In Uncategorized on 01/18/2018 at 18:14

State Farm Isn’t There

That’s Motor Vehicle Mfrs. Ass’n of the U.S. v. State Farm Mut. Auto Ins. Co., 463 U.S. 29 (1983). And while that case holds administrative agencies’ feet to the cliché when it comes to finding a rational basis, and statutory authority, for its regulation, especially when the regulation is “legislative,” that is, has the force of law, it doesn’t help SIH Partners LLLP, Explorer Partner Corporation, Tax Matters Partner, 150 T. C. 3, filed 1/18/18.

SIH is a gaggle of offshore LLC cash-stashes, hanging out in Luxembourg, the Emerald Isle, and the Caymans. The high-rolling quartet who own this stuff use the LLCs to guarantee loans made by Merrill Lynch in aid of their stock-trading and cash-stashing. The LLCs are never called upon to pay up, of course, despite cross-default and contribution clauses in their amended, restated, and recombobulated promissory notes and aggregated, sublimated and bloviated guarantees.

Judge Cohen sustains IRS’ Section 956(d) $2 million income inclusion to the onshore partakers in the goodies. The SIH quartet claims arbitrary, capricious and in violation of law.

The statute is clear: if your CFC guarantees, you’re deemed to get their E&P. And if the regulations (1.956-2(c)(1) and 1.956-1(e)(2)) might lead to onshore owners of multiple offshore LLCs getting charged in the aggregate more than is owed, it’s not the Court’s place to rewrite the regs, and anyway, that’s not the case here.

“Put simply, the statute at issue and the rules adopted did not require Treasury to engage in the level of detailed empirical analysis that the Court in State Farm found was integral to the rulemaking. Petitioner’s focus on the ‘reasoned decisionmaking and reasoned explanation requirements’ as it understands those requirements to be taken from State Farm is misplaced.

“Treasury’s rulemaking complied with the requirements of notice and comment under APA sec. 553(b). APA sec. 706(2)(A) imposes in addition a ‘general “procedural” requirement of sorts by mandating that an agency take whatever steps it needs to provide an explanation that will enable the court to evaluate the agency’s rationale at the time of decision.’ Pension Benefit Guar. Corp. v. LTV Corp., 496 U.S. 633, 654 (1990). We conclude that Treasury’s procedures in this case satisfied this general requirement and were not arbitrary or capricious. The agency’s path ‘may reasonably be discerned’. 150 T. C. 3, at pp. 29-30 (Citation omitted).

Judge Cohen shucks SIH’s argument about the guarantee. “Neither section 956(d) nor the regulations inquire into the relative importance that a creditor attaches to a guaranty. Crestek, Inc. v. Commissioner, 149 T.C. at __ (slip op. at 25-26). A guarantor’s precise financial condition or the likelihood that it would be able to make good on its guaranty are irrelevant in determining under the regulations whether the guaranty gives rise to an investment in United States property. Id. at __ (slip op. at 28). The regulations applicable in this case provide categorically that any obligation of a United States person with respect to which the CFC is a guarantor shall be considered United States property held by the CFC in the amount equal to the unpaid principal. They make no provision for reducing the section 956 inclusion by reference to the guarantor’s financial strength or its relative creditworthiness. Id. at __ & n.8 (slip op. at 29-30).” 150 T. C. 3, at pp. 44-45.

For more about Crestek, see my blogpost “At Home Abroad – Redivivus,” 7/27/17.

The SIH quartet, with their nuanced arguments, go the way of most nuanced arguments.

I’m grateful to the litigants and Judge Cohen for getting me back into my game with this meaty full-dress T.C. After three days fighting the flu from a hospital room, and being cooped up at home, it’s great to come back.

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