## Facts

- A U.S. parent (later Ashland Technology, Inc.) filed consolidated returns for 1975–1979.
- Through a domestic subsidiary, it indirectly owned Drew Ameroid International, a Liberian corporation with its principal office in Greece.
- Drew Ameroid was a controlled foreign corporation (CFC), and the domestic subsidiary was a U.S. shareholder for Subpart F purposes.
- Drew Ameroid entered a long-term manufacturing, licensing, and supply agreement with Tensia S.A., a Belgian corporation.
- Tensia was unrelated to Drew Ameroid and its U.S. affiliates; the relationship was governed by an arm’s-length contract.
- Drew Ameroid supplied trade secrets, know-how, technical information, and detailed manufacturing standards; Tensia manufactured soaps and cleaning products.
- Tensia sold products to Drew Ameroid (or Drew Ameroid’s customers) at raw material cost plus a conversion fee intended to provide Tensia a profit.
- Tensia’s contract sales were a minor part of its overall business, while products made by Tensia generated a large share of Drew Ameroid’s income.
- The Commissioner asserted that Tensia functioned as a “branch or similar establishment” of Drew Ameroid under I.R.C. § 954(d)(2), treating the resulting sales income as foreign base company sales income (FBCSI) includible under Subpart F.
- Petitioners moved for summary judgment challenging the statutory and regulatory basis for applying § 954(d)(2) to this arrangement.

## Issues

1. Whether I.R.C. § 954(d)(2) applies where a CFC uses an unrelated corporation under an arm’s-length contract to manufacture products.
2. Whether Treasury regulations treating “manufacturing branches” as within § 954(d)(2) can extend the statute to an unrelated contract manufacturer.

## Decision

- The Tax Court granted petitioners’ motion for summary judgment.
- The court held that Tensia was not a “branch or similar establishment” of the CFC within the meaning of § 954(d)(2).
- Because the statutory threshold was not met, § 954(d)(2) did not apply and the asserted Subpart F inclusions and deficiencies were rejected.
- The court declined to treat regulations as authorizing conversion of an unrelated corporation into a statutory “branch.”

## Legal Principles

- For § 954(d)(2), “branch or similar establishment” carries its ordinary business meaning, generally involving an office, division, or other organizational unit of the same enterprise rather than an independently owned, unrelated corporation.
- Treasury’s authority under § 954(d)(2) addresses how the branch rule operates once a branch exists; it does not authorize Treasury to expand the threshold meaning of “branch or similar establishment.”
- Contractual control over manufacturing specifications, long-term supply arrangements, and the economic importance of a supplier do not, without ownership or comparable organizational ties, make an unrelated manufacturer a “branch or similar establishment.”
- A disparity in tax rates between jurisdictions may be relevant only after a qualifying branch exists; tax-rate differences cannot create the statutory branch relationship.

## Conclusion

An arm’s-length contract manufacturing arrangement with an unrelated foreign corporation does not make that manufacturer a CFC’s “branch or similar establishment” under I.R.C. § 954(d)(2), and regulations cannot be applied to extend the branch rule beyond the statute’s threshold terms.


Ashland Oil, Inc. v. Commissioner, 95 T.C. 348 (1990)