Pacific Basin Manufacturing & Trade Company, Ltd., a Corporation v. Commissioner of Internal Revenue

Taxpayer appeals from a Tax Court judgment holding it liable for income tax deficiencies for tax years ending June 30, 1975 and 1976. We affirm.

I.

FACTS

Taxpayer is a Delaware corporation that maintains its sole manufacturing facility and its principal office in American Samoa, a United States possession. It manufactures jewelry and in 1975 and 1976 the bulk of its sales was to its parent, Edward D. Sultan Co., Ltd., a Hawaii corporation. Sultan paid for the goods purchased by depositing checks directly into taxpayer’s account in the Honolulu branch of the Bank of Hawaii.

For the tax years in question, taxpayer excluded from gross income all revenue from sales to its parent. This was done on the basis of 26 U.S.C. § 931 (a) (1970 & Supp. V 1975) (current version at 26 U.S.C. § 936 (a)), which provides that income of domestic corporations doing business in a United States possession is nontaxable if the income is derived from sources outside the United States. On audit, the Internal Revenue Service agreed that taxpayer met the conditions for section 931(a) treatment in both 1975 and 1976. It found, nonetheless, that exclusion of the Sultan proceeds was improper because of…