Attorney-at-Law

AT HOME ABROAD – REDIVIVUS

In Uncategorized on 07/27/2017 at 16:42

Crestek , Inc. & Subsidiaries, 149 T. C. 5, filed 7/27/17, sounds off a lot, but not so’s you’d hear it. Crestek makes and sells ultrasound equipment and semiconductors. And though they’re a DE C Corp with HQ in OH, they echo Rudy Kipling’s 1899 school song: “Each degree of Latitude/Strung about Creation/Seeth one or more of us… Keen in his vocation.” That is, they have a bunch of CFCs in Malaysia, The Netherlands, Denmark and Germany.

Well, Crestek got intercompany cash advances that might be loans from their CFCs. And they also got a loan from the Bank of Islam, which apparently is a Malaysian lender, who gets a guarantee from one of the local CFCs.

And the CFCs also had a bunch of trade receivables for stuff they sold to their US shareholder, Crestek. IRS claims those are in excess of the Section 956(c)(2)(C) cutoff “…the amount which would be ordinary and necessary to carry on the trade or business of both the other party to the sale or processing transaction and the United States person had the sale or processing transaction been made between unrelated persons * *.” 149 T. C. 5, at p. 14. IRS wants summary J, but it’s pretty obvious that’s a facts-and-circumstances gig.

All these goodies, except maybe some of the trade receivables, are US property, per Section 956, says IRS.

No doubt the offshoreniks are all CFCs. Crestek and its Stateside wholly-owneds own 100%, directly or indirectly, of all the voting and other stock of the offshoreniks.

First hurdle, SOL. Well here’s substantial omission because Crestek didn’t pay tax on millions, so 6SOL, and IRS beats the clock.

Next batter. “…petitioner observes that most of the proposed section 956 inclusions are attributable to investments in United States property that the CFCs had made in tax periods before FYE 2008.  In petitioner’s view, the IRS was obligated to make any adjustments under section 956 for the year in which the CFCs first acquired the United States property in question, not for any later period.  Petitioner cites no authority for this submission, and it has no merit.” 149 T. C. 5, at p. 17.

Section 956 inclusion is year-by-year. If IRS missed a year, well, that’s baseball, but nothing stops IRS from hitting another year. If they do, IRS must credit the onshore with any tax previously paid on the same money. Well, since Crestek didn’t pay tax on most of the alleged omitted income, it’s fair game.

Third, Crestek claims Section 6214 requires IRS to look at the onshores’ previous years. No, says Judge Lauber, this is about the CFCs’ tax attributes, not the parents’. And since Crestek and IRS stipulated the CFCs’ previously taxed (and thus not taxable again) income, there’s nothing else to look at.

Well, says Crestek, the intercompany loans were all paid off. Prove it, says IRS. Judge Lauber says to defeat summary J on this point, allege some facts. Can’t rest on denials, y’know. Crestek has only the Michael Corleone gambit on this one.

As for the guarantee, IRS claims that the Malaysian guarantor also pledged some of its US parents’ stock, as well as guaranteeing payment. Crestek says the guarantee/pledge was window dressing, as the Malaysian’s stock was worthless.

Judge Lauber doesn’t care. “At the outset we have difficulty seeing the relevance of this argument.  Section 956(d) provides that a CFC shall be considered as holding an obligation of a United States person if the CFC ‘is a pledgor or guarantor of such obligation.’ Petitioner concedes that CUM was a ‘guarantor.’  Under the subpart F regime as enacted by Congress, that is the end of the inquiry.  Neither section 956(d) nor the regulations interpreting it inquire into the relative importance that the creditor attaches to the guarantee.” 149 T. C. 5, at pp. 25-26.

Besides, a Malaysian bank like Bank of Islam, when making an $11 million loan to a US Corp, might want a local on the hook as well, especially as local law might have strong sanctions for welshing. Anyway, no Islamic banker provided an affidavit.

And although Crestek claims the Malaysian sub was under water, (a) what relevance is that as the guarantee was in place, and (b) there’s no proof that the Malaysian sub was insolvent. And the IRC doesn’t require that the guarantor be likely to be called upon to perform.

As for what part of the trade receivables are over the line, one batch accrued to an out-of-business entity, so clearly that isn’t necessary to carry on a trade or business. The other batch, in the hands of an operating entity, remained a more or less constant amount, so maybe so it was excessive. But we need a trial for that.

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