141 T.C. No. 5
UNITED STATES TAX COURT
BMC SOFTWARE INC. Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 15675-11. Filed September 18, 2013.
R determined that royalty payments from P to its controlled foreign corporation (CFC) were not arm’s length under I.R.C. sec. 482. P and R then entered into a closing agreement under I.R.C. sec. 7121 making primary adjustments regarding the royalty payments. The primary adjustments increased P’s income and required P to conform its accounts with secondary adjustments. P accomplished the secondary adjustments by electing to establish accounts receivable under Rev. Proc. 99-32, 1999-2 C.B. 296, rather than treat the secondary adjustments as deemed capital contributions.
P had previously repatriated funds from its CFC in transactions unrelated to the royalty payments or adjustments. P claimed a corresponding one-time dividends received deduction under I.R.C. sec. 965. The deduction was subject to certain limitations, including a reduction for an increased related party indebtedness between P and its CFC. P claimed the deduction before agreeing to the primary adjustments or establishing the accounts receivable. -2-
R determined that the accounts receivable that were deemed established during the testing period constituted an increase in related party indebtedness and disallowed a corresponding amount of the deduction. R issued a deficiency notice. P filed a petition for redetermination.
P contends that the reduction for related party indebtedness applies only to transactions intended to finance dividends. P also asserts that the parties agreed in a closing agreement that P avoids any Federal income tax consequences from establishing the accounts receivable. P also contends that the accounts receivable do not constitute related party indebtedness.
Held: The related party debt rule under I.R.C. sec. 965(b)(3) does not apply only to increased indebtedness resulting from intentionally abusive transactions.
Held, further, the election under Rev. Proc. 99-32, supra, allows P to avoid the Federal income tax consequences of a deemed capital contribution. The repayment is treated as a return of principal and interest for all Federal income tax purposes.
Held, further, the accounts receivable are deemed established during the testing period and qualify as increased related party indebtedness.
George Matthew Gerachis, Christine L. Vaughn, and Lina G. Dimachkieh,
for petitioner.
Daniel L. Timmons, for respondent. -3-
KROUPA, Judge: Respondent determined a $13 million1 deficiency in
petitioner’s Federal income tax resulting from his interpretation of section 965,2 a
one-time dividends received deduction for a U.S. corporation. The amount
qualifying for the dividends received deduction is reduced by increased related
party indebtedness under section 965(b)(3) (sometimes, related party debt rule).
We must decide for the first time whether an account receivable established under
Rev. Proc. 99-32, 1999-2 C.B. 296, may constitute increased related party
indebtedness for purposes of the related party debt rule. We hold that it may.
FINDINGS OF FACT
The parties have stipulated some facts. We incorporate the stipulation of
facts and the accompanying exhibits by this reference. Petitioner’s principal place
of business was Houston, Texas when it filed the petition.
I. Petitioner and Related Entities
Petitioner is a U.S. corporation that develops and licenses computer
software. Petitioner is the common parent of a group of subsidiaries that joined in
the filing of a consolidated Federal income tax return for the taxable year ended
1 All amounts are rounded to the nearest million dollars. 2 All section references are to the Internal Revenue Code for the years at issue, unless otherwise indicated. -4-
March 31, 2006. Petitioner is also the parent of non-consolidated foreign
affiliates. Petitioner’s wholly-owned BMC Software European Holding (BSEH)3
was a controlled foreign corporation (CFC) under section 957.
II. Transfer Pricing Dispute
Petitioner and BSEH collaboratively developed software. Two cost-sharing
agreements (CSAs) governed that relationship. Under the CSAs, they co-owned
the software and each held exclusive distribution rights for certain territories.
Petitioner terminated the CSAs by agreement in 2002 and took sole ownership of
the software. Petitioner agreed to pay future royalties to BSEH and licensed to
BSEH the software for distribution. Petitioner paid BSEH royalties required under
the CSAs for 2002 through 2006.
Respondent examined the Federal income tax returns petitioner filed for
2002 through 2006. Respondent concluded that the royalty payments between
petitioner and BSEH were not arm’s length. Petitioner and respondent entered
into a closing agreement in 2007 increasing petitioner’s income (transfer pricing
closing agreement) by $35 million for 2003, $23 million for 2004, $22 million for
3 BSEH indirectly owned 100% of issued and outstanding shares of BMC Software Europe, an Irish corporation, and directly owned 100% of BMC Software Mauritius, a Mauritius corporation. Each has been treated as an entity disregarded by BSEH for Federal income tax purposes. For the purposes of this matter, we will treat these entities as one and refer only to BSEH. -5-
2005 and $22 million for 2006 (collectively, primary adjustments). These primary
adjustments represented net reductions in royalties petitioner paid BSEH.
Respondent executed the transfer closing agreement on August 30, 2007.
The primary adjustments required petitioner to make secondary adjustments
to conform its accounts. Those secondary adjustments would have been treated as
deemed capital contributions from petitioner to BSEH except that petitioner
elected to establish accounts receivable under Rev. Proc. 99-32, supra, for
repayment. To that end, petitioner and respondent entered into another closing
agreement (accounts receivable closing agreement) that established for Federal
income tax purposes interest-bearing accounts receivable from BSEH to petitioner.
Respondent executed the accounts receivable closing agreement also on August
30, 2007. The amounts of the accounts receivable corresponded to the amounts of
the primary adjustments, including an account receivable for $22 million deemed
established on March 31, 2005 and another for $22 million deemed established on
March 31, 2006.
The accounts receivable bore interest at the applicable Federal rate. The
interest was deductible from BSEH’s taxable income and includible in petitioner’s
taxable income. The parties agreed as follows: -6-
BSEH will pay the account receivable, including interest thereon, by intercompany payment. Such payment will be free of the Federal income tax consequences of the secondary adjustments that would otherwise result from the primary adjustment; provided, the payment of the balance of the account, after taking into consideration any prepayment pursuant to section 4.02 of Rev. Proc. 99-32, is made within 90 days after execution of this closing agreement on behalf of the Commissioner.
BSEH paid the principal and the interest owed within 90 days of the accounts
receivable closing agreement’s becoming effective.
III. Petitioner’s Repatriation and One-Time Dividends Received Deduction
Petitioner repatriated from BSEH $721 million invested outside the U.S.
through a series of transactions between June 29, 2005 and March 31, 2006.
Petitioner filed a Form 1120, U.S. Corporation Income Tax Return, for 2006.
Petitioner claimed $709 million (repatriated dividends) as qualifying for the one-
time dividends received deduction under section 965 on Form 8895, One-Time
Dividends Received Deduction for Certain Cash Dividends from Controlled
Foreign Corporations. Petitioner reported its CFC did not have increased
indebtedness to petitioner or a related party between the close of the taxable year,
March 31, 2006, and the close of October 3, 2004 (testing period).4
4 The testing period with respect to petitioner is the period between March 31, 2006 and October 3, 2004 because petitioner made the election for the tax year ending March 31, 2006. As discussed below, the testing period is relevant (continued...) -7-
Respondent determined that $43 million of the repatriated dividends was
ineligible for the dividends received deduction. Respondent concluded that the
accounts receivable that were deemed established during the testing period
constituted increased related party indebtedness. The remaining repatriated
dividends qualified for deduction under section 965. Respondent issued the
deficiency notice for 2006, and petitioner timely filed the petition.
OPINION
We must decide whether accounts receivable that were deemed established
by a closing agreement under Rev. Proc. 99-32, supra, constitute increased related
party indebtedness for purposes of section 965. Respondent concedes that
petitioner did not establish the accounts receivable to fund the repatriated
dividend. Thus, if the related party debt rule applies only to abusive transactions,
as petitioner contends, then respondent incorrectly determined the deficiency. We
consequently will consider the related party debt rule and whether an account
receivable established under Rev. Proc. 99-32, supra, may constitute increased
related party indebtedness.
4 (...continued) because the amount of dividends eligible for deduction under sec. 965 is reduced by increased indebtedness between the close of the taxable year for which the election is in effect and October 3, 2004. -8-
We then consider whether the parties agreed in the accounts receivable
closing agreement that repayment of the accounts receivable was free from further
Federal income tax consequences. Finally, we consider whether the accounts
receivable that were deemed established during the testing period are taken into
account when determining related party indebtedness.
I. Dividends Received Deduction
We turn to whether petitioner’s CFC had increased related party
indebtedness as that term is intended in section 965(b)(3). Petitioner asserts that
the related party debt rule applies only where the U.S. shareholder intentionally
finances the dividend through an abusive transaction. Petitioner further argues
that the accounts receivable cannot constitute indebtedness as that term is intended
in section 965(b)(3). Respondent, on the other hand, argues that the accounts
receivable constitute increased related party indebtedness because the related party
debt rule is not limited to intentionally abusive transactions. Consequently,
respondent and petitioner dispute whether accounts receivable are within the scope
of section 965(b)(3) for increased related party indebtedness. To resolve this we
must analyze section 965. -9-
A. Statutory Interpretation Principles
Our principal task when interpreting a statute is to ascertain and give effect
to Congress’ intent. The statutory text is the most persuasive evidence of
Congressional intent. United States v. Am. Trucking Ass’ns, Inc., 310 U.S. 534,
542-543 (1940). The plain language of a statute is ordinarily to be given effect
unless to do so would produce an absurd or futile result, or an unreasonable result
that plainly conflicts with legislative intent. See United States v. Ron Pair Enters.
Inc., 489 U.S. 235, 242 (1989); Wadlow v. Commissioner, 112 T.C. 247, 266
(1999). We consider relevant legal authority and the statute’s purpose and
context. Dolan v. USPS, 546 U.S. 481, 486 (2006). We rely on legislative history
to ascertain congressional intent only if a statute is silent or ambiguous.
Burlington No. R.R. Co. v. Okla. Tax Comm’n, 481 U.S. 454, 461 (1987); Miss.
Poultry Ass’n, Inc. v. Madigan, 992 F.2d 1359, 1364 n.28 (5th Cir. 1993). Our
initial inquiry is therefore whether the language of section 965(b)(3) is so plain as
to permit only one reasonable interpretation to answer that question. See, e.g.,
Robinson v. Shell Oil Co., 519 U.S. 337, 340 (1997).
B. The Related Party Indebtedness Reduction of Section 965
We now turn to section 965 to interpret the dividends received deduction
and the related party debt rule. A corporation that is a U.S. shareholder of a CFC -10-
may elect, for one taxable year, an 85% deduction with respect to certain cash
dividends it receives from its CFC.5 Sec. 965(a). The eligible amount is reduced
by any increase in related party indebtedness during the testing period.6 Sec.
965(b)(3).
The parties dispute whether Congress meant the related party debt rule to
apply only to increased indebtedness resulting from intentionally abusive
transactions. The related party debt rule provides in pertinent part that
the amount of dividends which would * * * 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 of the close of the taxable year for which the election * * * is in effect, over
(B) the amount of indebtedness of the controlled foreign corporation to any related person * * * as of the close of October 3, 2004.
5 The deduction is limited to cash dividends that the U.S. corporation reinvested in the United States. Sec. 965(b)(2) and (4). Further, the dividends in excess of $500 million are eligible only if permanently invested outside the United States. Sec. 965(b)(1). 6 Respondent does not dispute that the repatriated dividends satisfied the other requirements of sec. 965. The repatriated dividends did not exceed the amount of earnings reported on petitioner’s applicable financial statement to be permanently reinvested outside the United States. See sec. 965(b)(1)(B). Petitioner reinvested the repatriated dividends pursuant to a domestic reinvestment plan. See sec. 965(b)(4). -11-
Sec. 965(b)(3). Petitioner contends this paragraph incorporates an intent
requirement. We disagree. Increased related party indebtedness is calculated by
determining the difference between the CFC’s “amount of indebtedness” from the
testing period’s beginning and end. The rule does not include an intent
requirement. Congress did not provide any exceptions to this arithmetic formula.
Petitioner points to flush language Congress later added conferring
authority to issue regulations to prevent transactions that avoid the statute’s
purposes and exclude dividends attributable to a transfer between the U.S.
corporation and its CFC. See Gulf Opportunity Zone Act of 2005, Pub. L. No.
109-135, sec. 403(q)(3), 119 Stat. at 2627. Petitioner argues that this grant of
regulatory authority means Congress intended section 965(b)(3) to prevent only
intentionally abusive transactions. Petitioner also keys on a snippet from the Joint
Committee on Taxation technical explanation7 to suggest that the related party
debt rule applies only in cases in which the transfer is part of an arrangement
undertaken with a principal purpose of avoiding the purposes of the related party
7 Petitioner emphasizes the following statement: “It is anticipated that dividends would be treated as attributable to a related-party transfer of cash or other property under this authority only in cases in which the transfer is part of an arrangement undertaken with a principal purpose of avoiding the purposes of the related-party debt rule of Code section 965(b)(3).” -12-
debt rule. See 151 Cong. Rec. S14028, S14050-S14051 (daily ed. Dec. 19, 2005).
We disagree with petitioner’s interpretation.
Congress did not amend the operative language of section 965(b)(3) when it
added the flush language. Nor do we interpret the grant of regulatory authority as
circumscribing the scope of the related party debt rule. Rather, the flush language
conferred on the Secretary the discretion to promulgate supplemental regulations.
A complete reading supports this conclusion.
The grant of regulatory authority “supplements existing circular cash flow
principles” to stop cash or property transactions that “effectively” fund the
dividend. Id. at S14050. Circular cash flows, by their nature, create a net zero
effect. This result, however, does not mean that all circular cash flow transactions
are abusive. Thus, supplemental regulations were to be aimed at preventing
abusive circular transactions that would not register indebtedness under the
arithmetic formula. Id. This reading is supported by the report’s discussion of
permissible circular transactions. Id. Congress therefore authorized regulations to
distinguish between abusive and permissible circular transactions.
The flush language therefore does not muzzle the related party debt rule by
adding an intent requirement. Rather, Congress authorized regulations to
supplement the related party debt rule to address abusive circular transactions. -13-
The grant of regulatory authority is ultimately irrelevant here because the
adjustments and repayment differ from a circular transaction. Thus, the related
party debt rule does not have an intent requirement.
C. Indebtedness for Purposes of Section 965
Having determined that the related party debt rule does not include an intent
requirement, we now address whether the accounts receivable are indebtedness
within the meaning of section 965(b)(3). Petitioner contends that the accounts
receivable are not indebtedness.8 In contrast, respondent contends that we should
interpret the term “indebtedness” under general Federal income tax principles. To
do so would mean that the accounts receivable are indebtedness.
We now consider the meaning of the term “indebtedness” as it is used in
section 965(b)(3). The Commissioner applied the same meaning as that term has
under general Federal income tax principles. See Notice 2005-38, sec. 7.02(a),
2005-1 C.B. 1100, 1111. Respondent contends that the term simply means debt.
We may consider dictionary definitions to understand the meaning that Congress
may have intended. See, e.g., Dixon v. Commissioner, 132 T.C. 55, 76 (2009)
8 Respondent determined that the 2005 and 2006 accounts receivable increased the related party indebtedness for the testing period. The parties agree that the relevant period is between October 3, 2004 and March 31, 2006, the close of the taxable year for which the election was in effect. -14-
(applying dictionary definition of “incurred” for purposes of interpreting section
6673(a)(2)). Indebtedness is defined as “[t]he condition or state of owing money”
or “[s]omething owed; a debt.” Black’s Law Dictionary 783 (8th ed. 2004).
Petitioner does not offer, nor do we contemplate, another reasonable interpretation
in the related party context of section 965(b)(3). And respondent’s definition is
consistent with the term’s plain meaning. We hold that the term “indebtedness” as
it is used in section 965(b)(3) means the condition of owing money or being
indebted.
We now consider whether an account receivable established under Rev.
Proc. 99-32, supra, falls within that definition. The term “account receivable” is
not defined in Rev. Proc. 99-32, supra, or the accounts receivable closing
agreement. The revenue procedure calls for the taxpayer to establish an “account
receivable” bearing an arm’s-length interest rate. Rev. Proc. 99-32, secs. 1,
4.01(2), 1999-2 C.B. at 297, 299. The CFC must satisfy the account within 90
days of the closing agreement’s becoming effective. Id. sec. 4.01(4). Account
receivable is defined as “[a]n account reflecting a balance owed by the debtor.”
Black’s Law Dictionary 18. Petitioner observed those requirements and included
only the interest payments as income. The characteristics described under Rev.
Proc. 99-32, supra, and petitioner’s treatment of the accounts receivable are -15-
consistent with the dictionary definition. We hold that accounts receivable
established under Rev. Proc. 99-32, supra, may constitute indebtedness for
purposes of section 965.
D. Trade Payables Exception
We next consider petitioner’s argument that the accounts receivable, even if
indebtedness, should nonetheless be exempt from section 965(b)(3) because they
are trade payables. See Notice 2005-38, sec. 7.02(b); Notice 2005-64, sec. 10.08,
2005-2 C.B. 471, 489. The trade payable exception excludes indebtedness that
arises in the ordinary course of a business from sales, leases, licenses or the
rendition of services provided to or for a CFC by a related person from the related
party debt rule. Id. The indebtedness must be actually paid within 183 days. Id.
If the accounts receivable are trade payables, then those amounts could not be
increased related party indebtedness. If not, then the accounts receivable could be
increased related party indebtedness.
Respondent argues that the accounts receivable are not trade payables
because they were not established in the ordinary course of business or paid within
183 days after the payables were created. We agree. The accounts receivable
were created after a section 482 adjustment rather than resulting from ordinary
business. Further, the relevant accounts receivable were paid more than a year -16-
after each was deemed established. The trade payables exception does not apply.
The accounts receivable therefore are increased indebtedness.
E. Related Party Debt Rule Conclusion
In sum, the related party debt rule does not have an intent requirement. The
accounts receivable may be indebtedness.
II. The Federal Income Tax Consequences of the Accounts Receivable
We now consider the effect of the accounts receivable closing agreement
provision that the payment would be free of the Federal income tax consequences
of the secondary adjustments that would otherwise result from the primary
adjustment. Petitioner contends that the accounts receivable closing agreement
precludes any further Federal income tax consequences resulting from the
repayment. The accounts receivable therefore would be excluded when
determining the amount of the dividend received deduction. Respondent contends
that the accounts receivable closing agreement provision allows petitioner to
substitute the tax consequences of the debt secondary adjustment for those of the
deemed capital contribution secondary adjustments. Put another way, the accounts
receivable would be established for all Federal income tax purposes with
petitioner avoiding the consequences of the repayment for a deemed capital
contribution. We agree with respondent. -17-
The accounts receivable stemmed from the primary adjustment agreed to in
the transfer pricing closing agreement. A primary adjustment under section 482
requires a secondary adjustment to conform a taxpayer’s accounts. Sec. 1.482-
1(g)(3), Income Tax Regs. A secondary adjustment is typically treated as a
dividend or a capital contribution. Id. Thus, petitioner was obligated to conform
its accounts with secondary adjustments.
The regulations authorize in certain circumstances a taxpayer’s “repayment
of the allocated amount without further income tax consequences.”9 Id. (emphasis
added). And the Commissioner promulgated Rev. Proc. 99-32, supra, for this
purpose. An eligible taxpayer may transfer funds attributable to a primary
adjustment via an account receivable “without the Federal income tax
consequences of the secondary adjustments that would otherwise result from the
primary adjustment.”10 Rev. Proc. 99-32, sec. 2, 1999-2 C.B. at 298. The
9 Sec. 1.482-1(g)(3), Income Tax Regs., provides that “[a]ppropriate adjustments must be made to conform a taxpayer’s accounts to reflect allocations made under section 482. Such adjustments may include the treatment of an allocated amount as a dividend or a capital contribution (as appropriate), or, in appropriate cases, pursuant to such applicable revenue procedures as may be provided by the Commissioner * * *, repayment of the allocated amount without further income tax consequences.” 10 This provision states in whole that
(continued...) -18-
accounts receivable closing agreement tracked that language by providing that
BSEH’s payment to petitioner would “be free of the Federal income tax
consequences of the secondary adjustments that would otherwise result from the
primary adjustment.” It also provided that it was “determined and agreed” that the
interest-bearing accounts receivable would be established for Federal income tax
purposes. Thus, we must determine the effect of the accounts receivable closing
agreement on the repayment’s collateral consequences.
We previously concluded that an account receivable established under Rev.
Proc. 65-17, 1965-1 C.B. 833 (the predecessor to Rev. Proc. 99-32, supra), and
after a section 482 adjustment, did not preclude all collateral Federal income tax
consequences. See Schering Corp. v. Commissioner, 69 T.C. 579 (1978). The
taxpayer in Schering was a U.S. corporation that established accounts receivable
by closing agreement to be “free of further Federal income tax consequences.” Id.
10 (...continued) Absent a United States taxpayer’s election of treatment under this revenue procedure, an adjustment under section 482 (the “primary adjustment”) entails secondary adjustments to conform the taxpayer’s accounts to reflect the primary adjustment. These secondary adjustments may result in adverse tax consequences to the taxpayer. * * * This revenue procedure allows the United States taxpayer to repatriate the cash attributable to a primary adjustment via an account without the Federal income tax consequences of the secondary adjustments that would otherwise result from the primary adjustment. [Rev. Proc. 99-32, sec. 2, 1999-2 C.B. 296, 298.] -19-
at 580-583. The taxpayer’s CFC declared a dividend to satisfy the account
receivable. Id. at 584. The relevant foreign tax authority treated the CFC’s
payment as a dividend. Id. at 585. The taxpayer claimed a foreign tax credit
under section 901 for the foreign tax paid on the dividend attributable to the
principal and interest. Id. at 588. The Commissioner disallowed the credit
claimed for the tax applied to the principal. Id. The Commissioner argued that the
foreign tax credit was a tax consequence the closing agreement precluded because
the closing agreement did not specifically provide that the taxpayer could claim
the credit for the amount representing the adjustment. Id. at 594-595.
We disagreed with the Commissioner that the closing agreement precluded
all collateral consequences. Rather, we concluded that the repayment was no
longer considered a deemed dividend for Federal income tax purposes. Id. at 598.
We reasoned that the applicable revenue procedure and corresponding closing
agreement were intended to allow the tax-free repatriation of money allocated to
the taxpayer by section 482. Id. at 595. And, indeed, the taxpayer treated the
repayment as a return of principal and excluded that amount from its income. Id.
at 598.
Our holding in Schering was predicated on two concepts. First, the closing
agreement characterized the payment for Federal income tax purposes -20-
notwithstanding the foreign tax authority’s dividend treatment. The
Commissioner and the taxpayer were bound to treat the payment as a return of
principal for all Federal income tax purposes and the repayment was no longer a
dividend. In short, we did not permit inconsistent characterizations for Federal
income tax purposes.
Second, the closing agreement determined that the taxpayer avoided the tax
consequences of the secondary adjustments absent the election. The collateral
consequences would be determined by applying the characterization for all Federal
income tax purposes. The closing agreement did not preclude all tax
consequences.
These principles apply to our interpretation of the accounts receivable
closing agreement. We find it significant that “repayment,” not the accounts
receivable, was free of consequences that “would otherwise” result from the
primary adjustment. This indicates that the taxpayer avoids the consequences that
would have resulted absent the election. It is undisputed that the deemed capital
contribution from petitioner to BSEH was a secondary adjustment that would
otherwise have resulted from the primary adjustment. The parties further agree
that an eliminated “Federal income tax consequence” of that secondary adjustment
included the taxable dividend petitioner would have received upon cash payment -21-
from BSEH equal to the deemed capital contribution. Such a secondary
adjustment would have been subject to tax with the entire amount consequently
included in petitioner’s income. It is this adverse tax consequence that the
election avoided.
Petitioner also argues that Rev. Proc. 99-32, supra, sets forth procedures that
are equitable and that the secondary accounts receivable adjustments did not, nor
were intended to, fund the repatriated dividends. We agree that the procedures set
forth in Rev. Proc. 99-32, supra, are equitable inasmuch as the taxpayer may avoid
the tax consequences from deemed capital contribution or dividend treatment. See
Schering Corp. v. Commissioner, 69 T.C. at 597. We disagree, however, that the
election allows for inconsistent characterizations for Federal tax purposes. As
previously discussed, petitioner avoided the consequences of the potential
secondary adjustments by agreeing to establish accounts receivable for all Federal
We read the accounts receivable closing agreement to mean that petitioner’s
election relieved it from the tax consequences that would have resulted absent the
election. Further, we hold that the accounts receivable are deemed established for
all Federal tax purposes. -22-
III. Increased Indebtedness in the Testing Period
We now address whether there was increased indebtedness during the
testing period because the accounts receivable were deemed established after the
testing period. Petitioner reasons that the deductible amount should not be
retroactively reduced because the accounts receivable were established after
petitioner repatriated the funds. Respondent argues, in contrast, that the parties
agreed that the accounts receivable were deemed established during the testing
period and the amount of dividends eligible for the deduction should accordingly
be reduced. We agree with respondent.
The Commissioner may enter into a written closing agreement with a
taxpayer relating to the liability of the person for any taxable period ending before
or after the date of the agreement. Sec. 7121; Hudock v. Commissioner, 65 T.C.
351, 362 (1975); sec. 301.7121-1(a), Proced. & Admin. Regs. A closing
agreement relating to a prior taxable period may relate to one or more separate
items affecting the tax liability of the taxpayer. Sec. 301.7121-1(b)(2), Proced. &
Admin. Regs. Some closing agreements decide only specific issues and bind the
parties only as to those issues. See Manko v. Commissioner, 126 T.C. 195,
201-202 (2006); Estate of Magarian v. Commissioner, 97 T.C. 1, 5 (1991). -23-
The accounts receivable closing agreement determined for all Federal
income tax purposes that petitioner would establish interest-bearing accounts
receivable from BSEH to petitioner. It further provided that two of the accounts
receivable were deemed to have been established during the testing period. We
therefore hold that the accounts receivable qualify as indebtedness during the
testing period because petitioner and respondent agreed that they were established
then.
IV. Conclusion
We hold that the accounts receivable constitute indebtedness for the
purposes of section 965(b)(3). We further hold that the accounts receivable
closing agreement permits petitioner to avoid the Federal income tax
consequences that would otherwise have resulted absent establishing the accounts
receivable and does not preclude reducing the dividends received deduction under
section 965(b)(3). We therefore sustain respondent’s determination.
In reaching these holdings, we have considered all of the parties’ arguments,
and, to the extent not addressed here, we conclude that they are moot, irrelevant or
without merit. -24-
To reflect the foregoing,
Decision will be entered for
respondent.