US vs E.I. Du Pont de Nemours & Co, October 1979, US Courts of Claims, Case No 608 F.2d 445 (Ct. Cls. 1979)

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Taxpayer Du Pont de Nemours, the American chemical concern, created early in 1959 a wholly-owned Swiss marketing and sales subsidiary for foreign sales — Du Pont International S.A. (known to the record and the parties as DISA). Most of the Du Pont chemical products marketed abroad were first sold by taxpayer to DISA, which then arranged for resale to the ultimate consumer through independent distributors. The profits on these Du Pont sales were divided for income tax purposes between plaintiff and DISA via the mechanism of the prices plaintiff charged DISA. For 1959 and 1960 the Commissioner of Internal Revenue, acting under section 482 of the Internal Revenue Code which gives him authority to reallocate profits among commonly controlled enterprises, found these divisions of profits economically unrealistic as giving DISA too great a share.
Accordingly, he reallocated a substantial part of DISA’s income to taxpayer, thus increasing the latter’s taxes for 1959 and 1960 by considerable sums. The additional taxes were paid and this refund suit was brought in due course. Du Pont assails the Service’s reallocation, urging that the prices plaintiff charged DISA were valid under the Treasury regulations implementing section 482.

The Court ruled in favor of the tax authorities with the following reasons:

In reviewing the Commissioner’s allocation of income under Section 482, we focus on the reasonableness of the result, not the details of the examining agent’s methodology …. The amount of reallocation would not be easy for us to calculate if we were called upon to do it ourselves, but Section 482 gives that power to the Commissioner and we are content that his amount… was within the zone of reasonableness. The language of the statue and the holdings of the courts recognize that the Service has broad discretion in reallocating income … A ‘broad brush’ approach to this inexact field seems necessary.


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