Ashland Oil, Inc. v. Commissioner of Internal Revenue
United States Tax Court
95 T.C. 348 (1990)
Ashland Oil, Inc. (Ashland Oil) (plaintiff) was an American corporation based in Kentucky. The Commissioner of Internal Revenue (the commissioner) (defendant) found deficiencies in the income-tax returns of Ashland Technology, Inc., a subsidiary of Ashland Oil, with similar deficiencies for Ashland Oil as transferee for the liability of Ashland Technology, Inc. The deficiencies covered a period from 1975 to 1979 and totaled over $8 million. Before Ashland Technology, Inc. was purchased by Ashland Oil, it had been United States Filter Corp. (U.S. Filter). U.S. Filter was a domestic corporation, and Drew Chemical Corp. (Drew Chemical) was its wholly owned domestic subsidiary. Drew Chemical was the principal of Drew Ameroid International (Drew Ameroid), a Liberian subsidiary with a principal office in Greece. That Drew Ameroid was a controlled foreign corporation of Drew Chemical and Drew Chemical was a US shareholder of Drew Ameroid were conceded. Drew Ameroid formed a business relationship with Societe Des Produits Tensio-Actifs et Derives, Tensia, S.A. (Tensia). Tensia was a Belgian corporation that manufactured household and industrial soaps and cleaning products. No common ownership of Tensia and any of the U.S. Filter entities existed, nor was Tensia a related person with respect to Drew Ameroid. Drew Ameroid and Tensia entered a manufacturing, leasing, and supply agreement in 1973, which continued throughout the period in question. Drew Ameroid transferred trade secrets, information, and other know-how in exchange for products Tensia would make under fairly specific standards. Tensia was then effectively guaranteed a profit, as the sale price was the raw cost plus a conversion fee that included a profit for Tensia. Although Tensia’s gross sales under this agreement never constituted more than 8 percent of its total sales, at least 80 percent of Drew Ameroid’s income came from these Tensia sales. The deficiency in this case was based on a finding that § 954(d)(2) applied to the Drew Ameroid-Tensia relationship and that Tensia was a branch or similar establishment of Drew Ameroid. Ashland Oil argued that Tensia was not a branch of Drew Ameroid and that extending the phrase “similar establishment” could not be justified. The government argued that § 954(d)(2) must be read broadly and that Tensia must be seen as a branch or similar establishment because of the close relationship between the entities.
Rule of Law
Holding and Reasoning (Nims, C.J.)
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