BMC Software, Inc. v. Commissioner, 780 F.3d 669

BMC, a U.S. corporation, took a one-time § 965 deduction in 2006 for dividends repatriated from its foreign subsidiary (BSEH); no related-party indebtedness existed on BMC’s 2006 return.
In 2007 BMC and the IRS executed a transfer-pricing primary adjustment (increasing BMC’s taxable income) and a § 1.482-1(g)(3)/Rev. Proc. 99-32 secondary adjustment.
The 2007 99-32 Closing Agreement created two interest-bearing accounts receivable (deemed established in 2005 and 2006) owed by BSEH to BMC and specified certain federal tax consequences (including that repayment would be free of secondary-adjustment tax effects).
In 2011 the IRS issued a deficiency, claiming the retroactive accounts receivable constituted related-party "indebtedness" during § 965(b)(3)’s testing period (Oct. 3, 2004–Mar. 31, 2006), which would reduce BMC’s § 965 deduction.
The Tax Court sustained the deficiency, treating the backdated accounts receivable as indebtedness during the testing period and refusing to give effect to the Closing Agreement’s language as preventing that result.
On appeal the Fifth Circuit reversed, holding (1) § 965(b)(3)’s plain text requires indebtedness to exist "as of the close of" the taxable year (Mar. 31, 2006) and the accounts did not exist then, and (2) the 99-32 Closing Agreement did not contractually obligate BMC to treat the accounts as indebtedness for § 965.

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether accounts receivable created in 2007 but backdated to 2005/2006 constitute "indebtedness" "as of the close of" the 2006 taxable year under § 965(b)(3)	The backdated accounts should be treated as indebtedness during the testing period, reducing the § 965 deduction	§ 965’s plain language requires indebtedness to exist as of the close of the taxable year; the accounts did not exist then	Held for BMC — § 965(b)(3) requires indebtedness to have existed at the close of the taxable year; retroactive creation in 2007 does not satisfy that text
Whether the 99-32 Closing Agreement contractually bound BMC to treat the accounts receivable as indebtedness for § 965 purposes	The Closing Agreement’s boilerplate "for federal income tax purposes" and its backdating show the parties agreed the accounts would count as indebtedness for all federal tax purposes, including § 965	The Agreement enumerates specific tax consequences and does not mention § 965; extrinsic evidence shows parties intended only the listed consequences; boilerplate cannot be read to render provisions superfluous	Held for BMC — the Agreement did not unambiguously treat the accounts as § 965 indebtedness, and extrinsic evidence supports BMC’s interpretation

Rodriguez v. Comm’r, 722 F.3d 306 (5th Cir.) (standard of review for Tax Court decisions)
Terrell v. Comm’r, 625 F.3d 254 (5th Cir.) (issues of law reviewed de novo; facts for clear error)
In re Universal Seismic Assoc., Inc., 288 F.3d 205 (5th Cir. 2002) (plain-language statutory interpretation principles)
Kelly v. Boeing Petroleum Servs., Inc., 61 F.3d 350 (5th Cir. 1995) (statutory text controls when unambiguous)
Smith v. United States, 850 F.2d 242 (5th Cir.) (closing agreements construed against the backdrop of governing law)
Long v. Comm’r, 93 T.C. 5 (Tax Ct.) (closing agreements are contracts governed by ordinary contract rules)