Rev. Rul. 57-598

Advice has been requested whether the tax on the transportation of property applies to amounts paid for the bareboat charter of tank ships, and for the management and operation of such tank ships under the circumstances described below.

An oil company has certain tank ships under bareboat charter from M company, a wholly owned subsidiary of O company. N company, which is also a wholly owned subsidiary of O company, was organized for the purpose of entering into agreements for the management and operation of tank ships and other ships controlled by the parties with whom it may contract for such services. The oil company entered into an agreement with N company, whereby N company would manage and operate the tank ships on behalf of, and at the expense of, the oil company, plus a fixed management fee. The agreement also provides for the management and operation of other tank ships that the oil company may acquire, either by purchase or by charter and designate for inclusion in the agreement. However, the tank ships would be under the direction and control of the oil company.

The oil company's agreement with M company for the bareboat charter of tank ships, and its agreement with N company to manage and operate such tank ships, are entirely independent and are not, either by reason of direction and control by O company over its subsidiaries or any other reason, in any way related to or contingent upon each other. The oil company has no stockholder interests, either directly or indirectly in (1) M company, (2) N company, or (3) O company.

Section 4271(a) of the Internal Revenue Code of 1954 imposes a tax upon the amount paid for the transportation of property by rail, motor vehicle, water, or air from one point in the United States to another.

It is held that neither the bareboat charter of the tank ships from M company nor the services performed by N company under the agreement for the management and operation of such tank ships, in themselves, constitute transportation of property for the oil company within the meaning of section 4271(a) of the Code. It is further held that under the circumstances described, the M company and the N company are not jointly engaged in the furnishing of a transportation service to the oil company. Accordingly, the tax on the transportation of property does not apply to amounts paid by the oil company to M company for the bareboat charter fo the tank ships, nor to amounts paid to N company under the management and operation agreement.