In Uncategorized on 04/08/2015 at 23:04

Fifth Circuit reverses Tax Court, holding that Section 965 related-party indebtedness must exist before it can torpedo a Rev. Proc. 99-32 accounts receivable deal. And in this case, it didn’t. BMC Software Inc. v. Com’r., No. 13–60684, 3/15/15.

And thanks to a certain Director at a Big Four accounting firm for bringing this case to my attention; and even more thanks for the Laphroaig.

Confused? See my blogpost “Stipulate, Don’t Capitulate – Redivivus”, 9/19/13, the story of BMC Software Inc.

BMC settled a Section 482 transfer pricing jumpball with IRS, and agreed to a return of monies from its overseas tax-dodging subsidiary. But to square the books with the cash, BMC, relying on Rev. Proc. 99-32, treated the cash return to the Land of the Free as an account receivable from the sub, with interest payable, rather than as a capital contribution to the sub.

Came Section 965, whereby a beneficent Congress allowed repatriation free of charge to parkers of cash in tax havens.

BMC hauled back a large amount of offshore diñero, but IRS claimed the accounts receivable created per Rev. Proc. 99-32 was related-party indebtedness, and thus taboo.

The related-party indebtedness bar was enacted to prevent “round-tripping”, where the US parent lent the offshore sub the money to send back, effectively keeping the cash offshore.

BMC claimed they had no such intent, but IRS said that didn’t matter. Fifth Circuit doesn’t rule on this.

Fifth Circuit said that the indebtedness was entered into before the test period for round-tripping began, thus didn’t exist when the test was on.

Fifth Circuit: “In sum, the plain language of § 965(b)(3) does not ask, ‘To be or not to be?’ It instead asks, ‘To have been or not to have been?’ And the answer to this question is clear: ‘as of’ March 31, 2006, the accounts receivable did not exist. Therefore, § 965(b)(3), by its plain language, cannot sustain the judgment of the tax court.”

Likewise, the agreement between BMC and IRS dealt extensively with tax consequences, and all IRS has is the boilerplate in all its agreements “for federal income tax purposes”. On basic contract interpretation, Fifth Circuit makes short work of IRS’s argument. IRS’s boilerplate would render much of the agreement surplusage, and stating the specific trumps the general.

BMC wins.

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