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Commissioner of Internal Revenue v. Hammond Organ Western Export Corp.

February 14, 1964

COMMISSIONER OF INTERNAL REVENUE, PETITIONER,
v.
HAMMOND ORGAN WESTERN EXPORT CORPORATION, RESPONDENT



Author: Duffy

Before DUFFY, KILEY and SWYGERT, Circuit Judges.

DUFFY, Circuit Judge.

The issue here for decision is whether taxpayer qualified as a Western Hemisphere Trade Corporation under Section 109 of the Internal Revenue Code of 1939 for the taxable year ended March 31, 1954, and Section 921 of the Internal Revenue Code of 1954 for the taxable years ended March 31, 1955, 1956, 1957 and 1958. If taxpayer qualifies, it is also exempt from excess profits tax pursuant to Section 454(f) of the 1939 Code, for the year ended March 31, 1954. The Tax Court held that taxpayer did so qualify.

Hammond Organ Western Export Corporation (taxpayer) was incorporated in the State of Delaware and has its principal office at 4200 West Diversey Avenue, Chicago, Illinois.It filed its income tax returns on an accrual method of accounting.

Hammond Organ Company (H.O.C.) is a Delaware corporation with its principal office located at 4200 West Diversey Avenue, Chicago, Illinois. H.O.C. is engaged in the invention, development, manufacture and sale of electrical musical instruments. H.O.C. products were sold under the brand name "Hammond Organ." These instruments were sold to customers in the United States and in foreign countries.

Prior to May 1952, H.O.C. became dissatisfied with its Canadian distributor, Northern Electric Company, Ltd. (Northern), due largely to the volume of sales in Canada. Also, Canadian dealers were dissatisfied because many of them felt Northern was not organized to effectively distribute Hammond organs.

The management of H.O.C. was aware of the tax advantages available to a Western Hemisphere Trade Corporation. Investigation was made exploring the possibility of forming a new corporation which would not only solve its distribution problems in Canada, but would also qualify as a Western Hemisphere Trade Corporation.

At a meeting of the Board of Directors of H.O.C., the following resolution was adopted:

"RESOLVED, That this Corporation cause the incorporation under the laws of Delaware of a corporation to conduct business as a Western Hemisphere Trade Corporation as defined by the federal Internal Revenue Code, and

"BE IT RESOLVED FURTHER, That such corporation be organized under the name of Hammond Instrument Western Export Corporation, * *"

The management of H.O.C. understood that in order for taxpayer to qualify as a Western Hemisphere Trade Corporation, taxpayer would be required to derive at least 95 per cent of its income from sources outside of the United States but within the western hemisphere. It believed this requirement could be satisfied by having taxpayer retain title, assume all the risk of loss or damage to the goods in transit, until the goods were delivered to the buyer outside of the United States. Taxpayer adopted this system. It intended to and did assume the risk of loss or damage as stated, and understood no sale would be considered consummated until the merchandise had been delivered in good condition to the customer.

During the taxable years, taxpayer's business consisted of purchasing Hammond organs exclusively from H.O.C. and selling these organs to customers located in North America, South America, Central America, the West Indies and Newfoundland. Taxpayer did not buy from nor sell to any persons or concerns located in countries outside of the western hemisphere.

The United States Court of Claims and the Tax Court of the United States have uniformly held that domestic corporations like the taxpayer, engaged in export trade from an office in the United States, satisfy the active trade or business test of Sections 109 and 454(f) of the 1939 Code, and Section 921 of the 1954 Code. A.P. Green Export Company v. United States, 284 F.2d 383 (Ct. Cl., 1960); Topps of Canada, Ltd. v. Commissioner, 36 T.C. 326 (1961); Pan American Eutectic Welding Alloys Co. v. Commissioner, 36 T.C. 284 (1961); Barber-Greene Americas, Inc. v. Commissioner, 35 T.C. 365 (1960).

In spite of the solid array of court decisions to the contrary, the Commissioner urges the decision of the Tax Court herein was erroneous. Much legislative history is cited. Counsel for the Commissioner claims the legislative history submitted in this case is ...


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