U.S. Steel Corp. formed Orinoco Mining Co., a wholly owned corporation, to mine large deposits of iron ore that U.S. Steel had discovered in Venezuela.

Orinoco, which was incorporated in Delaware, was subject to Venezuela’s maximum tax of 50 percent on net income. Orinoco was also subject to U.S.

income tax, but the U.S. foreign tax credit offset this amount. U.S. Steel purchased the ore from Orinoco in Venezuela. U.S. Steel formed Navios, Inc., a wholly owned subsidiary, to transport the ore. Navios, a Liberian corporation, was subject to a 2.5 percent Venezuelan excise tax and was exempt from U.S.

income tax. Although U.S. Steel was Navios’s primary customer, it charged other customers the same price it charged U.S. Steel. U.S. Steel’s investment in Navios was $50,000. In seven years, Navios accumulated nearly $80 million in Chapter 7 The Legal Environment of International Trade 153 cash but had not paid any dividends to U.S. Steel. The IRS used IRC § 482 to allocate $52 million of Navios’s income to U.S. Steel. U.S. Steel challenged this action, contending Navios’s charges to U.S. Steel were at arm’s length and the same it charged other customers. Decide. [United States Steel Corp. v Commissioner, 617 F2d 942 (2d Cir)]

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