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U.S. Supreme Court

National Carbide Corp. v. Commissioner, 336 U.S. 422 (1949)

National Carbide Corp. v. Commissioner

No. 151

Argued January 6, 1949

Decided March 28, 1949*

336 U.S. 422


1. Petitioners were wholly owned subsidiaries of a parent corporation which utilized them as operating companies in the manufacture and sale of products. They operated strictly in accord with contracts with the parent which provided, inter alia, that the subsidiaries were employed as agents of the parent, that the parent would furnish working capital, and that all profits in excess of six percent on their capitalization (which was nominal) would be paid to the parent. Title to the assets utilized by the subsidiaries was held by them, and advances by the parent of working capital were shown on the books of the subsidiaries as accounts payable to the parent.

Held: for purposes of federal income and excess profits taxes for the year 1938, income earned by the subsidiaries and paid over to the parent corporation was taxable to the subsidiaries, and not only to the parent corporation. Pp. 336 U. S. 424-439.

2. A corporation formed or operated for business purposes must share the tax burden despite substantial identity, in practical operation, with its owner. Complete ownership of the corporation, and the control primarily dependent upon such ownership, are no longer of significance in determining taxability. P. 336 U. S. 429.

3. So far as the basis for the result reached in Southern Pacific Co. v. Lowe, 247 U. S. 330, was the close relationship between corporations because of complete ownership and control of one by the other, that basis has been repudiated by subsequent decisions of this Court. Moline Properties, Inc. v. Commissioner, 319 U. S. 436; Burnet v. Commonwealth Improvement Co., 287 U. S. 415. Pp. 336 U. S. 428-430.

4. Ownership of a corporation and the control incident thereto can have no different tax consequences when clothed in the garb of agency than when worn as a removable corporate veil. P. 336 U. S. 430. chanroblesvirtualawlibrary

Page 336 U. S. 423

5. So far as control is concerned, there is no difference in principle between that exercised by the parent over the subsidiaries in this case and that exercised by the sole stockholder of the corporation in the case of Moline Properties, Inc. v. Commissioner, supra. Pp. 336 U. S. 433-434.

6. It makes no difference in this case that financing of the subsidiaries was carried out by means of book indebtednesses in lieu of increased book value of the subsidiaries' stock. Pp. 336 U. S. 434-435.

7. That the contracts required the subsidiaries to pay to the parent all but a nominal amount of the profits does not make them "agency" contracts within the meaning of the decisions of this Court. Pp. 336 U. S. 435-436.

8. While a corporation which performs the usual functions of an agent for its owner-principal may handle the latter's property and income without being taxable therefor, these subsidiaries are not true agents of, or trustees for, their parent. Pp. 336 U. S. 437-439.

9. Where a corporation chooses to avoid the burdens of principalship by utilizing subsidiary corporations to conduct certain business activities, it cannot escape the tax consequence of that choice, no matter how bona fide its motives or longstanding its arrangements. Pp. 336 U. S. 438-439.

167 F.2d 304, affirmed.

The Commissioner assessed against each of the petitioners deficiencies in income tax and declared value excess profits tax for 1938. The Tax Court determined that there were no deficiencies. 8 T.C. 594. The Court of Appeals reversed. 167 F.2d 304. This Court granted certiorari. 335 U.S. 810. Affirmed, p. 336 U. S. 439. chanroblesvirtualawlibrary

Page 336 U. S. 424

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