Sundstrand Corp. v. Comm'r of Internal Revenue
| Decision Date | 19 February 1991 |
| Docket Number | Docket No. 26230-83. |
| Parties | SUNDSTRAND CORPORATION AND SUBSIDIARIES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
During 1977 and 1978, petitioner and its subsidiaries manufactured and sold numerous products, including the constant speed drive (CSD), an extremely complex avionic device used to drive an airplane engine's generator at a constant speed regardless of the speed of the engine. In 1974, petitioner decided to expand the operations at SunPac, petitioner's wholly owned foreign subsidiary located in the Republic of Singapore, to include the production of CSD's. Pursuant to a license agreement entered into in July 1975, petitioner gave SunPac the exclusive right to use petitioner's industrial property rights for the manufacture of certain CSD spare parts in Singapore; the nonexclusive right to sell the spare parts anywhere in the world; the nonexclusive right for SunPac or its customers to use the parts anywhere in the world; the right for SunPac to subcontract in Singapore to third parties the partial manufacture of the spare parts; and the authorization for SunPac's use of petitioner's trademarks which petitioner normally used in the sale of similar products. Petitioner also agreed to furnish copies of the existing industrial property rights petitioner used in the manufacture of the products and to give SunPac reasonable technical assistance for the startup of SunPac's manufacture of the spare parts. SunPac agreed to pay to petitioner for these rights and for the assistance rendered to SunPac a royalty of two percent of the net selling price of each spare part manufactured and sold by SunPac. Petitioner purchased all of SunPac's output through 1978 at petitioner's catalog price less a 15-percent discount pursuant to a distributor agreement petitioner and SunPac entered into in 1976. Held, respondent abused his discretion under sec. 482, I.R.C. 1954, when he determined that SunPac acted as a subcontractor of petitioner. HELD FURTHER, the royalty contained in the license agreement did not constitute an arm's-length consideration for the use by SunPac of petitioner's intangibles, and the transfer price of petitioner's catalog price less a 15- percent discount did not constitute an arm's-length consideration for the SunPac parts petitioner purchased from Sunpac. However, respondent's sec. 482 adjustments were unreasonable. Sec. 1.482-2(b), (d), and (e), Income Tax Regs., applied to determine the proper sec. 482 adjustments. HELD FURTHER, petitioner is entitled to claim foreign tax credits for 1977 and 1978 applicable to Singapore income taxes paid on the royalty payments SunPac made to petitioner for those years. HELD FURTHER, petitioner is not subject to increased interest under sec. 6621(c).
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