Spermacet Whaling & Shipping Co. S.A. v. Commissioner of Internal Revenue

Werner G. Smith, an American citizen, was a director and vice president of Archer-Daniels-Midland Company (A.D.M.). A.D.M. purchased, processed, and sold oils, including sperm oil. Used as an additive to lubricants, sperm oil was in short supply after World War II. Sperm oil was mostly produced in Norway by a process involving multiple ships and refining. A.D.M. was the world’s largest refiner of sperm oil and, with a shortage, needed more oil. Smith contacted Norwegians Hans Bull Ovrevik and Magnus Konow to investigate obtaining more oil. Ovrevik and Konow reached out to Norwegian whaler Anders Jahre and devised a plan to obtain more oil. Jahre was to cause the Falkland Shipowners Limited, a British entity he controlled, to acquire a ship from the British government, which could be reconverted into a whaling boat. Soon thereafter, Smith, Ovrevik, Konow, Jahre, and another established Spermacet Whaling & Shipping Co. S.A. (Spermacet) (plaintiff) and established a plan under which the entity would participate in obtaining sperm oil, with profits divided among the parties. The initial plan had all of the funds going to the group and then being resold to A.D.M., but Smith’s attorney objected to these terms. Meanwhile, Spermacet was established as a Panamanian corporation. Unfortunately, Jahre then could not obtain the British ship because Panama was not part of the International Whaling Agreement, a whaling treaty that the US and Britain had entered. After much discussion, the Norwegians in Spermacet suggested retaining an American corporation called Smidas Company, Inc. (Smidas) to charter the vessel. Smidas agreed to do so in exchange for a payment of $25,000. Smidas chartered the ship, obtained the oil, and ultimately turned the oil over to Spermacet, which sold the oil to A.D.M. at a set price. The voyage was ultimately completed, and 15,357 long tons of sperm oil were obtained and ultimately sold to A.D.M. Spermacet received a total net income of $924,979.72. The issue was whether any or all of that income was taxable. To be taxable, the income must flow to a resident foreign corporation engaged in trade or business within the US and be gross income from sources within the US. The Commissioner of Internal Revenue (the commissioner) (defendant) argued that the income was taxable and that Spermacet had a deficiency of $351,492.29. Ultimately, the issue was whether Spermacet was engaged in trade or business within the US. The company denied conducting business in the US, and the commissioner asserted that Spermacet was engaged in US business.