GOVERNMENT: Storm Warning

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Can the U.S. tax a foreign company owned by Americans? The Government believes it can, if the owners conducted any of its operations in the U.S. Last week Government lawyers submitted an unprecedented brief to a U.S. tax court in Cleveland to try to collect more than $2,000,000 in back taxes from Consolidated Premium Iron Ores, Ltd., a Canadian mine holding company and its owners, Cleveland Financier Cyrus Eaton, chairman of the Chesapeake & Ohio Railway, and William R. Daley, owner of the Cleveland Indians.

The intricate tax case dates back to 1942, when Eaton set out to finance a new iron mine under Steep Rock Lake in western Ontario (TIME, Nov. 16, 1942. et seq.). Eaton raised $2,250,000 from U.S. investors, got the RFC to lend Steep Rock another $5,000,000, and got agreements from the Canadian and Ontario governments that would exempt Steep Rock from paying taxes until iron was produced.

In return, Eaton's new company, Consolidated Premium, got 1,437,000 shares of Steep Rock stock for a penny apiece when the stock averaged $1.67 on the Toronto Exchange. After Steep Rock got into production, it paid its investors (including Consolidated) handsomely, last year netted more than $9,000,000.

As with Steep Rock, Canada waived corporate income taxes on Consolidated Premium for the first three years. Since 1945, Consolidated has paid Canadian taxes, but none to the U.S. Now the U.S. contends that Consolidated ran its offices in Cleveland until 1950, therefore, owes $300,000 in U.S. taxes from 1944 to 1949. In addition, the U.S. wants more than $1,500,000 from Eaton, and more than $388,000 from Daley in back personal income taxes for 1943, the year of the stock transfer.

Last week, Canada's Prime Minister Louis St. Laurent sent off a note to the U.S. State Department emphasizing that Canada did not support the U.S. attempt to tax a Canadian company. Canadian and U.S. financiers feared that if the U.S. can collect against Consolidated Premium, other Canadian companies with trans-border operations and U.S. stockholders will be liable to similar tax raids.