147 T.C. 429
Tax Ct.2016Background
- Analog Devices, Inc. (ADI) is a U.S. parent that owned 100% of ADBV, a controlled foreign corporation (CFC). ADI repatriated a large cash dividend from ADBV in 2005 and claimed an 85% one-time dividends‑received deduction (DRD) under I.R.C. §965. ADI’s §965 testing period ran Oct. 3, 2004––Oct. 29, 2005.
- The IRS made a §482 primary transfer‑pricing adjustment increasing an intercompany royalty from 2% to 6% for 2001–2005, producing an "additional royalty amount." ADI and ADBV later recorded corresponding secondary adjustments and payments in 2006.
- ADI elected Rev. Proc. 99‑32 treatment and, in May 2009, executed a Form 906 closing agreement with the IRS that (among other things) established five interest‑bearing accounts receivable (deemed created as of the last day of each relevant taxable year) reflecting the royalty adjustments for 2001–2005.
- ADI reported zero related‑party indebtedness for ADBV on its Form 8895 for the §965 election. The IRS later issued a notice of deficiency asserting the §99‑32 accounts receivable constituted an increase in related‑party indebtedness during the §965 testing period, reducing ADI’s DRD and creating deficiencies for later years.
- The Tax Court (sitting en banc) considered two questions: (1) whether the closing agreement contractually resolved that the deemed accounts receivable were related‑party indebtedness for §965 purposes; and (2) whether, as a matter of law, the §99‑32 accounts receivable (deemed backdated) constitute related‑party indebtedness "as of" the close of the §965 election year under §965(b)(3).
Issues and Key Arguments
| Issue | Plaintiff's Argument (ADI) | Defendant's Argument (Commissioner) | Held |
|---|---|---|---|
| Did the Form 906 closing agreement establish that the §99‑32 accounts receivable are "related‑party indebtedness" for all Federal tax purposes including §965? | ADI: Closing agreement language "for all Federal income tax purposes" and the Rev. Proc. 99‑32 framework show the accounts were established for tax purposes and should be treated as indebtedness. | IRS: Boilerplate "for federal income tax purposes" means the accounts are treated as debt for all Federal tax purposes, so they increase CFC indebtedness for §965(b)(3). | Held: No. The Court read the agreement in context and concluded the parties did not specifically agree to treat the accounts as related‑party indebtedness for §965; the boilerplate caption does not expand the agreement beyond the specifically enumerated consequences. |
| Do §99‑32 accounts receivable, deemed (backdated) to the end of earlier years by the closing agreement, constitute an "increase in the amount of indebtedness of the CFC as of the close of the taxable year" under §965(b)(3)? | ADI: Even if deemed created earlier, the accounts should not reduce the §965 DRD because the accounts did not exist during the testing period absent the closing agreement, and the parties did not contract about §965. | IRS: Notice 2005‑64 and internal advice suggested Rev. Proc. 99‑32 accounts (payables/receivables) are treated as related‑party indebtedness for §965; the closing agreement's deemed dates effectuate retroactive indebtedness. | Held: No. Under the plain text of §965(b)(3), indebtedness must exist "as of" the close of the election year; backdating in a later closing agreement does not create actual indebtedness as of the measurement date. ADI is entitled to the full DRD. |
Key Cases Cited
- BMC Software, Inc. v. Commissioner, 141 T.C. 224 (Tax Ct. 2013) (Tax Court held Rev. Proc. 99‑32 closing agreement created retroactive indebtedness for §965 purposes)
- BMC Software, Inc. v. Commissioner, 780 F.3d 669 (5th Cir. 2015) (Fifth Circuit reversed the Tax Court, holding deemed backdating in a closing agreement does not create indebtedness "as of" the testing‑period measurement date)
- Schering Corp. v. Commissioner, 69 T.C. 579 (Tax Ct. 1978) (court reads closing agreement in context; Rev. Proc. style agreements do not necessarily bar collateral tax consequences)