Dover Corp. v. Comm'rDover Corp. v. Comm'r
Lead Opinion
OPINION
Dover Corp. (petitioner) is the common parent of an affiliated group of corporations making a consolidated return of income (the group or affiliated group). By notice of deficiency dated September 14, 2000 (the notice), respondent determined deficiencies in Federal income tax for
Unless otherwise stated, all section references are to the Internal Revenue Code in effect for 1997, the year at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
Background
Introduction
This case was submitted for decision without trial pursuant to Rule 122. Facts stipulated by the parties are so found. The stipulation of facts filed by the parties, with attached exhibits, is included herein by this reference. Respondent objects, on the grounds of relevance, to 26 exhibits referenced in certain of the stipulations. See the discussion infra section IV.
Petitioner is a Delaware corporation, whose shares are publicly traded and which maintains its principal place of business in New York, New York.
Business Activities of the Affiliated Group
Together, the affiliated group is a diversified industrial manufacturer, producing through its members and foreign subsidiaries a broad range of products and sophisticated manufacturing equipment for other industries and businesses. During and prior to 1997, the group’s business activities were divided into five business groups, one of which was known as Dover Elevator.
Dover Elevator
Dover Elevator, like each of the other business groups, was managed by a headquarters corporation, Dover Elevator
Sale of H&C
On June 30, 1997, Dover UK and petitioner entered into an agreement with Thyssen Industrie Holdings U.K. plc (Thyssen), a German corporation registered in England and Wales, and its German parent, Thyssen Industrie AG, for the sale by Dover UK to Thyssen of the entire issued share capital of H&C (the agreement or stock sale agreement). The agreement provided that it and other specified documents and agreements relating to the sale were to be held in escrow until the “Escrow Release Date” (July 11, 1997), by which time it was anticipated that the purchaser would have “completed its due diligence inquiries, and * * * determined that it does wish to proceed with * * * [the sale]” (the “escrow condition”). Dover UK, as “Vendor”, also agreed to accomplish certain document deliveries and undertakings by July 11, at which time Thyssen, as “Purchaser”, was required to “satisfy the consideration for the Shares”. Dover UK also agreed to carry on the H&C business “in the normal course without any interruption” between June 30 and July 11, 1997. On July 11, 1997, Thyssen notified Dover UK that the escrow condition had been satisfied, and (we assume, since there is no stipulation) the purchase price was received by Dover.
Petitioner obtained an opinion of UK counsel dated July 3, 2001, that, as a matter of English law, beneficial title to the
Retroactive Election To Treat H&C as a Disregarded Entity
By letter dated December 3, 1998, petitioner, on behalf of its (then) former indirect subsidiary, H&C, requested that respondent grant an extension of time, pursuant to sections 301.9100-l(c) and 301.9100-3, Proced. & Admin. Regs., for H&C to file a retroactive election to be a disregarded entity for Federal tax purposes (the request for 9100 relief). Specifically, petitioner requested: “H&C be granted an extension of time to make an election: (a) * * * to be disregarded as an entity separate from its owner for U.S. tax purposes and (b) effective immediately prior to the sale of stock in H&C by Dover UK to Thyssen UK.”
Initially, respondent was reluctant to grant the request for 9100 relief, in large part because, in respondent’s view, petitioner should not be entitled to benefits it might claim resulted from the disregarded entity election; i.e., the avoidance of FPHCI on the deemed sale of the H&C assets. However, after representatives of petitioner and respondent conferred, and petitioner made a supplemental submission, respondent, on March 31, 2000, granted the requested relief. Specifically, respondent granted to H&C “an extension of time for making the election to be disregarded as an entity separate from its owner for federal tax purposes, effective immediately prior to the sale on * * * [June 30, 1997
no inference should be drawn from this letter that any gain from the sale of* * * [H&C’s] assets immediately following its election to be disregarded as an entity separate from its owner gives rise to gain that is not foreignpersonal holding company income as defined in section 954(c)(1)(B) of the Internal Revenue Code.
On or about October 10, 1999, H&C made an election on Form 8832 to be disregarded as a separate entity. The Form 8832 specifies that the election is to be effective beginning June 30, 1997.
Discussion
I. Introduction
This case presents an issue of first impression and, insofar as we are aware, the first occasion that any court has had to opine on the impact of the so-called check-the-box regulations on the application of a specific provision of the Internal Revenue Code of 1986 (the Code), in this case, section 954(c)(l)(B)(iii) (defining, in part, FPHCl).
II. Code and Regulations
A. The Code
The provision of the Code principally at issue is section 954. Section 954 is found in subpart F of part III, subchapter N, chapter 1, subtitle A of the Code (subpart F), which encompasses sections 951-964. Subpart F is concerned with controlled foreign corporations (CFCs). Neither party disputes that, in 1997, both Dover UK and H&C (up until it became a disregarded entity) were CFCs, as that term is defined in section 957(a). Section 951 provides that each U.S. shareholder of a CFC shall include in gross income certain amounts, including “his pro rata share * * * of the * * * [cfc’s] subpart F income” for the taxable year. Sec. 951(a)(l)(A)(i).
SEC. 954 (c). Foreign Personal Holding Company Income.—
(1) In general. — For purposes of subsection (a)(1), the term “foreign personal holding company income” means the portion of the gross income which consists of:
(B) Certain property transactions. — The excess of gains over losses from the sale or exchange of property—
(iii) which does not give rise to any income.
B. The Regulations
1. Regulations Under Section 954(c)(l)(B)(iii)
In pertinent part, section 1.954-2(e)(3), Income Tax Regs., which defines “property that does not give rise to income”, provides:
(3) Property that does not give rise to income. Except as otherwise provided in this paragraph (e)(3), for purposes of this section, the term property that does not give rise to income includes all rights and interests in property (whether or not a capital asset) including, for example, forwards, futures and options. Property that does not give rise to income shall not include—
(ii) Tangible property (other than real property) used or held for use in the controlled foreign corporation’s trade or business that is of a character that would be subject to the allowance for depreciation under section 167 or 168 and the regulations under those sections (including tangible property described in section 1.167(a)-2);
(iii) Real property that does not give rise to rental or similar income, to the extent used or held for use in the controlled foreign corporation’s trade or business;
(iv) Intangible property (as defined in section 936(h)(3)(B)), goodwill or going concern value, to the extent used or held for use in the controlled foreign corporation’s trade or business[.]
In pertinent part, section 1.954-2(a)(3), Income Tax Regs., provides: “The use * * * for which property is held is that use * * * for which it was held for more than one-half of the period during which the controlled foreign corporation held the property prior to the disposition.”
a. Development and Issuance of the Regulations
The Commissioner announced, in Notice 95-14, 1995-
In 1996, the written comments and public hearing were followed by the issuance of, first, proposed and, then, final classification regulations. See PS-43-95, Proposed Income Tax Regs., 61 Fed. Reg. 21989 (May 13, 1996) (the proposed regulations); T.D. 8697 (Dec. 18, 1996), 1997-
Not only did both sets of regulations permit most domestic (unincorporated) and foreign business organizations to elect between association and partnership classification for Federal tax purposes, as first proposed in Notice 95-14,
The final regulations became effective as of January 1, 1997, with a special transition rule for existing entities. T.D. 8697, 1997-
The preamble to the final regulations contains the following warning to taxpayers:
in light of the increased flexibility under an elective regime for the creation of organizations classified as partnerships, Treasury and the IRS will continue to monitor carefully the uses of partnerships in the international context and will take appropriate action when partnerships are used to achieve results that are inconsistent with the policies and rules of particular Code provisions or of U.S. tax treaties. [T.D. 8697, 1997-1 C.B. at 216 .]
The preamble to the proposed regulations contains a substantially identical warning, except that the promise is to “issue appropriate substantive guidance” rather than “take appropriate action” with regard to the use of partnerships for what Treasury and IRS consider improper purposes in the international context. See 61 Fed. Reg. 21990 (May 13, 1996). We surmise that the change in language signaled an intent
b. Amendments to the Regulations
Since they were issued, the (final) check-the-box regulations have been amended several times. The only relevant amendments were additions to the regulations that, together, constitute the existing paragraph (g) of section 301.7701-3, Proced. & Admin. Regs. See T.D. 8844, 1999-
c. Applicable Provisions of the Regulations
Section 301.7701-3(a), Proced. & Admin. Regs., sets forth the general rule that “[a] business entity that is not classified as a corporation * * * can elect its classification for federal tax purposes as provided in this section”.
In pertinent part, section 301.7701-3(g)(l)(iii), Proced. & Admin. Regs., provides:
(iii) Association to disregarded entity. If an eligible entity classified as an association elects * * * to be disregarded as an entity separate from its owner, the following is deemed to occur: The association distributes all ofits assets and liabilities to its single owner in liquidation of the association.
Section 301.7701-2(a), Proced. & Admin. Regs., states that, “if * * * [an] entity is disregarded, its activities are treated in the same manner as a sole proprietorship, branch, or division of the owner”.
Under section 301.7701-3(c)(l)(i), Proced. & Admin. Regs., a classification election, including an election to change classification, is made by filing a Form 8832 with the IRS service center designated on that form. Under subdivision (iii), the election is effective “on the date specified by the entity on Form 8832” if, as in this case, one is specified.
Under section 301.7701-3(g)(3)(i), Proced. & Admin. Regs., an election to change classification “is treated as occurring at the start of the day for which the election is effective”, and “[a]ny transactions that are deemed to occur * * * as a result of a change in classification [e.g., in the case of a change in classification from association to disregarded entity, the deemed liquidation] are treated as occurring immediately before the close of the day before the election is effective”. For example, if H&C’s disregarded entity election is effective as of the start of business on June 30, 1997, the deemed liquidation of H&C is treated as occurring immediately before the close of business on June 29, 1997.
The making of a disregarded entity election “is considered to be the adoption of a plan of liquidation immediately before the deemed liquidation”, thereby qualifying the parties to the deemed liquidation for tax-free treatment under sections 332 and 337. Sec. 301.7701 — 3(g)(2)(ii), Proced. & Admin. Regs.
Lastly, section 301.7701-3(g)(2)(i), Proced. & Admin. Regs., provides:
(2) Effect of elective changes. — {i) In general. The tax treatment of a change in the classification of an entity for federal tax purposes by election under paragraph (c)(l)(i) of this section is determined under all relevant provisions of the Internal Revenue Code and general principles of tax law, including the step transaction doctrine.
The preamble to the 1997 proposed regulations, which contains the identical provision, explains the purpose of the above quoted provision:
This provision * * * is intended to ensure that the tax consequences of an elective change will be identical to the consequences that would have occurred if the taxpayer had actually taken the steps described in the * * * regulations. [REG-105162-97, 62 Fed. Reg. 55768 (Oct. 28, 1997).]
III. Summary of the Parties’ Arguments
A. Petitioner’s Argument
Petitioner argues that, by permitting a corporate taxpayer to “disregard” the separate entity status of a subsidiary and, instead, treat the subsidiary’s business as a hypothetical branch or division of the parent, the check-the-box regulations override the principle, based upon Moline Props., Inc. v. Commissioner,
Alternatively, petitioner argues that, giving effect to the “plain and ordinary meaning” of section 954(c)(l)(B)(iii), Dover UK’s deemed sale of the operating assets of H&C “could not possibly have been a sale of property ‘which does not give rise to any income’ because those assets were components of an active, ongoing commercial enterprise, which did give rise to income.” Therefore, petitioner argues that, because the requirement in section 1.954 — 2(e)(3)(ii) through (iv), Income Tax Regs., that such assets be used in the seller’s trade or business goes beyond the narrow statutory mandate that such assets simply not be property “which does not give rise to any income”, that regulation is invalid.
Respondent argues that the deemed sale of the H&C operating assets was not a sale of property used or held for use in Dover UK’s business. Therefore, respondent continues, that property was not excluded from the definition of property “which does not give rise to any income” pursuant to section 1.954-2(e)(3)(ii) through (iv), Income Tax Regs., and its deemed sale by Dover UK gave rise to FPHCI taxable to petitioner. Secs. 951(a)(l)(A)(i), 952(a)(2), 954(a)(1), (c)(l)(B)(iii).
Based primarily on the statutory language and legislative history of section 954(c)(1)(B), respondent also rejects petitioner’s argument that section 1.954-2(e)(3)(ii) through (iv), Income Tax Regs., is invalid.
IV. Motion and Evidentiary Objection
A. Petitioner’s Motion To Strike
1. Introduction
On July 14, 2003, after the parties’ submission of briefs, pursuant to Rule 52, petitioner moved to strike respondent’s argument that, as a matter of law, the doctrine of duty of consistency mandates a finding that Dover UK’s sale of H&C stock to Thyssen was completed as of June 30, 1997, not July 11, as urged by petitioner.
2. Duty of Consistency Argument
In its motion, petitioner denies that it is attempting to “change or recharacterize the facts [regarding the date of the sale of the H&C stock] in this fully stipulated case” or that it has “acted in a deceitful or misleading way” as implied by respondent. Rather, petitioner states that (1) the issue as to whether the stock sale agreement provided for a June 30 or July 11 sale of the H&C stock presents an issue of law and (2) its prior representation that the date of sale was June 30, 1997, constituted “a clear cut mistake of law * * * not a misrepresentation of fact”. Petitioner also argues that respondent was not surprised by petitioner’s argument because, on December 12, 2001, more than a year before it filed its opening brief, on March 5, 2003, petitioner apprised respondent of its new position regarding the date of sale. That notification
Respondent objects to petitioner’s motion on the ground that (1) respondent’s position is nothing more than a legitimate legal argument and (2) petitioner has not shown that respondent’s arguments are “redundant, immaterial, impertinent, frivolous, or scandalous matter” within the meaning of Rule 52.
In essence, petitioner’s motion raises the issue of whether we should strike respondent’s attack on petitioner’s argument that the sale of the H&C stock occurred on July 11, 1997, the date referred to in the stock sale agreement as the “escrow release date”, rather than on June 30, 1997, the date of that agreement and the date represented by petitioner to be the date of sale in the request for 9100 relief. In framing that issue, the parties have assumed that, were we to find that the stock sale occurred on July 11, 1997, rather than on June 30, 1997, there necessarily would be an 11-day period between the deemed liquidation of H&C into Dover UK and Dover UK’s deemed sale of the H&C operating assets, during which period Dover UK must be deemed to have operated the H&C business as its own. Under those circumstances, petitioner’s assertion that Dover UK’s deemed sale of the H&C operating assets constituted a sale of property used in its (Dover UK’s) business is arguably more persuasive than it would be if the assets are deemed to have been sold immediately after the deemed liquidation of H&C.
The underlying assumption by both parties is that, whether the sale of the H&C stock (and, therefore, the deemed sale of H&C’s assets) occurred on June 30 or July 11, 1997, the deemed liquidation of H&C is considered to have occurred immediately before the close of business on June 29, 1997, the day before the effective date of H&C’s disregarded entity election, as specified in the Form 8832 filed by H&C. See sec. 301.7701-3(c)(l)(iii), (g)(3)(i), Proced. & Admin. Regs. We question that underlying assumption. In its initial request for 9100 relief, petitioner specifically requested that “H&C be granted an extension of time to make * * * [a disregarded entity election] effective immediately prior to the sale of stock in H&C by Dover UK to Thyssen UK”. (Emphasis
Because resolution of the date-of-sale issue is unnecessary to our decision in this case, the issue as to whether respondent’s duty of consistency argument should be stricken is essentially moot.
3. Conclusion
Petitioner’s motion to strike will be denied.
B. Respondent’s Objection to Stipulated Exhibits
The exhibits to which respondent objects on the grounds of relevance were all executed in connection with the sale of the H&C stock to Thyssen. They were introduced by petitioner in order to show the multiplicity of steps taken and documents executed between June 30 and July' 11, 1997, in order to complete the sale in accordance with the terms of the June 30, 1997, agreement. As stated supra section IV.A.2., our decision in this case does not depend upon the actual date of
V. Status of the H&C Assets as Assets Used in Dover UKs Business: Application of Section 1.954 — 2(e)(3), Income Tax Regs.
A. Introduction
Petitioner argues that Dover UK’s deemed sale of the H&C assets qualifies as a sale of property used in Dover UK’s trade or business. Therefore, pursuant to section 1.954-2(e)(3)(ii) through (iv), Income Tax Regs., that property is not, within the meaning of section 954(c)(l)(B)(iii), property “which does not give rise to any income”, and Dover UK’s sale does not give rise to fphci taxable to petitioner. In support of its argument, petitioner relies upon the check-the-box regulations and revenue rulings previously issued by respondent. Respondent disagrees on the basis of caselaw, which he cites in support of his argument that Dover UK’s deemed sale of the H&C operating assets did not constitute a sale of assets “used or held for use” in Dover UK’s business within the meaning of section 1.954-2(e)(3)(ii) through (iv), Income Tax Regs.
B. The Relevant Authorities
1. Section 301.7701 — 2(a), Proced. & Admin. Regs.
Petitioner argues that “the check-the-box regulations * * * impose continuity of business enterprise as a consequence of * * * [a disregarded entity] election”, citing section 301.7701-2(a), Proced. & Admin. Regs. In pertinent part, that regulation provides: “If * * * [a business entity with only one owner] is disregarded, its activities are treated in the same manner as a sole proprietorship, branch or division of the owner.”
Petitioner argues: “As a consequence [of the above-quoted regulation], there was as a matter of law and under respondent’s own check-the-box regulations * * * a continuing business use of H&C’s assets, which were deemed to be a branch or division of Dover UK.”
Petitioner also argues that respondent’s position in this case is “wholly inconsistent with” his position contained in published revenue rulings, which, under principles derived from the attribute carryover rules of section 381(c) applicable to section 332 liquidations, “unequivocally attribute the trade or business of a subsidiary that is liquidated under section 332 to its parent.” Therefore, because H&C’s disregarded entity election involved a deemed section 332 liquidation of H&C, see sec. 301.7701-3(g)(l)(iii) and (2)(ii), Proced. & Admin. Regs., petitioner concludes that respondent’s position violates the principle of Rauenhorst v. Commissioner,
The revenue rulings cited by petitioner involve the question of whether the liquidation of a subsidiary followed by a pro rata distribution of the proceeds of the sale of the subsidiary’s assets to the parent’s shareholders in partial redemption of the parent’s stock may qualify as a partial liquidation of the parent under former section 346(a)(2).
The seminal ruling upon which petitioner relies is Rev. Rul. 75-223, 1975-
The revenue ruling, after noting that “[t]he business activities of a subsidiary are not generally considered to be business activities of its parent corporation”, recognizes that, under a section 332 liquidation (where the carryover basis rules of section 334(b)(1) apply), “[s]ection 381, in effect integrates the past business results of the subsidiary (as represented by its earnings and profits, net operating loss carryover, etc.) with those of the parent corporation.” Rev. Rul. 75-223, 1975-
For most practical purposes, the parent corporation, after the liquidation of the subsidiary, is viewed as if it has always operated the business of the liquidated subsidiary. Consequently, there is no meaningful distinction, for purposes of section 346(a)(2), between a corporation that distributes the assets of a division, or the proceeds of a sale of those assets, and a parent corporation that distributes assets of a subsidiary, or the proceeds of a sale of such assets, received from the subsidiary in a liquidation governed by sections 332 and 381. [Id.]
Accordingly, the ruling holds that, in situations 1 and 2, “the fact that the distributions * * * were attributable to assets that were used by a subsidiary rather than directly by the parent will not prevent the distribution from qualifying as a ‘genuine contraction of the corporate business’ of the parent
In Chief Counsel Memorandum (G.C.M.) 37,054 (Mar. 21, 1977),
Under that Ruling [Rev. Rul. 75-223] and G.C.M. 35246 a distribution by a parent corporation of the assets of a subsidiary (or the proceeds of a sale of such assets) received in a liquidation governed by Code sections 332 and 381 is to be treated no differently than a distribution by a corporation of the assets of a branch or division (or the proceeds of a sale of such assets).
Respondent reaffirmed his Rev. Rul. 75-223 position in Rev. Rul. 77-376, 1977-
Respondent has also reaffirmed his Rev. Rul. 75-223 position in the context of transactions other than partial liquidations. See, e.g., Priv. Ltr. Rul. 80-19-058 (Feb. 13, 1980), involving an amalgamation of a U.S. shareholder’s Country X CFCs, which qualified as a “corporate acquisition” within
3. The Caselaw
Respondent relies principally upon four cases in support of his argument that the H&C assets were not used in Dover UK’s business before their deemed sale by Dover UK: Reese v. Commissioner,
a. Reese v. Commissioner
In Reese, the taxpayer financed the construction of a manufacturing plant, which he intended to sell to investors who would agree to lease the building to a corporation for use in the corporation’s manufacturing business. The taxpayer was the chief officer and principal shareholder of the corporation. The partially completed plant was sold at a loss to satisfy a judgment against the taxpayer. The issue was whether the loss was capital or ordinary. The taxpayer argued for ordinary loss treatment on the ground that the plant was either (1) held primarily for sale to customers in the ordinary course of his construction business or (2) used in a trade or business, excludable, in either case, from capital asset status under what, respectively, are now paragraphs (1) and (2) of section 1221(a). The Court of Appeals for the Fifth Circuit found that (1) the taxpayer’s activities in financing and acting as builder, developer, and general contractor for the construction of the plant between 1968 and 1970, when the building was sold, constituted “an isolated, non-recurring venture”, which did not constitute a trade or business, and (2) the property sold was intended for use by the corporation in its manufacturing business, not by the taxpayer in his business of being a corporate executive. Reese v. Commissioner,
In support of his argument that Dover UK’s deemed holding of the H&C operating assets “for only a moment before the sale” did not transform those assets into assets used in Dover UK’s business, respondent relies on the conclusion of the Court of Appeals in Reese that an “isolated, non-recurring
b. Ouderkirk v. Commissioner and Azar Nut Co. v. Commissioner
Ouderkirk v. Commissioner,
In Ouderkirk, as in Reese v. Commissioner, supra, the issue was whether the property in question had a business connection sufficient to require its exclusion from the definition of a capital asset (in Ouderkirk, as property used in a trade or business, and, in Reese, as inventory type property). Therefore, Ouderkirk, like Reese, is distinguishable from this case, where the issue is whether assets undeniably used in a trade or business were used in a trade or business conducted by Dover UK.
In Azar Nut Co. v. Commissioner,
In Aero Manufacturing Co. v. Commissioner,
The taxpayer argued that the non-capital-asset character of the assets in Button’s hands should carry over to the taxpayer after the section 332 liquidation because, under the section 1223(2) holding period “tacking” provisions, the taxpayer is deemed to have held or owned those assets while they were used by Button in the conduct of its business. Acro Manufacturing Co. v. Commissioner, supra at 383. Respondent, while admitting that the assets distributed to the taxpayer in connection with the section 332 liquidation of Button were not capital assets in Button’s hands, argued that, because the former Button assets were never used in the taxpayer’s business, they constituted capital assets in the taxpayer’s hands. Id. at 384.
We rejected the taxpayer’s arguments and held that the character of the Button assets did not automatically carry over to the taxpayer; rather, we stated that our concern was with the “tax nature” of those assets in the taxpayer’s hands. We asked: “Were the assets acquired or used in connection with a business of * * * [the taxpayer]?” Id. We found that the taxpayer “neither acquired nor used the Button assets in its business, neither did * * * [the taxpayer] enter into the
Both the result in Acro Manufacturing Co. v. Commissioner, supra, and our reasoning in reaching that result were affirmed by the Court of Appeals for the Sixth Circuit. Acro Manufacturing Co. v. Commissioner,
While the facts of Acro Manufacturing Co. v. Commissioner,
C. Analysis and Application of Authorities
Respondent specifically acknowledges that, for tax purposes, H&C’s disregarded entity election constituted a deemed section 332 liquidation of H&C into Dover UK,
Accordingly, the principal question before us is whether, attendant to a section 332 liquidation, the transferee parent corporation succeeds to the business history of its liquidated subsidiary with the result that the subsidiary’s assets used in its trade or business constitute assets used in the parent’s trade or business upon receipt of those assets by the parent.
Because Dover UK’s disregarded entity election is characterized as an actual liquidation of H&C for income tax purposes, among the undisputed tax consequences are the following: (1) Dover UK recognized neither gain nor loss on its deemed receipt of H&C’s assets, see sec. 332(a); (2) it succeeded to H&C’s basis in those assets, see sec. 334(b); and (3) it would add H&C’s holding period to its own (deemed) holding period in those assets, see sec. 1223(2). Moreover, the deemed-received assets did not constitute a single, mass asset with a unitary holding period, but comprised the numerous classes of both tangible and intangible property necessary to constitute a going elevator installation and service business (e.g., tools, spare parts, fixtures, and accounts receivable). Each item deemed received by Dover UK came with a distinct, carryover basis and an existing holding period. Cf. Williams v. McGowan,
Agreeing, as he must, to the foregoing description of the tax consequences resulting to Dover UK from its deemed receipt of H&C’s assets, respondent, nevertheless, argues: “Dover UK must * * * use, or hold for use, such assets for the requisite period of time in its trade or business before Dover UK is allowed to exclude from fphci the gain from the [deemed] sale of those assets.” Respondent refuses to attribute H&C’s business history to Dover UK:
Dover UK had a separate identity from H&C and the business of H&C (installing and servicing elevators) was not the business of Dover UK (a holding company). In addition, Dover UK never intended to use the assets in an elevator business. It acquired the assets for the purpose of selling those assets and avoiding FPHCI.
The crucial finding in all of the rulings discussed supra section V.B. is that, in any corporate amalgamation involving the attribute carryover rules of section 381, the surviving or recipient corporation is viewed as if it had always conducted the business of the formerly separate corporation(s) whose assets are acquired by the surviving corporation. See, e.g., Rev. Rul. 75-223, 1975-
In Rauenhorst v. Commissioner,
Respondent’s acknowledgment that the business history and activities of a subsidiary carry over to its parent in connection with a section 332 liquidation of the subsidiary is also reflected in section 301.7701-2(a), Proced. & Admin. Regs., which provides that “if the entity is disregarded, its activities are treated in the same manner as a sole proprietorship, branch, or division of the owner”. In the context of a business organization, a “branch” is defined as a “division of a business”, and a “division” as an “area of * * * corporate activity organized as an administrative or functional unit.” American Heritage Dictionary (4th ed. 2000); see also Black’s Law Dictionary 188, 479 (6th ed. 1990) (defining a “branch”, in relevant part, as a “[division, office, or other unit of business located at a different location from main office or headquarters”, and a “division” as an “[operating or administrative unit of * * * business”). Thus, the plainly understood import of the cited regulation’s use of the terms “branch” and “division” to describe the impact of the deemed section 332 liquidation resulting from a disregarded entity election with respect to an operating subsidiary (particularly in light of respondent’s ruling position, as set forth supra) is that the activities of the business operation indirectly owned by the parent through its former subsidiary become the activities of a functional or operating business unit directly owned and conducted by the parent.
Finally, we note that, consistent with his admonition in the preamble to the final check-the-box regulations, T.D. 8697, 1997-
VI. Validity of Section 1.954r-2(e)(3), Income Tax Regs.
Because we find that Dover UK’s deemed sale of the H&C assets constituted a sale of assets used in Dover UK’s business within the meaning of section 1.954 — 2(e)(3)(ii) through (iv), Income Tax Regs., we do not address petitioner’s argument that section 1.954-2(e)(3), Income Tax Regs., is invalid.
VII. Conclusion
Dover UK’s gain on the deemed sale of the H&C assets does not constitute FPHCI to petitioner pursuant to section 954(c)(l)(B)(iii).
Decision will be entered under Rule 155.
Notes
DEI sold its German elevator service subsidiaries to Thyssen effective June 1, 1997, and members of the affiliated group sold the remainder of the group’s elevator business, within and without the United States, to Thyssen Industrie AG and Thyssen Elevator Holding Corp. in January 1999. Thus, in a series of three transactions, the Thyssen group purchased the group’s worldwide elevator business.
Pursuant to sec. 301.7701-3(c)(l)(iii), Proced. & Admin. Begs., H&C could have made the election to be a disregarded entity at any time within 75 days after the date (June 30, 1997), specified on the election form (Form 8832, Entity Classification Election). Because petitioner inadvertently missed that deadline, it was required to request an extension of time, pursuant to secs. 301.9100-l(c) and 301.9100-3, Proced. & Admin. Regs., to make the election.
Based upon petitioner’s representation, that is the assumed date of the sale of the H&C stock by Dover UK
There has, however, been much commentary concerning the issue before us today. E.g., Sheppard, “Behind the Eight Ball on Check-the-Box Abuses”, 101 Tax Notes 437 (Oct. 27, 2003); Yoder & Everson, “Check-and-Sell Transactions: Proposed Regulations Withdrawn, But Still Under Attack”, 32 Tax Mgmt. Int. J. 515 (Oct. 10, 2003); Click, “Treasury Withdraws Extraordinary Check-the-Box Regulations”, 101 Tax Notes 95 (Oct. 6, 2003).
The parties do not dispute that petitioner constituted a “United States shareholder”, as defined in sec. 951(b), with respect to Dover UK on the date of the sale of the H&C stock.
The final regulations provide a list of organizations (substantially the same as those listed in the proposed regulations) formed under foreign (or U.S. possession) law that, subject to certain grandfather rules, are treated as per se corporations. See sec. 301.7701-2(b)(8), (d), Proced. & Admin. Regs. In general, the list includes the publicly traded, limited liability organization that may be formed under the law of each country or possession. The per se corporation under United Kingdom law is a public limited company. H&C was not such a company.
The check-the-box regulations, like the classification regulations that they replaced, were issued under sec. 7701(a)(2) and (3), which defines the terms “partnership” and “corporation”. Some commentators have questioned whether the regulations constitute a valid exercise of the Treasury Secretary’s authority under sec. 7805(a) to issue interpretive regulations. See, e.g., Staff of Joint Committee on Taxation, Review of Selected Entity Classification and Partnership Tax Issues at 13-17 (J. Comm. Print Apr. 18, 1997); McKee et al., Federal Taxation of Partnerships and Partners, par. 3.08 at 3-102 (3d ed. 1997); Dougan et al., “Check The Box” — Looking Under The Lid, 75 Tax Notes 1141, 1143-1144 (May 26, 1997); Mundstock, A Unified Approach To Subchapters K & S 11 n.35 (2002). Neither party has challenged the validity of all or any portion of the regulations. Therefore, for purposes of this case, we accept (without deciding) that the regulations are valid.
We find the parties to be in agreement that, whatever our decision regarding the issue of whether Dover UK’s deemed sale of the H&C operating assets constituted a sale of “property which does not give rise to any income”, that decision applies to all of H&C’s assets as of the date of the deemed asset sale to Thyssen.
At the time of the issuance of the revenue rulings cited by petitioner, secs. 331 and 336 governed the tax consequences to the shareholders and distributing corporation, respectively, of a partial (or complete) liquidation of the corporation, and sec. 346(a) defined the term “partial liquidation”. Sec. 222 of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. 97-248, 96 Stat. 478, amended (1) sec. 346 to eliminate the definition of “partial liquidation” contained therein and (2) secs. 331 and 336 to omit the reference in each to a partial liquidation. Sec. 222 of TEFRA also amended (1) sec. 302(e) so that, essentially, it embodies the former sec. 346(a) definition of a partial liquidation, and (2) sec. 302(b)(4), so that it treats a redemption of stock from a noncorporate shareholder in connection with a partial liquidation of the distributing corporation as a distribution in part or full payment in exchange for the stock under sec. 302(a).
The ruling contrasts the partial redemption distribution in situation 3 and treats it as a corporate separation governed by sec. 355 rather than as a corporate contraction qualifying as a partial liquidation within the meaning of sec. 346(a)(2). Rev. Rul. 75-223, 1975-
Although under Treasury regulations G.C.M.s do not establish precedent (see sec. 1.6661-3(b)(2), Income Tax Regs.), they have been described as “an expression of agency policy”. Taxation With Representation Fund v. IRS,
Private letter rulings may be cited to show the practice of the Commissioner. See Rowan Cos. v. United States,
The position of the Court of Appeals for the Fifth Circuit in Reese v. Commissioner,
The taxpayer in Azar Nut Co. v. Commissioner,
Respondent points out that Dover UK failed to report any income from H&C’s business on its 1997 return filed with the United Kingdom Inland Revenue. While we deem that fact irrelevant, we note that Dover UK’s United Kingdom tax reporting position is justified by the fact that H&C’s disregarded entity election resulted in a deemed liquidation of H&C effective for United States, but not United Kingdom, tax purposes.
Among the tax attributes of the transferor subsidiary that carry over to the transferee parent, pursuant to sec. 381(c), are net operating loss and capital loss carryovers, earnings and profits, and the subsidiaiys overall method of accounting, method of computing inventories, and method of computing the allowance for depreciation.
We need not revisit our decision in that case at this time.
Because H&C’s use of its assets was entirely business related, that use almost certainly covered more than one-half of the various periods that, taking into account sec. 1223(2), Dover UK is deemed to have held those assets. Therefore, that use is deemed to be the use for which those assets were held for purposes of sec. 1.954^2(a)(3), Income Tax Regs.
Sec. 301.7701-2(a), Proced. & Admin. Regs., does not specify a minimum period of time after which a disregarded entity election results in branch or division status for the disregarded entity. Rather, the disregarded entity is deemed a branch or division of the owner upon the effective date of the election, a point that is conceded by respondent on brief. Nor do the eheck-the-box regulations require that the taxpayer have a business purpose for such an election or, indeed, for any election under those regulations. Such elections are specifically authorized “for federal tax purposes”. Sec. 301.7701-3(a), Proced. & Admin. Regs.
Because of Rev. Rul. 75-223, 1975-
Respondent did include an allegedly corrective amendment as part of proposed regulations issued on Nov. 29, 1999. See REG-110385-99, 64 Fed. Reg. 66591 (Nov. 29, 1999). The proposed regulations contained a special rule for foreign disregarded entities used in a so-called extraordinary transaction, one of which constitutes the sale of a 10-percent or greater interest in such an entity within 12 months of the entity’s change in classification from association taxable as a corporation to disregarded entity. Under those circumstances, the proposed regulations provided that the disregarded entity “will instead be classified as an association taxable as a corporation”. Sec. 301.7701-(h)(l), Proposed Proced. & Admin. Regs., 64 Fed. Reg. 66594 (Nov. 29, 1999). (We assume that the consequence of that approach would be that a CFC’s sale of the stock of the disregarded entity would be treated as a sale of property described in sec. 954(c)(l)(B)(i), rather than as a sale of property described in sec. 954(c)(l)(B)(iii), which is respondent’s approach in this case, under the existing regulations.) After receiving a number of unfavorable comments, respondent, on June 26, 2003, issued Notice 2003-46, 2003-