Danaher,*fn* Friendly and Hays, Circuit Judges.
This is an appeal from a decision of the Tax Court 52 T.C. 240 (1969), sustaining the Commissioner's allocation under Section 482 of the Internal Revenue Code of 1954 to Philipp Brothers Chemicals, Inc. (N. Y.), of the net income for the fiscal years ending June 30, 1960 and 1962*fn1 of five commonly controlled foreign sales corporations.*fn2
Philipp Brothers Chemicals, Inc. (N. Y.) is the principal corporation of a group of eleven corporations*fn3 organized by Charles Bendheim to engage in the business of buying and reselling industrial and agricultural chemicals in the United States and throughout the world. All eleven corporations during the period in question were under the control, direct or indirect, of the same interests. Bendheim was at all times president of each of the corporations.
The New York corporation was formed in 1946 by Bendheim and an associate to take over the chemicals department of a corporation in which Bendheim's father had been a 50 per cent owner. Within the next five years, other domestic sales corporations bearing the name "Philipp Brothers Chemicals, Inc." were either newly organized or acquired by the New York corporation. These corporations were incorporated and conducted business in Massachusetts, Pennsylvania, Maryland, Connecticut and Rhode Island. The Tax Court refused to sustain the Commissioner's Section 482 allocation of the net income of these five domestic sales corporations to the New York corporation. The Commissioner has not appealed from this determination.
In 1950 and 1951, the five foreign sales corporations were organized under the laws of New York. Nearly 90 per cent of the stock of these corporations was owned by Bendheim and his family. Two of the foreign sales corporations, Pan-American and Trans-America, were formed as Western Hemisphere trade corporations under Sections 921 and 922 of the 1954 Code. A qualifying Western Hemisphere trade corporation is allowed a special deduction which makes the effective tax rate for such a corporation substantially lower than that of the usual type of domestic corporations.
The chemicals business conducted by the corporations consisted of the purchase of industrial and agricultural chemicals in large quantities and the resale of these products in smaller quantities. Their operations did not include any repackaging, processing, or manufacturing of chemicals. Of the domestic corporations, only the Pennsylvania and Maryland corporations failed to maintain inventories at the end of the fiscal years in question. Among the foreign corporations, only International maintained any inventory at the end of fiscal year 1960. The absence of actual inventories was explained by the petitioner as being due to the practice of purchasing carloads of chemicals from foreign suppliers and forwarding those same carloads without actually taking physical possession of the chemicals. When one of the corporations needed a chemical that it did not have in inventory, it would purchase the chemical either from another of the corporations at cost or upon the open market.
Many orders to the foreign sales corporations were placed by customers year after year as a result of arrangements made in prior years by Charles Bendheim or by his late father.
All the shipping and bookkeeping arrangements for all of the corporations were handled in the office of the New York corporation at 10 Columbus Circle. Orders for chemicals to all the corporations were sent to the New York office, where employees of the New York corporation made arrangements for the filling and delivery of the orders. Sales were credited to the proper corporation. During 1960 and 1962, a total of $67,800 in service charges was paid by the domestic sales corporations for these bookkeeping and shipping functions. The figure for the five foreign corporations for legal, office and accounting expenses was $3,576.46. No corporation other than the New York corporation had its own bookkeeping or traffic department, but three of the domestic corporations (Massachusetts, Connecticut and Rhode Island) had their own salesmen. Maryland and Pennsylvania each maintained offices and employees in their respective states of incorporation.
For the fiscal years 1960 and 1962, the gross and taxable income of the eleven corporations of the Philipp Chemicals group was the following:
1960 $3,921,682.21 $16,989.00
1962 4,314,402.32 15,9 13.70
1960 2,999,138.06 26,162.43