PPG Indus., Inc. v. Comm'r of Internal Revenue, Docket No. 5842-66.

• Decision Date: 31 December 1970
• Docket Number: Docket No. 5842-66.
• Citation: 29 T.C.M. (CCH) 1710,55 T.C. 928
• Parties: PPG INDUSTRIES, INC., PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

29 T.C.M. (CCH) 1710
55 T.C. 928

PPG INDUSTRIES, INC., PETITIONER
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 5842-66.

United States Tax Court

Filed December 31, 1970.

[55 T.C. 928]

Ira T. Wender, Peter L. Briger, Carl E. Glock, Jr., Charles R. Pascoe, and Kenneth P. Simon, for the petitioner.

Donald W. Howser and Gary L. Stansbery, for the respondent.

Held, respondent's allocation under sec. 482 of the Internal Revenue Code of 1954 of a substantial portion of the sales income of a Swiss subsidiary in 1960 and 1961 to its domestic parent, a manufacturer of glass, paint, and chemical products, is not sustained; held, further, the existence of a long-standing interest-free indebtedness from a Brazilian subsidiary to its domestic parent did not justify the allocation of a portion of the subsidiary's income (dividends, interest, and gains from the sale of bonds) to the parent in 1960 under sec. 482 of the Internal Revenue Code of 1954; held, further, petitioner (the domestic parent corporation) did not receive a constructive dividend in 1961 as the result of the sale of stock by its Brazilian subsidiary to its Swiss subsidiary as part of a transaction in which such stock was ultimately sold to an unrelated third party; held, further, respondent failed to establish that the petitioner received a constructive dividend in 1960 as a result of the transfer of assets (land and buildings) between its second-tier foreign subsidiaries; held, further, the transfer by petitioner of patented and unpatented technology (including after-acquired technology) to its Swiss subsidiary under four separate agreements for a fixed period of years was not a transfer of all substantial rights in such technology and hence the payments received by petitioner in 1960 and 1961 did not qualify for capital gains treatment; and held further, the transfer of patented and unpatented technology (including after-acquired technology) under a fifth agreement by petitioner to its Swiss subsidiary constituted the sale of a capital asset.

MULRONEY, Judge:

This case involves income tax deficiencies determined by respondent for the years 1960 and 1961 in the respective amounts of $2,811,000.86 and $2,684,387.67 and additional deficiencies in income tax claimed by respondent by amendments to his answer in the amounts of $300,564 and $324,194 for the years 1960 and 1961, respectively. Concessions involving several issues have been made by

[55 T.C. 929]

both parties. The remaining issues before this Court are (1) whether respondent correctly allocated income in 1960 and 1961 to petitioner from Pittsburgh Plate Glass International S.A. (petitioner's wholly owned Swiss subsidiary) in 1960 and 1961 under section 482 of the Internal Revenue Code of 1954;¹ (2) whether gains realized by petitioner in 1960 and 1961 from the transfer by petitioner to Pittsburgh Plate Glass International S.A. of patents and technology are taxable as capital gains or as ordinary income; (3) whether the transfer of certain stock by petitioner's Brazilian subsidiary to Pittsburgh Plate Glass International S.A. in 1961 resulted in a constructive dividend to petitioner in the amount of $455,959; (4) whether respondent correctly allocated income in the amount of $27,304 in 1960 to petitioner from its Brazilian subsidiary under section 482 of the Internal Revenue Code of 1954 as a result of an interest-free loan made by petitioner to the subsidiary; and (5) whether the transfer of certain assets in 1960 by Distribuidora Quimica S.A. (an Argentine corporation which was a second-tier subsidiary of petitioner) to Pittsburgh Plate Glass Argentina S.A. resulted in a constructive dividend to petitioner.

FINDINGS OF FACT

PPG Industries, Inc. (hereinafter called petitioner), a manufacturer of glass, fiber glass and paint products, was incorporated under the laws of Pennsylvania in 1883. Its principal office and place of business at the time the petition in this case was filed was Pittsburgh, Pa. Petitioner filed its Federal tax returns for the years here involved with the district director of internal revenue at Pittsburgh, Pa. At all times here relevant petitioner kept its books and prepared its Federal income tax returns on a calendar year basis and on an accrual method of accounting.

Petitioner is successor in interest to Columbia-Southern Chemical Corp. (hereinafter called Columbia-Southern), a wholly owned subsidiary that was merged into petitioner on December 31, 1960.

Petitioner's operating divisions during the years here involved included a glass division, a chemical division, a paint and brush division, and a fiber glass division.

After World War II there was a great shortage of glass in the United States. In the years 1955 and 1956 petitioner bought more glass from foreign suppliers than it sold to foreign customers. In 1957 petitioner's productive facilities caught up with demand. Prior to 1957, petitioner's physical facilities and the domestic demand for glass limited the amount of glass products it could export.

[55 T.C. 930]

Prior to 1958 petitioner had investments in approximately 37 foreign corporations. Among these the principal operating companies in which petitioner had a controlling interest were Duplate Canada, Ltd., a Canadian corporation hereinafter called Duplate (glass), Canadian CPI (glass), Societe Anonyme des Glaces de Courcelles, a Belgian corporation hereinafter called Courcelles (glass), and Standard Chemical Ltd., a Canadian corporation hereinafter called Standard Chemical. Petitioner's foreign investments included a minority interest in Cristalerias de Chile S.A., a Chilean corporation (glass), Cia Commercial de Vidros do Brasil, a Brazilian corporation hereinafter called CVB (glass), Cia Anonima Industrias Miller de Venezuela, a Venezuelan corporation hereinafter called Miller de Venezuela (glass), Cristalerias Rigolleau S.A., an Argentine corporation (glass), Cia Vidraria Santa Marina, a Brazilian corporation hereinafter called Santa Marina (glass), Industrias Reunidas Vidrobras Limitada, a Brazilian corporation hereinafter called Vidrobras (paint), Pinturas Pittsburgh de Mexico S.A., a Mexican corporation hereinafter called Pinturas Pittsburgh (paint), and Pinturas Tucan S.A., a Venezuelan corporation hereinafter called Pinturas Tucan (paint).

Prior to 1958 petitioner had been relatively inactive in licensing foreign rights to its technology and in expanding manufacturing activities abroad.

For at least 30 years prior to 1958 petitioner had an export department to handle its export sales of glass, paint, and fiber glass products outside the Western Hemisphere. The export department did not handle chemical sales.

Prior to 1959 petitioner operated a Western Hemisphere trade corporation, Pittsburgh Plate Glass Export Corp. (hereinafter called PPGE) which was organized in 1955. For all practical purposes PPGE was integrated with the export department. Petitioner's export chemical sales in the Western Hemisphere were included among the products handled by PPGE. Columbia-Southern did not actively seek export markets for its chemical products. Generally, it accepted orders only when approached by foreign customers.

Petitioner's export department and PPGE handled the sales of petitioner's products to Duplate and CPI as well as other export sales. They made most of the non-Canadian export sales through commission agents and distributors located abroad. The export department accepted orders from customers, placed orders with the factories, expedited the orders, helped customers with their problems, and handled export documentations.

Petitioner established the prices for export sales handled by PPGE as well as by petitioner's export department. The export department

[55 T.C. 931]

usually sold petitioner's products, particularly glass products, at prices that yielded a higher profit than on domestic sales. These higher prices tended to restrict export sales. The export department could not on its own initiative grant special allowances and discounts. Export department personnel were not free to travel in order to develop new, or maintain existing, export markets without the specific approval of petitioner's executive vice president. The export department did not have personnel skilled in financing export sales but depended upon petitioner's treasurer for guidance in credit matters.

In 1958, and for some years prior to that, Leland Hazard (who in 1958 was general counsel, vice president, and a director of the petitioner) was aware of the opportunities for American capital and American skills in the European markets. Hazard, who was influential in the formation of Pittsburgh Plate Glass International S.A., had for years endeavored to have petitioner for an international subsidiary.

Pittsburgh Plate Glass International S.A. (hereinafter called PPGI) was incorporated under the laws of Switzerland in July 1958 as a wholly owned subsidiary of petitioner. The decision to form PPGI was made by petitioner's board of directors on April 1, 1958. The controlling purposes behind petitioner's decision to organize PPGI as its international subsidiary were (1) to expand the sale of petitioner's products outside the United States, (2) to develop opportunities outside the United States for the exploitation of petitioner's technology, and (3) to develop opportunities outside the United States for investments where equity interests could be built around the manufacture of products using petitioner's technology. It was also petitioner's intention that PPGI would manage petitioner's existing foreign investments. To accomplish these purposes most effectively, petitioner considered it would be advisable to place all of its export sales, foreign licensing, and investment activities into a single autonomous entity under independent management.

During its formative period the affairs of PPGI were conducted by a shareholder's executive board, as provided by Swiss law, which consisted of...