## Facts

- Spermacet Whaling & Shipping Co. S.A. was a Panamanian corporation using an accrual method and a fiscal year ending April 30.
- Archer-Daniels-Midland Co. (ADM), a U.S. corporation, sought a reliable supply of sperm oil, which was in short supply after World War II.
- ADM personnel and Norwegian whaling associates planned a pelagic (high-seas) whaling expedition off the west coast of South America; Spermacet was formed to participate in the venture and receive profits.
- Because of international whaling agreement constraints, a U.S. corporation, Smidas Co., Inc., was used as nominal charterer and seller for a fixed fee.
- Smidas chartered a vessel and conducted the expedition from April 1947 to January 1948, producing crude sperm oil on the high seas.
- Contracts to sell the oil to ADM were negotiated in the United States; the sales contract provided that title would pass upon delivery to ADM in New York City.
- Spermacet reported net income of $924,979.72 from the voyage for its fiscal year ended April 30, 1948.
- The Commissioner determined a $351,492.29 income-tax deficiency, asserting Spermacet was a resident foreign corporation engaged in a U.S. trade or business and had U.S.-source gross income.

## Issues

1. Whether Spermacet was a “resident” foreign corporation “engaged in trade or business within the United States” under I.R.C. 1939 § 231(b).
2. Whether Spermacet derived “gross income from sources within the United States” under I.R.C. 1939 § 231(c).
3. If Spermacet was otherwise taxable, whether the Commissioner was required to apply I.R.C. 1939 § 119(e)(2) and the related regulation concerning allocation for activities partly within and partly without the United States.

## Decision

- The Tax Court entered decision for Spermacet and disallowed the deficiency.
- Spermacet was not a resident foreign corporation engaged in a U.S. trade or business under § 231(b).
- Spermacet did not derive U.S.-source gross income from the whaling venture under § 231(c).
- Because Spermacet prevailed on the first two issues, the court did not need to reach the contingent allocation issue under § 119(e)(2).

## Legal Principles

- For § 231(b), a foreign corporation is not engaged in a U.S. trade or business merely because planning, financing, and contracting activities occur in the United States when the core profit-producing operations occur outside U.S. territory.
- For § 231(c), source-of-income analysis may focus on where the substantive income-producing activities are performed; profits tied to production and operational risk occurring abroad may be foreign-source even if delivery and passage of title occur in the United States.
- Corporate separateness is generally respected in determining whether U.S. acts of related or participating entities should be attributed to a foreign corporation for trade-or-business and source-of-income purposes.

## Conclusion

The Tax Court held that Spermacet’s whaling profits were not taxable under the Commissioner’s § 231(b) and § 231(c) theories because Spermacet’s principal income-producing operations occurred outside the United States, and U.S.-based contracting and delivery terms did not convert those profits into U.S.-trade-or-business income or U.S.-source income.


Spermacet Whaling & Shipping Co. S.A. v. Commissioner of Internal Revenue, 30 T.C. 618 (1958)