## Facts

- United States Gypsum Company (USG) and its wholly owned subsidiary, United States Gypsum Export Company (Export), sought federal income tax refunds for USG (1954, 1955, 1957, 1958) and Export (1957, 1958).
- The United States denied refund grounds and asserted offsets, primarily by reallocating income among USG and subsidiaries under 26 U.S.C. § 482.
- A separate depletion dispute was settled and removed from the case; the court decided remaining tax issues.
- USG used another wholly owned subsidiary, Panama Gypsum Company, Inc. (Panama Gypsum), to provide shipping services; the government claimed USG’s payments were excessive and should be reallocated to USG under § 482.
- Export participated in related-party purchase/resale patterns involving crude gypsum rock and sales of finished products for foreign resale.
- In one structure, a Canadian affiliate sold gypsum rock to Export at the same price as to USG; Export transferred title to USG during loading onto USG’s vessel, with Export’s ownership period being brief and structured to avoid Canadian tax.
- Export claimed Western Hemisphere Trade Corporation (WHTC) status to obtain favorable tax treatment, asserting it was engaged in the active conduct of a trade or business in the Western Hemisphere.
- USG deducted expenses from a stock split as ordinary and necessary business expenses.
- USG sought favorable treatment under § 1304 for a payment made to settle patent infringement litigation.

## Issues

1. Whether § 482 permitted reallocating income from Panama Gypsum to USG based on allegedly excessive shipping charges.
2. Whether § 482 permitted reallocating income between USG and Export arising from crude rock and finished-product pricing and structure.
3. Whether Export qualified as a WHTC, including whether it conducted an “active” trade or business.
4. Whether stock-split expenses were deductible as ordinary and necessary business expenses or were non-deductible capital expenditures.
5. Whether a patent litigation settlement payment qualified for favorable treatment under § 1304.

## Decision

- The court held the shipping charges paid by USG to Panama Gypsum were reasonable and denied the government’s proposed § 482 reallocation on that issue.
- The court applied § 482 on a transaction-specific basis as to USG–Export dealings, allowing reallocations where pricing and functions did not reflect arm’s-length dealing and rejecting reallocations where pricing approximated arm’s-length terms.
- The court held Export did not qualify as a WHTC because its activities lacked the required active conduct of a trade or business.
- The court held USG’s stock-split expenses were capital in nature and not currently deductible.
- The court held the patent litigation settlement payment did not qualify for favorable treatment under § 1304.

## Legal Principles

- Under 26 U.S.C. § 482, the government may allocate income and deductions among controlled entities to prevent tax evasion or clearly reflect income when intercompany dealings do not approximate arm’s-length results.
- Reasonableness for § 482 purposes turns on comparative, fact-intensive analysis (including functions performed, risks assumed, and comparable market or industry compensation).
- Formal interposition of a related entity and momentary title passage may be disregarded for tax characterization where the entity performs limited functions and bears little commercial risk.
- WHTC status requires substantive, active conduct of a trade or business; minimal or largely formal participation in transactions is insufficient.
- Costs tied to changes in corporate capital structure (including stock splits) are capital expenditures rather than ordinary and necessary business expenses.
- Special statutory treatment for litigation-related items depends on the payment’s character and whether it falls within the statute’s scope; a settlement payment outside that scope receives ordinary tax treatment.

## Conclusion

The court issued a mixed outcome: it rejected § 482 reallocation for Panama Gypsum shipping charges, permitted certain § 482 reallocations involving Export based on arm’s-length analysis, disallowed Export’s WHTC treatment, and denied deductions or special treatment for stock-split expenses and the patent settlement under the claimed provisions.


United States Gypsum Co. v. United States, 304 F. Supp. 627 (N.D. Ill. 1969)