Legal Document

336 U.S. 422 69 Supreme Court Reporter 726 93 L.Ed. 779 NATIONAL CARBIDE CORPORATIONv.COMMISSIONER OF INTERNAL REVENUE. AIR REDUCTION SALES CO. versus COMMISSIONER PURE CARBONIC, Incorporated Nos. 151, 152, and 153. Argued Jan. 6, 1949. Decided March 28, Mr. Erwin N. Griswold, of Cambridge, Mass., for petitioners. Hilbert Pacific KF135 P2 Zarky, Washington, D.C., respondent. [Argument Counsel from page 423 intentionally omitted] Chief Justice VINSON delivered the opinion Court. 1 Petitioners are three wholly owned subsidiaries Air Reduction Corporation (Airco). They seek a determination question whether deficiencies in income declared value excess profits taxes year 1938 found by Commissioner Internal Revenue properly chargeable to them. Their contention is that they corporate agents Airco, their operations must be determined on basis. 2 By series combinations dissolutions previously acquired subsidiary companies, Airco had, prior 1938, reduced number its four. All operated strictly accordance with contracts Airco.1 The were utilized as operating companies four major fields operation which it was engaged. Sales Company carried manufacture sale gaseous constituents air; National Carbide Corporation, calcium carbide; Pure Carbonic, Inc., carbon dioxide; Wilson Welder & Metals Co., welding machines, equipment supplies.2 3 between provided, substance, latter employed manage operate plants designed production products assigned each, sell output plants. furnish working capital, executive management office facilities subsidiaries. turn agreed pay all six percent outstanding capital stock, each case nominal amount.3 Title assets held them, amounts advanced purchase shown books accounts payable Airco. company thus approximated amount owed No interest ran these accounts. 4 organized horizontally into overriding divisions: corporate, operations, sales, financial, distribution, research. Officers heading division were, turn, officers Top officials similar positions companies. Directors met only ratify actions directors 5 considered turned over pursuant own reported such. per cent return entitled retain. Similarly, declaring stock tax purposes, at each. notified petitioners substantial returns, having taken position taxable well retained. Tax held, however, petitioners' property 8 United States Reports KF6280 A2 U55 594. Three judges dissented. Appeals Second Circuit reversed. 167 Federal Reporter, 2nd Series 304. We granted petition writ certiorari, 335 810, 44, because this conflict disagreement courts continuing vitality Southern Lowe, 1918, 247 330, 38 540, 62 1142. 6 Petitioners' is, our decision Moline Properties, Revenue, 1943, 319 436, 63 1132, 1135, 87 1499, laws require taxation entity if engages 'business activity,' expressly excepted situation corporation agent owner; supra, defines content 'agency' purposes; that, found, Court's characterization relationship corporations 'aptly descriptive' It follow, according petitioners, received them transmitted 7 Respondent does not quarrel first third propositions. collision occurs second. issue presented therefore, principal-agent described case—and arrangement contains 'usual incidents an agency relationship,' phrase used roperties, Commissioner, supra. established concept has survived later decisions may dealt rather summarily. That treated earned before 1, 1913, effective date Income Act accrued parent despite fact actual transfer funds declaration dividends occurred subsequent thereto. theory two could identical, purposes 1913 Act, complete domination control exercised subsidiary. 9 decision, said have 'looked beyond form,'4 'ignored separate corporation.'5 Whatever dialectics employed, commentators one there question; earnings merely 'a paper transaction.' (247 543) did not, purport rest any principle agency. reference (Central Pacific) made context: 10 '* * Central substance identical ownership possessed former, stockholder other capacities. While legal entities, yet fact, practical merged, former being but part latter, acting subject things proper direction control.' 337, 542, clear doubt referred usual or technical sense. 'Agency' 'practical identity,' those words case, unquestionably opposite sides same coin.6 close basis result reached, whatever articulation. 11 been repudiated Lowe special facts, we formed business share burden identity, operation, owner. Complete corporation, primarily dependent upon such ownership—the important ingredients case—are no longer significance determining taxability. supra; Burnet Commonwealth Improvement 1932, 287 415, 53 198, 77 399.7 12 In both cases last cited, argument now urged us rejected. cases, relied taxpayers. both, owner simply had identity distinct stockholders different form. true here do ask ignored completely purposes. willing retain Airco's 'agents.' But serves emphasize inapplicability rely. There, Properties If accorded status would taxed entire received. so after 1913; thereto directly.8 13 think, without merit based erroneous interpretation argument, quote 'is basically form depends issues discussed.'9 Ownership incident can consequences when clothed garb than worn removable veil. 14 necessary go farther. seem consider greater validity court, characterizing agents, term exactly Pacific, cases. According opinion: 15 'The (was decided) proceeding is: Whether, respondent determined, belonged them; whether, contend, exclusive small paid under contracts, company, incorporated departments, divisions branches express contract Airco.'10 16 expunged apparently since overruled purpose' rule laid down absolute, disregarded (or owner) facts approximate case. disagreed. decisions, carries activity retains affairs minutest detail, provides takes make difference tax-wise. court concluded 'Even though set up test, regard pro tanto controlling.'11 17 reached clearly required decisions. Our reluctance erase due belief lays correct generally, concerns 'very peculiar facts' distinguishable involving corporation.12 For reason, have, instead, 419, 199, 399; 439, 1134, 1499. out incompatible demonstrated consideration enumerated Court, reliance emphasis placed These relate ownership, control, right reserved parent. 18 So far concerned, see sole stockholder. Undoubtedly great majority 'dummies' sense policies day-to-day activities owners individually. significance, findings as, Board regular meetings petitioners,' chairman, vice chairman president charge administration petitioner directives respect promulgated board.'13 reversed face finding 'Full beneficial Thompson (the stockholder), who continued his individually.'14 19 Some stress here, adopted was, stated, amount. Assets considerable value, title subsidiaries, balanced thought material 'All furnished cash stock. supplied petitioner.' 20 valued equal assets, raised reality then comparable, Properties. think financing means book indebtednesses lieu increased subsidiaries' A derive sources: contributions, loans, operations. stockholder, preferred supply second method, either two,15 utilization need decide contributions loans. sufficient say very factors which, show 'supplied' 'furnished' also indicate recipients rat er loans.16 21 Not above account, become within meaning felt shows 'belonged Airco' should requiring earn it, anticipatory agreements prevent vesting earners, foreclose result. Lucas Earl, 1930, 281 111, 50 241, 74 731; Helvering Clifford, 1940, 309 331, 60 554, 84 788; Joliet Chicago R. 1942, 315 442, 86 658; Sunnen, 1948, 333 591, 68 715. Of course duties collection transmit money he receives principal agreement.17 deducting expenses profits, sure indication mere agents. Such agreement entirely consistent corporation-sole exists, relationships well.18 22 What trustee handling owner-principal therefor. Whether operates name account principal, binds actions, transmits receipt attributable services employees belonging principal19 some relevant considerations exists. agent, relations Its purpose carrying normal agent.20 Absence mentioned above, essentiality existence indicates fallacy 23 apparent claim net aggregating $1,350, during (1938) worth nearly million dollars, sales approximately one-half dollars net. thousands. passed lender, answer, belong principal. except trifling amounts, command persons, owns, dominates reasons own, wished avoid burdens principalship.21 See Sheldon Building Cir., 1941, 118 855. Compare Forshay B.T.A. 537. cannot escape choice, matter how bona fide motives longstanding arrangements. When relationship' meant just that—not disclo ed 24 arguments find merit. judgment affirmed. 25 Affirmed. typical subsidiaryparent follows: 'Airco hereby employs operate, contract, oxygen, acetylene gases apparatus containers transportation *; likewise market sell, agrees (1) give use cylinders, containers, motor trucks, equipment, shipping facilities, owns hereafter acquire; (2) need; (3) provide (but accounting, bookkeeping clerical service), accommodation conduct business. plants; maintain class condition, charging repairs replacements expense setting aside reserves depreciation distribute, product manufactured efficiently possible (4) maintenance selling, discharge liabilities incurred therein thereby collect receivable proceeds resulting therefrom; (5) credit monthly accruing cent. (6%) annum authorized deduct retain, accept full compensation hereunder; (6) emand becoming credited aforesaid.' deficit involved action. 125 shares $100 par value; Carbide's Carbonic value. Mertens, Law Taxation (1948 ed.), Vol. 10A, Page 237. Finkelstein, Corporate Entity Tax, 44 Yale L.J. 448. Ballantine, Separate Parent Subsidiary Corporations, Cal.L.Rev. 12, 18, writer discusses 'What terms 'adjunct,' 'agency,' 'instrumentality,' 'creature' 'mouthpiece'? conditions exist warrant treating adjunct B corporation? word often synonym mean, descriptive relation variously defined 'alter ego,' 'alias,' 'device,' 'dummy,' 'branch,' 'tool,' 'corporate double,' conduit,' etc., 'means' through corporation's actively prosecuted.' Munson Steamship Line 849. w § explained depending particular legislative justified disregarding entity. Plaintiff's Exhibit P, Number 452, October Term 1917, statement subsidiary, central pacific showing payment $3,333,846.18, total less one-sixth (i.e., making allowance months law went effect 1). pages 440-441, 594, 611. After enumerating pertinent, concluded: 'It true, course, separately foregoing themselves inoperative general juristic persons viewed together bring announced supra.' 614. added Appeals, whose written Judge, much mention references isolated quotations quoted footnote 1. court's phrases 'when shall person, parent'. 304, 305. 307. Two basic distinctions Gulf Oil Lewellyn, 248 71, 39 35, 133, followed immediately apparent. First, parent-owner corporation; second, earned, it. importance indicated 8, dispute liability post-1913 1913. intent Pacific's pre-1913 actually Act. states turns others controlling raised.' 338-339, 543, terms, limited precise facts. Much testimony introduced intercorporate certain more various performed departments integration system indicated, immaterial. charged, distorted extent, 'belonged' time receipt. distortion allocating $400,000 authority given him 45 26 Code KF62 45, Annotated KF65 U5 45. 647, 650. As matter, Even purchased directly withdrawn entered substantially Since year, obviously impossible note 15. C. E. Adams, Chairman testified represented realized dissolution words, never expectation dissolution. accounts, 'loans' name, capital. American Cigar 33 425; Hoyt 145 634; Van Clief Helvering, U.S.App.D.C. 135 254; Reading 132 306. Levy Simonds, Stockholder Advances Corporations . Are Loans Capital Contributions? Taxes 127, 128, state 'intention lend repayment valid debt.' further contributions. Berry Motor Car 43 Memo. Op. 1209, 25, 1941. gas cylinders amounting about $13,000,000, retained charge. these, too, unnecessary Free loan, allocations problem us. Restatement o Agency, 427. 658, lessee railroad rental payments lessor's directly. lessor thereafter active nevertheless stockholders, Article 22(a)-1 Treasury Regulations 101, provides: 'Art. 22(a)-1. included gross income.—Gross includes personal professional services, income, dealings property, interest, rent, dividends, gains, derived source whatever, unless exempt law. (See sections 22(b) 116.) general, gain labor, combined, provided understood include profit gained conversion assets. *' Eisner Macomber, 1920, 252 189, 207, 40 64 521, 1570; Merchants Loan Trust Smietanka, 1921, 255 509, 519, 41 386, 65 751, 1305. supplies labor hardly contended income. even satisfies tests sham unreal. Higgins Smith, 308 473, 355, 406; Gregory 1935, 293 465, 55 266, 79 596, 97 1355. Escaping 'business' activity. Investors Hoey, 144 466. main adoption method related Corp., these: 'Frankly, 1918 still, Reduction, New York corporation. early became evident, N Dec. Immigration Nationality Decisions already said, going scattered States. didn't want domicile 48 Union service states, distinctly reason using setup connection run divisions, sets forth. 'Now, addition field firing line, representative, officer, will say, trouble arises customer, officer all, goes straightens increases cudos (sic), helps negotiating efforts, competitors outside.' attempting vis-a-vis process agents; not. Peterson Chicago, R.I. P.R. 1907, 205 364, 391, 27 513, 51 841; Cannon Mfg. Cudahy Packing 1925, 267 333, 250, 634. deal customers relationship. On contrary, organization lead believe dealing top men manufacturing selling purchased.

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