District Judge of the E asternDistrict of Loui siana, sitting bydesignation. * 

### INTHE UNITED S TATESCOU RT OFAPPEALS

FORTHEFIFTH CIRCU IT

N o. 08- 60792

NEW YORK GUANGDON G FI NANCE I NC,

Pet i t i o ne r - Appe l l ant

v. C O M M IS S IO N E R O F IN T E R N A L R E V E N U E ,
R espon den t
- A pp el l ee

Appe alf

r o m aD e c i s i o n of th e U n i tedS tates T a x C ou rt

Be f o r e H I GG I N BO TH AM a ndST E W A R T, C i r c ui tJu d g e s , a nd EN GE LH ARD T, * D is tr ic t J u d g e . C A R L E
. ST E W A R T , C i rcui tJu dg e: N ew York G uangdong Fi nance, I nc. (“ G uangdong” ) appeal s t he Tax C o u r t ’s ju d g m e n ts u s t a in in gin p a r tth e C o m m is s io n e ro f I n t e r n a l R e v e n u e ’s (“ Com m i s s i o ne r” ) no t i c e o f de f i c i e nc y f

o rw i t hho l di ng t axde f i c i e nc i e s a nd
a d d i t i o n s t o t a x . W e AF FI RM
. United States Court of App eals Fifth Circuit 

### F I L E D November

20, 2009 Cha rl es R. F ulb ru g e II I ClerkN o. 08- 60792

2 I . B A CK GRO UND Du r i n gt h e 1 9 9 0 s , Gu a n g d o nge n g a g e di n l o a n t r a n s a c t i o n s wit h t wo f orei gn cor porati on s, G u an gd on g Inter n atio nalTr ust& I n vest m en tC orporati on (“ G I TIC ” ) and G u a n g X i n E nt er pri se s, Lt d. (“ G X E ” )

. G I TIC , a f i nanci al in s tit u tio n , w a s in c o r p o r a te din t h e P e o p le ’ s R e p u b lico f C h in aa n dw a s w h o lly
o w ne d a nd c o nt r o l l e d b y t he Ch i n ese gov e r nm e nt
. I tw as a l s o a5 0 pe r c e nt
s har e ho l de ro f

G uang do ng dur i ng t he r e l e va ntpe r i o d. GX E, at r ad i ng c o m pa ny and a w hol l y o w ned su bs i di ar y o f G I TIC , w as i nco r por at ed i n H ong K ong. Du r i n gt h e y e a r s a ti s s ue , G XE’ s h e a do f f i c e wa s l o c a t e di n Ho n gKo n g . GXE
s h a r e dth is o ffic e w ith G IT IC e m p lo y e e s , a l t h o u g h G X E ’ s e m p lo y e e s s a t in
s e p a r a te ro o m s fr o m G IT IC e m p lo y e e s . In 199 0, G u an gd on g borrow ed $2 m i l l i on f rom G X E
. T h e l oan provi dedf or a t er m of

one ye ar , w hi c h co u l d b e e xt ended f oran addi t i onalye ar . The l oan a g r e e m e nt l i s t e d GXE a s t he s o l e l e nd i ng p a r t y . GXE s ub m i t t e d a For m W

- 8, C er t i f i c at e o f For ei gn St at us, toG uangdong not i f yi ng G uangdong t hatG X E w as n ot a U
. S

. ci ti ze n or resid en t. I n 1 99 4, G ua n g d o n gb o rr o w e d $ 2 m i l l i o n f r o m G I TI C. The l o an ag r e e m e nt pro vi ded f

ora t w o- yeart er m . G I TIC w as l i st ed as t he s ol e l endi ng par t y. O n i t s Form s 1120, U
. S. C or por at i on I nco m e Tax Ret urns , f or1994, 1995, and1 99 6, G uang do ng c l ai m e d d e duc t i on s f o ri nt e r e s tpa ym e nt s m ad e dur i ng t hos e y ear s. G u a n gd on g at t ac hed For m 5472, I nf or m at i on R et urn o f

a 25 % For e i gn- O w ne d U. S. Cor po r at i o n o raFo r e i gn Cor po r at i o n Engagedi n aU
. S. T ra d e or B u sine ss, to its 19 9 4 tax retu rn , b u t n ot to i ts 1 9 9 5 or 19 9 6 retu rn s. In i ts 19 9 4 F orm 54 7 2 , G u a n g d o n g sta tedtha t G X E pr i n ci p a l l y co n d u ctedits busi nes s i n and f

i l ed i t s i nco m e t ax r et urns as a r es i dent of H ong K on g. G uangdong r epo r t ed thatitpai d G X E $ 9 9 , 1 4 5 o f i nt er es ti n 1994 o n i t s $2
m illio n lo a n .N o. 08- 60792

3 In a 199 8 l et t er, G u an gd on g provi dedit s acc ou n t an tw i t h i n f orm ati on on i n t erestpay m en t s i n res pon se t o an I n t erna lR even u e Servi ce (“IR S ” ) F orm 456 4, I n f

orm ati on D o cum en tR equ est
. Th e l et t er s t ated t h at: ( 1) w i t h res pect t o t he l oan fr om G XE , G uang do ng hadpa i d $ 16 4, 76 2 i n i nt e r e s ti n 1 99 5 and $1 39 , 79 8 i n i nt e r e s ti n 1 99 6, and ( 2) w i t h r e s pe c tt o t he G I TI C l o an, G uang do ng had pai d $177, 010 i n i nt er es ti n 1995 and $139 , 798 i n i nt er es ti n 1996. In 199 9, G u an gd on g f i l ed a F orm 1 120 X , A m en dedU
. S

. C orporati on I nco m e Tax R et urn, f or 1994, 1995, and 1996. G uangdong at t ac hed a For m 5472 f o r e a c h o f t he y e a r s a t i s s ue . The a m e nd e d 1 9 9 4 Fo r m 5 4 7 2 i ndi c at ed t hat G uang do ng hadr e c e ive d a n addit i o nal$2 m i l l i o n l o an f r o m G XE i n 199 4. The 199 5 an d 199 6 F orm s 54 72 reported t h at G u an gd on g m ai n t ai n ed the $4 m i l l i on l o an ba l anc e w i t h GX E t hr o ugh1 99 6. The Fo r m s 5 47 2 s t at e d thatG uang do ng had pai d i nt er es tt o G X E of $118, 052, $341, 772, and $99, 666, f ort he ye ar s 1994, 19 95 , and 19 96 , r e s pe c t ive l y. N o ne o f t he Fo r m s 5 47 2 i ndi c at e d thatG uang do ng
m a d e i n t e r e s tp a y m e n t s t o GI TI C. O n t h e adv i ce of

it s presi den t , L aw renc eW o ng (“W o ng”) , G uang don g n ever f i l ed a F orm 104 2, A n n u alW i t h h ol di n g T ax R et u rn f or U
. S . S ou rce Incom e of F orei gn P erso ns, or a F orm 104 2- S , F orei gn P erson’ s U
. S

. Sou rce Incom e Su bj ect t o W i t h h ol di n g, f

or anyof

t h e years i n i ssue. W on gh a d w o rkedas a cer t i f i ed publ i cac c ount antand a f i nanci alm anagerbe f or e j oi ni ng G uangdong i n 1992. I n 2 00 4, t he I RS i s s ue d ano t i c e o f de f i c i e nc y t o G uang do ng, i n whi c h t he I RS de t e r m i ne d thatG uang do ng w as l i ab l e fo rw i t hho l di ng t axde f i c i e nc i e s a nd addi t i ons t o t ax f

or1994, 1995, an d 1996. Th e not i c e s t at ed thatG uangdong had
m ad e i nt e r e s tpa ym e nt s t o G XE i n t he a m o unto f $ 11 8, 05 2, $ 34 1, 77 2, a nd $99, 66 6 f

o rt he y e ar s 1 99 4, 1 99 5, a nd 1 99 6, r e s pe c t ive l y. Tho s e nu m bers
c or r es ponded t o the am ount s G uangdong r epo r t ed i n i t s Form s 1120X f or1994, 199 5, an d 19 96. B ased on t h ese r eported i n t erest pa ym en t s, t h e I R S deter m i n ed t hatG uangdong had un pai d w i t hhol di ng t ax li abil i t i es of $35, 416 f

or1994,N o. 08- 60792

4 $102, 53 2 f

o r 1 9 9 5 , a nd $ 2 9 , 9 0 0 f o r 1 9 9 6
. The I RS a l s o d e t e r m i ne dt hat G uangdong w as l i abl e f oraddi t i ons totaxof $8, 854 f

or1994, $25, 663 f

or1995,
an d $6 , 727 f

or 1996 f

or fai l i n g t o f

i l e F orm s 1042
. Final l y, t h e I R S deter m i n ed th a t G u a n g d o n g w a s lia b le fo r a n a d d itio n to ta x o f $ 7 ,4 7 5 fo r fa ilu r e to tim e ly p a yth e a m o u n t o w e dfo rits 1 9 9 6 re tu r n . G u an gd on g petit i on ed the T ax C ou rtf or a r edeterm i n ati on of thepr o po sed defi ci en ci es an d ad di t i on s to tax. A f t er a t ri al , t h e T ax C ou rtsust ai n ed i n part t he Com m i s s i o ne r ’ s a s s e r t e d d e f ic i e n c i e s . T h ec o u rtd e t e r m i n e dth a tGu a n g do ng h a dr e c e iv e do n lyo n e $ 2 m il li o n lo a n . T h e c o u r ts u s t a in e dth e C o m m is s io n e r ’s de t e r m i nat i o n t hatG uang do ng hadpai d G XE i nt e r e s to f $ 11 8, 05 2 i n 1 99 4. The
c our tal sohel d t hat$177, 0 1 0 o f t he $341, 772 r epo r t ed as pai d t o G X E i n 1995
w as ac t u a l l yp a i dt o GI TI C, a n dt h u s e x e m p tf r o m U. S

. t a x a t i o n u n d e rt he A gr ee m entf

ort he Avoi dance of

D oubl e Taxat i on an d th e Preve nt i on o f Tax E vasi on W i t h R espect t o T axes on Incom e (“ C h i n a A greem en t” )

. W i t h re sp ect t o 1 99 6, t he c o ur tde t e r m i ne d t hat o nly $7 7, 09 9 o f t he $9 9, 66 6 r e po r t e d o n t he 19 96 Fo r m 5 47 2 r e pr e s e nt e d i nt e r e s t pa i d t o G XE
. The c o ur tc o nc l ude d thatt he in te r e s t p a idto G X E w a s n o t ex e m p t fro m U .S . ta x a tio n a n d , th e r e fo r e , sh o u ld h ave been s ubj e c tt o w i t hho l di ng t ax . Fi nall y, t he c o ur ts us t ai ne d the C om m i ss i oner ’ s det er m i nat i on o f addi t i ons t o t ax. I I . DI S CU S S I ON O n app eal , G u an gd on g rai ses th re e argu m en t s: ( 1) t h e T ax C ou rterr ed
w he n ita s s i g n e dGu a n g d o n gt h e b u r d e n o f p r o o f i n d e t e r m i n i n gt h a tt he C om m i ssion er’ s d eterm i n a ti on s ar e err on eo u s; ( 2 ) i t w a s n ot req u i redto
w i t h h ol d t ax on l oan pay m en t s t o G X E becau se th e C h i n a A greem en texem pted G uang do ng f

r o m t he us ualr e quir e m e ntt o w i t hho l d t axo n s uc h pa ym e nt s ; a nd ( 3) its houl d n otbe l i abl e f oraddi t i ons t o t ax be c ause it s fai l ure t o f i l e at ax r e tu r n w a s e x c u s e db yits re lia n c e o n a d v ic e fr o m its p r e s id e n t.N o. 08- 60792

5 W e r evi ew a Tax Court ’ s f i ndi ngs of

fac tf orc l earerr oran d i ss ues of l aw d e n o v o . G r e e n v . Co m m ’r , 50 7 F
. 3 d85 7 , 86 6 ( 5 thC i r. 20 0 7 ). W e rev i ew its d i scre ti on a ryru l i n gs f or a b u se o f d is c r e tio n . B ils k i v . Co m m ’r , 69 F. 3d 64, 67 ( 5th C i r. 199 5)

. I n t h i s c ase, w e af f i rm al lt h e T ax C ou rt ’ s r u l i n gs. A

. B u rden of

P roof T h e C o m m is s io n e r ’s d e t e r m in a t io n s w it h r e s p e c tto ata x p a y e r ’s
w i t hho l di ng t axl i ab i l i t i e s a nd a ddit i o ns t o t axa r e pr e s um e d c o r r e c t , and the t axp ayer bears t h e bu rden of provi n g t h at t h ese determ i n ati on s are erroneou s. W e lc h v
. He l v e r i ng , 2 9 0 U .S . 1 1 1 , 1 1 5 (1 9 3 3 ); Pay n ev . Co m m ’r , 224 F
. 3d 415, 420 ( 5th C i r. 200 0)

. If a t axp ayer est abli shes t h at an assessm en ti s “ arbi t rary an d erroneou s, ” t h e bu rden t h en s h ifts t o t h e governm en tt o prove t h e cor rect
a m o u n t o f ta x e s o w e d
. Ca r r a c c i v . Co m m ’r , 4 5 6 F .3d4 4 4 , 4 5 7 (5t h C ir. 2 0 0 6 ). G uangdong ar gues t hatt he C om m i ss i oner ’ s not i c e o f def i c i enc y w as arbit r ary ande r r o ne o us be c aus e i tgr o upe d t o ge t he rl o ans f r o m b o t h GX E and G ITIC i n determ i n i n g G u an gd on g’ s t ax d ef i ci en cy; t h eref

ore, t h e bu rden of

proof shi f t s t o t he G o ve r nm e nt
. W hi l e t he Com m i s s i o ne rdi d i nc o r r e c t l y i nc l ude i n t erestpaid t o G ITIC i n it s noti ce, as t h e T ax C ou rtnoted, nothi n g i n t h e rec ord i n di cat es th at th e deter m i n ati on w as arbitr ary. I nde e d, theCom m i s s i o ne r based i t s d e t e r mi n a t i o n s o n t h e i n fo r ma t i o n G u a n g d o n git s e l f r e p o r t e di n it s F o r ms 547 2
. Th e C om m i ssi on er di d n otactarbi t raril y w h en itreli ed on i n f orm ati on pro vi ded t o itby G uangdongu nderpenal t i es of perj ury. There f

or e, t he Tax C our tc or r ec t l y f

ound t hatt he bur den of pr oo f r em ai ned w i t h G uangdong. B
. W i th h oldin g T a x o n L oa n P a ym en ts I
. R. C. § 8 81 ( a) i m po s e s a3 0 perc e ntt axo n i nt e r e s tr e c e ive d f r o m U
. S.
s o u r c e s b yafo r e ig n co r p o r a tio n t o t h e e x te n t th a t t h e in te r e s t is n o t e ffe c tiv e ly
c onnec t ed w i t h t r ade o rbusi nes s w i t hi n t he U ni t ed St at es . Sec t i on 1441 requ i res t h at th e entit y pa yi n g t h e i n t erestt o a f orei gn cor porati on m u stded u ctN o. 08- 60792

For purposes of the treaty, H ong Kong was not consi dered a part of China during the 1 yearsat iss ue becau seChina’stax lawsdid notapply at th at tim e in Hong Kong. 6 a n d w i t h h ol d the t ax f rom t h e i n t erestpay m en t
. I f t h e pay i n g en t i t y does n ot do s o, iti s l i abl e f

ort he t ax under§ 1461. I
. R. C. § 8 94 ( a) r e quir e s t hatt he Cod e b e a ppli e d wi t h due rega r d t o a ny t r eaty o bl i gat i on o f

t he U ni t ed St at es . Secti on 8 8 4( e) ( 1) c l ar i f i es t hatf

or ei gn corp ora ti on s ar e n ot ex em p t f rom U n i tedS tates in com e tax a ti on u n d er a treaty
u n l ess t h e t re a tyis a n incom e t ax tr eaty andt h e cor porati on i s a qua l i f i ed
r es i dentof

s uch for ei gn c ount r y. A“quali f i ed r es i dent” i s def

i ned as any f

or ei gn corporat i on t h at i s a r esi den tof a f orei gn coun t ry u n l ess ( 1) 50 percent or m ore of t h e st ock of such corporat i on i s ow n ed by i n divi du al s w h o are n ot resi den t s of t h e f orei gn coun t ry an d w h o a re n otU n i t ed S t ates cit i zens or resi den tal i en s, or ( 2) 50 percen tor m ore of it s i n com e is u sed t o m eetli abili t i es t o persons w h o are n otres i den t s of

the f orei gn cou n t ry or cit i zens or r esi den t s of t h e U n i t ed S t ates. I.R .C

. § 8 8 4 (e)(4 )(A). A r tic le 1 o f th e C h in a A g r e e m e n t p r o v id e s th a t th e tr e a ty s h a ll a p p lyo n ly t o pe r s o ns w ho a r e re s i de nt s of one orbo t h of

t he C o nt r ac t i ng St at e s , t hati s , t he Peo pl e ’ s Rep ubli c o f

Chi na andt he U ni t e d St at e s . Ar t i c l e 4 de f i ne s ar e s i de nt of C hi na a s a p e r s o n who , un d e r t he l a ws o f Chi na , i s “l i a b l e t o t a x t he r e i n by reason of

hi s dom i cil e, re sid e n ce, pl ace of hea d of f i ce, pl ace of

i n corporat i on or a n yo th e rcr ite r io n o f as im ila rn a tu r e .” 1 A rt i cl e 10(3) of

t h e C h i n a A greem en texem pts cert ai n in te re stf rom t axa t i on . Th at provi si on st ates: [ I ] nt e r e s ta r i s i ng i n aCont r ac t i ng St at e a nd d e rived b y t he govern m en t of th e ot h er C on t ract i n g S t ate, a pol i t i calsubd ivi si on or l ocalau t h orit y t h ereof, t h e C en t ralB an k of t h at oth er C ont r ac t i ng St at e o rany f i nanci ali nst i t ut i on w hol l y o w ned by t hat go ve rn m en t, or b y a n y re siden t of th e othe r C on tractingS tate w i th r es pec tt o de bt

- c l ai m s i ndi r ec t l y f i nanced by the gov er nm entof t hat oth er C on tractingS tate, apo l i ti ca lsu b d ivisi on or l oca lau th orityN o. 08- 60792

7 t he r e o f, t he Cent r alBank of t hato t he rCont r ac t i ng St at e o ra ny f i nanci ali nst i t ut i on w hol l y o w ned by t hatgo ver nm ent , shal lbe exem pt f

rom t ax i n t h e f

i rst
- m en t i on ed C on t ract i n g S t ate. G u a n gd on g a rg u es th a t th e C h i n aA gr ee m en t exe m p ts i n teres t pa idto G X E f r om w i t hhol di ng t ax bec ause ( 1) G X E i s a r es i dentof C hi na; ( 2) G X E i s an a g en t of G IT IC , a resid en t of C h i n a ; a n d (3) th e l oa n from G X E w a s , in subs t ance , a l oan f

r om G I TIC

. U l t i m at ely, t hes e a r gum ent s ar e unavail i ng. 1. GX E ’ s R esi d ency G u an gd on g argu es th at th e C h i n a A greem en tapp l i es t o G X E b e ca u se G X E i s a r es i den t of C h i na. D uri ng pr e- t r i alpr oc ee di ngs, how eve r , t he Tax Cour tg r ant e d i n pa r tt he Com m i s s i o ne r ’ s m o t i o n i n li m i ne pr e c l udi ng G u an gd on g f

rom rai si n g G X E ’ s r esi den cy as an i ssue at t ri al
. A s th e T ax C ou rt
corre ctly n oted , G u a n gd on g d i dn ot raise th e issu e of G X E ’ s reside n cyu n tilits pr e - t ri alm e m o r and um , t hus pr e ve nt i ng t he Com m i s s i o ne rf r o m c o nduc t i ng s u ffic ie n t d is c o v e r y o n th e is s u e . T h e T a xC o u r t d idn o t a b u s e its d is c r e tio n in
e x c lu d in gth e is s u e . B i ls ki , 6 9 F .3 da t 6 7
. Eve n if G uang do ng pr o pe r l y r ai s e d t he i s s ue of G XE ’ s re s i de nc y, al lof t he evi den ce s u ggests t h at G X E i s a r esi den tof H on g K on g. G X E w as i n corporat ed in H o n gK o n g . I t s p r i n c i p a lp la c e o f b u s in e s s w a s H o n gK o n g . G u a n g d o n g ’s F orm s 54 7 2 rep orted tha t G X E p ri n ci p a l l y con d u cted i ts bu sine ss i n an df i l edits in c o m e ta xre tu r n s a s are s id e n t o f H o n gK o n g . B e c a u s e G X E is n o t a re s id e n t o f C h in aa n dG u a n g d o n gfa ile dto tim e ly
r a is e th e is s u e , th e C h in aA g r e e m e n t d o e s n o t a p p lyto t h e t r a n s a c tio n in que s t i o n. The r e f

o r e , t he T ax Cou r tc o r r e c t l y f o und t hatt he Chi na Agr e e m e nt d i dn ot ex em p t G u a n gd on g from the w i th h oldin g ta x o n its i n teres t pa ym en ts t o G X E
.N o. 08- 60792

8 2. The“ I n Subs t anc e ”

Argum e nt G uangdong al soar gues t hatt he l oan f r om G X E w as i n subs t ancea l oan f rom G ITIC

. U n der t h i s li n e of argu m en t , t h e l oan f rom G X E shou l d be tr eated
as al o an f

r o m GI TI C, aChi ne s e r e s i de nt , t he r e bye xe m pt i ng i tf r o m w i t hho l di ng t ax u n der t h e C h i n a A greem en t
. Th i s argum en ti s un persua sive. Taxpayer s ar e g ener al l y bo und by t he f or m of t he t r ansacti on theyhave
c h o s e n . Fra m a tom e Co n n ec tor s US A , In c. v. Co m m ’r , 1 1 8 T .C

. 3 2 , 4 7 (20 0 2 ). T h e s u b s t a n c e o f a tr a n s a c t i o n m a yp r e v a il , h o w e v e r , w h e n ata x p a y e r ’s

“ report i n g an d act i on s sh ow a n h on estan d consi st en tres pect f or th e substance of a tran sa cti on . ” Es ta te of W e in e r t v . Co m m ’r , 2 9 4 F .2d7 5 0 , 7 5 5 (5t h C ir. 1 9 6 1 ). H e r e , th e T a xC o u r tc o r r e c t l yn o t e dt h a tG u a n g d o n g ’s r e p o r t i n ga n da c tio n s fu lly sup port i t s f

i n di n g t h at t h e l oan f rom G X E t o G u an gd on g w as not i n substance a l oan f rom G ITIC

. Th e l o a n a g re e m en tw as si gn ed bya G X E representat ive, w as i ssuedon G X E l et t erhea d, l i st ed G X E as t h e l en der an d m ad e no m en t i on of G ITI C

. G u an gd on g’ s generall edg er s egregated an d i den t i f i ed i n t erest pa ym en t s m ad e to G X E , a n d G u an gd on g pa i d i n t erestdi rect l y t o G X E
. A l lof G uang do ng’ s Fo r m s 5 47 2 f o rt he y e ar s i n q ue s t i o n r e po r t e d thatG uang do ng pai d i nt er es tt o G X E
. Acc or di ngl y, w e a f f i r m t he Tax C our t ’ s r ul i ng. 3
. T h e Agen cy A n a lys is F in a lly , G u a n g d o n ga r g u e s th a t G X E w a s a n a g e n t or c o n d u it of G IT IC in
c o nne c t i o n wi t h G XE ’ s l o an. I f G XE w as a n a ge nto f G I TI C, t he n, G uang do ng a r g u e s , t h e Chi n aAg r e e m e n ta p p l i e s t o t h e l o a n t r a n s a c t i o n a n de x e m p t s GXE f r om t he w i t hhol di ng t ax. Thi s ar gum enti s al sounco nvi nci ng. “[ I] t i s u n con te s te d tha t th e law attrib u tes taxcon seq u en ces o f p rop erty h eld b y a ge n u i n e a ge n t t o th e p ri n ci p a l
. ” Com m ’ r v . B o lli nger , 485 U
. S. 340, 34 9 ( 19 88 )

. I n Nati on al Carb ide Corp. v. Com m i ssi on er , t h e Su prem e C ou rt st ated t h at, i n deter m i n i n g w h et h er a c orporati on i s an agen tof an ot h er, a court
s ho ul d c o ns i de r“w he t he rt he c o r po r at i o n o pe r at e s i n t he na m e a n d for theN o. 08- 60792

9 accoun tof

t h e pri n ci pa l , bi n ds t h e pri n ci pa l , by i t s act i on s, t ran sm i t s m on ey r e c e ive d t o t he pr i nc i pa l , a nd whethe rr e c e i pto f i nc o m e i s a t t r ibut ab l e t o t he
s e rv ic e s o f e m p lo y e e s o f th e p r in c ip a l a n dto a s s e ts b e lo n g in g to th e p r in c ip a l.” Na t’lCa r b id eCo r

p . v . Co m m ’r , 3 3 6 U .S

. 4 2 2 , 4 3 7 (1 9 4 9 ). T h e s u b s id ia r y ’s ag e nc y r e l at i o ns hi p m us tno tb e de pe nde ntupo n t he fac tt hatiti s o w ne d b y t he p r in c ip a l. I

d. T he a ge nt ’ s b us i ne s s pur po s e “ m us tb e t he c ar r yi ng o n o f t he
n orm a ldu ti es o f a n ag en t. ” I d. I n Com m i s s i o ne rv . Bol l i nger , t h e S u p r e me C o u rt d e clin e dto “p a r s e t h e tex t of Nat i o nalCar bi de” a n dh e ldth a t itis

“ reasona bl e f

or th e C om m i ssi on er t o dem an d u n equ ivocalevi den ce of ge n u i n en ess inth e corp ora ti on -sha reh olde r con tex t. ” B ol l i nger , 485 U
. S. at349. T h e T ax C ou rtcor rect l y h el d that t h e rec ord ref l ect s no credibl e evi den ce t hatG X E w as ac t i ng as G I TIC ’ s agenti n m aki ng t he l oan t o G uangdong. N oth i n g inthe loa n a gr ee m en t su gg ests th a t G X E w a s ac ti n g a s G IT IC ’ s ag en t. G IT IC ’ s la te ra n n u a l r e p o r ts d o n o t s ta te t h a t G X E is G IT IC ’ s a g e n t. T h e r e is
no e vi de nc e t hatG I TI C gua r ant e e d G XE ’ s de bt o rc o nt r o l l e d a nythi ng ab o utt he G XE l o an. I n s um , G uang do ng has pr o vi de d noe vi de nc e t hatG XE m e e t s a ny o f t he a ge nc y fac t o r s di s c us s e d i n Nati on a lCarbide Corp . There f or e, t he Tax C ou rt correctly h eld th a t G X E w a s n ot actingas G IT IC ’ s a ge n t w i th resp ect to i t s l oan t o G uangdong. C

. A ddi t i ons t o Tax U n d er I. R
. C

. § 6 6 5 1 (a)( 1 ), a n ad d i ti on to t a x m a y b e im p ose df or fail u re to fil e ataxretu rn , u n l ess the tax p a ye r sh ow s th a t su ch fa i l u re is du e to
rea s o nab l ec aus e . “ [W ] he ther th e el em en t s t h at c on st i t u t e ‘reasona bl e cause’are pre se nti n a given s i t uat i on i s a ques t i on o f fac t , butw hatel em ent s m ustbe p rese n t t o con sti tu te ‘rea son a b l e ca u se’i s a q u estionof l a w . ” R o b e r ts v . Co m m ’r , 860 F. 2d 1235, 1241 ( 5t h C i r . 1988) (c i t i ng Un itedS ta tes v. B oy le , 469 U
. S. 241, 25 0 n. 8 ( 19 85 ) )

. Thi s c o ur tr e vi e w s t he TaxCour t ’ s f i ndi ngs “regardi ng t heN o. 08- 60792

10 ex i sten ce orpr ese n ce of ci rcu m s ta n ti a lfa ctors w h i ch m i gh t give ri se to
rea son a b l e ca u se u n d er th e clearly er ron eo u s stan d a rd
. ” I d. at1242. T o dem on strat e rea so n a b le ca u se , ata x p a y e r “m u st s h o w th at he exerci sed

‘ ordi n ary bu si n ess care andprud en ce. ’” T reas. R eg. § 301. 665 1- 1(c) ( 1)

. “W h en an ac c ount antorat t or ney advi se s a t axpaye ron a m at t erof t ax l aw , s uch as
w h e th e ralia b ilitye x is ts , it is re a s o n a b le fo rth e ta x p a y e rto r e lyo n th a t a d v ic e .” B oy le , 469 U
. S. at251. In t h i s c ase, t h e I R S f ou n d G u an gd on g l i able f or ad di t i on s t o t ax f

or fai l u re t o f i l e F orm s 1042 , A n n u alW ithh ol di n g T ax R et u rn f or U
. S

. Sou rce Incom e of F orei gn P ersons, f

or 199 4, 199 5, an d 1996
. G u an gd on g argu es t h at its fai l u re t o f i l e t h e F orm s 1042 w a s d u e to r eason able cau se because: ( 1) it s very o b lig a tio n to file th e re tu r n s is th e is s u e b e in gliti g a t e d i n t h is ca s e a n d(2 ) it
r e ason ably r e l i e d o n t he a dv i c e o f W o ng, it s pr e s i de nta nd af o r m e rCPA , w ho beli eve d t hatthe i nt er es tpaym ent s t o G X E w er e no ts ubj ec tt o w i t hhol di ng t ax. A s th e T ax C o u rtcor rect l y n ot ed, G u an gd on g’ s argum en tfai l s f or a n u m b e ro f r e a s o n s . F ir s t, th e r e is n o e v id e n c e th a t G u a n g d o n gw a s to ldth a t it
ne e d no t f

i l e For m s 10 42
. Guang do ng po i nt s o utt hatW o ng ad vi s e d itt hatt he i n t erestpay m en t s t o G X E w ere not sub j ectt o w i t h h ol di n g. T h i s fact , how ever, i s ir r e l e v a n t t o wh e t h e r Gu a n g d o n g wa s r e q u i r e d t o f i l e a Fo r m 1 0 4 2. The
a p p lic a b le T r e a s u r yR e g u la tio n s re q u ir e ata x p a y e rto file aF o r m 1 0 4 2 e v e n if th e in te r e s t p a idis e x e m p t fr o m ta xu n d e ra t r e a ty
. T r e a s . R e g . § 1. 1461- 1(c ) ( 2) (I )

. Th er ef or e, eve n i f a t ax pro fes si onal advi se d G uangdong t hat i t s i nt e r e s tpa ym e nt s t o G XE w e r e e xe m ptf r o m t ax at i o n un der t he Chi na A gr ee m ent , G uangdong w oul d s t i l lbe l i abl e f orfai l i ng t o f

i l e For m s 1042. Se c o nd, t he r e c o r d c o nt ai ns no e vi de nc e t hatG uang do ng r e l i e d o n t he ad vi c e o f

ac o m pe t e ntpr o fe s s i o nali n de c i di ng no t t o f i l e t he For m s 1 04 2 f

o rt he years i n qu est i on . W on ga dm i t t ed that G u an gd on g h adrec eivedno w rit t en a d vice o n t h e su bj ect of w i th h oldin g ta x li a b i l i ty u n d er th e C h i n aA gr ee m en t.N o. 08- 60792

11 W o ng hi m s e l f

w as no ta n e m pl o ye e o f G uang do ng unt i lAugus t1 99 6, a f t e rt he F orm s 1042 f

or 1994 an d 19 95 w ere due. F or th ese rea son s, th e T a x C ou rt w a s n ot cl ea rl y erron eo u s w h en it d eterm i n edtha t G u a n gd on g fail edto estab l i sh rea son a b l e c a u s e for fa i l u re to fi le F o r m s 1 0 4 2 fo rt h e y e a r s a tis s u e . T h e r e fo r e , w e a ff ir m th e T a xC o u r t ’s h o ld in gth a t G u a n g d o n gis lia b l e fo ra d d itio n s to ta xfo re a c h o f th e y e a r s in i ssue. I I I . C ONC L US I ON In sum , t h e T ax C ou rtcor rect l y f ou n d th at t h e bu rden of proof rem ai n ed
w i t h G u an gd on g. G u an gd on g’ s i n t erestpay m en t s t o G X E w ere not exem pt f rom t he w i t hho l di ng t axund e rt he Chi na Agr e e m e ntb e c aus e t he Chi na Agr e e m e nt d i dn o ta p p l yt o GXE, aH o ngKo ngr e s i d e nt
. Th e r e c o r ds up p o r t s t heTax C ou rt ' s c on cl u si on tha tG X E w as n ota n a gen tf or G ITIC an d that t h e l oan f rom G X E w as noti n subs t ancea loa n fr om G I TIC

. Th e Tax Court ’ s f i ndi ng t hat G u an gd on g w as l i able f or add i t i on t o t ax f

or each of

years i n is su e w as not
c l ear l y e r r oneo us. Acc or di ngl y, w e af f i r m t he w ell

- r eas oned r ul i ngs of t he Tax C ou rt.