1 5 0 T.C. No . 3

UNITED STATES TAX COURT
SIH PARTNERS LLLP, EXPLORER PARTNER CORPORATION, TAX

M ATTERS PARTNER, Pet i t i o ner v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 3 4 2 7-1 5. Fi l edJ an uary1 8 , 2 0 1 8
.
S was th e U.S. s h areh o l d er o f t wo CFCs th atg u aran t eedl o an s m ad e t o a U.S. p ers on . R d et erm i n ed thatS m u s ti n cl u d e i n i t s g ro s s i n co m e fo r t h e t ax y ears i n i s s u e t h e CFCs ’ ap p l icab l e earn i n g s p u rs uan tt o I.R.C. s ecs . 9 5 1 (a)(1 )(B) an d9 5 6 (d ). R’ s d et erm i n at i o n rel i edo n reg ul at i o n s p ro m ul g at edu n d er I.R.C. s ec. 9 5 6 (reg u lat i o n s ). R al s o d et erm i nedthatthe am o u n t s i n cl u d edi n S’ s g ro s s i n co m e s h o u l d b e t ax ed as o rd i n ary i n co m e. P co n t en d s th atth e reg u lat i on s are i nv al i dan dth ati n th e ab s en ce o f v al i dreg u l at i o n s R’ s d et erm i n at i o n can n o tb e s u s tai n ed
. If we s u s t ai n R’ s d et erm i n at i o n o f t h e am ou n t s i n cl u dedu n der I.R.C. s ecs . 9 5 1 (a)(1 )(B) an d 9 5 6 (d ), P co n t en d s th atth e am o u n t s s h o u l db e t ax edas qu al i fi edd i v i d en di n co m e u n der I.R.C. s ec. 1 (h )(1 1 ). Hel d : Th e reg u lat i o n s are v al i d , an dR co rrect ly d et erm i n ed th atS m u s ti ncl u d e i n g ro s s i n co m e t h e CFCs ’ ap p l i cab l e earn i n g s fo r th e t ax y ears i n i s su e.- 2
- Hel d , fu rt h er, t h e am o u n t s i n cl u d edi n P’ s g ro s s i n co m e p u rs uan tt o I.R.C. s ecs . 9 5 1 (a)(1 )(B) an d9 5 6 (d ) are n o tqu al i fi ed d i v i den di n co m e u n d er I.R.C. s ec. 1 (h )(1 1 ).

M arkD. Lanp h er, Ro b ertA. Ru dn i ck , an dKri st enM . Garry , fo r p et i t i o n er. J effreyB. Fi en b erg , Ri ch ardA. Rap p azzo , an dJ u l i e An n P. Gas per, fo r
res p o n d en t.

OPINION COHEN, Ju d g e: OnNo vem b er 1 0 , 2 01 4 , res p o n den ti s s u edtwo n o t i ces o f fi nal part n ers h ip ad m i n i s trat iv e ad ju s t m en t(FPAAs ) t o Ex p l orer Part n er Co rp . (Ex p l o rer Co rp .) as t ax m at t ers p artner fo r SIH Part n ers LLLP (SIHP) fo r t ax y ears 2 0 0 7 an d2 0 0 8 . Inth e FPAAs res p o n d en td et erm in edth at SIHP h as i n co m e i n cl u s i o n s u n d er s ect i o n s 9 5 1(a)(1 )(B) an d 9 5 6 o f $ 3 7 5,3 9 2 ,9 8 8 an d$ 1 ,6 9 7 ,2 4 7 fo r 2 0 0 7 an d 2 0 0 8, res p ect iv el y . Inth e FPAAs res po n d en tal s o d et erm i n edth at th e i n co m e i n cl u s io n s fo r SIHP are n o tqu al i fi edd i v id en di nco m e el i g i b l e fo r t h e p referen t i al 1 5 % t ax rat e u nd er s ect i o n 1 (h )(1 1 ). Th e i s s u es fo r co n s i d erat i o n are: (1 ) wh et her SIHP h as i n co m e i n cl u s i o n s
u n d er s ect i o n s 9 51 (a)(1 )(B) an d9 5 6 i n am o u n t s equ al t o th e res pect i ve ap p l i cab l e- 3
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earn i n g s o f t wo o f i t s co n tro l l edfo rei g n co rp o rat i o ns b ecau s e th es e en ti t ies g u aran teedl oan s th atM erri l l Ly n ch m ad e t o Su s qu eh an na In t ern at i o n al Gro up , LLP (SIG), an d (2 ) i f SIHP h as i n co m e i n cl u s i o n s u n d er s ect io n s 9 5 1 (a)(1 )(B) an d 9 5 6 , wh et h er t h e i n co m e i n cl us i o n s are q u al i fi edd i v id en d i nco m e u n d er s ect i o n 1 (h )(1 1 ). Th es e i ss u es are b efo re t h e Co u rt o n t h e p art i es ’ cro s s -m o t i o n s fo r
s u m m ary ju d g m en tp urs u an tt o Ru l e 1 2 1 . Un l es s o therwi s e i n d icat ed , al l s ect i o n referen ces are t o th e In t ern al Rev en u e Co d e (Co d e) i n effect fo r t h e t ax y ears i n i s su e, an dal l Ru l e referen ces are t o th e Tax Co u rtRu l es o f Pract i ce an d Pro cedure. Su m m ary ju d g m en ti s i n t en d edt o ex p ed i te l i t i g at i o n an d av o i du n n eces s ary
an d ex p en s i ve t ri al s. Fl a. Peach Co rp . v . Co m m i s s i o ner, 9 0 T.C. 6 7 8 , 6 8 1 (1 9 8 8 ). Su m m ary ju d g m en tm ay

b e g ran t edwi th res p ectt o al l o r an y p arto f t h e l eg al i s su es i n co n tro v ers y

“ if t h e p l ead i n g s , an s wers t o i n t erro g at o ri es , d ep os i t i o n s , ad m i s s i o n s , an dan y

o th er accep t ab l e m at eri al s , t o g et h er wi th th e affi d av it s o r d ecl arat io n s , i f an y , s h o w thatth ere i s n o g en u i ne d i s p ut e as t o an y m at eri al fact
an d th ata d eci s i o n m ay

b e ren d eredas a m at t er o f l aw.” Ru l e 1 2 1 (b ). Res p o n d en t
co n ten d s t h atn o g en ui n e i s s u e o f m at eri al factex i s ts wi th res p ect t o ei th er i s s u e. Pet i t io n er ch al len g es the v al i d i ty o f t h e reg u l at i o ns o n wh i ch res p o n d en trel i edi n
m ak i n g t he d et erm in at i o n s i n th e FPAAs , an di tco n t en d s th ati f we co n cl u d e t h at- 4
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th e reg u l at i o n s are i n val i dth en s u m m ary ju d g m en ti n i t s fav o r i s ap p ro p ri at e. If th o s e reg u l at i o n s are n o t i n v al id , th en p et i t i o n er co n t en d s t hati s s u es o f m at eri al fact rem ai n i n d i s p u t e as t o wh eth er res p o n d en tp ro p erl y ap p l iedth e reg u l at i o n s t o th e fact s an dci rcu m s t an ces o f t h i s cas e. W e co n cl u d e t h at al l fact s m at eri al t o th e Co u rt ’ s d i s p os it i o n o f t h e cro s s -m o t i o n s fo r s umm ary ju d g m en tcan b e d rawnfro m th e p art i es ’ s t i p u l at i o n s an dare n o treas o n ab l y i n d i sp u te. Back gro u n d W e s t at e t h e s t i p u l at edfact s i n g reat er d et ai l th an m ay b e n eces s ary

s o th at th e reco rdi s co m

p l et e. Fo rm at i o n o f SIHP Ex p l o rer Co rp ., a Del aware co rp orat i o n , i s an S co rp o rat io n fo r Fed eral i n co m e t ax p u rp o ses . Duri n g th e t ax y ears i n i s s u e Ex p l o rer Co rp . h adth e fo l l o w i n g s h areh o l d ers : Eri c Bro o k s (Bro o k s ), J o el Green b erg (Green b erg ), Art h u r Dan t ch i k(Dan t ch i k ), an dJ effreyYas s (Yas s ). Fro m th e b eg i nn i n g o f 2 0 0 7 th ro u g h M arch 2 0 0 7, Bro o k s , Green b erg , Dan tch ik , Yas s, an da fi ft h i n d i v i du al , An drew Fro s t (Fro s t ), were t h e s o l e
s h areh o ld ers o f Su s qu eh an n a In t ern at i o n al Ho l d i n g s , In c. (SIH In c.). SIH In c., a Del aware co rp o rat i o n i n co rp o rat edi n 1 99 9 , was an S co rp o rat i o n fo r Fed eral i n co m e t ax p u rp o ses . InM arch 2 0 0 7 SIH In c. red eem edFro s t ’ s s h ares . Ono r- 5
-

aft er M arch 3 1 , 2 00 7 , Bro o k s , Green b erg , Dan t ch i k , an dYas s were t h e rem ai n i n g
s h areh o ld ers o f SIH In c. Ono r aft er Ap ri l 2 , 2 0 0 7, Bro o k s , Green b erg , Dan t ch i k , an dYas s tran s ferred the s t ocko f SIH In c. t o Ex p l o rer Co rp . Fo l l o wi n g th e tran s fer, SIH In c. co n v ert edt o a l i m it edl i ab i l i ty co m p an y , wh i ch was d is reg ard edas an en t i t y
s ep arat e fro m it s o wn er fo r Fed eral i n co m e t ax p u rp o s es , an dch an g edi t s n am e t o Su s qu eh an n a In t ern at i o n al Ho l d i n g s, LLC (SIH LLC). Th e s tep s o f t h es e tran s act io n s were t reat edt o g et her as a reo rg an i zat i o n u n d er s ect i o n 3 6 8 (a)(1 )(F). OnAp ri l 2 , 2 0 0 7 , SIHP was fo rm edas a Del aware p artn ers h ip . Ono r ab o u t Ap ri l 3 , 2 0 0 7, Ex p lo rer Co rp . tran sferred SIH LLC t o SIHP i n ex ch an g e fo r a 1 %
o wn ers hi p i n t eres t i n SIHP. Ex p l o rer Co rp . i s th e t ax m at t ers p art n er fo r SIHP. Fro m o n o r ab o u tAp ri l 3 , 2 0 0 7 , thro u g h th e en d o f t ax y ears 2 0 0 7 an d2 0 0 8 fi ve S co rp o rat i o ns o wn edth e rem ai n i n g 9 9 % o f SIHP i n v ary i n g o wn ers h i p p ercen t ag es . Bro o ks , Green b erg , Dan t ch i k , Yas s , an d a fi ft h i nd i v i du al , M ark Do o l ey (Do o l ey ), each o wn ed1 0 0 % o f o ne o f t he S co rp o rat i o n s. SIG US an d In t ern at i o n al Affi l i at es Du ri n g th e t ax y ears i n i s s u e Bro o ks , Green b erg , Dan t ch i k, Yas s , Do o l ey , an d Fro s to wn edco l l ect iv el y an dth ro u g h cert ai n en t it i es 1 0 0 % o f t he i nt eres ti n SIG. SIG an d i t s U.S. affi l iat es (t o g et h er, SIG US) co n s t i tu t e an i n v es t m en tfi rm- 6
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th attrad es , d i rect l y an d th ro u g h v ari o u s affi l i at es , m o s tl i s t edfi n an ci al p ro du ct s
an d as setcl as ses . SIG US trad es th es e p ro du ct s p ri m ari l y th ro u g h b ro k er-d eal ers reg i s tered wi th th e U.S. Secu ri ti es an dEx ch an g e Co m m i s s i o n. Du ri ng th e t ax y ears i n i s s u e SIHP o wn edi n d i rect l y cert ai n o f SIG’ s i n t ern at i o n al affi li at es . SIHL an d SEHL Fro m o n o r ab o u tJ an u ary

1 , 2 0 0 7 , t o o n o r ab o u tAp ri l 2 , 2 0 0 7 , SIH In c.
o wn ed1 00 % o f t h e s t o ck o f Su s qu eh an n a Irel an dHo ld i ng s Li m it ed (SIHL), a
co rp o rat i o n o rg an izedu n d er t h e l aws o f Irel an d. Fro m o n o r ab ou tAp ri l 3 , 2 0 0 7 , t o o n o r ab o ut Decem

ber 3 , 2 0 0 7 , SIH LLC o wned1 0 0 % o f SIHL’ s s t o ck
. Th ro u g h SIH LLC (an en t i ty d i s reg ard edfo r Fed eral i n co m e t ax p urp o s es ) SIHP
was treat edas o wn in g 1 00 % o f SIHL’ s s t o ck
. OnDecem

b er 4 , 2 0 07 , SIHL was acq u i redb y Su squ eh an n a Eu ro p e Ho l di n g s Li m i t ed(SEHL), a co rp o rat i on n ewl y o rg an i zedu n d er t he l aws o f Irel an dan dwh o s e t ax res i d en cy was i n Lu xem

b o u rg . Inco n n ect i on wi th th e acq u is i t io n , SIHL el ect edt o b e cl as s i fi edas a d is reg ard eden t i ty fo r Fed eral i n co m e t ax p u rp o ses . Th is acq u i s i t i o n an del ect i o n t o g eth er co ns t i tu teda
reo rg an i zat i o n u n d er s ect io n 3 68 (a)(1 )(F). Fro m Decem b er 4 , 2 0 07 , th ro u g h Decem b er 3 1 , 2 0 08 , SIHP o wn edSEHL thro u g h SIH LLC an d o th er en t i t i es d i s reg ard edfo r Fed eral i n co m e t ax p urp o s es .- 7
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Fro m th e b eg i nn i n g o f t ax y ear 2 00 7 u n ti l i t s reo rg an i zat i o n SIHL was a
co n tro l l edfo rei g n co rp o rat i o n (CFC) wi th i n the m ean i n g o f s ect i o n 9 5 7 (a). SIHP
was a “ Un i t edSt at es s h areh o l d er” u n d er s ect i o n 9 5 1 (b ) wi th res p ectt o SIHL th at
o wn edwi th i n t h e m ean i n g o f s ect i o n 9 5 8 (a) 1 0 0 % o f SIHL’ s s t o ck . Fro m i t s
o rg an i zat i o n an dth ro u g h ou tt ax y ears 2 0 0 7 an d2 0 0 8, SEHL was al s o a CFC. SIHP was a U.S. s h areh o l d er o f SEHL th ato wn ed 1 0 0 % o f SEHL’ s s t o ck
. SEHL i s the s u cces s o r t o SIHL (t o g et h er, SIHL/ SEHL). STS Fro m o n o r ab o u tJ an u ary

1 , 2 0 0 7 , t o o n o r ab o u tAp ri l 2 , 2 0 0 7 , SIH In c.
o wn ed1 00 % o f t h e s t o ck o f Su s qu eh an n a Trad i n g Serv i ces , In c. (STS), a
co m p an y o rg an i zedu n d er th e l aws o f t h e Caym an Is l an d s th atwas treat ed as a
co rp o rat i o n fo r Fed eral in co m e t ax p u rp os es . Fro m o n o r ab o u t Ap ri l 3 , 2 0 0 7 , th ro u g h Decem

b er 3 1 , 2 0 0 8, SIH LLC o wn ed th e s t o cko f STS. Th ro u g h SIH LLC, SIHP was treat edas o wn i n g STS’ s s to ck
. Du ri n g t ax y ears 2 0 0 7 an d2 0 0 8 STS was a CFC. SIHP was a U.S.
s h areh o ld er wi th res p ectt o STS t h ato wn edwi th i n th e m ean i n g o f s ect i o n 9 5 8 (a) 1 0 0 % o f STS’ s to ck
.- 8
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Lo an Recei v edb y

SIG Befo re 2 0 0 7 , SIG an di t s affi l i at es h ada l o n g st an d i n g rel at i o n s h i p wi th th e b ro k erag e fi rm

M erri l l Ly

n ch . M erri ll Ly

n ch act edas p ri m e b ro k er t o SIG an di t s affi l i at es . As p ri m e b ro k er, M erri l l Ly n ch cl eared s ecu ri t i es an dco m m od i t i es tran s act io n s i n wh i ch SIG an di t s affi l i at es en g ag ed , an di th el das cu st o d ian fo r SIG an di t s affi l iat es th e res u l t in g s ecu ri ty an dco m m o d i ty p o si ti o n s fro m

s u ch trad i ng . M erri l l Ly

n ch p ro v i d edm arg i n l o an s t o SIG an di t s affi l i at es , an d i th el d
a s ecu ri ty i n t eres t i n th e as s et s th atSIG an d i t s affi l i at es m ai n t ai n ed i n acco u n t s at M erri l l Ly

nch
. Th e No t es OnOct o b er 2 , 2 0 07 , SIG i s s u ed th ree n o t es p ay ab l e t o cert ai n M erri l l Ly n ch affi l i at es (SIG n o t es ): (1 ) t h e Sev en th Am en d edan dRes t at edPro m i s s ory No t e i n th e am o un to f $ 1.4 b i l l i o n b et ween SIG as b o rro wer an dM erri l l Ly n ch In t ern at io n al (M LI) as l en d er; (2 ) t h e Am en d ed an d Res t at edPro m is s o ry No t e i n th e am o un to f $ 75 m i l l i on b et ween SIG an dM erri l l Ly nch Pro fes s i o nal Cl eari n g Co rp . (M L Pro , an dt o g eth er wi th M LI, M erri l l Ly n ch ); an d (3 ) t h e Seco n d Am en d edan dRes t at edPro m i s s o ry No t e i n the am o u n t o f $ 1 0 m il l i o n b et ween SIG an dM L Pro . Th e SIG n o t es ev i d en ced$ 1 .4 8 5 b i l l io n i n ag greg at e b o rro wi n g- 9
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s ep arat e an d ap artfro m

the m arg i n l o an s th atM erri ll Ly n ch p ro v i d edi n th e
o rd i n ary co u rs e o f i t s ro le as SIG’ s p ri m e b ro k er. Th e Gu aran t ies OnOct o b er 2 , 2 0 07 , SIG al so ex ecu t edjo i n t l y wi th i t s affi l i at es th e Am en d edan dRes t at edGu aran t ee an dSecu ri ty Ag reem en t(ARGSA). Pu rs u an tt o th e ARGSA, 3 9 en ti t ies g u aran t eedth e SIG n o t es . SIHL an dSTS were t wo o f t h e g u aran to rs o f t h e SIG n ot es u n d er t h e ARGSA. Th e rem ai n i n g 3 7 g u aran to rs were ei th er d o m es t i c en t i t ies or en t it i es d i s reg ard edfo r Fed eral i n co m e t ax p u rp o s es . OnDecem

b er 8 , 2 0 07 , SEHL ex ecu t ed a J o i n d er Ag reem en t , i n wh ich SEHL ack n owl ed gedth ati twas a p art y t o an d g u aran t o r u nd er t h e ARGSA. Cert ai n SIG affi l i at es u n der t h e ARGSA al s o p l ed g edthei r as s et s as co ll at eral fo r t h e SIG
n o t es . SIHL/ SEHL an dSTS were n ei th er p l ed g o rs n o r p l ed g eden t it i es u n d er t h e ARGSA. Un d er th e ARGSA each g u aran t or as su m edjo i n tan ds ev eral l i ab i li ty fo r t h e fu l l p aym en to f t h e SIG n o t es . Th e ARGSA i n cl u d eda “ p ro rat a p ro v i s io n” u n d er wh i ch i f an y

g u aran t o r m ad e an y p aym en to r s u ffered an y l o s s p u rs uan tt o i t s g u aran ty , th en i tb ecam e en t i t ledt o co n tri b u t i on p aym en t s fro m th e rem ai n i n g g u aran to rs . Th e p ro vi si o n s t at edth ateach n o np ay i ng g u aran t o r wo u ldb e req u i red t o co n tri b u t e t o th e p ay in g g u aran t o r an am ou n tequ al t o i t s “pro rat a s h are” o f an y- 1 0 -

s u ch paym en t . Th e ARGSA d efi n eda g i v en g uaran t o r’ s “p ro rat a s h are” o f an y p aym en t as th e rat i o o f fu n ds thatth e g u aran to r h adrecei v edfro m affi l iat es s i n ce th e d at e o f t h e ARGSA t o the ag g reg at e am o un to f al l fu nd s thatal l g u aran t o rs h ad recei v edfro m

affi l i at es duri n g th e s am e p eri o d. Th e SIG n o t es rem ai nedo u t s tan d i n g th ro u g h Decem b er 3 1 , 2 00 8 . As o f th atd at e, $ 1
. 2 8 5 b i l l io n i n p ri n ci p al rem ai n edo u t s t an d i ng o n th e SIG n o t es . SIG fu l l y rep ai dth e SIG n o t es as o f Decem b er 2 2 , 2 01 1 . No g u aran t o r was ev er cal led
up o n t o p ay

an y am o u ntdu e u n d er t h e SIG n ot es p u rs u an t t o i ts o bl i g at i o n s u n d er th e ARGSA. CFCs ’ Earn i n g s & Pro fi t s an d Di s tri b u ti o n s SIHL/ SEHL As o f J an u ary

1 , 2 0 0 7 , SIHL h adaccu m ul at edearn i n g s an dp ro fi t s o f $ 3 6 0 ,6 9 4 ,4 2 2 . Bet ween J an u ary an dM arch o f 2 0 0 7, SIHL d i s tri bu t ed $ 3 5 9 ,6 0 0 ,0 0 0 t o SIH In c., b efo re SIH In c.’ s reo rg an i zat i o n u n der s ect i o n 3 6 8 (a)(1 )(F). Fo r t ax y ear 2 00 7 SIHL/ SEHL g en erat edt og et h er cu rren tearn i n g s
an d p ro fi t s o f $ 2 9 3,5 6 5,1 4 5. As o f J an u ary

1 , 2 0 0 8 , SEHL h ad accu m u l at edearn i n g s an d p ro fi t s o f $ 2 9 4 ,6 5 9 ,5 6 7 . Fo r t ax y ear 2 0 0 8 SEHL h ada d efi ci ti n cu rren t earn i n g s an d p ro fi ts o f $ 1 4 8 ,4 3 0 ,2 6 0. SEHL d i dn o tm ak e an y d is tri b u t i o n s i n 2 0 0 8
.- 1 1 -

STS As o f J an u ary

1 , 2 0 0 7 , STS h adaccu m u l at edearn i n g s an dp ro fi t s o f $ 8 4 ,1 6 4 ,0 2 2 . As o f th atd at e, $ 3 ,6 2 5 ,4 6 9 was p rev i o u sl y t ax edearn in g s an d p ro fi ts , as d es cri b edi n s ect i o n 9 5 9 (c)(2 ). Fo r t ax y ear 2 00 7 STS g en erat edcu rren t
earn i n g s an dp ro fi t s o f $ 1 ,4 2 6 ,2 0 9
. As o f J an u ary

1 , 2 0 0 8 , STS h adaccu m u l at edearn i n g s an dp ro fi t s o f $ 8 5 ,5 9 0 ,2 3 1 . Fo r 2 0 0 8 STS g en erat ed$ 1 ,6 97 ,2 4 7 o f cu rren tearn i n g s an dp ro fi t s . STS d i dn o tm ak e an y d i s tri b u t i o n s i n ei th er 2 0 0 7 o r 2 0 0 8
. In co m e In cl u s i o n s Det erm i n edb y Res p o n d en t Res p o n d en td et erm i n edi n th e FPAAs th atSIHP h adi nco m e i n cl u si o n s p u rs u an t t o s ect io n 9 51 (a)(1 ) fo r t h e t ax y ears i n i s s u e as a res u l t o f SIHL/ SEHL’ s
an d STS’ g u aran t i es o f the SIG n o t es . Th e FPAAs s tat ed th atth e i n cl u s i o n s were fro m th e “ i n v es tm en to f earn in g s i n U.S. p ro p ert y ” b y th e CFCs
. Di s cu ss i o n I. Th e Am o u nt In cl u dedUn d er Sect i o ns 9 5 1 (a)(1 )(B) an d 9 5 6 In th e o rd i narycas e, fo rei g n s o u rce i n co m e earn edb y a CFC i s n o ts ub

ject t o U.S. t ax at i o n u n ti l i ti s rep atri at ed i n th e fo rm o f a d i v id en d o r o th er d i s tri b u t i o n t o the CFC’ s U.S. s h areh o l d ers . Secs . 8 8 1 an d8 8 2 ; Dav e Fi s ch b ei n M fg
. Co . v . Co m m i s s i o n er, 5 9 T.C. 3 38 , 3 5 3 (1 9 7 2 ); s ee al so S. Rep t . No . 8 7 -1 8 81 , at7 8- 1 2 -

(1 9 6 2), 1 9 62 -3 C.B. 7 0 3 , 7 8 4
. Ho wev er, u n d er s ect i on 9 5 1 (a), a U.S. s h areh o l d er
m u sti n cl u d e i n g ro s s i n co m e fo r t h e cu rren tt ax ab l e y ear i t s p ro rat a s h are o f cert ai n i t em s at tri bu t ab l e t o the CFC, reg ard l es s o f wh et her an y d i s tri b u t i o n was actu al l y m ad e. Th i s i n cl u d es “ th e am o u ntd et erm i n edu nd er s ect i o n 9 5 6 ”. See
s ec. 9 5 1(a)(1 )(A) an d(B). Th e am ou n td et erm in edu n d er s ect i o n 9 5 6 wi th res pect t o a U.S. s h areh o l d er fo r t h e t ax ab l e y ear i s th e l es s er o f: (1 ) th e s h areh o l d er’ s p ro rat a s hare o f t h e
av erag e am o u n to f “ Un i t ed St at es p ro p ert y ” h el db y th e CFC d u ri n g th e t ax ab l e y ear (l es s th e am o u n to f an y p rev i o u s l y

t ax edearn i n g s an dp ro fi ts d es cri bedi n
s ect i on 9 5 9 (c)(1 )(A) wi th res p ectt o th ats h areh o l d er) o r (2 ) th e s h areh o l d er’ s p ro rat a s hare o f t h e CFC’ s “ ap p l i cab l e earn in g s ” as d es cri b edi n s ect i o n 9 5 6 (b )(1 ). Sec. 9 5 6(a). Gen eral l y

th e am o u ntt ak en i n t o acco u n twi th res pect t o an y p ro p ert y th ati s Un i tedSt at es p ro p erty u n d er s ect i o n 9 5 6(a) i s i t s ad ju s t edb as i s, redu cedb y
an y l i ab i li ty t o wh i ch th e p ro p ert y

i s s ub ject . Id . (fl u s h l an g u ag e). Sect io n 9 5 6 (c) d efi nes Un i t edSt at es p ro p ert y thatwi l l cau se an i ncl u s i o n fo r a U.S. s h areh ol der i f h el d d i rect l y o r i n d i rect l y

b y th e CFC d u ri n g th e t ax ab l e y ear. Un i t edSt at es p ro p ert y i n cl u d es : (A) t an gi b l e p ro pert y l o cat edi n the Un i t ed St at es ; (B) t h e s t o cko f a d o m es t i c co rp o rat io n ; (C) t h e o b l ig at io n o f a Un i t ed St at es p ers o n; an d(D) cert ai n i n t an g i b l e p ro p ert y acq u i redo r d ev el o pedb y th e- 1 3 -

CFC fo r u s e i n th e Un it edSt at es . Sec. 9 5 6 (c)(1 ). Sect i o n 9 5 6 (c)(2 ) p ro v id es a l i st
o f ex cep ti o n s fo r i t em s th atwo u l do th erwi s e qu al i fy as Un i t ed St at es p ro p ert y
u n d er s ect i o n 9 5 6 (c)(1 ). Pro p ert y s p eci fi cal l y

ex cep tedfro m th e d efi n i ti o n o f Un i ted St at es p ro p ert y

i n cl u d es , e.g ., o b li g at i o n s o f t he Un i t edSt at es an dp ro p ert y l o cat edi n th e Un i t ed St at es wh i ch i s p urch as edi n the Un i t ed St at es fo r ex p o rtt o , o r u s e i n , fo rei g n co u n tri es . See s ec. 9 56 (c)(2 )(A) an d(B). Sect io n 9 5 6 (d ) p ro vi d es th ata CFC “ s h al l , u n d er reg u l at i o n s p res cri b edb y th e Secret ary , b e co n s i d eredas h o l d i n g an o b l i g at i o n o f a Un i t edSt at es p ers o n i f
* * * [t h e CFC] i s a p l ed g or o r g u aran t o r o f s u ch o b li gat i o n .” Reg ul at io n s p res cri be i n g en eral (1 ) wh en a CFC’ s p l ed g e o r g u aran ty wi l l b e co n s i dered th e
s am e as ho l d i n g th e u n d erl y i n g o b l i g at i o n an d(2 ) t he am o u n t o f an y o bl i g at i o n
co n si d eredt o b e h el d , fo r p u rp o s es o f d et erm i n in g th e am o u n t o f Un i tedSt at es p ro p erty h el db y th e CFC as a res u l to f i t s p l ed g e o r g u aran ty . See, e.g ., s ecs . 1 .9 56 -1 (e)(2 ), 1 .9 5 6-2 (c)(1 ), In co m e Tax Reg s . As i n effect fo r t h e t ax y ears i n i s su e, s ect i o n 1 .9 5 6 -2 (c)(1 ), In co m e Tax Reg s., p ro v i des that“ an y o bl i g at i o n * * * o f a Un i t edSt at es p ers o n * * * wi th
res p ectt o wh i ch a co n tro l l ed fo rei g n co rp o rat i on i s a p l ed g o r o r g u aran to r s h al l b e
co n si d eredfo r p u rp o s es o f s ect i o n 9 5 6 (a) * * * t o b e Un i t edSt at es p ro p ert y h el d b y s u ch co n tro l l edfo rei gn co rp o rat i o n .” (Em p h as i s ad d ed .) Un d er reg u l at i o n s- 1 4 -

th atad dres s “ i nd i rect ” p l ed g es an dg u aran t i es , a CFC wh o s e as s et s s erv e (ev en th o u g h i n d i rect l y ) as s ecu ri ty fo r t h e p erfo rm an ce o f an o b l i g at i o n o f a Un i t ed St at es p ers o n wi l l b e co n s i d ereda p l ed g o r o r g u aran t o r o f t hato b l ig at i o n . Sec. 1 .9 56 -2 (c)(2 ), In co m e Tax Reg s . A CFC i s n ottreat edas h o l d i n g Un i t edSt at es p ro p erty u n d er th e g en eral ru l e o f s ect io n 1 .9 5 6 -2 (c)(1 ), In co m e Tax Reg s ., i f i t
m ak es a p l ed g e o r g u aran ty o f an o bl i gat i o n o f a Un it edSt at es p ers on an dth at p ers o n “ i s a m ere co n du i ti n a fi n an ci n g arran gem en t .” Sec. 1 .9 5 6 -2 (c)(4 ), In co m e Tax Reg s . Sect io n 1 .9 5 6 -1 (e), In co m e Tax Reg s ., p ro v i d es ru les fo r d et erm i n i n g th e
am ou n tat tri b u t ab l e t o Un i t edSt at es p ro p erty t ak en i n to acco u n tu n d er s ect i o n 9 5 6 , an ds ect i o n 1 .9 5 6 -1 (e)(2 ), In co m e Tax Reg s ., p ro v id es th e ru l e fo r p led g es
an d g u aran t i es . As i n effect fo r t h e t ax y ears i n i s s u e, s ect i o n 1 .9 5 6 -1 (e)(2 ), In co m e Tax Reg s ., p ro v id es th at“ th e am o u n tt ak en i n t o acco u ntwi th res p ectt o
an y p l ed g e o r g u aran t ee * * * s h al l b e t h e u np ai d p ri nci p al am o u nto n th e ap p li cab l e d et erm i n at i o n dat e o f t h e o b l i g at i o n wi th res p ectt o wh ich th e
co n tro l l edfo rei g n co rp o rat i o n i s a p l ed g o r o r g u aran t o r.” (Em p h as i s ad ded .) Res p o n d en tco n t en d s th atth e ap p l i cab l e reg u l at io n s an d t h e u n di s p u t ed fact s o f t h i s cas e s up p ortth e d et erm i n edi n co m e i ncl u s i o ns wi th o u tth e n eedfo r ad d it i o n al factfi n d in g . Iti s u nd i s p u t edth atthe CFCs g u aran t eed o b l i g at io n s (t he- 1 5 -

SIG No t es ) o f a Un i t edSt at es p ers o n (SIG) an dth atSIHP was du ri ng th e t ax y ears i n i ss u e a U.S. s h areh o l der t h ato wn edo r was co n s i dered as o wn i n g 1 0 0 % o f b o t h CFCs ’ s t ock . Res p o nd en tco n t en d s th at the g en eral ru le o f s ect i o n 1 .9 56 -2 (c)(1 ), In co m e Tax Reg s ., ap p l i es t o th e CFCs ’ g u aran t ies an dth e CFCs are acco rd i n g l y
co n si d eredt o h av e h el d th e u n d erl y i n g o b l i g at i o n s u nd er s ect i o n 9 5 6 (d ). Res po n d en tco n t en d s th atth e am o u n t o f t he Un i t edSt at es p ro p ert y co ns i d ered h el db y each CFC eq u al edth e u np ai dp ri n ci pal am ou n ts o f t h e SIG n o t es as o f t h e cl o s e o f each qu art er fo r wh i ch th e CFCs rem ai n edg u aran to rs . See s ec. 1 .9 5 6
- 1 (e)(2 ), In co m e Tax Reg s . Th e SIG n o t es rem ai n edo u t st an d in g an dthe CFCs
rem ai n edg u aran t o rs u n d er t h e ARGSA fro m Oct o b er 7 , 2 0 07 , atl eas t th ro u g h Decem b er 3 1 , 2 0 08
. Res p o n d en tco n t en d s th atth e am ou n ts d et erm i n edu nd er s ect i o n 9 5 6 th at
s h o u ldb e i n cl u d edi n SIHP’ s g ro s s i n co m e u nd er s ect i o n 9 5 1 (a)(1 )(B) are l i m i t ed i n thi s cas e t o th e CFCs ’ res p ect i v e ap p l i cab l e earn i n g s fo r t h e t ax y ears i n i s s u e. Th e av erag e u np ai dp ri n ci p al am o u n t s o f t he SIG n ot es du ri ng th e t ax y ears i n i s su e ex ceed edth e CFCs ’ ap p l i cab l e earn i n g s fo r t ho s e y ears as cal cu l at edu n d er
s ect i on 9 5 6 (b )(1 ). Th e p art i es h av e s t i p ul at edth e CFCs ’ ap p l i cab l e earn i n g s fo r th e t ax y ears i n i s su e.- 1 6 -

Pet i t i o ner co n ten d s , an dres p o nd en t d oes n ot d i s p ut e, t hats ect i on 9 5 6 (d ) i s
n o ts el f-ex ecu t i n g an d th at th e ap p l i cab il i ty o f s ect i o n 9 5 1 (a)(1 )(B) an dth e
am ou n to f t h e i n co m e i n cl u s i o n s ati s su e can b e d et erm i n edo n l y b y referen ce t o reg u l at i o n s p ro m

u l g at edb y

the Dep art m en to f t h e Treas u ry (Treas u ry ),
s p eci fi cal l y

s ect io n s 1 .9 56 -2 (c)(1 ) an d1 .9 5 6 -1 (e)(2 ), In co m e Tax Reg s . Pet i t io n er’ s p ri n ci p al arg u m en t, o n wh i ch i t s m o t i o n fo r s u m m ary ju d g m en tres t s , i s thatth es e reg u l at i o n s are i n val i d . Pet i t i o n er co n t en d s th ati n th e ab s en ce o f
v al i dreg u l at i o n s th e i n co m e i n cl u s i on s d et erm i n edb y res p o nd en tcan n o tb e
s u s t ai n ed
. II. Val i di ty

o f Reg u l at i o n s Pet i t i o ner co n ten d s th atth e s ub jectreg u l at io n s are arb i trary an dcap ri ci o u s
u n d er p ri n ci p l es o f ad m i n i s trat i v e l aw. Itco n t en d s th ati n th e p ro ces s o f p ro m u l gat i n g th e reg u lat i o n s Treas u ry fai ledt o en g ag e i n reas o n ed d eci s i o n m ak i n g o r t o p ro v i d e a reas o n edex p l an at i o n fo r t he ag en cy ’ s act i o n s . See M o t o r Veh i cl e M frs . As s’ n o f t h e U.S. v . St at e Farm M u t . Au to In s . Co
. , 4 6 3 U.S. 2 9 (1 98 3 ). Itfu rt her co nt en d s th atth e reg u l at i o n s are “ arb i traryan dcap ri ci o u s i n
s ub s t an ce” an dth e ru l es em b o di edtherei n “ rep res en tan u n reas o n ab l e p o l i cy ch o ice i n l ig h to f t h e d el eg at i n g s t atu t e an d i ts l eg i s l at i v e h i s to ry .” See Ch ev ro n U.S.A. In c. v . Natu ral Res . Def. Co u nci l , In c., 4 6 7 U.S. 8 3 7 (1 9 8 4 ). Res p o n d en t- 1 7 -

co n ten d s t h atth e reg u l at i o n s are en t i t l edt o d eferen ce u n d er Ch ev ro n an d are
v al i d
. Su m

m ary ju d g m en ti s an ap p ro p ri at e v eh i cl e fo r d et erm i ni n g the v al i d i ty o f reg u l at i o n s . See, e.g
. , Al tera Co rp . & Sub s . v . Co m m i ss i o n er, 1 4 5 T.C. 9 1 (2 0 1 5 ). To ad dres s p et i t io n er’ s arg u m en t s , we m u s trev i ew i n d et ai l the h i s t o ry o f t h e
s ub jectreg u lat i o n s. A. Rel ev an tLeg i s l at iv e Hi s t o ry an dAdm i ni s trat i v e Reco rd 1
. Rev en u e Acto f 1 9 6 2 Treas u ry pro m

ul g at edth e reg u l at i o n s at i s s ue fo l l o wi n g th e p as sag e o f t he Rev enu e Acto f 1 9 6 2 (1 96 2 Act ), Pub . L. No . 8 7 -8 3 4 , s ec. 1 2 , 7 6 St at . at1 0 0 6 , wh i ch en act eds ect i o n s 9 5 1 an d9 5 6 as p arto f s ub part F o f p artIII, s ub ch ap t er N, ch ap ter 1 o f t h e 1 9 5 4 Co de (s ub p artF) as am en d ed
. Pu rs u an tt o s ect i o n 9 5 1 (a)(1 )(B) U.S. s h areh o l ders were req u i redt o i n cl u d e i n g ro ss i n co m e t h ei r p ro rat a s hares o f a CFC’ s “ i n creas e i n earn i n g s i nv es t edi n Un i t edSt at es p ro pert y ”, wi th th atam o u n td et erm i n ed u n d er t h e p ro v i s i o n s o f s ect i o n 9 5 6 . Un it edSt at es p ro p erty was d efi n ed i n s ect i o n 9 5 6 (b )(1 ) an d i n cl u d edth e s am e fo ur cat eg o ri es o f p ro p erty (i n cl u d i n g o b li g at i o n s o f Un i t edSt at es p ers o n s ) p ro v i d edfo r cu rren t l y
u n d er s ect i o n 9 5 6 (c)(1 ). Sect i on 9 5 6 (b )(2 )(A)-(F) ex cep t edcert ai n i t em s o r tran s act io n s fro m

th e d efi ni t i o n o f Un i t ed St at es p ro p ert y . Sect i o n 9 5 6(c),- 1 8 -

co n cern in g th e t reat m en to f CFC p l ed g es an dg u aran ti es o f o b l i g at i o n s o f Un i t ed St at es p ers o ns , was i d en t i cal t o t h e p ro v i s i o n cu rren tl y en act ed as s ect i o n 9 5 6 (d ). Th e Co d e s ect io n s m ak i n g up s ubp artF (s ect io n s 9 5 1 th ro u g h 9 6 4 ) were
en act edi n res p o n s e t o p ercei vedab u s es b y U.S. t ax p ay ers th ro u g h t h e u s e o f CFCs . See Do u g h ert y v . Co m m i s s i o n er, 6 0 T.C. 9 1 7 , 9 2 8 (1 9 7 3 ) (“ In s ub p artF, Co n g res s h as s i ng l edo u ta p art i cu l ar cl as s o f t ax pay ers , U.S. s h areh o l d ers , wh o s e d eg ree o f co n tro l o v er t h ei r fo rei g n co rp o rat i o n al lo ws th em t o treat th e
co rp o rat i o n’ s u nd is tri b u t edearn i ng s as th ey s ee fi t .”). Gen eral ly Co n g res s i n t en d edth ats ect i o n s 9 51 (a)(1 )(B) an d9 5 6 wo u l d o p erat e “ t o p rev en t th e rep at ri at i o n o f i nco m e t o th e Un i t edSt at es i n a m an n er wh i ch d o es n o ts ubjecti tt o U.S. t ax at i o n .” H.R. Rep t . No . 8 7 -1 4 4 7 , at5 8 (1 9 62 ), 1 9 6 2 -3 C.B. 4 0 5 , 4 6 2 . Th e rep o rto f t h e Sen at e Fi n an ce Co m m i t t ee acco m

pan y i n g th e 1 9 6 2 Actn ot edth at

“ [g ] en eral l y ” u n t ax edCFC earn i n g s i n ves t edi n Un i tedSt at es p ro p erty are t ax edt o U.S. s h areh o l d ers o n th e g ro u n d s th atth e u se o f s uch fu n d s fo r d o m es ti c i n v es t m en ti s a b en efi t, wh i ch “ i s s ub st an t ial l y th e eq u i v al en t o f a d i v id en db ei n g p ai dt o th em .” S. Rep t . No
. 8 7 -1 8 81 , s up ra at8 8 , 1 9 6 2 -3 C.B. at7 9 4 . Co n g res s p ro v id eds p eci fi c ex cep t i o n s u n d er s ect i o n 9 5 6 (b )(2 ) b ecau s e i n i t s b el i ef t h es e i t em s , al th o u g h t ech n i cal l y i n v es t m en t s i n d o m es ti c p ro pert y , co n s t i tut ed“ n o rm al
co m m erci al tran s act i on s wi th o u tth e i n t en t i o n t o p erm itth e [CFC’ s ] fu n d s t o- 1 9 -

rem ai n i n th e Un it edSt at es i nd efi n i t el y ”. S. Rep t . No . 8 7 -1 8 81 , s up ra at8 8 , 1 9 6 2 -3 C.B. at7 9 4
.

2
. Pro p o s edan dFi n al Reg u l at i o n s OnAp ri l 1 1 , 1 9 6 3, Treas u ry i s su eda No t i ce o f Pro p o sedRu l em ak i n g , wh i ch s etfo rt h an ds o l i ci tedp ub l i c co m m en to n a p ack ag e o f reg ul at i o n s p ro p os edu n d er s ect i o n s 9 5 5 , 9 5 6 , an d9 5 7 (c). 2 8 Fed . Reg . 3 51 5 (Ap r. 1 1 , 1 9 6 3 ). Wri t t en co m

m en t s recei v edi n co n n ect i o n wi th th e p ro p o s edru l em ak i n g i n cl u d ed
s o m e rel at in g t o th e p ro p o s ed reg u l at i o n s u nd er s ect i o n 9 5 6 . No ne o f t hes e
co m m en t s rai s edco n cern s s p eci fi cal l y as t o the ru les fo r p led g es an d g u aran t i es i n
s ect i on s 1 .9 5 6-2 (c)(1 ) an d1 .9 56 -1 (e)(2 ), Pro p os edIn co m e Tax Reg s ., 2 8 Fed
. Reg
. 3 5 4 9 , 3 5 50 (Ap r. 1 1 , 1 9 6 3 ). Th e Am eri can Bar As s o ci at i o n Sect i o n o f Tax at i o n s ub m i t t edo n e co m m en tth atreferen ced“ th e g en eral ru l e as t o th e treat m en to f p led g es an dg u aran t i es ”, an d wh i ch s ug g es t edth atth e p ro p o s ed
ex cep t i o n fo r g u aran t i es m ad e p u rs u an t t o “ co n du itarran g em en ts ” s h o u l d b e b ro ad en ed
. A p ub l i c h eari n g was h el do n J u n e 2 0 , 1 9 6 3
. OnFeb ru ary 2 0 , 1 9 6 4, Treas u ry ad o p t edas fi n al th e p ro po s edreg u l at i o n s
u n d er s ect i o n 9 5 6 , s ub

jectt o cert ai n ch an g es . T.D. 6 7 0 4 , 1 9 6 4 -1 C.B. (Part 1 ) 2 8 4 . Th e p ream

b l e t o th e Treas u ry

Deci s i o n s t at edth e fi n al reg u l at i o n s were p ro m u l gat ed“ t o co n fo rm * * * [t h e In co m e Tax Reg u l at i o n s ] t o s ect i o n 9 5 6 o f t h e- 2 0 -

In t ern al Rev enu e Co d e o f 1 9 5 4 , as ad d edb y s ect i on 1 2 (a) o f th e Rev en u e Acto f 1 9 6 2 ” an ds t at edth ey

were ad o p t ed “ [a] ft er co n s i d erat i o n o f al l s uch rel ev an t
m at t er as was p res en t edb y i n t eres tedp ers o n s reg ard i n g th e ru les p ro p o s ed ”. Id
. Th e Treas u ry

Deci s i o n s t at edth atth e reg u l at i o ns were i ss u ed u n d er t h e au th o ri t y
co n tai n edi n s ect i o n 7 8 0 5 . Id ., 1 9 6 4 -1 C.B. (Part 1 ) at2 9 6 . Sect i o n s 1 .9 5 6
- 2 (c)(1 ) an d1 .9 5 6 -1 (e)(2 ), In co m e Tax Reg s ., were ad o pt eds ubs t an ti al l y
u n ch an g edfro m th e p ro p o s edreg u l at i o n s . Th e ex cep t i o n fo r CFC g u aran t i es
m ad e p u rs uan tt o co n du i tfi n an ci n g arran g em en t s was ex t en s iv el y rev i s edan d b ro ad en ed
. Co m

p are s ec. 1 .9 5 6 -2 (c)(2 ), Pro p o s ed In co m e Tax Reg s ., 2 8 Fed
. Reg
. 3 5 5 0 (Ap r. 1 1 , 1 9 6 3 ), wi th T.D. 6 70 4 , 1 9 6 4 -1 C.B. (Part 1 ) at2 9 3 -2 9 4
.

3
. St atu t o ry

Am en dm en t s Th e Om n i b u s Bu d getReco n ci l iat i o n Acto f 1 9 9 3 (OBRA), Pu b . L. No . 1 0 3
- 6 6 , 1 0 7 St at . 3 1 2 , m o d ifi edth e “ s tru ctu re an do p erat in g ru l es ” o f s ect i o n 9 5 6
. H.R. Rep t . No . 1 0 3 -1 1 1 , at6 9 2 (1 9 9 3 ), 1 9 9 3 -3 C.B. 1 67 , 2 6 8 . Sect io n s 9 5 1 (a)(1 )(B) an d9 5 6 (a) were am en d edt o read i n t h ei r cu rren t fo rm s . See OBRA
s ecs . 1 3 23 2(a), (c), 1 0 7 St at . at5 0 1-5 0 2 . OBRA d idn o t am en d s ub s t an t i v el y th e Co d e s ect i o n s d efi n i n g Un i t ed St at es p ro p ert y o r requ i ri n g g en eral l y th atp l ed g o rs
o r g u aran t o rs o f o b l i gat i o n s o f Un it edSt at es p ers o n s b e t reat edas h o l d i n g s u ch p ro p erty . OBRA red es i g nat eds ect i o n 9 5 6(b ) (d efi n i ng Un i tedSt at es p ro p ert y )- 2 1 -

an d (c) (rel at i n g t o p l ed g es an d g u aran t i es ) as s ect i o n 9 5 6(c) an d (d ), res pect i v el y , b u to th erwi s e i t reen act edth os e t wo p ro vi s i o n s fu l l y . Fo r t he t ax y ears i n i s s u e t he
ru l es u n d er s ect i o n s 1 .9 5 6 -2 (c)(1 ) an d 1
. 9 5 6 -1 (e)(2 ), In co m e Tax Reg s ., were t h e
s am e as th e fi nal ru l es ad op t edi n 1 9 6 4
. B. An al y s i s Un der Pri n ci p l es o f Ad m i n i s trat i v e Law 1
. Leg i s l at i v e Ru l es an dAPA Sect i o n 5 5 3 (b ) A d i s t in ct i o n i s drawn i n ad m i n i s trat i v e l aw b et ween i n terp ret i v e an d
s ub s t an t i ve (o r l eg i sl at i v e) ag en cy ru l es . Ani n t erp ret i v e ru l e m erel y cl ari fi es o r
ex p lai n s p reex is t i ng s ub s t an t i v e l aw o r reg u l at i o ns . El i zab et h Bl ack wel l Heal th Ct r. fo r W o m en v . Kn o ll , 6 1 F.3 d1 7 0 , 1 8 1 (3 dCi r. 1 9 95 ). A l eg i s l at i v e ru l e, b y
co n tras t , “ creat es ri gh t s , as s i g n s dut i es , o r i m p os es o b l i g at i o n s , the b as i c t en o r o f wh i ch i s n o tal read y

o u t li nedi n t h e l aw i ts el f”. Di a Nav i g at i o n Co . v . Po m ero y , 3 4 F.3 d1 2 5 5, 1 2 6 4 (3 dCi r. 1 9 9 4 ) (qu ot i n g La Cas a Del Co nv al eci en t e v . Su l l i van , 9 6 5 F.2 d1 17 5 , 1 1 7 8 (1 s tCi r. 1 9 92 )). Leg i s l at i v e ru l es , u n l i k e i n t erp ret i v e ru l es , h av e “ th e fo rce an deffect o f l aw”. Ch ry s l er Co rp . v . Bro wn , 4 4 1 U.S. 2 8 1 , 3 0 3 (1 9 7 9 ); s ee al s o Ch ao v . Ro th erm el , 3 2 7 F.3 d2 2 3 , 2 2 7 (3 dCi r. 2 0 0 3 ). Th e reg u l at i o n s ati s su e are l eg i s l at iv e ru l es . Th e ad j u s t m en t s d et erm i n ed fo r SIHP’ s i nco m e can o n ly b e s u s t ai n edo n th e b as i s th atth e reg u l at i o n s p ro p erl y- 2 2 -

ap p ly t o th e CFCs ’ g uaran t i es , an dwe wo ul db e u n ab l e t o d et erm i n e wh et h er an d i n wh atam o un tth e g uaran t i es s h o u ldcau s e an i n co m e i n cl u s i o n fo r SIHP fo r t h e t ax y ears i n i s s u e ab s en t th e ru l es ex p res s edi n the reg u l at i o n s . Thu s th ey

“ i m p o s e[ ] o b l i g at i on s ” n o ts p eci fi cal l y o ut li n ed i n th e g o v ern i n g s tatu t e. In p ro m u l gat i n g th e reg u lat i o n s Treas u ry i n v o k eds ect i o n 7 8 0 5, u n der wh i ch i ti s d el eg at edau th ori ty

t o “p res cri b e al l n eed fu l ru les an dreg u l at i o n s fo r t he
en fo rcem en to f” t he Co d e. Su ch reg u l at i o n s carryth e fo rce o f l aw, an d th e Co d e i m p o s es p en al t i es fo r fai l in g t o fo l l o w th em . See Al t era Co rp . v . Co m m i s s i o n er, 1 4 5 T.C. at1 16
. Leg i s l at i v e ru l es , b ecau s e t h ey “ creat e n ew l aw, ri g h t s , o r du ti es ”, are
s ub jectt o t h e n ot ice an dco m m en treq u irem en ts o f t h e Ad m i n i s trat i v e Pro cedu re Act(APA), 5 U.S.C. s ec. 5 5 3 (b ) (2 0 1 2 ). SBC In c. v . FCC, 4 1 4 F.3 d4 8 6 , 4 9 7 (3 d Ci r. 2 0 05 ). Pu rs u an tt o APA s ec. 5 5 3 (b ) an d(c) an ag en cy p ro m u l g at i n g reg u l at i o n s b y i n fo rm al ru l em ak i n g m u s t(1 ) p ub l i s h a n o t i ce o f p ro p o sed
ru l em ak i n g i n th e Fed eral Reg i s t er, (2 ) p ro v i d e “ in t eres t edp ers o n s an o p p o rtu n i t y t o p art ici p at e * * * th ro u g h s ub m i s s i on o f wri t ten d at a, v i ews , o r arg um en t s ”, an d (3 ) “ [a] ft er co n s id erat i o n o f t h e rel ev an t m at t er p res en t ed , * * * i n co rp o rat e i n th e
ru l es ad o p t eda co n ci s e g en eral s t at em en t o f t h ei r b as is an dp u rp o s e.” Th es e p ro cedures are i n ten d edt o as s i s tju d i ci al rev i ew an d“ t o p ro v i d e fai r t reat m en tfo r- 2 3 -

p ers o n s affect edb y

a ru l e.” Ho m e Bo x Offi ce, In c. v . FCC, 5 6 7 F.2 d9 , 3 5 (D.C. Ci r. 1 9 77 ). Th e ad m i ni s trat iv e reco rdrefl ect s th atTreas u ry ’ s ru l em ak i n g fo r t h e l eg i s lat i v e ru l es ati s s u e co m pl i edwi th th e req ui rem en t s o f APA s ec. 5 5 3 (b ). Pet i t io n er d o es n o td is p ut e thatth e ag en cy p ro p erl y p ro m u l g at edth e reg u l at i o n s b y n o ti ce an dco m

m en t . Nev ert h el es s, we reach a d et erm i n at i o n as t o th i s i s s u e,
an d i ti s rel ev an ti n s o far as p et i t i o n er co n t en ds thatth e ag en cy ’ s p ro cedu res i n p ro m u l gat i n g th e reg u lat i o n s were i n ad equ at e. Pet i t i o n er co n t en d s th at Treas u ry fai l edt o s at i s fy

“ th e reas on edd eci s i o n m ak i n g req u irem en t an dth e reas o n ed
ex p lan at i o n req u i rem en t ”.

2
. Pro cedu ral Req u i rem en t s Bey o ndNo ti ce an d Co m m en t Co n gres s m ay

p ro v i d e i n th e g o v ern i n g s t atu t e t h atru l es th ereu n d er are t o b e p ro m u l g at edp urs u an tt o m ore fo rm al p ro cedu res than th o s e req u i redu n d er APA s ec. 5 5 3 (b ). See APA s ecs . 5 5 3 (c), 5 5 6, 5 5 7; s ee al so Un i t ed St at es v . Al l eg h en y -Lu dl u m

St eel Co rp ., 4 0 6 U.S. 7 42 , 7 5 6 -7 5 7 (1 9 7 2 ). Ho w ev er, ab s en ta
s p eci fi c co n gres s io n al d i rect i v e t h e Sup rem e Co u rth as h el d“ th atg en eral l y
s p eak i n g * * * [APA s ec. 5 5 3(b )] es t ab l is hedth e m ax im u m p ro cedu ral req u i rem en t s wh i ch Co n g res s was wi l l i n g t o h av e th e co urt s i m p o s e up o n ag en ci es i n co n du ct i n g ru l em ak i ng p ro cedu res .” Vt . Yan k ee Nu cl ear Po w er Co rp . v .- 2 4 -

Natu ral Res . Def. Co u nci l , In c., 4 3 5 U.S. 5 19 , 5 24 (1 9 78 ); s ee al so FCC v . Fo x Tel ev i s i on St at i o n s , In c., 5 5 6 U.S. 5 0 2 , 5 1 3 (2 0 0 9 ) (t h e APA “ s et s fo rth th e fu ll
ex t en to f ju d i ci al au th o ri ty t o rev i ew ex ecu t iv e ag en cy act i o n fo r p ro cedural
co rrect nes s ”). Th ere m ay b e ci rcu m s t an ces that“

ju st i fy a co u rti n o v ertu rn i n g ag en cy act i o n b ecau s e o f a fai l u re t o em p l o y p ro cedu res b ey o ndth o s e req u i redb y
* * * [APA s ec. 5 5 3 (b )] ”; h o wev er, “ s u ch ci rcu m s t an ces * * * are ex trem el y rare.” Vt . Yan k ee, 4 3 5 U.S. at5 2 4
. APA s ec. 7 0 6 (2 )(A) p ro v i d es th ata rev i ewi n g co u rts h al l i n al l cas es h o l d
u n l awfu l an ds etas i d e ag en cy act i o n th ati s “ arb i trary , cap ri ci o u s , an ab u s e o f d i s cret i o n , o r o th erwi s e n o ti n acco rd an ce wi th l aw”. Pu rs u an tt o th i s s t an d ardan ag en cy m u s t“ art icu l at e a s at i s fact o ry ex p l an at i o n fo r i t s act i o n .” St at e Farm , 4 6 3 U.S. at4 3 . W e m

u s td et erm i ne i n th e l i g h to f t h atex p l an at i o n wh et h er t h e ag en cy ’ s d eci si o n “ was b as edo n a co n s i d erat i o n o f t h e rel ev an tfact o rs an d wh et h er t h ere h as b een a cl ear erro r o f ju d gm en t .” Bo wm an Tran s p., In c. v . Ark an s as -Bes t Frei gh tSy s ., In c., 4 1 9 U.S. 2 8 1 , 2 8 5 (1 97 4 ) (qu o t i n g Ci t i zen s t o Pres . Ov ert o n Park , In c. v . Vo l p e, 4 0 1 U.S. 4 0 2, 4 1 6 (1 9 7 1), ab ro gat edo n o th er g ro u nd s b y

Cal i fan o v . San d ers , 4 3 0 U.S. 9 9 (1 9 7 7 )). Th e s co p e o f o u r rev i ew “ i s
a n arro w o n e” an d“ th e co u rti s n o tem p o weredt o s ub s ti tut e i t s ju d gm en tfo r t h at
o f t h e ag en cy .” Id . Al th o u g h a co u rtcan n otp ro v i d e a reas o nedb as i s fo r th e- 2 5 -

ag en cy ’ s d eci si o n i f t h e ag en cy i t s el f d i dn o tp ro v id e o n e, a co u rtm u s t “ up h o l da d eci s i o n o f l es s th an i d eal cl ari ty i f th e ag en cy ’ s p at h m ay reas o n ab l y

b e d i s cern ed .” Id . at2 8 6. Pet i t i o ner rel i es o n St at e Farm i n arg ui n g th at an ag en cy i s b o u n d i n ev ery
cas e t o m eet “ th e reas o n edd eci s i o n m ak i n g an dreas o n edex p lan at i on req u i rem en t s ” an dth atTreas ury ’ s p ro cedu res fai l ed t o s at i sfy th es e requ irem en t s i n res p ecto f t h e fi n al ru les ad o p t edfo r p l ed g es an d g u aran t i es . InSt at e Farm th e Sup rem e Co u rth el dth atan ag en cy ’ s d eci s i o n t o res ci nda p ri o r reg u l at i o n was arb i trary an dcap ri ci o u s u nd er APA s ec. 7 0 6 (2 )(A). In s o h o l d i ng th e Sup rem e Co u rtco n cl u d edth atth e ag en cy ’ s act i o n was arb i traryan d cap ri ci o u s b ecau s e i t

“ fai l edt o p res en tan ad equ at e b as i s an dex p l an at i o n ” fo r i t s d eci s i o n . St at e Farm , 4 6 3 U.S. at3 4. Th e Sup rem e Co u rtwro t e: No rm al l y , an ag en cy

ru le wo u ldb e arb it raryan dcap ri ci ou s i f th e ag en cy h as rel i ed o n fact o rs wh i ch Co ng res s h as n o ti n ten d edi tt o co n s i d er, en t irel y

fai l edt o co n s i d er an i m

po rt an tas p ecto f t h e p ro b l em , o fferedan ex p lan at io n fo r i t s d eci s i o n th atru n s co u n ter t o th e ev id en ce b efo re t h e ag en cy , o r i s s o i m p l au si b l e t h ati t co u l dn o t b e as cri b edt o a d i fferen ce i n v i ew o r t he p ro du cto f ag en cy ex p ert i s e. * * * [Id . at4 3 .] Treas u ry ’ s act i o n s i n p ro m u l g at i n g th e reg u l at i o ns ati s su e m u st b e s etas id e i f i t s p ro cedu res fai l edt o s at i s fy th e g en eral s t an d ardu n d er APA s ec. 7 0 6 (2 )(A). Ho wev er, th e fact s s urro u n di n g the ag en cy act io n i n St at e Farm

are i n ap p o s i t e,- 2 6 -

an d th e co n cern s t h atl edth e Co u rti n th at cas e t o rev i ew m o re s tri ng en tl y th e ag en cy ’ s p ro ces s are n o tp res en t edh ere. Th e ag en cy

act i o n i n St at e Farm , 4 6 3 U.S. at3 5, rep res en teda cl ear an d ab rup trev ers al i n ag en cy p ol i cy , an dth e earl i er p o l i cy was s up p o rt edb y

a
s ub s t an t i al b o dy

o f fact s d ev el o p edb y

th e ag en cy

i t s el f. A nu m

b er o f fact s
co n ti n u eds tro ng l y

t o s up p ortth e i ni t i al ru l e o v er t h e res ci s si o n , an di t was
s i gn i fi can ti n th e Co u rt ’ s v i ew t h atCo ng res s i n t en ded al l ag en cy fi n d in g s u n d er th e g o vern i n g s t atu te t o b e “ s upp o rt ed b y ‘ s ub s t an t ial ev i d en ce o n the reco rd ’ ”. Id . at4 3 -4 4 , 4 7 -4 8. Th e Co u rts t at edth at“ an ag en cy ch an g in g i t s co u rs e m u s t
s up p ly a reas o nedan al y s i s ”. Id . at5 7 (qu o t i n g Great er Bo s t o n Tel ev i s i o n Co rp . v . FCC, 4 44 F.2 d8 4 1 , 8 5 2 (D.C. Ci r. 1 9 7 0 )). M o reo v er, t h e Co u rtfo u n d th atth e ag en cy ’ s d eci si o n t o res ci n d th e ru l e fai l edt o co n s i d er an o b v i o u s m o di fi cat i o n th atwo u l dh av e l eftth e ru l e i n p l ace an dco n t i n u edt o p ro m o t e t h e s t atu t e’ s p u rp os e. See i d . at4 6 -4 8 . Co ng res s h adex p res s ly s t at edi t s i n t en t i o n th at “ s afet y
s h al l b e t h e o v erri d i n g co ns i derat i o n i n th e i s s u an ce o f s t an d ard s ” u n d er t h e g o v ern i n g s t atut e, an dth e Co u rts u g g es tedth e ag en cy m ay h av e g i v en i m

p ro p er wei g h t t o o th er fact o rs i n i t s an al y s i s . Id . at5 5
. Un d er th e ci rcu m st an ces i n St at e Farm , th e Sup rem e Co urtco n cl u dedth at th e ag en cy

m u s t p ro v i d e a m o re ex t en s i v e reas o n edan al y s i s an dex p l an at i o n i n- 2 7 -

o rd er t o d em o ns trat e t h at i t s act i o n s were n o tarb i trary , cap ri ci ou s , o r o th erwi s e
n o ti n acco rd an ce wi th th e l aw. In rem an d i n g th e m at t er t o th e ag en cy th e Co u rt
s t at edth ati n the l i g h to f s p eci fi c “ l im i t at io n s o f t h e reco rd ” t h e ag en cy ’ s
ex p lan at i o n was “ no ts u ffi ci en tt o en ab l e u s t o co ncl u d e th atth e res ci s s io n was th e p ro ducto f reas o n edd eci s i o n m ak i n g ”. Id . at5 2 . Th e Co u rtreject edth e n o t i o n th ati n rev i ewi n g th e ag en cy ’ s act io n u n d er APA s ec. 7 0 6 (2 )(A) i twas

“ i m p o s [i n g ] ad d i t i o n al p ro cedural req u i rem en t s up o n th e ag en cy .” St at e Farm , 4 6 3 U.S. at5 0 (ci t i n g Vt . Yan k ee, 4 3 5 U.S. 5 1 9). Th e reg u l at i o n s ati s su e d i dn o trev ers e p rev i o u s l y s et t l edag en cy

p ol i cy , an d th ey were n otp ro m

u l gat edco n trary t o fact s o r an al y s i s th ats up p ort eda d i fferen t o u t co m e. Treas ury ’ s ru l em ak i n g i n th is cas e d i ffers fu n d am en t al ly fro m th e ag en cy

act i o n i n St at e Farm

b ecau s e Treas u ry ’ s d eci s i o n d i dn o t(an dco u l d
n o t ) p u rp o rtt o rel y

o n fi n d i n g s o f fact . Treas ury ’ s act i o n s p ro m ul g at i n g th e ru l es fo r p l ed g es an dg u aran t ies refl ectat m o s t th e i m p l em en t at i o n o f a p o l i cy ju d g m en t . Th e ad m in is trat i v e reco rdrefl ect s th atn o s ubs t an ti v e al t ern at i v es t o the fi nal ru l es were p res en t edfo r Treas u ry ’ s co n s i d erat i o n du ri n g th e ru l em ak i n g p ro ces s . Th e ag en cy

d i dn o tactarb i trari l y

o r cap ri ci o u s l y

b y fai l in g t o ad dres s
co n traryv i ewp o in t s o r fi n d i ng s o f fact th at were n ev er d ev el o p edo r p res en t ed
.- 2 8 -

Pet i t i o ner co n ten d s th atth e reg u l at i o n s are n o tthe p ro du cto f reas o ned d eci s i o n m ak i n g b ecau s e Treas u ry fai ledt o co n s id er du ri ng th e ru l em ak i n g

“ i m p o rt an tas p ect [s ] o f t h e p ro b l em ” as s o ci at edwi th CFC p l ed g es an dg u aran t i es . See i d . at4 3 . Pet i t i o n er p ro v i d es a l i s to f fact o rs th ati tco n ten d s are rel ev an tas t o

“ wh et h er a g i v en CFC g u aran t ee can b e co n s i d ereda rep at ri at i o n o f earn in g s ”. Pet i t io n er co n ten d s th atth e ag en cy was o b li g at edu n d er t h e g o vern i n g s t atu t e t o wei g h an db al an ce t h es e fact o rs (an dp o s s i b l y o th ers ) t o p ro m u lg at e ru l es
co n si s t en twi th “ th e u n d erl y i ng p u rp o s es o f s ect i o n 9 5 6”. W e d o n o tag ree t hatan o n -t h e-reco rdco n s id erat i o n o f an y p art i cu l ar fact ors i s req u i redfo r ru l em ak i n g u n d er s ect i o n 9 5 6 (d ). Th e p l ai n t ex t o f t h e
s t atu te d o es n o treq u ire t h e ag en cy t o en g ag e i n a p ro ces s o f b al an ci n g o r t o p ro v id e an an al y s is o f i t s d eci s i o n m ak i ng b as edo n th e fact o rs th atp et i t i o n er i d en t i fi es . Co n g res s s t at edcl earl y i n th e s tatu t e t hatan y

CFC g u aran t o r o f an y
o b l i g at i o n o f a Un i t edSt at es p ers o n “ sh al l * * * b e co n s i d eredas h o l di n g ” t h e
u n d erl y i n g o b l i g at i o n . W i th res p ectt o o ther i s s u es co n cern in g g uaran t i es th atare
n o tad dres s edex p res s l y

i n th e s t atu t e (fo r ex am

p l e, t h e am o u n to f Un i t edSt at es p ro p erty th at th e CFC s h o u ldb e t reat edas h o l d i n g b y reas on o f i t s g uaran ty ), Co n g res s u s ed b ro add el eg at i v e t erm s i n s ect i o n 9 5 6 (d ). Gen eral l y we wo ul dn o t i m p o s e ad d i t io n al p ro cedu ral req u i rem en t s o n an y ad m i n i s trat iv e p ro ceed i n g- 2 9 -

wi th o u ta cl ear i n di cat i o n t h atCo n g res s i n ten d edad d i t i o nal p ro cedu res t o b e
o b s erv ed
. Ap artfro m

the t ex t o f t he s t atu t e, n ot h in g i n th e s t atu t e’ s l eg i s l at i v e h i s t ory d i rect s Treas ury t o p ro m

u l g at e ru l es i n co n s i d erat i o n o f wh et h er a p art i cu lar g u aran ty cau s es an effect iv e rep at ri at i o n o r i n co n s i d erat i on o f “ eco no m i c real it i es ” as p et i ti o n er s ees th em . Th e p urp o s e u nd erl y i n g s ect io n 9 56 g en eral l y i s

“ t o p rev en tth e rep at ri at i o n o f i n co m e”, H.R. Rep t. No . 8 7-1 4 4 7 , s up ra at5 8 , 1 9 6 2 -3 C.B. at4 6 2 , th ati s “ s ub s t an t i al l y th e eq u i v al en to f a d iv i d en d ” t o th e U.S.
s h areh o ld er, S. Rep t . No . 8 7 -1 8 8 1 , s up ra at 8 8 , 1 9 62 -3 C.B. at 7 9 4 . Ho w ev er, we fi ndn o s up p o rtfo r t h e p ro p o s it i o n th atCo n g res s i n t en d edru l em ak i ng u n d er
s ect i on 9 5 6 (d ) t o fo cu s m i n u tel y o n eco n o m i c fact o rs , wh i ch m ay o r m ay n o t i n d i cat e i n wh at am o u nta p art i cu lar g u aran ty co n st i tu t es a rep at ri at i o n o f
earn i n g s . W e d o n otco ncl u d e t h atCo n g res s i nt en d edth e am ou n td eem ed effect i v el y

rep at ri at edt o b e an “ i m

p o rt an tas p ecto f t he p ro b l em ” as s o ci at edwi t h g u aran ti es th at Treas u ry

was b ou n dt o co n si der o r g i v e s p eci al wei g h tt o i n p ro m u l gat i n g ru l es u n d er t h e s t atu t e. See St at e Farm , 4 6 3 U.S. at 4 3
. Th e p ream

bl e t o th e fi n al ru l es s t at edth atth ey were i n t en d ed“ t o co n fo rm ” th e In co m e Tax Reg ul at i o n s t o s ect i o n 9 5 6 , wh i ch th ey cl earl y an d
s trai g h t fo rward l y

d o. Pu ts i m

p l y , the s tatu t e at i s su e an dth e ru l es ad o p t edd i dn o t- 3 0 -

req u i re Treas u ry

t o en g ag e i n th e l ev el o f d et ai l ed em p i ri cal an al y s i s th atth e Co u rt i n St at e Farm

fo u n dwas i n t eg ral t o th e ru lem ak i n g . Pet i t i o n er’ s fo cu s o n th e

“ reas o nedd eci s io n m ak in g an d reas o n edex pl an at i o n req u i rem en t s ” as i t
u n d ers t an d s th o s e req u i rem en t s t o b e t ak en fro m St at e Farm

i s m i s p l aced
. Treas u ry ’ s ru l em ak i n g co m p l i edwi th th e req u i rem en t s o f n o t i ce an d
co m m en tu n d er APA s ec. 5 5 3 (b ). APA s ec. 7 0 6(2 )(A) i m p o s es i n ad d i t i o n a

“ g en eral ‘ p ro cedu ral ’ req u i rem en to f s o rt s b y m an d at i n g th atan ag en cy t ak e wh at ev er s t ep s i t need s t o p ro v i d e an ex pl an at i o n thatwi ll en ab l e t h e co u rtt o
ev al u at e t h e ag en cy ’ s rat i o n al e atth e t i m e o f d eci s i o n.” Pen s i o n Ben efi tGu ar. Co rp . v . LTV Co rp ., 4 96 U.S. 6 3 3 , 6 5 4 (1 9 90 ). W e co n cl ud e t h atTreas ury ’ s p ro cedures i n t h is cas e s at i s fi edth i s g en eral req u irem en t an dwere n otarb i traryo r cap ri ci ou s . Th e ag en cy ’ s p at h “ m ay reas o n ab ly

b e d i scern ed ”. Bo wm an Tran s p ., 4 1 9 U.S. at2 86
. Treas u ry ’ s p ro p os edan dfi n al ru l es co ncern i n g CFC p led g es an dg u aran t i es
s o u g htt o i m

p l em en t th e cl ear wo rd i n g o f t h e s t atu t e an dt o equ at e t h e t reat m en to f th es e t ran s act i o n s wi th th e t reat m en to f i tem s o f Un i t edSt at es p ro p erty u n d er t h e
s t atu te. Th e g en eral ly

ap pl i cab l e ru l e i n s ect i o n 1 .9 5 6 -2 (c)(1 ), In co m e Tax Reg s ., th at“ an y o b li g at i on ” o f a Un i t edSt at es p ers o n wi th res p ectt o wh i ch a CFC i s a g u aran to r s h al l b e t reat edas Un i t edSt at es p ro p ert y h el db y th e CFC, res t at es i n- 3 1 -

es s en ce t h e t ex to f th e s t atu te. Th e ag en cy m ad e n o cl ear erro r i n ju d g m en tb y ad o pt i n g th e ru l e th ati td i d , rat h er t h an u n d ert ak i ng t o co n s i d er a m o re n u an ced
ru l e o f t he s o rtp et i t i o n er ad v o cat es t o g o v ern a d eem ed effect i v e rep at ri at i o n . As we h av e s ai d , th e s t atu t e m ak es n o m en t io n o f an effect i v e rep at ri at i on s t an d ard , an d we can fi n d n o g ro u n d s fo r i m p o s i ng s u ch a s t an d ard
. Th e ru l e fo r th e am ou n to f Un i t edSt at es p ro p ert y co n s i dered h el db y

reas o n
o f a p l ed g e o r g u aran ty

l i k ewi s e ad h eres t o th e t ex t o f t h e s t atu t e. Un der s ect i o n 1 .9 56 -1 (e)(2 ), In co m e Tax Reg s ., th e am ou n ttreat edas h el db y the CFC fo r i t s g u aran ty wi l l i n m o s tcas es equ al th e am o u n tth e CFC wo u ldh av e b een treat edas h o l d i n g h adi th el d t h e u n d erl y i n g o b l i g at io n (i .e., th e p ri n ci p al am o u nto f t h e
o b l i g at i o n). Th e g en eral ru l e u n d er s ect i o n 9 5 6(a) i s th atth e am o u n to f an y Un i ted St at es p ro p ert y

t ak en i nt o acco u n ti s i t s ad ju s t edb as is , an do rd i nari l y a l en d er t ak es a b as i s i n a l o an equ al t o th e u np ai d p ri n ci p al am o u n t . Treas u ry ’ s d eci s i o n m ak in g was u n co m pl i cat ed , b u tth atd oes n o t m ean the ad m i n is trat i v e p ro ces s was arb i traryo r o th erwi s e d efi ci en tu n d er t h e s t an d ard art i cu l at edi n APA s ec. 7 0 6 (2 )(A). No co m m en ts , s i g n i fi can to r o th erwi s e, were rai s edb y i n t eres t edp art i es duri n g the ru l em ak i n g . As a rev i ewi n g co u rt , we
can n otd em an dth atan ag en cy en g ag e i n an dd o cu m en tan ex h au s t i v e rev i ew o f h y p o th et i cal “ as pect [s ] o f th e p ro b l em ” t h at n o o ne h as rai sedan dwh i ch Co n g res s- 3 2 -

h as n otas k edth e ag en cy t o co ns i d er. So l on g as an ag en cy ’ s rat io n al e can
reas on ab l y

b e d i s cern ed an d th atrat i o n al e co i n ci d es wi th t h e ag en cy ’ s au th o ri ty
an d o b l i g at i o n s u n d er t h e rel ev an ts t atu t e, a rev iewi ng co urtm ay n o t “ bro ad l y req u i re an ag en cy t o co n s i d er al l p o l i cy al t ern at i ves i n reach i n g d eci si o n .” St at e Farm , 4 6 3 U.S. at5 1
. Pet i t i o ner ci t es cert ai n ag en cy d o cu m en t s , a 2 0 0 2 fi el ds erv i ce ad v i ce
m em o ran du m

(FSA) an d a 2 0 1 5 n o t i ce o f p ro p o s edru l em ak i n g (2 0 15 NPRM ), t o arg u e t h atres p o nd en tan dTreas u ry “ h av e th em s el v es reco g n izedthatth e reg u l at i o n s ati s su e are i n ad equ at e”. Th es e d o cu m en ts ackn o w led g e t h atth e reg u l at i o n s p res cri b e n o treat m en tfo r s itu at i o n s i n wh i ch m ul t ip l e CFCs g u aran t ee th e s am e o b li g at i on . Th e FSA n o t edthatwh ere m u lt i pl e CFCs o f t h e s am e U.S.
s h areh o ld er h av e g u aran t eedthe s am e o b l ig at io n s , co m p u ti n g th e i n co m e i n cl u s i o n u n d er t h e cu rren tru l es m ay p ro du ce “ s tran g e res ul t s ”. Fi el dServ i ce Ad v i ce 2 0 0 2 1 6 0 2 2 (J an . 8 , 2 00 2 ). Si m i larl y , th e p ream bl e t o th e 2 0 1 5 NPRM
ex p lai n s th at“ [t ] o th e ex t en tth at th e CFCs h av e s u ffi ci en tearn in g s an d p ro fi t s , th ere co u l db e m

u l t i p l e s ect i o n 9 5 1 i n cl u s io n s wi th res p ect t o th e s am e o b l i g at i o n th atex ceed , i n the ag g reg at e, t h e u np ai dp ri n ci p al am o u n t o f t h e o b l i g at i o n .” 8 0 Fed
. Reg . 5 3 0 6 2 (Sep t . 2 , 2 0 15 ). Th e p ream bl e al s o s t at edth atTreas ury an d
res p o n d en t were co n s i deri n g p res cri b i ng n ew reg u l at io n s “ to al l ocat e t he am o u n t- 3 3 -

o f t h e o b l i gat i o n am o n g th e rel ev an tCFCs s o as t o el i m i nat e t h e p o t en t i al fo r
m u lt i p l e i n cl u s i o n s an d, i ns t ead , l i m i tth e ag g reg at e i n cl u s io n s t o th e u npai d p ri n ci p al am o u n to f t h e o b l i g at i o n .” Id . Pet i t i on er co n t en d s t h at thes e s t at em en t s
co n st i tu t e “ a fu n ct i on al ad m i s s i o n” t h atwh et h er an dh o wreg u l at io n s u n d er
s ect i on 9 5 6 (d ) s h o u l dap p l y t o s i tu at i o n s i n v o l v i n g m u l t i p le g uaran t o rs “ are qu es ti o n s th at were n ev er co n s i d eredb y th e ex i st i n g reg u l at ory

s ch em e.” In 2 0 1 6 Treas u ry i s s u ed fi nal reg u l at i o n s wi th o u tp ro p o s i n g o r ad o pt i n g an y ad d i t i o n al p ro v is i o n s t o l i m i tth e i n co m e i n cl u s i o n i n cas es o f m ul t i p l e g u aran t o rs . T.D. 9 7 9 2 , 2 0 1 6 -4 8 I.R.B. 7 5 1 ; s ee Cres t ek , In c. v . Co m m i s s io n er, 1 4 9 T.C. _

_, _

_ n .8 (s l i p o p. at2 9 -3 0 ) (J ul y

2 7, 2 0 1 7 ) (d i s cu s s i n g 2 0 15 NPRM an d2 0 1 6 fi n al reg u l at i o n s ). Th e d o cu m en ts th atp et i t i o n er ci t es are n o np reced en ti al , an dwe wo u l dn o t rel y o n th em fo r a p o i n t o f l aw ev en i f we fo un d thei r reas o ni n g ap p l i cab l e an d p ers u as i v e. See s ec. 6 1 1 0 (k )(3 ) (a wri tt en d et erm i nat i o n m ay n otb e u s ed o r ci t ed
as p reced en t ); Gen . Dy

n am i cs Co rp . v . Co m

m i s s io n er, 1 0 8 T.C. 1 0 7 , 1 2 0 (1 9 9 7 ) (p ro p o s edreg u l at i o n s acco rd edn o m ore wei g h tthan a l i t i g at i n g p o s it i on ). In an y
ev en t, th e s p eci fi c s i tu at i o n ad dres s edi n b o th d o cu m en t s i s d i s t i n g u i s h ab l e fro m p et i t i o n er’ s cas e. Th e i n co m e i n cl u s i o n s thatres po n d en td et erm i n edfo r SIHP d o
n o tex ceedth e u npai dp ri nci p al am o u n to f t h e g u aran t eed o b l i g at i o n s . W e al s o- 3 4 -

can n otag ree t hatan ag en cy ’ s reco gn i t io n th atreg u l at i o n s m ak e n o p ro v i si o n fo r
o r m ay p ro du ce s tran g e res u lt s u n d er p art i cu lar ci rcu m s t an ces i s an ad m i s s i o n o f th ei r “ i n ad equ acy ” as a m at t er o f ad m i ni s trat i v e l aw. Treas u ry i s au th o ri zedt o
reco n s i d er an drev i se reg u l at i o n s u n d er t h e Co d e (p ro v i d edth at ad equ at e p ro cedures are em

p l o y ed ), an dth e ag en cy ’ s d eci s i o n t o rev i s i tth e ru l es fo r p l ed g es an d g u aran ti es s h o u l dn o tb e t ak en as ev i d en ce t h atth e cu rren t ru l es are i n
s o m e way p ro cedu ral l y defect i v e. Onth e b as is o f th e ad m i n i s trat i v e reco rdwe co n cl u d e t h atTreas u ry ’ s d eci s i o n m ak i n g was b as ed o n a co n si d erat io n o f rel ev an tfact o rs u n d er t h e s t atu t e
an d th ere was n o cl ear erro r i n ju d gm en t . Th e ag en cy ’ s p ro cedu res i n p ro m u l gat i n g th e reg u lat i o n s ati s s u e were s u ffi ci en t . W e wo u l d n o ti n v al i d at e th em o n th atb as i s . 3
. Th e Ag en cy ’ s Co n s tru ct i on o f t h e St atu te Th e reg u l at i o n s refl ectTreas u ry ’ s d et erm i n at i o n t h ats ect i o n 9 56 (d )
s up p ort s an dCo ng res s i nt en d eda b ro adru l e wh i ch treat s an y CFC g u aran t o r o f
an y (n o n ex cep t ed ) o b l i g at i o n o f a Un i t edSt at es p ers o n as h o l d in g Un i t edSt at es p ro p erty equ al t o th e p ri n ci p al v al u e o f t h e o b l i g at io n g uaran t eed . Ord in ari l y a
co u rtrev i ews an ag en cy ’ s s ub s t an t i v e co n st ru ct i o n o f a s t atu te t h e ag en cy i s ch arg ed w i th ad m i n i st eri n g u n d er t h e t wo -s t ep t es tp ro v id edi n Ch ev ro n . Th e- 3 5 -

d eferen t i al s tan d ardu n d er Ch ev ro n i s ap p ro p ri at e “ wh en i t ap pears thatCo n g res s d el eg at edau th ori ty

t o th e ag en cy

g en eral l y t o m ak e ru les carry i n g t h e fo rce o f l aw,
an d th atth e ag en cy

i nt erp ret at i o n cl ai m i n g d eferen ce was p ro m u l g at ed i n th e
ex erci s e o f t h atau th o ri ty .” M ay o Fo u n d. fo r M ed . Edu c. & Res earch v . Un i t ed St at es , 5 6 2 U.S. 4 4, 5 7 (2 0 1 1 ) (qu ot i n g Un i t edSt at es v . M eadCo rp ., 5 33 U.S. 2 1 8 , 2 2 6 -2 2 7 (2 0 01 )). Th e ap pl i cab i l i ty o f Ch ev ro n d eferen ce “ d oes n o tturn o n wh et h er Co n gres s ’ s d el eg at i o n o f au th o ri ty was g en eral o r s p eci fi c.” Id . “ [T] h e
u l t i m at e qu es t i o n i s wh et h er Co n g res s wo u l dh av e i n t en d ed , an dex p ect ed , co u rt s t o treat[t h e reg u l at i o n] as wi th i n , o r o u t si d e, i t s d el eg at i o n t o th e ag en cy o f

‘ gap -fi l l i n g ’ au th o ri ty . ” Id
. at 5 8 (quo t i n g Lo n g Is l an d Care at Ho m e, Lt d . v . Co k e, 5 5 1 U.S. 1 58 , 1 7 3 -1 7 4 (2 0 0 7 )). Co n gres s i n t en d edt o d el eg at e t o Treas u ry th e au th o ri ty t o p ro m ul g at e ru l es
u n d er s ect i o n 9 5 6 (d ) h av i n g th e fo rce an d effect o f l aw, an di t s ru l em ak i n g was an
ex erci s e “ wi th i n th e s t atu t o ry g ran to f au th o ri ty ”. Id . (qu o t i n g Lo n g Is l an dCare, 5 5 1 U.S. at1 73 ). Treas ury p ro m u l g at edth e reg u l at i o n s p u rs u an tt o an ex p res s d i rect i v e i n th e g o v ern i n g s t atu t e an dp u rs u an tt o th e g en eral ru l em ak i n g au th o ri t y
es t ab l i s h edi n s ect i o n 7 8 0 5 . As th e ag en cy was b o u n dt o d o fo r l eg i s l at i v e ru l es , i t fo l l o w edp ro cedu res p res cri b edu n d er APA s ec. 5 5 3 (b ). “ Iti s fai r t o as s u m e * * * Co n g res s co nt em

p l at es ad m in is trat iv e act i o n wi th th e effect o f l aw wh en i t- 3 6 -

p ro v id es fo r a rel at i v el y

fo rm al ad m i n i s trat i ve p ro cedu re t en di ng t o fo s t er * * * fai rn es s an d d el i b erat i on ”, M ead , 5 3 3 U.S. at2 3 0 , an dth e u s e o f n ot i ce an d
co m m en tb y the ag en cy

i s “ a ‘ s i g n i fi can t ’ s i g n th ata ru le m eri t s Ch ev ro n d eferen ce”, M ay o Fo u n d ., 5 6 2 U.S. at5 7 -5 8 (quo t i n g M ead , 5 3 3 U.S. at2 3 0
- 2 3 1 ). Th e reg ul at i o n s are p ro p erl y an al y zedu n der Ch ev ro n. Un d er s t ep o n e o f Ch ev ro n , 4 6 7 U.S. at8 4 2 , we as k “ wh et h er Co n g res s h as d i rect l y s p o k en t o th e p reci s e qu es t io n ati s s u e.” “ If t he i n t en to f Co n g res s i s cl ear, t h ati s th e en d o f t h e m at t er”. Id . Here, n ei th er p art y co n t en ds th atCo n g res s h as s p ok en d irect l y

as t o th e rel ev an ti s s u es , i .e., wh en an di n wh atam o u n ta CFC wi l l b e co n s i dered t o h o l dUn i t edSt at es p ro p ert y u n d er s ect i o n 9 5 6 as a res u l to f i t s g u aran ty

o f an o b l i g at i on o f a Un i t edSt at es p ers o n. Th e s tatu t e p ro v i d es o n l y th ata p l ed ge o r g u aran ty

s h al l b e t reat edas h o l d i n g th e u n d erl y i n g o b l ig at io n

“ u n d er reg u l at i o n s p res cri b ed by th e Secret ary ”. Sec. 9 56 (d ). No n e o f t h e
o rd i n ary t o o ls o f s t atut o ry

co n s tru ct i o n l ead s u s t o co n cl u d e th atCo n g res s h as cl earl y ex p res s edi t s i n t en tas t o wh atfo rm th o s e reg ul at i o n s s h o u l dt ak e o r t h e
s ub s t an ce t h at s ho u l db e refl ect edi n th em . See Ci ty o f Arl i n g t o n v . FCC, 5 6 9 U.S. 2 9 0 , 2 9 6 (2 0 1 3 ). Wh ere, as h ere, t h e s t atu t e d o es n o tad dres s the q u es t i on ati s s u e, s t ep two
o f Ch ev ro n , 4 6 7 U.S. at8 4 3, as k s o n l y wh ether t h e ag en cy ’ s p o si t io n “ i s b as edo n- 3 7 -

a p erm is s i b l e co n st ru ct i o n o f t h e s t atu t e”. In res p ecto f a l eg i s lat i ve reg u l at i o n we wi l l d efer t o th e ag en cy ’ s co n st ru ct i o n o f th e s t atu te “ u n l es s i ti s ‘ arb i traryan d cap ri ci ou s i n s ubs t an ce, o r m an i fes t l y co n traryt o th e s t atu t e’ .” M ay o Fo u n d ., 5 6 2 U.S. at5 3 . If th e ag en cy ’ s ch oi ce “ rep res en t s a reas o n ab l e acco m m o d at io n o f
co n fl i ct i n g p o l i ci es thatwere co m m i t t edt o th e ag en cy ’ s care b y th e s t atu t e, we
s h o u ldn o td i s tu rb i tu n l es s i tap p ears fro m th e s t atu t e o r i t s l eg i s lat i v e h i s t o ry th at th e acco m

m o d at i on i s n o t o n e t h atCo n g res s wo ul dh av e s an ct i o n ed .” Ch ev ro n , 4 6 7 U.S. at8 45 (qu o ti ng Un it edSt at es v . Sh i m er, 3 6 7 U.S. 3 7 4 , 3 8 3 (1 96 1 )). Pet i t i o ner co n ten d s th atth e reg u l at i o n s u n d er s ect i o n 9 5 6 (d ) can n o tp as s th e d eferen t i al t es tu n d er Ch ev ro n s t ep two b ecau s e t h e ru les em b o d iedth erei n are an
u n reas o nab l e p o l i cy

ch o i ce i n th e l i g h to f t h e s t atu t e an d i t s l eg i sl at iv e h i s t o ry . Pet i t io n er co n ten d s th atCo ng res s “ was o nl y co n cern ed i n s ect i on 9 5 6 wi th i n v es t m en t s i n U.S. p ro p ert y th atrep at ri at e earn i n g s” an d th ata CFC’ s g u aran t y o f
an o b l ig at i o n o f a Un i tedSt at es p ers o n i s n o t“ n eces s ari ly a t ran s act io n th at rep at ri at es earn i n g s ”. Pet i ti o ner arg u es th at“ wh ether an d t h e d eg ree t o wh i ch an y g i v en g u aran t ee * * * can b e co n si d eredt o h av e rep at ri at edearn i n g s are
n eces s ari l y

fact -s p eci fi c qu es t io n s , wh i ch wi l l d ep en do n th e ‘ fact s an d ci rcu m s t an ces ’ o f th e t ran s act i o n ”.- 3 8 -

Treas u ry ’ s reg ul at i o n s d o n o t i n qu ire wh eth er a p art i cu l ar g u aran ty h as

“ effect i v el y

rep at ri at ed ” earn i n g s o f t h e CFC t o i t s U.S. s h areh o ld ers . Th e g en eral l y ap p l i cab l e ru l es treatan y CFC g uaran t o r as h o l d i n g Un i t edSt at es p ro p erty equ al t o th e fu ll u npai dp ri n ci p al am o u n t o f t h e o b l i g at i o n . Pet it i o n er arg u es th atth e reg ul at i o n s are “ t o o b l u n t” an d “ t o o m ech an i cal ” an dfai l t o
reas on ab l y

i m pl em en tth e “ n u an cedap p ro ach ” fo r p l ed g es an dg u aran t i es th ati t
co n ten d s Co n g res s i n t en d ed
. Th e g en eral ru l es fo r t h e treat m en to f p l ed g es an dg u aran t i es are n o tato d d s wi th th e wo rd in g o f t h e s t atu t e. No th i n g i n th e p l ai n t ex t o f s ect i o n 9 5 6 (d ) i n d i cat es th atan y

p art icu l ar p led g e o r g u aran ty s h al l n o tb e t reat edas h o l d i n g th e
u n d erl y i n g o b l i g at i o n o r d i rect s th at th e am o u n tco n s id eredt o b e h el d s ho u l db e
o n l y the am o u ntth atcan b e d eem edt o b e rep at ri at ed . Th atCo n g res s p ro v i d ed g u aran ti es s ho u l d b e t reat ed“ u n d er reg ul at i o n s p res cri bedb y th e Secret ary ” d o es
n o tes t ab l i s h , as p et i t i o n er co n t en d s , th atTreas u ry was b o u n dt o d ev i s e a m o re
n u an cedo r fact s -an d -ci rcu m s t an ces ap p ro ach fo r s u ch tran s act i o n s . Sp eci al
o p erat i n g ru l es fo r t h e treat m en to f p l ed g es an d g u aran t i es as Un i t ed St at es p ro p erty wo u l db e req ui redi n an y ev en t , b ecau s e t h e g en eral ru le i n th e s tatu t e fo r th e am o un to f Un i t edSt at es p ro p ert y co n s i d eredh el db y

th e CFC co u l dn o tap pl y- 3 9 -

wi th res p ect t o a p l ed g e o r g u aran ty . See s ec. 9 5 6(a) (fl u s h l an g u ag e) (e.g ., a g u aran to r o rd i n ari l y

t ak es n o b as i s i n th e g u aran ty ). W e al s o can n o t co n cl u d e as p et i t io n er co n t en d s th at th e ru les p ro m u l g at ed b y th e ag en cy

are co n trary to Co n g res s ’ i nt en t . Co ng res s g en eral l y i n t en d edth at
s ect i on 9 5 6 s ho u l d cau s e i n co m e i n cl u s i on s wh ere CFC fu n d s are d i rect edt o i n v es ti n Un i tedSt at es p ro p ert y fo r t h e b en efi to f i t s U.S. s h areh o l d ers , s u ch th at th o s e fu n d s are effect i v el y rep atri at edfo r u s e b y

th e s h areh ol d ers . A CFC’ s g u aran ty o f a U.S. s h areh o l d er’ s (o r rel at ed p art y ’ s ) d eb t cl earl y b en efi t s the U.S.
s h areh o ld er, an dn ot hi n g i n th e s t atu t e o r i t s l eg i s l at i v e h is t ory s u g ges t s th at Co n g res s ex pect edTreas u ry t o craft adh o c ex cep t i on s b as edo n s o m e s o rto f fact s-an d-ci rcu m s tan ces t es t . Fro m th e l eg i s l at i ve h i s t o ry

o f s ect i on 9 5 6 i t ap p ears Co n g res s i t s el f tho u g h tex t en s i v el y ab o u twh i ch tran s act i on s s ho u l db e treat edth e
s am e as rep at ri at i o n s o f CFCs ’ earn i n gs . Co n gres s h as p ro v i d edfo r n u m ero u s ex cep t i o n s t o th e d efi n i t io n o f Un i t ed St at es p ro p ert y , an di th as ad d edan drem o ved ex cep t i o n s o v er t i m e t o refl ecti t s
ev o lv i n g co n cep t i o n o f wh ats h o u l do r s h o u l dn o treq u i re an i n co m e i n cl u s i o n as
an i n v es t m en to f earn i ng s i n Un i t edSt at es p ro p ert y . See Tax Refo rm Act o f 1 9 7 6 , Pub . L. No . 9 4 -4 5 5 , s ec. 1 0 2 1 (a), 9 0 St at . at 1 6 1 8 -1 6 1 9 ; Defi ci tRedu ct i on Acto f 1 9 8 4 , Pub . L. No
. 9 8 -3 6 9, s ec. 8 0 1 (d )(8 ), 9 8 St at . at9 9 6 -9 9 7 ; Tax p ay er Rel i ef Act- 4 0 -

o f 1 9 97 , Pub . L. No . 1 05 -3 4 , s ec. 1 1 7 3 (a), 1 1 1 St at . at9 8 8 -9 89 ; Am eri can J o b s Creat i o n Act o f 2 0 04 , Pub. L. No . 1 0 8-3 5 7 , s ec. 4 0 7 (a), 1 1 8 St at . at 1 49 8 -1 4 9 9
. So m e o f t h es e ex cep t i on s effect th e ap pl i cat i o n o f s ect i o n 9 5 6(d ); fo r ex am p l e, b y p ro v id i n g th atcert ai n o bl ig at i o n s are n o tt o b e i n cl u d edwi th i n th e d efi n i t io n o f Un i ted St at es p ro p ert y . See s ec. 9 5 6(c)(2 )(C), (F), (J ), (L); s ee al s o 8 0 Fed . Reg
. 5 3 0 6 1 (Sep t . 2 , 2 0 15 ) (“ [T] h e g en eral ex cep t i on s t o th e d efi n i t i o n o f Un i t edSt at es p ro p erty wo u l dap p l y

t o th e o b l i g at i on treat edas h el db y th e CFC [b y reas on o f i t s g u aran ty ] .”). Ho wev er, Co n g res s h as n ev er u n d ert ak en t o am en do r p ro v i d e
ex cep t i o n s t o s ect i o n 9 5 6 (d ) d irect l y . Co ng res s ’ d eci s io n t o l eav e t h e t erm s o f
s ect i on 9 5 6 (d ) u nch an gedm ay refl ecti t s u n d ers tan d i n g th ata CFC o rd i n ari l y
wo u l dn o tb e d i rect edb y i t s s h areh o l d ers t o p ro v i de a g u aran ty u n l es s th e g u aran ty
was n eces s ary

an d of v al ue t o th e b o rro wer an d th e s h areh o l d ers . Pet i t i o ner arg u es ex t en s i v el y th atth e reg u l at i o n s cau s e i n co m e i n cl u s i o n s fo r U.S. s h areh o l d ers co n traryt o “ co m m erci al an deco n o m i c real i ty ”. Pet it i o n er i n p art i cu l ar cri t i ci zes th e reg ul at i o n s fo r fai l i n g t o ad dres s ci rcu m s t an ces i n wh i ch a CFC i s o n e o f s ev eral g u aran t o rs o f a s i n gl e o b l ig at i o n . Pet i t i o n er co nt en d s th ati f
m u lt i p l e g u aran t i es s up p o rtth e u n d erl y i ng o b l i g at io n th enn o o n e co u l d
reas on ab l y

co n cl u d e t h at“ th e en t i re u np ai d p ri n ci p al was o b t ai n ed[s o lel y ] as a
res u l t o f t h e CFC[’ s] g u aran t ee”. Pet i t i o n er al s o p o i n ts o u tth ati n s i tuat i on s wh ere- 4 1 -

(as h ere) m

u lt i pl e CFCs h av e g u aran t eedth e s am e o b l i g at i o n the reg u l at i o ns wi l l treat each CFC as h o l d i ng Un i t edSt at es p ro p ert y equ al t o th e fu l l u np ai d p ri n ci p al
am ou n to f t h e o bl i g at i o n . Th e reg u l at i o n s th erefo re co u l dal l o wu n d er cert ai n ci rcu m s t an ces (wh i ch are n o tp res en th ere) m u l t i p l e, arg u ab l y

dup li cat i v e i n co m e i n cl u s i o n s th atex ceed i n t h e ag g reg at e th e p ri nci p al v al u e o f t h e o b l i g at i o n . Ev en accep t i ng p et it i o n er’ s arg u m en t s co n cern in g eco n o m i c real i ty an dth e

“ s tran g e res u lt s ” th atth e reg u l at i o ns m ay y i el du nd er p art i cu l ar ci rcu m s tan ces , i t
m u stb e s ai dth atan ag en cy i s n o t req u i redt o t ak e acco u n to f an dm ak e s p eci al
acco m m o d at i o n fo r ev ery s cen ari o i n wh i ch i t s ru les m ay ap p l y . “ Reg u l at i o n , l i k e l eg i s lat i o n , o ft en req ui res drawi n g l i n es .” M ay o Fo un d ., 5 62 U.S. at5 9
. Un d o ubt ed l y , as p et i t i o n er h as s h o wn , al t ern at i v es ex i s tt o (an di m p ro vem en t s
m i g h tb e i m ag i n edfo r) t h e g en eral l y ap p l i cab l e ru l es fo r CFC p l ed g es an d g u aran ti es . Nev ert h el es s , “ we d o n o ts i tas a co m m it t ee o f rev i s i o n t o p erfect th e ad m i n is trat i o n o f t h e t ax l aws ”, Un i t edSt at es v . Co rrel l , 3 8 9 U.S. 2 9 9 , 3 0 6 -3 0 7 (1 9 6 7), an dwe wi l l up h o ld reg u l at i o n s thath av e a reas o n ab le b as i s i n th e s t atu t o ry h i s t o ry ev en wh ere t h e t ax p ay er’ s ch al len g e t o a reg u l at i o n ’ s p o l i cy h as “ l o g i cal fo rce”, Fu l m an v . Un i t ed St at es , 4 3 4 U.S. 5 2 8 , 5 3 6 (1 97 8 ). “ Th e ro l e o f t h e ju d i ci ary i n cas es o f t h i s s o rtb eg i n s an den d s wi th as s u ri n g t h atth e- 4 2 -

Co m m i s s i o n er’ s reg u l at i o n s fal l wi th i n h i s au th o ri ty t o i m p l em en t the
co n gres si o n al m an dat e i n s om e reas o n ab l e m an n er.” Co rrel l , 3 8 9 U.S. at3 0 7
. Th e reg u l at i o n s i m

p l em en t eda reas o n ab l e i n t erp ret at i o n o f s ect i o n 9 5 6 (d ), i .e., th ati n th e o rd i n ary

cas e a p l ed g o r o r g u aran t o r s ho u l db e treat edas h o l d i n g th e u n derl y i n g o b l i g at io n . Ex cep t i o n s are p ro v i d edfo r d i rect an di n di rect tran s act io n s i n the s t atu te an d i n th e reg u l at i o n s , an dt ak enas a wh o l e Treas u ry ’ s
ru l es are a reas o n edap p ro ach t o d et erm in in g wh en an di n wh atam o u nta g u aran t y
s h o u ldb e t reat edas an i nv es t m en ti n Un i t edSt at es p ro p ert y u n der s ect io n 9 5 6 . It i s n o tm an i fes t l y

co n traryt o th e s t atu t e o r u n reas o n ab l e th at th e ag en cy wo u l d ch o os e a b ro adb as el in e ru l e fo r p l ed ges an d g u aran t i es as o pp o s edt o a l es s ad m i n is trab l e cas e-b y -cas e ap p ro ach . Cert ai n l y n o thi n g i n s ect i on 9 5 6 (d ) i n d i cat es th atan y

p art icu l ar t y

pe o f p l ed ge o r g u aran ty

s h ou l dn o tb e treat edas h o l d i n g th e o b l i g at i o n o r d irect s th at th e am o u n t co n s i d eredt o b e h el ds h o u l db e
o n l y the am o u ntth atcan b e d eem edt o b e rep at ri at ed . Onth e b as i s o f o ur o wn
ex h au s t i v e rev iew we co n cl u d e th atatn o p o i n t i n th e ex t en s i v e l eg i s lat i ve h i s t o ry
o f s ect i o n 9 5 6 h as Co n g res s ex p res s eda d es i re t hati n cl u s i o n s fo r g u aran t ies b e d et erm i n edcas e b y cas e. W e up ho l dth e v al i d i ty

o f s ect io n s 1
. 9 5 6 -2 (c)(1 ) an d1 .9 5 6 -1 (e)(2 ), In co m e Tax Reg s . Treas u ry

p ro m u l gat edth es e reg u l at i o ns b y p ro cedu res th ats at i s fy

th e- 4 3 -

req u i rem en t s o f t h e APA, an d th e s ub st an ce o f t h e reg u l at i o n s i s b as edo n a p erm i s s i b l e co n s tru ct i o n o f s ect i o n 9 5 6 (d ) en t i t l edt o d eferen ce u nd er Ch ev ro n . Wh i l e “ n ei th er an t iqui ty

n o r co n t em

p o ran ei ty wi th [a] s t atut e i s a co n d i t i o n
o f [a reg u l at i o n ’ s ] v al i di ty ”, i ti s rel ev an tt o p et i t i o n er’ s cas e t h atth e co nt es t ed reg u l at i o n s h adex i st edfo r n earl y 5 0 y ears atth e t i m e t he CFCs ex ecu t edth e g u aran ty tran s act i o n ati s s u e. See Sm i l ey v . Ci t i b an k(S.D.), N. A., 5 1 7 U.S. 7 3 5 , 7 4 0 (1 99 6 ). Co ng res s reen act eds ect i o n 9 5 6 (d ) un am en d edi n OBRA, atwh i ch t i m e Co ng res s h adrev i s i t edi n d ep th th e o p erat i n g ru l es u n d er s ect i o n 9 5 6
. Co n g res s ex pres s edn o co n cern s as t o th e cu rren tru l es g ov ern i ng p l ed ges an d g u aran ti es , wh i ch s tro n g l y s u g g es t s th ati td i d n o tv i ew Treas ury ’ s co n s tru ct i o n o f
s ect i on 9 5 6 (d ) as u n reas on ab l e o r co n traryt o th e l aw’ s p urp o se. See Co t t ag e Sav
. As s ’ n v . Co m

m is s i o n er, 4 9 9 U.S. 5 5 4 , 5 6 1 (1 9 9 1 ). III. Pet i t i o ner’ s Oth er Co n t en t i o n s Pet i t i o ner co n ten d s th ati n th e ev en twe co n cl ud e, as we h av e, t h atth e reg u l at i o n s are v al i d , we s h o u ldn o t g ran tres po n den t’ s m o t i o n fo r s u m m ary ju d g m en t . It co n t en d s th atres po n d en t’ s p ro p os edap p l i cat i on o f t h e reg u l at i o n s , d et erm i n i n g i n co m e i n cl u s i o n s o f t h e fu l l am o u n to f t h e CFCs ’ ap p l i cab l e
earn i n g s , i s i n co n s i s ten twi th th e p u rp o s e o f s ect i o n 9 5 6. Itco n t en d s th atan
ex am i n at i o n o f fact s an dci rcu m s t an ces b ey o ndth o s e i d en t ifi edb y res p on d en tas- 4 4 -

d i s p o s i t i ve i s n eces s ary

t o d et erm i n e wh et her “ i n s ub s t an ce” t h e CFCs ’ g u aran t i es rep at ri at ed earn in gs i n the am o u n t s o f t h e as sert edi n cl u s i o n s . Pet i t i o ner av ers an ds ub m i t s affi d av i t s o f i t s o ffi cers i n s up p o rto f t h e fo l l o w i n g fact s : (1 ) SIG an d i t s d o m es t i c affi l i at es m ai n t ai nedas s et s i n acco u n t s atM erri l l Ly

n ch o f ap p ro x im at el y twi ce t h e v al u e o f t h e SIG n o t es ; (2 ) M erri l l Ly n ch n ev er i n d i cat eddu ri n g n eg o t i at i o n s thatSIG req u i red“ ad d i ti o n al cred i t
s up p ort ” fro m

en t i t i es th ath el das s et s o u t s i d e o f M erri ll Ly n ch ; (3 ) t h e CFCs h ad
co m b i nedn etas s et s o f $ 2 4 0 m i l l i o n atth e t i m e t h e SIG n o t es were ex ecu t ed , wh i ch was n o t en o ug h t o s at i s fy rep aym en t o f t h e SIG n o t es ; an d(4 ) M erri l l Ly n ch req u es t edthatthe CFCs s i g n th e ARGSA o nl y b ecau s e i twan t ed t o “ ri n g fen ce” t h e SIG affi l i at es fro m wh i ch i tco u l ds eekrep aym en ti n th e ev en to f a d efau l tan dt o p rev en t“ l eak ag e” o f as s et s h el di n M erri l l Ly n ch acco u n t s . Pet i t io n er co n ten d s th atth es e fact s s h ow t h e CFCs ’ g u aran ti es h adn o s ub s t an t i al effect o n SIG’ s ab i l i ty “ as a cred i tm at ter” t o recei v e t h e fu nd s rep res en t edb y the SIG n o t es . Pet i t i on er co n t en d s th atth e CFCs ’ earn i n g s h adn o th i n g t o d o wi th M erri l l Ly

nch ’ s d eci si o n t o l en dt o SIG. Nei ther s ect i o n 95 6 (d ) n o r t he reg u lat i on s i n qu i re i n t o th e rel at i v e i m p o rt an ce t h ata cred i t o r at t ach es t o a g u aran ty . Cres t ek , In c. v . Co m m i s s i o n er, 1 4 9 T.C. at_

_ (s l ip o p . at 2 5 -2 6 ). A g uaran t o r’ s p reci s e fi n an ci al co n d i t i o n o r t h e- 4 5 -

l i kel i h o o d t h ati two ul d b e ab l e t o m ak e g o odo n i t s g u aran ty are i rrel ev an ti n d et erm i n i n g u n d er t h e reg u l at i on s wh et h er t h e g u aran ty g i ves ri se t o an i n v es t m en t i n Un it edSt at es p ro p ert y . Id . at_ _ (s l i p o p. at 2 8 ). Th e reg u l at io n s ap pl i cab l e i n th i s cas e p ro v i d e cat eg o ri cal l y th atan y o b l i g at i o n o f a Un i t edSt at es p ers o n wi t h
res p ectt o wh i ch th e CFC i s a g u aran t o r s h al l b e co n si d eredUn i t ed St at es p ro p ert y h el db y th e CFC i n t h e am o u ntequ al t o th e u np ai dp ri n ci p al . Th ey m ak e n o p ro v is i o n fo r redu ci n g th e s ect i o n 9 5 6 i n cl u s io n b y referen ce t o th e g u aran t o r’ s fi nan ci al s tren g th o r i t s rel at iv e cred i tw o rt h i n es s . Id
. at_ _ & n .8 (s l i p o p . at2 9
- 3 0 ). In effect , p et it i o n er as k s u s t o i n s erti n t o th e reg u l at i o n s an ad d ed req u i rem en tth atth e fact s an dci rcu m s t an ces s ho u l dd em o n s trat e “ an actu al rep at ri at i o n h as o ccu rred ” i n res p ecto f t h e am o u n t s g uaran t eed . Pet i t io n er
co n ten d s t h ata fact s -an d-ci rcu m s t an ces an al y s i s i s warran t edb ecau s e th e reg u l at i o n s as p ro m

u l g at edd o n o tp ro v i d e an y s p eci al treat m en tfo r g u aran t i es o f
o b l i g at i o ns fo r wh i ch th ere are m u l t i p l e g u aran t o rs . Pet i t io n er co n t en d s th atwe are req u i redu nd er t h es e ci rcu m s t an ces “ to ap p o rt i o n th e am o un t o f U.S. p ro p ert y
* * * h el db y

each CFC g uaran t o r am on g th em s el v es an dth e rem ai n i ng g u aran to rs , th e p l ed g ors , an dth e o b l i g o r.”- 4 6 -

Th e ru l es d o n o t al l o w ap p o rt i o n i n g a g u aran t eedo b l i gat i on am o n g g u aran to rs o r t h e o b l i g o r, an dth e s tatu t e d oes n ot req u i re t h atth e ru l es i m pl em en t
an ap pro ach fo cu si n g s tri ct ly o n th e am o u n to f an o bl i g at i o n t h ata p art i cu lar g u aran to r effect i v el y

rep at ri at es . Th e CFCs b ot h g av e t hei r g u aran t i es o f
o b l i g at i o ns o f a Un i t edSt at es p ers o n , an d t h e reg u l at i o n s acco rd i n g l y treat each as h o l d i n g Un i t edSt at es p ro p ert y equ al t o th e u np ai dp ri n ci pal o f t h o s e o b l i g at i o n s . W e can n o ti g n o re o r al t er reg u l at i o n s th atare an au tho ri t at i v e an dreas o n ab l e i n t erp ret at io n o f t h e g o v ern i n g s t atu t e. Th e am ou n t s d et erm i n ed u nd er s ect i o n 9 5 6 are cap p edb y

th e s t atu t e atth e CFCs ’ ap p li cab l e earn i n gs fo r t h e t ax y ears i n i s su e. Th o s e am o u n ts are n o ti n d i s p u t e an d d o n ot ex ceed th e v al u e o f th e
u n d erl y i n g o b l i g at i o n s . Las t ly , p et i t i o ner co n t en d s th at th e s tru ctu re o f t h e ARGSA “ an d rel at ed ag reem en t s ” s h o u l daffect o u r ap p l icat i o n o f t he ru l es t o the g u aran t i es i n t h i s
cas e. Pet i t i o n er arg u es th at“ th e m o s t a g i v en CFC co u ldb e d eem ed t o h av e

‘ in v es t ed ’ i n U.S. p ro p ert y i s th atam o u n t* * * fo r wh i ch i tag reedt o b e u l t i m at el y
res p o n s i b l e”, an d p u rs u an t t o th ei r ri g h t s o f co n tri b ut i o n u n d er th e p ro rat a p ro v is i o n p et i ti o n er av ers th atth e CFCs “ wo u l d h av e b een en t it l edt o ap p ro x i m at el y 1 0 0 % rei m b u rs em en tfo r an y

am ou n t s p ai d ” as a res ul to f t h e- 4 7 -

g u aran ti es . Pet i t i o n er fai ls t o ex p l ai n h o w th e rel at edag reem en t s s h o u l daffect o u r
an al y s i s. W e can n o tv i ew t h e p ro rat a p ro v i s i o n as o ffs et t i n g th e CFCs ’ g u aran t i es . Th e CFCs u n d ert o o ku n l im i t edg u aran t i es fo r fu l l p aym en to f t he SIG n o t es , an d fi rs tan dfo rem o s tthe CFCs wo u l dh av e b een l eg al l y o b l i g at edt o m ak e an y

s u ch p aym en t s o u to f th ei r o wnearn i n g s an dp ro fi t s . Th ei r ri g h t s t o co n tri b u t i on fro m
o th er g u aran t o rs were s ub s i d i ary t o th ei r o b l i g at i o n s u n der t h e g u aran t i es . Iti s qu es ti o n ab l e wh et h er, i n the ev en tth at th ey h adb een req u i red t o m ak e p aym en t s p u rs u an t t o th ei r g u aran ti es , th e CFCs wo ul d h av e b een s eri o us l y i n cl i n edt o
en fo rce t he p ro rat a p ro vi si o n ag ai n s t thei r co m m on l y o wn edaffi l i at es . Pet i t i o ner v i g o ro u s l y co n t en d s th atm an y p l ed g es an d g u aran t i es , an d p art i cu l arl y

the g uaran t i es ati s s u e, are n o tn eces s ary fo r t h e recei pto f t h e l o an b y th e b o rro wer, an dfo r t h at reas on a CFC g u aran t or s h o u l dn o tb e au t o m at i cal l y treat ed as rep at ri at i ng earn i ng s fo r u s e b y i t s U.S. s h areh o ld ers . Pet i t i o n er’ s arg u m en t , h owev er, h i g h l i g h t s th e s o lu t io n t o th e p red i cam en ti n wh ich i t n o w fi nd s i ts el f: If a g u aran ty b y a CFC i s u n n eces s ary , then i tn eedn o tb e m ad e; an d th e ap p l i cat i o n an d effect s o f t h e reg u l at i o n s u n der s ect i o n 9 5 6 (d ) wi l l b e av o i d ed
. Th i s Co u rth as i s s u edp rev i o u s l y two o p i n i o n s co n cern i n g i n co m e i n cl u s i o n s d et erm i nedu n der t h e p ro v i s io n s o f s ect i o n 9 5 6 (d ) an dth e s ub ject- 4 8 -

reg u l at i o n s , Lu dwi g v . Co m m i s s i o n er, 6 8 T.C. 9 7 9 (1 9 77 ), an d Cres t ek , In c. v . Co m m i s s i o n er, 1 4 9 T.C. _

_ (J ul y 2 7 , 2 0 1 7 ). In n ei th er cas e d idth e t ax p ay er ch al l en g e t h e v al i d it y

o f t he reg u l at i o n s . Th e d eart h o f cas el aw o n thi s t o pi c i s
u n s u rp ri s i n g , b ecau s e, as p et i t i o n er ack n o wl ed g es , the ru l es p ro m u l gat edfo r p l ed g es an d g u aran ti es l en dth em s el v es t o eas y t ax p l an n i n g. Pet it i o n er m ay n ot
u n d o the effect s o f i ts tran s act io n b ecau s e i n th i s p art i cu l ar i n s t an ce t h e g en eral l y ap p li cab l e ru l es g en erat e an o u t co m e t h ati s u nfav o rab l e t o i t . Th e reg u l at i o n s ap p l y

an ds up p o rtth e i n co m e i ncl u s io ns th at res p on d en t d et erm i n edfo r SIHP u n d er s ect i o n s 9 5 1 (a)(1 )(B) an d9 5 6 . W e s u s t ai n
res p o n d en t’ s d et erm i n at i o n s i n t h e FPAAs th atSIHP h as i n co m e i ncl u s io n s fo r t h e t ax y ears i n i s s u e equ al t o th e CFCs ’ ap p l i cab l e earn i n g s . IV. Ap p li cab l e Tax Rat e Th e rem ai n i n g i s s ue fo r o u r co n si derat io n i n vo l v es th e t ax rat e ap p l icab l e t o SIHP’ s i n co m e i n cl u s i o n s . Pet i t i o n er co n t en ds th atan y am o u n ti n cl u d edi n SIHP’ s g ro s s i n co m e at tri b u t ab l e t o SIHL/ SEHL’ s g u aran ty s h o u l db e “ qu al i fi ed d i v i d en d i n co m e” u n d er s ect i o n 1 (h )(1 1 ). Res p o n d en td et erm i n ed i n t h e FPAAs th atth e i n co m e i n cl u s io ns were n o t qu al i fi edd i v i d en di n co m e an dare p ro p erl y t ax edas o rd i naryi n co m e.- 4 9 -

As en act edi n th e J o b s an dGro wth Tax Rel i ef Reco n ci l i at io n Acto f 2 0 0 3 , Pub . L. No . 1 0 8 -2 7 , s ec. 3 0 2 , 1 1 7 St at . at 7 6 0 , s ect i o n 1 (h )(1 1 ) p ro v i d es p referen t i al t ax rat es fo r qu al i fi ed d i v i den di n co m e. Qu al i fi edd i v i d en di n co m e i n cl u d es d i v i d en d s recei v eddu ri n g th e t ax ab le y ear fro m “ qu al i fi edfo rei g n
co rp o rat i o ns ”. Sec. 1 (h )(1 1 )(B)(i )(II). A q u al i fi edfo rei g n co rp o rat io n i s g en eral l y ei th er a co rp o rat i o n i n co rp o rat edi n a p o s ses s i o n o f t h e Un i t edSt at es o r
a co rp o rat i o n el i g i b l e fo r t h e b en efi t s o f a co m p reh en si v e i n co m e t ax treat y wi t h th e Un i t edSt at es . Sec. 1 (h )(1 1 )(C)(i ). STS was o rg an i zedu n d er t h e l aws o f t h e Caym an Is l an ds , wh i ch h as n o
co m p reh en s i v e i n co m e t ax treat y wi th t h e Un i tedSt at es . Res p o nd en t as sert s th at STS was n o t a qu al i fi ed fo rei g n co rp o rat i o n du ri n g th e t ax y ears i n i ss u e, an d p et i t i o n er d o es n o t co n t en do th erwi se. Acco rd i n gl y , we wi l l co n si d er o n l y wh et h er an y

i n co m e i n cl u s io n at t ri b u t ab le t o SIHL/ SEHL’ s g u aran ty m ay b e t ax ed atthe p referen ti al rat es u n d er s ect i o n 1 (h )(1 1 ). Th i s Co u rth as h el d p rev i o u s l y th at i nco m e i n cl u si o n s req u i redu n der
s ect i on s 9 5 1 (a)(1 )(B) an d 9 5 6 d o n o tco ns t i tu t e qual i fi edd i v i d en di n co m e u n d er
s ect i on 1 (h )(1 1). Ro dri g u ez v . Co m m is s io n er, 1 3 7 T.C. 1 7 4 (2 01 1 ), aff’ d , 7 2 2 F.3 d3 0 6 (5 th Ci r. 2 0 1 3). In Ro dri g u ez v . Co m m i s s io n er, 1 3 7 T.C. at1 7 7 , th e CFC o wn edreal an d t an gi b l e p ers o n al p ro p ert y l o cat edi n th e Un i t edSt at es , an d- 5 0 -

we h el dth atan i n co m e i n cl u s i o n u n d er s ect i o n 9 5 1 was n o ta “ d i v i d en d ” t o t h e CFC’ s U.S. s h areh ol ders , as th att erm i s d efi n edi n s ect i o n 3 1 6 (a). W e reas o n ed th atth e s ect i o n 9 5 1 i n cl u si o n i n v o l v es n o ch an g e i n o wn ers h i p o f co rp o rat e p ro p erty an dth e i n cl u si o n ari s es n o tfro m an y d i s tri b ut i o n o f p ro p ert y

b y th e CFC b u trat her fro m

i t s i n ves tm en to f earn i n g s i n s p eci fi edp ro p ert y . Id
. Pet i t i o ner co n ten d s th ato u r res u l ti n Ro dri g u ez s h o u ldn o t co nt ro l h ere. Pet i t io n er co n ten d s th atth e h o l d i n g i n Ro dri g u ez ap p li eds p eci fi cal l y t o CFC i n v es t m en t s i n real o r t an g i b l e Un i t edSt at es p ro p erty , wh i ch d idn o t res u lti n an y d i s tri b u t i o n b ecau s e th e CFC co n ti n ued t o h o l dth e p ro p erty an dth e s h areh o l d ers recei v edn o p ro p erty . Pet it i o n er arg u es thati n th i s cas e t h e ju st i fi cat i o n fo r t h e i n co m e i n cl u s i o n s was a “ d eem edi n v es t m en t ” i n p ro p ert y , wh ich “ n eces sari l y i n v o l v e[d ] a co n s tru ct iv e o r d eem edd i st ri b u t i o n ” i n the fo rm o f t h e cas h th atSIG recei v edfro m

M erri l l L yn ch . Pet i t i o n er co nt en d s t h atwe s ho u l dd is ti n g u i sh Ro dri g u ez as b ei ng d eci dedn arro w l y o n i t s fact s an dco n cl u d e i n th i s cas e t h at d eem edo r co n s tru ct i v e d i v i d en d s were p ai do u t o f t h e CFCs ’ earn i n g s an dp ro fi t s , t o wh ich s ect i o n 1 (h )(1 1 ) m ay ap p ly
. W e fi n dn o m eri t i n th e d i s t i n ct i on s th atp et i t i o n er at t em p t s t o draw fro m Ro dri g u ez. Th ere i s n o reas o n t o d i fferen t i at e b et ween an i n v es t m en ti n t an g i b l e Un i ted St at es p ro p ert y

u n der s ect i o n 9 5 6(c)(1 )(A) an d wh atp et i t i o ner t erm s a- 5 1 -

“ d eem ed i n v es t m en t ” b y

reas o n o f a g u aran ty

u n d er s ect i o n 9 5 6 (d ). In ei th er cas e th e U.S. s h areh o l d er o bt ai n s the u s e an db en efi t o f d o m es t i c p ro p ert y th ro ug h th e
u s e o f CFC earn in g s . Wh en a CFC g u aran t ees a l o an , th e s hareh o l d er o r a rel at ed p art y b en efi t s fro m

the u s e o f l o an p ro ceed s ; b u t th e CFC h as n o td is tri b u t edi t s
earn i n g s an y

m o re t h an i f i t h adu s edth e earn i n g s t o p u rch as e t an g i b l e p ro p ert y . In th i s cas e, as i n Ro dri g u ez, n o d i s tri b u ti o n o f p ro pert y o ccu rredfro m

th e CFCs t o thei r U.S. s h areh o l d er. Si m p l y p u t , n o tran s fer o f o wn ers h i p fro m co rp o rat i o n t o s h areh o l d er o ccu rredwi th res p ectt o an y p ro pert y . If we d ecl i n e t o i n t erp retRo dri g u ez as b ei ng d eci d edn arro wl y o n i t s fact s, th en p et i t i o n er co n t en ds i n t he al t ern at i v e t h atRo dri g uez was d eci d edi n co rrect l y . Pet i t io n er co n ten d s th ati n Ro dri g u ez we d i s reg ard edo u r o wnp reced en tth atth e t ax at io n o f u n d i st ri b u tedCFC earn i n g s i s ju s t i fi edb ecau s e i n v es tm en t s i n Un i t ed St at es p ro p ert y

m ay b e t reat edth e s am e as d eem edo r co n s tru ct i v e d iv i d en d s . Pet i t io n er ci t es Do u g h ert y v . Co m m i s s i o n er, 6 0 T.C. 9 1 7 , a cas e i n wh i ch we
up h el dth e co n s ti tu t i o n al i ty o f s ect i o n 9 51 (a)(1 )(B) an di n wh i ch we wro t e t h at
s ect i on 9 5 1 (a)(1 )(B) “ h as th e s t at edo b ject i v e o f t reat i n g a co n tro ll edfo rei g n
co rp o rat i o n’ s i n creas e i n earn i ng s i n v es t edi n U.S. p ro pert y as i f i t were a d i v i d en d p ai dt o th e co rp o rat i o n ’ s s h areh o l d ers .” Id . at9 2 6
.- 5 2 -

Th e fact th ats ect i o n 9 51 i n o p erat i o n treat s a CFC’ s i nv es t m en ti n Un i t ed St at es p ro p ert y

“ as i f i twere a d i v i d en d ” i n n o way es tab l is h es th atth e i n co m e i n cl u s i o n s req u i redfo r s h areh ol d ers th ereu nd er act ual l y are d i v i d en d s fo r g en eral p u rp os es o f t he Co d e. See Ro dri g u ez v . Co m m i s s i o n er, 1 37 T.C. at1 7 9 -1 8 0 ; s ee al s o Kl ei n v . Co m

m i s s i o n er, 1 4 9 T.C. _

_, _

_ (s l i p . o p . at1 7 -2 3 ) (Oct o b er 3 , 2 0 1 7 ); M u n cy

v . Co m m i s si o ner, T.C. M em o . 2 0 1 7 -8 3 (co n cl u di n g th at “ the d i s t i n ct i o n b et ween ‘ as i f’ an d‘ as ’ i s s i g n i fi can t ”). In Ro dri g u ez v . Co m m i s s i o n er, 1 3 7 T.C. at1 7 8, we fo u ndam p l e reas o n t o co n cl u d e t h at , ab s en t
ex p res s p ro v i s i o n , Co n g res s d i dn oti n ten ds u ch i n cl u si o n s t o b e co n s i d ered d i v i d en d s. W e ci tedCo d e s ect i o n s th atp ro v id e u n d er l i m i t edci rcu m s t an ces an d fo r l i m i t edp u rp o ses th ats ect i o n 9 5 1 i n cl u s i o n s s h o u ldb e t reat edth e s am e as d i v i d en d s. W e co n cl u d edth at s u ch carefu l l eg i s l at i ve d es i g n wo u l db e ren d ered
s up erfl u o u s an d u n neces s ary i f (co n traryt o wel l -es t ab l i s hedt en et s o f s t atu t o ry
co n st ru ct i o n ) we d et erm in edth ats ect i o n 9 5 1 (a)(1 )(B) g i v es ri s e t o a d i v i d en di n th e o rd i n ary

co u rs e. Id .; s ee al s o Ro dri g u ez v . Co m m i s s i o n er, 7 2 2 F.3 dat3 1 1 (“ [I] f al l s ect io n 9 5 1 i n cl u s io n s co n st i tu t edqu al i fi ed d i v i d en d s , th en s t atut o ry p ro v is i o n s s p eci fi cal l y

d es i g n at i n g cert ai n i n cl u s i o n s as d i v i d en ds wo u l dam o u n t t o s u rp l u s ag e.”). W e al so co n cl u d edth atthe s tru ctu re o f s ect i on 9 5 6 , p art i cu l arl y
as i th as ev o lv edo v er t i m e, s tro n g l y i n d i cat es th ati n cl u si o n s fo r i n v es t m en t s i n- 5 3 -

Un i ted St at es p ro p ert y

d o n o tco n s t i tu t e d i v i d en d s u n d er t h e Co d e. Ro dri g u ez v . Co m m i s s i o n er, 1 3 7 T.C. at1 8 0; s ee al s o Ro dri g u ez v . Co m m i ss i o n er, 7 2 2 F.3 dat 3 1 1 (“ [T] h e o ri g i n al v ers i on o f s ect i o n 9 56 s p eci fi cal l y s t at edth atCo ng res s d i d
n o ti n t en dam o u n t s cal cu l at ed th ereu nd er t o co n s t i tu te d i v i d en ds . * * * Itd o es n o t ap p ear t h atth e o m i s s i on o f t hi s l an g u ag e fro m th e n ew v ers i o n o f t h e s tatu t e was i n t en d edt o ch an g e t h e t reat m en to f am ou n t s cal cu l at edu n der s ect i o n 9 5 6 .”). W e co ncl u d e t h at th e rat i o n al e i n Ro dri gu ez ap p l i es wi th eq u al fo rce t o th e i n co m e i n cl u s i o n s ati s s u e, wh i ch were d et erm i ned u n d er s ect i on s 9 5 1(a)(1 )(B)
an d 9 5 6 (d ). Th e i n co m e i n cl u s i o n s fo r t he CFCs ’ g u aran t i es were n otd i v i d en d s recei v edb y

SIHP, an d acco rd i ng l y

th ey are n o t qu al i fi edd i v i den di n co m e u n d er
s ect i on 1 (h )(1 1). Ab s en ta s h owi n g th ats o m e o th er ch aract eri zat i o n s h o u l dap p l y
u n d er t h e Co d e, an y

i n co m e i n cl u d edi n SIHP’ s g ro s s i nco m e fo r t he t ax y ears i n i s su e s h o u l db e t reat edas o rd i n ary i n co m e.- 5 4 -

W e h av e co n s id eredal l arg u m en t s m ad e, an d , t o th e ex t en tn otm en t i o n ed , we co n cl ud e t hatth ey

are m o o t , i rrel ev an t , o r wi th o utm eri t. To refl ectthe fo reg o i n g , Ano rd er an dd eci s i o n wi l l b e
en t eredg ran t i n g res p o nd en t’ s m ot i o n fo r
s u m m ary ju d g m en t an d d en y i n g p et i t i o ner’ s m o t i on fo r s u m m ary ju dg m en t .