In Uncategorized on 01/08/2020 at 19:43


I’m not sure if Adams Challenge (UK) Limited, 154 T. C. 3, filed 1/8/20, is related to Adams Offshore Services, Ltd., but they both seem to be dealing with Section 638(1) and the Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital Gains, UK.-U.S., July 24, 2001, T.I.A.S. No. 13,161 (entered into force Mar. 31, 2003), and its 1975 edition.

For Adams Offshore’s story, see my blogpost “Sea Hunt,”12/9/14.

Challenge time-chartered its specialty boat to a US outfit decommissioning damaged or played-out oil wells on the Outer Continental Shelf. This was some boat.

Judge Albert G (“Scholar Al”) Lauber: “The Challenge Vessel was equipped with state-of-the-art specialized systems. These included a ‘class 2 dynamic positioning system,’ a nine-man ‘saturation diving system,’ a helipad, and a hydraulic deck crane capable of lifting 100 tons. A dynamic positioning system enables a vessel to maintain a reasonably stationary position above an underwater worksite. The vessel plants transponders on the sea floor, then triangulates data from those transponders to keep its position stable over a particular spot. A saturation diving system enables divers to work at greater depths for longer periods. Divers live in a sealed, pressurized chamber that is lowered to working depth. This permits the divers to be ‘decompressed’ only once at the end of their tour of duty, thus reducing the risk of illness. Saturation diving is a highly specialized form of diving. In 2015 only 336 commercial divers were recognized by the U.S. Coast Guard as regulated saturation divers.” 154 T. C. 3, at pp. 4-5, footnote omitted.

Would you believe one of my nearest and dearest is one of the 336?

Well, the actual decommissioning was done by the US outfit. The Challenge claimed they had nothing to do with exploring or exploiting on the Continental Shelf.

Judge Scholar Al says Section 638(1) is broad enough to cover. And the treaty language and the Section 638(1) language mean the same thing.

Now before you all shout “effectively connected! Permanent establishment!” Section 638 makes Continental Shelf exploring and exploiting effectively connected, even if not anchored.

And exploitation includes decommissioning, because the oil leases under which the exploiters operate require them to clean up.

The Section 638 regs say the work of cooks on oil rigs and MDs who helicopter out to treat crew is “related to” exploitation. Definitely a purpose-built specialized boat fits in. Now there is a Fed Cir case that says foreign companies insuring the oil rigs aren’t liable for US tax, because insurance is too remote. And the one insurance example in the Section 638 regs doesn’t overrule Section 953. So Section 953, limiting effectively-connected US insurance business to dry land, is independent of Section 638(1). Taishoff notes that if it wasn’t, European companies, which insure and reinsure the huge oil rig exposure, would run away.

Judge Lauber cuts to the cliché.

“One does not need an advanced degree in linguistics to appreciate the similarities between the text of the statute, the section 638 regulation, and the Treaty. Section 638 extends U.S. tax jurisdiction over the OCS ‘with respect to mines, oil and gas wells, and other natural deposits.’ The regulation provides that U.S. tax jurisdiction extends over the OCS ‘to the extent * * * [that] persons, property, or activities are engaged in or related to the exploration for, or exploitation of, mines, oil and gas wells, or other natural deposits.’ Sec. 1.638-1(c)(4), Income Tax Regs. And the Treaty provides that an enterprise is deemed to carry on activities through a permanent establishment in the United States, and thus be subject to U.S. tax jurisdiction, where its activities are ‘carried on offshore * * * in connection with the exploration * * * or exploitation * * * of the sea bed and sub-soil and their natural resources situated in that State.’ Treaty art. 21(1) and (2).” 154 T. C. 3, at p. 40.

“Applying principles of U.S. tax law, we discern no appreciable difference between the terms “related to,” “connected with,” and “in connection with.” These terms appear throughout the Code and seem to be used interchangeably. Compare sec. 162(e) (denying deduction for expenses incurred ‘in connection with * * * influencing legislation’), with sec. 162(q) (denying deduction for payment ‘related to sexual harassment’). Both terms regularly appear close to each other in the same Code provision, with no apparent difference in meaning. Compare sec. 6103(h)(2)(A) (referring to a proceeding ‘in connection with’ determining a taxpayer’s liability), with sec. 6103(h)(2)(B) (referring to treatment of an item ‘related to’ resolution of an issue in such proceeding). “ 154 T. C. 3, at p. 42.

IRS wins, but any deductions or credits allowable to Challenge must await another day.



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