Adams Challenge (UK) Limited v. CommissionerAdams Challenge (UK) Limited v. Commissioner
P is a U.K. private limited liability company whose sole income-producing asset for the years at issue was a multi-purpose support vessel. The vessel was chartered by a U.S. company to assist in decommissioning oil and gas wells and removing debris on portions of the U.S. Outer Continental Shelf (OCS) in the Gulf of Mexico. During 2009-2011 petitioner derived gross income of $45 million from the charter.
Foreign corporations are subject to Federal income tax on income “effectively connected with the conduct of a trade or business within the United States.”
The bilateral income tax treaty (Treaty) between the United States and the U.K. provides that a U.K. enterprise shall not be subject to Federal income tax unless it conducts business in this country through a U.S. “permanent establishment.”
Held: P‘s activities were conducted on the OCS “with respect to * * * oil and gas wells,”
Held, further, P‘s activities were carried on offshore “in connection with the * * * exploitation * * * of the sea bed and sub-soil and their natural resources” under article 21 of the Treaty. P is therefore deemed to have a U.S. permanent establishment, and the Treaty does not exempt its charter income from Federal income tax.
Andrius R. Kontrimas and Robert C. Morris, for petitioner.
William D. White, Richard A. Rappazzo, and Russell S. Shieldes, for respondent.
OPINION
LAUBER, Judge: Petitioner is a company incorporated under the laws of the United Kingdom (U.K.). For the tax years at issue petitioner‘s only income-producing asset was a multi-purpose support vessel. A U.S. firm chartered petitioner‘s vessel to perform work decommissioning oil and gas wells and removing hurricane-related debris on portions of the U.S. Outer Continental Shelf (OCS) in the Gulf of Mexico. From this charter petitioner during 2009-2011 earned income of about $45 million, most of which it treated as exempt from Federal income tax.
Before the Court are petitioner‘s motion for summary judgment and a cross-motion for partial summary judgment filed by the Internal Revenue Service (IRS or respondent). These motions require us to decide whether petitioner‘s charter income was subject to tax under the Internal Revenue Code (Code)1 and the bilateral income tax treaty between the
Background
The following facts are based on the parties’ motion papers, the stipulation of facts, and the attached exhibits. During the tax years at issue petitioner had its registered office and mailing address in Northampton, England.
A. The Challenge Vessel
Petitioner was formed in 2006 as a private limited liability company under U.K. law. It is a subsidiary of a Bermuda entity wholly owned by Khalifa A. Algosaibi Diving and Marine Technical Services Co., a Saudi Arabian branch of a Bahraini entity. Petitioner is the registered owner of a multipurpose support vessel, the M.V. Adams Challenge (Challenge Vessel), which was placed in service on January 1, 2009. During 2009-2011 the Challenge Vessel was petitioner‘s only income-producing asset.
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
B. The Time Charter
EPIC Diving & Marine Services, LLC (EPIC), is an oil and gas services company that specializes in decommissioning oil and gas wells and related activities. In early 2009 EPIC was planning to bid on a project in the Gulf of Mexico, but its existing fleet did not have the capacity to complete the project. EPIC chartered the Challenge Vessel to fill this gap. It selected the Challenge Vessel because it was a brand new vessel with the specialized equipment necessary to execute EPIC‘s intended scope of work.
On May 15, 2009, EPIC and petitioner entered into a standard time charter for the Challenge Vessel. Under a time charter a vessel is hired for an agreed-upon period, as opposed to a voyage charter, where a vessel is hired to complete a particular trip. The charter was memorialized on a standard Baltic and International Maritime Council form. Various addenda were added to the charter during 2009 and 2010, and the Challenge Vessel operated at all times consistently with the terms of the charter as thus revised. At no time were petitioner and EPIC partners or agents of one another.
The charter specified payment to petitioner of a flat daily rate (adjusted from time to time) plus a daily meal fee of $70 for each member of the Challenge Vessel maritime crew.4 Petitioner received this payment regardless of whether the ship was engaged in operations, in transit between work sites, or in port between assignments. The charter initially recited that no taxes were due in the United States. As of October 13, 2010, the charter was amended to state that “Owners [viz., petitioner and its affiliates] are responsible for any taxes, including U.S. taxes owed as a result of income to the Owners under the Charter Party.”
The Challenge Vessel and its marine crew shared responsibility with EPIC for deepwater operations. Crew members were responsible for operation of the hydraulic deck crane and maintenance of all vessel equipment, including the saturation diving system when it was not in active use by EPIC‘s divers. Although EPIC generally had responsibility for all subsurface operations, the master of the Challenge Vessel was authorized to suspend all diving activity for safety reasons, e.g., because of adverse weather or electrical problems.
EPIC entered into contracts with oil and gas companies to perform various decommissioning services on oil and gas rigs within the OCS. Holders of Federal offshore leases, including the companies with which EPIC contracted, are required to decommission and remove equipment for terminated or non-producing leases and are subject to the decommissioning requirements of the Department of the Interior (Interior Department). See
During 2009-2011 EPIC used the Challenge Vessel for work on 11 projects in various “blocks” within the Gulf of Mexico. Each project site was within 200 nautical miles of the coast of Louisiana or Texas, within the OCS. The Federal
The projects on which the Challenge Vessel worked involved decommissioning of oil and gas facilities, including wells and pipelines. Specific tasks included excavating around damaged rigs, severing metal components from toppled platforms, plugging abandoned wells, and removing metal debris from the seabed. None of the sites was actively producing oil or gas at the time. At most sites active production had ceased several years previously, and at one site no oil or gas was ever produced. At no time did EPIC employ the Challenge Vessel to explore for oil or gas.
The marine crew maintained logs to record how the Challenge Vessel spent its time during the charter. The logs divide that time into four categories: work, port, transit, and “other.” Work time reflected active use of the vessel at project sites; port time reflected hours spent in harbor resupplying or maintaining the vessel; transit time reflected hours moving the vessel between port(s) and project sites; “other” time was a catchall that included hours the vessel was at sea but idle because of bad weather. The logs show that the vessel‘s time was divided as follows:
| Year | Work | Port | Transit | Other |
|---|---|---|---|---|
| 2009 | 85% | 6% | 2% | 6% |
| 2010 | 64% | 22% | 4% | 10% |
| 2011 | 61% | 24% | 7% | 7% |
At EPIC‘s direction the Challenge Vessel departed for Mexico on August 11, 2011. It remained outside the United States (including the OCS) for the remainder of that year.
C. Tax Filings and IRS Examination
Petitioner did not file a timely Federal income tax return for 2009 or 2010. On April 9, 2014, the IRS prepared a substitute for return for each year. See
On November 25, 2014, the IRS issued to petitioner a notice of deficiency for the tax years at issue. The notice determined that petitioner for 2009 and 2010 had effectively connected income of $13,595,167 and $19,135,125, respectively, and that petitioner for 2011 had underreported its effectively connected income by $9,897,975. Petitioner timely petitioned for redetermination of the resulting deficiencies and additions to tax.6
By amendments to pleadings respondent alleged increased deficiencies for 2010 and 2011. For 2010 respondent urges that petitioner‘s effectively connected income was $21,380,541; for 2011 he contends that petitioner should be allowed no deductions, increasing its taxable income to $12,634,425. Petitioner amended its pleadings to allege that it erroneously reported $2,736,450 of gross income on its 2011 return and that its effectively connected income for that year was zero.
On May 3, 2019, petitioner filed a motion for summary judgment contending that none of the income derived from the charter of the Challenge Vessel was subject to Federal income tax. Respondent concurrently filed a cross-motion for partial summary judgment contending that all of the income from that charter was subject to Federal income tax. Neither motion asks us to address, and we do not address in this Opinion, the extent to which petitioner for any year may be entitled to deductions from gross income or credits against U.S. tax.
Discussion
The purpose of summary judgment is to expedite litigation and avoid costly, unnecessary, and time-consuming trials.
Whether petitioner‘s charter income is subject to Federal income tax depends first on whether that income was taxable under the Code, i.e., was “effec-tively connected with the conduct [by petitioner] of a trade or business within the United States.” See
A. Taxability Under the Code
Under the time charter, petitioner provided property (the Challenge Vessel) and the services of its marine crew in assisting with the decommissioning of oil and gas facilities in the Gulf of Mexico. The questions we must decide are wheth-er petitioner conducted these activities “within the United States” and whether its income was “effectively connected”
1. Analysis
of the terms “United States” and “foreign country” for purposes of tax jurisdiction over continental shelf areas. See Tax Reform Act of 1969, Pub. L. No. 91-172, sec. 505(a), 83 Stat. at 634.
For purposes of applying the provisions of this chapter (including sections 861(a)(3) and 862(a)(3) in the case of the performance of personal services) with respect to mines, oil and gas wells, and other natural deposits—
(1) the term “United States” when used in a geographical sense includes the seabed and subsoil of those submarine areas which are adjacent to the territorial waters of the United States and over which the United States has exclusive rights, in accordance with international law, with respect to the exploration and exploitation of natural resources * * *
In the Gulf of Mexico the OCS extends to a distance of up to 200 nautical miles from the U.S. coastline. Ibid.; see 43 U.S.C. sec. 1331(a). The OCS thus comprises a territory that occupies many thousands of square miles. Needless to say, a great variety of maritime activity—commercial and otherwise—occurs within this territory. These activities include fishing, shrimping, pleasure boating and sailing, and commercial transportation of persons and property.
If the statute is construed according its plain terms, the answer to this question would seem to be “yes.” During 2009-2011 the Challenge Vessel worked on 11 projects in various “blocks” on the OCS within the Gulf of Mexico. All 11 projects involved decommissioning of oil and gas wells or pipelines connected to oil and gas rigs. The Challenge Vessel spent most of its time actively engaged in decommissioning activity. It spent the balance of its time in transit between project sites, performing maintenance and repairs in port, or idle at sea awaiting better weather. The latter activities were indispensable components of its central purpose under the charter—to assist in decommissioning oil and gas facilities.
The parties have directed most of their attention to a regulation issued by the Department of the Treasury (Treasury Department) in 1973. See
Persons, property, or activities are within the United States * * * or a foreign country, as the case may be, pursuant to this paragraph, only to the extent such persons, property, or activities are engaged in or related to the exploration for, or the exploitation of, mines, oil and gas wells, or other natural deposits.
Respondent does not contend that the Challenge Vessel was used to explore for oil or gas, and all 11 projects on which it worked involved wells that were non-producing at the time. Respondent nevertheless contends that the vessel‘s activities were within the scope of
The parties have cited, and we have discovered, no judicial precedent dictating how the regulation should be interpreted as applied to the facts here. However, certain general principles
It also seems clear that property or activity may be “related to” exploration or exploitation of natural resources even though that relationship is not direct and immediate. In FMC Corp., 100 T.C. at 605, the taxpayer manufactured industrial cranes that were sold to oil companies “to provide assistance on [OCS] drilling platforms.” The question was whether the cranes constituted “export property” for purposes of
The examples in the regulation likewise give broad scope to the phrase “related to.” See
These examples give wide (but not limitless) scope to the types of activities that are “related to” the exploration for, or exploitation of, natural deposits. Although the fact patterns of these examples involve exploring for or producing oil, respondent urges that the universe of activities “related to the * * * exploitation” of natural resources is broader. Respondent contends that the Challenge Vessel‘s activities in decommissioning oil and gas wells were “related to the * * * exploi-tation of * * * oil and gas wells” because these activities were integral to, and an inevitable corollary of, exploiting oil and gas resources on the OCS. We agree.
The Interior Department has promulgated detailed regulations requiring all oil and gas lessees that operate on the OCS to undertake extensive decommissioning activities when wells cease production. Lessees and owners of operating rights are jointly and severally responsible for plugging abandoned or nonproducing wells, decommissioning pipelines, removing platforms and related structures, and clearing the sea floor of all obstructions resulting from activities undertaken to exploit oil and gas resources. See
Petitioner contends that the Challenge Vessel had nothing to do with the “exploitation of * * * oil and gas wells,” see
(bidding on offshore leases, getting permits, and drilling wells), production activities (staffing platforms, extracting resources, and performing repairs and maintenance), and post-production activities (plugging wells, decommissioning pipelines, and removing debris). All three sets of activities are equally essential. No lease could be secured and no production would ever occur unless the lessee bound itself to carry out the post-production phase of the exploitation cycle. We see no logical reason to exclude post-production activities (any more than pre-production activities) from the universe of activities that are “related to the * * * exploitation of * * * oil and gas wells” on the OCS.
Petitioner emphasizes that decommissioning of wells was the legal obligation of the oil and gas lessee (or operator), that EPIC and its divers undertook the undersea decommissioning work, and that petitioner simply provided a ship and crew. But we do not see how this affects the analysis. In deciding whether decommissioning is “related to the * * * exploitation of * * * oil and gas wells,” it is irrelevant whether the lessee performs that work or contracts it out. And although EPIC‘s divers actually dismantled the platforms and plugged the wells, the Challenge Vessel and its marine crew performed indispensable supporting services. Indeed, EPIC recognized that it could not have completed its intended scope of work without chartering the Challenge Vessel. If the activities of a medical doctor and cook are “related to” the exploitation of oil and gas resources--as examples in the regulation show--it follows a fortiori that the activities of the Challenge Vessel and its crew were so “related.”
In sum, because the decommissioning activities in which the Challenge Vessel engaged were integral to, and legally required to be undertaken in connection with, the exploitation of oil and gas resources on the OCS, those activities were “related to the * * * exploitation of * * * oil and gas wells” within the meaning of
2. Petitioner‘s Arguments
Petitioner urges several arguments in support of a contrary conclusion. Its principal position is that
Petitioner next contends that, because
The regulation confirms this conclusion. It provides: “For purposes of applying this section, persons, property, or activities which are engaged in or related to the exploration for, or the exploitation of * * * oil and gas wells * * * need not be physically upon, connected, or attached to the seabed or subsoil * * * to be deemed to be within the United States.”
The examples to the regulation point to the same conclusion. As noted supra pp. 17-19, they indicate that
Petitioner seeks support for its position from a ruling it received from the Department of Homeland Security, U.S. Customs and Border Protection (CBP). Under the Jones Act and related Federal laws, foreign ships like the Challenge Vessel are prohibited from engaging in the transportation of merchandise (including debris) and passengers (other than crew) between “coastwise points” in the United States. See
On June 22, 2009, CBP issued a ruling to petitioner reiterating this position, but we do not think it helps petitioner‘s cause. To begin with, CBP revoked the ruling two months later, stating: “[F]urther information is needed to clarify the status of the wells before a determination may be made regarding whether they constitute coastwise points.” More fundamentally, whether damaged platforms constitute “coastwise points” for purposes of the Jones Act and other maritime laws is not determinative in ascertaining the scope of U.S. tax jurisdiction under
Finally, petitioner cites Ocean Drilling & Expl. Co. v. United States (ODECO), 988 F.2d 1135 (Fed. Cir. 1993), in support of its assertion that “[r]espondent has gone rogue * * * in its attempt to expand its taxing authority under
Thus, the question in ODECO was whether the OCS drilling platforms were “in the United States” for subpart F purposes.
On this point the subpart F regulations appeared to conflict with
The Federal Circuit resolved this conflict in the taxpayer‘s favor, concluding that ”
The Federal Circuit‘s opinion in ODECO supplies no support for petitioner‘s position. The court held that income derived from insuring drilling platforms on the OCS was not subpart F income. That holding has no relevance to this case. The court‘s subsidiary conclusion that OCS drilling platforms are not “within the United States” for purposes of taxing insurance income likewise has no salience here. Insurance aside, petitioner does not dispute that
Finally, petitioner errs in implying that the ODECO opinion somehow tarnished
Having concluded that petitioner‘s charter income was taxable under the Code, we consider next whether a different outcome is required by the bilateral income tax treaty between the United States and the U.K. This case is governed by the Treaty that entered into force on March 31, 2003. See supra note 2. As a threshold matter the parties have stipulated that petitioner was a resident of the U.K. under article 4 of the Treaty (Residence) and met the requirements of article 23 (Limitation on Benefits). The parties also agree that an earlier version of the treaty (1975 Treaty)14 has some relevance in interpreting the current version.
Article 7(1) of the Treaty provides that “business profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein.” The parties have stipulated that petitioner does not have a permanent establishment in the United States under the general principles of article 5 (Permanent Establishment). But article 21, titled “Offshore Exploration and Exploitation Activities,” creates a special rule for activities carried on in connection with exploitation of natural resources. It provides in pertinent part:
1. The provisions of this Article shall apply notwithstanding any other provision of this Convention where activities are carried on offshore in a Contracting State in connection with the exploration (hereinafter called “exploration activities“) or exploitation (hereinafter called “exploitation activities“) of the sea bed and sub-soil and their natural resources situated in that State.
2. An enterprise of a Contracting State which carries on exploration activities or exploitation activities in the other Contracting State shall * * * be deemed to be carrying on business in that other State through a permanent establishment situated therein.
The question we must decide is whether the Challenge Vessel‘s activities, for purposes of the Treaty, were carried on “in connection with the * * * exploitation * * * of the sea bed and sub-soil and their natural resources” in the OCS.
The Treaty does not define the terms “exploitation” or “in connection with.” However, it provides that, absent Treaty context or competent authority agreement dictating otherwise, “any term not defined therein shall * * * have the meaning which it has at that time under the law of that State for the purposes of the taxes to which this Convention applies.” Treaty art. 3(2). In particular, “any meaning under the applicable tax laws of that State“--i.e., the country whose tax jurisdiction is being invoked--“prevail[s] over a meaning given to the term under other laws of that State.”
Neither party contends that the Treaty‘s context or any competent authority agreement points to a particular definition of the terms “exploitation” and “in connection with” as used in article 21. Accordingly, since we are applying the Treaty to determine whether U.S. tax applies, we must ascertain the meaning that these terms have under U.S. law, particularly under U.S. tax law. See Maximov v. United States, 373 U.S. 49, 53 (1963) (applying the Code in interpreting an undefined treaty term pursuant to a treaty provision deferring to the meaning under the laws of the State whose tax was sought to be applied); Filler v. Commissioner, 74 T.C. 406, 412-413 (1980) (same).
During the early 1970s the United States entered into a number of bilateral income tax treaties that mirrored the
When used in a geographical sense, the term “United States” * * * includes (A) the territorial sea thereof and (B) the seabed and subsoil of the submarine areas adjacent to the territorial sea, over which the United States exercises sovereign rights, in accordance with international law, for the purpose of exploration and exploitation of the natural resources of such areas, but only to the extent that the person, property, or activity to which this Convention is being applied is connected with such exploration or exploitation.
The final clause--providing that persons and property are within the United States “only to the extent * * * connected with such exploration or exploitation“--added a refinement or clarification that was not explicit in the text of
The Treasury Department supplied a technical explanation of the U.S.-Norway treaty. See Treasury Department Technical Explanation of the Proposed U.S.-Norway Income Tax Convention, signed at Oslo on Dec. 3, 1971, art. 2, Tax Treaties (CCH) para. 7046, at 147,227. It stated that article 2 was intended to follow
The addition of a definition of the continental shelf * * * follows section 638 of the Internal Revenue Code and defines the United States continental shelf as the seabed and subsoil of the adjacent submarine areas over which the United States exercises exclusive rights in accordance with international law for the purpose of exploration and exploitation of the natural resources of such area, but only to the extent that the person, property, or activity to which the proposed Convention is to be applied is connected with such exploration or exploitation.
It further explained:
The defined continental shelf is only part of the United States or Norway, as the case may be, in limited situations. It is included only to the extent that the person, property, or activity to which the Convention is being applied is connected with exploration or exploitation of the continental shelf. The phrase “connected with” does not require physical attachment to the continental shelf to be within the scope of the definition.
The Treasury Department published the
The 1975 Treaty between the United States and the U.K. was signed two years after the Treasury Department issued the
the seabed and subsoil of the submarine areas adjacent to the coast thereof, but beyond the territorial sea, over which the United States exercises sovereign rights, in accordance with international law, for the purpose of exploration for and exploitation of the natural resources of such areas, but only to the extent that the person, property, or activity to which the Convention is being applied is connected with such exploration or exploitation * * *.
[A] person who is a resident of a Contracting State and carries on activities in the other Contracting State in connection with the exploration or exploitation of the seabed and sub-soil and their natural resources situated in that other Contracting State shall be deemed to be carrying on in respect of those activities a business in that other Contracting State through a permanent establishment * * * situated therein.
The current Treaty was signed on July 24, 2001, and entered into force on March 31, 2003.
One does not need an advanced degree in linguistics to appreciate the similarities between the text of the statute, the
The historical evolution outlined above shows the symbiotic relationship between
“exploitation,” as used in the Treaty, has the same meaning that it has in
The only distinction between the formulas set forth in the Treaty and the regulation appears in the phrase that precedes “exploration or exploitation.” The regulation refers to activities “related to” exploration or exploitation of OCS resources.
Judicial precedents in tax cases likewise show that “in connection with” and “related to” have the same meaning. See Huntsman v. Commissioner, 905 F.2d 1182, 1184 (8th Cir. 1990) (interpreting “in connection with” in
Non-tax judicial precedents point to the same conclusion. In Azima v. RAK Inv. Auth., 926 F.3d 870 (D.C. Cir. 2019), the question was whether a dispute was “in connection with” a contract for purposes of the contract‘s forum-selection clause. Applying general U.S. contract principles, the U.S. Court of Appeals for the D.C. Circuit stated: “We begin by defining ‘in connection with.’ This phrase is equivalent to ‘in relation to,’ which is quite broad.” Id. at 877.
In Coregis Ins. Co. v. Am. Health Found., Inc., 241 F.3d 123 (2d Cir. 2001), the question was whether a dispute was “related to” a party‘s insolvency for purposes of the insolvency exclusion in an insurance contract. The U.S. Court of Appeals for the Second Circuit, speaking through Judge (now Justice) Sotomayor, treated the term “relating to” as “equivalent to the phrases ‘in connection with’ and ‘associated with,’
As explained supra p. 23, we have concluded that the Challenge Vessel‘s decommissioning activities were “related to the * * * exploitation of * * * oil and gas wells” for purposes of
2. Petitioner‘s Arguments
Petitioner first contends that the section 638 regulation is “not entitled to any deference in the treaty-interpretation context” because it “contradict[s] * * * the language of the [T]reaty.” But the regulation does not contradict any Treaty language. Both refer to “exploration or exploitation” of OCS natural resources. The regulation refers to activities “related to” exploration or exploitation, whereas the Treaty refers to activities “in connection with” exploration or exploitation. As explained supra pp. 41-44, these terms are synonymous.
When determining the application of U.S. tax, the Treaty provides that any term not defined therein shall have the meaning it has under U.S. law, particularly under U.S. tax law.
Second, petitioner relies on extra-textual sources to contend that the Treaty covers only “drilling activity” on the OCS. “In interpreting a treaty it is proper, of course, to refer to the records of its drafting and negotiation.” Air France v. Saks, 470 U.S. 392, 400 (1985). But the Treasury Department‘s explanation of the Treaty clearly states that covered OCS activities are not limited to the direct extraction of oil and gas. See Treasury Department Technical Explanation of the U.S.-U.K. Income Tax Convention, art. 21, Tax Treaties (CCH) para. 10,911, at 201,340 (stating that “‘exploration activities’ and ‘exploitation activities’ * * * include, but are not limited to, the exploration for and extraction of oil, minerals, and natural gas.” (Emphasis added.)).
Petitioner relies chiefly on the Senate Foreign Relations Committee‘s report on the Third Protocol to the 1975 Treaty, which added
The proposed protocol adds a new Article 27A to the proposed treaty covering offshore activities. This provision is intended to deal primarily with the activities of certain U.S. independent drilling contractors in the U.K. sector of the North Sea. * * * While the protocol provisions were added primarily to deal with activities of U.S. persons in the North Sea, they also make it clear that British activities in connection with activities on the U.S. continental shelf are subject to U.S. tax. [S. Comm. on Foreign Relations, S. Exec. Rept. No. 96-5, at 12 (1979).]
Similar statements appear in other legislative materials describing article 27A.20
Advancing an alternative argument, petitioner contends that the income it earned from chartering the Challenge Vessel was “shipping income” under
The Challenge Vessel was not engaged in mere “transport” of passengers or goods. It was chartered as a support vessel with specialized equipment valuable for decommissioning activity, including a class 2 dynamic positioning system, a
Finally, petitioner contends that, if it is determined to have had a U.S. “permanent establishment,” respondent erred in treating 100% of the charter income as attributable to that permanent establishment. During 2009-2011 the Challenge Vessel spent between 14% and 38% of its time in port (resupplying or maintaining the vessel), in transit (moving the vessel from port to project sites), or in other nonproductive activity (e.g., idling at sea because of bad weather). See supra p. 9. Petitioner contends that it should be subject to U.S. tax only on the portion of its charter income corresponding to time spent in actual decommissioning activity at the 11 project sites.
We see no merit in this argument. The charter specified a flat daily rate (adjusted from time to time), and petitioner received this payment regardless of whether the Challenge Vessel was engaged in operations, idle at sea, in transit between work sites, or in port between assignments. Time spent resupplying the vessel, performing maintenance, moving between sites, and dealing appropriately with bad weather are inseparable components of a vessel‘s time charter. All of these activities were essential in carrying out its mission--to support the decommissioning of oil and gas facilities. All of these activities were thus “related to,” and were carried out “in connection with,” the exploitation of oil and gas wells on the OCS. Petitioner has provided no legal basis for allocating any portion of its charter income to a location other than its U.S. “permanent establishment.”
To reflect the foregoing,
An appropriate order will be issued denying petitioner‘s motion for summary judgment and granting respondent‘s cross-motion for partial summary judgment.