E.I. Du Pont de Nemours and Company v. United States

221 Ct. Cl. 333, 608 F.2d 445 (1979)

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E.I. Du Pont de Nemours and Company v. United States

United States Court of Claims
221 Ct. Cl. 333, 608 F.2d 445 (1979)

JC

Facts

E.I. Du Pont de Nemours and Company (Du Pont) (plaintiff) was an American manufacturer. Du Pont established a Swiss-owned marketing and sales subsidiary for foreign sales named Du Pont International S.A. (DISA). Du Pont began arranging international sales by selling its products to DISA, which then arranged for resale through various distributors. The profits from the sales were thus divided by the prices that Du Pont charged DISA, with DISA typically taking 75 percent of the total profits. This arrangement was because DISA, as a Swiss entity, was taxed much lower than Du Pont. This arrangement drew the ire of the Commissioner of Internal Revenue (the commissioner), who used the power of that position under 26 U.S.C. § 482 to reallocate about $18 million in income to Du Pont for 1959 and 1960. Du Pont fought this reallocation in court, ultimately filing suit against the United States (defendant) to attempt to avoid the reallocation. No question existed that the establishment of DISA, although legitimate and legal, was clearly an attempt to avoid taxation. In cases involving sales of tangible goods, reallocation was controlled by finding an arm’s-length price for the sales in question and reallocating the difference in that price from the price charged. Tax regulations offered four tests to determine the arm’s-length price, but the argument in this case centered on the resale price method. Under that method, the prices charged were compared with those of comparable uncontrolled dealers. Du Pont offered evidence of a handpicked group of distributors as similar, even though no indication of similarity of products, functions, or geographic or marketing functions was present. Similarly, Du Pont tried to compare its figures to the gross profit margins cited by certain drug and chemical wholesales in the Internal Revenue Service’s Source Book of Statistics of Income. Those entities varied from 9 to 33 percent, which Du Pont did not account for.

Rule of Law

Issue

Holding and Reasoning (Davis, J.)

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