The consequence of this ruling is that the tax base is the amount Organizer pays Carrier, as opposed to the amount the customer pays Retailer (or the amount Retailer pays Organizer).

The ILM does not rule on the tax base but only determines who is the carrier and who is the taxpayer. It states that the contract between Organizer and Carrier establishes Carrier's fee as its cost plus a percentage markup.

Section 4271 imposes a federal excise tax on domestic transportation of property by air. The regulations make it clear that intermediaries like freight forwarders are not carriers. Therefore, the only way the Carrier in this case could NOT be the carrier for tax purposes would be if the separate organization of the three subsidiaries were disregarded or the Retailer or Organizer were treated as the agent of the Carrier.

The ILM rules that the three affiliated corporations will be treated as separate entities (citing Moline Properties) and that none is the agent of the other.

The ruling could not have rejected the separate existence of the affiliates, unless the IRS wanted to upset nearly a century of federal entity law. The agency question is a closer one. Parent, the owner of all of the entities, is the one that holds itself out to the public as carrying property and the ultimate customers do not know that they are dealing with an entity other than the actual carrier. The ILM states: "Organizer is not under the supervision and control of Carrier and therefore is not considered the agent of Carrier."

In one sense, this is entirely normal legal analysis. For state law purposes a principal generally is identified as one who controls the performance of the agent, whereas the independent contractor determines how to do the job itself.

Even if Retailer or Organizer dealt exclusively with Carrier (which is not discussed in the memo) that would not make them agents of Carrier. Because Organizer and Retailer are sister entities to Carrier, Carrier cannot be accused of controlling them through ownership. Nevertheless, Parent controls them all. Under the Supreme Court's opinion in Bollinger, one affiliate cannot be the agent of the other without fairly direct agency designation in the contracts, which was not present here.

This ILM is in response for a request for assistance from the IRS field. That means that the field had questions about applying the tax to the fee charged by the Carrier. But in fact there is nothing wrong with that because the taxpayer was merely applying a century of federal tax law that has chosen to treat separately incorporated affiliates as separate for the initial simple reason that on balance the Treasury is happier that they are all eligible to be taxpayers.