Attorney-at-Law

THE SECRET SHARER

In Uncategorized on 03/28/2017 at 16:11

Yes, this is a sea story, as the title (cribbed from the 1910 Joseph Conrad classic) indicates, but it’s a tax story as well, and moreover, it’s a full-dress T. C., as told by Judge Chiechi in Good Fortune Shipping, SA, 148 T. C. 1, filed 3/28/17.

The fight is about the Section 887(a) 4% tax on a foreign corporation’s US source gross transportation income, which would make a dandy question for the EA exam.

Here’s the skinny for the year at issue (subsequent amendments changed this, natch).

“Section 883(a)(1) excludes from the gross income of a foreign corporation and exempts from U.S. taxation gross income from the international operation of ships derived by the foreign corporation if the foreign country in which the corporation is organized grants an equivalent exemption to corporations organized in the United States (U.S. corporations).  Section 883(c)(1) provides that the exclusion from gross income and the exemption from U.S. taxation that section 883(a)(1) allows will not apply to a foreign corporation that derives gross income from the international operation of ships if 50% or more of the value of its stock is owned, directly or indirectly through the application of certain attribution rules in section 883(c)(4), by individuals who are not residents of a foreign country that grants an equivalent exemption to U.S. corporations.” 148 T. C. 10, at pp. 5-6.

So if your foreign shipping corporation is 50% or more owned by nationals of a country that exempts US shipping corporations from an equivalent tax, you’re cool.

Good Fortune owned Good Luck Shipping, and they hang out in the Republic of the Marshall Islands. So if you see a vessel home-ported in Majuro, as we did going through the Panama Canal two months ago, good luck and good fortune to you.

So why is this an issue? Apparently the Marshall Islands give the requisite exemption.

But all of Good Fortune’s shares were issued in bearer form. That means that whoever has the certificates owns the shares. Good Fortune had no share ledger, whether paper or on-line, and had no idea who owned what. Good Fortune did submit written statements from persons claiming to be officers, and persons claiming to be owners, all from the right nations.

But Reg. 1.883-4(b)(1)(ii), (c)(1), (d)(1), and (4)(i)(E), as in effect for the year at issue, say bearer shares disqualifies the corporation from the exemption.

Good Fortune says good luck with that, y’all flunk the Chevron test. The statute is plain: “owned” means “owned.” Whether ownership is by registered shares or bearer shares, mox nix.

The Regs mean Good Fortune can’t prove it’s more than 50% owned by the proper foreigners.

Chevron question 1 is ambiguity in the statute. Good Fortune claims IRS conflates ownership with proof of ownership. The statute says “owned,” it doesn’t talk about how ownership is to be proven. So, using the ordinary and usual meaning of the word “owned,” as long as you hold those share certificates in your hot little paws, you own them.

But just like in Mayo, which is Chevron meets the Internal Revenue Code, a case-by-case and lengthy facts-and-circumstances approach short-circuits Congress’ intent completely.

“The words ‘owned by individuals’ in section 883(c)(1) do not, as petitioner appears to acknowledge, explain or otherwise address how to establish ownership by individuals for purposes of section 883(c)(1), let alone how to establish ownership where the shares of the foreign corporation are owned in bearer form.  The dictionary definitions of the word ‘own’ on which petitioner relies, which petitioner claims are unambiguous definitions, do not address the problem under section 883(c) of determining how to establish ownership by individuals for purposes of section 883(c)(1) that the Internal Revenue Service (IRS) confronts when it examines a return of a foreign corporation seeking the benefits of section 883(a)(1) for a prior taxable year.  In any such examination, the IRS must determine after the fact whether during at least one-half of the total number of days in that prior taxable year 50% or more of the value of the stock of that corporation was owned by individuals who were not residents of a foreign country that granted an equivalent exemption to U.S. corporations.  In that event, section 883(c)(1) would preclude that foreign corporation for that prior taxable year from excluding from gross income and exempting from U.S. taxation under section 883(a)(1) the income described in section 883(a)(1).

“We conclude that ‘Congress has [not] directly spoken to the precise question at issue’, Chevron, 467 U.S. at 842, of how ownership by individuals may be established for purposes of section 883(c)(1) by a foreign corporation seeking the benefits of section 883(a)(1), including such a foreign corporation the shares of which were issued in bearer form.  We also conclude that section 883(c)(1) as well as its legislative history is silent–there is a gap in that section as well as its legislative history–as to how ownership by individuals may be established for purposes of section 883(c)(1) by a foreign corporation seeking the benefits of section 883(a)(1), including such a foreign corporation the shares of which were issued in bearer form.  We hold that the Treasury Secretary was authorized under Chevron to fill that gap by promulgating regulations.  See Chevron, 467 U.S. at 842-843.” 148 T. C. 10, at pp. 32-33. (Footnote omitted).

Treasury could promulgate regulations, and Judge Chiechi (and every other Tax Court judge) finds these are a reasonable construction of the statute.

And OECD recognized that bearer shares are a great way to disguise ownership and pull off tax dodges.

So, just as in Józef Teodor Konrad Korzeniowski’s story, the secret sharers go overboard.

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