A. P. Green Export Company v. United States
6 A.F.T.R.2d (RIA) 5951, 151 Ct. Cl. 628, 284 F.2d 383 (1960)
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Rule of Law:
For purposes of determining the source of income under tax law, the place of sale is determined by where title and risk of loss pass from the seller to the buyer. A taxpayer may structure a transaction to pass title in a specific location to gain a tax advantage, provided the transaction is not a sham and has a legitimate non-tax business purpose.
Facts:
- A. P. Green Export Company was a wholly-owned subsidiary of A. P. Green Fire Brick Company, created specifically to operate as a Western Hemisphere trade corporation.
- The company's sole business was buying refractory products from its parent and selling them to customers in Canada, Central America, and South America.
- The plaintiff company maintained no sales force or business establishment outside the United States.
- In its offers to foreign customers, the company explicitly stated: 'Title to these goods and responsibility for their shipment and safe carriage shall be in A. P. Green Export Company until their delivery to the customer at destination.'
- The offers also specified they became binding contracts once the customer placed their acceptance in the mail.
- Foreign customers accepted these terms and shipments were made by public carrier, with the plaintiff often prepaying freight charges.
- The plaintiff purchased insurance for its own benefit, which covered the goods until after they arrived at the foreign port.
Procedural Posture:
- A. P. Green Export Co. filed suit against the United States in the U.S. Court of Claims, which is a court of first instance for such claims.
- The company sought a refund of federal income taxes it had paid for the years 1952 and 1953.
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Issue:
Does a domestic corporation derive its income from sources outside the United States for purposes of the Western Hemisphere trade corporation tax credit when it intentionally arranges for title to goods to pass to the buyer in a foreign country, even if this arrangement is motivated by tax considerations?
Opinions:
Majority - Chief Judge Jones
Yes, a domestic corporation that intentionally retains title to goods until they reach a foreign destination derives its income from sources outside the United States, even if motivated by tax considerations. The court first rejected the government's argument that a corporation must have a 'significant foreign investment' to qualify as a Western Hemisphere trade corporation, finding no such requirement in the statute's text or legislative history. The court then affirmed the 'title-passage test' as the standard for determining the place of sale and, consequently, the source of income, valuing its certainty over vaguer tests like 'substance of the transaction.' Applying this test, the court found the explicit contractual language stating that title passed upon delivery at the foreign destination was controlling. Finally, addressing the government's tax avoidance argument under the doctrine of Gregory v. Helvering, the court held that a taxpayer may arrange their affairs to minimize tax liability. The arrangement is permissible so long as it is not a sham and has a legitimate business purpose apart from tax consequences. Here, retaining title until delivery served valid commercial purposes, such as mitigating geopolitical risks (e.g., embargoes, seizures) and simplifying insurance recovery, thus validating the transaction's form despite the tax-motivated structure.
Analysis:
This decision solidifies the 'title-passage' test as the dominant standard for determining the source of income in export sales for U.S. tax purposes. It provides a clear legal safe harbor for corporations seeking to qualify for tax incentives by structuring their sales contracts to explicitly control where title passes. The case importantly reinforces the principle from Gregory v. Helvering that a transaction motivated by tax avoidance is not invalid if it has economic substance and a legitimate non-tax business purpose. This ruling created a blueprint for export companies to gain tax advantages without needing substantial foreign investment or physical presence abroad.
