dissenting: The core of the present question is whether a reallocation of income is necessary under section 45, Internal Revenue Code, to prevent distortion of petitioner’s income. See Hearst Corp., 14 T. C. 575. Since no arm’s length bargaining occurred between these commonly controlled entities, see Helvering v. U. S. Industrial Alcohol Co. (W. Va.), (C. A. 2), 137 F. 2d 511; Eskimo Pie Corp., 4 T. C. 669 affd. (C. A. 3), 153 F. 2d 301, our concern must be whether petitioner received from the sales companies fair value for its products. If not, distortion of income resulted. G. U. R. Co., 41 B. T. A. 223, affd. (C. A. 7), 117 F. 2d 187; National Securities Corp., 46 B. T. A. 562, affd. (C. A. 3), 137 F. 2d 600, certiorari denied, 320 U. S. 794.
Petitioner has failed to prove that it received fair value, or that its subsidiaries performed any valuable function.1 The evidence, in fact, indicates the contrary, and that petitioner granted to its subsidiaries excessive discounts.2 By selling below the standard fair market price, petitioner “voluntarily released to another * * * a part of its earnings for no consideration whatever,” R. O. H. Hill, Inc., 9 T. C. 153, 157, a typical occasion for the corrective provisions of section 45 to be brought into play. Welworth Realty Co., 40 B. T. A. 97.
Section 45 clearly authorizes the Commissioner in such circumstances to allocate gross income and deductions which, in effect, is what he did.3 That the amounts of gross income allocated to petitioner should correspond with the net income of the sales companies4 is a reasonable corollary of the fact, which the record amply demonstrates, that the subsidiaries rendered no services of any value such as to entitle them to a portion of the business profit.
Disposition in respondent’s favor under section 45 would dispense with the necessity of considering both of his other contentions. But it is not as clear as seems to be assumed that the case is controlled by National Carbide and Moline Properties. Cf. Higgins v. Smith, 308 U. S. 473. Nor does it seem to me possible to say so cavalierly that section 129 has no application when the alleged business purposes are as flimsy as they were here; when the question is concededly one of fact, Alcorn Wholesale Co., 16 T. C. 75; Berland's Inc. of South Bend, 16 T. C. 182; and when as the hearer of the evidence, I would have found that no substantial purpose was, nor could have been expected to have been, served by the sales companies, see MacPherson v. Buick Motor Co., 217 N. Y. 382, except the tax avoidance objective which has apparently been attained.
TURNER, Tietjens, and Kaum, JJ., agree with this dissent.An analysis of tlie findings shows that the only services purportedly rendered by the sales companies during each of the tax years were to bill customers, to receive payment from them, and to enter into sales agreements with sales agents. All of these functions had previously been performed by petitioner. When performed during the tax years nominally on behalf of the sales companies, they were actually rendered by officers and employees of petitioner for whose compensation full deduction has been allowed by respondent’s determination. Hence, it appears that the sales companies rendered no service of any value to petitioner during the tax years in issue.
A special lo per cent discount, purportedly to cover costs, actually gave a gratuitous profit to the subsidiaries. That is really the only amount in controversy. Petitioner’s vice president testified with respect to the discounts:
‘‘It took considerable study to arrive at that 25%. The 50% is very easy to explain because it is passed on to the wholesale jobber. * * * The 50% is the standard discount that is given by manufacturers to wholesale jobbers whether it be our company or any of our competitors. That is a normal, justifiable discount for them [and was allowed by respondent]. The 25% [additionall comprises 10% commission to the agent [also allowed by respondent] and then we have 15% to run our business.” [Emphasis added.)
Respondent’s action is not the same as a consolidated return, if that should be material. Here items of gross income and deductions were left with the sales companies. Respondent’s regulations, read as a whole, have as their apparent purpose to make it clear that the Commissioner may not be compelled to apply section 45 by taxpayers who, for example, might attempt to substitute it for consolidated returns. Cf. Remco Steamship Co., 30 B. T. A. 579, affd. (C. A. 9), 82 F. 2d 988, certiorari denied, 299 U. S. 555.
Respondent’s deficiency notice treated as petitioner's income “the amounts * * * alleged to represent net income as corrected of” the Sales Companies. This was no more than a practical shorthand expression in a field where practicality is assumed to be the touchstone. See Leedy-Glover Realty & Insurance Co., 13 T. C. 95, 107, affd. per curiam (C. A. 5), 184 F. 2d 833.