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contractappealcorporation

contractcorporationsustained

Related Cases

Asiatic Petroleum Co., Delaware, Limited, v. Commissioner of Internal Revenue, 79 F.2d 234, 35-2 USTC P 9547, 16 A.F.T.R. 610, 1936-1 C.B. 181

Facts

Asiatic Petroleum Company, a Delaware corporation, was a holding company that owned shares in various subsidiaries, including a Louisiana corporation called Norco. In 1929, Asiatic contracted to sell its Norco shares to a Netherlands corporation, Bataafsche, at cost, while Bataafsche subsequently sold those shares at a profit to another corporation. The Commissioner of Internal Revenue determined that the profit realized by Bataafsche should be allocated to Asiatic, resulting in a tax deficiency, which the Board of Tax Appeals confirmed.

Asiatic owned 39,997 shares of a Louisiana corporation (referred to as Norco), and on January 8, 1929, contracted in London, England, to sell said Norco shares to Bataafsche for the price of $3,999,700, which was the cost basis of the stock to Asiatic.

Issue

Did the Commissioner of Internal Revenue properly apply section 45 of the Revenue Act of 1928 to allocate income from Bataafsche to Asiatic Petroleum Company, thereby creating a tax deficiency?

The petitioner contends that section 45, properly interpreted, is inapplicable to the facts of this case, and, if applied, is unconstitutional.

Rule

Section 45 of the Revenue Act of 1928 allows the Commissioner to allocate gross income among businesses controlled by the same interests to prevent tax evasion or to clearly reflect income.

Section 45 authorizes the Commissioner to make an allocation of gross income among businesses controlled by the same interests in order (1) to prevent evasion of taxes, or (2) clearly to reflect the income of any of such businesses.

Analysis

The court found that the transactions between Asiatic and Bataafsche were structured to avoid taxation on the profit that Asiatic would have realized had it sold the shares directly to Shell Union. The court interpreted 'evasion of taxes' broadly, concluding that the avoidance of realizing income through the transfer of shares constituted tax evasion under section 45. The court also determined that the definition of 'gross income' should be applied broadly, regardless of whether the recipient was a domestic or foreign corporation.

Asiatic had an actual profit (excess of value over cost) before the sale to Bataafsche, though as yet unrealized for income taxation. The phrase 'evasion of taxes' is broad enough to include the avoidance of the realization for taxation of such a profit through its transfer to another branch of the same business enterprise in a way which only changes its place in the business set up.

Conclusion

The court affirmed the Board of Tax Appeals' decision, upholding the Commissioner's allocation of income to Asiatic Petroleum Company and confirming the tax deficiency.

For the foregoing reasons we are satisfied that section 45 is applicable to the facts at bar.

Who won?

The Commissioner of Internal Revenue prevailed in the case, as the court upheld the allocation of income to Asiatic Petroleum Company, finding that the transactions were structured to avoid taxation.

The Board sustained the Commissioner.

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