Source: https://law.justia.com/cases/federal/appellate-courts/F2/435/182/96168/
Timestamp: 2019-08-22 13:10:04
Document Index: 625428982

Matched Legal Cases: ['§ 922', '§ 482', '§ 482', '§ 482', '§ 482', '§ 482', '§ 482', '§ 482', '§ 38', '§ 482']

Baldwin-lima-hamilton Corporation, a Corporation of Delaware, Plaintiff-appellee, v. United States of America, Defendant-appellant, 435 F.2d 182 (7th Cir. 1970) :: Justia
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Baldwin-lima-hamilton Corporation, a Corporation of Delaware, Plaintiff-appellee, v. United States of America, Defendant-appellant, 435 F.2d 182 (7th Cir. 1970)
US Court of Appeals for the Seventh Circuit - 435 F.2d 182 (7th Cir. 1970)
Johnnie M. Walters, Asst. Atty. Gen., John Brown, Atty., Tax Division, U. S. Department of Justice, Washington, D. C., William J. Bauer, U. S. Atty., Chicago, Ill., Lee A. Jackson, Harry Baum, Stuart A. Smith, Attys., Department of Justice, Washington, D. C., Thomas A. Foran, U. S. Atty., of counsel, for appellant.
Taxpayer argues that since AWH was a valid Western Hemisphere Trade Corporation and entitled to take advantage of the tax benefits under § 922, the Commissioner cannot use § 482 to strip it of its favored tax treatment. The creation of a corporation in order to obtain tax benefits is a valid business purpose and cannot constitute evasion of taxes. Nevertheless, Western Hemisphere Trade Corporations are not immune from § 482.
If Congress had intended to make * * * [§ 482] * * * inapplicable to Western Hemisphere trade corporations, it would have been very simple to have said so at the time the original Western Hemisphere trade corporation provisions were enacted. Eli Lilly & Company v. United States, 372 F.2d 990, 1001, 178 Ct. Cl. 666, (1967).
Even if the creation of a Western Hemisphere Trade Corporation, such as AWH, was not for the purpose of tax avoidance, the sales transactions and pricing policies between it and AW are subject to § 482 inquiry. The income of each company must be "clearly reflected" for tax purposes.
Taxpayer's reliance on W. Braun Co. v. C.I.R., 396 F.2d 264 (2d Cir. 1968), is misplaced. Braun merely holds that the creation of a corporation to take advantage of the tax laws does not constitute evasion of taxes under § 482. It does not decide that § 482 is inapplicable if the income of a validly created corporation, such as AWH, is not clearly reflected vis-à-vis its parent.
The evil to which § 482 addresses itself is the "* * * improper `milking' of one business for the benefit of the other, * * *." Simon J. Murphy Co. v. Commissioner of Internal Rev., 231 F.2d 639, 644 (6th Cir. 1956). See Mertens, Law of Federal Income Taxation, vol. 7, § 38.61 et seq. As the Third Circuit stated:
The Commissioner decided that the inter-organizational sales between AW and AWH reflected on their tax returns presented an inaccurate portrait of their respective income. For this reason, he re-allocated the income between the companies under § 482 in order to place AWH on a parity with the other distributors of AW's products.
Taxpayer bears the burden in this refund suit to show that the Commissioner's re-allocation was arbitrary, and that the amounts shown on the tax returns were correct. Local Finance Corp. v. C.I.R., supra; Eli Lilly & Co. v. United States, supra; Grenada Industries, Inc. v. Commissioner of Internal Rev., 17 T.C. 231, 259 (1951), aff'd 202 F.2d 873 (5th Cir. 1953), cert. denied 346 U.S. 819, 74 S. Ct. 32, 98 L. Ed. 345 (1953). It advanced two theories in the district court to show that the AW-AWH sales transactions constituted an arm's length relationship, and that the Commissioner's total re-allocation was thus erroneous. First, it alleged that the 5% profit margin realized in the AWH resolution by AW represented the profit AW would have made in an arm's length sale to other distributors. Second, the actual profits AWH realized would have been the same if it were an uncontrolled domestic distributor of AW. While both theories indicate that a total re-allocation of income from AWH to AW by the Commissioner was erroneous, they also show that some re-allocation was necessary. The district court did not critically examine these theories and make a finding that partial re-allocation was necessary.
The second theory — treating AWH as an independent domestic distributor — rests on the assumption that the prices AWH paid would have been the same if it were an independent distributor. The fallacy of this theory is that AWH would not have been entitled to the discounts which the study gave it. Without the discounts, AWH's costs would be higher and its profit lower. To give to AWH certain discounts which it would not have received as an independent and uncontrolled distributor is not a proper application of the arm's length standard here.