Court Opinion

ID: 9447499
Source: CourtListenerOpinion
Date Created: 2023-08-03 22:36:37.357919+00
Date Added: 2024-06-11T17:31:04.420525
License: Public Domain

SIMONS, Senior Judge
(dissenting).
Out of the organization, operation and activities of the respondent in a whaling venture which resulted in very substantial profit, there emerged a tax controversy culminating in a determination by the petitioner of a deficiency in respondent’s income tax return for the fiscal year ending April 30, 1948. The Tax Court held respondent’s income from the venture not taxable, as provided in Sections 14(c) (1) and 15 of the Internal Revenue Code of 1939. The petitioner seeks review of that holding.
The controlling question is whether the respondent, during its taxable year, was a “resident * * * foreign corporation engaged in trade or business within the United States,” as that phrase is used in Section 231(b) I.R.C. of 1939 as amended and whether the respondent, during the tax year, derived “gross income from sources within the United States,” as that phrase is used in Section 231(c) I.R.C. of 1939. The Tax Court supported its conclusion by lengthy and detailed findings of facts and I accept the evidentiary facts as found. Whether they support the legal conclusion at which the Tax Court arrived is the heart of the controversy. I shall endeavor to summarize the facts as best I may.
The purpose of the venture was to obtain sperm oil, which is obtained from the sperm whale and is used for industrial purposes, primarily as an additive to lubricants. Norway was the largest producer of whale oil in the world and an American corporation styled Archer-Daniels-Midland Company, hereinafter referred to as ADM, was the largest refiner of sperm oil in the world. In 1946, sperm oil was in short supply, primarily because the Norwegian whaling fleets had been depleted by enemy action during World War II and because whaling fleets then in operating condition were required for other purposes. Werner G. Smith, a citizen of the United States residing in Cleveland, was a director and executive vice president of ADM. He was its highest paid officer and was in charge of the division of its business known as the Werner G. Smith Company. This had been owned and operated by Smith independently but had been absorbed by ADM with Smith remaining in an executive capacity. The nature of its business required that ADM make long time commitments to its customers and so it sought to maintain large inventories and to establish assured sources of supply. During the period here involved, there was a great demand for sperm oil and a limited supply because of which ADM faced a critical business need. In an effort to meet it, Smith contacted two Norwegian citizens by the names of Hans Bull Ovrevik and Mag-nus Konow. Hans Bull, as Ovrevik was known, was a broker in sperm oil and Konow was a shipowner and a former manager of a Norwegian whaling company.1 These individuals, in turn, approached Anders Jahre, one of Norway’s leading whalers, to inquire whether he would be interested in organizing a new whaling company to engage in the production of sperm oil. They indicated that they would like to join Jahre in such a venture and that Smith in the United States would be interested, if by that method he could secure sperm oil for ADM. Jahre was willing to organize a *653company but suggested that it would be necessary first to secure a suitable factory ship.
Thereafter, Jahre caused the Falkland Shipowners Limited, a British corporation which he controlled, to acquire from the British government an old factory ship called the “Anglo Norse.” Jahre had at his disposal sufficient “killer boats” to outfit a whaling expedition. On June 22, 1946, Jahre prepared a memorandum which he circulated among the parties interested in the proposed whaling expedition and, as a result, Smith went to Europe, met with the others in Norway, where a memorandum was initialed which provided that an operating company be formed, that the capital stock of the company ($200,000.00) be subscribed 40% by Smith and 60% divided among the others; that the stockholders would lend the company $200,-000.00 in proportion to their stockhold-ings, that a syndicate be formed composed of the stockholders, that the entire production of sperm oil by the operating company would be sold to the syndicate, and then resold to the Smith Division of ADM, and that ADM would lend the new company up to $500,000.00. Upon Smith’s return to the United States, he discussed the proposed agreement with his attorney, Clayton A. Quintrell, who objected to the syndicate arrangement and it was abandoned.
Meanwhile, the price of sperm oil in the world markets had increased substantially and the labor and reconversion of the Anglo Norse found to cost more than anticipated so the Norway parties advised that oil could not be sold to ADM for $280.00 per ton. After consulting with the president of ADM, Smith indicated to the Norwegians that ADM would be willing to pay $320.00 per ton. Early in December, Jahre, Bull and Smith met in New York City and caused the respondent to be incorporated under the laws of the Republic of Panama. Jahre, Bull and Smith became its directors. They held their first meeting in New York City. The Tax Court found that Smith made his investment in the respondent in order to obtain an adequate supply of sperm oil for ADM.
At the first meeting of the directors, Jahre, acting for the respondent in New York, signed a sales contract between the respondent, as seller, and ADM, as buyer. While this contract provided that title to all sperm oil produced by respondent should pass to ADM upon the placing of oil in the tanks of the factory vessel, the proposed sales contract was never signed by ADM and never had operative effect. Shortly thereafter, on December 12, 1946, Jahre, in Norway, sought to formalize an arrangement with respect to the “Anglo Norse” by obtaining a charter for the ship from Falkland. Since the latter was a British corporation, it could not execute such charter to a foreign corporation without the approval of the British Government. The latter refused its consent on the ground that Panama had not subscribed to the international whaling agreement.
This decision jeopardized the entire sperm oil venture. Jahre first proposed that ADM charter the “Anglo Norse” but ADM refused to be a party to such arrangement. The respondent’s Norwegian shareholders then proposed to Smith that the Smidas Company, Inc. charter the vessel and work out some relationship with the respondent for the conduct of the expedition. Smidas accepted the proposal.
This is the first reference to Smidas in the court’s factual narrative and I digress for a moment. Smidas is an American export corporation, formed in 1945. Smith owned 54.5% of its stock acquired at its incorporation and was also its Secretary-Treasurer. Its business was to promote exports of certain technical items and its income was derived from commissions and fees. Nothing in the findings indicates that Smidas was active, or even interested in sperm oil, or that it participated in any way in the organization of the .respondent. It was, however, available to Smith by reason of his controlling interest. There is no evidence or finding that Smidas contributed anything to the organization *654of the respondent, or received any part of the purchase price from ADM.
I return to the Tax Court’s narrative. Smidas authorized a contract to be signed by Smith, as its Secretary-Treasurer, to charter the “Anglo Norse” and it was chartered on or about February 5, 1947, in its name. During the fiscal year, various credit arrangements were worked out by the respondent. Jahre negotiated for it a credit of 300,000 British pounds from Lazard, a London banker. Additional loans were obtained from respondent’s stockholders and from ADM in order to carry on operations. While, on February 21, 1947, a contract was entered into between respondent, as seller, and ADM, as buyer, of the oil to be produced, it was later rescinded when Smith’s attorney, Quintrell, pointed out that Smidas and not respondent was to be the legal owner of the oil. Two new contracts were thereafter drawn * * * one between the respondent and Smidas, on March 8, 1947, and a sales contract between Smidas and ADM, dated May 26, 1947. Under the first, respondent was to manage the operations, furnish the “killer boats,” hire personnel, pay all expenses and insurance, assume all the obligations of Smidas, and exonerate Smidas from liability relating to the whaling operations. Smidas, in turn, was to enter into a contract with ADM to sell it all the oil produced at $320.00 per ton and to pay the entire proceeds to respondent for services and for undertaking the burdens, expense and risks, less $25,000 which it would retain along with any selling expenses. The sales contract between Smidas and ADM provided that title pass in New York City upon the delivery of the oil.
The venture was launched. “Killer ships” were acquired, crews hired and repairs on the “Anglo Norse” made. Smith, in the United States, arranged for fuel to be delivered to the ships while at sea. The expedition began in April, 1947, and operations continued in South American fishing grounds until about January 4, 1948. The operations under Jahre’s supervision produced 15,357 tons of sperm oil. Part of the oil was delivered to ADM at New York City by private transport, in October, 1947, at which time ADM paid the purchase price of $2,622,343 in the following manner: $1,429,900 was paid by ADM directly to the banker, Lazard, to discharge its lien and the balance was deposited by ADM to the respondent’s account with the New York Guaranty Trust Company. On January 27, 1948, the “Anglo Norse” delivered the rest of the oil to ADM in New York and the purchase price of $2,-287,668 was deposited in the New York bank account of the respondent. This account had been opened in order to pay the respondent’s obligations in the United States. Another account had also been opened in a Norwegian bank. Smith could make withdrawals from the New York account but orally agreed to first secure approval by the Norwegians. All books and records, other than those involved in the New York bank account, were kept in Norway. Four directors’ meetings were held in New York City and several informal meetings in Norway.
The respondent reported net income of $810,576.38 — later adjusted to $924,979.-72 — for the fiscal year but denied tax liability on it. The Commissioner determined a deficiency of $351,492.29. The Tax Court, however, held there was no deficiency, since Smidas was the owner of the oil sold to ADM in New York and respondent was not engaged in any substantial, regular, or continuous business activity in the United States. Four judges of the Tax Court dissented, taking the view that in reality respondent conducted the whole whaling operation and Smidas was its “mere agency or instrumentality.”
The question to be determined was whether the respondent was “engaged in a trade or business within the United States” as defined in Sec. 231(b) of the 1939 Internal Revenue Code, (26 U.S.C. 1952 ed.) which reads:
“(b) Resident corporations. A foreign corporation engaged in trade or business within the United *655States shall be taxable as provided in Section 13 and Section 15.”
Most of the activities cited by the petitioner as having taken place within the United States were, in the opinion of the Tax Court, without substance including the arrangement for the discharge of the oil when it was delivered in New York, the legal services performed by Quintrell, his position as assistant secretary of the respondent, payment of obligations required to be paid in American dollars out of the- bank account with the Guaranty Trust Company, or the holding of directors’ meetings in New York. They were considered by it as ministerial and clerical in nature, involving little exercise of discretion or business judgment necessary to the production of the income in question. The holding of directors’ meetings in New York were solely, it was said, for the personal convenience of the directors, with no' particular consequence in any major aspect.
The Court reasoned that the fact that the whaling enterprise was under the management of the respondent at the time the oil was delivered was not enough to require a holding that the respondent was engaged in trade or business within the United States. It contended that to be engaged in trade or business within the United States the taxpayer must, during a substantial portion of the taxable year, have been regularly or continuously transacting a substantial portion of its ordinary business in this country, and this the respondent did not do. The respondent is, therefore, not a resident foreign corporation engaged in trade or business within the United States and not taxable as provided in Sections 14(c) (1) and 15 of the Internal Revenue Code of 1939.
The four dissenting Tax Court judges disagreed. They relied upon holdings wherein the Supreme Court has repeatedly taken the position that the incidence of taxation depends upon the substance of a transaction and not its form. Gregory v. Helvering, 293 U.S. 465, 55 S.Ct. 266, 79 L.Ed. 596; Commissioner of Internal Revenue v. Court Holding Co., 324 U.S. 331, 65 S.Ct. 707, 89 L.Ed. 981, and Griffiths v. Commissioner, 308 U.S. 355, 60 S.Ct. 277, 278, 84 L.Ed. 319. They relied on the observation of the Supreme Court in the latter case: “We cannot too often reiterate that ‘taxation is not so much concerned with the refinements of title as it is with actual command over the property taxed, the actual benefit for which the tax is paid’ ” and on the reasoning of the Supreme Court in Corliss v. Bowers, 281 U.S. 376, 378, 50 S.Ct. 336, 74 L.Ed. 916. The dissenters deemed it clear that in reality the respondent conducted the whole whaling operation and the sale of the oil and that Smidas was a “mere agency or instrumentality” used by the respondent for chartering the “Anglo Norse.” They point out that the respondent assumed all the obligations of Smidas under the charter party, procured the “killer boats,” outfitted each vessel, hired all necessary personnel, procured the insurance, conducted the whaling operations, paid all expenses, delivered at least a part of the oil and directly received the proceeds from the sale of the oil. Whereas, in form, the contract provided that the respondent would manage, finance and operate the expedition for Smidas, the respondent received payment of the entire proceeds from the sale of the oil except $25,000 which would be retained by Smidas. In reality, it was the respondent which received all the proceeds and paid Smidas for what appears to have been merely entering into the charter agreement. All the oil was sold in the United States and since the delivery and sale of products are the most important functions of a business for profit, it is clear that the respondent was engaged in trade or business within the United States within the meaning of Section 231(b) of the Internal Revenue Code of 1939 and, therefore, taxable upon income from sources within the United States.
I agree with the reasoning of the dissenting judges. To it, I may add that the whole enterprise was a unified venture by which Smith, as the dominating *656spirit, sought and succeeded in obtaining sperm oil for ADM without which the economic status of ADM would be greatly jeopardized. To this end, Smith interested the Norwegian whaling interests and when faced by an impasse in respect to the charter of the “Anglo Norse,” and after refusal of ADM to act as the charter party, secured the assistance of one of his own corporations, Smidas. The result was the delivery of processed oil finally to ADM though preliminary agreements indicated a differing program, directed to the same end. It is idle in considering what is meant by being “engaged in trade or business within the United States” to submit an enterprise to the test of whether the activity is normal, regular, or continuous in other enterprises in ordinary times. By its very nature, the present venture contemplated a “one shot” operation with substantial profits envisioned by the unusual circumstances that existed in an abnormal time.
We had occasion in Commissioner of Internal Revenue v. Ashland Oil & R. Co., 6 Cir., 99 F.2d 588, 591, to study the problem of the relationship between form and substance in tax cases in a different environment, where we concluded that: “The question remains, however, whether if the entire transaction, whatever its form, was essentially in intent, purpose and result, a purchase by Swiss of property, its several steps may be treated separately and each be given an effect for tax purposes as though each constituted a distinct transaction. * * * the courts have recognized that where the essential nature of a transaction is the acquisition of property, it will be viewed as a whole, and closely related steps will not be separated either at the instance of the taxpayer or the taxing authority.”
It is true that we are dealing with just one sale involving two deliveries of oil to the United States. It must be noted that the transaction in the United States was the culmination of all of the respondent’s business .activity. It involved an expedition which was at sea for over nine months, produced 15,357 tons of sperm oil, a purchase price of over three million ($3,000,000) dollars, and a net income of $924,979.00. These end results were brought about by the sale in the United States which accounted for over 90% of respondent’s total income for the tax year. I conclude that all activities ending in the resulting sale in the United States constituted the respondent being engaged in trade or business within the United States under Section 231(b) I.R.C.
I believe the decision should be reversed and the cause remanded for a determination of the amount of income attributable to sources within the United States within Section 231(c) I.R.C.

. Konow later retired from the project.