1 4 9 T.C. No . 5

UNITED STATES TAX COURT
CRESTEK, INC. & SUBSIDIARIES, Pet i t io n er v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 8 2 8 5-1 3. Fi l edJ u l y 2 7, 2 0 17
.
P i s t h e p aren t o f a g ro up o f co m p an i es th ati ncl u d es a n u m b er o f co n tro l l edfo rei g n co rp o rat i o n s (CFCs ). Befo re FY 2 0 0 8 o ne o f P’ s d o m es t i c s ub s id i ari es (S1 ) b orro wedm o n ey fro m th e CFCs , an d th o s e l o an s rem ai nedo u t s t an d i n g th ro u g h o u tFY 2 0 08 an d2 0 0 9 . S1 b efo re FY 2 0 0 8 al s o b o rro wedm o ney fro m a M al ay s i anb an k. CFC-1 , P’ s M al ay s i an s ub s i d i ary , g u aran t eed thi s l o an . Befo re m i d -2 0 0 5 CFC-1 s o l dco m p let edp ro du ct s t o an o th er d o m es t i c s ub s i d i ary

(S2 ), fo r wh i ch S2 i n cu rredp aym en to b li g at i o n s i n th e fo rm

o f trad e recei v ab l es . CFC-1 ceas edm an u factu ri n g o p erat i o n s i n m id -2 0 0 5 . Th e n ettrad e recei v ab l e b al an ce o wed b y S2 t o CFC-1 rem ai n edco n s t an tat$ 7 .9 2 m il l io n fro m m id -2 0 05 th ro u g h the en do f FY 2 0 0 9
. Aft er m i d -2 0 0 5 CFC-2 as s um edth e m an ufact u ri ng act i v i t i es o f CFC-1 an ds o ld co m

p let edp ro duct s t o S2 . Th e n ettrad e recei v ab l e b al an ce o wedb y

S2 to CFC-2 ro s e fro m

$ 8 .8 7 m i l l i o n i n t h e fi rs t qu art er o f FY 2 0 0 7 t o $ 1 8 .4 1 m i l l i o n i n the l as tqu art er o f FY 2 0 0 9.- 2
- R d et erm i n edth at al l o f t h es e t ran s act i o n s g av e ri s e t o i n v es t m en ts i n “ U ni t edSt at es p ro p ert y ” u n d er I.R.C. s ec. 9 5 6 (c)(1 )(C) an dacco rd i n g l y d et erm i n edth atP was req u i redt o i n cl u de v ari o u s am o u nt s i n g ro s s i n co m e u n d er I.R.C. s ec. 9 5 1 (a)(1 )(B). 1
. Hel d: Th e o u t s t an d i n g i n t erco m p an y l o an b al an ce o wedb y S1 t o th e CFCs co n s ti tut ed“ Un i tedSt at es p ro p ert y ” h el db y th e CFCs , wi th i n th e m ean i n g o f I.R.C. s ec. 9 5 6 (c)(1 )(C), du ri n g FY 2 0 0 8 an d 2 0 09
. 2
. Hel d, fu rt h er, CFC-1 ’ s g u aran ty o f S1 ’ s l oan an d d i rect o r i n d i rectp l ed g e o f as set s as s ecu ri ty fo r th atl o an co ns t i tu ted“ Un i ted St at es p ro p erty ” h el db y

CFC-1 , wi th i n the m ean i ng o f I.R.C. s ec. 9 5 6 (c)(1 )(C) an d(d ), du ri n g FY 2 0 08 an d 2 0 0 9
. 3
. Hel d, fu rt h er, t h e $ 7 .9 2 m il l i o n trad e recei v ab l e b al an ce o wedb y S2 t o CFC-1 , wh i ch h adb een o ut s t an d i n g fo r atl eas tth ree y ears an db ore n o i n t eres t , was i n ex ces s o f t he am o u ntth at“ wo u l d b e o rd i n ary

an dn eces s ary ” i n a t ran s act i o n b et ween u nrel at edp art i es , wi th in th e m ean i n g o f I.R.C. s ec. 9 5 6 (c)(2 )(C), t o carryo n th ei r res p ect i v e t rad es o r b u s i n es s es . Th at trad e recei v ab l e t h u s co n s t i tu t ed
“ Un i t edSt at es p ro p ert y ” h el db y CFC-1 , wi th i n th e m ean i ng o f I.R.C. s ec. 9 5 6 (c)(1 )(C), du ri n g FY 2 0 0 8 an d 2 00 9
. 4
. Hel d, fu rt h er, i n co n s equ en ce o f t h e h o ld i n gs ab o ve, P m u s t i n cl u d e v ari o u s am o un t s i n g ro ss i n co m e u n der I.R.C. s ec. 9 5 1 (a)(1 )(B). 5
. Hel d, fu rt h er, t h ere rem ai n s a m at eri al d i s p ut e o f fact as t o wh et h er t h e t rad e recei v ab l e b al an ces o wedb y S2 t o CFC-2 , wh i ch were i n cu rredi n an o n g o i n g trad e o r b u si nes s b et ween tho s e en t it i es , were “ o rd i n ary

an dn eces s ary ” wi th i n the m ean i ng o f I.R.C. s ec. 9 5 6 (c)(2 )(C), t o carryo n th ei r res p ect i ve t rad es o r b u s i nes s es .- 3
-

Ri ch ardJ o s ep h Sap i n s ki , Ro b ertAl an St ern , J effers o n H. Read , M at th ew T. No l l, an dJ o hn H. Di es , fo r p et i t i o n er. Li s a M . Ro dri g u ez, Pau l N. Sch n ei d erm an , an dCarm en N. Pres i n al
Ro b ert s, fo r res po n d en t .

OPINION LAUBER, J u d g e: Pet i t i o n er i s th e p aren t o f a g ro up o f co m p an i es th ati n cl u d es a n u m

b er o f co n tro l l ed fo rei g n co rp o rat i o n s (CFCs ). Th e In t ern al Rev en u e Serv i ce (IRS o r res p o n d en t ) d et erm in edth atth es e CFCs h ad i n v es t ed s ub s t an t i al
am ou n t s o f u n tax edearn i n g s an dp ro fi t s (E&P) i n “ Un i t edSt at es p ro p ert y ” as d efi nedi n s ect i on 9 56 (c). 1 Th e IRS acco rd i ng l y d et erm i n ed th atp et i ti o n er, as th e
u l t i m at e s h areh o l d er o f t h e CFCs , was req u i redt o i ncl u d e i n i n co m e u n d er s ect i o n 9 5 1 (a)(1 )(B) t h e am o u n t s th e CFCs h ad i n v es t ed
. As a res ul to f t hes e an do th er d et erm i n at i o n s, th e IRS d et erm i n ed , fo r p et i ti o n er’ s fi scal y ears en d i n g J u n e 3 0 , 2 0 0 8 (FYE 2 0 08 ), an dJ u n e 3 0 , 2 0 0 9 (FYE 2 0 09 ), d efi ci en ci es an daccu racy rel at ed p en al t i es u n der s ect i o n 6 6 6 2 (a) an d(d ) as fo l l o ws :

1 Al l s t atut o ry

referen ces are t o th e In t ern al Rev en u e Co de i n effect fo r t h e t ax p eri o d s ati s s u e, an dal l Ru le referen ces are t o th e Tax Co urtRu l es o f Pract i ce an d Pro cedu re. W e ro u ndal l d o l l ar am o u nt s t o th e n eares td o l l ar.- 4
- Pen al ty Year Defi ci en cy s ec. 6 6 6 2(a) FYE 2 0 0 8 $ 1 0 ,0 5 6 ,6 05 $ 2 ,0 1 1 ,3 2 1 FYE 2 0 0 9 2 ,1 5 6 ,6 9 9 4 3 1 ,3 40 Th i s cas e i s cu rren tl y

b efo re t h e Co u rto n res p o n den t ’ s m o ti o n fo r p art i al
s u m m ary ju d g m en tfi l edu n d er Ru l e 1 2 1 . Inth i s m o ti o n res p o nd en t s eek s ju d g m en tas a m at t er o f l aw th atp et i t i o n er’ s CFCs h el d i n v es t m en ts i n Un i t ed St at es p ro p erty v i a t h ree s et s o f tran s act i o n s : (1 ) l o an s ex ten d edb y fo u r CFCs t o a d o m es t i c s ub s i di ary

i n th e fo rm

o f i n t erco m

pan y cas h ad v an ces ; (2 ) a CFC’ s g u aran ty o f a l o an th ata d o m es t i c s ub s i d i ary h ads ecu redfro m

a fo rei g n b an k ; an d(3 ) l o an s ex t en d edb y

two CFCs t o a d o m es t ic s ub s id i ary i n th e fo rm

o f trad e recei v ab l es i n ex ces s o f am o u nt s th at“ wo u l db e o rd i n ary an dn eces s ary , ” wi th i n th e
m ean i n g o f s ect i o n 9 5 6 (c)(2 )(C), t o carryo n th ei r res p ect i v e t rad es o r b us i n es s es . W e co ncl u d e t h at th e fi rs tan ds eco n d i ss u es m ay ap p ro pri at el y

b e ad ju d i
cat eds u m

m ari l y an dth atres p o n d en ti s en t i t l edt o s u m m ary ju dg m en t thatth e i nt erco m p an y l o an s an d t he l o an g u aran ty co n s t i tu t edi nv es t m en ts i n “ Un i t edSt at es p ro p erty ” wi th i n th e m ean i n g o f s ect i on 9 5 6 (c)(1 )(C). Owi ng t o d is p u t es o f m at eri al fact , we co n cl u d e t h atth e t h i rdi s s ue m ay b e ad ju di cat eds u m

m ari l y o n l y

i n p art . W e wi ll acco rd i n g l y g ran ti n p art an dd en y

i n p artres p o n d en t ’ s m o t i o n fo r p art i al s u m

m ary ju d gm en t .- 5
- Back gro u n d Th e fo l l o w i n g fact s are d eri vedfro m th e p art i es ’ p l ead i n g s an dm ot i o n p ap ers , i n cl u di n g th e d ecl arat i o n s an dth e ex h i b i ts at t ach edtheret o. Cres t ek , In c. (p et i ti o n er), i s a C co rp o rat io n i n co rp o rat edi n Del aware. It h adi t s p ri n ci pal p l ace
o f b u si n es s i n New J ers ey at th e t i m e i tfi l edi ts p et i t i o n . Pet i t i o ner i s th e p aren to f a g ro up o f m o re t han 4 0 co m p an i es th atm an u factu re an ds el l u l tras o n i c eq u i p m en t , i n dus tri al cl ean i n g t an k s , cl ean i ng s y s tem s , ceram i cs , s ubas s em

b l i es , an dwi re b o n di n g equ i p m en t . Th e p ri m ary m ark et s fo r p et i t i o n er’ s p ro du ct s are s em i co n du ct o r m an ufact uri n g co m pan i es an d co m

p an i es th aten g ag e i n i n dus tri al t es t i n g . Pet i t i o n er an di t s d o m es t i c s ub s i d i ari es fi l e a
co n so l i d at edFed eral i nco m e t ax retu rn . Pet i t i o ner’ s fo rei g n s ub s i d i ari es du ri n g th e t ax p eri o d s at i s su e co n du ct edo p erat i o n s p ri m ari l y i n Eu ro p e an dAs i a, wi t h
s ub s t an t i al m an ufact uri n g faci l i t i es i n M al ay s i a. Pet i t i o ner i s th e s ol e s h areh o l d er o f t h e Cres tGro up In c. (CGI), a Del aware
co rp o rat i o n. CGI i s th e s o l e s h areh ol d er o f o n e d o m es t i c s ub si d i ary an d fo u r fo rei gn s ub s i d iari es . CGI’ s d o m es t i c s ub s id i ary i s Cres tUl tras o n ics Co rp . (Ul t ras o n i cs ). CGI’ s fo rei gn s ub s i d i ari es are Cres tUl tras o n i cs M al ay si a (CUM ), a M al ay si an co rp o rat i o n ; Adv an cedCeram i cs Tech no l o g y M al ay s ia (ACTM ), a M al ay si an co rp o rat i o n ; KLN M ecas o n i c BV (M ecas o n i c), a Du tch l i m it ed l i ab i l i t y- 6
-

co m p an y ; an d Cres t Eu ro p e Ap S (Cres tEu ro p e), a Dan i sh co rp o rat i o n . Cres tEu ro p e was th e s o l e s h areh ol der o f Cres tEu ro p e Gm b H (Cres tGerm an y ), a Germ an
co rp o rat i o n. Al l fi v e fo rei g n s ub s i d i ari es were CFCs wi thi n th e m ean i ng o f
s ect i on 9 5 7 (a). Pet i ti o ner an d CGI were Un i tedSt at es s h areh o ld ers o f t h es e CFCs wi th i n th e m ean i n g o f s ect i on 9 5 1(b ) b ecau s e th ey o wn ed(d i rect l y o r i n d i rect l y ) 1 0 0 % o f t h e t o t al co m

b i n edv o t i n g p o wer o f al l cl as ses o f t h e CFCs ’ s t ock
. A. In t erco m

p an y Lo an s Atv ari o u s t i m es b efo re FYE 2 0 0 8 CUM , M ecas o n i c, Cres t Eu ro pe, an d Cres tGerm an y

h ad m ad e l o an s t o CGI. Sub st an t i al b al an ces o n th es e l oan s rem ai n edo u t s t an d i n g t h ro u g h o u tth e t ax p eri o ds ati s s u e. Th e CFCs , ap artfro m Cres tGerm an y , ex t en d edn o ad d i t io n al cred i tt o CGI du ri n g FYE 2 0 0 8 o r 2 0 0 9
. Atth e cl o s e o f t h e fi rs tqu art er o f FYE 2 0 0 8 , th e o u t s t an di n g i nt erco m p an y l o an b al an ces o wedb y CGI t o CUM , Cres t Eu ro p e, an d M ecas o n i c were $ 1 0 ,6 1 9 ,5 8 5 , $ 3 , 7 9 5 , 9 0 5 , an d $ 3 ,4 5 0 ,0 0 0, res p ect iv el y . Th es e b al an ces rem ai n ed
co n st an tfo r t h e s ev en s u cceed i n g cal en d ar q u art ers . Atth e cl o s e o f th e fi rs tqu art er o f FYE 2 0 0 8 th e o u t s t an d i n g i nt erco m p an y l oan b al an ce o wedb y

CGI t o Cres t Germ an y was $ 7 11 , 4 6 7 ; th at b al an ce rem ai n ed co n s t an t fo r t he res to f FYE 2 0 0 8
. Atth e cl o s e o f t h e fi rs tqu art er o f FYE 2 0 0 9 , th e o u t s t an di n g i nt erco m p an y l o an b al an ce o wedb y

CGI t o Cres tGerm an y

was $ 7 5 4,1 5 5 ; th atb al an ce rem ai nedco n -- 7
-

s t an t fo r t h e res to f FYE 2 0 0 9
. Nei th er p et i t i o n er n o r CGI h adp rev i o u s l y i n cl u d ed i n i nco m e, fo r an y

y ear b efo re FYE 2 0 0 8 , an y p o rt i o n o f th es e o u t s t an d i n g l o an b al an ces . B. Gu aran ty

Tran s act i on In Feb ru ary

2 0 0 1 CGI b o rro wed$ 1 1 m i ll i on fro m th e Ban k o f Is lam , a M al ay si an b an k
. Th i s l o an was s tru ctu redas a “ d eb en tu re,” a d eb ti n s tru m en t
u s ed to b o rro w fo r m ed i um - t o l o n g -t erm p eri o d s . As a co n di t io n o f ex t en d i n g cred i t , th e Ban ko f Is l am

req u i redCGI t o s ecu re a g u aran ty fo r t h e l o an . CUM , o n e o f p et i ti o n er’ s M al ay si an CFCs , s up p li edth e req u i redg u aran ty . Al th ou g h the d eb en tu re reci t es th ata g u aran ty “ ex ecu t edb y

* * * [CUM ] i n fav o u r o f the Ban k ” was at t ach ed , p et i t i o ner h as b een u nab l e t o p ro du ce t h e d o cu m en tb y wh i ch CUM s up pl i edi t s g u aran ty . Thu s , i ti s n o ten t i rel y cl ear wh at
as s et s CUM p l ed gedd i rect ly as s ecu ri ty

fo r CGI’ s l o an . Ho w ev er, t h e d eb en tu re req u i redCGI t o p l ed g e as s ecu ri t y fo r t h e Ban ko f Is l am

l oan “ al l s t o ck s [an d ]
s h ares ” t h atCGI t h eno wn edo r t h ereaft er acq u i red , as wel l as “ al l th e ri gh t s , t i t l es , an d i n teres t s ” an d“ th e b en efi t s o f al l ri gh t s , s ecu ri t i es , an dg u aran t ees o f an y
n atu re wh at s o ev er” t h atCGI t h en h el do r t h ereaft er acq u i red
. Th e Ban ko f Is l am

l o an h adan o u ts t an d i n g b al an ce o f $ 1 0 .7 m il li o n atth e
en d o f t h e fi rs tqu art er o f FYE 2 0 0 8 , wh i ch rem ai nedco ns t an tfo r t h e s u cceed i n g- 8
-

s ev en cal en d ar q u art ers . CUM ’ s g u aran ty o f t h i s l oan rem ai n ed i n p l ace co n t i n u o u s l y fro m Feb ru ary

2 0 01 th ro u g h th e en d o f FYE 2 0 0 9 . Nei th er p et i t i o ner n o r CGI h adp rev i ou s l y

i n cl u d edi n i nco m e, fo r an y y ear b efo re FYE 2 0 0 8 , an y p o rt i on o f t hi s o u t s t an d in g l o an b al an ce. C. Trad e Recei v ab les Befo re 2 0 0 5 CUM p u rch as edraw m at eri al s fro m Ul tras o n i cs t o u s e i n m an u fact u ri ng i t s p ro du ct s . CUM l at er s o l d i t s co m p l et edp ro duct s t o Ul tras o ni cs an d
o th ers . CUM i n cu rredp aym en to bl i g at i o n s t o Ul tras o ni cs fo r t h e raw m at eri al s
an d reco rd edth es e o ut s tan d i n g o b l i g at i o n s as i nt erco m p an y trad e p ay ab l es . Co n v ers el y , Ul tras on i cs i n cu rred p aym en to b l i g at i o n s t o CUM fo r th e co m p let edp ro du ct s , an dCUM reco rd edth es e o u t s t an di n g o b l i g at i on s as i n t erco m pan y trad e recei v ab l es . See s ec. 8 64 (d )(3 ) (d efi n i n g “ trad e o r s erv i ce recei vab l e” as an “ acco u ntrecei v ab l e o r ev i d en ce o f i n d eb t ed n es s ari si n g o u to f * * * th e d i s p o s i t i o n b y a rel at ed p ers o n o f p ro p ert y d es cri b edi n s ect i on 1 2 2 1(a)(1 )).” CUM ceas ed i t s m an ufact u ri n g o p erat i o ns s o m et i m e b efo re J u ne 3 0 , 2 0 0 5
. Du ri n g FYE 2 0 0 8 an d 2 0 0 9 CUM h ad n o trad e p ay ab l es o f an y k in dt o Ul tras o n i cs o r an y o th er U.S. affi l i at e. Bu ti th ads ub s t an t i al trad e recei v ab l es fro m Ul t ras o n i cs fo r co m

pl et ed p ro du ct s i th ads o l dt o Ul tras o ni cs b efo re 2 0 0 6
. Th e n et trad e recei v ab l e b al an ce o wedt o CUM b y Ul tras o ni cs was $ 7 ,9 1 9 ,7 5 8 at th e cl o s e- 9
-

o f t h e fi rs t quart er o f FYE 2 0 0 8 . Th atb al an ce rem ai nedco n s t an tfo r t h e s u cceed
i n g s ev en cal en d ar q u art ers . Ul tras o n i cs h ad p rev i o u s l y i ncl u d ed$ 2 ,1 8 4 , 8 4 3 o f th es e t rad e recei v ab l es i n g ro s s i n co m e u n d er s ect i on 9 5 1
. Aft er CUM ceas ed i t s m an u fact u ri n g o p erat i o ns , th o se o p erat i o n s were tran s ferred t o ACTM , wh i ch ren t edm an u factu ri n g faci l i t i es fro m CUM . ACTM
co n ti n u edt o p u rch as e raw m at eri al s fro m Ul tras on i cs t o u s e i n m an u factu ri n g i t s p ro duct s an dl i k ewi s e s o l d i t s co m p let edp ro du ct s t o Ul tras o n i cs an d o th ers . ACTM i n cu rred p aym en to bl i g at i o n s t o Ul tras o ni cs fo r th e raw m at eri al s an dreco rd ed th es e o u t s t an d i ng o bl ig at i o n s as i nt erco m p an y trad e p ay ab l es . Co n v ers el y , Ul tras o n i cs i n cu rred p aym en to b l i g at i o n s t o ACTM fo r th e co m p l et edp ro du ct s , an d ACTM reco rd ed th es e o u t s t an d i n g o b l i g at i o n s as i n t erco m p an y trad e recei v ab l es . Du ri n g FYE 2 0 0 8 an d 2 0 0 9 ACTM h el ds ub st an t i al n ettrad e recei v ab l es fro m Ul tras o ni cs fo r i t s co m

pl et edp ro du cts al es . Th e n etam o u nt s o f t rad e recei v ab l es o wedt o ACTM b y Ul tras o n i cs fo r t h es e t ax p eri o d s , n o p o rt i o n o f wh i ch h ad p rev i o u sl y

b een i n cl u d edi n p et i t i o n er’ s g ro s s i n co m e, were as fo l l o ws :- 1 0 - Qu art er en di n g O u t s t an d i n g b al an ce 6 / 3 0 / 2 0 07 $ 8,8 6 5 ,1 1 5 9 / 3 0 / 2 0 07 1 0,8 5 3 ,5 8 1 1 2/ 3 1 / 2 0 07 1 3,0 9 3 ,1 4 9 3 /3 1/ 2 0 0 8 1 3,9 5 8 ,8 8 3 6 /3 0/ 2 0 0 8 1 5,8 3 9 ,7 5 3 9 /3 0/ 2 0 0 8 1 6,4 9 3 ,2 6 1 1 2/ 3 1 / 2 0 08 1 7,6 9 2 ,0 5 0 3 /3 1/ 2 0 0 9 1 8,0 3 2 ,4 1 3 6 /3 0/ 2 0 0 9 1 8,4 1 3 ,2 2 4 Atth e cl o s e o f FYE 2 0 0 8 an d2 0 0 9 p et it io n er’ s CFCs h adp rev io u s l y u n t ax edE&P, d en om i n at edi n eu ro fo r t h e Eu ro pean s ub s i d i ari es an di n ri n gg i tfo r th e M al ay s i an s ub s i d i ari es , as fo l l o w s :

En t i ty FYE 2 0 0 8 FYE 2 00 9 Cres tEu ro p e € 2 ,2 86 ,6 0 4 €1 8 4 ,8 41 M ecas o n i c € 6 ,2 87 ,2 2 1 € 4 ,9 4 2 ,2 1 3 Cres tGerm an y € 7 ,9 75 ,1 0 9 € 7 ,9 7 5 ,1 0 9 CUM RM 6 7 ,2 7 4,4 6 6 RM 5 ,3 1 7 ,1 8 6 ACTM RM 4 5 ,1 2 8,7 2 1 RM 1 1 ,0 4 6 ,3 1 4 Pet i t i o ner fi l edt im el y

co n s o l i d at edFo rm s 1 1 2 0 , U.S. Co rp o rat i o n In co m e Tax Retu rn , fo r FYE 2 0 0 8 an d2 0 0 9 . Th e IRS s el ect edp et i t i o n er’ s retu rn s fo r ex am in at i o n an dd et erm i n edth ati t s CFCs duri n g FYE 2 0 0 8 an d 2 00 9 h ad h el ds ub
-- 1 1 -

s t an t ial i n v es t m en t s i n Un i tedSt at es p ro p erty , wh i ch p et it i o n er h adn eg l ect edt o i n cl u d e i n g ro s s i n co m e. As a res u l tth e IRS d et erm i n edd efi ci en ci es an d accu racy -rel at ed p en al t i es as s etfo rth ab o v e. See s upra p . 4 . Th e IRS i s s uedp et i t i o n er a t im el y n o t i ce o f d efi ci en cy , an di tt i m el y p et i t i o n edth i s Co urt . Di s cu ss i o n I. Su m

m ary J u dg m en tSt an d ard 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 dco s t l y an d
u n n eces sarytri al s . See FPL Grp ., In c. & Sub s . v . Co m m i ss i o n er, 1 1 6 T.C. 7 3 , 7 4 (2 0 0 1). Ei th er p art y m ay m o v e fo r s u m m ary ju dg m en tup on al l o r an y p arto f t h e l eg al i ss u es i n co n tro v ers y . Ru l e 1 2 1 (a). A m o t i on fo r s u m m ary ju d g m en to r p art i al s u m m ary ju d gm en twi l l b e g ran t ed o nl y i f i ti s s h own th atth ere i s n o g en u i ne d i s p u t e as t o an y

m at eri al factan d t h ata d eci s i o n m ay b e ren d ered as a m at t er o f l aw. See Ru l e 1 2 1 (b ); El ec. Art s , In c. v . Co m m i ss i on er, 1 1 8 T.C. 2 2 6 , 2 3 8 (2 0 0 2 ). Th e m o vi ng p arty

b ears th e b u rd en o f p ro v i n g th atth ere i s n o g en ui n e d i s p u t e as t o an y

m at eri al fact . Fo r t h i s p u rp o s e t h e Co u rtv i ews al l fact u al m at eri al s
an d i n feren ces i n t he l i g h t m o s tfav o rab l e t o t h e n o nm o v i n g p art y . Dah l s tro m v . Co m m i s s i o n er, 8 5 T.C. 8 12 , 8 2 1 (1 9 8 5 ). Ho wev er, th e n o nm o v i n g p art y “ m ay n o t
res t up o n th e m ere al leg at i o n s o r d en i al s” o f h i s p l ead i n g s b uti ns t ead“ m u s ts et fo rt h s peci fi c fact s s h o wi n g thatth ere i s a g en u i n e d i s p u t e fo r t ri al .” Ru l e 1 2 1 (d );- 1 2 -

s ee Su n d s tran dCo rp . v . Co m m i s s i o n er, 9 8 T.C. 5 18 , 5 2 0 (1 9 9 2 ), aff’ d , 1 7 F.3 d 9 6 5 (7 th Ci r. 1 9 94 ). II. Go v ern in g St atut ory Fram ewo rk A CFC i s a fo rei g n co rp o rat i o n m o re t h an 5 0 % o f wh o s e s t o ck(i n t erm s o f
v o t i n g p o wer o r v al u e) i s o wn ed(d i rect l y , i nd i rect ly , o r co n s tru ct i v el y ) b y Un i t ed St at es s h areh o ld ers . Sec. 9 57 (a). A Un i t edSt at es s h areh ol d er i s a U.S. p ers o n wh o o wn s (d i rect l y , i n d irect l y , o r co n st ru ct iv el y ) 1 0 % o r m o re o f th e t o tal co m b i n edv o t i n g p o wer o f t h e fo rei g n co rp o rat i o n ’ s s t o ck
. Sec. 9 5 1 (b ). Th e p art i es ag ree t h atal l o f p et i ti o ner’ s fo rei g n s ubs i d i ari es are CFCs an dth atp et i t i o n er, t h ei r
s o l e u l t i m at e s hareh o l d er, i s 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 ). Sect io n 9 5 1 (a)(1 ) req u i res th ata Un it edSt at es s hareh o l d er o wn i n g CFC
s t ocko n th e l as td ay o f t h e CFC’ s t ax ab le y ear i n cl u d e i n g ro s s i n co m e (am o n g
o th er t hi n g s ) “ th e am o un td et erm i n edu n der s ect i o n 9 5 6 wi th res p ectt o s u ch
s h areh o ld er fo r s uch y ear.” Un d er s ect i o n 9 5 6 (a), t h e am ou n td et erm in edu n d er
s ect i on 9 5 6 wi th res p ect t o a Un i t edSt at es s h areh o l der i s t h e l es s er o f:

(1 ) t h e ex ces s (i f an y ) o f (A) s u ch s h areh ol d er’ s p ro rat a s h are o f t h e av erag e o f th e am o u nt s o f Un i t edSt at es p ro p ert y h el d (d i rect l y

o r i n d irect l y ) b y

th e co n tro l l ed fo rei g n co rp o rat i o n as o f t h e cl o se o f each qu art er o f s u ch t ax ab l e y ear, o v er- 1 3 - (B) t h e am o u n to f earn i n g s an dp ro fi t s d es cri b ed i n s ect i o n 9 5 9 (c)(1 )(A) wi th res p ectt o s u ch s h areh o ld er, o r (2 ) s u ch s h areh o l d er’ s p ro rat a s h are o f t h e ap p l i cab l e earn i n g s o f s u ch co n tro l l edfo rei g n co rp o rat i o n .

“ Un i t edSt at es p ro p ert y ” i n cl u d es (am o n g o th er t h i n g s ) “ an o b li g at i o n o f a Un i ted St at es p ers o n .” Sec. 9 5 6 (c)(1 )(C). An “ o b l i g at i o n” g en eral l y i ncl u d es

“ an y b o n d , n o te, d eb en tu re, * * * acco u n trecei v ab l e, n o t e recei v ab l e, o p en acco u nt , o r o th er i nd eb t ed n es s . ” Sec. 1 .9 5 6 -2 T(d )(2 )(i ), Tem p o raryIn co m e Tax Reg s., 5 3 Fed . Reg . 2 2 1 6 3 (J u n e 1 4 , 1 98 8 ). Fo r p u rp o s es o f s ect i on 9 5 6 (a), a CFC “ s h al l , u n d er reg u l at io n s p res cri b ed b 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 io n o f a Un i t ed St at es p ers o n i f s uch * * * [CFC] i s a p l ed g o r o r g u aran t o r o f s u ch o b l i gat i on .” Sec. 9 5 6 (d ). Th e Secret ary h as i s s u edreg u l at i o n s i n t erp ret in g th i s p ro v is io n . Th e reg u l at i o ns g en eral l y p ro v i d e t h atan y

o b l i g at i on o f a U.S. p ers on “ wi th res p ectt o wh ich a
* * * [CFC] i s a p l ed go r o r g u aran t o r” s h al l b e co ns i d ered Un i t edSt at es p ro p ert y h el db y th e CFC. Sec. 1 .9 5 6 -2 (c)(1 ), In co m e Tax Reg s.; s ee i d . s ub p ara. (2 ) (p ro v i d i n g th ata CFC wi l l b e co n s i d ereda g u aran t o r i f i t s as set s “ s erv e atan y t i m e, ev en th ou 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 bl i g at i o n o f a Un i ted St at es p ers o n ”).- 1 4 -

“ Un i t edSt at es p ro p ert y ” i s d efi n edt o ex cl u d e s p eci fi edty p es o f p ro p ert y , i n cl u d i n g cert ai n trad e recei v ab l es . Sect i o n 9 5 6(c)(2 )(C) p ro v id es th atUn i t ed St at es p ro p ert y

d o es n o ti ncl u d e:
an y o b li g at i o n o f a Un i t edSt at es p ers on ari s i n g i n co n nect i o n wi th th e s al e o r p ro ces si n g o f p ro p ert y i f t h e am ou n to f s u ch o b l i g at i o n o u t s t an d i n g atn o t i m e du ri n g th e t ax ab l e y ear ex ceed s th e am o u n t wh i ch wo u l db e o rd i naryan dn eces s ary t o carryo n th e t rad e o r b u s i n es s o f b ot h the o th er p art y t o th e s al e o r p ro ces s i n g tran s act i o n an dth e Un i t edSt at es p ers o n h adth e s al e o r p ro ces si n g tran s act i o n b een m ad e b et w een u n rel at edp ers o n s * * * Wh et h er t h e am ou n to f ani n terco m p an y o b l i g at io n i s “ o rd i naryan dn eces s ary ”
u n d er t h i s p ro v i si o n “ i s t o b e d et erm i n ed fro m al l th e fact s an dci rcu m s t an ces i n each cas e.” Sec. 1 .9 56 -2 (b )(1 )(v ), In co m e Tax Reg s . Th e am ou n to f t he i n ves tm en ti n Un i t edSt at es p ro p ert y u n d er s ect i o n s 9 5 1 (a)(1 )(B) an d9 5 6 (a) wi th res p ectt o an o b li g at i o n i s t h e CFC’ s ad ju s t edb as i s i n the o b l i g at i o n reduced b y cert ai n l iab i l i t i es . Sec. 1 .9 5 6 -1 (e)(1 ), In co m e Tax Reg s. In th e cas e o f a p l ed ge o r g u aran ty , th e am ou n ti n cl ud i bl e i s b as edo n “ 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 wi th res p ectt o wh ich th e * * * [CFC] i s th e p l ed g o r o r g u aran t o r.” Id . s ub p ara. (2 ). Th e am o u nt i ncl u d ib l e i s redu cedb y an y p rev i ou s ly

t ax edE&P o f t he CFC. See s ecs . 9 5 1 (a)(1 )(B) (l as t cl au s e), 9 5 9(a), (c). An di tcan n o t ex ceed the Un it edSt at es s h areh o l d er’ s “p ro rat a s hare o f t h e ap p li cab l e earn i n g s ” o f t h e CFC. Sec. 9 5 6 (a)(2 ).- 1 5 -

III. An al y s i s Res p o n d en tco n t en d s th atp et i t i o n er’ s CFCs du ri n g FYE 2 0 08 an d2 0 0 9 h el dth ree s et s o f i n v es t m en t s i n Un i t edSt at es p ro p ert y u n der s ect io n 9 5 6 (a) t h at p et i t i o n er was req u iredt o i n cl u d e i n g ro s s i n co m e u n d er s ect i o n 9 5 1 (a)(1 )(B). Th e t h ree s et s o f al l eg edi n ves tm en t s were: (1 ) t h e o u ts t an d i n g l o an b al an ces
o wedb y CGI t o CUM , Cres t Eu ro p e, M ecas o n i c, an d Cres t Germ an y ; (2 ) CUM ’ s g u aran ty o f t h e l o an th atCGI s ecu redfro m th e Ban ko f Is l am ; an d (3 ) t h e o u t s t an d i n g trad e recei v ab l es o wedb y Ul tras on i cs t o CUM an dACTM . W e wi l l ad
dres s thes e i t em s s ep arat el y aft er co n si d eri n g p et i t i o ner’ s t h res h o ld arg u m en t s , wh i ch ap p l y

t o al l th ree s et s o f i n v es t m en ts . A. Th res h o l dArg u m en t s Pet i t i o ner fi rs tco n t en d s th atal l o f res p on d en t ’ s ad ju s t m en t s are b arred b y th e s t atu t e o f l i m i t at i on s o n as ses s m en t . Sect i o n 6 5 0 1 (a) g en eral l y req ui res th e IRS t o as s es s a t ax wi thi n th ree y ears aft er t h e fi l i ng o f a ret u rn . Th is th ree-y ear p eri o db eg i n s o n th e due d at e o f t h e ret u rn i f i ti s t i m el y fi l edo r o n the act ual fi l
i n g d at e i f t h e ret u rn i s fi l edl at e. See s ec. 6 50 1 (b )(1 ). If t h e IRS i s s u es a t i m el y
n o t i ce o f d efi ci en cy

an dth e t ax p ay er t i m el y

p et i t i o n s th i s Co u rt , th e p eri o do f l i m i tat i on s i s ex ten d ed u n t i l th e d eci s i o n o f t h e Co u rtb eco m es fi n al an dfo r 6 0 d ay s th ereaft er. See s ecs . 6 5 0 3(a)(1 ), 7 4 8 1 (a)(1 ); Zari n s v . Co m m i ss i o n er, T.C.- 1 6 -

M em o. 2 0 0 1 -6 8 , 8 1 T.C.M
. (CCH) 1 3 7 5, 1 3 80 , aff’ d , 3 7 F. Ap p ’ x 7 4 7 (6 th Ci r. 2 0 0 2 ). Sect io n 6 5 0 1 s et s fo rt h s ev eral ex cep t i o n s t o th e t h ree-y ear ru l e, i ncl u d i n g th e ex cep t i o n th atap p ears i n s ect i o n 6 5 0 1 (e)(1 )(B). 2 Itp ro vi d es : “ If t h e t ax p ay er
o m it s fro m

g ro s s i n co m e anam o u n tp ro p erl y i n cl u d i b le t h erei n u n d er s ect i o n 9 5 1 (a), t h e t ax m ay

b e as s es s ed* * * atan y

t i m e wi thi n 6 y ears aft er t h e ret u rn
was fi l ed .” Th e IRS d et erm in edi n th e n o t i ce o f d efi ci en cy thatp et i t i o n er h ado m i t t ed fro m g ro s s i n co m e s ub s t an t i al am o u n t s p ro p erl y i n cl u di b l e t h erei n u n d er s ect i o n 9 5 1 (a)(1 )(B) an ds ect i on 9 5 6 (a). Sect i o n 6 5 0 1 (e)(1 )(B) t hu s o p erat edt o ex t en dt o
s i x y ears th e p eri o do f l i m i t at i o n s o n as s es sm en t . Pet i ti o n er fi l edi t s Fed eral i n co m e t ax return s fo r FYE 2 0 0 8 an d2 0 0 9 o n Feb ru ary 2 8 , 2 0 0 9 , an dM arch 1 2 , 2 0 1 0 , res p ect i v el y . Th e n o t i ce o f d efi ci en cy was m ai ledt o p et i t i o n er o n J an u ary 1 6 , 2 0 1 3 . Th atd at e i s wel l wi th i n th e s i x -y ear p eri o ds p eci fi edi n s ect i o n 6 5 0 1 (e)(1 )(B).

2 Sect i o n 6 5 0 1(e)(1 )(B) was red es i g nat edas s ect i o n 6 5 0 1 (e)(1 )(C) i n 2 0 1 0 b y th e Hi ri n g In cen ti v es t o Res t o re Em p l oym en tAct , Pub
. L. No . 1 1 1 -1 4 7, s ec. 5 1 3 (a)(1 ), 1 2 4 St at . at 1 1 1 (2 0 10 ). Fo r eas e o f referen ce, we wi l l refer t o s ect i o n 6 5 0 1 (e)(1 )(B) fo r al l rel ev an tt ax p eri o d s .- 1 7 -

Seco n d , p et i t i o n er o b s erv es th atm o sto f t h e p ro p o s eds ect i o n 9 5 6 i n cl u s i on s are at tri b u t ab l e t o i n v es t m en t s i n Un i t edSt at es p ro p ert y thatth e CFCs h adm ad e i n t ax p eri o d s b efo re FYE 2 0 0 8 . Inp et i t i o n er’ s v i ew, th e IRS was o bl i g at edt o
m ak e an y ad ju s t m en ts u nd er s ect i on 9 5 6 fo r th e y ear i n wh i ch th e CFCs fi rs t acq u iredth e Un i t edSt at es p ro p ert y i n qu es t i o n , n otfo r an y

l at er p eri o d
. Pet i t i o n er ci t es no au th o ri ty

fo r t hi s s ub m i s si o n, an di t h as n o m eri t . Co n gres s p ro v id edth atth e s ect i o n 9 5 6 i n cl u s i o n “ fo r an y t ax ab l e y ear”
s h al l b e d et erm i n edb y

m eas uri n g the av erag e am o u n t o f Un i t edSt at es p ro p ert y h el db y a CFC “ as o f t h e cl o s e o f each qu art er o f s u ch t ax ab l e y ear.” Sec. 9 5 6 (a) (fl u sh l an g u ag e), (1 )(A). Th e s t atu t e d o es n otreq u i re t hatth e i n cl u s i on b e m ad e fo r t h e fi rs t y ear i n wh ich the CFC acq u i res i t s i nv es t m en to r t hatth e i ncl u s i o n b e
m ad e fo r an y p art i cu lar y ear. To th e co n trary : Th e s tatu t e d efi nes th e i n cl u s i o n fo r an y p art i cu lar y ear b y

referen ce t o “ th e am ou n t s o f Un i t edSt at es p ro p ert y h el d (d i rect l y o r i n d i rect l y ) b y

th e co n tro l l ed fo rei g n co rp o rat i o n ” du ri n g t h aty ear. Sec. 9 5 6(a)(1 )(A) (em

p h as i s ad d ed ). Th u s , wh ere a CFC h o l d s an i t em o f Un i t ed St at es p ro p ert y

fo r m u l t i p le y ears , s ect i o n 9 5 6 (a) p erm i t s an i n cl u si o n i n i n co m e fo r an y o n e o f t h o se y ears . Th e o n l y rel ev an tl im i tat i o n i s th ata s ect i o n 9 5 6 i n cl u si o n can no tb e m ad e
m o re th an o nce fo r an y

p art i cu l ar i n v es tm en tb y a CFC i n Un i t edSt at es p ro p ert y .- 1 8 -

Co n g res s acco m

p l i sh edth i s l i m i t at i o n b y p ro vi d in g th atan y

s ect i o n 9 5 6 i n cl u s i o n
m u stb e redu cedb y

p rev i ou s l y

t ax edi n co m e (PTI) u n d er s ect i o n 9 5 9 (c)(1 )(A). Pet i t io n er co n ced es th at , ex cep twi th res p ectt o $ 2 ,1 8 4,8 4 3 o f t rad e recei v ab l es , s ee s up ra p . 9 , th e PTI l im i t at i o n o f s ect i o n 9 5 9 (c)(1 )(A) d o es n o t ap p l y b ecau s e p et i t i o n er h as n o tp rev i o u s l y i n cl u d edan y

am o un t i n i nco m e o n acco u n t o f th e CFCs ’ i nv es t m en t s i n Un i t ed St at es p ro p ert y . W i th th atp ro vi s o , n ot h i n g i n th e
s t atu te b ars th e IRS fro m m ak i n g s ect i o n 9 56 ad

ju s t m en ts fo r FYE 2 00 8 an d/ o r 2 0 0 9 . Cf. M cCu l l o ch Co rp . v . Co m m i s s i o n er, T.C. M em o . 1 9 8 4 -4 22 , 4 8 T.C.M
. (CCH) 8 0 2 (b arri ng IRS fro m m ak i n g an ad

ju s t m en t , u n d er an earl i er v ers i o n o f
s ect i on 9 5 6 , fo r y ears aft er t h e y ear i n wh i ch th e CFC m ad e i t s i n i t i al i nv es t m en t i n Un it edSt at es p ro p ert y ). Pet i t i o ner’ s fi n al th res h o l darg u m en t i s t h at , ev en i f a s ect i o n 9 5 6 (a) i n cl u s i on i s req ui red , th e Co u rt“ m u s tred et erm i n e p et i t i o n er’ s i n co m e fo r p rev i o u s y ears t o co rrect l y

acco u n tfo r cu rren tearn in g s an d p ro fi t s .” Pet it i o n er ci t es s ect i on 6 2 1 4 fo r t h e p ro p o s i t i o n th atth i s Co u rt , i n red et erm i n i ng a d efi ci en cy fo r a p art i cu l ar y ear, “ s h al l co n s i d er s u ch fact s wi th rel at i o n t o th e t ax es fo r o th er y ears
* * * as m ay

b e n eces s ary

co rrect ly t o red et erm i ne t he am o u nto f s u ch d efi ci en cy .” T h i s arg u m en t , as p et i t i o n er art i cu lat es i t , i s m is g u i d ed
. Pet i t i o n er’ s o wn E&P--t hati s , th e E&P o f t h e U.S. p aren tco rp o rat i o n --are wh o ll y i rrel ev an ti n- 1 9 -

d et erm i n i n g th e p ro p er am o u n to f a s ect i o n 9 5 6 i n cl us i o n at tri b u t ab l e t o i n v es t m en t s i n Un i t edSt at es p ro p ert y b y p et i t i o n er’ s CFCs
. Th e en t i t i es wh os e t ax at tri b u t es are rel ev an tt o th i s d et erm in at i o n are t he CFCs , n o t p et i ti o n er. W i th res p ect t o th e CFCs , two s et s o f t ax at tri b ut es are p ot en t i al l y rel ev an t : th ei r “ ap p l i cab l e earn i n gs ” an dth ei r “ p rev i o u s l y t ax edearn i n g s .” See s ecs . 9 5 6 (a)(2 ), 9 5 9 (c)(1 )(A). Bu t th e p art i es h av e s t i p u l at edth atth e fi v e CFCs h av e
n o PTI ap artfro m

$ 2 ,1 8 4 , 8 4 3 o f t rad e recei v ab les th at was p rev i o u sl y i ncl u d edi n p et i t i o n er’ s i n co m e. An dth e p art i es h av e s t i pu l at ed th e am o un t s (ex pres s edi n th e l o cal cu rren cy ) o f each CFC’ s p rev i o u s l y u n t ax edE&P fo r FYE 2 0 08 an d 2 0 0 9
. See s up ra p . 1 0 . Th atb ei n g s o , we d o n o ts ee wh at“ red et erm i n at i on ” o f E&P we
wo u l db e cal l ed up o n t o m ak e. 3 In s u m , we co n cl u d e t h atn o n e o f p et i t i o ner’ s th res h o l d arg u m en t s p recl u des
u s fro m co n si d eri ng th e i s s u es th atres p o n d en tp res en t s fo r s u m m ary ju d g m en t . W e t herefo re p ro ceed to ad dres s the t h ree s et s o f t ran s act i on s th at , i n res p o n d en t ’ s
v i ew, g iv e ri s e t o a s ect io n 9 5 6 i n cl u s i o n fo r FYE 2 0 0 8 an d/ o r 2 0 0 9
.

3 To th e ex t en tth atth ere i s an y u n cert ai n ty ab o u tth e d o l lar am o u nt s o f t h e CFCs ’ p rev i o u s l y

u n t ax edE&P (o wi n g t o cu rren cy co n v ers io n o r o therwi s e), t h at u n cert ai nt y

wi l l b e res ol v edi n l at er p ro ceed in g s i n t h i s Co u rt .- 2 0 -

B. In t erco m

p an y Lo an s Atv ari o u s t i m es b efo re FYE 2 0 0 8 CUM , Cres tEu ro p e, M ecas o n i c, an d Cres tGerm an y

h ad m ad e l o an s t o CGI, an ds ubs t an ti al b al an ces o n th es e l o an s
rem ai n edo u t st an d i n g du ri n g the t ax p eri o d s ati s s u e. Ato f t h e cl o s e o f th e fi rs t qu art er o f FYE 2 0 0 8, the o ut s tan d i n g i n terco m p an y l o an b al an ces o wed b y

CGI t o CUM , Cres tEu ro p e, an d M ecas o n i c were $ 1 0 ,6 19 ,5 8 5 , $ 3 ,7 9 5,9 0 5 , an d $ 3 ,4 5 0 ,0 0 0 , res p ect i v el y . Th es e b al an ces rem ai n edco n s t an t fo r t h e s ev ens u cceed i n g cal en d ar q u art ers . Atth e cl o s e o f t h e fi rs t qu art er o f FYE 2 0 0 8 , th e o u t s t an d i n g i n t erco m

p an y l o an b al an ce o wedb y

CGI t o Cres tGerm an y

was $ 7 1 1 ,4 6 7 ; th atb al an ce rem ai n edco n s t an t fo r t h e res to f FYE 2 0 08 . Atth e cl o s e
o f t h e fi rs t quart er o f FYE 2 0 0 9 , th e o u t s t an d i n g i n t erco m p an y l o an b al an ce o wed b y CGI t o Cres t Germ an y

h adri s en t o $ 7 5 4,1 5 5 ; th atb al an ce rem ai n edco n s t an t fo r t h e res t o f FYE 2 0 09
. Pet i t i o ner d o es n o td is p ut e t h atl o an s i n th es e d o l l ar am ou n ts were o u t s t an d i n g atth e t i m es s tat edo r t h at th e l o an s co n st i tu t ed“ o b l i g at i o n [s ] o f a Un i t ed St at es p ers o n” wi th i n th e m ean i n g o f s ect i o n 9 5 6 (c)(1 )(C). No r d o es p et i t i o n er
co n ten d th atth es e l o an s fal l wi th i n an y ex cep t io n t o th e d efi n it i on o f “ U n i t ed St at es p ro p ert y ” i n s ect i o n 9 5 6(c)(2 ). In s t ead , p et i ti o n er as sert s th ats o m e o f t h e l o an s m ig h th av e b een “ d i s ch arg ed ” an d(al t ern at i v el y ) t h atan y s ect i o n 9 5 6 i n cl u -- 2 1 -

s i on at tri b u t ab le t o th e l oan s m u s th av e o ccu rred(i f atal l ) i n a y ear b efo re FYE 2 0 0 8 . W e reject b o th arg u m en t s . In i t s res p o n se t o th e m o t i o n fo r p art ial s u m m ary ju d g m en t, p et it io n er as s ert s t h at“ th e t ri er o f fact m u s td et erm i n e i f o r wh entho s e l o an s were d i s ch arg ed .” Bu t i n op p o s i n g a m ot io n fo r s u m m ary ju d g m en t , th e n o nm o v i n g p art y m ay n o t
res t up o n m ere al l eg at io n s o r d en i al s b u ti n st ead“ m u s t s etfo rt h s p eci fi c fact s
s h o wi n g th atth ere i s a g en ui n e d i s p u t e fo r t ri al .” Ru le 1 21 (d ) (em ph as i s ad d ed );
s ee Su n d s tran dCo rp ., 9 8 T.C. at5 2 0 . Pet i t i o ner h as s etfo rt h n o s peci fi c fact s
rem o t el y s u g g es t i n g t h atan y o f t h e l o an s h as b een d i s ch arg edo r (i f a p art i cu l ar l o an were t h o u g h tt o h av e b een d i s ch arg ed ) h o w th atl o an was d i s ch arg edan d wh en . 4 In i t s d ecl arat io ns an dd i s co v ery res p o ns es p et it i on er h as ad m i t t ed th at

“ th ere h av e b een n o p aym en t s o n p ri n ci p al fo r an y o f t h es e l oan s ” an dth atal l o f th e l o an s l is t edab o v e “ co n t i nu edt o b e o u t s t an d i n g th ro u g ho u tth e rel ev an tt i m e p eri o d s en d i n g * * * J u n e 3 0 , 2 0 0 9 .” Lo an s t h at rem ai n “ o u t s t an d i n g” can n o t h av e b een “ d i s ch arg ed .” Pet it i o n er h as p ro vi d ed n o th i n g b u tv ag u e s p ecu l at i o n o n th i s p o i n t , u n s up p o rt edb y s p eci fi c fact ual al l eg at i o n s o f an y k i n d . Th i s i s i n s u f4 If t h e CFCs tru l y

d i s ch arg edCGI fro m

i ts o b l ig at io n o n o n e o r m o re l o an s , th atwo u l dg i v e ri se t o i nco m e fro m d is ch arg e o f i n d eb t ed n es s u n d er s ect i o n 1 0 8 u n l es s s o m e ex cl u s i o n ap p l ied
.- 2 2 -

fi ci en tt o wi ths t an da p ro p erl y s up p o rt edm o t i on fo r s u m m ary ju d g m en t . Fl a. Co u n try Cl ub s , In c. v . Co m

m i ss i o n er, 1 2 2 T.C. 7 3 , 7 6 (2 0 0 4 ), aff’ d , 4 04 F.3 d 1 2 9 1 (1 1 th Ci r. 2 0 0 5 ); Cam erat o v . Co m m is s i o n er, T.C. M em o . 2 0 0 2-2 8 , 8 3 T.C.M . (CCH) 1 1 4 7 , 1 1 51
. Pet i t i o ner’ s al t ern at i ve arg u m en t i s equ al l y u np ers uas i v e. To th e ex t en t p et i t i o n er co n t en d s th atth e IRS was o b l ig at edt o m ak e an y s ect i o n 9 5 6 ad

ju s t m en t fo r t h e y ear i n wh i ch th e CFC fi rs t ex t en d edeach l oan , we h av e al read y reject ed th atarg u m en t. See s up ra p p. 1 7 -1 8 . To th e ex t en tp et i t i o ner co n t en d s th atth e
s ect i on 9 5 6 i n cl us i on s s h ou l db e redu cedb y PTI u n der s ect io n 9 59 , th atco n t en t i on i s fo recl o s edb y

i t s ad m i s s i o n t h atn o p o rt i o n o f t he l o an b al an ces was ev er p rev i o u s l y i n cl u d edi n i ts g ro s s i n co m e u n d er s ect i o n 9 5 1
. In s u m , we co n cl u d e t h atth e i n t erco m p an y l o an b al an ce o wedb y

CGI t o each CFC co n st i tut ed“ Un i t edSt at es p ro p erty ,” wi th i n th e m ean i n g o f s ect i o n 9 5 6 (c)(1 )(C), h el d b y

th atCFC du ri ng FYE 2 0 0 8 an d 2 0 0 9
. Subjectt o an y ap p li
cab l e E&P l i m i t at i o n s, p et i ti o n er i s acco rd i n gl y req ui redb y

s ect i o n 9 51 (a)(1 )(B) t o i ncl ud e i n g ro s s i n co m e t h e fo l l owi n g am o un t s: fo r FYE 2 0 0 8 , th e o u t s t an d i n g b al an ces o wedb y CGI t o CUM , Cres tEu ro p e, M ecas o n i c, an d Cres tGerm an y at th e cl o s e o f th e fi rs t qu art er o f t h aty ear; an d fo r FYE 2 00 9 , th e $ 4 2 ,6 8 8 i n creas e- 2 3 -

i n the o u t s t an d i ng b al an ce o wedb y CGI t o Cres t Germ an y

atth e cl o s e o f t h e fi rs t qu art er o f t h aty ear. 5 C. Gu aran ty

Tran s act i o n In Feb ru ary

2 0 0 1 CGI b o rro wed$ 1 1 m i ll i on fro m th e Ban k o f Is lam , a M al ay si an b an k
. As a co nd i t i o n o f ex t en d in g cred i tth e b an kreq u i redCGI t o
s ecu re a g u aran ty

fo r t h e l o an . CUM , o n e o f p et i t i o ner’ s M al ay s i an CFCs , s up p l i edthe req u i redg u aran ty . Th i s l oan h ad ano u t s t an d i n g b al an ce o f $ 1 0 .7 m i l l i o n atth e en d o f t h e fi rs t qu art er o f FYE 2 0 0 8. Th e l o an b al an ce rem ai n ed co ns t an t fo r t h e s u cceed in g s ev en cal en d ar q u art ers , an dCUM ’ s g u aran t ee o f t he l o an rem ai n edi n p l ace t h ro u g h
o u tth i s p eri o d . Nei th er p et i t i o n er n o r CGI h adp rev i o u s l y i n cl u dedi n i n co m e, fo r
an y y ear b efo re FYE 2 0 0 8 , an y p o rt i on o f t h i s o u t s t an d i n g l oan b al an ce. Res p o n d en tco n t en d s th atCUM , as a g uaran t o r o f t h e Ban ko f Is l am l o an ,

“ i s co n s i dered as h o l d in g t h e o b l i g at i o n o f a Un i tedSt at es p ers o n ” u n d er s ect i o n 9 5 6 (d ). Res po n d en t acco rd i ng l y co n cl u d es that , i n th e ab s en ce o f an y PTI, th e $ 1 0 .7 m i l l i o n b al an ce o f th atl o an i s i ncl u d i b l e i n p et i t io n er’ s g ro ss i n co m e fo r FYE 2 0 08 u n d er s ect i on 9 5 1 (a)(1 )(B). See s ec. 1 .9 5 6 -1 (e)(2 ), In co m e Tax Reg s .

5 Gi v en p o s s i bl e u ncert ai n t y as t o the d o ll ar am o u n t s o f t h e CFCs ’ ap p l i cab le E&P (o wi n g t o cu rren cy

co n v ers io n o r o therwi s e), th e p reci s e am ou n t s o f t h e s ect i on 9 5 6 i n cl u s i on s wi ll b e res o l v edi n l at er p ro ceed i n g s i n thi s Co u rt .- 2 4 -

(p ro v i d i n g th at , i n th e cas e o f a g u aran ty o r p l ed g e, t h e am o u n to f t h e Un i t ed St at es p ro p ert y

i n ves t m en ti s “ th e u np ai dp ri nci p al am o u nt* * * o f t he o b l i g at i o n wi th res p ect t o wh i ch th e * * * [CFC] i s the p l ed g o r o r g u aran t o r”). Al th ou g h CUM ’ s s t atu s as a g uaran to r wo u ldb e s u ffi ci en tt o s upp o rtth e g ran to f p art i al s u m

m ary ju d g m en tfo r res p o n den t , CUM al so ap p ears t o h av e b een a “ p l ed g o r” i n s up p o rto f t h e Ban ko f Is l am l o an . See s ec. 9 5 6 (d ). A CFC wi l l b e reg ard edas a “ p l ed go r” i f i t s as s et s s erv e d i rect l y o r i n d irect 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 io n o f a Un i t edSt at es p ers o n .” Sect io n 1
. 9 5 6 -2 (c)(2 ), In co m e Tax Reg s ., p ro v id es th at th e p l ed ge o f s t o cko f a co n tro ll edfo rei g n co rp orat i on wi l l b e co n s i d
ered as th e i n d i rectp l ed g e o f t h e as s et s o f t he co rp o rat i o n i f atl eas t 6 6 -2 / 3 p ercen t o f t h e t o t al co m b i ned v o t i n g p o w er o f al l cl as ses o f s t ocken t i t l edt o v o t e i s p l ed g edan di f t h e p l ed g e o f s t o ck i s acco m p an i edb y o n e o r m ore n eg at i v e co v en an t s o r s i m i l ar res tri ct io n s o n th e s h areh o l d er effect i vel y l i m i t in g th e co rp orat i on ’ s d i scret i o n wi th res p ectt o th e d is p o s i t i o n o f as s et s an d the i n cu rren ce o f l iab i l i t ies o th er t h an i n the o rd i n ary co u rs e o f b u s i n es s . Becau s e p et i t i o n er was u n ab l e t o p ro duce a co p y o f t he act u al g u aran ty d o cu m en t , we d o n o t kn o wwh atas s et s CUM p l ed g edd i rect ly t o th e Ban k o f Is l am . Bu tthe d eb en ture req u i redCGI t o p l ed g e t o the b an k“ al l s t o ck s [an d ]
s h ares ” t h ati to wn ed , wh i ch i n cl u d edi t s 1 0 0 % s t o ck o wn ers h i p i n t eres t i n CUM
. CGI fu rt h er p l ed g ed al l “ ri g h t s , s ecu ri t i es , an dg uaran t ees ,” as wel l as “ th e b en e-- 2 5 -

fi ts o f al l ri g h t s , s ecu ri t i es , an dg u aran t ees o f an y n atu re wh at s o ev er” wh i ch i tth en h el do r th ereaft er acq u i red . To th e ex t en tth atthi s l at t er p l ed g e “ effect iv el y l i m i t[ed ] * * * [CGI’ s ] d i s cret io n wi th res p ectt o the d i s p os i t i o n o f * * * [CUM ’ s ]
as s et s an dth e i n cu rren ce o f l i ab i l i ti es , ” t h e d eb en tu re co nt ai n ed “ neg at i v e co v en an ts o r s i m i l ar res tri ct i on s , ” s ee i b i d
. , th atren d eredCUM an i n di rect “pl ed g o r”
as wel l as a “ g u aran t or.” Pet i t i o ner ad v an ces ag ai n s tthi s co n cl u s i o n two arg um en ts , th e g i s to f b o t h b ei n g th atCUM ’ s g u aran ty h adl i tt l e o r n o v al u e. Pet i t i o n er fi rs t n o t es th atCGI h ad o ri g i n al l y

p led g ed 1 ,5 0 0 s h ares o f p et i t io n er’ s s t o ckas co l l at eral fo r t h e Ban k
o f Is l am l o an . Th atb ei n g s o , p et i ti o n er as s ert s th atCUM ’ s g u aran ty was “ a m ean i n g l es s g es tu re.” Acco rd i n g t o p et i t i o n er, CUM ’ s g uaran ty fu rn is h ed m erel y a
s eco n d ary

fo rm o f co l l at eral th atp ro v i d edn o i n crem en tal s ecu ri ty fo r t h e Ban ko f Is l am . Atth e o ut s et we h av e d i ffi cu l ty s eei n g t h e rel ev an ce o f t hi s arg u m en t . Sect i on 9 5 6 (d ) p ro v i d es th ata CFC s h al l b e co ns i d ered as h o l d i n g an o b l i g at i o n o f a Un i ted St 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 l i g at i o n .” Pet i t io n er co n ced es th atCUM was a “ g u aran t or.” Un d er t h e s ub part F reg i m e as
en act edb y

Co n g res s , th ati s th e en do f t h e i n qu i ry . Nei th er s ect io n 9 5 6 (d ) n o r t h e- 2 6 -

reg u l at i o n s i n t erp ret in g i t i n qu i re i n t o th e rel at i ve i m po rt an ce th at th e cred i t o r at t ach es t o th e g uaran t ee. In an y ev en t , p et i ti o n er o ffers n o “ sp eci fi c fact s ,” s ee Ru l e 1 2 1(d ), t o s up p o rti t s as s ert i o n th atth e Ban ko f Is l am reg ard edCUM ’ s g u aran t ee as “ a m ean i n g l es s g es tu re.” As a M al ay s ian b an k , th e Ban ko f Is l am m ay h av e reg ard edCGI’ s p l ed g e o f s t o ck

i n a cl o s el y

h el dU.S. co m

pan y as co l l at eral o f qu es t i o n ab l e v al u e. Fo r reas o n s i t deem ed ad equat e, t h e Ban ko f Is l am d em an d eda g u aran ty

fro m a M al ay si an co m

p an y wi th M al ay s i an as s et s , an dCUM du l y p ro v i d edth atg u aran t ee. Wh en a b an kag rees t o m ak e an $ 1 1 m i l l i o n l o an o n l y aft er s ecu ri n g a g u aran ty fro m a l o cal co m

p an y wi th l o cal as s et s , i ti s l o g ical t o as s um e t hatth e b an k reg ard s th atg uaran ty

as v al u ab l e s ecu ri ty . Pet i t i o ner h as s up p l i edn o affi d av i t fro m th e Ban k o f Is l am

o r o ther d o cu m en t th atwo u l ds up po rta d i fferen tco n cl u s i on . Pet i t i o n er’ s s pecu l at i o n ab o u tth e Ban ko f Is l am ’ s m o t iv at i o n i s i n s u ffi ci en t, wi th o u tm o re, t o o v erco m e a wel l -s up p o rt edm o t i on fo r s u m m ary ju d g m en t . See Ru l e 1 2 1 (d ); Su nd s tran dCo rp . , 9 8 T.C. at5 20 ; Dah ls tro m , 8 5 T.C. at 8 2 0 -8 2 1
. Al t ern at i v el y , p et it i o n er as s ert s th atCUM ’ s g u aran ty was wo rth l es s b ecau s e

“ o ther l i ab i l i t i es en cu m

b eri n g CUM ’ s as s et s ex ceed edthe fai r m ark etv al ue o f th es e as s et s atth e t i m e CUM g u aran t eedth e d eb en tu re.” In co n t en di n g t h atCUM
was fu n ct i o n al l y

i n s o l v en t, p et i t i o n er h as s up pl i edn o b al an ce s h eet s , i n co m e- 2 7 -

s t at em en t s , o r o th er d o cu m en t at i o n co n cern i n g CUM ’ s fi n an ci al p o s i t i o n atan y p o i n ti n t i m e. Th e s o l e s up p o rti tad v an ces fo r th is al l eg at i o n o f i n s ol v en cy i s th e
as s ert i o n i n a d ecl arat i o n b y J . M i ch ael Go o d s o n , i t s ch i ef ex ecu t i v e o ffi cer, t h at

“ th e as s et s p l ed g edi n s up p o rto f t h e g u aran t ee h adl i ab i l i t i es th atex ceed edth ei r fai r m ark etv al u e.” Th e reg u l at i o n s p ro v i d e t h ata CFC wi l l b e co ns i d ered a g u aran t o r i f i t s
as s et s “ s erv e atan y

t i m e” as s ecu ri ty

fo r t he p erfo rm an ce o f an o b l i g at i o n o f a Un i ted St at es p ers o n . Sec. 1
. 9 5 6 -2 (c)(2 ), In co m e Tax Reg s . CUM ’ s g u aran tyrem ai n edi n p l ace co nt i n u o us l y fro m Feb ru ary 2 0 0 1 th ro u g h J u ne 3 0 , 2 00 9 . Pet i
t i on er h as p ro v i dedn o d o cu m en t s s u g g es t i n g t h atth e Ban ko f Is l am ev er q u es t i on edth e v al u e o f CUM ’ s co l l at eral o r d em an d edad d i t io n al s ecu ri ty . Th e p art i es ag ree t h atCUM du ri n g FYE 2 0 0 8 an d2 0 0 9 h adb o o k as s et s o f atl eas t $ 1 8 .5 m i l l i o n : $ 1 0,6 1 9,5 8 5 o f l o an recei v ab l es an d $ 7 ,9 1 9 ,7 5 8 o f t rad e recei v ab l es fro m

i t s U.S. affi li at es . If CUM h adg en u i ne l i ab i l i ti es th atp u ti t s
s o l v en cy i n t o s eri o u s qu es t io n , p et i t i o n er was req u i redt o “ s etfo rt h s p eci fi c fact s
s h o wi n g th atth ere i s a g en ui n e d i s p u t e fo r t ri al ” o n t h i s p oi n t . See Ru l e 1 2 1 (d ); Su n d s tran dCo rp ., 9 8 T.C. at5 2 0 . M r. Go o d s o n ’ s n ak edas s ert i on o f i n s ol v en cy , d ev oi do f an y

s up p o rt i n g fi n an ci al o r acco u n t i n g d at a, i s i n s u ffi ci en tt o d o th i s .- 2 8 -

In an y ev en t , i ti s n o tcl ear t h at CUM ’ s p reci s e fi n an ci al co n d i ti o n i s ev en rel ev an t i n d et erm i n i ng wh et her i t s g u aran ty g i ves ri s e t o an i n v es t m en ti n Un i t ed St at es p ro p ert y . Sect i o n 9 5 6 (d ) p ro v i des th ata CFC “ s h al l , u n d er reg u l at i on s p res cri bedb y

th e Secret ary , b e co n s i d eredas h o l di n g an o b l i gat i o n o f a Un it edSt at es p ers o n i f s uch * * * [CFC] i s a p l ed g o r o r g u aran t o r o f s u ch o b li g at i o n . ” Th e reg u l at i o n s p ro v i de cat eg o ri cal l y , wi th an ex cep t i o n n o t rel ev an t h ere, 6 th at an y o b l i
g at i o n o f a Un i t edSt at es p ers o n wi th res p ect t o wh i ch a CFC i s a p l ed g or o r g u aran t o r “ s hal l b e co n s i d ered* * * Un i t edSt at es p ro p ert y ” h el d b y the CFC. See s ec. 1 .9 56 -2 (c)(1 ), In co m e Tax Reg s . Nei ther t h e reg u l at i o n s n o r t h e ex am p l es i l lu s trat i ng th em

m ak e an y referen ce t o th e l ik el i h oo dth atth e CFC wi l l b e cal l edup o n (o r b e ab l e) t o m ak e g o o d
o n i t s g u aran tee. See s ec. 1 .9 5 6 -2 (c)(3 ), Ex am p les (1 ) an d(2 ), In co m e Tax Reg s . Th e reg u lat i on s refl ectthe co m m o n s en s e p ro po s i t i on th at a l en d er wo ul dn o tas k fo r, o r b e s at i s fi edwi th, a g u aran t ee fro m a p ers o n wh o l ack edth e fi n an ci al cap aci ty t o p ro v i d e t h e s ecu ri ty

th atth e l en d er d es i res . Fo r t ax p u rp o s es m o re g en eral l y ,

6 Th e ex cep t i o n i s p ro v i dedfo r cert ai n co n du itfi n an ci ng arran g em en t s . See s ec. 1 .9 5 6-2 (c)(1 ), In co m e Tax Reg s . (cro s s -referen ci n g s ub p ara. (4 )).- 2 9 -

th e co u rt s h av e fo u n d v al idg u aran t i es t o ex is t wi th ou t cl o sel y s cru ti n i zi n g th e g u aran to r’ s as s et s , l i ab i li t i es , o r o v eral l fi n an ci al h eal th
. 7 In s h o rt , n ei th er th e s t atut e n o r t he reg u l at i o n s p ro v i d e an y s up p o rtfo r p et i
t i on er’ s s ub m i s s i o n . On e ex am p l e i n a p ro p o sedreg u l at i o n d i drefer t o th e v al u e
o f t h e p l ed gi n g CFC’ s as s et s , b u tth atreferen ce was o m i t t edwh en th e reg u l at i o n
was fi n al i zed . Co m

p are s ec. 1 .9 5 6 -2 (c)(3 ), Ex am p l e (3 ), Pro p o s edIn co m e Tax Reg s., 4 4 Fed . Reg . 2 3 8 8 3 (Ap r. 2 3 , 1 9 7 9 ), wi th s ec. 1 .9 56 -2 (c)(3 ), Ex am p l e (3 ), In co m e Tax Reg s . As actual l y p ro m u l g at ed , th e reg u lat i on s m ak e n o p ro v i s i o n fo r redu ci n g th e s ect i o n 9 5 6 i n cl u si o n b y referen ce t o th e g u aran t o r’ s fi n an ci al
s tren gt h
. 8

7 See, e.g ., Lu dw i g v . Co m m i s s i o n er, 6 8 T.C. 9 7 9 , 9 8 5 (1 9 7 7) (h ol d in g th at two es s en t i al el em en t s are req ui redfo r a v al i d g u aran ty : “ (1 ) an u n d ert ak i n g o r p ro m i s e o n th e p arto f t h e g u aran t o r an d (2 ) a l i ab il i ty o f t h e g u aran to r t o m ak e p aym en t i f t h e p ri m ary

o b l ig or fai l s t o d o s o”); Perry v . Co m m i s s io n er, 4 7 T.C. 1 5 9 , 1 6 3 (1 9 6 6) (d efi n in g a g u aran ty as “ anu n d ert ak i n g o r p ro m i se o n th e p arto f o n e p ers on wh i ch i s co l l at eral t o a p ri m ary o r p ri n ci p al o b l i gat i on o n th e p arto f an o th er, an dwh ich b i n d s th e o b l i go r t o p erfo rm an ce i n t h e ev en to f n o nperfo rm an ce b y s u ch o th er”), aff’ d , 3 9 2 F.2 d4 58 (8 th Ci r. 1 9 6 8 ).
8 In Au g us t 2 0 1 5 th e Secret ary i s s u edp ro p os edreg u l at i o n s p ro v i d i ng g u i d
an ce co n cern i n g th e cal cu l at i o n o f s ect i o n 9 56 i n cl us i o n s at tri b ut ab l e t o p l ed g es an d g u aran t i es . See s ec. 1 .9 5 6 -1 (e)(2 ), Pro po s edIn co m e Tax Reg s . , 8 0 Fed . Reg
. 5 3 0 6 2 (Sep t . 2 , 2 0 15 ). On e co n cern p ro m pt i ng th i s p ro p os al was th e p os s i b i l i t y o f m u lt i p l e s ect io n 9 5 6 i n cl u s io n s at tri b u tab l e t o m u l t i p l e g u aran t o rs , wh ich co u l d res u l t i n an ag g reg at e i n cl us i on ex ceed i n g t h e u np ai dp ri n ci pal am ou n to f t h e g u aran ti edo b l i g at i o n . See i b i d . Th e Secret ary s o u gh tco m

m en t s o n a p ro po s al t o

(co n ti n u ed ...)- 3 0 -

Fo r t h es e reas on s we co ncl u d e t h atCUM ’ s g u aran t ee o f t h e Ban ko f Is l am l o an g av e ri s e t o an i nv es t m en ti n “ Un i t edSt at es p ro p ert y ” wi th i n th e m ean i n g o f
s ect i on 9 5 6 (c)(1 )(C). Sect io n 9 5 6 (d ) p ro v i d es th ata CFC “ s h al l * * * b e co n s i
d eredas h o l d i n g an o b li g at i o n o f a Un it edSt at es p ers on i f s u ch * * * [CFC] i s a p l ed g o r o r g u aran t o r o f s u ch o b l i g at i o n .” Th e reg u lat i o n s th e Secret ary h as p res cri beds p eaki n s im i l arl y cat eg o ri cal t erm s, p ro v i d i n g n o ex cep ti o n s k ey edt o th e CFC-g u aran t o r’ s fi nan ci al s tren g th . As s u m i n g arg u en do th at CUM ’ s fi n an ci al
s tren gt h m i g h tb e rel ev an t , p et i t i o n er h as co m e fo rwardwi th n o s peci fi c fact s s u g g es t i ng th atCUM l ack edthe fi n an ci al cap aci ty t o p ro vi d e t h e s ecu ri ty

th e Ban k o f Is l am d es i red . W e acco rd i n g l y h o ldth at , s ub

jectt o an y ap pl i cab l e E&P l i m i t at i on s , p et i t i o n er i s req ui red b y s ect i o n 9 5 1 (a)(1 )(B) t o i ncl u d e i n g ro s s i n co m e fo r FYE 2 0 08 th e $ 10 .7 m i l l i o n b al an ce o f t h e Ban ko f Is l am l o an o u t s t an di n g o n th at d at e. See s ec. 1 .9 5 6 -1 (e)(2 ), In co m e Tax Reg s . (p ro v i d i n g th at , i n th e cas e o f a p l ed g e o r g u aran ty , the am ou n to f t h e Un i t edSt at es p ro p ert y i n ves t m en t i s “ th e

8 (...co n t in u ed ) al l o cat e t h e u np ai d p ri n ci p al am o u n to f th e g uaran t i edo bl i g at i o n am o n g m u l t i p le CFCs i n acco rd an ce wi th th ei r “ cred i t cap aci t i es ,” as m eas u red(fo r ex am p l e) b y th e rel at i v e n etv al u es o f t h ei r as s et s . Ib i d . Th e Secret ary u l ti m at el y

ch o s e n o tt o i m p l em en tth i s ap p ro ach . Th i s s eri es o f ev en ts i s co n s i s ten t wi th the co n cl u s i o n th atth e fi n an ci al cap aci ty o f t h e CFC-g u aran t o r i s n o t a fact o r u n d er th e reg u l at i on s thatcu rren tl y

ex i s t.- 3 1 -

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 wi th res p ectt o wh ich th e * * * [CFC] i s th e p l ed g o r o r g u aran t o r”). D. Trad e Recei v ab les Pet i t i o ner co n ced es th atCUM an d ACTM du ri n g FYE 2 0 0 8 an d2 0 0 9 h el d
s ub s t an t i al trad e recei v ab les o wedb y Ul tras o ni cs . Th e recei v ab le o w edb y Ul t ras o n i cs t o CUM was $ 7 ,9 1 9 ,7 5 8 thro u g h ou tth i s p eri o d . Th e n etrecei v ab l es o wed b y Ul tras o n i cs t o ACTM g rew s t ead i l y fro m $ 8 ,8 6 5 ,1 1 5 i n th e fo u rt h qu art er o f FYE 2 0 07 t o $ 1 8,4 1 3,2 2 4 i n the fo u rt h qu art er o f FYE 2 0 0 9
. See s up ra p . 1 0
. Pet i t i o ner co n ten d s th atth es e recei v ab l es are ex cep tedfro m th e d efi n i t i o n
o f Un it edSt at es p ro p ert y b y s ect i o n 9 5 6 (c)(2 )(C). Th i s ex cep t i o n co v ers “ an y
o b l i g at i o n o f a Un i t edSt at es p ers o n ari s i n g i n co n n ect io n wi th the s al e o r p ro ces s i ng o f p ro p ert y ,” b u t o n l y i f t h e am o u n to f s u ch o b l i g at io n “ atn o t im e du ri n g th e t ax ab l e y ear ex ceed s the am o u n twh i ch wo u l db e o rd i n ary an d n eces saryt o carry
o n th e t rad e o r b u s i nes s” o f b o th p art i es t o the t ran sact i o n , as s u m i n g th atth ey were “ u n rel at ed p ers on s . ” Wh eth er t h e v o l u m e o f t rad e recei v ab l es h el db y a CFC i s “ o rd i n ary

an dn eces sary ” fo r t h i s p u rp o s e “ i s t o b e d et erm i n edfro m al l th e fact s
an d ci rcu m s t an ces i n each cas e.” Sec. 1 .9 5 6-2 (b )(1 )(v ), In co m e Tax Reg s . Res p o n d en tco n t en d s th atn o recei vab l es h el d b y CUM o r ACTM qu al i fy fo r t h e s ect i o n 9 5 6 (c)(2 )(C) ex cep t i o n. Pet i t io n er co n t en d s th at th e ex cep t i o n fo r- 3 2 -

trad e recei v ab l es p res en t s a fact u al qu es t i o n an d th atm at eri al d i sp u t es o f fact
ex i s t . W e ag ree wi th res p o nd en tas t o th e recei v ab l e h el db y CUM b utwi th p et i ti o n er as t o th e recei v ab les h el db y ACTM
. Befo re 2 0 0 5 CUM h adp u rch as edraw m at eri al s fro m Ul tras o n i cs , m an u factu redv ari o u s p ro du ct s , an ds o l dth e co m p l et edp ro du ct s t o Ul tras o ni cs an do th ers . Bu t CUM ceas ed al l m an u fact u ri n g o p erat i o n s s o m et i m e b efo re J u n e 3 0 , 2 0 0 5 , an d th os e o p erat i o n s were t ran s ferred t o ACTM . Fro m th atp o in tfo rward ACTM rep l aced CUM as p et i t i o n er’ s co n tract m an u fact u rer. Th e p art ies h av e s t i p u l at ed th atCUM th ereaft er rem ai n ed“ i n ex i s ten ce an d h as n o tb een d i s s o l v ed .” As far as th e reco rdrev eal s , h owev er, CUM ’ s s o le co m m erci al act i vi ty

aft er J un e 3 0 , 2 0 0 5 , was ren t i n g i t s fo rm er m an u fact u ri n g faci l i t i es t o ACTM , i t s M al ay s i an s i s t er co rp o rat i o n . Fo r a v ari et y

o f reas o n s , we co n cl u d e th atth e $ 7 ,9 1 9 ,7 5 8 recei v ab l e h el d b y CUM du ri n g FYE 2 00 8 an d 2 0 0 9 d o es n otqu al ify fo r t h e s ect i o n 9 5 6 (c)(2 )(C)
ex cep t i o n . Becau s e CUM h adceas edal l m an u fact u ri ng o p erat io n s b y m i d -2 0 0 5 , al l s ub s equ en t tran s act i o n s i n v o l v i n g i n v en t o ry p u rch as es an dp ro du ct s al es o ccu rredb et ween ACTM an di t s U.S. affi l i at es . Pet i t io n er d o es n o tco nt en dth at CUM en g ag edi n an y

co m m erci al tran s act io n wi th an y U.S. affi l i at e du ri n g th e t ax- 3 3 -

p eri o d s ati s s ue. CUM h ad n o trad e p ay ab l es t o an y U.S. affi l i at e du ri n g th i s p eri
o dan dthe d ol l ar am ou n to f t h e recei v ab l e o n i t s b o o ks d i d n o tch an g e. Th i s $ 7 ,9 19 ,7 5 8 recei v ab l e was a l eg acy o f a b u s i n es s act i v i ty

th atCUM h ad t erm i n at edtwo y ears p rev i o u s l y . Wh i le i twas an o b l i g at i o n th ato ri g i n al l y
aro s e “ i n co nn ect io n wi th th e s al e o r p ro ces s i ng o f p ro p ert y ,” b y FYE 2 0 0 8 i twas
s i m p l y an o p en acco un to wedt o CUM b y i t s U.S. affi l iat es . Hav i n g l o s t an y co n n ect i on t o o n go i n g co m

m erci al tran s act i on s , th e recei vab l e was n o t“ o rd i n ary an d
n eces s ary ” b ecau s e CUM an d Ul tras on i cs were n o l o ng er en g ag edi n a t rad e o r b u s i n es s wi th each o th er. See s ec. 9 5 6 (c)(2 )(C). To qu al i fy

fo r t h e s t atu t o ry

ex cep t i o n , th e t ax p ay er m u s tes t ab l i s h t h atth e
am ou n to f t h e o bl i g at i o n d o es n o tex ceed th e am o un tth atwo u l db e “ o rd i n ary an d
n eces s ary t o carryo n the t rad e o r b us i n es s” o f b o th p art i es t o th e t ran s act i o n , i f t h e
s al es o r p ro ces s i n g tran s act i o n h ad“b een m ad e b et ween u n rel at edp ers o n s .” Ib i d
. In co m m erci al s al es tran s act i o n s b et ween u n rel at edp ers o n s , v en d o rs ex p ectt o b e p ai drel at i v el y

p ro m p t l y . Th e $ 7 ,9 1 9 , 7 5 8 recei v ab l e o n CUM ’ s b o o k s du ri n g th e fi rs tqu art er o f FYE 2 0 0 8 h ad b een o u t s t an d i n g fo r atl eas t th ree y ears an d b o re n o i n t eres t . By

n o s tret ch o f t h e i m ag i n at i o n co u l d t h i s b e d es cri b edas “ o rd i nary ” i n
a s al es tran s act i o n b et ween u n rel at edp art ies . An ds i n ce th ere were n o o n g o i n g
co m m erci al tran s act i on s b et w een CUM an di t s U.S. affi l i at es , p et i t io n er can n o t- 3 4 -

s h o w th atan y

p ort i on o f th is recei v ab l e was “ n eces s ary ” t o faci l it at e t h e s al e o r p ro ces s i n g o f an y p ro p ert y . To o v erco m e a wel l-s up p o rt edm o t i o n fo r s u m m ary ju d g m en t , a p art y

m u st
s etfo rt h “ s p eci fi c fact s s h o w i n g th atth ere i s a g en u in e d i s p u t e fo r t ri al
. ” Ru l e 1 2 1 (d ); s ee Su n d s tran dCo rp ., 9 8 T.C. at 5 2 0 . Pet i t i o ner h as s etfo rth n o “ s p eci fi c fact s” s u g g es t in g th atan y p o rt i o n o f CUM ’ s $ 7 ,9 1 9 ,7 58 recei vab l e qu al i fi es fo r th e s ect i o n 9 5 6 (c)(2 )(C) ex cep t i o n . Th e v ag u e an dco n cl u s o ry as s ert i o n b y

p et i
t i on er’ s CEO that“ th e t ran s act i o n s an dam o u nt s ex ch an g edb et ween Cres tUl tras o n i cs Co rp . , Cres t Ul tras o ni cs M al ay s i a an d Ad v an cedCeram i cs Tech n o l o g y M al ay si a were o rd i n ary

an dn eces s ary ” d o es n o t s u ffi ce t o creat e a t ri ab l e i s s u e o f fact
. Onth e o th er h an d , we ag ree wi th p et i t i o ner t h atm at eri al d i sp u t es o f fact d o
ex i s t as t o wh et h er t he v o l u m e o f t rad e recei v ab l es h el db y ACTM was “ o rd i n ary
an d n eces s ary .” Pet i ti o n er h as s up p l i edd o cu m en t s s h o wi n g ex t en s i v e acco u n t p ay ab l e an dacco un trecei vab l e act i v i ty b et ween Ul tras o n ics an dACTM duri n g FYE 2 0 08 an d2 0 0 9 . Its eem s l i k el y th atth e v o l u m e o f ACTM ’ s n et recei v ab l es
was ex ces s i v e: Its h owedn o trad e p ay ab l es at th e en do f ei th er y ear, wh i l e t h e
v o l u m e o f i t s trad e recei vab l es s t ead i l y i n creas edfro m

$ 8 ,8 6 5 ,1 1 5 t o $ 1 8 ,4 1 3 ,2 2 4
. Bu t d et erm i n in g the ex actv o l u m e t h at qu al i fi edas “ o rd in ary an dn eces s ary ” d e-- 3 5 -

p en ds o n “ al l th e fact s an dci rcu m s t an ces i n each cas e” an dwi l l th u s req u i re t ri al
. See s ec. 1 .9 5 6 -2 (b )(1 )(v ), In co m e Tax Reg s. In s u m , we co n cl u d e t h at , s ub jectt o an y

ap p l icab l e E&P l i m i t at io ns , an d
s ub jectt o a PTI red u ct i o n o f $ 2,1 8 4 , 8 4 3 o n acco u n to f t rad e recei v ab l es p rev i o u s l y i n cl u d edi n p et it i o n er’ s g ro s s i n co m e, p et it io n er i s req u i redb y s ect i o n 9 5 1 (a)(1 )(B) t o i n cl u d e i n g ro s s i n co m e fo r FYE 2 0 0 8 th e $ 7 ,9 1 9,7 5 8 recei v ab l e th atUl tras o n i cs o wedt o CUM . As t o th e b al an ce o f t h e t rad e recei v ab l es , drawi n g al l i n feren ces i n th e l i g h tm o s t fav o rab l e t o p et i ti o n er as th e n o nm o v i n g p art y , s ee Dah l st ro m , 8 5 T.C. at8 2 1, we co n cl u de t h atres p o n d en t ’ s m o t i o n fo r s u m m ary ju d g m en tm

u s tb e d en i ed
. To i m p lem en tth e fo reg o i n g , Ano rd er wi l l b e i s s u edg ran t i n g i n p artan dd en y i n g i n p artres p o n d en t ’ s
m o t i o n fo r p art i al s u m

m ary ju d g m en t .