Supplemental Petition — E. I. du Pont de Nemours & Co. v. United States

No. 79-1104

IN THE

Supreme Court of the United States

OcTOBER TERM, 1979

E.I. DU PONT DE NemMours & COMPANY,

Petitioner,

V.

THE UNITED STATES,

Respondent.

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF CLAIMS

SUPPLEMENT TO PETITION

DANIEL M. GRIBBON

Covington & Burling

888 Sixteenth Street, N.W.

Washington, D.C. 20006

Attorneys for Petitioner

April 4, 1980

IN THE

Supreme Court of the United States

OCTOBER TERM, 1979

No. 79-1104

E.I. DU PONT DE NEMourRS & COMPANY,

Petitioner,

V.

THE UNITED STATES,

Respondent.

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF CLAIMS

SUPPLEMENT TO PETITION

The purpose of this Memorandum is to bring to the Court’s

attention a recent decision of the Court of Appeals for the

Second Circuit which gives Section 482 of the Internal Revenue

Code and the regulations thereunder an interpretation drasti-

cally different from that rendered by the Court of Claims in

petitioner’s case. This decision further illustrates the conflicting

views in the lower courts of this complex and important area of

tax law, thus emphasizing the need for review and supervision

by this Court.

The decision, United States Steel Corporation v. Commis-

sioner of Internal Revenue, Nos. 167, 514 (2d Cir. Mar. 12,

1980), involved payments made by a parent to its shipping

subsidiary. In refusing to approve a reallocation proposed by

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the Commissioner, which had been sustained in part by the Tax

Court, the Second Circuit rejected the view that virtual identity

between controlled and uncontrolled transactions must be

proved under regulatory language requiring that the latter

transactions be “similar” to the transaction under scrutiny, to be

considered in applying the standard of Section 482.1 Moreover,

the Second Circuit specifically held that “the absence or

presence of any intent on the part of the taxpayer to distort his

income” is irrelevant in the application of section 482. Slip op.

at 1734. In each respect the approach of the Second Circuit

sharply contrasts with that of the Court of Claims below, which

imposed on petitioner the burden of establishing practical

identity between controlled and uncontrolled transactions, and

gave great weight to petitioner’s stated intention to conduct its —

foreign operations in a manner that would minimize income

taxes.

In U.S. Steel, the parent, “Steel,” used a fully owned

subsidiary, ““Navios,” to ship iron ore which was produced in

Venezuela by another subsidiary, “Orinoco.” Since Navios paid

Steel no dividends “‘[i]n effect ... Navios became an offshore

tax shelter.” Slip op. at 1730. Income was reallocated to Steel

from Navios on the Commissioner’s theory that the shipping

rates paid by Steel were in excess of arms’ length rates.

The Tax Court rejected the evidence proffered by Steel

noting that the relationship between it and Navios was so

unique that market transactions—even those between Navios

and unrelated third parties—were inherently dissimilar and

therefore could not be used as an indication of the rates that

would have been charged at arms’ length. Specifically, the Tax

Court was of the view that since Steel and Navios had a

continuing relationship, and Navios was thus assured of Steel’s

'The regulation applied in petitioner’s case, pertaining to the

sale of goods between related companies, Treas. Reg. §1.482-2(e),

and that applied in U.S» Steel, pertaining to the provision of services,

Treas. Reg. 1.482-2(b), apply the identical statutory standard and are

‘ keyed to the same concept of similarity between controlled and

uncontrolled transactions.

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business, Navios’ transactions with unrelated parties, as to

which it lacked such assurance, were not relevant. The Tax

Court’s approach thus was substantially identical to that of the

Court of Claims below, in accepting the Government’s view

that near identity of transactions must be shown under the

regulations, and treating a parent-subsidiary relationship as

inherently unique.

In rejecting this interpretation of the regulatory standard,

the Second Circuit said:

“‘We are constrained to reject this argument. Although

certain factors made 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. In very few industries

are transactions truly comparable in the strict sens: used

by [the Tax Court]. Every transaction in wheat, for

example, is more or less the same, except for standard

variations in amount, time of delivery and place of deliv-

ery. 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 [the

Tax Court] would read it—would allow the taxpayer no

safe harbor from the Commissioner’s virtually unrestricted

discretion to reallocate.” Slip op. at 1742-43 (emphasis by

the court) (footnotes omitted ).2

2In one of the omitted footnotes, fn. 11, the Court of Appeals

noted the uncertainty, “present in all §482 cases,” of the method by

which the Commissioner calculates the reallocation of income, point-

ing out that the Commissioner had reallocated $52 million for a four-

year period while the Tax Court had sustained only $25 million of

that amount. In this case the difference between the Commissioner

and the petitioner amounts to some $18 million for a taxable period of

less than two vears.

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This excerpt from the Second Circuit’s opinion states the

essence of petitioner’s position in this case: the regulations

under Section 482 as interpreted by the Court of Claims

provide, contrary to the expressed intention of Congress, no

protection from the Commissioner’s “virtually unrestricted dis-

cretion to reallocate.” The contrasting analysis of the Second

Circuit in rejecting the approach sustained by the Court of

Claims below, reflects again the serious and continuing differ-

ences among the lower federal courts in this significant area of

the tax law, which should be reconciled by the Court at this

time.

Respectfully submitted,

DANIEL M. GRIBBON

Covington & Burling

888 Sixteenth Street, N.W.

Washington, D.C. 20006

Attorneys for Petitioner

April 4, 1980

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