Palmolive Co. v. Conway

• Decision Date: 06 August 1930
• Docket Number: No. 1406.,1406.
• Citation: 43 F.2d 226
• Parties: PALMOLIVE CO. v. CONWAY et al.
• Court: U.S. District Court — Western District of Wisconsin

43 F.2d 226 (1930)

PALMOLIVE CO. v. CONWAY et al.

No. 1406.

District Court, W. D. Wisconsin.

August 6, 1930.

Lines, Spooner & Quarles, of Milwaukee, Wis., Olin & Butler, of Madison, Wis., and Nathan Glicksman, of Milwaukee, Wis., for plaintiff.

John W. Reynolds, Atty. Gen., Theo. W. Brazeau, Sp. Counsel, of Wisconsin Rapids, Wis., and Leo J. Federer, Attorney for Wisconsin Tax Commission, of Madison, Wis., for defendants.

LINDLEY, District Judge.

Plaintiff seeks to enjoin the state tax commission and the county treasurer from collecting additional state income taxes assessed for the years 1924, 1925, and 1926, on the ground that the assessments are illegal under the Wisconsin law and that the collection thereof would violate the rights of plaintiff under the due process clause of the Federal Constitution.

Palmolive Company of Wisconsin, hereinafter referred to as the Wisconsin company, under that and other names, had existed in Milwaukee since 1894, manufacturing and selling trade-marked "Palm Olive" soap. In 1923 the individuals connected with it as officers and otherwise organized as a Delaware corporation the Eastern Operating Company, which during the same year became the Palmolive Company (of Delaware), and later the Palmolive-Peet-Colgate Company, its present name. This corporation is hereinafter designated the parent company. During the same year the same interests caused to be incorporated, also in Delaware, the Western Operating Company, which retained its original name during all the taxable period under consideration, but later, in 1927, became Palmolive Company (of Delaware), and through ownership of all the outstanding capital stock of the Wisconsin company, as a result of the latter's dissolution, succeeded to all the assets thereof. The assets it thus received were subject to outstanding liabilities, including the alleged unpaid additional income taxes. Hence it became plaintiff herein, seeking to restrain the taxes, and is hereafter designated plaintiff company.

Upon incorporation of the parent company it acquired all the capital stock of the Wisconsin company. It then purchased from the Wisconsin company all the assets of said corporation located outside of the state, consisting of real estate, warehouses, branch offices, merchandise, and the accounts receivable due from parties outside of the state and the intangibles, consisting of trade-marks, trade secrets, and good will, paying therefor by delivering to the Wisconsin company a certain proportion of the latter's capital stock, which then became treasury stock of the Wisconsin company. The remainder of the capital stock the parent company then sold to plaintiff company in exchange for all the capital stock of plaintiff and certain advances. Plaintiff company then bought from Wisconsin company the manufacturing plant and equipment located at Milwaukee, and paid for same by delivering to Wisconsin company a certain part of the capital stock of the latter which it had received from the parent company. This stock became treasury stock of the Wisconsin company. The capital stock of the Wisconsin company remaining in the hands of plaintiff company then, and thenceforth constituted the only capital stock of Wisconsin company outstanding.

As a result of this reorganization, parent company became the owner of the property transferred to it by Wisconsin company, constituting all tangible property outside Wisconsin and the intangibles aforesaid and of all the capital stock of plaintiff. Plaintiff became the owner of the Milwaukee plant and equipment and of all the capital stock of Wisconsin company. The latter remained the owner of the inventory at Milwaukee and the accounts receivable relating to Wisconsin business. The properties of the three companies remained in this status throughout the taxable period.

The three corporations were governed by officers and directors substantially identical. The parent company established its chief office in Chicago, where it occupied seven floors. Plaintiff had no separate offices and no full time employees. Its transactions were few, and its books and records were kept by the office force of parent company.

Plaintiff leased the manufacturing plant and equipment occupied by Wisconsin company at Milwaukee, and conveyed by the latter to plaintiff as aforesaid to the Wisconsin company for a fixed rental in 1924 of $120,000, plus taxes and repairs and in 1925 and 1926 for 5½ per cent. of the investment therein plus depreciation. The rental for 1925 was $234,394, and for 1926 $231,108.

Parent company contracted with Wisconsin company to buy the latter's entire output of Palm Olive soap, except such as Wisconsin company might sell in Wisconsin, for the year 1924, at factory cost plus 3 per cent. For 1925 and 1926 the purchase price was factory cost plus 6 per cent.; the change being made, as now insisted by plaintiff, because in 1924 glycerine, a by-product of considerable importance as a saleable product, was not credited against factory cost, whereas, in 1925 and 1926, it was, though the contract for none of the years mentions glycerine. Plaintiff asserts that the failure to consider the proceeds of sale of glycerine in determining factory costs in 1924 was due to an oversight, and that it was a matter involving too much labor thereafter to correct the same, though the glycerine sales in 1924 amounted to $493,000 and increased through following years to over $900,000 in 1926. The parent company purchased all material for the Wisconsin company and reserved the contractual right to supervise the Wisconsin company's manufacturing activities.

As a result of the reorganization above narrated, there were created an open account from Wisconsin company to parent company of $1,597,390 and one from plaintiff to parent company of $4,058,569. Upon these accounts no interest was charged in 1924, but in 1925 and 1926 the parent company charged 5½ per cent.

The Wisconsin company calculated income upon the basis of its profits upon its factory cost plus percentage contracts aforementioned and its profits from Wisconsin sales and in 1924 reported an income of $298,000, in 1925 $273,000, and in 1926 $341,000. Plaintiff reported on the basis of its rental receipts from Wisconsin company less interest paid to parent company, and reported net income in 1924 of $17,950, in 1925 a deficit of $90,911, and in 1926 a deficit of $101,352. The tax commission allocated certain of the profits of the parent company and of the Buckingham Agency to these two companies, fixing the taxable income of both of them for 1924 at $1,297,967, or an increase of $1,175,108, and for 1926 at $1,367,879, or an increase of $1,127,446. It is the assessments upon this alleged additional income that plaintiff now seeks to enjoin.

The defendants justified their actions under section 71.01 of the Wisconsin Statute 1925, which provides, "There shall be assessed, levied, collected and paid a tax on all income received in each calendar year beginning with the year 1920, by every person residing within the state, and by every nonresident of the state, upon such income as is derived from property located or business transacted within the state, except as hereinafter exempted;" under section 71.02, which provides, "Income from mercantile or manufacturing business, rentals, royalties or the operation of any farm, mine or quarry or from the sale of real or personal property for the purposes of taxation, shall follow the situs of the property or business from which derived;" and under section 71.25, which provides, "When any corporation liable to taxation under the act conducts its business in such manner as either directly or indirectly to benefit the members or stockholders thereof or any person interested in such business, by selling its products or the goods or commodities in which it deals at less than the fair price which might be obtained therefor, or where a corporation, a substantial portion of whose capital stock is owned either directly or indirectly by another corporation, acquires and disposes of the products of the corporation so owning a substantial portion of its stock in such manner as to create a loss or improper net income, the commission may determine the amount of taxable income of such corporation for the calendar or fiscal year, having due regard for the reasonable profits which but for such arrangement or understanding might or could have been obtained from dealing in such products, goods or commodities."

The Commission contends that it ignored no constitutional rights of plaintiff, but recognized all of such rights and rendered its decisions in accordance therewith. The question as presented is whether, with the same business in Wisconsin as before, the corporation has by its contracts so manipulated its organization and contracts and relations to cover up the true income attributable to Wisconsin property and business; whether the court may go behind the contracts of the correlated corporations, or whether it is bound by the same. If the contracts are binding upon the state, if no part of the alleged additional income is attributable to the state of Wisconsin, no relief can be had, but, if the circumstances are such that it follows that the contracts were made for the express purpose of evading taxation, that is, to attempt to remove, without in fact removing, income earned in the state of Wisconsin to a place beyond the state, then the court has a right to go behind the contract and ascertain the facts.

The Wisconsin company shipped direct to parent company's customers outside Wisconsin just as it did to its own customers in the state, and losses from miscarriage of shipments were treated as an expense of Wisconsin company. The parent company advertised for Wisconsin company, and reserved in its contract the right to control the amount of product which Wisconsin company might sell to its trade. The federal income tax return of...