Procter & Gamble Company v. Commissioner of Internal Revenue

Procter & Gamble Company (P&G) (plaintiff) was an Ohio corporation producing and selling consumer and industrial products. Procter & Gamble A.G. (AG) was a Swiss subsidiary of P&G that marketed P&G products, particularly in nations where P&G did not otherwise have a subsidiary or affiliate handling such work. P&G attempted to establish a new subsidiary in Spain in 1967. Spain had fairly stringent protectionist laws that severely limited (and directed) foreign entities. Accordingly, P&G sent a letter to the presidency of the Spanish government looking to organize a Spanish corporation called Espana, which would employ Spanish residents and might require building a new factory. The government ultimately approved P&G’s application for a 100 percent interest in Espana in 1968. Espana was strictly limited in that Espana could not pay any amounts for royalties or technical assistance. For some unknown reason, AG held the full interest in Espana. Despite subsequent efforts, the Spanish government would not allow Espana to make technical-assistance payments to AG. Eventually, the Commissioner of Internal Revenue (the commissioner) (defendant) filed a notice of deficiency against P&G, alleging that income of $1,232,653 in 1978 and $1,795,005 in 1979 must be allocated from Espana to AG. This reallocation was based on a royalty of 2 percent of Espana’s net sales for the taxable years in question. P&G argued that it should be protected from the reallocation based on P&G’s compliance with Spanish law, which had prohibited the royalty payments in question. P&G analogized the situation to that involving the First Security Bank of Utah, in which a similar reallocation was reversed because banks were legally prohibited from receiving a portion of insurance premiums.