### I N THE UNI TED STATES COURT OF APPEALS FOR THE FI F TH CI RCUI T

No. 12-60533

OSVALDO RODRIGUEZ; ANA M. RODRIGUEZ, Petitioners–Appellants,
v. COMMISSIONER OF INTERNAL REVENUE, Respondent–Appellee.

Appeal from the Decison of the United States Tax Court

Before DeMOSS, DENNIS, and PRADO, Circuit Judges. PRADO, Circuit Judge: Osvaldo Rodriguez and Ana M. Rodriguez ( “Appellants”) c h a l lenge a determination of tax deficiency made by the IRS. The IRS determined that, for 2003 and 2004, the gross income Appellants reported based o n their ownership of a controlled foreign corporation should have b een taxed at the rate of Appellants’ ordinary income rath e r than the lower tax rate Appellants had

c laimed. Appellants challenged the IRS’s determination before the Tax Court and lost. This appeal followed. For the reasons that follow, we affirm the Tax Court’s determination. U n i t e d S t a te s C o u rt o f A p p e al s F i f t h C i rc u i t 

### F I L E D J uly 5, 2013 Ly l e W . Cay ce Clerk Case: 12-60533 Document: 00512297517 Page: 1 Date Filed: 07/05/2013No. 12-60533 I Ap p ellants are Mexican citizens and permanent r e sidents of the United States who, during the relevant time periods, owned all of the s tock of Editora Paso del Norte, S.A. de C .V. (“ E ditora”), a c ompany that is incorporated in Mexico. Editora has a branc h i n t he United States called Editora Paso del Norte, S.A. de C.V., Inc. Editora is a controlled foreign corporation (“CFC”). On October 15, 2005, Appellants amended their 2003 tax return to include

an additional $1,585,527 o f gross income attributable t o t heir ownership of Editora’s shares. At the same time, Appellants also filed their 2004 tax returns, in which they included $ 1,478,202 in gross income attributable to Editora. They reported both amounts as qualified dividend income, which was taxed a t a rate of 15%, rather t han the 3 5% a t which their other income w as taxed. On March 20, 2008, the I RS issu e d a n o t i ce of deficiency to Appellants. The notice indicated that Appellants’ i ncome tax payments fo r 2 0 0 3 a n d 2 004 were deficient in the amounts of $3 16,950 and $295,530, respectively, based on the IRS’s determination t hat Appellant s ’ E ditora-attributable income should have been taxed as ordinary income rather than as qualified dividend income. Ap p e l lants challenged the deficiency, and the case was submitted to t he Tax C ourt on a f

u lly s tipulated record. 1 The only i s s ue for the Tax Court was
one of s tatutory interpretation: whether Appellants’ income attributable to Editora constituted qualified dividend i ncome su bj e c t to a lower tax rate than Appellants’ ordinary income. The Tax Court ruled in favor of t he IRS. After unsuccessfully seeking a revision of the Tax Court’s determination, Appellants filed this appeal.

1 The p arties d o not dis p ute the am ounts of E d itora- attributable incom e or the am ount ow ed if the incom e is taxed as ord inary incom e. The p arties als o d o not d is p ute that Ed itora qualif ies as a controlled f

oreign corp oration. 2 Case: 12-60533 Document: 00512297517 Page: 2 Date Filed: 07/05/2013No. 12-60533 II As this is a direct appeal from a final decision of the Tax Court, we have jurisdiction pursuant to 26 U.S.C. § 7482(a)(1). In revi e w i ng Tax Court decisions, we apply the same standard as applied to district court determinations. Terrell v. Comm’r , 625 F.3d 254, 258 (5th Cir. 2010). Since this

case presents a purely legal issue of statutory interpretation, we review the Tax Court’s decision de novo. I d

. III

A The issue in this c a s e is whether amounts included in Appellants’ gross income for 2003 and 2004 pursuant to 2 6 U.S.C. §§ 951(a)(1)(B) and 956 (collectively, “ § 951 inclusions”) constitute qualified dividend income under 26 U.S.C. § 1(h)(11). The § 951 inclusions would be subject to a lower tax rate if t hey constitute qualified dividend income

. O r d i n ary income is taxed at a higher rate. Sections 951 and 956 are provisions of t h e tax code intended to limit the deferral of taxes that would o therwise be owed to the United States. See Elec. Arts, I nc. v. Comm’r , 1 18 T.C. 226, 272 (2002). These sections require that CFC shareholders include CFC-owned United States property a s part of the shareholder’s gross income. 26 U

. S.C. §§ 951(a)(1), 956(a). Tax deferrals are thus minimized because CFC shareholders lose the ability t o defer U n i t ed States tax obligations b y k eeping the CFC’s earnings abroad or by investing i n property instead of repatriating income through the payment of dividends. 2

2 “ [ I ] n c o m e e arned by a C FC

. . . generally is subject to U. S. tax w hen the incom e i s rep atriated , f

or exam ple as a divid end or a royalty. I f t h e C F C inves ted the incom e in the U nited States , f

or exam p le, by the p urchas e of p rop erty or a loan to the p arent corp oration, the incom e w ould be ef f ectively rep atriated in a m anner that w ould es cap e current tax. Thus , generally, in the cas e of certain inves tm ents in U

. S. p rop erty by a C FC, the U

. S. s harehold er m us t includ e in incom e an am ount calculated by ref erence to the am ount inves ted in the U

. S. p rop erty. ” O F F I C E OF TA X P OL I CY , D E P ’ T OF T H E T R EA SUR Y , T H E D E F E RR

AL O F I N C OM E E AR N E D 3 Case: 12-60533 Document: 00512297517 Page: 3 Date Filed: 07/05/2013No. 12-60533

Section 951(a)( 1 ) ( B) requires that United States shareholders of CFCs “shall include in [their] gross income

. . . the amount determined under section 956 with respect to such shareholder for such year . . . . ” 26 U.S.C. § 9 51(a)(1)(B). S e ction 956 describes how to determine a shareholder’s pro rata share of United States property held by the CFC for inclusion as gross income. Id. § 956(a). The p arties do n ot dispute the a mount calculated pursuant to § 956. Their only dispute is whether the a mount determined by § 956 and included as income pursuant to § 9 5 1 constitutes “qualified dividend income” under § 1(h)(11). Section 1(h)(11)(B)(i)(II) d efines qualified divid e n d i ncome as including “dividends received during the taxable year from

. . . qualified foreign corporations.” I

d. § 1(h)(11)(B)(i)(II). A dividend is “any distribution of property made by a corporat i o n t o i t s shareholders” out of its earnings and profits. I d. § 316(a). There are also instances where a statute specifica l ly states that certain income is t o b e t reated as if it were a dividend. See infra Part III.C. These “deemed dividend” provisions operate b y legislative fiat. Appellants argue that their § 951 i nclusions constitute e ither actual d ividends or d e e m ed dividends. As explained below, Appellants’ § 951 inclusions do not qualify as either. B Section 951 i nclusions do not constitute a ctual d ividends because actual dividends r equire a distribution by a corporation and receipt by the shareholder; there must be a change in ownership o f something o f value. Since these § 951 inclusions involve n o distribution o r change in ownership, they do not constitute qualified dividend income. Section 316(a) defines a dividend as “any distribution of property made by

a corporation to its s hareholders

. . . .” 26 U .S.C. § 316(a) (emphasis added). In

T H R O U GH U

. S. C ONTR OLL E D F OR E I GN C OR P OR AT I ONS : A P O LI CY S T U DY xv ( D ec. 2000) , http : //w w w . treas ury. gov/res ource- center/ tax- p olicy/ D ocum ents / s ubp artf

. p df

. 4 Case: 12-60533 Document: 00512297517 Page: 4 Date Filed: 07/05/2013No. 12-60533

the same vein, § 1 (h)(11)(B)(i) defines “ q ualified d ividend income” as “dividends received during the taxable year . . . . ” 26 U.S.C. § 1(h)(11)(B)(i) (emphasis added). These statutory provisions illustrate what case law e xplicitly states: in determining when a dividend has issu e d , “ [ t ]he question is not whether a shareholder ends up with ‘more’ b ut whether the c hange in t h e f orm of his ownership represents a transfer to him, by the corporation

. ” C omm’r v. Gordon , 391 U.S. 83, 91 n.5 (1968) (emphasis added); see also Jack’s Maint. C ontractors, Inc. v . Comm’r , 703 F.2d 154, 156 (5th Cir. 1 983) ( “[A]ll that is necessary [for a dividend] is that the corporation c o nf er an economic benefit on a shareholder without expectation of repayment and that the primary advantage of the transaction be to the shareholder’s personal interests rat h er than to the corporation’s business interests.” (emphasis added)). Section 951 inclusions do not q ualify a s actual divid e nds because no transfer occurs. Indeed, these statutory provisions exist specifically to account for instances where C FCs do not make t ransfers of value to s hareholders. Under the statutes at issue here, ownership of the CFC’s property does not change. On this basis alone, § 9 51 inclusions d o not constitute actual dividends. Section 951 inclusions are c a l c u lated purely on the basis o f CFC-owned United States property and the C FC’s earnings, without any change o f ownership. 26 U.S.C. § 956(a). Shareholders are required to c o unt the CFC’s earnings and property

as part o f their o wn gross i ncome to ensure that they cannot defer United States tax obligations b y keeping e arnings abroad or investing i n property instead of repatriating income through the payment of d i v i dends. Section 9 56(a) makes clear t hat § 951 inclusions involve no t ransfer of ownership and no distribution to shareholders. Section 951 inclusions are calcul a t e d s o l e ly on the basis of property owned by the CFC. They thus do not constitute actual dividends. It is also worth noting that, i n the context of this case, Appellants—as Editora’s sole sharehol d e r s

—could have caused a dividend to issue. Had they

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done so, the income at issue would h a v e unquestionably q ualified as dividend income subject to a lower tax r ate, a point the IRS concedes. Appellants use this point to de c ry the outcome reached here. They urge the Court t o avoid the “absurd, harsh, and unjust result” of taxing Appellants’ § 951 inclusions at a higher rate than qualified dividend income, w hen Appellants, a s E ditora’s sole shareholders, could have easily caused a dividend to i ssue, thereby avoiding this issue altogether. This argument is unavailing. Appellants could have caused a dividend to issue. They c ould h ave a l s o p a id themselves a salary o r invested Editora’s earnings elsewhere. Each of these decisions would have carried d i f f e r ent tax implications, t hereby altering our analysis. Appellants cannot n ow avoid their tax obligation simply because they regret the specific decision they made. 3 C In the alternative, Appellants claim t hat their § 951 inclusions should be dee m e d dividends. This a rgument is unpersuasive, h owever, because, when Congress decides to treat certain inclusions a s d ividends, it explicitly states as much, and Congress h as not so designated the i nclusions at issue here. See, e.g. , 2 6 U.S.C. § 851(b) (“For purposes of paragraph (2), t here shall be treated a s dividends amounts i ncluded i n gross income under section 951(a)(1)(A)(i)

. . . for the taxable year to the e xtent that

. . . there is a distribution out of the earnings and profits of the taxable y ear . . . .”) (emphasis added); 26 U.S.C. § 904(d)(3)(G)

3 Ap p ellants als o attem p t to avoid the outcom e reached here by curs orily claim ing that the tax law giving ris e to benef icial treatm ent of divid end incom e cam e into ef fect af ter s om e of the d ecis ions at is sue had been m ad e. That is , they m ak e a brief atte m p t a t c o n t e s ting § 1(h) ( 11) ’s retroactivity. H ow ever, as id e f rom p rovid ing no s ubs tantive argum ent on p oint, their claim is unp ers uas ive. The Sup rem e Court has generally up held t a x law s w ith retroactive ef

f ect, g oing s o far as to d es cribe s uch law s as “cus tom ary congres s ional p ractice” that is of

ten required by “the p racticalities of prod ucing national legis lation. ” U ni ted Sta tes v . D a rusm ont , 449 U

. S. 292, 296–97 (1981) ; see a lso U ni ted S t a t es v . Ca rl t on , 512 U

. S. 26, 32–35 ( 1994) ; U

ni t ed S ta tes v. H

em m e , 476 U

. S. 558, 568–71 ( 1986) ; Wel ch v. H enry , 305 U

. S. 134, 150–51 ( 1938) ; M i l l i ken v. U

ni ted Sta tes , 283 U

. S. 15, 23–24 ( 1931)

.

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(“For p u rpose s of this paragraph, the term ‘dividend’ i ncludes any amount included in gross income in section 951(a)(1)(B)

. ”) (emphasis added); 26 U.S.C. § 959(a)(1) (“For purposes of this chapter, t he earnings and profits of a foreign corporati o n a t t r ibutable to amounts which are, or have been, i ncluded in the
g r o s s income o f a United States shareholder under s ection 951(a) shall not [b e included as gross i ncome] when such amounts are distributed to

. . . such shareholder

. . . .”) ( emphasis added); 26 U. S.C. § 960(a)(1) (“For purposes of subpart A of this part, if there i s included under section 951(a) in the gross i n c o m e o f a d omestic corporation any amount attributable to e arnings and profits of a foreign c orporation

. . . then, except to t he extent provid e d in regulations, section 902 shall be a pplied as if the a mount so included were a dividend paid by such foreign corporation

. . . .”) (emphasis added). Moreover, if a ll § 951 inclusions constituted qualified dividends, then s tatutory provisions specifically designating certain inc l usions as dividends would a mount to surplusage. Cf. Freeman v. Quicken Loans, I nc. , 1 32 S. Ct. 2 034, 2042–43 (2012) (statutory interpretations that avoid surplusage are favored); Microsoft Corp. v. i4i Ltd. P’ship , 131 S. Ct. 2238, 2248–49 (2011) (same). Relatedly, the o riginal version of § 956 s p e c i f ically stated that C ongress did not intend amounts calculated thereunder to constitute dividends. Under the original language of § 956, enacted in 1962, CFC earnings invested in United States property “[are] t he aggregate a mount o f such property he l d , directly or indirectly, by the [ CFC]

. . . to the extent such a mount would h ave constituted a dividend

. . . i

f it had been distributed .” Revenue Act of 1 962, Pub. L. No. 87-834, Sec. 12, § 956, 76 Sta t

. 960, 1015–16 (emphasis added). This language was removed only in 1993 when the entire subpart was rewritten i n light of other,

new regulations. Omnibus Budget Reconciliation Act of 1993, Pub. L. No. 103- 66, Sec. 13232, § 956, 107 Stat. 312, 501. It does not appear that the omission of this language from the new version of the statute w as intended to change the
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treatment of amounts calculated under § 9 56. As these examples demonstrate, Congress specifical l y designates when § 951 inclusions are t o be treated as dividends, and Congress has not so stated here. Appellants’ reli a n c e on various non-binding secondary sources does not alter our analysis here because the sources cited are i n each instance either nonbinding or inapposite. In the historical sources cited by Appellants, references to a conceptual e quivalence between § 951 i n clusions and d ividend income do not carry the weight Ap p ellants a ttribute because such comments were m ade at a time when there was no tax advantage to c lassifying CFC-owned property as a dividend; the distinction was treated loosely at the time because it did not carry tax implications. Secti o n 1 (h)(11), the statute creating the tax disparity between dividend income a nd ordinary income, was not enacted u ntil 2003. See Jobs and Growth Tax Relief Reconciliation Act o f 2003, Pub. L. N o. 108-27, Sec. 302, 117 Stat. 752, 760 (enacting § 1(h)(11)). For the reasons discu s sed above, it is clear that C ongress did not intend to deem as dividends t he § 951 inclusions at i ssue her e . T h e s tatute is completely silent, a fact which carries add ed weight when compared to the

m y r i a d provisions specifically stating that certain income is to be treated as if it were a dividend. Appellants’ reliance on other non-binding sources is unavailing. As such, we affirm the Tax Court. IV For the f oregoing reasons, t he judgment of the Tax Court is AFFIRMED.

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