ANALOG DEVICES, INC. & SUBSIDIARIES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 17380-12.
UNITED STATES TAX COURT
Filed November 22, 2016.
147 T.C. No. 15
P is a corporation that is a U.S. shareholder of a controlled foreign corporation (CFC). P repatriated cash dividends from the CFC and claimed an 85%
R determined, and P agreed, that the annual 2% royalty from CFC to P should be increased to 6% for 2001-05 to reflect arm’s-length pricing. See
Held: The parties did not reach an agreement in the closing agreement with respect to the treatment of the accounts receivable under
Held, further,
Held, further, the accounts receivable did not increase CFC’s related party indebtedness during the testing period.
Held, further, P is entitled to the full amount of its claimed DRD.
Kenneth B. Clark, James P. Fuller, Jennifer L. Fuller, Andrew J. Kim, and Larissa B. Neumann, for petitioner.
Michele J. Gormley and Curt M. Rubin,
OPINION
MARVEL, Chief Judge: Respondent determined deficiencies in petitioner’s Federal income tax of $3,997,804 and $22,112,640 for taxable years 2006 and 2007, respectively. The issue for decision is whether the accounts receivable that the parties established in a 2009 closing agreement pursuant to Rev. Proc. 99-32, 1999-2 C.B. 296, created retroactive indebtedness between petitioner and its controlled foreign corporation (CFC) under
Background
The parties submitted this case fully stipulated under Rule 122. The stipulated facts and facts drawn from the stipulated exhibits are incorporated herein by this reference.3 Petitioner is a U.S. corporation with its principal place of business in Norwood, Massachusetts.
Analog Devices, Inc. (petitioner), was founded in 1965. It is the common parent of a group of subsidiaries that joined in the timely filing of consolidated Federal income tax returns for the 2006-07 tax years. It is also the parent of nonconsolidated foreign affiliates.
Petitioner, its subsidiaries, and its affiliates design, develop, manufacture, and sell high-performance analog, mixed-signal, and digital signal processing integrated circuits. In 1976 petitioner incorporated Analog Devices B.V.
I. The Intercompany Royalty
In 1982, in connection with a
The IRS regularly conducted examinations for petitioner’s tax years following the 1998 license agreement. In 2006 the IRS conducted an examination for petitioner’s 2001-03 tax years. As a result of that examination, the IRS proposed under its authority pursuant to
Petitioner filed an amended 2004 Federal income tax return on July 18, 2006, to reflect the increased royalty rate. Petitioner timely filed its 2005 Federal income tax return on July 13, 2006, and reported a 6% royalty from ADBV.5 For
In July 2006 ADBV and petitioner credited and debited their respective intercompany accounts by the royalty adjustment amount. ADBV paid the additional royalty amount in a series of payments to petitioner between July 25 and October 26, 2006. Petitioner did not make an election under Rev. Proc. 99-32, supra, in 2006 with respect to the payments.6
II. Petitioner’s Repatriation and Section 965 Election
In 2005 petitioner’s and ADBV’s boards of directors approved a domestic reinvestment plan to repatriate a cash dividend to take advantage of a limited 85% DRD under
ADBV declared the dividend and paid it to petitioner on October 24, 2005.7 At the time of the payment of the dividend, ADBV’s cash balance, including marketable securities and short-term investments, was approximately $1.6 billion. Its cash balance at the end of its 2005 taxable year, after it paid the dividend, was $485,306,732.
Petitioner attached a Form 8895, One-Time Dividends Received Deduction for Certain Cash Dividends from Controlled Foreign Corporations, to its timely filed Federal
III. The IRS’ Examination for Petitioner’s 2004-05 Taxable Years, Petitioner’s Rev. Proc. 99-32 Election, and the Notice of Deficiency
The IRS commenced an examination for petitioner’s 2004 and 2005 taxable years in May 2006. The IRS commenced an examination for petitioner’s 2006-07 taxable years around May 2006 and April 2007, respectively.9
On May 3, 2007, the IRS faxed to petitioner an issue resolution agreement stating that ADBV’s payments of the additional royalty amount resulted in a constructive dividend to petitioner.10 In a letter to the IRS dated July 17, 2007, petitioner’s chief financial officer requested relief under Rev. Proc. 99-32, supra, with respect to the additional royalty amount (Rev. Proc. 99-32 election). The election would permit petitioner to establish interest-bearing accounts receivable from ADBV instead of treating the transfer pricing
Petitioner’s treasurer, William Martin, also attached a “Statement Pursuant to Revenue Procedure 99-32” to petitioner’s timely filed 2006 tax return to ensure that the IRS would not treat ADBV’s payment of the additional royalty amount as a dividend. The statement reiterated petitioner’s Rev. Proc. 99-32 election and stated that petitioner was permitted to establish interest-bearing accounts receivable from ADBV.
In October 2007, during the course of the examinations, the IRS raised
In May 2009 petitioner and the IRS signed a Form 906, Closing Agreement on Final Determination Covering Specific Matters, finalizing petitioner’s Rev. Proc. 99-32 election. Petitioner’s chief financial officer signed the closing agreement on petitioner’s behalf. He did not have signatory authority for ADBV, and no one with signatory authority for ADBV signed the agreement.
The parties’ closing agreement is titled “Closing Agreement on Final Determination Covering Specific Matters” (sometimes, Rev. Proc. 99-32 closing agreement). The first section of that agreement includes the recitals, which are introductory, explanatory clauses beginning with the word “whereas“. Some recitals in the closing agreement are specifically negotiated, while others borrow standard terms from the IRS’ Rev. Proc. 99-32 Pattern Agreement. See Internal Revenue Manual (IRM) pt. 8.13.1-22 (Nov. 9, 2007). One of the specifically negotiated recitals states: “The Parties desire to enter into this closing agreement to resolve with finality certain issues identified below that the IRS reviewed during CAP, which impact the taxpayer’s tax year ended October 28,
After the recitals is a caption that states: “NOW IT IS HEREBY DETERMINED AND AGREED, for all Federal income tax purposes that“. This is standard wording from the IRS’ Rev. Proc. 99-32 Pattern Agreement. See IRM pt. 8.13.1-22; see also Rev. Proc. 68-16, sec. 6.05(3), 1968-1 C.B. 770, 779 (stating that the caption emphasizes the transition from the recitals to matters upon which the parties have agreed).
The “determined” clauses--those to which the parties agreed to be bound--follow the caption and include both standard and specifically negotiated terms. One of the determined clauses establishes five accounts receivable between petitioner and ADBV reflecting the difference between the 2% and 6% royalty rates for 2001-05. Each account was deemed to have been created as of the last day of petitioner’s taxable year to which it relates. The determined clause establishing the accounts receivable states: “Taxpayer has established intercompany Accounts Receivable, set forth below, which were recorded on Taxpayer’s books and treated as term loans to Controlled Entity [ADBV] reflecting the following balances, each such Account Receivable being deemed to have been created as of the last day of the taxable year to which it relates.” These deemed accounts receivable did not come into existence until the execution of the closing agreement.
Other determined clauses discuss, inter alia, payment of the accounts receivable,13 the tax implications of the payments,14
The IRS subsequently issued a notice of deficiency dated April 19, 2012, determining that the accounts receivable established under Rev. Proc. 99-32, supra, constituted an increase in related party indebtedness during petitioner’s testing period under
Discussion
I. Applicable Law and IRS Guidance
A. Section 965
The Commissioner has carved out an exception to the related party indebtedness rule for intercompany trade payables. Indebtedness arising in the ordinary course of business from sales, leases, licenses, or the rendition of services that a related person provides to or for a CFC is not related party indebtedness under
B. Secondary Adjustments Under Section 482
Because the primary and correlative allocations shift taxable income from one related party to the other, the entities must make so-called secondary or conforming adjustments to reconcile the entities’ cash accounts with their adjusted tax positions. See id. subpara. (3)(i). The regulations under
The Commissioner promulgated Rev. Proc. 99-32, supra, pursuant to the above-quoted regulation.17 Rev. Proc. 99-32, supra, permits qualifying U.S. taxpayers to make secondary adjustments by establishing an interest-bearing account receivable from, or payable to, its CFC in the amount of the primary transfer pricing adjustment in lieu of treating the adjustment as a deemed dividend or a capital contribution. Rev. Proc. 99-32, secs. 1, 4.01, 1999-2 C.B. at 297, 299.
For cases pending before the IRS, a taxpayer may elect treatment under Rev. Proc. 99-32, supra, by requesting the election in writing signed by a person with authority to sign the U.S. taxpayer’s Federal income tax returns and submitting the request before “closing action is taken on the primary adjustment.” Id. sec. 5.01(1), 1999-2 C.B. at 300. If the taxpayer qualifies, the IRS and the U.S. taxpayer will enter into a closing agreement under
Rev. Proc. 99-32, sec. 4.01, describes the features of an account established under these procedures. The account may be established and paid “without the Federal income tax consequences of the secondary adjustments that would otherwise result from the primary adjustment.” The account is deemed to have been created as of the last day of the taxable year for which the primary adjustment was made. It bears interest computed pursuant to section 1.482-2(a)(2), Income Tax Regs., from the day after the deemed establishment date. For purposes of section 1.482-2(a)(2)(iii), Income Tax
Rev. Proc. 99-32, sec. 4.03, clarifies that electing treatment under that revenue procedure does not affect the primary adjustment but affects the taxpayer’s taxable income and credits to the extent indicated in Rev. Proc. 99-32, sec. 4.01.19 Rev. Proc. 99-32, sec. 4.03, further states that the election eliminates “the collateral effects of secondary adjustments, such as those described in section 2 [regarding deemed dividend treatment].”
C. IRS Guidance on the Intersection of Section 965 and Rev. Proc. 99-32
No statutory or regulatory authority addresses the intersection of
In September 2008 the IRS Associate Chief Counsel (International) released Advice Memorandum AM 2008-010 (advice memorandum). The advice memorandum stated that an account receivable established under Rev. Proc. 99-32, supra, is treated as debt for purposes of
II. BMC Software, Inc. v. Commissioner
We first addressed the intersection of
A. Our Holding in BMC Software I
We began our analysis in BMC Software I with
“[a]n account reflecting a balance owed by the debtor.“’ See id. at 232-233 (quoting Black‘s Law Dictionary 18 (8th ed. 2004)).
We then analyzed the effect of the parties’ Rev. Proc. 99-32 closing agreement on our analysis of
B. The U.S. Court of Appeals for the Fifth Circuit‘s Holding in BMC Software II
BMC appealed our decision to the U.S. Court of Appeals for the Fifth Circuit. The Court of Appeals first considered
The Court of Appeals then considered whether the parties contractually agreed in the Rev. Proc. 99-32 closing agreement to treat the accounts receivable as related party indebtedness despite the plain language of
The Court of Appeals also distinguished Schering. The Court stated that Schering involved a collateral tax consequence that flowed from an action that the taxpayer had taken on the basis of a closing agreement, i.e., the payment of accounts receivable established under the predecessor of Rev. Proc. 99-32, supra.
However, the issue in BMC Software, Inc. was the tax consequences of the establishment of the accounts receivable themselves, not any action that BMC had taken as a result of the closing agreement. See BMC Software II, 780 F.3d at 678. Therefore, the Court of Appeals reversed our holding in BMC Software I.
Absent a stipulation to the contrary, this case is appealable to the U.S. Court of Appeals for the First Circuit, which has
III. Stare Decisis
The doctrine of stare decisis is important to this Court, and we are mindful of its role in this case. In Vasquez v. Hillery, 474 U.S. 254, 265-266 (1986), the Supreme Court stated:
[T]he important doctrine of stare decisis * * * [is] the means by which we ensure that the law will not merely change erratically, but will develop in a principled and intelligible fashion. * * * While stare decisis is not an inexorable command, the careful observer will discern that any detours from the straight path of stare decisis in our past have occurred for articulable reasons, and only when the Court has felt obliged “to bring its opinions into agreement with experience and with facts newly ascertained.” Burnet v. Coronado Oil & Gas Co., 285 U.S. 393, 412 (1932) (Brandeis, J., dissenting).
Our history does not impose any rigid formula to constrain the Court in the disposition of cases. Rather, its lesson is that every successful proponent of overruling precedent has borne the heavy burden of persuading the Court that changes in society or in the law dictate that the values served by stare decisis yield in favor of a greater objective. * * *
This case presents issues on which a Court of Appeals has reversed our prior decision. In such a scenario, “[c]learly * * * [we] must thoroughly reconsider the problem in the light of the reasoning of the reversing appellate court and, if convinced thereby, the obvious procedure is to follow the higher court.”22 Bayer v. Commissioner, 98 T.C. 19, 22 (1992) (quoting Lawrence v. Commissioner, 27 T.C. 713, 716-717 (1957), rev‘d on other grounds, 258 F.2d 562 (9th Cir. 1958)); see also Trout v. Commissioner, 131 T.C. 239, 245 n.6 (2008) (“But nothing in Golsen or in Lawrence precludes us from revisiting an issue, as we do here, when the issue on which there has been an intervening reversal arises anew.“). By revisiting the issues in BMC Software I, we are not capriciously disregarding our prior analysis but rather examining
Moreover, the principles in BMC Software I are not entrenched precedent. The issues in this case have come before us only once before, and no other opinions rely on or cite our previous holding. See Estate of Bradley v. Commissioner, 1 T.C. 518, 527 (1943) (holding that stare decisis was not an impediment to overruling a prior opinion when only two other cases relied on it), aff‘d, 140 F.2d 87 (2d Cir. 1944); cf. Hesselink v. Commissioner, 97 T.C. 94, 99 (1991) (stating that the application of stare decisis was “particularly apropos” because there were “numerous and consistent court opinions interpreting and/or applying” the previous holding). To our knowledge, no other Court of Appeals has spoken on the issues we consider today. Therefore, the important goals of stare decisis to ensure the “evenhanded, predictable, and consistent development of legal principles” and to “foster[] reliance on judicial decisions“, see Payne v. Tennessee, 501 U.S. 808, 827 (1991), are not served by our continued adherence to our previous Opinion. There has been no predictable or consistent development of the legal principles affecting this case. See Jefferson v. Commissioner, 50 T.C. 963, 967 (1968) (stating that stare decisis, “which arose from a necessity to preserve the harmony and stability of the law, requires adherence by courts to a principle of law [original emphasis] settled by a series of decisions” (last emphasis added)); cf. Stewart v. Commissioner, 127 T.C. 109, 114-116 (2006) (overturning a prior Tax Court opinion when a Court of Appeals had reversed our earlier opinion and we had examined the issue only once before); Lunsford v. Commissioner, 117 T.C. 159, 164 (2001) (overruling a case that the Court had decided in the early stages of its section 6320/6330 jurisprudence).
Generally, stare decisis is of particular importance in cases involving contract rights, because reliance interests are involved, Payne, 501 U.S. at 828, and cases involving statutory construction, because of the possibility of legislative intervention, John R. Sand & Gravel Co. v. United States, 552 U.S. 130, 131 (2008). Although contract rights are at issue here, we find it unlikely that the Commissioner would have relied to his detriment on our Opinion in BMC Software I by deciding to leave a section 965 provision out of future
On balance, we conclude that the importance of reaching the right result in this case outweighs the importance of following our precedent. But cf. Burnet v. Coronado Oil & Gas Co., 285 U.S. at 406 (Brandeis, J., dissenting) (“[I]n most matters it is more important that the applicable rule of law be settled than that it be settled right.“). We therefore conclude that stare decisis does not prevent us from reconsidering BMC Software I, and we do so below.
IV. Petitioner‘s Rev. Proc. 99-32 Closing Agreement
We first examine petitioner‘s Rev. Proc. 99-32 closing agreement to determine whether the parties contractually agreed to treat the accounts receivable as related party indebtedness for purposes of the DRD.23
A. Closing Agreements Generally
The Secretary is authorized to enter into closing agreements with taxpayers pursuant to
A closing agreement is “final and conclusive“, and it is binding on the parties “as to the matters agreed upon“. See
mentioned in the closing agreement.” Zaentz v. Commissioner, 90 T.C. 753, 766 (1988). The scope of a closing agreement is therefore strictly construed to encompass only the issues enumerated in the closing agreement
Closing agreements are contracts, and they are subject to the rules of Federal common law contract interpretation. See Long v. Commissioner, 93 T.C. 5, 10 (1989) (citing United States v. Lane, 303 F.2d 1, 4 (5th Cir. 1962)), aff‘d without published opinion, 916 F.2d 721 (11th Cir. 1990). Contracts are construed according to the intent of the parties as of the time of entering into the agreement. Id. Intent is inferred from the four corners of the agreement where the contract is unambiguous; extrinsic evidence may be used to discern intent where the contract has ambiguities. Rink v. Commissioner, 100 T.C. 319, 325 (1993), aff‘d, 47 F.3d 168 (6th Cir. 1995). The starting point for ascertaining the parties’ intent is the contract itself. See Nault v. United States, 517 F.3d 2, 4 (1st Cir. 2008) (quoting Filiatrault v. Comverse Tech., Inc., 275 F.3d 131, 135 (1st Cir. 2001)). The contract must be read as a whole, and the contract must be interpreted in context. See Kolbe v. BAC Home Loans Servicing LP, 738 F.3d 432, 439-440 (1st Cir. 2013) (and cases cited thereat). This is because “[t]he meaning of words * * * commonly depends on their context[.] * * * When the parties have adopted a writing as a final expression of their agreement, interpretation is directed to the meaning of that writing in the light of the circumstances.” 2 Restatement, Contracts 2d, sec. 202, cmt. b (1981).
B. Analysis of Petitioner‘s Rev. Proc. 99-32 Closing Agreement
1. The Four Corners of the Agreement
In BMC Software I, we held that a closing agreement that established similar accounts receivable “for Federal income tax purposes” created related party indebtedness under
However, in BMC Software I we did not consider the context in which the parties used the caption, which the rules of Federal common law contract interpretation require us to do. We therefore interpret the closing agreement by giving proper weight to the
The parties entered into the closing agreement against the backdrop of longstanding caselaw holding that “a court may not include as part of the agreement matters other than the matters specifically agreed upon and mentioned in the closing agreement.” See Zaentz v. Commissioner, 90 T.C. at 766. Comments in the IRM accompanying the IRS’ Pattern Agreement, from which much of the closing agreement‘s wording is derived, recognize and incorporate this principle. IRM pt. 8.13.1-22(E) para. (1) states: “Matters expressly determined in closing agreements are accorded finality under section 7121 of the Code. Though certain inferences and substantially automatic consequences may appear to logically flow from such determinations, these results cannot be considered to be matters determined with finality unless expressly provided for in the closing agreement.”25 Additionally, the closing agreement is self-limiting.
One of the separately negotiated recitals, while not binding on the parties, expressly conveys the parties’ intent to limit the scope of the closing agreement to “certain issues identified below“.26 Therefore, both the recitals in the closing agreement itself
A caption taken verbatim from the IRS’ Pattern Agreement is not a matter to which the parties specifically agreed. It is not a determined clause that binds the parties, but rather an introductory phrase that signals the transition from the recitals to the determined clauses.27 See Rev. Proc. 68-16, sec. 6.05(3). Therefore, our giving the phrase “for all Federal income tax purposes” a literal application would be to ignore our mandate to interpret a contract in context and would
broaden the scope of the closing agreement beyond what the parties intended.28 See 17A C.J.S., Contracts, sec. 399 (2011); cf. 11 Williston on Contracts, sec. 32:10 (4th ed. 1999) (“Even absent a true conflict, specific words will limit the meaning of general words if it appears from the whole agreement that the parties’ purpose was directed solely toward the matter to which the specific words or clause relate.“); see also New Seabury Co. Ltd, P‘ship v. New Seabury Props., LLC ( In re New Seabury Co. Ltd. P‘ship), 450 F.3d 24, 35 (1st Cir. 2006) (“Courts will not read language into a contract where it does not appear.“); Estate of Magarian v. Commissioner, 97 T.C. at 5-6 (holding that the taxpayer and the
Commissioner did not agree to additions to tax when the closing agreement did not specifically mention them).
The determined clauses--in which the parties specifically stated to what they agreed--established the accounts receivable as described in Rev. Proc. 99-32, sec. 4.01; provided for the rates and amounts of interest; and described the methods by which ADBV paid the accounts, including the tax implications of the payments. Certain matters with respect to the accounts, such as the tax consequences of ADBV‘s payment of the account, were specifically enumerated. Any tax implication of the establishment of the accounts themselves was not, and the closing agreement does not mention section 965. See BMC Software II, 780 F.3d at 676-677 (finding that the closing agreement in that case did not extend to section 965 because that agreement enumerated other specific tax consequences).
Because the parties enumerated in considerable detail the tax consequences of the closing agreement, we find that these specific clauses must be interpreted to limit the phrase “for all Federal income tax purposes“. We therefore hold that when the parties signed the closing agreement they did not manifest an intent with respect to
The dissent would have us give the phrase “for all Federal income tax purposes” a literal interpretation and ignore the intent of the parties. The parties signed a closing agreement that enumerated specific tax consequences, and section 965 was not specifically enumerated.29 Although this phrase is
agreed, in the boilerplate provision, to treat the accounts receivable as retroactive indebtedness for all Federal tax purposes, then these additional provisions would be surplusage.” (Alteration in original)). We focus our analysis on specific tax implications enumerated in the closing agreement as evidence of the parties’ intent rather than a general provision that is intended as a transition from the recitals to the determined clauses.
We also read the holding in Schering Corp. v. Commissioner, 69 T.C. 579, to be consistent with our holding. In Schering a U.S. corporation entered into a Rev. Proc. 65-17 closing agreement that established accounts receivable to effect secondary adjustments between the corporation and its Swiss CFC. The taxing authority in Switzerland considered the CFC‘s payment of the account receivable to be a taxable dividend, and the CFC paid the tax as a withholding agent for the U.S. corporation.
Although the U.S. taxpayer‘s closing agreement stated that the repatriation would be free of Federal income tax consequences, we allowed the taxpayer a section 901 foreign tax credit with respect to the entire Swiss dividend tax. In so doing, we looked to the closing agreement as a whole and held that the phrase “free of further Federal income tax consequences” showed only the parties’ intent that the taxpayer would not have gross income upon receipt of the CFC‘s payment of the account “and that it was not intended to determine
In BMC Software I, 141 T.C. at 236, we interpreted Schering to hold that “[t]he closing agreement did not preclude all tax consequences” and therefore used it as support for our holding that BMC‘s closing agreement established accounts receivable “for all Federal income tax purposes“, including under
We also held in Schering that Rev. Proc. 65-17, 1965-1 C.B. 833, which we “construed to mean only that the United States parent is not required to recognize gross income under section 301 upon receipt of payment of the account receivable“, did not preclude the taxpayer‘s ability to take a foreign tax credit. Id. at 597-598. Similarly, we do not read Rev. Proc. 99-32, supra, to engender a particular result under section 965. Rev. Proc. 99-32, sec. 4.01, states that it allows a U.S. taxpayer to establish and pay an account receivable to repatriate the cash attributable to a primary adjustment “without the Federal income tax consequences of the secondary adjustments that would otherwise result from the primary adjustment.” This phrase refers only to the revenue procedure‘s purpose of allowing a taxpayer to avoid deemed dividend treatment. Although the revenue procedure treats payment of the account receivable “as a payment of the account for all Federal income tax purposes“, see id. sec. 4.01(4), it does not address any tax implications of establishing an account.
2. Extrinsic Evidence of the Parties’ Intent
Assuming arguendo that the parties’ Rev. Proc. 99-32 closing agreement is ambiguous, we examine extrinsic evidence of the parties’ intent and apply principles of contract interpretation to that evidence. See Elrod v. Commissioner, 87 T.C. 1046, 1066 (1986) (explaining that we consider extrinsic evidence to interpret contract terms or to explain the purpose and intention of contracting parties when the contract is ambiguous). Under the rules of Federal common law contract interpretation, when contracting parties have attached different meanings to a contract or a contract term, the ambiguous term “is interpreted in accordance with the meaning attached by one of them if at the time the agreement was made * * * that party did not know [or had no reason to know] of any different meaning attached by the other, and the other knew [or had reason to know] the meaning attached by the first party“. 2 Restatement, Contracts 2d, sec. 201(2); see Rink v. Commissioner, 100 T.C. at 326-327. Respondent contends that, if the closing agreement is ambiguous, petitioner had reason to know of respondent‘s intent to treat the accounts receivable as related party indebtedness because he stated that position (1) in Notice 2005-64, sec. 10.06 and (2) to petitioner orally and in the NOPA in 2007. Respondent therefore asserts that petitioner should be bound to respondent‘s understanding of the closing agreement.
Assuming arguendo that petitioner knew or had reason to know of respondent‘s position--despite the advice memorandum‘s recommendation that all closing agreements under Rev. Proc. 99-32, supra, include a provision addressing
explain proposed changes to a taxpayer‘s return. See IRM pt. 4.46.3.3.3.4(1)(d) (Dec. 29, 2009). Under the IRM, “unless the taxpayer‘s agreement to an issue is fully documented by the signing of Form 870, the issue will be treated as unagreed“. Id. Petitioner did not agree to the adjustments, which put respondent on notice that petitioner did not agree with his position regarding section 965.
V. Applicable Federal Law
Closing agreements do not preclude the imposition of otherwise applicable law unless the parties explicitly agree on that point. Bush v. United States, 84 Fed. Cl. 90, 95 (2008) (citing Estate of Magarian v. Commissioner, 97 T.C. at 6-
7)). The Rev. Proc. 99-32 closing agreement does not provide for a particular result under
The amount of dividends which would (but for this paragraph) be taken into account under subsection (a) shall be reduced by the excess (if any) of--
(A) the amount of indebtedness of the controlled foreign corporation to any related person (as defined in
section 954(d)(3) ) as of the close of the taxable year for which the election under this section is in effect, over(B) the amount of indebtedness of the controlled foreign corporation to any related person (as so defined) as of the close of October 3, 2004.
In BMC Software I, 141 T.C. at 232-233, we determined that a Rev. Proc. 99-32 account receivable was “indebtedness” under
The U.S. Court of Appeals for the Fifth Circuit, holding that the closing agreement did not alter the application of
Upon consideration, we agree with the Court of Appeals’ analysis that, under the plain meaning of
Accordingly, we hold under
VI. Conclusion
We hold that the accounts receivable did not constitute indebtedness under
We have considered the parties’ remaining arguments, and to the extent not discussed above, conclude those arguments are irrelevant, moot, or without merit.
To reflect the foregoing,
Decision will be entered for petitioner.
FOLEY, VASQUEZ, GALE, THORNTON, HOLMES, PARIS, KERRIGAN, BUCH, LAUBER, NEGA, PUGH, and ASHFORD, JJ., agree with this opinion of the Court.
LAUBER, J., concurring: I join the opinion of the Court without reservation and write briefly in response to the dissent. The dissent is based on the presence of the word “all” in the introduction to the Analog Devices closing agreement, a word that does not appear in the introduction to the BMC Software closing agreement. Although I am a strong advocate of paying close attention to texts, I think the dissent points to a distinction without a difference.
First, as emphasized by the Court of Appeals for the Fifth Circuit in BMC Software v. Commissioner, 780 F.3d 669, 676 (5th Cir. 2015), rev’g 141 T.C. 224 (2013), and by the Court here, see op. Ct. p. 11, the introductory reference to “Federal income tax purposes” is part of the boilerplate that appears in all closing agreements. It simply recites that the parties are entering into the closing agreement to resolve a Federal tax dispute (as opposed to a corporate or an antitrust dispute) and that the agreements within the body of the document are made for Federal income tax purposes. This is truly boilerplate, in part because the point it makes is obvious. This introduction does not itself constitute an agreement but simply tells us the purpose for which the parties are entering into the specific, itemized agreements that follow. The precise form this boilerplate takes should not be outcome determinative, as the dissent would make it.
Second, I do not believe that the presence or absence of the word “all” changes the meaning. Suppose Taxpayer X reaches an agreement with the Internal Revenue Service that, “for purposes of computing X’s Federal income tax liability for 2015, her itemized deductions shall be $20,000.” Would the meaning change if the agreement read “for all purposes of computing X’s Federal income tax liability for 2015”? I do not think so. When we say “for purposes” without any conditions, we mean “for all purposes.” In short, I see no meaningful distinction between these two forms of boilerplate.
Under Rev. Proc. 99-32, 1999-2 C.B. 296, this treatment is elective with the taxpayer. The parties entered into the closing agreement in order to square the accounts between the U.S. parent and the foreign affiliate and get the cash in the right place without payment of a taxable dividend. It makes little sense to treat the deemed retroactive creation of accounts receivable, to which the parties agreed for a very limited purpose in 2009, as actual debt that existed in 2005.
In an effort to justify giving the word “all” outcome-determinative force, the dissent quotes a portion of a sentence from the Court of Appeals’ BMC Software opinion. The dissent implies that the Court of Appeals noted the absence of the word “all” from the closing agreement and suggested that it might have decided the case differently if the word “all” had been included. See dissenting op. p. 51. That is not at all what the Court of Appeals said or implied, and this selective quotation is taken out of context.
The Court of Appeals rejected the Commissioner’s submission that the parties had agreed to backdate the accounts receivable for all Federal tax purposes, concluding instead that the parties had agreed to backdate the accounts receivable only for “those tax consequences that * * * [the closing agreement] expressly enumerates.” BMC Software, Inc., 780 F.3d at 677. The Court of Appeals based this conclusion on two canons of construction: expressio unius est exclusio alterius and the antisurplusage canon.
The sentence from which the dissent’s squib is excerpted was part of this analysis and reads in full as follows: “If the parties agreed, in the boilerplate provision, to treat the accounts receivable as retroactive indebtedness for all federal tax purposes, then these additional provisions would be surplusage.” Id. at 676. The Court of Appeals in this sentence was not saying that it might have reached a different outcome if the boilerplate phrase had included the word “all.” It was saying that the boilerplate phrase (however drafted)
MARVEL, GALE, HOLMES, BUCH, NEGA, and ASHFORD, JJ., agree with this concurring opinion.
GUSTAFSON, J., dissenting: The taxpayer executed an agreement with the Internal Revenue Service that provides (with boldface added here):
NOW IT IS HEREBY DETERMINED AND AGREED, for all Federal income tax purposes that: * * *
3) Accounts Receivable Established by Taxpayer.
a) Taxpayer has established intercompany Accounts Receivable, set forth below, which were recorded on Taxpayer’s books and treated as term loans to Controlled Entity reflecting the following balances, each such Account Receivable being deemed to have been created as of the last day of the taxable year to which it relates.
Today the Tax Court effectively edits this provision to delete “all” and to provide instead that the agreement is only for some Federal income tax purposes, excluding the dividends received deduction of section 965. I would not do so.
The agreement is on Form 906, “Closing Agreement on Final Determination Covering Specific Matters”. The “specific matters” it addresses are the royalties deemed paid to the taxpayer by its subsidiary, the resulting increase in the taxpayer’s income, and the resulting accounts receivable and payable on the books of the taxpayer and the subsidiary. The agreement does not specifically mention section 965 or the dividends received deduction. Likewise, it does not mention section 6601 or the underpayment interest yielded by the agreement, nor even section 11 or the income tax liability yielded by the agreement. Such specific mentions were not necessary. The agreement is “for all Federal income tax purposes” (emphasis added), and that would include sections 11, 6601, and 965.
In BMC Software, the Court of Appeals invoked the anti-surplusage canon, and the majority attempts to do the same here, see op. Ct. p. 23, but for materially different language. That canon tells us to prefer an interpretation that gives meaning to all the contractual provisions and renders none surplus. The canon is not properly consulted to save one contractual provision from redundancy by giving no effect to another contractual provision, but that is what the Tax Court does today: It gives no meaning whatsoever to “all” but decides instead that “all” is simply to be ignored; and it violates the canon by rendering that word itself to be surplusage. As to the expressio unius est exclusio alterius canon invoked in BMC Software by the Court of Appeals and in the concurring opinion, “The doctrine properly applies only when the unius (* * * the thing specified) can reasonably be thought to be an expression of all that shares in the grant * * * involved.” A. Scalia & B. Garner, Reading Law: The Interpretation of Legal Texts 107 (2012). Particular consequences enumerated in a closing agreement cannot reasonably be thought to implicitly exclude other consequences where the opening words of the agreement explicitly provide for “all” consequences.
The majority asserts, see op. Ct. p. 32, that this phrase “is not a matter to which the parties specifically agreed.” The word “specifically” saves this statement from being an outright error, since evidently the parties did not bargain over the wording of this phrase. However, the parties did agree to this wording when they signed the agreement. This wording
The majority, see op. Ct. pp. 32-33, 37, explicitly decides not to “giv[e] the phrase ‘for all Federal income tax purposes’ a literal application”, but I would do so.
COLVIN, GOEKE, and MORRISON, JJ., agree with this dissent.