Asiatic Petroleum Co. v. Commissioner of Internal Rev.

• Decision Date: 16 August 1935
• Docket Number: No. 472.,472.
• Citation: 79 F.2d 234
• Parties: ASIATIC PETROLEUM CO. (DELAWARE), LIMITED, v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Second Circuit

79 F.2d 234 (1935)

ASIATIC PETROLEUM CO. (DELAWARE), LIMITED, v. COMMISSIONER OF INTERNAL REVENUE.^*

No. 472.

Circuit Court of Appeals, Second Circuit.

August 16, 1935.

Cravath, de Gersdorff, Swaine & Wood, of New York City (William D. Whitney, M. T. Moore, Joseph C. White, and George G. Tyler, all of New York City, of counsel), for petitioner.

Frank J. Wideman, Asst. Atty. Gen., and Sewall Key and Lucius A. Buck, Sp. Assts. to Atty. Gen., for respondent.

Before MANTON, SWAN, and CHASE, Circuit Judges.

SWAN, Circuit Judge.

This case was heard by the Board upon stipulated facts, which included a stipulation that, if the Commissioner was correct in applying section 45 of the Revenue Act of 1928 (45 Stat. 806, 26 USCA § 2045), there was a deficiency of $303,083 in the petitioner's tax for the year 1929; otherwise there was no deficiency. The Board sustained the Commissioner.

The agreed facts are these: Two foreign corporations, one organized under the laws of the Netherlands (called Royal Dutch) and the other under the laws of Great Britain (called British Shell), owned, respectively, 60 and 40 per cent. of the stock of another Netherlands corporation (called Bataafsche) and of the petitioner (hereafter referred to as Asiatic). Neither Royal Dutch nor British Shell has ever done any business in the United States other than holding stock of domestic corporations. Bataafsche deals in petroleum products in various parts of the world other than the United States. Asiatic is a Delaware corporation, organized in 1920, and has always been a holding company engaged in holding the stocks of various subsidiary corporations. For the year 1929 Asiatic filed a consolidated return, for itself and its subsidiaries, which omitted to include any profit from the transactions now to be described. Asiatic owned 39,997 shares of a Louisiana corporation (referred to as Norco), and on January 8, 1929, contracted in London, England, to sell said Norco shares to Bataafsche for the price of $3,999,700, which was the cost basis of the stock to Asiatic. Payment was made in London, and on the following day, January 9, 1929, the stock certificates, properly indorsed in blank, were delivered to a representative of Bataafsche in Montreal, Canada. On the same date Bataafsche sold and delivered in Montreal said Norco shares to a Delaware corporation known as Shell Union for the sum of $6,755,000. No part of the purchase price paid by Shell Union was ever received by Asiatic. Bataafsche owned 59 per cent. or more of the voting stock of Shell Union. On May 3, 1919, Shell Union sold said Norco shares to Shell Petroleum Corporation of St. Louis, a Virginia corporation whose stock was wholly owned by Shell Union, for $6,755,000. Thereupon Shell Petroleum took over the assets and liabilities of Norco and caused the latter to be dissolved before the end of 1929. The profit of $2,755,300 realized by Bataafsche upon its sale of the Norco shares to Shell Union was allocated by the Commissioner to Asiatic by applying to the foregoing facts the provisions of section 45 of the Revenue Act of 1928, 26 USCA § 2045. This produced the deficiency complained of, which the Board of Tax Appeals confirmed.

The statute under which the Commissioner purported to act reads as follows:

"Sec. 45. Allocation of Income and Deductions. In any case of two or more trades or businesses (whether or not incorporated, whether or not organized in the United States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests, the Commissioner is authorized to distribute, apportion, or allocate gross income or deductions between or among such trades or businesses, if he determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such trades or businesses."

The petitioner contends that section 45, properly interpreted, is inapplicable to the facts of this case, and, if applied, is unconstitutional.

Section 45 authorizes the Commissioner to make an allocation of gross income among businesses controlled by the same interests in order (1) to prevent evasion of taxes, or (2) clearly to reflect the income of any of such businesses. The substance of the two contemporaneous sales above described was to transfer the Norco stock to Shell Union at a price of $6,755,000, and it can scarcely be doubted that the intermediate sale to Bataafsche, made abroad and at the cost basis of the stock to Asiatic, was devised for the purpose of avoiding income taxes on the profit of $2,755,300, to which Asiatic would concededly have been subject had it sold direct to Shell Union at the price which the latter paid. Since the parent corporations had the same stock ownership in both Asiatic and Bataafsche, it would be a matter of indifference to the beneficial owners of the profit whether it was realized by the one subsidiary or the other. But the petitioner contends that, assuming a purpose to avoid taxes, the Commissioner cannot justify his allocation to Asiatic of the profit realized by Bataafsche on the ground of preventing an "evasion of taxes," because that phrase is not the same as avoidance of taxes. It is argued that "avoidance" connotes escape from taxation by avoidance of the receipt of income, while "evasion" connotes an effort to escape taxation by one who has received taxable income, and is conduct criminally punishable under section 146 (b) of the Revenue Act of 1928, 26 USCA § 2146 (b). By selling to Bataafsche at cost what it might have sold to Shell Union at a profit, Asiatic avoided the receipt of income; hence, it is urged, it did not evade any tax, and section 45 is inapplicable on the basis of tax evasion. We cannot accept so narrow a construction. Asiatic had an actual profit (excess of value over cost) before the sale to Bataafsche, though as yet unrealized for income taxation. The phrase "evasion of taxes" is broad enough to include the avoidance of the realization for taxation of such a profit through its transfer to another branch of the same business enterprise in a way which only changes its place in the business set up. That such was the meaning ascribed to it during the progress of the bill through Congress is evident from the committee reports which explain that evasion may be attempted "by the shifting of profits, the making of fictitious sales, and other methods frequently adopted for the purpose of `milking.'" H. Rep. No. 2, 70th Cong., 1st Sess., p. 16; S. Rep. No. 960, 70th Cong., 1st Sess., p. 24. See, also, 69 Cong. Rec. pt. 2, p. 1068.

Section 45, although it has no exact counterpart in earlier legislation, is based on the consolidated return provisions of section 240 (d) of the Revenue Acts of 1921 (42 Stat. 260) and 1924, 26 USCA § 993 note, and section 240 (f) of the Revenue Act of 1926, 26 USCA § 993 (f). Upon the fact that the committee reports explaining section 240 (d) of the 1921 Act (H. Rep. No. 350, 67th Cong., 1st Sess., p. 14; S. Rep. No. 275, 67th Cong., 1st Sess., p. 20) refer to foreign subsidiaries as a frequently employed method of "milking" the parent company or otherwise improperly manipulating its financial accounts and that the committee reports regarding section 45 also mention "milking," the petitioner bases an argument that the "milking" at which the legislation was aimed, is only that of a domestic parent by a foreign subsidiary, so that section 45 has no application when the parent is a foreign corporation or, as in the present case, two such corporations. But we see nothing in the language or in the purpose of the statute to justify giving it so restricted a meaning. An evasion or avoidance of taxes may be accomplished when a foreign subsidiary "milks" a domestic subsidiary of the common foreign parent as well as when it "m...