What are the elements of an arrangement between a parent corporation and its wholly-owned subsidiary?
The following excerpt is from Kraft Foods Company v. Commissioner of Internal Rev., 232 F.2d 118 (2nd Cir. 1956):
Undoubtedly, there are elements in the present case which invite close scrutiny by the Commissioner, among them the fact that the arrangement was made between a parent corporation and its wholly-owned subsidiary. Since the sole stockholder can deal as it pleases with the corporate entity it controls, the transaction is not the result of arm's-length dealing. Consequently, it may be a sham. See Higgins v. Smith, 1941, 308 U.S. 473, 60 S.Ct. 355, 84 L.Ed. 406. The parent-subsidiary relation also indicates that the earnings of the corporation will wind up in the same hands
[232 F.2d 124]
whatever name the instruments bear. And although the instruments are transferable on their face, there has been no actual transfer and apparently none was intended.[232 F.2d 124]
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