United States Steel Corporation v. Commissioner of Internal Revenue

United States Steel Corporation (Steel) (plaintiff) was a major producer of steel and owned iron ore mines in the United States and elsewhere. In 1947, Steel found new sources of iron ore in Cerro Bolivar, Venezuela, a remote village on the Orinoco River. Transporting the steel from Venezuela was intricate, requiring about $200 million in development costs. In 1949, Steel formed Orinoco Mining Company (Orinoco), a Delaware subsidiary, to own the mines and direct the product of Venezuelan-sourced steel. Orinoco first used two independent companies to transfer vessels for the process, but ultimately another Steel subsidiary, Navios, Inc. (Navios), began chartering the vessels. Navios was established in Liberia, and Steel began paying Navios for transporting Venezuelan ore to the United States. For the relevant tax years, Navios earned 73 percent of its gross revenues from Steel compared to 5 percent from independent domestic steel producers. Navios’s income was taxed more favorably than the income of Orinoco or Steel. Ultimately, the Commissioner of Internal Revenue (the commissioner) (defendant) used the power of the position to reallocate income to find that Navios had overcharged Steel for its services by 25 percent and to make income adjustments accordingly. At the times in question, no public market price for the carriage of iron ore by sea existed. Steel protested vigorously, noting that Navios had charged Steel the same prices as all other American steel producers. Those prices were always the same as the set United States prices of iron ore, termed the “Lower Lake Erie” price. Some foreign purchasers were charged different prices, but those prices were based on different shipping mileage and routes to fulfill the iron ore provided. Ultimately, the concern was what would constitute an arm’s-length price, which would make the transactions sufficient to overturn the commissioner’s reallocation. Although Steel argued that charging the same price was evidence of an arm’s-length transaction, the commissioner argued that given its near-monopoly, Navios was still overcharging Steel. The commissioner also argued that given the few companies transporting Venezuelan iron ore, the prices charged to non-Steel companies were not competitively set but were actually an extension of Navios’s virtual monopoly power on prices.