CORPORATIONs-SUBSIDIARY'S EVASION OF INCOME TAX LAW BY CONTRACT WITH PARENT COMPANY-INCOME ATTRIBUTABLE TO BUSINESS TRANSACTED WITHIN THE STATE

Authors

Abstract

The Palmolive company sought to reduce to a minimum the amount of its income taxable in Wisconsin. Three companies were formed which, for convenience' sake, will be designated as: parent company, a Delaware corporation; plaintiff company, a Delaware corporation; and Wisconsin company, a Wisconsin corporation. The parent company acquired all the capital stock of the Wisconsin company, and then acquired all its assets outside the state of Wisconsin, surrendering therefor part of the stock of the Wisconsin company so acquired. The balance of the capital stock of the Wisconsin company the parent company transferred to plaintiff company in exchange for all the capital stock of the latter company. The plaintiff company then acquired the physical property of the Wisconsin company in the state of Wisconsin, surrendering therefor part of the capital stock of Wisconsin company it had acquired from the parent company. This left the Wisconsin company with nothing but its inventory and Wisconsin bills receivable, and its only outstanding stock was in the hands of plaintiff company. Then the plaintiff company leased the plant in Wisconsin to the Wisconsin company which in turn contracted with the parent company to sell to the latter its entire output, with the exception of what the Wisconsin company sold in Wisconsin, at cost plus 3%, which was later raised to 6%. Before the contract the Wisconsin company had been making 50% profit on its sales. After the contract it made only 9% including the sales to its own Wisconsin trade. The parent company purchased all the material for the Wisconsin company and reserved the contractual right to supervise its manufacturing activities, and to control the amount of goods the Wisconsin company could sell to its own trade. Under this arrangement the Wisconsin company shipped directly to parent company's customers. The plaintiff and parent companies had the same offices, and plaintiff had no full-time employees. Its transactions were few, and its books and records were kept by the office force of the parent company.

Recommended Citation

CORPORATIONs-SUBSIDIARY'S EVASION OF INCOME TAX LAW BY CONTRACT WITH PARENT COMPANY-INCOME ATTRIBUTABLE TO BUSINESS TRANSACTED WITHIN THE STATE, 29 Mich. L. Rev. 600 (1931).
Available at: https://repository.law.umich.edu/mlr/vol29/iss5/5