In Uncategorized on 11/22/2016 at 16:17

“As Of”

My transfer pricing readers, the few of the few, will remember Fifth Circuit’s blow-off of Tax Court in BMC Software. Everyone else can read my blogpost “Repatriation Isn’t Capitulation,” 4/8/15.

So today we have a reprise of the Section 99-32 accounts receivable cure to deemed dividend distribution in Analog Devices, Inc. & Subsidiaries, 145 T. C. 15, filed 11/22/16. Analog did a turn on this blog before, on a minor issue; see my blogpost “No Called Strike,” 2/8/16.

Tax Court adopts Fifth Circuit wholesale.

“The U.S. Court of Appeals for the Fifth Circuit, holding that the closing agreement did not alter the application of section 965, focused on the timing requirement in subsection (b)(3).  It stated that ‘[t]he text of * * * [section] 965(b)(3) specifically requires that the determination of the final amount of indebtedness be made “as of the close of the taxable year for which the [section 965] election * * * is in effect.”’  BMC Software II, 780 F.3d at 674-675.  BMC’s election year was 2006.  ‘[A]s of’ 2006 the accounts receivable did not exist and indeed could not have existed until the signing of the closing agreement in 2007, which was after the testing period had closed.  Id. at 675.  Even though the closing agreement deemed the accounts established in 2006, it did not change the reality that the accounts did not actually exist in that year.  Therefore, the Court held that the accounts did not constitute an increase in related party indebtedness during BMC’s testing period.  Id. at 676.

“Upon consideration, we agree with the Court of Appeals’ analysis that, under the plain meaning of section 965(b)(3), a CFC has an increase in related party indebtedness only if the indebtedness existed ‘as of’ the close of the election year.  Petitioner’s testing period closed long before the execution of its Rev. Proc. 99-32 closing agreement, and the accounts receivable did not exist before the closing agreement.  Respondent concedes that [CFC] would not have an increase in related party indebtedness if petitioner did not make an election under Rev. Proc. 99-32, supra, and did not execute the closing agreement.  Therefore, the only way in which the accounts receivable could have been established ‘as of’ the close of petitioner’s election year is if the closing agreement’s deemed established dates applied to the application of section 965(b)(3).  We held supra that the parties did not reach an agreement in their Rev. Proc. 99-32 closing agreement with respect to section 965(b)(3), and we do not take the deemed establishment dates of the accounts to alter subsection (b)(3).” 147 T. C. 15, at pp. 42-43.

There’s a lot here about stare decisis, and contract interpretation of Section 7121 settlement agreements, that practitioners should bookmark for their next memo of law.

Suffice it to say that, notwithstanding Judge Gustafson’s dissent that “all” means “all” (recalling a discussion I had with a very senior attorney when I was a young pup), which Judge Lauber, concurring, dismisses as a distinction without a difference, BMC I is overruled.

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