Ross Glove Co. v. Comm'r of Internal Revenue , Docket Nos. 7486-70

CourtUnited States Tax Court
Writing for the CourtSIMPSON
Citation60 T.C. 569
PartiesROSS GLOVE COMPANY, ET AL.,1 PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
Decision Date23 July 1973
Docket Number3849-71.,Docket Nos. 7486-70,3838-71,3837-71,3848-71

60 T.C. 569

ROSS GLOVE COMPANY, ET AL.,1 PETITIONERS
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket Nos. 7486-70

3837-71

3838-71

3848-71

3849-71.

United States Tax Court

Filed July 23, 1973.


[60 T.C. 569]

Walter Treumann, Edward C. Rustigan, Stanton A. Kessler, and Franklin P. Auwarter, for the petitioners.

Denis J. Conlon and James L. Norris, for the respondent.

P was president and controlling shareholder of a Wisconsin glove-manufacturing corporation, and he desired to establish a glove-manufacturing operation in the Philippines. In 1960, a Bahamian corporation was formed, with P as the controlling shareholder, for the primary purpose of manufacturing gloves in the Philippines, and such corporation did conduct the business of the Philippine operation, although P represented to the Philippine authorities that he was the sole proprietor of the Philippine operation. During 1961 and 1962, the Bahamian corporation provided sewing services, made advances, and allegedly sold raw materials to the Wisconsin corporation. From 1963 through 1969, it sold gloves to the Wisconsin corporation. Held:

1. The Bahamian corporation was not a sham, and the income of the Philippine operation was its income;

2. Advances made from the Bahamian corporation to the Wisconsin corporation did not result in constructive dividends to P;

3. Adjustments under sec. 482, I.R.C. 1954, with respect to the transactions between the two corporations determined;

4. The deductibility by the Wisconsin corporation of certain travel expenses of the American manager of the Philippine plant and his family determined; and

5. The fraud penalty is not applicable.

SIMPSON, Judge:

The respondent determined the following deficiencies in, and additions to, the petitioners' income tax:

+-----------------------------------------------------------+
                ¦Petitioner ¦Year¦Deficiency¦Sec. 6653(b) 2 ¦Sec. 6654(a)¦
                +-------------+----+----------+----------------+------------¦
                ¦ ¦ ¦ ¦addition ¦addition ¦
                +-------------+----+----------+----------------+------------¦
                ¦ ¦ ¦ ¦ ¦ ¦
                +-------------+----+----------+----------------+------------¦
                ¦Ross Glove Co¦1961¦$19,075.42¦ ¦ ¦
                +-----------------------------------------------------------+
                
 1962 55,424.72
                 1963 73,307.41
                 1964 66,528.43
                 1966 60,259.52 $30,129.76
                 1968 65,389.64
                 1969 17,247.13
                Carl and Janet Ross 1961 85,234.69 42,617.34 $49.06
                
 1962 170,506.43 85,253.21 34.24
                 1963 146,772.19 73,386.09 28.10
                 1965 45,046.76 22,523.38
                 1966 125,740.11 62,870.06
                 1968 130,982.05 65,491.03
                 1969 38,109.62 19,054.81
                

[60 T.C. 570]

The respondent also determined that if the section 6653(b) addition for 1963 with respect to the individual petitioners is not applicable, that a section 6651(a) addition is applicable for that year. In his amended answer, the respondent increased the deficiencies against the Ross Glove Co. by $43,864.16 for 1961 and by $51,596.99 for 1962. Some of the issues have been settled, and the issues remaining for decision are: (1) Whether the income from the Philippine manufacturing operation is attributable to Mr. Ross or to Carla Trading, a Bahamian corporation; (2) whether advances from Carla Trading to Ross Glove resulted in taxable dividends to Mr. Ross, who controlled both corporations; (3) whether certain transactions between Ross Glove and the Philippine manufacturing operation were at arm's length within the meaning of section 482; (4) whether the travel expenses of the manager of the Philippine operation and his family are deductible in their entirety by Ross Glove; and (5) whether the fraud penalty is applicable with respect to Mr. Ross for the years 1961 through 1969.

FINDINGS OF FACT

Some of the facts were stipulated, and those facts are so found.

The individual petitioners, Carl Ross and Janet R. Ross, are husband and wife, who maintained their legal residence in Sheboygan, Wis., at the time their petitioners were filed in this case. They filed their joint Federal income tax returns for the years 1961 through 1969 with the district director of internal revenue, Milwaukee, Wis.

The corporate petitioner, Ross Glove Co. (Ross Glove), was incorporated in 1917 under the laws of the State of Wisconsin and had its business office in Sheboygan, Wis., at the time its petitions were filed in this case. It filed its Federal income tax returns for the years 1961 through 1969 with the district director of internal revenue, Milwaukee, Wis.

Description of the Petitioners and the Glove Industry

Since it was founded by the father of Mr. Ross, Ross Glove has manufactured men's, ladies', and boys' leather dress gloves in Sheboygan, Wis., and has sold such gloves to wholesalers and retailers in the United States. In addition, since 1959, Ross Glove has imported gloves from the Philippines and sold such gloves to wholesalers and retailers in the United States.

Mr. Ross joined Ross Glove on a full-time basis in 1946, and during the period from 1946 until his father's death in 1957, he assisted his father in operating the business. After his father's death, Mr. Ross became the sole shareholder of Ross Glove and its chief executive officer. In 1972, he was president of Ross Glove and owned approximately 60 percent of the outstanding shares of Ross Glove. His children,

[60 T.C. 571]

Carla (who was born in 1957) and Hugh Andrew (who was born in 1964), each owned approximately 20 percent of such shares.

The glove industry has always been very competitive, and during the period from 1946 to 1959, it included many small, cost-conscious manufacturers. During such period, Ross Glove manufactured between 40,000 to 60,000 dozen pairs of gloves per year in its Sheboygan, Wis., plant. Such plant consisted of 30,000 square feet and employed between 175 and 200 employees.

The primary raw materials utilized by Ross Glove in the manufacture of gloves were pickled sheepskins (which are made into leather), rabbit linings (which are used to line fur-lined gloves), and knit linings (which are used to line knit-lined gloves). The knit linings were domestically produced, while the sheepskins and fur linings were purchased by Ross Glove from suppliers in the Gloversville, N.Y., area, which obtained such material from outside the United States. After they were purchased, the sheepskins were tanned in the Gloversville area, and the resultant leather was shipped to Sheboygan, where the gloves were manufactured.

Interest in a Foreign Glove-Manufacturing Operation

Serious competition to the domestic glove industry began in 1955 with the importation of gloves from the Philippines, Japan, Europe, and Puerto Rico. One of Ross Glove's most important domestic competitors was opening a plant in the Philippines and several other competitors were operating in Puerto Rico. Labor rates were cheaper in those countries than in the United States, and as a result, Ross Glove was forced to lower its prices in order to maintain its portion of the market.

Mr. Ross began to consider establishing a foreign glove-manufacturing facility, and in 1957, he went to Puerto Rico to inspect glove-manufacturing operations located there. Sometime after such trip, Mr. Ross met with Mr. Louis Feurer, in the Milwaukee, Wis., office of Peat, Marwick, Mitchell & Co. (PM-Milwaukee), and discussed the possibility of establishing a foreign manufacturing facility. PM-Milwaukee were the accountants for Ross Glove and prepared its Federal income tax returns. Mr. Feurer had gained familiarity with the glove industry and with Ross Glove as audit manager of the Ross Glove account for PM-Milwaukee since 1950, and through other work involving the leather industry. Mr. Ross also spoke with key Ross Glove customers and was advised to consider overseas production or risk the possibility of losing their business.

In the spring of 1958, Mr. Ross met Mr. L. J. Gould, vice president of South Seas Trading Corp., a New York corporation (South Seas (NY)), to discuss the purchase of gloves by Ross Glove. A 100-

[60 T.C. 572]

percent subsidiary of South Seas (NY), South Seas Trading Corp., a Philippine corporation (South Seas (Phil.)), supplied the labor for the manufacture of various goods on a contract basis under the following arrangement: South Seas (NY) signed a contract with the customer, the customer sent the materials and generally the machinery needed to complete his order to the Philippines, and the labor services were performed in South Seas (Phil), which charged South Seas (NY) for such services. South Seas (NY) then charged the customer a contract price for the services, which included the expenses of both South Seas (NY) and South Seas (Phil.) and a profit for each. Pursuant to such an arrangement, South Seas (NY) charged Ross Glove $4.50 a dozen for a trial lot of 94 dozen pairs of leather gloves, and such charge was reduced to $4.30 a dozen on subsequent lots, which totaled about 3,000 dozen. Such prices included the costs of shipping the raw materials to the Philippines and the gloves from the Philippines to the west coast of the United States.

In late 1958, Ross Glove sent 10 sewing machines to the Philippines, and thereafter, it sent leather and rabbit linings to the Philippines at the approximate rate of 100 dozen per week. During 1959, South Seas (Phil.) performed the manufacturing operations through the preliminary inspection and packed the gloves 12 pairs to a bundle and 12 to 16 bundles to a carton. Ross Glove pressed and boxed the gloves and conducted the final inspection. The arrangement between Ross Glove and South Seas (NY) ended in early 1960.

During 1959, Mr. Ross made several business trips overseas. In March, he flew to the Philippines via Turkey, where he investigated sources of supply for sheepskins. While in the Philippines, he inspected the South Seas (Phil.) operation, as it was incurring difficulties in producing the gloves which were being manufactured for Ross Glove. He also investigated the possibility of setting up his own glove-manufacturing operation in...

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57 practice notes
  • Hosp. Corp. of America v. Comm'r of Internal Revenue, Docket Nos. 12988–78
    • United States
    • U.S. Tax Court
    • September 21, 1983
    ...Law. This in and of itself is not a sufficient reason to disregard the corporate existence of LTD. Ross Glove Co. v. Commissioner, 60 T.C. 569, 588 (1973). See also Nat Harrison Associates, Inc. v. Commissioner, supra, 42 T.C. at 618. In Higgins v. Smith, 308 U.S. 473, 477 (1940), the Supre......
  • Brittingham v. Comm'r of Internal Revenue , Docket Nos. 6626-71
    • United States
    • U.S. Tax Court
    • June 3, 1976
    ...the customs value is not one of the methods provided in the regulations for determining an arms'-length price. Yet, in Ross Glove Co., 60 T.C. 569, 605 (1973), we held that: Considering the similarity between the constructed value computation of Customs and the cost-plus method of section 4......
  • Donor, Lisa Lekumberry, Ex'r & Tr. v. Comm'r (In re Estate of Giovacchini), T.C. Memo. 2013-27
    • United States
    • United States Tax Court
    • January 24, 2013
    ...of Value. In the absence of contrary evidence, we accept, as we do with valuations by the Customs Service, Ross Glove Co. v. Commissioner, 60 T.C. 569, 605 (1973), that USFS appraised this property before purchasing it as required by 42 U.S.C. sec. 4651 (2006). The effect of another U.S. of......
  • Koufman v. Commissioner, Docket No. 8641-72
    • United States
    • U.S. Tax Court
    • October 28, 1976
    ...between the parties, but will be found whenever it is shown that such an arrangement in fact existed. Ross Glove Co. Dec. 32,053, 60 T.C. 569, 592 (1973). The petitioner's testimony on this issue was consistent with all the other circumstances, and we found it to be credible and All of the ......
  • Request a trial to view additional results
57 cases
  • Hosp. Corp. of America v. Comm'r of Internal Revenue, Docket Nos. 12988–78
    • United States
    • U.S. Tax Court
    • September 21, 1983
    ...Law. This in and of itself is not a sufficient reason to disregard the corporate existence of LTD. Ross Glove Co. v. Commissioner, 60 T.C. 569, 588 (1973). See also Nat Harrison Associates, Inc. v. Commissioner, supra, 42 T.C. at 618. In Higgins v. Smith, 308 U.S. 473, 477 (1940), the Supre......
  • Brittingham v. Comm'r of Internal Revenue , Docket Nos. 6626-71
    • United States
    • U.S. Tax Court
    • June 3, 1976
    ...the customs value is not one of the methods provided in the regulations for determining an arms'-length price. Yet, in Ross Glove Co., 60 T.C. 569, 605 (1973), we held that: Considering the similarity between the constructed value computation of Customs and the cost-plus method of section 4......
  • Donor, Lisa Lekumberry, Ex'r & Tr. v. Comm'r (In re Estate of Giovacchini), T.C. Memo. 2013-27
    • United States
    • United States Tax Court
    • January 24, 2013
    ...of Value. In the absence of contrary evidence, we accept, as we do with valuations by the Customs Service, Ross Glove Co. v. Commissioner, 60 T.C. 569, 605 (1973), that USFS appraised this property before purchasing it as required by 42 U.S.C. sec. 4651 (2006). The effect of another U.S. of......
  • Koufman v. Commissioner, Docket No. 8641-72
    • United States
    • U.S. Tax Court
    • October 28, 1976
    ...between the parties, but will be found whenever it is shown that such an arrangement in fact existed. Ross Glove Co. Dec. 32,053, 60 T.C. 569, 592 (1973). The petitioner's testimony on this issue was consistent with all the other circumstances, and we found it to be credible and All of the ......
  • Request a trial to view additional results

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