Case Name: The STANDARD OIL COMPANY, an Ohio Corporation, v. The UNITED STATES
Court: United States Court of Claims
Jurisdiction: United States
Decision Date: 1955-05-03
Citations: 130 F. Supp. 821
Docket Number: No. 49152
Parties: The STANDARD OIL COMPANY, an Ohio Corporation, v. The UNITED STATES.
Judges: Before JONES, Chief Judge, and LITTLETON, WHITAKER, MADDEN and LARAMORE, Judges.
Reporter: Federal Supplement
Volume: 130
Pages: 821–824

Head Matter:
The STANDARD OIL COMPANY, an Ohio Corporation, v. The UNITED STATES.
No. 49152.
United States Court of Claims.
May 3, 1955.
H. Vincent E. Mitchell, Cleveland, Ohio, for plaintiff. M. E. Newcomer and McAfee, Grossman, Taplin, Hanning, Newcomer & Hazlett, Cleveland, Ohio, were on the brief.
H. Brian Holland, Asst. Atty. Gen., for the defendant. Andrew D. Sharpe, Ellis N. Slack and J. W. Hussey, Washington, D. C., were on the brief.
Before JONES, Chief Judge, and LITTLETON, WHITAKER, MADDEN and LARAMORE, Judges.

Opinion:
MADDEN, Judge.
On July 1, 1940, the Federal Manufacturers' Sales Tax on gasoline was, by a statute enacted before that date, to be increased from its former rate of one cent to the rate of one and one-half cents a gallon. In anticipation of that increase, the plaintiff, the manufacturer of the gasoline in question, on June 27, purported to lease to the Fleet-Wing Corporation, hereinafter called Fleet-Wing, which had for some years been buying large quantities of gasoline from the plaintiff, storage tanks located on the land of the plaintiff's refineries at Canton, Cleveland, Toledo, Lima and Cincinnati, Ohio. The purpose of leasing the tanks was to enable the plaintiff to transfer possession of gasoline to Fleet-Wing by placing it in the tanks. On June 28 the plaintiff entered into an agreement of purported sale to Fleet-Wing of 6,300,000 gallons of gasoline. Orders for delivery of the gasoline into the leased tanks were given on June 27, 28, 29 and 30, and the gasoline was, in fact, delivered by the plaintiff into the leased tanks on or before June 30. The tanks were locked, when filled, and the keys to the locks were turned over to Fleet-Wing, also on or before June 30.
From the foregoing, it would seem that the plaintiff, the manufacturer, had sold the gasoline before July 1, and that the tax rate applicable to the sale was one cent per gallon. The Commissioner of Internal Revenue, however, concluded that the purported sale was not a sale, because Fleet-Wing Corporation was a wholly owned subsidiary of the plaintiff. He concluded that no true sale took place until later when Fleet-Wing, as the alter ego'oí the plaintiff, in due course sold the gasoline to others. That took place after July 1, when the one and one-half cent tax rate was in effect. The Manufacturers' Excise Tax becomes due when the manufacturer sells the product. The Commissioner imposed the higher rate and the plaintiff paid it. The difference, with interest accrued up to the date of its collection on August 12, 1942, was $35,015.92. The plaintiff sues for the recovery of that amount, with statutory interest.
Except for the fact that Fleet-Wing was the wholly owned subsidiary of the plaintiff, the conduct of the parties would seem quite natural. When a sales tax is to be imposed or to be increased, individuals and business enterprises buy as many of the goods as they have room for and will need, in order to avoid paying the tax. The Government points to the meticulous care and formality with which the instant transaction was carried out; the formal lease, the agreement of sale, the orders for delivery, the livery of seisin of the keys. It says, in effect, "Methinks the lady doth protest too much". We are, of course, not competent in that field. But we see in the formalities no particular evidence of a mens rea in these inanimate juristic entities, except by way of premonition of the suspicious eye which the tax-gathers have, as it has turned out, cast upon the transaction.
The law permits the fictitious situation of a legal entity which is wholly owned by and -is therefore wholly subject to the control of, another legal entity or an individual. In proper cases, the law, having permitted the creation of this fiction, makes believe that it does not. exist. The law "pierces the corporate veil" and gets to the substance of the transaction. In the instant situation, if we try to imagine how the parties would have acted if Fleet-Wing had not been owned by the plaintiff, it would seem that they might well have acted the same way. The plaintiff would still have wanted Fleet-Wing to sell as much of the plaintiff's gasoline as possible. It would have wanted to put this good customer in a position of competitive advantage over sellers of rival gasolines. If it had storage tanks available, as it apparently did have, it would have been quite normal for it to do what it did here.
As to the Government's contention that, for tax purposes, Fleet-Wing was identical with the plaintiff, and the purported sale from the plaintiff to Fleet-Wing was a nullity, we doubt whether the Government would really stand by that proposition. If, before Fleet-Wing removed the gasoline from the leased tanks and sold it to others, lightning had struck a tank and destroyed the gasoline, no tax at all would have been payable by anyone, according to the Government's contention in this case, because the manufacturer would never have sold the gasoline.
The Government cites, among other cases, our decisions in The Ayer Company v. United States, 38 F.Supp. 284; 93 Ct.Cl. 386; Black, Starr & Frost-Gorham, Inc., v. United States, 39 F.Supp. 109, 94 Ct.Cl. 87; and Kin-Septic Co. v. United States, 64 F.Supp. 142, 105 Ct.Cl. 594. In these cases the subsidiary corporations were formed for the purpose of avoiding excise taxes. They operated at the same place with the same employees doing the same things which they had done before the tax questions arose. They were obvious shams. In the instant case, Fleet-Wing had been formed, and its stock had been later acquired by the plaintiff for reasons and purposes wholly unrelated to any tax question; it had its own office and its own sales accounting office and administrative staff; it conducted its own advertising and determined its own business policies, it sold its gasoline to its own customers and made no use of the plaintiff's sales organization. It sold its gasoline under its own trade name and its gasoline competed with that of the plaintiff in the market in the same area.
The Government cites Continental Oil Co. v. Jones, 10 Cir., 113 F.2d 557. There the parent company purported to sell large quantities of gasoline and oil to wholly owned subsidiaries in anticipation of an increase in the Manufacturers' Excise Tax. It purported to sell 33 million gallons of gasoline and 5 million gallons of oil to a subsidiary which had never been in the business of buying or selling gasoline or oil and had no facilities for so doing, had no money, and was nothing but "a small dummy or holding company organized to protect" the parent company's name in states where the parent company was not authorized to do business. The gasoline and oil were ultimately sold by the parent company in the usual way and the money never passed, even formally, through the hands of the subsidiary company.
The Government urges that the plaintiff cannot recover because, in general, Fleet-Wing raised the price of gasoline to its customers by one-half cent on July 1, 1940, and thus passed on the tax to them. But the tax was imposed on the plaintiff and paid by it and not passed on by it to Fleet-Wing. Only by concluding that the sale to Fleet-Wing was a nullity, which we do not do, would the price which Fleet-Wing charged its customers be relevant on the question of passing on the tax.
We think that what occurred in the case before us was tax avoidance, and not tax evasion. The fact that there was no reason for the parties doing what they did, when they did it, except to escape taxes, does not make the transaction vulnerable. United States v. Cumberland Public Service Co., 338 U.S. 451, 70 S.Ct. 280, 94 L.Ed. 251, affirming, 83 F.Supp. 843, 113 Ct.Cl. 460.
The plaintiff may have a judgment for $35,015.92, with interest according to law.
It is so ordered.
LARAMORE, WHITAKER, and LITTLETON, Judges, concur.