Extraterritorial income transition rule | KPMG | US

Federal Circuit: Extraterritorial income transition rule applies for post-2006 earnings

Extraterritorial income transition rule

The U.S. Court of Appeals for the Federal Circuit today reversed and remanded the decision of the U.S. Court of Federal Claims granting summary judgment to the government with respect to a transition rule for extraterritorial income (ETI) earned after 2006 but pursuant to a transaction entered into in 2006.

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The Federal Circuit held that the transition rule allows the ETI exclusion for income earned after 2006 but with respect to transactions entered into in 2005 and 2006.  The transition rule reduced the ETI benefit to 80% for 2005 transactions and 60% for 2006 transactions.

The case is: DWA Holdings LLC v. United States, 2017-1358 (Fed. Cir. May 9, 2018). Read the Federal Circuit’s decision [PDF 143 KB]

Background

The taxpayer entered into a transaction (distribution license) in 2006 for worldwide rights for film distribution, and the taxpayer continued to receive income from the 2006 license during 2007, 2008, and 2009. 

While subject to an IRS examination of tax years 2007, 2008, and 2009, the taxpayer realized that it had not sought ETI benefits under the section 101(d) of the American Jobs Creation Act of 2004 (AJCA) transition rule with respect to income attributable to its 2006 license. 

The taxpayer filed refund claims for tax years 2007, 2008, and 2009 and asserted that it was entitled to a partial exclusion under AJCA section 101(d) for qualifying ETI recognized in those years and attributable to the 2006 license transaction. The taxpayer asserted it was owed income tax refunds exceeding $4.4 million (representing the tax paid on 60% of the income received under the 2006 license agreement during 2007 through 2009). The IRS denied the refund claims; the taxpayer filed a tax refund suit in federal claims court; and the claims court granted summary judgment for the government.

Federal Circuit

Today, the Federal Circuit reversed and remanded the case to the federal claims court, after concluding that the AJCA transition rule: 

 

“…unambiguously provides for transition relief for all extraterritorial income received from transactions entered into in 2005 and 2006, even if that income is received in later years.” [Emphasis in original.]

 

The Federal Circuit also awarded costs to the taxpayer.

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