Aiken Industries v. Commissioner of Internal Revenue

Aiken Industries, Inc. (plaintiff) (Aiken), incorporated in the United States, was the parent and sole stockholder of another United States corporation, Mechanical Products, Inc. (MPI). MPI was the parent and almost sole owner of Ecuadorian Corporation, Ltd. (ECL), incorporated in the Bahamas. Compania de Cervezas Nacionales (CCN), incorporated in Ecuador, was the wholly owned subsidiary of ECL. MPI borrowed $2.25 million from ECL in 1963, giving ECL a 4 percent promissory note to acknowledge the debt. In 1964, Industrias, wholly owned by CCN, was incorporated in Honduras. ECL transferred the promissory note to Industrias. Industrias gave ECL nine notes, payable on demand, with a principal amount of $250,000 at a 4 percent interest rate. Internal Revenue Code §§ 1441(a) and 1441(b) required withholding of taxes on payment of income, including interest, to foreign partnerships and nonresident aliens. If income of a type described in § 1441 was paid to a foreign corporation, § 1442(a) required withholding of a tax of 30 percent at the source. The United States-Honduras Income Tax Convention (convention) was in effect in 1964 and 1965. The convention’s Article IX provided that interest paid by a United States corporation and “received” by a Honduran corporation with no permanent presence in the United States was exempt from United States tax. Sections 1441 and 1442 would have obliged MPI to withhold tax on interest payments to Industrias. MPI did not withhold this tax, asserting that it was exempt from withholding under Article IX. Aiken, a successor to MPI, denied liability for the tax. The commissioner of Internal Revenue (commissioner) (defendant) urged the court to disregard Industrias’s corporate structure and to treat ECL as the recipient of the interest payments, ultimately holding Aiken liable for the tax.