Philipp Brothers Chemicals, Inc.(NY) v. CIR
| Decision Date | 01 December 1970 |
| Docket Number | No. 8-13,34249-34253.,Dockets 34243,8-13 |
| Citation | 435 F.2d 53 |
| Parties | PHILIPP BROTHERS CHEMICALS, INC. (N. Y.), Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee, PHILIPP BROTHERS CHEMICALS TRANS-AMERICA CORP., Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Appellant. PHILIPP BROTHERS CHEMICALS PAN-AMERICAN CORP., Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Appellant. PHIBRO INTERNATIONAL CORP., Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Appellant. PHILIPP BROTHERS CHEMICALS INTERNATIONAL CO., Inc., Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Appellant. PHILIPP BROTHERS CHEMICALS EXPORT CORP., Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Appellant. |
| Court | U.S. Court of Appeals — Second Circuit |
Irwin B. Robbins, New York City (Otterbourg, Steindler, Houston & Rosen, New York City, on the brief), for appellant in No. 34,243 and for appellees in Nos. 34,249-34,253.
Harold C. Wilkenfeld, Washington, D. C. (Johnnie M. Walters, Asst. Atty. Gen., Lee A. Jackson, Stuart A. Smith, Attys., Dept. of Justice, Washington, D. C., on the brief), for appellee in No. 34,243 and for appellant in Nos. 34,249-34,253.
Before DANAHER,* FRIENDLY and HAYS, Circuit Judges.
This is an appeal from a decision of the Tax Court, 52 T.C. 240 (1969), sustaining the Commissioner's allocation under Section 482 of the Internal Revenue Code of 1954 to Philipp Brothers Chemicals, Inc. (N.Y.), of the net income for the fiscal years ending June 30, 1960 and 19621 of five commonly controlled foreign sales corporations.2
Philipp Brothers Chemicals, Inc. (N. Y.) is the principal corporation of a group of eleven corporations3 organized by Charles Bendheim to engage in the business of buying and reselling industrial and agricultural chemicals in the United States and throughout the world. All eleven corporations during the period in question were under the control, direct or indirect, of the same interests. Bendheim was at all times president of each of the corporations.
The New York corporation was formed in 1946 by Bendheim and an associate to take over the chemicals department of a corporation in which Bendheim's father had been a 50 per cent owner. Within the next five years, other domestic sales corporations bearing the name "Philipp Brothers Chemicals, Inc." were either newly organized or acquired by the New York corporation. These corporations were incorporated and conducted business in Massachusetts, Pennsylvania, Maryland, Connecticut and Rhode Island. The Tax Court refused to sustain the Commissioner's Section 482 allocation of the net income of these five domestic sales corporations to the New York corporation. The Commissioner has not appealed from this determination.
In 1950 and 1951, the five foreign sales corporations were organized under the laws of New York. Nearly 90 per cent of the stock of these corporations was owned by Bendheim and his family. Two of the foreign sales corporations, Pan-American and Trans-America, were formed as Western Hemisphere trade corporations under Sections 921 and 922 of the 1954 Code. A qualifying Western Hemisphere trade corporation is allowed a special deduction which makes the effective tax rate for such a corporation substantially lower than that of the usual type of domestic corporations.
The chemicals business conducted by the corporations consisted of the purchase of industrial and agricultural chemicals in large quantities and the resale of these products in smaller quantities. Their operations did not include any repackaging, processing, or manufacturing of chemicals. Of the domestic corporations, only the Pennsylvania and Maryland corporations failed to maintain inventories at the end of the fiscal years in question. Among the foreign corporations, only International maintained any inventory at the end of fiscal year 1960. The absence of actual inventories was explained by the petitioner as being due to the practice of purchasing carloads of chemicals from foreign suppliers and forwarding those same carloads without actually taking physical possession of the chemicals. When one of the corporations needed a chemical that it did not have in inventory, it would purchase the chemical either from another of the corporations at cost or upon the open market.
Many orders to the foreign sales corporations were placed by customers year after year as a result of arrangements made in prior years by Charles Bendheim or by his late father.
All the shipping and bookkeeping arrangements for all of the corporations were handled in the office of the New York corporation at 10 Columbus Circle. Orders for chemicals to all the corporations were sent to the New York office, where employees of the New York corporation made arrangements for the filling and delivery of the orders. Sales were credited to the proper corporation. During 1960 and 1962, a total of $67,800 in service charges was paid by the domestic sales corporations for these bookkeeping and shipping functions. The figure for the five foreign corporations for legal, office and accounting expenses was $3,576.46. No corporation other than the New York corporation had its own bookkeeping or traffic department, but three of the domestic corporations (Massachusetts, Connecticut and Rhode Island) had their own salesmen. Maryland and Pennsylvania each maintained offices and employees in their respective states of incorporation.
For the fiscal years 1960 and 1962, the gross and taxable income of the eleven corporations of the Philipp Chemicals group was the following:
Gross Taxable
Income Income
New York
1960 $3,921,682.21 $16,989.00
1962 4,314,402.32 15,913.70
Massachusetts
1960 2,999,138.06 26,162.43
1962 2,975,386.39 23,031.40
Connecticut
1960 1,121,140.87 22,766.18
1962 1,008,391.45 23,223.21
Rhode Island
1960 1,792,310.40 25,596.44
1962 2,513,846.77 26,189.06
Pennsylvania
1960 939,143.57 25,836.19
1962 1,413,497.57 25,433.09
Maryland
1960 1,243,545.82 27,294.00
1962 2,840,582.02 24,934.98
International
1960 142,139.82 18,856.88
1962 262,815.36 28,499.39
Trans-America
1960 256,286.79 9,913.62
1962 136,422.13 6,567.51
Pan-American
1960 569,735.33 17,768.39
1962 423,417.31 26,774.03
Export
1960 41,101.26 4,548.47
1962 76,147.54 3,889.66
Phibro
1960 97,317.84 9,866.40
1962 14,797.84 3,558.14
Unlike the five domestic sales corporations which incurred and reported expenses for officers' salaries, other wages and salaries, and rent, the five foreign sales corporations claimed no similar deductions on their returns with the exception of a single item of $471.77 reported by Pan-American for 1962 for "Salesmen's expenses."
The sole issue is whether the Tax Court erred in holding that the Commissioner's allocation to Philipp Brothers Chemicals of New York, pursuant to Section 482 of the Internal Revenue Code of 1954, of all of the net income of its five commonly controlled foreign sales corporations, was arbitrary or unreasonable.
Section 482 of the Internal Revenue Code of 1954 vests the Commissioner with considerable discretion in cases of this kind:
The House Report which accompanied the original version of the section (Section 45 of the Revenue Act of 1928, c. 852, 45 Stat. 791) explained that the purpose was to allow the "Commissioner * * * to distribute the income or deductions between or among the controlled corporations * * * in order clearly to reflect their true tax liability." H.Rep. No. 2, 70th Cong., 1st Sess., 1939-2 Cum. Bull. 395.4
A determination by the Commissioner under Section 482 "is essentially one of fact and * * * must be affirmed if supported by substantial evidence." Advance Machinery Exchange v. C. I. R., 196 F.2d 1006, 1007-1008 (2d Cir.), cert. denied, 344 U.S. 835, 73 S.Ct. 45, 97 L.Ed. 650 (1952). The Commissioner has broad discretion in appraising particular fact situations. His determinations will not be set aside unless clearly shown to be unreasonable or arbitrary, Ballentine Motor Co. v. C. I. R., 321 F.2d 796, 800 (4th Cir. 1963), and the taxpayer has the burden of proving that this discretion has been abused. Hall v. C. I. R., 294 F.2d 82, 85 (5th Cir. 1961).
The Commissioner argues that the taxpayers here have not met their required burden of proving that the allocation of all of the net income of the five foreign sales corporations of the New York corporation was either arbitrary or unreasonable. We agree.
Section 482 was designed to grant the Commissioner authority to reallocate income among controlled businesses in just such a situation as this. The statute rests on the well-settled policy that income is taxable under Section 61 of the 1954 Code to the party who earns it and that it is economic reality rather than legal formality...
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