US vs United States Steel Corporation, March 1980, United States Court of Appeals, Second Circuit, 617 F.2d 942

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US Court of Appeal had to decide whether the controlled prices determined by US Steel was in accordance with the arm’s length principle, or rather what kind of evidence was sufficient for a taxpayer to challenge successfully the Commissioner’s determination that payments between a parent and a subsidiary are not “arm’s length” and thus are subject to reallocation under § 482 of the Internal Revenue Code.

The appeal before the Court of Appeal related to a decision issued by the Tax Court in 1977 where it had been concluded that a § 482 reallocation of profits issued by the tax authorities was justified because US Steel had caused a related party – Navios – to charge rates such that, at all times, the delivered price of Orinoco-origin iron ore in the United States was equivalent of the Lower Lake Erie price. In the Tax Court’s view, this equivalence served several purposes. First, it protected US Steel’s interest in the revenues of its subsidiary, Oliver Mining Co., by insuring that the Lower Lake Erie price was not undercut by cheaper foreign ore. Second, because US Steel could be sure of selling its Orinoco production so long as the delivered United States price did not exceed the Lower Lake Erie price, it enabled US Steel to earn “extra” profits. Third, such extra profits, because they were earned through Navios, were not subject to Venezuelan tax and were sheltered from United States tax.

Judgement of the Court

The Second Circuit set aside the decision of the Tax Court and ruled in favor of US Steel.


“We think it is clear that if a taxpayer can show that the price he paid or was charged for a service is “the amount which was charged or would have been charged for the same or similar services in independent transactions with or between unrelated parties” it has earned the right, under the Regulations, to be free from a § 482 reallocation despite other evidence tending to show that its activities have resulted in a shifting of tax liability among controlled corporations. Where, as in this case, the taxpayer offers evidence that the same amount was actually charged for the same service in transactions with independent buyers, the question resolves itself into an evaluation of whether or not the circumstances of the sales to independent buyers are “similar” enough to sales to the controlling corporation under the circumstances, “considering all relevant facts.” In our view, “considering all the relevant facts,” the evidence was sufficient to show similar enough transactions with independent buyers to establish that the price Steel paid Navios was an arm’s length price.”

“In sum, the record shows that over four years’ time half a dozen large corporations chose to use the services of Navios despite the fact that they were not compelled to do so. In such circumstances, we think the taxpayer has met its burden of showing that the fees it paid (which were identical to those paid by the independents) were arm’s length prices. We do not say that, had different or additional facts been developed, the Commissioner could not have countered the taxpayer’s showing and sustained the validity of his reallocation. Such a counter-showing would have required evidence that Navios’ charges, although freely paid by other, independent buyers, deviated from a market price that the Commissioner could have proved existed for example, if worldwide ore-shipping contracts had been recorded and published during the period in question.”

“We do not think that in order so to hold it must be shown that Navios’ prices were the result of a perfectly competitive market. Prices arrived at by independent buyers and sellers in arm’s length transactions may vary from such a perfect market price depending on factors extraneous to § 482.


The fact that transactions take place in the market place at different price levels does not, by itself, prove that transactions between unrelated buyers and sellers, such as Navios and Jones & Laughlin are not at “arm’s length.” The Regulations say that “independent transactions with or between unrelated parties” are enough to insulate a taxpayer’s price from § 482. We decline to use the “all relevant facts” clause to transform this limited approach into a requirement that the taxpayer’s price be the result of a perfectly competitive market.

Nor does the statute require that all independent transactions be at the price taxpayer charged or paid; therefore, the fact that Orinoco ore bought by Bethlehem Steel was transported to the United States at rates different from what Navios charged Steel and other customers is irrelevant. Since there were independent transactions significant in number and dollar amount and occurring over a long period of time, we need not address the question of how many such “independent transactions” at the taxpayer’s price would be needed to insulate taxpayer from § 482 in a situation where a preponderance of the “independent” transactions take place at a price far different from the price paid or charged by taxpayer.”

“Although certain factors make the operations undertaken by Navios for Steel unique at one point, for example, Navios’ ore-carriers were the largest of their kind in the world the approach taken by the Tax Court would lead to a highly undesirable uncertainty if accepted.11  In very few industries are transactions truly comparable in the strict sense used by Judge Quealy. Every transaction in wheat, for example, is more or less the same, except for standard variations in amount, time of delivery and place of delivery. But few products or services are as fungible as wheat. To say that Pittsburgh Steel was buying a service from Navios with one set of expectations about duration and risk, and Steel another, may be to recognize economic reality; but it is also to engraft a crippling degree of economic sophistication onto a broadly drawn statute, which if “comparable” is taken to mean “identical”, as Judge Quealy would read it would allow the taxpayer no safe harbor from the Commissioner’s virtually unrestricted discretion to reallocate.”

“Accordingly, the decisions of the Tax Court sustaining and modifying reallocations of income from Navios to Steel, and disallowing the Commissioner’s reduction of Steel’s basis in open account obligations of Navios, are hereby reversed.”

US vs US Steel 2 circ 1980

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