Garlock, Inc. v. Commissioner of Internal Revenue
United States Court of Appeals for the Second Circuit
489 F.2d 197 (1973)

- Written by Joe Cox, JD
Facts
Garlock, Inc. (plaintiff) was an American corporation that established a Panamanian subsidiary, Garlock, S.A. (S.A.). S.A. had one class of common stock through 1962 that was entirely owned by its parent company. That said, the Revenue Act of 1962 was enacted, which provided that a controlled foreign corporation was taxable if a foreign corporation with more than 50 percent of the total combined voting power of all classes of stock entitled to vote was owned by United States shareholders. Accordingly, S.A. planned to revamp its capital stock structure. S.A. was to establish a new issue of $100,000 callable, cumulative preferred stock with 1,000 shares at $100 par value, with one vote going with each share. A pair of sympathetic foreign investors would be approached who would reliably vote with the usual stockholders in exchange for an ample dividend rate. The foreign investors were obtained—and the investors happened to employ the same law firm as Garlock, Inc. A majority of the new stock was issued to those foreign investors. None of these actions stopped the Commissioner of Internal Revenue (the commissioner) (defendant) from finding S.A. to be a controlled foreign corporation. Garlock, Inc., filed suit in tax court, which upheld the commissioner’s determination. The regulations indicated that the mere ownership of stock could be disregarded if (1) the percentage of voting power was greater than the proportionate share of corporate earnings (S.A.’s foreign shareholders maxed out at an unusually low 16 percent dividend), (2) facts indicated that the foreign shareholders failed to exercise their voting rights independently or at all, and (3) a principal purpose of the arrangement was to defeat classification as a controlled foreign corporation. S.A. argued that its foreign shareholders held more than 50 percent of the new stock and that the tax court erred in substituting an actual control test for the mere numerical information submitted.
Rule of Law
Issue
Holding and Reasoning (Oakes, J.)
What to do next…
Here's why 814,000 law students have relied on our case briefs:
- Written by law professors and practitioners, not other law students. 46,300 briefs, keyed to 988 casebooks. Top-notch customer support.
- The right amount of information, includes the facts, issues, rule of law, holding and reasoning, and any concurrences and dissents.
- Access in your classes, works on your mobile and tablet. Massive library of related video lessons and high quality multiple-choice questions.
- Easy to use, uniform format for every case brief. Written in plain English, not in legalese. Our briefs summarize and simplify; they don’t just repeat the court’s language.