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

281 F.2d 646, 6 A.F.T.R.2d (RIA) 5331, 1960 U.S. App. LEXIS 3871

• Court: Court of Appeals for the Sixth Circuit
• Decided: August 10, 1960
• Docket: 13887
• Status: Published

Opinions

SHACKELFORD MILLER, JR., Circuit Judge.

The respondent, Spermacet Whaling & Shipping Co., is a corporation organized under the laws of the Republic of Panama. During the period of April, 1947, through the latter part of January, 1948, it participated in a fishing expedition for sperm whales and the production of sperm oil off the western coast of South America. It received from these operations during its fiscal year ending April 30, 1948, net income of $924,979.72. The respondent, as a foreign corporation, contends that not any of such net income is taxable to it by the United States. The Commissioner ruled otherwise and made a deficiency assessment of $351,492.29.

The facts are most interesting, but lengthy. They are set out in detail in the Findings of Fact and Opinion of the Tax Court, reported at 30 T.C. 618, to which reference is made. The following summary is sufficient for our present purposes.

Sperm oil is obtained from the sperm whale and is used for industrial purposes, primarily as an additive to lubricants. In 1946 sperm oil was in short supply, primarily because' the Norwegian whaling fleets had been depleted by enemy action during World War II, and because the whaling fleets then in operation were required to be used principally for the production of edible oils. Norway was the largest producer of whale oil in the world.

A typical whaling expedition to obtain crude sperm oil consists of a large mother or factory ship and a number of killer boats. The killer boats are used to catch the sperm whales and to tow them to the factory ship where the sperm oil is extracted. The operation is carried on without operational contact with a base station located in coastal waters.

Archer-Daniels-Midland Company, a Delaware corporation, hereinafter called A. D. M., was engaged in the business of purchasing, processing and selling certain special oils, including sperm oil. Because of the limited supply it faced a critical business need. Smith, its Executive Vice-President in Cleveland, Ohio, contacted Jahre, one of Norway’s leading whalers, for the purpose of organizing a new whaling company to engage in the production of sperm oil. Jahre caused the Falkland Shipowners Limited, a British corporation, which he indirectly controlled, to acquire from the British Government an old factory ship called the Anglo Norse, which required a considerable expenditure of money to put it in suitable condition. He had at his disposal sufficient killer boats to outfit a whaling expedition. After considerable negotiations, Jahre, Smith and others, in December, 1946, caused the respondent to be incorporated under the laws of Panama. It held its first meeting of its board of directors in New York City on December 12, 1946.

Jahre returned to Norway and attempted to obtain for respondent a charter of the Anglo Norse from Falkland. Since Falkland was a British corporation, it could not execute such a charter to the respondent, a foreign corporation, without the approval of the British Government. The British Government refused to consent on the ground that Panama, the country of respondent’s incorporation, had not subscribed to the International Whaling Agreement.

Jahre proposed that A. D. M. charter the Anglo Norse and then permit respondent to manage the sperm oil expedition, but A. D. M. refused to be a party to such an arrangement. After discussing the situation among themselves, respondent’s Norwegian shareholders proposed to Smith that Smidas Company, Inc., hereinafter called Smi-das, charter the vessel and then work out some definitive relationship with respondent for the conduct of the expedition. Smidas was an Ohio corporation, incorporated on February 19, 1945, engaged in promoting export business of certain technical items. At the time of its incorporation Smith acquired 54.5 per cent of its capital stock. After some negotiation, Smidas accepted the proposal. On or about February 4, 1947, a “bare boat charter party” was negotiated in Europe and there signed by Falkland as the owner of the Anglo Norse, by which Smidas chartered the vessel for a period of four years, with options to renew for further periods totaling six years, for $50,000.00 per annum.

By contract dated March 8, 1947, between Smidas and respondent, respondent assumed all of the obligations of Smidas under the charter party and agreed to organize, equip and manage the whaling expedition. It was to receive for its services and the obligations assumed, the proceeds to be received by Smidas from the sale of the oil, after deducting from such proceeds the sum of $25,000.00 and certain expenses incurred by Smidas in the sale and delivery of the oil.

By contract dated May 26, 1947, Smi-das sold the sperm oil produced by the whaling expedition to A. D. M., with the provision that title to the sperm oil would pass to A. D. M. at the time that the sperm oil was delivered to A. D. M. in New York City;

The Anglo Norse was reconditioned and equipped for the contemplated expedition entirely in Norwegian shipyards, with the contracts therefor being negotiated, executed, and carried out in respondent’s behalf by Norwegians in Norway. All officers and all members of the crews of the several vessels, aggregating about 300 men, were Norwegian and were employed pursuant to contracts negotiated in respondent’s behalf in Norway. Certain fuel oil purchases in the United States were arranged for by Smith at the direction of respondent’s Norwegian management, to be delivered to the Anglo Norse off the western coast of South America.

The Anglo Norse and the seven killer boats left Norway on the sperm oil expedition in April, 1947, proceeded to the fishing grounds off the western coast of South America, where fishing for sperm whales and the production of sperm oil was commenced on May 20, 1947. These operations continued until about January 4, 1948, at which time the killer boats returned to Norway. During this entire period the vessels were in constant contact with respondent’s management in Norway via shortwave radio and' remained under Jahre’s supervision.

About half of the sperm oil produced was delivered in October, 1947, to a transport which brought a load of fuel oil to the Anglo Norse, and after delivering the fuel oil received the sperm oil from the floating factory and delivered it to A. D. M. in New York. The balance of the sperm oil was delivered to A. D. M. in New York by the Anglo Norse about January 27, 1948. After unloading her cargo of sperm oil the Anglo Norse returned to Norway.

Respondent maintained a bank account at the Guaranty Trust Co. of New York, which it opened about February 8, 1947, with a deposit of $125,630.11. Deposits to that account included loans by shareholders and individuals to respondent and the money paid by A. D. M. for the purchase of the sperm oil in the amounts of $1,191,963.84 and $2,287,-668.26 for the respective two deliveries, after proper provisions by A. D. M. for use of part of the proceeds to discharge lien indebtedness. The payments from that account consisted, in general of amounts paid at the direction of the Norwegian management to discharge obligations of respondent requiring payment in United States dollars, payments to or for the personal benefit of respondent’s Norwegian shareholders (such payments being considered loans to those shareholders), repayment of loans, transfer of funds to Norwegian accounts for use by the Norwegian management, and for the payment of a tanker which was built and purchased in Europe and whose operations are not involved in this controversy. Smith acted as Treasurer of the respondent and in addition to drawing the checks on the Guaranty Trust Co. account maintained financial records in accordance with standard accounting practice.

Respondent did not at any time prior to April 30, 1948, have an office in the United States, nor was it qualified to do business in any state in the United States. It did not at any time have any United States employees. Smith’was its sole officer in the United States. Respondent had an office in Norway, in which and from which it directed and managed its operations. Its board of directors held meetings in New York City on September 29, 1947, October 2, 1947, January 13, 1948, and February 2, 1948, to discuss and approve or ratify corporate procedures and policies. These meetings were called in New York City because it better suited the personal convenience of the directors to come there.

The basis for the assessment was the finding by the Commissioner that under the foregoing facts the respondent was a foreign corporation engaged in trade or business within the United States and that its gross income from the sperm oil expedition was from sources within the United States, thus making the net income taxable income to the respondent under the provisions of Section 231(b) and (c), Internal Revenue Code of 1939, 26 U.S.C.A. § 231(b).

On petition to the Tax Court for a redetermination of the deficiency, the Tax Court, with four judges dissenting, held that the respondent was not a resident foreign corporation engaged in trade or business within the United States and that its net income was accordingly not taxable as provided in Sections 14(c) (1) ¹ and 15, Internal Revenue Code of 1939, 26 U.S.C.A. §§ 13, 15. The Commissioner seeks a review of the decision of the Tax Court.

There is no dispute about the foregoing basic facts, many of them being stipulated. From these facts the Tax Court found that the management contract between respondent and Smidas, and the sales contract between Smidas and the purchaser, A. D. M., were bona fide contracts serving a real business purpose, and were in fact what they appeared to be in form. It pointed out that Smidas was not a corporation organized for tax purposes, or for the particular part it played in this transaction. On the contrary, it had been in existence for some time, had ample assets and was at times engaged in various business activities. The Tax Court, recognizing the contract of sale between Smidas and A. D. M., said, “We think the facts here clearly show that petitioner was not the owner and seller of the oil.”

The fact that the transaction took the form it did for the purpose of avoiding taxes, even if we assume such to be the case, is not sufficient to permit the Court to treat as taxable a transaction which in form is nontaxable, provided the component parts of the transaction are bona fide and not a sham. United States v. Cummins Distilleries Corp., 6 Cir., 166 F.2d 17, 20-21; Chamberlin v. Commissioner, 6 Cir., 207 F.2d 462, 468, certiorari denied 347 U.S. 918, 74 S.Ct. 516, 98 L.Ed. 1073; United States v. Cumberland Public Service Co., 338 U.S. 451, 455, 70 S.Ct. 280, 282, 94 L.Ed. 251. The Supreme Court stated in the Cumberland Public Service Co. case, “It is for the trial court, upon consideration of an entire transaction, to determine the factual category in which a particular transaction belongs. Here as in the Court Holding Co. case we accept the ultimate findings of fact of the trial tribunal.” See also: United States v. Cummins Distilleries Corp., supra, 6 Cir., 166 F.2d 17, 20. Likewise, we accept the findings of the Tax Court in the present case that the contracts involved were bona fide ones, with the result that Smi-das, not the respondent, was the owner and seller of the oil.

The Tax Court also found that “Upon the entire record, we are convinced that petitioner was not engaged in any substantial, regular, or continuous ordinary business activity in the United States.” This is a finding of fact which we believe is not clearly erroneous and which we are required to accept.

Based upon that finding, the Tax Court concluded that the taxpayer was not “engaged in trade or business within the United States” within the meaning of Section 231(b), Internal Revenue Code of 1939. Whether a foreign corporation is engaged in trade or business within the United States is a question of fact. Jan Casimir Lewenhaupt v. Commissioner, 20 T.C. 151, 162, affirmed, 9 Cir., 221 F.2d 227; Consolidated Premium Iron Ores, Ltd. v. Commissioner, 28 T.C. 127, 150, affirmed, without reference to this question, 6 Cir., 265 F.2d 320; European Naval Stores Co. v. Commissioner, 11 T.C. 127, 132; Scottish American Investment Co., Ltd. v. Commissioner, 12 T.C. 49, 54. The fact that the ultimate finding is a conclusion drawn from undisputed or established subsidiary facts does not change such a finding from one of fact to a conclusion of law. Being a finding of fact it is not to be set aside unless clearly erroneous. Section 7482, Internal Revenue Code of 1954, 26 U.S.C.A. § 7482; Rule 52(a), Rules of Civil Procedure, 28 U.S.C.A.; United States v. United States Gypsum Co., 333 U.S. 364, 394, 68 S.Ct. 525, 92 L.Ed. 746; Commissioner of Internal Revenue v. Consolidated Premium Iron Ores, Ltd., supra, 6 Cir., 265 F.2d 320, 326.

We recognize that there are a number of decisions in- several of the circuits, including our own, which hold that where the subsidiary facts are undisputed and no question of credibility is involved, the Court of Appeals is as well qualified as the trial judge to draw inferences and conclusions therefrom, and such inferences and conclusions of the trial judge can be reviewed by the Court of Appeals free of the limitation of the “clearly erroneous” rule. Seagrave Corp. v. Mount, 6 Cir., 212 F.2d 389, 394; E. H. Sheldon & Co. v. Commissioner, 6 Cir., 214 F.2d 655, 658. However, in Rich v. Pappas, 6 Cir., 229 F.2d 308, 313, we concluded that in view of the ruling of the Supreme Court in United States v. United States Gypsum Co., supra, 333 U.S. 364, 394, 68 S.Ct. 525, 92 L.Ed. 746, the conclusions of the trial judge, even though drawn from undisputed facts, were findings of fact which were not to be set aside unless clearly erroneous. We followed this new ruling, with one judge dissenting, in Dixie Sand & Gravel Corp. v. Holland, 6 Cir., 255 F.2d 304, 308, 314, and again in Commissioner of Internal Revenue v. Consolidated Premium Iron Ores, Ltd., supra, 6 Cir., 265 F.2d 320, 326. However, some members of the Court have been of the opinion that the rule as stated in the earlier Seagrave Corp. and E. H. Sheldon & Co. cases was the correct and better rule and have followed it in recent cases. Yunker v. Commissioner, 6 Cir., 256 F.2d 130, 133; Gudgel v. Commissioner, 6 Cir., 273 F.2d 206, 209-210.

The Supreme Court has very recently expressed its opinion in what we believe is an analogous situation. In Commissioner of Internal Revenue v. Duberstein, 80 S.Ct. 1190, 1194, decided June 13, 1960, the question presented was whether under certain facts and circumstances the transfer of a Cadillac automobile from one businessman to another constituted a “gift” within the meaning of the statute which excludes from the gross income of an income taxpayer “the value of property acquired by gift.” The Court stated that decision of the issue must be based ultimately on the application of the fact-finding tribunal’s experience with the mainsprings of human conduct to the totality of the facts of each case, that primary weight in this area must be given to the conclusions of the trier of fact, and although it may not satisfy an academic desire for precision in this area, the question remained basically one of fact, for determination on a case-by-case basis. The opinion states, “One consequence of this is that appellate review of determinations in this field must be quite restricted. * * * Where the trial has been by a judge without a jury, the judge’s findings must stand unless ‘clearly erroneous.’ Fed.Rules Civil Proc. 52(a) * * The rule itself applies also to factual inferences from undisputed basic facts, * * *, as will on many occasions be presented in this area. * * * And Congress has in the most explicit terms attached the identical weight to the findings of the Tax Court. I.R.C. § 7482(a).” (Emphasis added.) The opinion refers to its previous ruling in United States v. United States Gypsum Co., supra, 333 U.S. 364, 394, 68 S.Ct. 525, 92 L.Ed. 746, which we previously considered controlling in Rich v. Pappas, supra, 6 Cir., 229 F.2d 308, 313. Accordingly, in the present case, we construe the ultimate findings of the Tax Court, drawn from undisputed or established subsidiary findings, as findings of fact which are not to be set aside unless clearly erroneous.

In our opinion, the conclusions of the Tax Court that the respondent was not engaged in trade or business within the United States is not clearly erroneous and must be accepted on this review. As the Tax Court pointed out, the business in which respondent was engaged, treating the contracts between the parties as bona fide contracts serving a real business purpose, was that of managing the expedition for Smidas, and its activities which produced the income in question took place almost entirely on the. high seas or in Norway. It was not, during some substantial portion of the taxable year regularly and continuously transacting a substantial portion of its ordinary business in the United States, which is a necessary requirement before a taxpayer can be found to be “engaged in trade or business within the United States.” Lewellyn v. Pittsburgh, B. & L. E. R. Co., 3 Cir., 222 F. 177, 185-186; European Naval Stores Co. v. Commissioner, supra, 11 T.C. 127, 133; Scottish American Investment Co., Ltd. v. Commissioner, supra, 12 T.C. 49, 59; Linen Thread Co., Ltd. v. Commissioner, 14 T.C. 725, 736.

The decision of the Tax Court is affirmed.

1 . Now 26 U.S.C.A. § 13.