## Facts

- DuPont formed a wholly owned Swiss subsidiary, Du Pont International S.A. (DISA), in 1959 to conduct marketing and sales for foreign markets.
- DuPont sold most foreign-market chemical products to DISA, which resold through independent distributors to end customers.
- DuPont set intercompany transfer prices so that DISA retained a large portion of overall profit from foreign sales.
- Trial findings, adopted by the court with minor changes, found DuPont intended to allocate as much income as possible to DISA and designed its pricing system to achieve that result.
- For tax years 1959 and 1960, the Commissioner determined the profit split was economically unrealistic and used I.R.C. § 482 to reallocate substantial DISA income to DuPont, increasing DuPont’s U.S. tax.
- DuPont paid the assessments and sued for a refund in the Court of Claims.

## Issues

1. Whether DuPont proved its transfer prices to DISA satisfied the applicable § 482 regulations’ arm’s-length standard, particularly the resale price method for tangible property.
2. Whether the Commissioner’s § 482 reallocations were arbitrary, capricious, or unreasonable, or instead within the discretion granted to the IRS.
3. Whether DuPont’s proposed comparables and statistical evidence established sufficient functional and market comparability to validate DISA’s gross margins as arm’s-length.

## Decision

- The Court of Claims (en banc) entered judgment for the United States and denied DuPont’s refund claims.
- The court held DuPont failed to demonstrate that its pricing met the governing § 482 regulations and failed to prove entitlement to any refund.
- The court upheld the Commissioner’s reallocations as within a permissible zone of reasonableness and not an abuse of discretion.
- The court agreed DISA’s functions and risks were limited relative to the profits it retained and found the Commissioner’s determination that the results were economically unrealistic to be reasonable.

## Legal Principles

- Under I.R.C. § 482, the Commissioner has broad discretion to reallocate income among commonly controlled entities to prevent tax evasion and clearly reflect income.
- Judicial review of a § 482 allocation focuses on the reasonableness of the result rather than the fine details of the examiner’s methodology; the determination is sustained if within a “zone of reasonableness.”
- A taxpayer seeking a refund bears the burden to show the Commissioner’s § 482 allocation is wrong and that the taxpayer is entitled to a specific refund.
- Under the resale price method in the § 482 regulations, arm’s-length proof depends on meaningful comparability in products, functions, risks, and markets; generalized margins or weak comparables are insufficient.
- Evidence of tax-driven structuring and disproportionate profit allocations may support a finding that intercompany pricing is not economically realistic under the arm’s-length standard.

## Conclusion

The Court of Claims upheld the IRS’s § 482 reallocations from DuPont’s Swiss sales subsidiary to DuPont for 1959–1960, holding that DuPont did not carry its burden to prove its transfer prices produced an arm’s-length result under the resale price method and that the Commissioner’s determination was unreasonable.


E.I. du Pont de Nemours & Co. v. United States, 221 Ct. Cl. 333, 608 F.2d 445 (Ct. Cl. 1979)