations, timely filed consolidated Federal income tax returns for its taxable years 1974 and 1975 on behalf of itself, and certain of its subsidiary corporations, with the Office of the Internal Revenue Service at Pittsburgh, Pennsylvania.

For convenience, we will set forth separate findings of fact for each of the three issues addressed in this opinion.

ADJUSTMENT OF FREIGHT RATES BETWEEN AFRAM AND GULFTANKERS

There are generally three types of chartering arrangements common in the marine transportation industry: bare boat charters, voyage charters, and time charters. Under a bare boat charter the vessel and the equipment necessary to make it seaworthy are delivered to the charterer in ‘bare‘ condition. The charterer must bear the costs of crew and supplies plus all voyage costs, which include the cost of fuel and port charges. Under a voyage charter the owner bears all capital, operating, and voyage costs and the charterer simply pays a single charge for the use of the vessel. Under a typical time charter the charterer, who must pay all voyage costs in addition to the charter rate, has use of the vessel for a period of time. The charter rate is quoted as a dollar figure per dead weight ton of the vessel per month.

A charter can be set between the parties for any length of time. Charters are generally classified as either long term, short term, or spot charters. A short-term charter is in effect for up to 2 years; a charter for a period of more than 2 years is considered to be long- term. A spot charter lasts only for the length of time it takes for the vessel to complete a specific voyage or voyages.

To assist in the communication and comparison of world-wide charter rates, the marine transportation industry developed the worldscale rate index approximately 25 years ago. Each worldscale rate is calculated by assuming a standard vessel and calculating all of the costs of that vessel for each route over which tankers operate in the world. The worldscale rates are adjusted semiannually by a group of London and United States tanker brokers to reflect current costs. To illustrate the usefulness of the worldscale rate index, assume a charterer desired to charter a tanker from Puerto La Cruz, Venezuela, to Philadelphia and was quoted a rate of ‘Worldscale 50,‘ a shorthand expression meaning 50 percent of the worldscale rate. In order to determine the actual cost of the charter, the charterer would consult the worldscale rate schedule. If the worldscale rate for this voyage was $4 per ton of cargo carried, expressed as 100 on the worldscale index, the charterer would know the rate he was being quoted was $2 per ton of cargo.

To further assist in the comparison of marine freight rates, the Average Freight Rate Assessment (AFRA) was developed. AFRA is a calculation by a group of London tanker brokers of actual average freight rates on a monthly basis. Stated in terms of worldscale index rates, AFRA is a composite figure that represents the weighted average rate of all charters currently in effect including long-term, short- term, and spot charters. AFRA is calculated separately for six size classes of vessels.

Both the worldscale rate and AFRA indices have become accepted tools in the industry. While the worldscale rate reflects an estimate of the costs of operating a vessel on a specified voyage, AFRA represents actual current charter rates. However, because the worldscale rate and AFRA reflect the cost of shipping one ton of freight, the indices must be converted into a dollar figure per dead weight ton of vessel so that they may be used to quote time charter rates. Furthermore, because both AFRA and worldscale rates include all costs of moving freight, voyage costs, including fuel and port charges, must be subtracted from these rates to approximate the appropriate rate for a time charter of a vessel.

During the taxable year 1974, Gulftankers, a Liberian corporation, and Afran, also a Liberian corporation, were both wholly owned subsidiaries of petitioner. During the taxable years in issue, Gulftankers and Afran were engaged in the marine transportation business. Afran owned, but did not operate, much of petitioner's oil tanker fleet. During the taxable years in issue, Afran was engaged in the business of time chartering tankers exclusively to Gulftankers, which operated the tanker fleet. Gulftankers, in turn, transported oil world-wide on behalf of Gulf subsidiaries and affiliates. However, as much as 25 percent of the gross income of...

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8 cases
  • Gulf Oil Corp.. v. Comm'r of Internal Revenue, Docket No. 22499-82
    • United States
    • United States Tax Court
    • 24 Noviembre 1987
    ...by order of the Chief Judge dated Nov. 24, 1987. 1 This is the final opinion on the severed issues. The other opinions are reported at: 87 T.C. 548 (1986) (Constructive Dividends and Payables); 87 T.C. 324 (1986) (Intangible Drilling and Development Costs); 87 T.C. 135 (1986) (Worthless Pro......
  • Schering-Plough Corp. v. U.S., Civ. Action No. 05-2575 (KSH).
    • United States
    • United States District Courts. 3th Circuit. United States District Courts. 3th Circuit. District of New Jersey
    • 28 Agosto 2009
    ...Jacobs Eng'g Group, Inc. v. United States, No. 96-2662, 1997 WL 314167, at *3 (C.D.Cal. Mar. 5, 1997) (citing Gulf Oil Corp. v. Comm'r, 87 T.C. 548, 571, 1986 WL 22015 (1986)). To credit plaintiff's position on the evidence before the Court would mean disregarding this pervasive legislation......
  • Jerry Lipps, Inc. v. Commissioner, Docket No. 11452-78
    • United States
    • United States Tax Court
    • 12 Junio 1990
    ...to another related corporation primarily for the personal benefit of the common controlling shareholder. Gulf Oil Corp. v. Commissioner Dec. 43,308, 87 T.C. 548, 565 (1986), on appeal (CA-3, Dec. 1, 1989); see Ross Glove Co. v. Commissioner, 60 T.C. at 595. Intercorporate transfers which ar......
  • Menard, Inc. v. Commissioner, Docket No. 673-02.
    • United States
    • United States Tax Court
    • 16 Septiembre 2004
    ...1972), affg. in part, revg. in part on another ground and remanding [Dec. 30,835(M)] T.C. Memo. 1971-145; Gulf Oil Corp. v. Commissioner [Dec. 43,308], 87 T.C. 548, 565 (1986); Rapid Elec. Co. v. Commissioner [Dec. 32,216], 61 T.C. 232, 239 (1973); Shedd v. Commissioner [Dec. 54,046(M)], T.......
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1 books & journal articles
  • Now what? Collateral consequences of transfer pricing adjustments.
    • United States
    • Tax Executive Vol. 47 No. 4, July 1995
    • 1 Julio 1995
    ...593 (5th Cir. 1971); Young & Rubicam v. United States, 410 F.2d 1233, 1238 (Ct. Cl. 1969). But see Gulf Oil Corp. v. Commissioner, 87 T.C. 548, 568 (1986) (suggests that avoiding tax constitutes direct benefit to common parent, but in non-arm's-length, non-section 482 setting). (29) 102......

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