CIR v. Spermacet Whaling & Shipping, 13887.

• Decision Date: 10 August 1960
• Docket Number: No. 13887.,13887.
• Citation: 281 F.2d 646
• Parties: COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. SPERMACET WHALING & SHIPPING CO., S/A, Respondent.
• Court: U.S. Court of Appeals — Sixth Circuit

281 F.2d 646 (1960)

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. SPERMACET WHALING & SHIPPING CO., S/A, Respondent.

No. 13887.

United States Court of Appeals Sixth Circuit.

August 10, 1960.

Meyer Rothwacks, Atty., Dept. of Justice, Washington, D. C. (Howard A. Heffron, Acting Asst. Atty. Gen., Lee A. Jackson, Chief, Appellate Section, Tax Division, Dept. of Justice, and Harry Baum and George W. Beatty, Attys., Dept. of Justice, Washington, D. C., on the brief), for petitioner.

Richard F. Stevens, Cleveland, Ohio (Charles D. Leist, Baker, Hostetler & Patterson, Cleveland, Ohio, on the brief), for respondent.

Before SIMONS, Senior Judge, and MILLER and O'SULLIVAN, Circuit Judges.

SHACKELFORD MILLER, JR., Circuit Judge.

The respondent, Spermacet Whaling & Shipping Co., is a corporation organized under the laws of the Republic of Panama. During the period of April, 1947, through the latter part of January, 1948, it participated in a fishing expedition for sperm whales and the production of sperm oil off the western coast of South America. It received from these operations during its fiscal year ending April 30, 1948, net income of $924,979.72. The respondent, as a foreign corporation, contends that not any of such net income is taxable to it by the United States. The Commissioner ruled otherwise and made a deficiency assessment of $351,492.29.

The facts are most interesting, but lengthy. They are set out in detail in the Findings of Fact and Opinion of the Tax Court, reported at 30 T.C. 618, to which reference is made. The following summary is sufficient for our present purposes.

Sperm oil is obtained from the sperm whale and is used for industrial purposes, primarily as an additive to lubricants. In 1946 sperm oil was in short supply, primarily because the Norwegian whaling fleets had been depleted by enemy action during World War II, and because the whaling fleets then in operation were required to be used principally for the production of edible oils. Norway was the largest producer of whale oil in the world.

A typical whaling expedition to obtain crude sperm oil consists of a large mother or factory ship and a number of killer boats. The killer boats are used to catch the sperm whales and to tow them to the factory ship where the sperm oil is extracted. The operation is carried on without operational contact with a base station located in coastal waters.

Archer-Daniels-Midland Company, a Delaware corporation, hereinafter called A. D. M., was engaged in the business of purchasing, processing and selling certain special oils, including sperm oil. Because of the limited supply it faced a critical business need. Smith, its Executive Vice-President in Cleveland, Ohio, contacted Jahre, one of Norway's leading whalers, for the purpose of organizing a new whaling company to engage in the production of sperm oil. Jahre caused the Falkland Shipowners Limited, a British corporation, which he indirectly controlled, to acquire from the British Government an old factory ship called the Anglo Norse, which required a considerable expenditure of money to put it in suitable condition. He had at his disposal sufficient killer boats to outfit a whaling expedition. After considerable negotiations, Jahre, Smith and others, in December, 1946, caused the respondent to be incorporated under the laws of Panama. It held its first meeting of its board of directors in New York City on December 12, 1946.

Jahre returned to Norway and attempted to obtain for respondent a charter of the Anglo Norse from Falkland. Since Falkland was a British corporation, it could not execute such a charter to the respondent, a foreign corporation, without the approval of the British Government. The British Government refused to consent on the ground that Panama, the country of respondent's incorporation, had not subscribed to the International Whaling Agreement.

Jahre proposed that A. D. M. charter the Anglo Norse and then permit respondent to manage the sperm oil expedition, but A. D. M. refused to be a party to such an arrangement. After discussing the situation among themselves, respondent's Norwegian shareholders proposed to Smith that Smidas Company, Inc., hereinafter called Smidas, charter the vessel and then work out some definitive relationship with respondent for the conduct of the expedition. Smidas was an Ohio corporation, incorporated on February 19, 1945, engaged in promoting export business of certain technical items. At the time of its incorporation Smith acquired 54.5 per cent of its capital stock. After some negotiation, Smidas accepted the proposal. On or about February 4, 1947, a "bare boat charter party" was negotiated in Europe and there signed by Falkland as the owner of the Anglo Norse, by which Smidas chartered the vessel for a period of four years, with options to renew for further periods totaling six years, for $50,000.00 per annum.

By contract dated March 8, 1947, between Smidas and respondent, respondent assumed all of the obligations of Smidas under the charter party and agreed to organize, equip and manage the whaling expedition. It was to receive for its services and the obligations assumed, the proceeds to be received by Smidas from the sale of the oil, after deducting from such proceeds the sum of $25,000.00 and certain expenses incurred by Smidas in the sale and delivery of the oil.

By contract dated May 26, 1947, Smidas sold the sperm oil produced by the whaling expedition to A. D. M., with the provision that title to the sperm oil would pass to A. D. M. at the time that the sperm oil was delivered to A. D. M. in New York City.

The Anglo Norse was reconditioned and equipped for the contemplated expedition entirely in Norwegian shipyards, with the contracts therefor being negotiated, executed, and carried out in respondent's behalf by Norwegians in Norway. All officers and all members of the crews of the several vessels, aggregating about 300 men, were Norwegian and were employed pursuant to contracts negotiated in respondent's behalf in Norway. Certain fuel oil purchases in the United States were arranged for by Smith at the direction of respondent's Norwegian management, to be delivered to the Anglo Norse off the western coast of South America.

The Anglo Norse and the seven killer boats left Norway on the sperm oil expedition in April, 1947, proceeded to the fishing grounds off the western coast of South America, where fishing for sperm whales and the production of sperm oil was commenced on May 20, 1947. These operations continued until about January 4, 1948, at which time the killer boats returned to Norway. During this entire period the vessels were in constant contact with respondent's management in Norway via shortwave radio and remained under Jahre's supervision.

About half of the sperm oil produced was delivered in October, 1947, to a transport which brought a load of fuel oil to the Anglo Norse, and after delivering the fuel oil received the sperm oil from the floating factory and delivered it to A. D. M. in New York. The balance of the sperm oil was delivered to A. D. M. in New York by the Anglo Norse about January 27, 1948. After unloading her cargo of sperm oil the Anglo Norse returned to Norway.

Respondent maintained a bank account at the Guaranty Trust Co. of New York, which it opened about February 8, 1947, with a deposit of $125,630.11. Deposits to that account included loans by shareholders and individuals to respondent and the money paid by A. D. M. for the purchase of the sperm oil in the amounts of $1,191,963.84 and $2,287,668.26 for the respective two deliveries, after proper provisions by A. D. M. for use of part of the proceeds to discharge lien indebtedness. The payments from that account consisted, in general of amounts paid at the direction of the Norwegian management to discharge obligations of respondent requiring payment in United States dollars, payments to or for the personal benefit of respondent's Norwegian shareholders (such payments being considered loans to those shareholders), repayment of loans, transfer of funds to Norwegian accounts for use by the Norwegian management, and for the payment of a tanker which was built and purchased in Europe and whose operations are not involved in this controversy. Smith acted as Treasurer of the respondent and in addition to drawing the checks on the Guaranty Trust Co. account maintained financial records in accordance with standard accounting practice.

Respondent did not at any time prior to April 30, 1948, have an office in the United States, nor was it qualified to do business in any state in the United States. It did not at any time have any United States employees. Smith was its sole officer in the United States. Respondent had an office in Norway, in which and from which it directed and managed its operations. Its board of directors held meetings in New York City on September 29, 1947, October 2, 1947, January 13, 1948, and February 2, 1948, to discuss and approve or ratify corporate procedures and policies. These meetings were called in New York City because it better suited the personal convenience of the directors to come there.

The basis for the assessment was the finding by the Commissioner that under the foregoing facts the respondent was a foreign corporation engaged in trade or business within the United States and that its gross income from the sperm oil expedition was from sources within the United States, thus making the net income taxable income to the respondent under the provisions of Section 231(b) and (c), Internal Revenue Code of 1939, 26 U.S.C.A. § 231(b).

On petition to the Tax Court for a redetermination of the deficiency, the Tax Court, with four judges dissenting, held that the respondent was not a resident foreign corporation engaged in trade or business within the United States and that its net income was accordingly not taxable as provided in Sections 14(c) (1)¹ and 15, Internal Revenue...