United States Gypsum Co. and United States Gypsum Export Co. v. United States of America

The United States Gypsum Company (plaintiff) (USG) and United States Gypsum Export Company (Export) filed suit against the United States (defendant) for a refund of federal income taxes paid. The government not only denied the basis for refund, but also alleged offsets as affirmative defenses. Additionally, whether Export was a Western Hemisphere Trade Corporation, a designation under prior tax law applying a more favorable taxation rate as classified under the tax code, and whether Export’s income from the sale of rock to USG must be reallocated to USG to reflect USG’s taxable income more clearly were of concern. Such exercise is within the government’s power to reallocate income under 26 U.S.C. § 482. In essence, if the income in question was paid by Export, as a Western Hemisphere Trade Corporation, Export would have a deduction that reduced its tax rate from 52 percent to 38 percent. USG ultimately purchased gypsum rock from its Canadian subsidiary, Canadian Gypsum Company (Canadian). Canadian agreed to produce, sell, and deliver one million tons of gypsum rock to Export for the same price that USG had paid Canadian. Export then entered into a sales agreement with USG under which Export would sell and USG would buy the same amounts of gypsum rock as Export agreed to purchase previously from Canadian. Under the two agreements, title in the gypsum rock passed from Canadian to Export when the crude rock passed across Canadian’s dock during delivery. Export then sold the rock to USG so that Export held title and possession of the gypsum rock only for the brief period when it passed across the decks until the rock was loaded onto USG’s vessel. USG paid Export 50 cents per ton plus costs and overhead, and Export had no Canadian tax because Export did not take title on a Canadian shore. Whether Export qualified as a Western Hemisphere Trade Organization by being engaged in the active conduct of a trade or business and whether the income of Export must be reclassified to USG were questioned. USG and Export asserted the affirmative on the organizational question and negative on the reclassification question, but the government asserted the opposite on the basis that the organizations functioned as a tax shelter with no real business or ownership occurring except to prevent taxation.