Vetco Inc. & Subsidiaries v. Comm'r of Internal Revenue
| Decision Date | 29 November 1990 |
| Docket Number | Docket No. 45506-86. |
| Citation | 95 T.C. No. 40,95 T.C. 579 |
| Parties | VETCO INC. AND SUBSIDIARIES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
VI is a wholly owned Swiss subsidiary of VE, a California corporation. VI is a controlled foreign corporation (CFC) within the meaning of sec. 957(a). VO is a wholly owned U.K. subsidiary of VI. VI, under license from VE, sold pipe connectors for use on offshore oil drilling equipment. Most of the pipe connectors sold by VI were manufactured by I, an unrelated West German company. The connectors were shipped to VO's plant located in Aberdeen, Scotland, where VO would weld them to pipe and store the pipe assembly until it was shipped to VI's customers, which were unrelated oil companies. VO billed VI for the cost of its services plus a markup of 5 percent. HELD, the wholly owned subsidiary VO is not a ‘branch or similar establishment‘ of VI, a CFC, within the meaning of sec. 954(d)(2). Ashland Oil, Inc. v. Commissioner, 95 T.C. 348 (1990), followed. HELD FURTHER, we do not address whether sec. 954(d)(1) by itself applies because it was not raised by the parties. John W. Armagost and Paul L. Freese, for the petitioner.
John O. Kent and Kim A. Palmerino, for the respondent.
By notice of deficiency dated October 2, 1986, respondent determined the following deficiencies in and addition to petitioner's Federal income tax:
+-------------------------------------+
¦ ¦Addition to tax ¦
+-------+-----------------------------¦
¦TYE ¦Deficiency ¦Sec. 6653(a) 1 ¦
+-------+------------+----------------¦
¦4/30/74¦$289,885 ¦$14,494 ¦
+-------+------------+----------------¦
¦4/30/75¦8,664,734 ¦--- ¦
+-------------------------------------+
Respondent also determined that interest on the deficiency for taxable year ended April 30, 1975, is to be computed under section 6621(c) (formerly section 6621(d)).
After concessions, 2 the issues for decision are: (1) whether the wholly owned United Kingdom subsidiary of a Swiss controlled foreign corporation (CFC) is a branch or similar establishment within the meaning of the branch rule of section 954(d)(2); and if so, (2) whether the United Kingdom subsidiary was engaged in manufacturing so as to result in subpart F income to the Swiss CFC by operation of the section 954(d)(2) branch rule.
Some of the facts of this case have been stipulated and are so found. The stipulation of facts, together with the exhibits attached thereto, is incorporated herein by this reference.
VETCO, Inc. (hereinafter referred to as VETCO or petitioner), was incorporated under the laws of the State of California. Petitioner's principal place of business was in Ventura, California, when it filed its petition in this case.
During the years at issue, VETCO was involved in engineering, manufacturing, marketing, and selling proprietary equipment for worldwide use in exploratory and development drilling, and in the production of offshore oil and gas, primarily in connection with floating drilling rigs in deep water applications. VETCO also provided tubular inspection and anti-corrosion coating services for the petroleum industry, as well as general petroleum industry sales and services. These activities were carried on domestically by VETCO's subsidiaries and sales offices located in California, Texas, and Louisiana, as well as internationally in Australia, Brazil, Canada, England, France, Holland, Italy, Japan, Nigeria, Scotland, Singapore, South Africa, Switzerland, and West Germany. For the years at issue, the United Kingdom's corporate income tax rate exceeded Switzerland's.
During the years at issue, VETCO's group of proprietary products included specialty connectors which had been designed and manufactured 3 for offshore drilling use to facilitate the connection of steel pipe products in a minimum amount of time. The pipe sizes suitable for connection with the specialty connectors ranged from 20 to 183 centimeters in diameter. VETCO sold the connectors either as separate items or welded to a length of pipe.
This case involves VETCO's specialty connectors and centers on the activities and relationships of a United Kingdom subsidiary of VETCO's wholly owned Swiss holding company. The United Kingdom subsidiary maintained facilities in Aberdeen, Scotland, which, during the years at issue, served as a principal service and supply depot for oil drilling activity in the North Atlantic Ocean.
In October 1968, VETCO exercised an option to acquire all the stock in Oelfeld Bohrgestange-Dienst, A.G. (OBD), a privately held Swiss company, in exchange for VETCO common stock. OBD was organized in 1961 and engaged in the European sales of oil field materials, including tungsten carbide and weld wire. The owners of OBD were family members of the principal owners of VETCO. Prior to its acquisition by VETCO, OBD had organized a wholly owned United Kingdom subsidiary, Oilfield Tubular Service Company, Limited (OTS). OBD organized OTS to perform nondestructive tubular goods inspection services under a license from an unrelated U.S. corporation, AMF- Tuboscope, Inc. After its acquisition by petitioner, OBD's name was changed to Vetco International, A.G. (VIAG), and OTS's name was later changed to Vetco Offshore, Limited (VOL).
During the years at issue, VIAG was classified as a Swiss holding company and, as such, it had no employees but paid Swiss Federal and cantonal income taxes. In order to maintain VIAG's preferential Swiss tax status, Vetco Management, A.G. (Vetco Management) was formed in Switzerland for the purpose of performing operating functions (on behalf of VIAG) for which VIAG, and all other subsidiaries of petitioner, paid management fees. Vetco Management employed from 12 to 18 people during the years at issue.
When petitioner acquired VIAG in 1968, oil exploration and discovery was under way in the North Sea. VIAG, under license from VETCO, sold oil drilling equipment and other products designed and manufactured by VETCO for use in the North Sea. The products sold included pipe and pipe connectors. VETCO designed the pipe connectors, and from 1968 throughout the years at issue, VIAG had them machined from raw forgings by ITAG, an unrelated (within the meaning of section 954(d)(3)(A)) West German company located in Celle, West Germany. ITAG machined the connectors pursuant to its 1968 agreement with VIAG. The raw forging material consisted of a block of steel purchased by ITAG in accordance with VETCO's metallurgical specifications and standards. The most costly material in the process was the pipe to which the machine connectors were precision welded in accordance with VETCO's specifications.
During the years at issue, VOL maintained a facility in Aberdeen, Scotland, near the North Sea oil drilling sites. VOL,s facility was capable of providing welding, grinding, beveling, inspection, repair, and storage services. VOL stored VIAG's pipe connectors in its Aberdeen facility. During 1974 and 1975, machine tools were delivered to VOL's Aberdeen plant which gave VOL the capability of machining VETCO-designed connectors from raw forgings. During those years, VOL arranged for VIAG's purchase of machined pipe connectors from ITAG, as well as other materials, which it stored for VIAG. VOL also performed precision welding in assembling the connectors to the pipe. VOL then prepared the pipe assembly for shipment to customers.
In 1975, VOL began machining from raw forgings a limited quantity of VETCO-designed connectors for sale to VIAG. These connectors were placed in VIAG's inventory maintained by VOL in its Aberdeen facility. ITAG also continued to machine connectors for VIAG under the terms of the ITAG agreement.
During the years at issue, VOL, either directly or through its wholly owned subsidiary, VETCO (London), Limited, arranged for the sale of the pipe assembly to customers for use outside of Switzerland. At all relevant times, title to the materials was held by VIAG, which bore the full risk of loss.
During taxable year 1974 and for the first quarter of 1975, VOL and VIAG utilized Zanora, a Luxembourg corporation, to bill VIAG for fabrication services performed by VOL for VIAG. VOL invoiced Zanora its costs for the fabrication services plus a 5-percent markup. Zanora then invoiced VIAG the amount charged by VOL, without further markup. For financial and tax reporting purposes, petitioner's financial auditors treated VOL, Zanora, and VIAG as related parties. All of VIAG's sales for taxable year 1974 that are at issue involve transactions in which VOL utilized Zanora to rebill VIAG. After the first quarter of taxable year 1975, VOL billed VIAG directly for the fabrication services.
On all VIAG sales during the years at issue involving fabrication services performed by VOL, all pipe connectors (except the SF 341,653.13 in connectors which were purchased by VIAG from VOL and included in VIAG's 1975 cost of sales and reported as subpart F income) were purchased, using a VOL purchasing office, from suppliers in which petitioner and its subsidiary companies had no ownership interest.
VOL, either directly or through Zanora, invoiced VIAG the following amounts for fabrication and related services included in VIAG's cost of sales for the taxable years at issue:
+------------------------------------------+
¦ ¦1974 ¦1975 ¦
+---------------+---------------+----------¦
¦VOL-Zanora-VIAG¦SF4 1,341,727¦SF 115,244¦
+---------------+---------------+----------¦
¦VOL-VIAG ¦--- ¦3,796,723 ¦
+------------------------------------------+
VIAG billed its customers SF 11,553,754 and SF 69,723,770 during taxable years 1974 and 1975, respectively, for items involving VOL's services.
The primary service provided for VIAG by VOL was the welding of VIAG's VETCO-designed connectors to pipe. The process of...
To continue reading
Request your trial
-
Pk Ventures, Inc. v. Commissioner, Dkt. No. 5836-99.
...determining when the Commissioner is raising a "new matter". E.g., Shea v. Commissioner, supra at 189-197; Vetco Inc. v. Commissioner [Dec. 47,001], 95 T.C. 579, 587-589 (1990); Wayne Bolt & Nut Co. v. Commissioner [Dec. 46,100], 93 T.C. 500, 506-508 (1989). A synopsis of these criteria is ......
-
Elec. Arts, Inc. v. Comm'r of Internal Revenue
...of certain foreign corporations—those meeting the definition of a “controlled foreign corporation”. Vetco, Inc. v. Commissioner, 95 T.C. 579, 585–586, 1990 WL 183738 (1990). Under subpart F (secs. 951 through 964), a U.S. shareholder of a “controlled foreign corporation” generally must incl......
-
Barnette v. Commissioner
...outside the United States, unless the foreign personal holding company provisions, secs. 551-558, were applicable. Vetco, Inc. v. Commissioner, 95 T.C. 579, 585 (1990). Subpart F was enacted to impose limitations on the ability of U.S. taxpayers to use foreign corporations to defer For the ......
-
DeMann v. Commissioner
...matter when it alters the original deficiency or requires the presentation by petitioner of different evidence. Vetco, Inc. v. Commissioner [Dec. 47,001], 95 T.C. 579, 588 (1990); Achiro v. Commissioner [Dec. 38,351], 77 T.C. 881, 890 (1981); Estate of Falsese v. Commissioner [Dec. 31,517],......
-
CHAPTER 13 TAX CONSIDERATIONS: BRANCH VERSUS SUBSIDIARY
...controlled foreign corporation provisions. See Ashland Oil Inc. v. Commissioner, 95 T.C. No. 25 (1990), and Vetco Inc. v. Commissioner, 95 T.C. No. 40 (1990). See also Reg. § 1.367(a)-6T(g)(1). [10] Generally, a U.S. corporation is created under the laws of one of the states, such as Delawa......
-
The application and analysis of the new proposed contract manufacturing regulations.
...unsuccessfully litigated these arrangements in the Ashland Oil v. Comm'r, 95 T.C. 348 (1990), and Vetco Inc. and Subsidiaries v. Comm'r, 95 T.C. 579 (1990), cases. The issue in both cases was whether a separate manufacturing corporation should be treated as a branch of the CFC. In Ashland O......
-
Contract manufacturing: a different perspective.
...1.954-3(b)(1)(i)(b) and -3(b)(1)(ii)(b). (17) This circular reasoning was noted by the Tax Court in Vetco Inc. v. Commissioner, 95 T.C. 579 (1990). The court furthered noted that such reasoning makes section 954(d)(1) superfluous because section 954(d)(1) already covers separate related (18......
-
IRS revokes key Subpart F ruling.
...if the CFC had a lower effective tax rate than the contract manufacturer. In 1990, in both Ashland Oil Co., 95 TC 348, and Vetco, Inc., 95 TC 579, the Tax Court rejected the "branch" analysis of Rev. Rul. 75-7. Since then, many taxpayers with CFCs that use contract manufacturers have ignore......