# Petition for Writ of Certiorari — Oil Base, Inc. v. Commissioner > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385602_1722%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition for Writ of Certiorari - **Published:** January 1, 1966 - **Citation:** 385 U.S. 928 ## Text s e _ IN THE a Ae _ +] Offiee-Supseme Court, U.S. | | —16— The Court of Appeals in the Frank case in speaking with respect to the Commissioner of Internal Reve- nue’s arm’s length bargaining argument, stated as fol- lows : , “But entirely aside from the appellee’s position that the Commissioner fs precluded from advancing this argument on appeal, we do not agree with | the Commissioner’s contention that ‘arm’s length’ bargaining’ is the sole criterion for applying the - statutory language of section 45 in determining what the ‘true net income’ is of each ‘controlled - taxpayer’. Many decisigns have been reached un- der Section 45 without reference to phrase ‘arm’s length barggining’ and without reference to Treasury Department regulations. and ms which state that the talismariic- combinat of words—‘arm’s length’—is the standard to be ap- plied in every case. . “For ‘example, it. was not ‘any less proper for the District Court to use here the ‘reasonablg re- turn’ standard than it was for other Courts to use ‘full fair value’ ‘fair price, including a reasonable ° profit’ ‘method which seems not unreasonable’ ‘fair consideration which reflects arm’s length -dealing’ ‘fair and reasonable’ ‘fair and reasonable’: or ‘fair and fairly arrived at’ or ‘judged as to fairness all used in interpreting Section 45.” (308 F. 2d at 528-529). : In a footnote this Court then cites the following cases as supporting the second paragraph of the above quéted portion of the decision. ; The Friedlander Corp., 25 T.C. 70, 77 (1955); > 7 —17— ; Grenada Industries, Inc., 2? te: 231, 260 (1951). Affirmed 202 F. 2d 873, certiorari denied 346 U.S: 819; Motors Securities €o., JInc., 11 T.CM.. 1074, 4 1082 (1952); : | | we Palm Beach Aero Corp., 17 T.C, 1169, 1176 | (1952); =‘ a ae Polak’s Frittal Works, 7 21 TC, , 953, 975- ' 976 (1954); and ‘ Seminole — Co., 4 T.C. 1215; 1232 (1945). In making the statement. quoted above, the Court of Appeals in the Frank case ‘was not speaking strictly ‘within the confines of the facts before it in that case. . It was, on the other hand, enunciating what it consid--. ered to be an established rule of law based upon’ the cases which it cites in support thereof. The Frank case ‘clearly. stands ‘for the proposition that if a taxpayer meets either the “fair and reasonable” criterion, or the “arm’s length bargaining” criterion, the Cornmissioner may not reallocate. incomie ‘deductions, etc., under the eprovisions of Section 482. It-is also clear that the Congress believed and un-.-- . derstood that the standard under, Section”482 with re-. ° _ spect to inter-company sales to be a fair ér reasonable price. This-is. clearly eviderfced by the following state- ments made by the House Committee on Ways and_ Means when'in 1962 it was.-studying the effect of Section 482 ini the specific area of inter-company pric- —lCltC~« eA 3 “Present law in Section 482 authorizes the Sec- retary of tne Treasury to allocate income between . related organizations where he determines this ‘al- » a“ ’ —1&a— , : - * - location is necessary ‘in order to prevent evasion of taxes or Carly to. reflect the income of any such organizations.’ This. provision appears to give the Secretary the necessary authority to’ allocate income between’ domestic parent and its foreign subsidiary. Howe er, in practice the difficulties in determining a fair price under this provision severe- ly limit ‘the usefulness of this power, especially where there thousands of different transactions engaged in between domestic company and its for- eign subsidiary.” (Emphasis added).* a ‘In the instant proceeding below the petitioner es- . tablished that in making domestic sales of its products, :_ it sold directly to its customers thrqugh its own selling ~ _ personnel. With respect’ to its export sales the petitioner: established that it sold through sales representatives who received a discount or commission with. respect to such ‘sales. The petitioner further established that de- spite the, rates of commission and discount which were paid or‘ ‘allowed to Oil Base de Veneztiela, which the Commissioner ‘of Internal Revenue deemed excessive, the return on its manufacturing activity with respect to export sales was equal to or greater than the re- 7 turn on ‘its manufacturing activity with respect to do- mestic: sales. The petitioner contended, therefore, that its transactions with its foreign subsidiary were “fair | and reasonable” sirfte the’ price it received for manu- facturing’ the products which were sold’ abroad, pro- duced for it a return which was equal to or greater 3H. R. Rep. No. 1447,- 87th ——- Second Session, ‘28 (1962). . aa ye than the return on its manufacturing activity with re- spect to products which were sold to unrelated parties. In the instant proceeding the Court of Appeals be- low in commenting, on its prior decision ‘in the Frank _ case states that the Frank case did not hold that the arm’s length standard established by Regulation -was _ improper. The petitioner. does not so contend. The Court of Appeals below further notes that the Frank case held that the arm’s length staridard ‘was ‘not “the sole criterion” for determining fhe true net income of each controlled taxpayer, and then goes on to state: “However, permissible departure from the Regula- tions’ arm’s length standard was under the facts of that case very narrowly limited.” ; It ig respectfully submitted by, the petitioner, however, that the enunciation of the Court of Appeals in the Frank case that the arm’s length standard was not the sole criterion was not made solely with reference to the - facts of the Frank case. It was stated as a basic propo- sition of law, and as stated above, the clear implica- tion is that if a taxpayer satisfies either of such cri- _ terion, the Commissioner may not reallocate under Sec- tion 482. The holding of the Court of. Appeals in the. instant proceeding below substantially obscures the state of Jaw in this: area.. The Commissioner of Internal Reve- nue in his Regulations continues’ to take the position that the standard to be applied in every case is that of an uncontrolled taxpayer dealing at arm’s length —, with another uncontrolled taxpayer. The clear —on ; of the Court of Appeals in the Frank case was that this was not the sole criterion, but that the taxpayer would prevail if it could show that’ its~dealings- with... its controlled business were fair and reasonable. In lim- _ ‘iting the application of the fair and reasonable doc-: trine, the Court of Appeals in the instant proceeding. creates such uncertainty in the area of inter-company pricing in international business operations, as to pro- foundly affect the conduct thereof. A further question which begs clarification By this Court is whether the authority granted to the Commis: sioner of Internal Revenue by Section 482 is such as to permit him to create a loss in one of the controlled businesses. | In the instant proceeding the elite catia } in the Courts below,that the same agreenient between the petitioner and Oil Base de Venezuela, including the rates of commission and discount, which the Com- — missioner of Internal Revenue deemed excessive, was in effect not only during the year. before the Courts below, that being the petitioner’s fiscal year ended Sep- tember 30,1959, but also during. the fiscal years: ended in 1960, '1961, and 1962. As shown in-the Statement of the case in ‘this Petition, Oil Base de Venezuela for’ its fiscal year ended in 1960 showed a net profit of ‘- Ninty-Two Dollars ($92.00). For its fiscal year ended _. in 1961 it suffered a loss of Four Hundred Ninety- Four Dollars ($494:00), and for“its fiscal year ended . in 1962 a loss of Three Thousand Five Hundred . Ninety-Six Dollars ($3,596.00). The foregoing are the “results of Ojl Base de Venezuela’s operatiorts prior to the reallocation of income made \Py the Commissioner et tetene i) . changed to a loss, and the losses which it suffered in: the fiscal years ended in 1961 and’ 1962 will be sub- | ° 8 . —21— Ps of Internal Revenue. It is. readily apparent that if the basis of reallocation maidé by the Commissioner of‘ In- ternal Revenue in the fiscal year ended in 1959 is ap- plied to the three ensuing years, the small profit which it realized in its fiscal year ended in 1960 will be stantially enlarged. At the same time, the taxable net income of the petitioner is correspondingly enlarged. In comparing the operating results of the two corporations on a consolidated basis, both before and after the re- allocation "proposed by the Commissioner. of Integfial ~ Revenue, it would appear that the Commissioner is creating income taxable by the United States where in fet none actually exists. ° . Additionally, assuming arguendo that: arm’s length bargaining i 1s the standard to be applied in every case, can it be said that parties dealing at arm’s length would enter into transactions which would force one of the | _arm’s length bargaining parties to operate at a loss? It is submitted that the question supplies its own an- swer. — e (Shey 3 Accordingly, it ‘is respectfully submitted that the Congress in granting.to the Commissioner of Internal Revenue the power to reallocate certdin| items of income deductions, etc., did not intend to confer upon the Com- | missioner the power to force one ‘of the controlled tax- - payers to operate at a loss while i increasing the income of the other controlled. taxpayer; that the instant pro- ceeding is a glaring example of the fact: that the*Com- ‘ missioner is exercising: such power to such effect, and it is further Sabmitted will continue to do so unless this Court places a limitation upon such power. G re . 4 ‘. % 2 ; Conclusion. — wt .A question of ever increasing importante. in the ad- ministration of the, Federal tax laws and the ability of the business community to frame international busi- ness transactions in the light thereof has been thrown into an even greater state of confusion by the decision _ of the Court of Appeals for the Ninth Circuit in the instant proceeding. Only this Court can end this con- fusion, and create ‘an environment of reasonable cer- tainty within which international business operations can be conducted. We urge the Court, therefore, to © grant the Writ of Certiorari. Respectfully submitted, WILson B. CopEs, WELLMAN P. THAYER, 4 1ttarneys for Petitioner. v - at te ial (A ied eed ao et =o Be ers BS ono ‘ternal Revenue, Respondent. No. 20,073. -*APPENDIX IT: — Judgment. ' United States Court of Appeals For the Ninth Cir- cuit. “Oil Base; Inc., Petiicner, VS. Commissioner of In- r) Upon, Petition to Review a Decision of The Tax Court of the United States, * This Carjse came on to be heard on the Transcript © "of the Record from ‘The Tax Court of the ‘Vatted States, and was duly submitted. On. Consideration Whereof, it is now here dedeted and adjudged by this Court, that the Decision of the ‘said Tax Court of the United States in this Cause be, and hereby is affirmed. ; | _ Filed and entered May 23,. 1966. APPENDIX II. " Opinion of the United States Court of Appeals. » for the Niath Circuit. “United States Court of Appeals, for the Ninth Cir- * cuit. Vv: Oil Base, omy Petitioner, vs. Commissioner of ‘In- ternal Reyenue, Respondent. No. 20,073. - [May 23, 1966] On Petition for Review of a Decision of the Tax NN Court of the United States. eg \ Before: Merrill and “Browning, Circuit Judges, and T ‘hotmpson, District Judge. Merrill, Circuit Judge: se] Petitioner as taxpayer seeks review:of a ‘Pax Court decision respecting income taxes for the taxpayer’s’ fiscal yaar ending. September 30, 1959. Phe tase in- volves allocation of itteome between the taxpayer and its subsidiary, a wholly owned, Venezuela corporation, ; Oil Base de Venezuela, C.A. (hereinafter referred to as “Obvenca”), which, during ‘the yeay in question, served as taxpayer’ s foreign sales representative. bead ifcome derived by Obvenca was attributable to commissions and Sues allowed by the-taxpayer pur- suant ‘to an ‘@ereement between the two companies. Finding” these commissions and discounts to, be roughly twice as: large asathose paid ‘or allowed: “by taxpayer in agréements with five separate uncontrolled foreign sales representatives (including Obvenca’s Venezuelan pred- . ecessor and three -of Obvenca’s subagents), the Com- pe missioner, under section 482, Internal ‘ Revenue Code of 1954," rejected the terms of the agreement as not clearly’ reflecting the income of the parties and having the effect of imptoperly shifting incgme from taxpayer to its controlled foreign subsidiary. Pursuant to Treas- ury Regulations’ the Commissioner allocated to taxpay- er that income which the arm’s-length arrangements ae : ; ‘Internal Revenue Code of 1954: « “SEC. 482. ALLOCATIONS -OF INCOME AND DE- DUCTIONS AMONG TAXPAYERS. In any case of two or more organizations, trades, or businesses (whether or not incorporated, whether or not or- ganized.in the United States, and whether or not affiliated ) owned or controlled directly or indirectly by*the same in- terests, the Secretary or his delegate may distribute, ap- portion, or allocate gross income, deductions, creditsSor al- ‘ lowances between or among such organizations, trades, or businesses, if. he deterrhines: that such distribution, appor- tionment, or allocation is necessary in order to prevent . evasion of. taxes or clearly to reflect the income ‘of an such organizations, trades, or: businesses.”: (26. U.S.C.. 19 ed., Sée. 482.)° ' ’ #Section 1.482-1(b) provides in part: * | “Scope and purpose. (1) The purpose of sectidn 482 is to’ place a controlled taxpayer on a tax parity with an uncontrolled taxpayer, by determining, according to the / ' standard of an uncontrdlled taxpayer, the true taxable income from the property and business of a controlled taxpayer.” ” Section “1:482-1(a)(6) provides’: , gthe term ‘true taxable income’ means, in the case of a controlled taxpayer, the taxable income (or, as the’ case may he, any item or element affecting taxable income) which. would have resulted to the controlled taxpayer, had it in. the conduct of its affairs (or, as the case may be, in the par- ticular contract, transaction, arrangement, of other act) dealt with the other member or members of the group at arm’s length. It does not mean the income;. the deductions, the e credits, the allowances, or the item or element of ificome, g deductions, credits, or allowances, resulting to the controlled '. taxpayer by reason of the particulas contract, transaction, ‘or | - arrangement, the controlled taxpayer, or the interests con- trolling it, chose to make (even though such contract, trans-, action, or arrangement be legally binding upon the parties thereto) .” : g: *. Poe, an with uncontrolled foreign sales representatives would have produced.* The Tax Court supported the Commis- sioner. We agree. | , As stated by the Tax Court in its opinion: “The -burden is on petitioner to show error in re- spondent’s allocation and respondent's determination must be stistained unless it is unreasonable, arbi- trary or capricious.” -, Taxpayer contends here, as it did before the Tax ' Court, that the Commissioner has erred in establish- ing by regulation and using here a standard of arm’s- — length bargaining. Taxpayer points out:that no such standard is‘contained in the statute. ‘It; contends that under the statute thé question. is not what income arm’s- léngth bargaining would have produced, but what in- come properly is attributable to each of the two com- monly held corporations as its true net income in light of what each performs’ or produces. Relying on this © court’s decision in Frank v. International Canadian Corporation, 308 F.2d 20, 528-529 (9th Cir. 1962), ~ *The Comatestonss explained his adjustment to the taxpayer . as follows: “It is determined that commissions ‘paid and discounts oe to your ‘controlled foreign subsidiary, Oil Base de of Veneuda, CA, vere “dome fr Solar codeine’ i ing rom you to cont foreign subsidiary, thereby distorting your and the were paid to Oil Base de Venezuela on certain sales occur- ring outside of Venezuela which were, in substance, your and on these sales no commissions are being allowed this determination. In determining the allowable as commissions and discounts paid. 3 Oil Base i ieee. CA, chat cin amnels to.enpitly anette, the determination has been based on arm’s length negotiated rates between yourselves and uncontrolled parties on- identical and services. This issue involves application of sections 1 and 482 of the Internal Revenue Code df 1954.” 4 it contends that in the present case the question is whether the income reported by taxpayer is a fair and reasonable, return on its retained manufacttiring acti- vity.! ,. =a * We cannot agree. Where, as here, the extent of the income.in question is largely determined by the terms of business transactions entered into bétween two ‘con- trolled: corporations it is not unreasonable to construe “true” taxable income as that which would have resulted if the transactions had*taken place upon such terms as would have apphied had the dealings been at arm’s - length between ‘unrelated parties. eet: ‘° Frank v. International ‘Canadian C or poration, supra, did not hold that the arm’s-length standard established by regulation:was improper. It held that it was’ not’ “the sole criterion” for determining the true net income of each controlled taxpayer. However, permissible de- parture from the regulation’s arm’s-length standard was, under the facts’ of that case, very narrowly limited® and the holding has no application to the facts before us. | *Taxpayer asserts that this has been conclusively . established by proof that even after payment of the commissions and ‘al-. lowances of the. discounts in question, it has realized a higher return on its manufacturing activity in respect to foreign sales than it has in respect to its domestic sales. The Tax Court dismissed this contention with the comment: - “There is no evidence to show that the percentage return retained by petitioner on domestic: sales would represent a reasonable return on its export sales.” ity *It was held: (1) that where the pretrial order pursuant to’ stipulation specified that the.standard to be, applied was “rea- sonable price and profit,” the District Court was not in error in applying that standard; and (2) that the court was not in error im holding the price and profit to be reasonable where (a) the price charged resulted.in a reasonable return to the retained manufacturing. activity, and (b) there was no evidence that (This footnote is continued on the next page) ’ satis We conclude that the arm’s-length bargaining stand- ard was properly applied pursuant to —e Hall v. Comm’r, 294 F.2d 82 (Sth Cir. 1961). . : Taxpayer contends that certain Sestirs bearing on Obvenca’s business activities distinguish its situation - from that of its predecessor and render the arm’s-length history irrelevant.and its return inadequate. It contends that adjustment should be, made to compensate for these factors and, that .doubling the commissions and dis- counts previously paid was reasonable adjustment. The Tax Court considered these factors and rejected ' taxpayer’s contentions with respect to them. _For the | reasons expressed by the court we do not regard this | ruling as arbitraty or unreasonable under the circum-_— ‘ stances. Affirmed. ° be] arm’s-length bargaining upon the specifi. commodities sold had produced a higher return. Further, fromthe complexity of the circumstances surrounding the services rendered by the subsidi- ary it appears that it would have been difficult for the court to hypothesize an arm’s-length transaction. a APPENDIX Ik © Memorandum Findings of Fact and Opinion. | T. C. Memo 1964-298 Tax Court of the United States Oil Base, Inc., Petitioner, v. Commissioner of In- ternal Revenue, Ruisdelen Docket No. 2289-63. Filed November 17, 1964. + | .. Wilson B.C opes, for the petitioner. John W. Alexander, for the respondent® ‘Scott, Judge: Respondent determined a deficiency in - ‘petitioner’ s income tax for its fiscal year ended Sep- tember 30, 1959, in the amount of $51, 718.66. | The i issues ie decision are: (1) Whether respondent properly included in peti-— tioner’s income under the provisions of section 482 of ' the Internal Revenue Code of 1954 a portion of the com- missions paid and discounts allowed to petitioner’s * wholly owned foreign subsidiary. (2) Whether’ respondent properly disallowed peti- tioner’s deduction for all commissions paid to its wholly owned subsidiary, on sales of petitioner’s products in countries other: than Venezuela. FINDINGS OF FACT. . Some of the facts have been stipulated and are found accordingly. ° se i Petitioner is a California corporation with its prin- cipal place of business in Houston, Texas. _ Petitioner’s income tax return for its fiscal year ended September 30, 1959, was. filed with the district director of internal revenue for the Sixth District of California. 5 . _ » : During its fiscal year 1959 petitioner’s principal place of business was in Campton, California. Petitioner is and has been. since prior to 1946, en- _ gaged in the business of manufacturing and selling oil base drilling fluid and related pemucts ¢ to the oil ha - ing industry. ( o> Sincé approximately 1946 petitioner has been selling its products in certain foréign countries where oil drill- ing activity was being conducted. Petitioner’s principal product is an oil base drilling fluid known as ‘Black Magic.” Black Magic i is a special- * ized product for use in the, oil drilling industry possess- ing certain qualities,not found in water base drilling ’ fluids: It: produces highly desirable’ results in certain specialized oil well drilling situations. The product is more expensive than water base drilling fluids and, is dirty and disagreeable to work with: For this reason. petitioner considers it necessary to direct its selling ef- forts to all levels of oif drilling personnel ranging from the top production executives of an oil company down to the drilling crews. Generally, it requires more than © one contact to’ result in a sale of petitioner’s product. Service of the use of petitioner’s products after a sale is also an important feature of petitioner’s business. % Petitioner maintains a staff of service enfitcers whose main duty: is to service and supervise the use of its products by its customers. All of’ petitioner’s sales and service engineer® are trained in the use of petitioner’s °, products and» petitioner’s top executives are. ne trained. / A true oil base drilling fluid j is weed i in niienteidecey 2 percent of all oil wells drilled. Thare are several ie: companies which manufacture and sell a trie oil base drilltng fluid, and these companies other than petitioner are’ petitioner’ s direct Competitors. Prior to’ October 1, 1955, petitioner’s foreign sales had been accomplished’ tnreagh various independent sales representatives. _ On or about October 1, 1955, petitioner and Batitina. de Venezuela, S.A., a Venezuelan corporation of Car- acas, Venezuela (hereinafter referred to as Baritina),-. | . executed an agreement gursuant to which Baritina was to act as the exclusive sales representative for peti- tioner’s products in the country of Venezuela. This _ agreement’ provided that Baritina would diligently and . faithfully prosecute the sales of petitioner’s products and would forward to petitioner all orders to be shipped _by petitioner directly to Baritina’s customers, that Bari- tina would.pay its own costs and expenses and: would maintain at its own expense ‘an adequate and competent — staff of sales engineers in connection with the selling ‘and servicing of petitioner’s products. It further pro- _ vided that Baritina would send one or more persons to petitioner’s Compton plant for instruction in the use and ‘sale of petitioner’s “products. The agreement: also _ provided that Baritina would not sell or attempt to sell ° arty product similar to petitioner’s products * without ‘ petitioner’s consent. The agreement contained* in addi- | tion other general provisions prith respect to liabilities: of the parties, claims, and prices of merchandise, and it contained the foltowing provision with respect to. Bari- tina’s commissions and discounts: ~ . 8. First Party (OIL BASE; INC.) agrees’ to pay to Second Party [Baritina] as commissions ,, ypon merchandise shipped directly by First Party > f “—1lo— to the consumers within Second Party’s territory, as hereinafter set forth under heading (a) of this paragraph contained; First Party does further agree to allow Second Party discounts from its list "price of merchandise hereinafter listed as may be purchased by Second Party from First Party for 2 resale and stocked or warehoused ‘by it, as herein- after set forth under headings (b) and (c) of this paragraph contained; | (a): " (b) Ac) * Net 90 days Net 90 days . . fromdate from date . ofinvoice — of invoice a (commission) (discount) (discount) - OB Wate 15% 17% - 20% Filer Presses 15%. 7% 2%. Chemical “V”’ 15% — 174% 20% OB Zero - 15% . 17Y%% 20% - Mix Fix | 15%: 17Y%z% 20% - . Additive “E” 18%.° 174% * 20% _ Sacked Black | ° ek: Magic « 20% j§§ 22%4% © 25% OB Gel 20% - 22290 25% | '- OBGen © 20% — 22Uu% " 25% White Magic - 20% . . 22%% 25% Economagic 20% © 2214 % 25% Peptomagic ° 20% 221% : 25%. No-Glo Oil 20% 221%4% 25% No-Glo .. 200% ~. 224u%% “25% Thread ~ Lubricant ‘ Special , : : Q» Additive 58 200% . 22U%% .- 25% Formaseal 20% . 22U% 25% -MudGuns ° 20% 22Y% #.. 25%, Well Wash 20% ' 22Uu% 25% Chemical - : trees Pes ie | 20% * 22Y%- . 25% Black Magic ' Premix 20% j§§ 224% . 25% Hand Gleaner *. 20%’ ) »22Y% 25% _ tina &xecnted a document gntitled Sup ili, The foregoing may be amended in writing endorsed thereon. “On or about December 1, 195 titioner and Bari- mental Agree- | ment” pursuant to which sth’ ‘country,. of Colofibia was added to the territory for which Baritina was to be the exclusive representative of petitioner’s products. This _ supplemental agreement: surther provided that AZ Ex-” port, S.A., a corporation, Was to be named as the exclusive subagent and distributor of petitioner’s prod- ucts-in the Republic of Colombia. * The agreement between petitioner and Baritina with the. supplement including sales: im, the Republic of | Colombia, remained. in “force through September 30, 1957. , After September 3Q, 1957, and during the period of ~ time in which Baritina and. petitioner were negotiating. in an effort to reach a new agreement Baritina con- » tinued to’ sell petitioner's products, even though -no written contract in this respect between the two parties was in effect. Prior to October 1, 1955, while petitioner was. repre- ” sented by indeperident sales representatives in selling its products in foreign countries petitioner sent per- sonne]_ from its own plant to assist its sales representa- - ‘tives in the sales and servicing of petitioner’s products even though some of the sales representatives had _per- sonnel who had been trained i in the uses and applications: of petitioner’s products. ' During, the time that Baritina was representing peti- — tioner, petitioner furnished Baritina one of its own ex: - perienced engineers who went to Venezuela and becatne a Cxdfnw employed by Baritina. This. engineer while employed by Baritina, worked primarily on sales of ° petitionet’s _ products. | 5 After the termination of the agreément between peti- tioner and Baritina on September 30, 1957, the two com- - panies negotiated for the renewal and modification of the agreement. These. negotiations. consisted of cor- | ‘respondence between the two companies, and represen- _ tatives of petitioner and a representative of Baritina had’ one personal conference. The personal conference took place in petitioner’s offices at Compton, California, and petitioner was represented by i its president and exeg- utive -vice president, and Baritinz by its assistant gen- - eral manager. Petitioner’s representatives in these ne- | gotiations, took the position that since ‘40 percent of Baritina’s stock has been acquired by. National Lead Company, which operated a division, called .the Baroid Division which was a direct competitor of petitioner, petitioner should have protection with respect to the \. time period of the contract and quantity of inventory carried by. Baritina. In addition, petitioner wanted Bar- _ itina to erect.a premix plant in order. that petitioner’s _ products might be shipped in a dry state to Venezuela and. mixed in fiquid form ‘in that country. Petitioner also wanted Baritina to agree to send four or more per- sons to its plant at Compton for training. ee During the course of. the negotiations Baritina re- quested higher. commissions and discounts. At'the per- sonal conference between representatives of petitioner. and of Baritina, petitioner’s representatives received the impression that the representative of . Baritina had authority. to agree to.a contract on behalf of Baritina and..at the conclusion of the conference were under “ ee a the i impression that an agreement had been vaigia be- tween the two companies regarding the provisions of a | new- contract. In accordance with this understanding | . petitioner’s president, under date of March 10, 1958, - submitted to the general manager of Baritiha a proposed new contract to be entered inté between the two com- _ panies as of April 1, 1959, which proposed contract he ‘understood to be in accordance with the agreement: reached at the Lpliaies “road The proposed agree- ment submitted by petitioner’s. president to Baritina _ with a letter dated March 10, 1958, was for a period of - 1 year and contained, among its Provisions, the fol- lowing: ‘3. ~ Baritihe agrees ws *. x KK KOK we (e) Maintain at its own expense an adequate and competent staff of “sales engineers” in ‘connection with the selling and servicing of Oil Base’s prod- - ucts, it being agreed that -service by trained and skilled personnel is necessary to the proper use by. the consumer of Oil Base’s products and to the. proper sales coverage thereof. | | te, In connection with the foregoing, Baritina agrees "to send four or ‘more persons to Oil. Base’s plant at Compton,_ California, within a period of one hundred twenty (120) days from date hereof for instru¢tion in the use, and sales procedures adopted by‘ Oil Base in connection with the consujner use es sale of its products, to wit: For instruction as a “séles engineer” as said term js herein used. All .- transportation, living, maintenance, and salary ex- penses of and for such persons ‘shall be borne and paid by. Baritina ; alae however, that Bari- é q . eae ane tina may at its option in lieu of sending the afore- described four persons for training at Oil Base’s .plant at Compton, California, as sales engineers, . request Oil Base to send one of its trained sales ‘engineers to Venezuela to train and. instruct: _‘said four persons as sales engineers, all expenses of said representative, including salary, to be borne and paid by Baritina. The request ‘and sending of said representative as last described: shall con- stitute full performance’ of this Subparagraph (e) by. Baritina. | | ¢'*:-% ‘a @ 9. Baritina: agrees to maintain at all times dur-# ‘ing the existence of this agreement a minimum stock of Oil Base material in the following quanti- ties at the listed points or warehousing’ sites, to wit: ct » - ke * * * * * Having this in mind, Baritina agrees that the aforedescribed inventory shall never at any. “ tinf@during the term of this Agreement or exten- -sion hereof be allowed to go below and remain below a minimuriy purchase price value of” $100,- _ 000.00, * * * | 10. It is ccna that Baritina has made certain sales of all Oil-Base’s products in Colombia ; and Venezuela.during the months of October, 1957,. through March, 1958 during which’ times Baritina had no sales representation agreement: with Oil Base and no agreement with respect to payment by- Oil Base of any commissions. to Baritina on ac- count of -said sales, it being. further-agreed that . calculated amounts .of said ‘commissions exceeds SS alte - $18, 000.00. In consideration of Oi Base” paying said described commissions in such exact ‘amount as. the same may appear and be, Baritina agrees: to immediately erect at its’ sole expense a premix . plant in accord with bluprints [sic] furnished to Baritina by Oil Base. Said premix plant shall be. erected at Las Morochas, Venezuela, for use in. the processing, storage and sale of Oil’ Base products. Payment of ‘said described commissions shall be — made when said plant is erected and in operation. he ee 14. Baritina agrees that it will maintain two trained sales engineers” ( trained, as provided in paragraph 3(e) -) resident in the Republic of Co- . lombia at all times during the existence of this Agreement, “ * >» © The ‘commissions and discounts set forth’ in the pro- posed agreement were identical to those whiclt had been contained in the prior agreement between petitioner and Baritina: The term of 1 year in the’ contract was in _- aecordance with information that the assistant general ~manager of Baritina had given to representatives of petitioner ‘subsequent ‘to the personal, conferencé be- | tween representatives of the two companies to the ef- fect that the general manager, of Baroid Salés Divi- sion of National Lead Company. would agreed to a 1- year term only for the contract.”. .. Subsequent to the submission of the proposed con- ‘tract to ‘Baritina ‘by letter dated March 10, 1958, fur- ther correspondence took place between representatives | of petitioner and representatives of Baritina in which the representatives of Baritina stated that Baritina could not agree to the new provision of the proposed con- "je ° tract which required’ Baritina ‘to keep a minirhum in-— ventory and to construct a premix plant in Venezuela. The estimated cost of construction of the premix plant was approximately $25,000. Ina letter dated March 17, 1958, from the assistant general manager of Baritina to ‘petitioner’s president discussing the proposed new contract, the followitg statement was made: We are more than willing to continite on the basis of. the old contract, making whatever new ar- rangements within reason which you feel are nec- essary in C olumbia [sic]. This would mean put- © a Mixing Plant or maintaining. minimum invento- ries at the present time. May we hope that you can see your way clear to extend the old contract or a modified form of the new contract: excluding those portions coms mented on in thepreceding paragraphs, At the time the negotiations were being carried: on with respect to a new contract between petitioner and Baritina, the latter company was maintaining in Ven- ezuela’ an inventory of petitioner’s products in an amount of approximately $85.000. | The proposed new contract between petitioner and Baritina was never executed and negotiations were terminated ime April of 1958. - * After termination of negotiations between petitioner and Baritina regarding the new contract, petitioner’s management gave consideration. to the best method of ed ease aN marketing petitioner’s . products in foreign countries. After consulting counsel-in Los Angeles, California and a Venezuelan attorney, petitioner’s board of directors decided to form a wholly owned Venezuelan corpora- tion to act as petitioner’s sales representative in for- eign countries. On or about July 13, 1958, petitioner; caused the formation of | Oil Base de Venezuela, C.A.¢ a Venezuelan corporation (hereinafter referred to as" -Oil Base, Venezuela) as a wholly owned subsidiary of petitioner. ‘Oil Base, Venezuela was organized with ‘a paid-i -in capital of $6,000 and at no time during the | fiscal year ended September 30, 1959, was this paid- in capital increased. On or about June 20, 1958, _peti- | tioner and Oil Base, Venezuela, executed an agreement pursuant to which Oil Base, Venezuela, “was to act as” petitioner’s exclusive sales representative for the sale of petitioner’s products in all countries of the world-ex- cept all of the States of the United States and all of the Provinces and Dominions of, Canada. Section 8 of this agreement provided as follows :: 8.-O.B.I. agrees to pay O.B. Ven., as Commis- sions upon merchandise shipped divecthy by. O.Bi4. from any of its plants or warehauses located in’ the United States of America to’ a customer lo- cated within O.B. Ven.’s territory, such sum as will represent twenty per cent (20%) the net invoice billings of said sales, exclusivy; of, trans- portation, packaging, insurance and taxes, of those products of O.B.I. known as OB Wate, Filter Presses, Additive “V”, OB Zero, MixFix, Addi- tive “X” and. Additive “FE”; and such sum as will represent forty per cent (40%) of the net invoice billings of sales, exclusive of transportation, pack- = aging, insurance and taxes, of all other of O.B.12s ° products. O.B.1. does further agree-to allow O.B. ° Ven. discounts of twenty per cent (20%) from its.established export: list price of its products, ex- clusive of freight, taxes and special charges for —. export crating, known as OB Wate, Filter Presses, Additive “V”, OB Zero, MixFix, Additive “X” and Additive “E”’; and-discounts of forty per cent (40%) from its established list price, exclusive | of freight, taxes and special charges for export crating, on all other of O.B.I.’s products. If such “* commissions are due O:B.’'Ven. because of direct purchases made from O.B.I. by ‘ctstomers’ opera- ting in O.B. Ven.’s territory as_aforedescribed, such commissions shall be determined and paid on . the 20th day of. the month next succeeding “the - month in which — is made to 0. B.I. by such customers. _ The agreement between petitioner and Oil Base, Ven-. “eauela, was -for a period commencing June 20, 1958, and ending January 1, 1959, but this, agreement was ex- tended for an additional year: to December 31, 1959. _ The agreement between. petitioner and Oil Base, Yen- ezuela, made mo requitement of a minimum inventory to be maintained by Oil Base, Venezuela, for the erec- © ‘tion of a premix plant, the training of four ‘sales en- ' gineers in petitioner’s plant, or the maintenance “of twa” sales engineers in Colombia. ! tween petitioner and Baritina. | The contracts between Oil Base, Venezuela and its. three subagents were each signed by the president of ' Oil Base, Venezuela, who was also -petitioner’s, presi- The agreement between Oil Base, Venezuela, and Volco, Inc., covering the period beginning July 1, 1959 and ending September 30, 1960, provided for commis- sions to be paid and discounts fo be allowed to Volco, | ‘ Inc., in the-same amourtts as had been ‘allowed by peti- tioner to Baritina and as were being allowed to Ser- vicios and Gene L. Towle. | On October 1, 1958, petitioner and Milwhite Mud - Sales Co., Ltd. (hereinafter referred to as Milwhite), entered into a contract r which Milwhite was des- ignated as the exclusiv@¥sale representative for peti- tioner’s products in the Provinces of Alberta and Sas-, katchewan, Canada. The commissions and discounts allowed to Milwhite under this contract werg exactly the same as those which had been allowed by petitioner _ to Baritina and which were set forth in the proposed contract of April 1, 1958, between petitioner and Bari- tina. Petitioner’s agreement with Milwhite was for a l-year period and ‘was extended for an additional pe- - riod to October 1, 1960. During the period beginning June 20, 1958, and con- tinuing until about December 20, 1958, Richard New-_ man was the only full-time employee of Oil Base, Ven- ezuela. Newman was stationed in Puerto La Cruz, Ven- -ezuela. Prior to being employed by Oil Base, Venezuela, N n had been employed as a sales rlineer by Bari- tina in Venezucts and in that — a) had sold and. -. —2]l— serviced petitioner’s products. Prior to becoming em- ployed by Baritina, Newman. had beer employed as a- sales engineer for petitioner. Newman severed his con- ‘nections with ‘Oil Base, Venezuela about December y _1958.°A period of approximately 2 weeks expired be- fore Newman’s replacement arriyed in Puerto La Cruz, Venezuela. oe ae a %, Newman’s replacement was a man named White who - had been employed by petitioner prior to becoming ‘em- ployed by Oil Base, Venezuela. White took over his du- ties with Oil Base, Venezuela, shortly after January 1, ‘1959. White was the only fuil-time employee of Oil Base, Venezuela, from the time he -became so employed throughout the balance of the fiscal year ended Septem-. ber 30, 1959. Newman while employed by Oil Base, Venezuela,,,and White when. he replaced Newman, served as sales engineer, service engineer, and: general manager of Oil Base, Venezuela. | Shortly after Oil. Basey public accountant located in open a set of boaks for the newly organized corporation and it was agreed that -this accountant would be paid for _ bookkeeping service for the corporation and in addition, with no additional charge, he would permit Oil Base, Venezuela, to use his post office box number in Puerto La Cruz and furnish an office for the general manager of Oil Base, Venezuela, to occupy: from time to time. This accountant had other clients besides Oil Base, Ven- ezutela. It was agreed that: the ‘payment for services, enezuela, was organized, a __ without any additional charge for the use of the post of- ficé box and furnishing an office, would be approxi- mately $150 per month: The accounting practice of the — accountant with whom Oil Base, Venezuela, made. the: 3 enezuela was paid $75 to. - ~ DB, eth a. arrangement was purchased around the first of May - 1959 by an accounting firm which continued the same arrangement with Oil Base, Venezuela. 3 During the fiscal year ended September +30, 1959, the president and vice president of petitioner, who were also the president and executive vice president .of Oil Base, Venezuela,-made a trip, to Venezuelayyand during the course of the trip visited Mexico and Colombia. Most of the time the two, officers of petitioner and Oil. Base, Venezuela, were traveling together. In the business deal- ings conducted in Venezuela, they represented them- selves as officers of Oil Base, Venezuela. During some of the trip, the two officers were accompained by New- man, the manager of Oil Base, Venezuela. On‘the trip in Colombia, petitioner’s two officers were accompanied - by the Colombian agents who handled petitioner’s -prod- | ucts and represented themselves. as officers of Oil Base, Venezuela. In accordance ‘with the agreement between Oil Base, Venezuela,”and: petitioner, each of the com- panies bore one-half of the expense of ‘the trip made by these officers to Venezuela, Colombia, and Mexico. {t had been petitioner’s consistent practice during the years that it was marketing its products in: foreign coun- tries to send its employees to the countries‘ th which its products were being sold for the purpose of assisting - its sales representatives arid servicing the use. of its. 4 products. Petitioner’s assistant sales manager was us-. ually the representative sent to Venezuela and @olgmbia, and while on such trips he actually went to the site where petitioner’s products were being used and serv- iced the iise- of petitioner’s products. The expense of these trips was borne solely by petitioner. ss = ie As of September 30, 1958, Oil Base, Venezuéla,- had _ inventory of a valué-of $21,809 stored at a leased ware- house at Puerto La Cruz, Venezuela; and as of Sep- tember 30, 1959, it had inventory stored at this ware- house of a value of $27,764. As of these same’ dates Oil Base, Venezuela, owned office equipment which had a cost of $758 and’ an automobile which had a cost of $3,611; and as of September 30, 1959, Oil Base, Ven- ezuela, owned furniture for a —— s house which -. had a cost of $1,200. .* +: oe : - During the fiscal ‘period ended September 30, 1958, and the fiscal year ended September 30, 1959, Oil Base, Venezuela, leased a warehousé in Puerto’La Cruz for Bs.500 per month. Dufing the fiscal year 1959 it re: | ired three and one-third bolivars (Bs.) to equal one United States: dollar’: | F - During the fiscal period ended - Septiatber 30,. 1958, and the fiscal year ended September 30, 1959, Oil Base, ‘Venezuela, leased a manager’s house located at Phillips Camp at San Roque, Venezuela, for a monthly rental of BS.800 and a house located at Nalco Camp, Anaco, for a monthly rental of Bs. 1 ,000. For the. fiscal year ended September 30; 1959, Oil Base, Venezuela, was charged for services rendered, ’- a: ,136.33 and $1,055.33 of the salaries paid by peti- oner to its. president and vice president, respectively, who were also the president and executive vice president of Oil Base, Venezuela. In addition petitioner’s treas- *. urer also rendered.services for Oil Base, Venezuela, and for such services rendered by the individual, who was petitioner’s treasurer until July 1959, Oil Base, Venezu- " ela, was charged $275.40 and for services rendered by _ the individual who became petitioner’s treasurer on July ill “1, 1959, Oil Base, Venezuela, was charged $117.63 for. services rendered during the fiscal year ended Septem- ; ‘ber 30, 1959.:: a ' Oil Base, Vewids, had net income ‘eit retained ai earnings of $18,208 for the 314 month period ended Sep- \ tember 30, 198. and a net income of $81,031 for its| fiscal year ended September 30, 1959, and retained earn- -. _ ings of $99,259 for the fiscal year ended September 30, 1959. Petitioner’s direct’ profit from sales for. its. fiscal : "years ending, September 30; 1956, 1957, 1958, and 1959, expressed as-a percentage of total gross‘sales, the similar direct profit for domestic sales expressed as a percentage of those sales, and export sales expressed as a Piermnee of such sales are as follows: Fiscal years ‘ended i 30 — 1957, - 1958 1939. Percent Total. = 247 2116 1 8O-.. . ae ‘Domestic 224 (140 212 ~- 22.5. Export - 34.6 .301 456. — 23.9 _ Direct profit used in computing these percentages rep- resents the profit after deducting from gross sales all - discounts and commissions allowed, njanufacturing costs _ ing salesmen’s: taints salaries, and entertainment ex- a penses 5. ; : : : Throughout the fiscal year ended September 30, 1959, petitioner owned all of, the outstanding capital steck-of _ Oil. Base, Venezuela. ae oe “Ye ‘Each of the officers ‘ins directors of Oil Base, Ven-* ezuela, was also an of ficer of petitioner. Crores _ ployees of petitioner. “2 _> : om _ In May ot 1958, prior to the ¢ organization of Oil Base, : Venezuela, petitioner’s vice president made a trip to’ e, Venezuela and Colombia, at which? time ‘he : discussed _ with Newman, who was then employed by Baritina, em- _ » ployment ‘in Venezuela by petitioner’s proposed subsid- | iary. He also discussed: with Vollmer.and Cooper in. Co- lombia ° their serving as sales” representatives . for peti- _ tioner’s products in Colombia: At that time Vollmer and Cooper ‘were. employees of ‘the ‘subagent who was the distributor of petitioner’s Products in Colombia on be- * half of. Baritina. Certain officers at petitioner who were also officers of Oil Base, Venezuela, carried on extensive cotrespond- : ence on Wehalé of Oil Base, Venezuela, from petitioner’s offices in Compton, California. Although the letterhead :0f Oil Base, Venezuela,. was “used for. this correspond- ence, such correspondence was po raps tage in Comp- ton, California by - secretaries who were full-time em- rT \ @ During the fiscal year ended September 30, 959, ‘be- tween 80 and 85 percent of the sales of petitioner’s prod- ucts ir the Republic of Colombia were madegto Texas ‘Petroleum Company i in Colombia. Some of the sales: re- sulted from orders sent by. Texas Petroleum Company’s - ‘New’ York: City office to petitioner in Compton, Cali- ‘fornia with directions: that the order was td be Shipped to Texas Petroleum Company in Colombi Petitioner . would then prepare documents showing petitioner as the shipper and Texas Petroleum Campany, Colombian Di- vision, as the consignee and purchaser. ee’ ‘P&titioner on its Federal income tax return for “its fiscal year ended’ September 30, 1959, reported, taxable _ income of - An? 80. “ F . . i . 6 oO: <4 — Respondent if in his notice of deficiency, in addition to | ~ making-adjusthents which, though originally placed in issue in the petition-in_ this case, have now been a a of by agreement of the parties, increased petitioner’s ? ' “reported irjfeme by an amount of $106,699.14 designated - 4 as “Sales increased” and made the _—— explanation _ - of this adjustment : It is determined that. commissiqns paid and dis- counts allowed té your controlled foreign subsid- - jary, Oil Base de Venezuela, C. A. were excessive in amount and had the effect of improperly shift- ‘ ing income from you to your Controlled foreign _ subsidiary, thereby distérting your income and the . income of your subsidiary. Furthermore, sales com-. . missions were paid to Oil Base de Venezuela on cer- tain sales occurring outside of Venezuela which were, in substance, your sales“and on these sales no commissions are being allowed under this determi- nation. In determining the proper amount allow- able as commissions ‘and discounts paid to Oil Base de Venezuela, C.A. where some amount is properly allowable, the determination has been based on ". arim’s length negotiated rates between yourselves and uncontrolled. parties on identical goods and services. This issue. involves the application of set-., tions 61 and 482 of the Eternal Revenue Code of 1954. * * * Pr ee re Oeics Sew ‘ox 27 OPINION. Petitioner recognizes that it’ and Oil Base, Venezuela, are organizations owned and controlled ‘by the same in- - terests within the meaning of section 482 of the In- ternal Revenue Code of 1954.' Petitioner contends’ that’ under. that section respondent ha$ erroneously used, in ‘the reallocation of gross income deductions, credits, or | allowances between petitioner and its subsidiary, a stand- . ard of arm’s length bargaining. Petitioner points out* that no such. provision is contained in the statute and that —_—— respondent’s regulations’ contain | a state- 1Air referenves are to the Internal Revenue Code of 1954 7 . unless otherwise indicated. ; SEC. 482; ALLOCATION _OF INCOME AND DEDUC- ‘ | TIONS AMONG TAXPAYERS: ; In any case of two or more organizations, trades, or businesses (whether or not incorporated,whether or not organized in: the . United States, and whether or not affiliated) owned or coz- trolled directly or indirectly by the same interests, the Secretary or his delegate may distribute, apportion, or allocate gross in- come, deductions, credits, or allowances, between or among such organizations, trades, or businesses, if he determines that such distribution, apportionment, or allocation is necessary.in order - to prevent evasion of taxes or clearly to reflect the income of any of such organizations, trades, or businesses. - Sec. 1.482-1(b) [Income Tax Regs.] Scope and purpose. . -(1) . The purpose of section 482 is to place a controlled taxpayer on a tax parity with an uncontrolled taxpayer, by determining, according to the standard of an uncontrolled taxpayer, the true ~ taxable income from the property and business-of a controlled taxpayer. The interests controlling a group 6f controlled tax- payers are assumed to have complete power to cause each con- trolled taxpayer so to confluct its affairs, that’ its transactions: . and .accounting records truly reflect: the taxable income: from + property and business of each of the controlled taxpayers. If, however, this has not been. done, and the. taxable incomes are thereby understated, the district’ director shall intervene, and, by making suclr distributions, apportionments, or allocations as - , he may deem necessary of gross income; deductions, credits, or allowances, or of any item or element affecting taxable income, (This footnote is continued on the next page) *5 a D ae] has been applied.by” the, courts. | Sa” _-ment that’ the standard to be applied in every case is. that of an uncontrolled taxpayer dealing at arm’s length , with another uncontrolled taxpayer, no such standard . Petitioner relies primarily upon Frank v. Interna- : tional: Canadian Corporation, 308 F. 24 520 (C.A. 9; 1962), and cases cited and discussed i in that case. _ Petitioner ‘relies particularly on the following para- wrath in Frank’ v. International Canadian C orporation, : supra: i . _. For example, it was not any iene proper for the - district court to tise here the “reasonable return” standard than it was-for other courts to use “full . - fair value,’® “fair price, including a . reasonable ~ profit,” “method which seems not -unteason- . able,” “fair consideration which reflects arm’s _ length dealing,” “fair and reasonable,”” “fair ‘ and reasonable” or “fair and fairly arrived at,” or “judged as to fairness,” [footnote omitted] all used in interpreting: § 45 [of the Internal Revenue Code of 1939, the predecessor of Sec. 482]. _ ae ae 8The Friedlander Corp., 1955,,25 T.C. 70, 77. es ye yee ng Inc., 1951, 17 T.C, 231, 260, affirmed S Cir.. 2d 873, certiorari denied, 346 USS. 819, 74S. Ct. an, BL Ed. 348. : Motor Securities Co., Inc., 1952, 11 TCM 1074, 1082. 11Pqlm Beach Aero Corp., 1952, 17. T.C. 1169, 1176. ‘ 12Polak’s Frutal Works, Inc., supra i Th. la (1954) ] 21 T.C. at 975-976. 8 Seminole Flavor Co:, 1945, a ye oe i215, 1232. between or among the controlled taxpayers constititing the group, shall determiné’the true taxable income of each controlled tax-. payer. The standard to be apptied in every case is that of an ° uncontrolled taxpayer dealing at arm’s length with another un- . ‘controlled taxpayer. \ —m,: ¢ It is petitioner’s position that since it retained a slightly higher percentage of, direct profit. from: export marae than from domestic sales even after allowance of com- missions and discounts_toits subsidiary in accoréance with their gontract, it has established, under the criteria \ of Frank v. International Canadian C orpgration, supra, that it retained a reasonable return. It is “unnecessary for us to decide whether the sole standard in cases under section 482 is.one of an amount which would be arrived at in arm’s length -transac- tions betweert-unrelated parties. The commissioner has been given much latitude in his use of section 482 when ,» “necessary to prevent the evasion of Federal income tax by shifting of profits between taxpayers subject to com- mon control. Ballentine Motor Col, 39 T:C. 348, 357 (1962), affd. 321 F. 2d 796 (C.A. \ 1963). ~~ ° The burden is on. petitioner.to Show error in re- spondent’s allo¢ation, and respondent’s determination must be ‘sustained unless it is unreasonable, arbitrary, _or-capricious. Grenada Industries, Inc., ‘17 T.C.-231, 255 (1951), affd. 202 F. 2d 873 (C.A. 5,. 1953), .certiorari denied 346 U.S. 819. There is no evidence to - show that the percentage return retained by petitioner on domestic sales would represent a reasonable return _ on its export sales. There is‘ likewise no evidence to show... ‘that the amount of commissions and discqunts paid t9 ~\ Oil Base, Venezuela, represented a reasonable amount, a __ fair amount, or an amount which would meet any of the other criteria referred to by the Court in Frank v. ‘International Canadian Corporation, supra. Certainly the fact that these commissions are almost double those paid by petitioner to unrelated persons in arm’s length - transactions is evidence that they were -not fair and reasonable. - ' Petitioner. justifies the rates established for Oil Base, Venezuela, whith were, about twice the amounits it had © -been paying to Baritina and was currently paying to its representative in’ Canada, as well as about twice the amounts which its: distributors, through classed as sub- 3 agents of Oil Base, Venezuela, were charging in- other. . | countries, by stating that petitioner ’s hoard” of directors considered a number of factors in arriving ‘at the rates of commission and discount. The factors which peti- tioner stated were’ considered were that Baritina had represented to petitioner that it, had just about been breaking even with respect to its representation of peti- | tioner; that Oil Base, Venezuela, would be handling — only petitioner’ s products ‘whereas Baritina had handled . noncompeting: products of several other manufacturers © and consequently had a broader base over which to spread its overhead costs; that Oil Base, Venezuela, would be starting from. the. very beginning whereas ~ Baritina was an. established and’ going. concern; the | manufacturing costs of the products involved which, of - “cline course, were known to petitioner as well as the selling price of the products;the high cost of’ operating in Venezuela and Colombia which was known to petition-- - ef’s management; and that: it. would be necessary for Oil Base, Venezuela, to obtain subagents and distribu- tors. in various foreign countries and: to pay them com- missions on sales made in those countries." None of the alleged reasons justifies. the rate of com- missions and discounts allowed to Oil Base, Venezuela. Petitioner, irt its proposed contract with .Baritina had not increased-the rate of commissions and discounts although it was insisting on minimum inventory to be maintained by Baritina, the building of a premix plant,” and the training of several sales engineers. It would, | therefore, appear. that, if personnel of Baritina_ had --Tepfesented to petitioner that, Baritina had just about been breaking. even with respect to representation of petitioner, petitioner: was not impressed with this repre- sentation to the extent that it was ‘considering: the rais- ing of commissions for Baritina or withdrawing fram | some of the additional demands it, was maeeing upon Baritina. ‘The second contention is likewise unimpressive. Oil » Base, Venezuela, had only:one full-time employee, who was the same person who as an employee of Baritina had devoted full time to petitioner’s products. This arrange- ment was made prior, to the. incorpération of .Oil Base, Venezuela. Petitioner does ‘ not explain why it consid- ered a concern that was merely beginning in. business. to be entitled to a higher commission than a going con- - cern with a number of employees. Petitioner has shown | no reason why its knowledge ofthe gross profits from its sales should persuade it to allow commissions to its subsidiary about twice those it had previously paid, other than the inference that respondent would draw’ of ‘shifting i income to Oil Base, Venezuela. The high opér- ating costs in Venezuela would not affect: Oil Base, Venezuela, to an’ appreciable extent since its: manner —of-operation had been set prior to its incorporation. Petitioner’s last point is not well taken since it has - «not shown why Oil Base, Venezuela,. should. have, any, “appreciable profit on sales. made by subagents in other ae _ foreign countries. All of the evidence of record jn this _ "case indicates that a fair and reasonable commissiori : and ‘discount to be allowed to Oil Base, ‘Venezuela is the. amount of commission and discount that had been ; "3 é . ys ae —32— : _ allowed to. Baritina, was proposed in the new contract to ‘be allowed’ to Baritina, and was allowed to petitioner’s Canadian representative and various’ subagents with the exception of a lower commission being allowed to the a Colombian representative for’a short period’ of time. See Jesse E. Hall, Sr.; 32 T.C: 390 (1959), affd. 294 F. 2d 82 (C:A. 5, 1961). We sustain respondent: with respect to ‘his determination of the amount of commis-_ sion. properly. allowable on sales in Venezuela. ae The evidence ‘clearly shows that petitioner fieeded sales representatives in Colombia-and Mexico and that some commissions or. discounts were necessary: ‘ge obtain —such representatives. Respondent’s action .in disallowing _* commissions and discounts on such sales is Unrea- sonable and arbitrary. ‘During the time’ Baritina repre- - sented petitioner, that company handled petitioner's sales in Golombia through a: subagent at the same commis- 7 sions and discounts paid to it for, sales in Venezuela. o Petitioner has failed to show why commissions and dis- counts on sales in Colombia, Mexico, and Peru, if any, paid to Oil Base, Venezuela, should be different from '. those allowed to Oil Base, Venezuela, on salesin Vene- zuela. “The agreements with thé various subagents were for’amounts of discounts and commissions identical to those paid by petitioner to Barjtina and to its Canadian . _ representative, and which respondent recognizes: as ' proper to be allowed to Oil Base, Venezuela, on sales in Venezuela, except for a short period .of the contract with Volco in Colombia. However, petitioner - has _showri no services “performed by Oil Base, Venezuela, which would entitle it to a profit on these Sales. ‘In this state of the record, we tonclude that the same rates of commissions’ and discounts which respondent: “TSP. ® Sew eee eee foe ie ? BT EN arg cid Ay at an RS Ae Gal acta te ~ ae 8 9° es tes allowed to petitions? in pee its deductions with respect to sales in Venezuela. are allowable to de- termine the proper deduction by. pétitioner with respect. to sales in Colombia, Mexico, and Peru. We therefore hold that the tates of, commissions allowed by respond- ent with respect to petitioner’ s Venezuelan sales are also proper with respect to all sales’ of petitioner’ s products in Colombia, Mexico; and Peru made through Oil Base, Veneziiela, ‘during the fiscal yaar ended September 30, 1959, ‘in computing the aniount of the commissions paid by petitioner to its subsidiary which is properly ‘deductible by petitioner in determining its taxa in- come for its fiscal year 1959.* eek "Decision will be entered under Rule 50. & , ¢,. a, 4 8Joint ‘Exhibits 26-P and 1 270, stipulated exhibits. incorpo- rated herein by teference, show the necessary information from | which this: ee may be —: --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385602_1722%3A1. Public record. Not legal advice.