The US tax authorities had issued an assessment on the basis of transfer prices as determined by US Steel was not considered in accordance with the arm’s length principle and thus subject to reallocation under § 482 of the Internal Revenue Code.
Judgement of the Court
The Tax Court concluded that the assessment 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.
US vs UNITED STATES STEEL CORP T.C.M. 1977-140 EDV