The U.S. Tax Court today, on summary judgment motions, found that the U.S. taxpayer must include various amounts in gross income under section 951(a)(1)(B) because the following constituted “United States property” within the meaning of section 956(c)(1)(C):
The case is: Crestek, Inc. v. Commissioner, 149 T.C. No. 5 (July 27, 2017). Read the Tax Court’s opinion [PDF 128 KB]
The taxpayer is the parent of a group of companies that includes a number of controlled foreign corporations (CFCs).
Before FY 2008, one of the taxpayer’s domestic subsidiaries (S1) borrowed money from the CFCs, and those loans remained outstanding throughout FY 2008 and 2009. That subsidiary (before FY 2008) also borrowed money from a Malaysian bank. A CFC (the taxpayer’s Malaysian subsidiary) guaranteed this loan.
Before mid-2005, the Malaysian CFC sold completed products to a second domestic subsidiary (S2), for which S2 incurred payment obligations in the form of trade receivables. The Malaysian CFC ceased manufacturing operations in mid-2005. The net trade receivable balance owed by S2 to the Malaysian CFC remained constant at $7.92 million from mid-2005 through the end of FY 2009.
After mid-2005, a second CFC (CFC-2) assumed the manufacturing activities of the Malaysian CFC and sold completed products to S2. The net trade receivable balance owed by S2 to CFC-2 rose from $8.87 million in the first quarter of FY 2007 to $18.41 million in the last quarter of FY 2009.
The IRS determined that all of these transactions gave rise to investments in “United States property” under section 956(c)(1)(C). Thus, it was determined that the taxpayer had to include various amounts in gross income under section 951(a)(1)(B).
The Tax Court’s opinion sets out the following holdings on motions for partial summary judgment:
Given these findings, the court held that the taxpayer must include various amounts in gross income under section 951(a)(1)(B).
The Tax Court, however, found there was a material dispute of fact as to whether the trade receivable balances owed by S2 to CFC-2, incurred in an ongoing trade or business between those entities, were “ordinary and necessary” within the meaning of section 956(c)(2)(C), to carry on their respective trades or businesses. Thus, the court did not grant summary judgment with respect to this issue.
© 2018 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.