1The Code, which is codified at “26 U.S.C.,” may hereinafter be cited as “I.R.C.”

2Susan Stanford is a party to this proceeding because she signed the Stanfords’ contested

1990 joint federal income tax return pursuant to I.R.C. § 6013. Unless otherwise indicated,

subsequent references to “Stanford” refer exclusively to Robert A. Stanford.

 IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 97-60531

ROBERT A. STANFORD; SUSAN STANFORD,

Petitioners-Appellants,

versus

COMMISSIONER OF INTERNAL REVENUE,

Respondent-Appellee.

Appeal from the United States Tax Court

September 3, 1998

Before DUHÉ, BENAVIDES and STEWART, Circuit Judges.

STEWART, Circuit Judge:

This case, which calls for us to construe certain provisions of section 952(c)(1)(C) of the

Internal Revenue Code (the “Code”),1 involves a dispute regarding the 1990 income tax liability of

Robert A. Stanford and his wife Susan Stanford.2 On appeal, the Stanfords challenge a decision of

the Tax Court upholding the Internal Revenue Commissioner’s (“Commissioner”) assessment of (1)
2

a tax deficiency against them with respect to their jointly-filed 1990 income tax return and (2) an

accuracy-related penaltyfor their resulting underpayment oftax. See Stanford v. Commissioner, 108

T.C. 344 (1997). For the following reasons, we VACATE the underpayment of tax penalty imposed

against the Stanfords and AFFIRM the Tax Court’s judgment in all other respects.

I.

A. FACTUAL BACKGROUND

The underlying facts of this case are, for the most part, undisputed. Between 1985 and 1987,

Stanford, a United States citizen and Houston resident, formed three corporati ons in the crown

colony of Montserrat in the British West Indies, each of which qualified as a “controlled foreign

corporation” within the meaning of section 957(a) of the Code. The first corporation, Guardian

International Bank, Ltd. (“Guardian Bank”), was incorporated in December 1985 to engage in

offshore banking activities. In January 1986, Guardian Bank acquired a banking license from the

Montserrat government authorizing it to engage in business as an offshore investment bank.

The second corporation, Guardian International Investment Services, Ltd. (“Guardian

Services”), was incorporated in October 1986. Guardian Services’ charter authorized it to engage

in a broad array of business activities, including real estate development and trademark/patent

acquisition. Pursuant to a 1988 written service agreement with Guardian Bank, Guardian Services

provided marketing and advertising services to Guardian Bank during 1989 and 1990. The

Commissioner concedes that the provision of these services by Guardian Servicesinduced deficits in

Guardian Services’ earnings and profits for both those years.

Finally, Stanford Financial Group, Inc. (“Stanford Financial”) was incorporated in February

1987, with Stanford owning 95 percent of itsshares. In relevant part, Stanford Financial’s objective
3

was to “carry on the business of a [h]olding [c]ompany” and to “take part in the formation,

management,supervision or controlofthe business operations of anycompany.” Upon incorporation

of Stanford Financial, all of the shares of stock of both Guardian Bank and Guardian Services were

transferred to Stanford Financial; thus (1) Guardian Bank and Guardian Services became related as

brother-sister corporations with (2) Stanford Financial as the common parent. Pursuant to a service

agreement withGuardianBank, Stanford Financialprovided administrative andmanagementservices

to Guardian Bank during 1989 and 1990. The Commissioner concedes that the provision of these

services by Stanford Financial induced deficits in Stanford Financial’s earnings and profits for both

those years.

B. STATUTORY BACKDROP AND THE STANFORDS’ 1990 INCOME TAX RETURN

Section 951(a) of the Code requires a United States shareholder of a controlled foreign

corporation (“CFC”) to include in his gross income his pro rata share of the controlled foreign

corporation’s “subpart F income” — as defined in sect ion 952 — whether or not such income is

distributed to him. I.R.C. § 951(a). A CFC is defined as any foreign corporation where more than

50 percent of the corporation’s stock, either by voting power or value, is owned directly, indirectly,

or constructively byUnited Statesshareholders. I.R.C. § 957(a). Section 951(b) of the Code defines

a “United States shareholder” as a United States person who owns directly, indirectly, or

constructively 10 percent or more of the voting stock of a foreign corporation. I.R.C. § 951(b). In

this case, the parties have stipulated that (1) Stanford is a United States shareholder of Guardian

Bank, Guardian Services, and Stanford Financial, and (2) Guardian Bank, Guardian Services, and

Stanford Financial are CFCs.

Of the three CFCs in this case, only Guardian Bank realized subpart F income in 1990.
4

Subpart F income is defined in I.R.C. § 952 as including five different types of income, the most

pertinent of which, in this case, is “foreign base company income (as determined under section 954).”

I.R.C. § 952(a)(2). Section 954(a) defines foreign base company income as including “foreign

personal holding company income,” I.R.C. § 954(a), which consists of, among other things,

dividends, interest, rents, gains from commodity transactions, and foreign currency gains. I.R.C. §

954(c)(1). The parties in this case have stipulated that Guardian Bank’s 1990 income included

interest, gains on foreign currency exchanges, dividends, and gains on commodity transactions, and

that GuardianBank’sresulting subpart F income for that year was $2,789,722. Indeed, the Stanfords

reported this figure as Guardian Bank’s subpart F income on their 1990 joint federal income tax

return.

The amount of subpart F income of a CFC that is ultimately taxed to a United States

shareholder may be limited by any ofthree limitationsset forth in I.R.C. § 952(c). The only limitation

applicable here is that found in I.R.C. § 952(c)(1)(C), and it is the interpretation of the language of

this provision that is at the heart of the dispute in this case. Section 952(c)(1)(C) reads, in pertinent

part, as follows:

(C) Certain deficits of member of the same chain of corporations may be taken into

account.--

(i) In general.--A controlled foreign corporation may elect to reduce the

amount of its subpart F income for any taxable year which is attributable to

any qualified activity by the amount of any deficit in earnings and profits of a

qualified chain member for a taxable year ending with (or within) the taxable

year of such controlled foreign corporation to the extent such deficit is

attributable to such activity . * * *

(ii) Qualified chain member.--For purposes of this subparagraph, the term

“qualified chain member” means, with respect to any controlled foreign

corporation, any other corporation which is created or organized under the

laws of the same foreign country as the controlled foreign corporation but
3Section 952(c)(1)(C) was added to the Code in 1988, and was made retroactively applicable

to any tax year ending after 1986. See Technical and Miscellaneous Revenue Act of 1988, Pub. L.

No. 100-647, § 1012(i)(25)(A), 102 Stat. 3342, 3512. Thus, subparagraph (i), which has been

referred to in commentary as the “TAMRA chain deficit rule,” was applicable in 1990, the tax year

of the Stanfords at issue in this case. As discussed infra note 9, a considerably broader “chain deficit

rule” was in effect for tax years ending prior to 1987. 

4Of the total claimed deficit, $1,251,891 was generated by Guardian Services and $154,474

was generated by Stanford Financial. 

5

only if--

(I) all the stock of such other corporation (other than directors’

qualifying shares) is owned at all times during the taxable year in

which the deficit arose (directly or through 1 or more corporations

other than the common parent) by such controlled foreign

corporation, or

(II) all the stock of such controlled foreign corporation (other than

directors’ qualifying shares) is owned at all times during the taxable

year in which the deficit arose (directly or through 1 or more

corporations other than the common parent) by such other

corporation.

I.R.C. § 952(c)(1)(C).3 Under section 952(c)(1)(C), a CFC may reduce its subpart F income

attributable to a “qualified activity” by the deficits in earnings and profits of a “qualified chain

member” to the extent the deficit of the chain member is “attributable to” to such qualified activity.

Relying on retained, expert tax advice, the Stanfords invoked Guardian Bank’s section

952(c)(1)(C)(i) election and reduced Guardian Bank’s 1990 subpart F income ($2,789,722) by the

totaldeficitsin the 1990 earnings and profits ofGuardian Services and Stanford Financial, which total

they determined to be $1,406,365.4 On audit, however, the Commissioner disallowed this reduction

as violative ofsection 952(c)(1)(C). Notably, the Commissioner conceded (and does not contest on

appeal)that (1) Guardian Services and Stanford Financial accumulated deficitsin earnings and profits

in 1990; (2) these deficits in earnings and profits were generated exclusively through administrative,
5On their 1990 tax return, the Stanfords also reported a net operating loss carryforward from

1989 of $615,890, which arose, in part, from the Stanfords’ reduction of Guardian Bank’s 1989

subpart F income of $580,483 by the 1989 deficits in earnings and profits of Guardian Services and

Guardian Financial of $385,386. On audit, the Commissioner also disallowed this reduction. 

6TheCommissioner also assessed theStanfords a late-filingpenaltyunderI.R.C. § 6651(a)(1),

which the Tax Court later sustained and the Stanfords do not contest on appeal.

6

marketing, or management services provided to GuardianBank under applicable service agreements;

and (3) the deficits accrued t o a total of $1,406,365. Such concessions notwithstanding, the

Commissioner prohibited theStanfordsfromoffsetting these deficits against GuardianBank’ssubpart

F income, determining that (1) Guardian Services was not a “qualified chain member” with respect

to Guardian Bank within the meaning of section 952(c)(1)(C)(ii) (and, thus, Guardian Services’

deficit in earnings and profits was not deductible vis-à-vis Guardian Bank’s subpart F income); and

(2) Stanford Financial’s deficit, although accrued by a “qualified chain member” with respect to

Guardian Bank, was not “attributable to [the same] qualified activity” to which Guardian Bank’s

subpart F income was attributable (and, thus, was also not deductible vis-à-vis Guardian Bank’s

subpart F income).5 

The Commissioner determined the resulting deficiency in the Stanfords’ 1990 tax to be

$423,531.36. Additionally, because the Stanfords’ understatement of tax was substantial, the

Commissioner assessed the Stanfords an accuracy-related penalty of $84,706.27 under I.R.C. §

6662(a).6 The Stanfords filed a petition challenging these determinations in the United States Tax

Court.

C. THE TAX COURT’S OPINION

The TaxCourtsustained theCommissioner’s determinations. First, the court agreed with the

Commissioner that Guardian Services was not a qualified chain member with respect to Guardian
7

I.R.C. § 952(c)(1)(B)(iii)(VI) defines “qualified activity,” in pertinent part, as “any activity

giving rise to, in the case of a qualified financial institution, foreign personal holding company

income.” See I.R.C. § 952(c)(1)(B)(iii) (defining “qualified activity” as also including “any activity

giving rise to [(1)] foreign base company shipping income, [(2)] foreign base company oil related

income, [(3)] foreign base company sales income, [(4)] foreign base company services income, [and

(5)] in the case of a qualified insurance company, insurance income or foreign personal holding

company income.”). The Commissioner conceded below (and does not contest on appeal) that

Guardian Bank, by actively engaging in the activity of banking and financing during 1989 and 1990,

(1) was a “qualified financial institution” in 1989 and 1990, see I.R.C. § 952(c)(1)(B)(vi), and (2)

generated “foreign personal holding company income” during those years, see discussion supra. By

definition, that income wassubpart F income under the Code. I.R.C. §§ 952(a)(2); 954(a). As such,

we find no error in the Tax Court’s determination that Guardian Bank’s 1989 and 1990 subpart F

income was “attributable to” a “qualified activity” within the meaning of section 952(c)(1)(B)(iii). 

7

Bank, and therefore the deficits of Guardian Services could not be used to reduce the subpart F

income of Guardian Bank. The court held that section 952(c)(1)(C)(ii), which defines the term

“qualified chain member,” providesthat CFCs are qualified chain members “onlywhere the CFCs are

related to each other directly or indirectly through a single, straight-line chain of corporations, as in

a parent-subsidiary relationship, and not where the CFCs are related to each through a common

parent, as in a brother-sister relationship.” Because Guardian Services and Guardian Bank were

related to each other as brother-sister corporations through their common parent — Stanford

Financial — the court concluded that Guardian Services was not a qualified chain member with

respect to GuardianBank. Accordingly, the court held that Guardian Services’ deficit in earnings and

profits could not offset Guardian Bank’s subpart F income.

With respect to Stanford Financial, the court acknowledged that (1) as Guardian Bank’s

parent, Stanford Financial was a qualified chain member with respect to Guardi an Bank, and (2)

Guardian Bank’s subpart F income was “attributable to” the “qualified activity” of banking and

financing,7but concluded that because Stanford Financial’s deficit in earnings and profits arose from

the performance of administrative and management services, it was (A) not “attributable to” the
8

qualified activity to which Guardian Bank’s subpart F income was attributable and therefore (B) not

deductible against that income. In essence, the Tax Court determined that to be deductible against

a related CFC’s subpart F income under section 952(c)(1)(C), a qualified chain member’s deficit in

earnings and profits must be generated through the conducting of a qualified activity, which activity

must also have generated the CFC’s subpart F income. Because this “identity of activity”

requirement was not met in the instant case, the Tax Court held that Guardian Bank’s subpart F

income could not be reduced by the deficit in earnings and profits of Stanford Financial undersection

952(c)(1)(C)(i).

Finally, the Tax Court sustained the Commissioner’s determination that the Stanfords were

liable for the accuracy-related penalty imposed by I.R.C. § 6662(a) for a substantial understatement

of tax. In so holding, the court determined that because no portion of the Stanfords’ understatement

was attributable to the tax treatment of an item that was supported by “substantial authority,” the

Stanfords were not entitled to a reduction of the penalty under I.R.C. § 6662(d)(2)(B). Notably, the

court did not directly address whether the Stanfords were entitled to a reduction of the penalty under

I.R.C. § 6664(c)(1), which section prohibits accuracy-related penalties for any portion of an

underpayment with respect to which the taxpayer had reasonable cause and acted in good faith. The

Stanfords timely appeal the Tax Court’s determinations.

II.

A. STANDARD OF REVIEW

The focus of this case is on the interpretation and application of section 952(c)(1)(C) of the

Code. The Tax Court’s determinations of law — for example, interpretations of the statutory
9

language — are reviewed de novo, while its factual findings are reviewed for clear error. G.M.

Trading Corp. v. Commissioner, 121 F.3d 977, 980 (5th Cir. 1997) (citing Bolding v. Commissioner,

117 F.3d 270, 273 (5thCir. 1997)). “A finding is ‘clearly erroneous’ when although there is evidence

to support it, the reviewing court on the entire evidence is left with the definite and firm conviction

that a mistake has been committed.” Id. (citation omitted). In this case, the facts are essentially

undisputed. In such a situation, the question of whether a taxpayer has “substantial authority” for any

tax treatment that results in an underpayment of tax, precluding a penalty for substantial

understatement of tax, is a legal question reviewed de novo. Westbrook v. Commissioner, 68 F.3d

868, 874, 881-82 (5th Cir. 1995); Little v. Commissioner, 106 F.3d 1445, 1449 (9th Cir. 1997). 

B. DISCUSSION

The Stanfords make three arguments on appeal — that (1) Guardian Services is a qualified

chain member with respect to Guardian Bank and thus its deficits in earnings and profits may validly

reduce Guardian Bank’s subpart F income under section 952(c)(1)(C); (2) Stanford Financial’s

deficits in earnings and profits are “attributable to” the same qualified activity to which Guardian

Bank’ssubpart F income is attributable and thus are also deductible against that income undersection

952(c)(1)(C); and (3) a substantial understatement of tax penalty is unwarranted in this case, either

because (a) substantial authority exists for their tax treatment of the deficits at issue or (b) any

resulting underpayment was due to a reasonable cause and was premised on good faith behavior on

their part. We examine each of the Stanfords’ arguments in turn.

1. Qualified Chain Member

The Stanfords contend that section 952(c)(1)(C)’s statutory language, itslegislative history,

and a current treasury regulation example support their view that Guardian Services is a “qualified
8We use the term “deficit corporation” to refer to any foreign corporation that has a deficit

in earnings and profits that is potentially deductible against a CFC’s subpart F income under section

952(c)(1)(C)(i), or, where applicable, under prior I.R.C. § 952(d) (1962),see infra note 9 (discussing

prior section 952(d)). 

10

chain member” of Guardian Bank’s and that Guardian Services’ deficits in earnings and profits are

deductible against Guardian Bank’s subpart F income. We disagree. As always, we commence our

analysis by examining the plain language of the relevant statute, G.M. Trading Corp., 121 F.3d at

981, which in this case is section 952(c)(1)(C). In the absence of any ambiguity, our examination is

confined to the words of the statute, which are assumed to carry their ordinary meaning. Id. 

Section 952(c)(1)(C)(ii) definesthe term“qualified chain member.” It provides that a deficit

corporation (here, Guardian Services)8is a qualified chain member vis-à-vis a CFC with offsettable

subpart F income (here, Guardian Bank) if (1) the deficit corporation is organized under the laws of

the same foreign country as the CFC, and (2) either one of the two condi tions set forth in

subparagraphs (I) and (II) of section 952(c)(1)(C)(ii) is satisfied. I.R.C. § 952(c)(1)(C)(ii). In this

case, both Guardian Bank and Guardian Services were organized under the laws of Montserrat. As

such, resolution of the “qualified chain member” issue depends solely on whether either of the

conditions set forth in subparagraphs (I) and (II) was satisfied.

Under subparagraphs (I) and (II), a deficit corporation is a qualified chain member vis-à-vis

a CFC with offsettable subpart F income only if the CFC “owns” all the stock of the deficit

corporation, or if the deficit corporation “owns” all the stock of the CFC. I.R.C. § 952(c)(1)(C)(ii).

Specifically, subparagraphs (I) and (II) provide that the deficit corporation is a qualified chain

member of the CFC only if (1) all of the deficit corporation’s stock is owned by the CFC either

“directly or through 1 or more corporations other than the common parent,” I.R.C. §
9Assuch, the focus ofsection 952(c)(1)(C) is on the stock ownership interests ofthe CFC and

the deficit corporation at issue. By contrast, the old “chain deficit rule” — which was codified in

prior section 952(d) and repealed in 1986 — focused on the stock ownership interests ofthe ultimate

taxpayer, the United States shareholder. See I.R.C. § 952(d) (1962), repealed by Tax Reform Act

of 1986, Pub. L. No. 99-514, § 1221(f), 100 Stat. 2085, 2554. Under former section 952(d), a CFC

with subpart F income and a deficit corporation were part ofthe same qualified chain of corporations

if either corporation was owned directly by “a United Statesshareholder,” and the other wasthereby

derivativelyowned (i.e., indirectly) bysuch shareholderin the mannerspecified bytreasuryregulation

section 1.952-1(d)(2)(ii)(b). See Treas. Reg. § 1.952-1(d)(1); Treas. Reg. § 1.952-1(d)(2)(ii) (“A

chain of foreign corporations shall, with respect to a United States shareholder, include (a) [a]ny

foreign corporation in which such shareholder owns [directly] (within the meaning of section

958(a)(1)(A)) stock but, only to the extent of the stock so owned and (b) [a]ll foreign corporations

in which such shareholder owns[indirectly] (within the meaning ofsection 958(a)(2))stock, but only

to the extent of the stock so owned by reason of his ownership of the stock referred to in (a) of this

subdivision.”) (emphasis added).

The Tax Court correctly noted that, for all tax years ending prior to 1987, section 952(d)

permitted the use of deficits in earnings and profits of deficit corporations in a chain to reduce the

subpart F income of a CFC in a chain regardless of the manner by which the deficit corporations and

the CFC were related to each other (i.e., regardless of whether the relevant deficit corporation and

theCFChad a parent/subsidiaryor a brother/sisterrelationship), aslong as each such corporation was

directly or indirectly held by the U.S. shareholder (in the manner specified by regulation section

1.952-1(d)(2)(ii)). Such a chain constituted a single chain so long as the relationships between the

relevant corporations did not extend back through the United Statesshareholder to another separate

and distinct chain. The government concedesthat if priorsection 952(d) was applicable to the instant

case, Guardian Services would indeed be a “qualified chain member” with respect to GuardianBank.

10It should be emphasized that the stock attribution rules of I.R.C. § 318 — which provide

guidance in applying numerous provisions of the Code for which constructive ownership ofstock is

relevant — are immaterial here, as they have not been made applicable to section 952(c)(1)(C)(ii).

See I.R.C. § 958(b) (expressly limiting the applicability ofsection 318'sstock attribution rulesto the

following provisions ofsubpart F: I.R.C. § 951(b), I.R.C. § 954(d)(3), I.R.C. § 956(c)(2), and I.RC.

11

952(c)(1)(C)(ii)(I); or (2) all of the stock of the CFC is owned by the deficit corporation either

“directly or through 1 or more corporations other than the common parent,” I.R.C. §

952(c)(1)(C)(ii)(II).9

In this case, neither Guardian Bank nor Guardian Services owned the other’s stock directly.

Hence, the relevant questionbecomeswhether GuardianBank or GuardianServices owned indirectly

all of the other’sstock in a way that satisfies the requirements ofsection 952(c)(1)(C)(ii).10 In other
§ 957). 

11Contrary to the Stanfords’ suggestion, section 952(c)(1)(C)’s limitation against indirect

ownership “through the common parent” cannot simply be read as a restriction against indirect

ownership “through the common United States shareholder.” As discussed, the limitation imposes

a restriction against otherwise qualifying indirect ownership (i.e., ownership “through 1 or more

corporations”) of a deficit corporation by a CFC (or vice versa) ifsuch ownership flows “through the

common parent.” The Stanfords’ reading of the limitation — which assumes that the phrase “the

common parent” is synonymous with the phrase “the common United Statesshareholder” — results

in a restriction against such ownership only if it runs through the “common United States

shareholder.” This reading would simply reimpose the limitation against indirect ownership that was

part of the old chain deficit rule — i.e., being able to trace a relationship back to a common United

States shareholder is not enough to make a deficit corporation and a CFC with offsettable subpart

F income part of the same chain.

We find it more plausible to interpret the indirect ownership limitation in section

952(c)(1)(C)(ii) as a restriction against indirect ownership through the common parent corporation,

which corporation may or may not be a United States shareholder. The phrase “other than the

12

words, the issue of whether Guardian Services is a qualified chain member with respect to Guardian

Bank turns on whether Guardian Bank or Guardian Services owned 100 percent of the other’s stock

“through 1 or more corporations other than the common parent.” I.R.C. § 952(c)(1)(C)(ii). Of

course, in this case, such qualifying ownership could flow only through Stanford Financial, which

directly owned all of the stock of both Guardian Bank and Guardian Services. 

We agree with the Tax Court’s final conclusion — that Guardian Services is not a qualified

chain member with respect to Guardian Bank and thus its deficit in earnings and profits cannot be

used to reduce Guardian Bank’s subpart F income. Under the plain language of section

952(c)(1)(C)(ii), a deficit corporation is a qualified chain member vis-à-vis a CFC with offsettable

subpart F income only if one completely owns the other “directly” (not applicable in this case) or

“through one or more corporations other than the common parent.” I.R.C. § 952(c)(1)(C)(ii)

(emphasis added). As such, any qualifying indirect relationship between a CFC and a deficit

corporation cannot flow through “the common parent [corporation].”11 In this case, involving a
common parent” clearlymodifiesthe word “corporations” in the phrase which precedesit — namely,

“through 1 or more corporations” — and thus the word “parent” is simply a shorthand reference for

“parent corporation.” See I.R.C. § 952(c)(1)(C)(ii) (“through 1 or more corporations other than the

common parent”) (emphasis added). We accordingly hold that a CFC’s indirect ownership of a

deficit corporation (or vice versa) exclusively through a common parent corporation cannot confer

“qualified chain member”-status on the deficit corporation. 

12We express no opinion on whether the Tax Court erred in determining that an indirect

relationship with a CFC that triggers “qualified chain member”-statusfor a deficit corporation under

section 952(c)(1)(C)(ii) must be ofthe “single,straight-line” variety. Even if section 952(c)(1)(C)(ii)

contemplates that a non-straight-line indirect relationship may suffice, the plain language of the

statutemakes clearthatsuch a relationship maynot flow through “the common parent[corporation],”

thus eliminating Guardian Services’ bid to be a qualified chain member of Guardian Bank’s.

13Noting correctly (1) that prior section 952(d) was repealed in 1986 because of, inter alia,

congressional concern that deficitsin earnings and profits of members within a chain of corporations

were being used to reduce subpart F income of CFCs within the chain even though the deficits arose

from “a nonsubpart F income category” or “[bore] little or no relation to the income [they offset],”

see H.R. Conf. Rep. No. 99-841, at 621-26 (1986), reprinted in 1986 U.S.C.C.A.N. 4075; and (2)

that the legislative history of section 952(c)(1)(C) (a) fails to mention the term “qualified chain

member” and (b) refers approvingly to deficit corporations and CFCs within “a single chain of

corporations” (i.e., the term used to describe a qualified chain of corporations under the pre-1987

chain deficit rule), see S. Rep. No. 100-445 (1988), reprinted in 1988 U.S.C.C.A.N. 4515, 4786, the

Stanfords argue that the legislative history ofsection 952(c)(1)(C) reflects no dissatisfaction with the

expansive pre-1987 rule for det ermining which deficit corporations qualify as chain members for

purposes of offsetting a CFC’s subpart F income. As alluded to above, however, where — as here

— a plain reading of the statute unambiguously precludes a taxpayer’s interpretation thereof, no

13

simple tripartite structure, Guardian Services would be deemed to be an indirect owner of Guardian

Bank only through their common parent corporation, Stanford Financial. Likewise, Guardian Bank

would be deemed to be an indirect owner of Guardian Services only through the same common

parent corporation. Accordingly, read in the light of ordinary understanding, the “other than the

common parent” language ofsection 952(c)(1)(C) prevents Guardian Servicesfrombeing a qualified

chain member with respect to Guardian Bank.12 Because a plain reading of the statute precludes

reaching a contrary result in this case, we need no t conduct an analysis of the statute’s legislative

history. See Nalle v. Commissioner, 997 F.2d 1134, 1140 (5thCir. 1993).13 The Tax Court correctly
amount of favorable legislative history can rescue the taxpayer’s interpretation. Nalle, 997 F.2d at

1140. The Stanfords’ argument premised on legislative history must fall short for this reason. 

14The Stanfords’ reliance on treasury regulation section 1.952-1(d)(3), example 1(c), is also

misplaced. Example 1(c) was quite obviously intended as an application of the old chain deficit rule

contained in section 952(d), and thus its acknowledgment that a sister corporation of a CFC may

qualify as a chain member with respect to such CFC is not instructive for purposes of this case. See

Treas. Reg. § 1.952-1(d)(3), Example 1(c). Indeed, the paragraph of the regulations that the example

attempts to illustrate advises the reader to “[s]ee section 952(d).” See Treas. Reg. § 1.952-1(d)(1).

While we are unsure why the example was not withdrawn after Congress’ repeal of section 952(d),

we are constrained from sustaining the Stanfords’ reliance on it because — as established above —

it is “plainlyinconsistent with the [currently applicable] revenue statute[],” section 952(c)(1)(C). See

Brown v. United States, 890 F.2d 1329, 1336 (5th Cir. 1989) (quoting Bingler v. Johnson, 394 U.S.

741, 749-50, 89 S.Ct. 1439, 1444-45, 22 L.Ed.2d 695 (1969)). 

14

held that the Stanfords could not reduce GuardianBank’ssubpart F income by the deficitsin earnings

and profits of Guardian Services.14

2. Attributable to Such Qualified Activity

We next consider whether the Tax Court erred, as the Stanfords claim, when it refused to

allow them to reduce Guardian Bank’s subpart F income by the deficits in earnings and profits of

Stanford Financial, GuardianBank’s parent corporation. As discussed above, section 952(c)(1)(C)(i)

provides that a CFC’s subpart F income attributable to a qualified activity may be reduced by the

deficits in earnings and profits of a qualified chain member to the extent the deficit of the chain

member is “attributable to such activity.” I.R.C. § 952(c)(1)(C)(i) (emphasis added). The parties

agree that (1) Stanford Financial, by directly owning all of the stock of Guardian Bank in 1989 and

1990, was a qualified chain member with respect to GuardianBank, I.R.C. § 952(c)(1)(C)(ii)(II);(2)

Stanford Financial generated deficits in earnings and profits during 1989 and 1990, which deficits

arose from the conferral of administrative and management support services to Guardian Bank; and

(3) Guardian Bank’s subpart F income in 1989 ($580,483) and 1990 ($2,789,722), which consisted
15For “qualified financial institutions” such as GuardianBank, a “qualified activity” is one that

“giv[es] rise to . . . foreign personal holding company income.” I.R.C. § 952(c)(1)(B)(iii)(VI). Here,

the parties agree that Guardian Bank’s “qualified activity,” through which it generated foreign

personal holding company income, was banking. See supra note 7.

15

exclusively of foreign personal holding company income earned through the active conduct of a

banking business, was “attributable to [a] qualified activity,” I.R.C. §§§ 952(c)(1)(C)(i);

952(c)(1)(B)(iii)(VI); 952(c)(1)(B)(vi); see supra note 7.15 Hence, the sole issue on appeal is

whether the deficits of Stanford Financial were “attributable to such activity,” i.e. banking, so that

they could be deducted against Guardian Bank’ssubpart F income on the Stanfords’ 1990 tax return.

Our first task, then, is to interpret the phrase “attributable to such activity,” and in doing so,

we must attempt to give the component words their ordinary, common meaning. G.M. Trading

Corp., 121 F.3d at 981. While “[t]he term ‘attributable to’ has no particular technical significance

under the tax laws [—] [indeed,] nowhere in the Internal Revenue Code is such term defined,”

Lawinger v. Commissioner, 103 T.C. 428, 435 (1994) (punctuation omitted) — it has occasionally

been interpreted in case law in both tax and nontax contexts:

Under the definition of collapsible corporation under section 117(m)

of the 1954 Code, the Supreme Court interpreted “attributable to,” in

the phrase “gain attributable to such property,” as “merely confin[ing]

consideration to that gain caused or generated by the property in

question.” Braunstein v. Commissioner, 374 U.S. 65, 70 (1963). In

interpreting the statutory language ofsection 165(i) of the 1954 Code

that governs the ability of taxpayers to claim refunds or credits for

property expropriated by the government of Cuba, the District Court

of Mississippi held that the normal meaning of one thing to be

attributed to another is that one thing is caused or brought about by

that other thing. Ogden v. United States, 432 F.Supp. 214, 216 (S.D.

Miss. 1975), (citing Webster’s Third New International Dictionary),

aff’d, 555 F.2d 134 (5th Cir. 1977). These interpretations are based

onthe conclusionthat “attribute” or “attributable” connotes causation.

See NationalAssociation ofGreetingCard Publishers v. United States

Postal Service, et al., 462 U.S. 810, 823 (1983); Watson v.
16

Employment Sec. Commn. of North Carolina, 432 S.E.2d 399, 401

(N.C. App. 1993). For example, section 6663(a) provides: “If any

part of any underpayment *** is due to fraud, there shall be added to

the tax an amount equal to 75 percent of the portion of the

underpayment which is attributable to fraud.” . . . Similarly, the

accuracy-related penalty provision provides that the penalty applies

“to the portion of any underpayment which is attributable to”

negligence, substantial understatement of tax, etc. Sec. 6662(b).

Lawinger, 103 T.C. at 435. Based on this analysis, the Lawinger court found that “the plain meaning

of [the phrase] ‘attributable to’ is . . . due to, caused by, or generated by.” Id. On appeal, the

Stanfords provide no reason why a different meaning should apply to this phrase in the context ofthis

case.

The St anfords argue that because the administrative and managerial services provided by

Stanford Financialto GuardianBank were “driven solely by,” “directed solely to,” and “in allrespects

indispensable to” Guardian Bank’s qualified activity of banking, the deficits thereby generated by

Stanford Financial were “attributable to such activity.” Because the plain meaning of the phrase

“attributable to” does not embrace the interpretations given to it by the Stanfords, we cannot agree

with their assessment. While there is no question that the deficit-inducing activities of Stanford

Financial were (1) substantially related to Guardian Bank’s qualified banking activity and indeed (2)

helped give rise to GuardianBank’ssubpart F income attributable to that activitywhich the Stanfords

now hope to offset, section 952(c)(1)(C)(i) requires more — i.e., a causal relationship between such

activity (banking) and Stanford Financial’s deficits — before those deficits may offset that income;

in short, the deficits must have been “caused by” or “generated through” the conducting of the same

qualified activity which generated the subpart F income sought to be offset. While this requirement

may seem an overly strict one, it is one mandated by a plain reading of the phrase “to the extent such

deficit is attributable to such activity” in section 952(c)(1)(C)(i). (emphasis added). Because Stanford
16Once again, the Stanfords’ reliance on the legislative history of section 952(c)(1)(C) is

mooted by an unambiguous application of the relevant statutory language. The Stanfords argued

below that because the legislative history of section 952(c)(1)(C) speaks expressly of curtailing

taxpayer reduction ofsubpart F income of CFCs by deficits in earnings and profits of chain members

that “[bear] little or no relationship to [that] income,” S. Rep. No. 100-445 (1988), reprinted in 1988

U.S.C.C.A.N. 4515, 4786, section 952(c)(1)(C)(i) clearly contemplates that Stanford Financial’s

deficits — which indisputably bore “a substantial relationship” to Guardian Bank’s banking activity

and the income generated therefrom — may be deducted against Guardian Bank’s subpart F income.

Unfortunately for the Stanfords, not only does the plain language of section 952(c)(1)(C)(i) nullify

their argument, see discussion supra, but an example in the legislative history provides further proof

that such a deficit offset is available only ifthe deficit is generated through the conducting ofthe same

qualified activity that generates the income sought to be offset. See id. (“For example, assume that

a U.S. corporation owns all the stock of a banking corporation organized in a foreign country, and

that the latter owns all the stock of a second banking corporation organized in the same country. The

parent foreign bank . . . has subpart F income of $50. The subsidiary foreign bank has a loss of $100

attributable to activities that, when profitable, generate foreign personal holding company income,

and has a deficit in earnings and profits of $60. Under [new section 952(c)(1)(C)], the parent foreign

corporation may elect to reduce its subpart F income to zero reflecting the subsidiary’s deficit.”)

(emphasis added). As such, were we to even consider the legislative history of section 952(c)(1)(C),

we could not find it to be unequivocally in favor of the Stanfords’ position. 

17

Financial’s deficits in earnings and profits were not “due to,” “caused by,” or “generated by” (1)

Guardian Bank’s qualified banking activity or (2) any similar qualified banking activity conducted by

Stanford Financial, those deficits were not “attributable to [the qualified] activity” to which Guardian

Bank’s subpart F income was attributable. Read in the light of ordinary understanding, section

952(c)(1)(C)(i) thus precludes the Stanfords’ ability to offset Guardian Bank’s subpart F income by

the earnings and profits deficits of Stanford Financial. The Tax Court’s decision to this effect is

accordingly affirmed.16 

3. Accuracy-Related Penalty

The final issue we address is whether the Tax Court erred in sustaining the Commissioner’s

determination that the Stanfords are liable for an accuracy-related penaltyof $84,706.21 under I.R.C.

§ 6662. Section 6662 imposes a penalty equal to 20 percent of any “substantial understatement of
17Added to the Code in 1989, section 6664 is applicable to all tax returns due after December

31, 1989 (determined without regard to extensions). See Revenue Reconciliation Act of 1989, Pub.

L. No. 101-239, § 7721(d), 103 Stat. 2106, 2400. The Stanfords’ 1990 income tax return was due

in 1991. Consequently, assuming the Stanfords invoked section 6664 below, the reasonable

cause/good faith defense in subsection (c)(1) is pertinent to resolving whether the understatement

penalty at issue — stemming fromthe Stanfords’ 1990 return— is warranted. Prior to the enactment

of section 6664, the reasonable cause/good faith defense was contained in I.R.C. § 6661(c), which

read as follows:

(c) Authority to waive.-- The Secretary may waive all or any part of

the addition to tax provided by thissection[, i.e., the accuracy-related

penalty,] on a showing by the taxpayer that there was reasonable

cause for the understatement (or part thereof) and that the taxpayer

acted in good faith.

I.R.C. § 6661(c) (repealed in 1989). As such, prior to the applicability of section 6664, the

Commissioner had discretion whether to waive the substantial understatement penalty on account of

a taxpayer’s (a) reasonable cause for the understatement and (b) good faith actions, and our review

of the Commissioner’s decision wasfor abuse of that discretion only. See Heasley v. Commissioner,

902 F.2d 380, 384-85 (5th Cir. 1990).

18

income tax.” See I.R.C. §§ 6662(a); 6662(b). It is undisputed that the Stanfords’ income tax

deficiency that we affirmed in Sections II.B.1 and II.B.2 of this opinion was a “substantial

understatement” of tax as defined by I.R.C. § 6662(d)(1)(A). Nonetheless, the statute provides that

the amount of an understatement against which the penalty isimposed shall be reduced by the portion

of the understatement that is attributable to (1) tax treatment that was supported by “substantial

authority,” or (2) tax treatment for which (a) there is a “reasonable basis” and (b) the relevant facts

were “adequately disclosed in the return or in a statement attached to the return.” I.R.C. §

6662(d)(2)(B). Furthermore, I.R.C. § 6664(c)(1) provides that “[no] penalty shall be imposed . . .

with respect to any portion of an underpayment if it is shown that there was a reasonable cause for

such port ion and . . . the taxpayer acted in good faith with respect to such portion.” I.R.C. §

6664(c)(1).17 Finding a lack of substantial authority to support the Stanfords’ reduction of Guardian
19

Bank’s 1989 and 1990 subpart F income by the deficits in earnings and profits of Guardian Services

and Stanford Financial, the Tax Court refused to set aside the accuracy-related penalty imposed

against them by the Commissioner. On appeal, the Stanfords request a reversal of this penalty,

contending either that (1) their tax treatment of the deficits was supported by substantial authority,

or (2) any substantial understatement of tax resulting from this treatment was due to a reasonable

cause and supported by good faith behavior on their part.

We need not resolve the Stanfords’ “substantial authority” argument because we accept their

alternative one — that the underpayment of tax resulting from their treatment of the deficits of

Guardian Services and Stanford Financialwas due to a reasonable cause and supported by good faith

actions. We accordingly vacate the accuracy-related penalty imposed against them. See I.R.C. §

6664(c)(1). According to the applicable regulations, “the extent ofthe taxpayer’s effort to assess[his]

proper tax liability” is “[g]enerally[] the most important factor” in determining reasonable cause and

good faith. Treas. Reg. § 1.6664-4(b); see Streber v. Commissioner, 138 F.3d 216, 223 (5th Cir.

1998) (citing Heasley, 902 F.2d at 385). Additional “[c]ircumstances that may indicate reasonable

cause and good faith include [(1)] an honest misunderstanding offact or law that isreasonable in light

of all the facts and circumstances, including the experience, knowledge, and education of the

taxpayer,” Treas. Reg. § 1.6664-4(b), and (2) reliance on the advice of a professional tax advisor “if,

under all the circumstances, such reliance was reasonable and the taxpayer acted in good faith,” id.;

Reser v. Commissioner, 112 F.3d 1258, 1271 (5th Cir. 1997).

Here, the Commissioner acknowledges that the Stanfords relied on the advice of attorney

Kenneth Allen, an expert in international banking law, in setting up their Montserrat offshore banking

enterprise. Nothing in the record indicates that the heeded advice, which called for the utilization of
20

a tripartite corporate structure consisting of Guardian Bank, Guardian Services, and Stanford

Financial, had as a purpose the facilitation of tax avoidance. More importantly, the Commissioner

does not dispute that the Stanfords’ 1990 tax return reporting the income and deficits from this

enterprise was prepared by Harry Failing (“Failing”), an experienced CPA who (1) served as the

Stanfords’ principal tax advisor and regular tax-return preparer, and who (2) prior to starting his own

extensive tax compliance practice, worked for Price Waterhouse in an office where he alone

comprised “the international tax department.” At trial, Failing testified that before preparing the

Stanfords’ return he (1) reviewed the business and tax records of GuardianBank, Guardian Services,

and Stanford Financial; (2) studied the language of section 952(c)(1)(C), the section’s legislative

history, and what he considered to be the applicable regulations; and (3) concluded that the Stanfords

could deduct undersection 952 the deficitsin earnings and profits of Guardian Services and Stanford

Financial against Guardian Bank’s subpart F income on their 1990 tax return. On appeal, the

Commissioner does not allege that the Stanfords failed to advise Failing of any facts material to the

determination of their 1990 tax liability or limited the scope of his research in any way. See Treas.

Reg. § 1.6664-4(c)(1). 

Although Mr. Stanford stated at trial that he was “not an unsophisticated taxpayer,” it is not

reasonable under the above-stated factsto expect that the Standfords could “monitor[Failing,][their]

independent advisor[,] to make sure [he] [conducted] sufficient research to give knowledgeable

advice.” Mauerman v. Commissioner, 22 F.3d 1001, 1006 (10th Cir. 1994). “It is for exactly this

reason that manyintelligent investors hire independent, educated expertsto advise them,” particularly

with respect to arcane matters of tax law such as those at issue in this case. Id. (emphasis added);

see also Chamberlain v. Commissioner, 66 F.3d 729, 733 (5th Cir. 1995) (“To require the taxpayer
18As is evident from our discussion above, we do not accept the Commissioner’s contention

that theStanfordswaived theirreasonable-cause-for-underpayment argument byfailing to adequately

raise it in the court below. Noting that “to be preserved, an argument must be pressed, and not

merely intimated,” In re Fairchild Aircraft, 6 F.3d 1119, 1128 (5th Cir. 1993) (citation omitted), the

Commissioner insists that the Stanfords’ “passing references” to the reasonable cause argument in

the Tax Court were insufficient to preserve this argument for review, especially given the fact that

the Tax Court failed to rule on it. Unfortunately for the Commissioner, he reads the above-cited

language in Fairchild out of context. In particular, we highlight the sentences both preceding and

following the language that the Commissioner isolates:

Citing casesthat may contain a useful argument [(i.e., byimplication)]

is simply inadequate to preserve that argument for appeal; to be

preserved, an argument must be pressed, and not merely intimated.

In short, the argument must be raised to such a degree that the trial

court may rule on it.

21

to challenge the [expert], to seek a ‘second opinion,’ or to try to monitor [the expert] on the

provisions of the Code himself would nullify the very purpose of seeking the advice of a presumed

expert in the first place.”) (quoting United States v. Boyle, 469 U.S. 241, 251, 105 S.Ct. 687, 692-

93, 83 L.Ed.2d 622 (1985)). Here, Failing satisfied himself that the deficits of Guardian Services and

Stanford Financial could offset Guardian Bank’s subpart F income under section 952(c)(1)(C), and

the Stanfords had reasonable cause, because o f his extensive expertise in the field of international

taxation, to trust his advice. Although Failing’s legal interpretation of section 952(c)(1)(C) turned

out ultimately to be incorrect — and indeed gave rise to a substantial understatement of tax on the

Stanfords’ 1990 joint return — we find that the Stanfords’ reliance on that interpretation constitutes

“reasonable cause” for purposes of precluding the penalty imposed against them for that

understatement. See Boyle, 469 U.S. at 250, 105 S.Ct. at 692 (“‘[R]easonable cause’ is established

when a taxpayer shows that he reasonably relied on the advice of an accountant or attorney that it

was unnecessary to file a return, even when such advice turned out to have been mistaken.”).

Accordingly, the Tax Court’s affirmance of the Stanfords’ accuracy-related penalty is reversed.18
Id. at 1128 (quotations omitted) (emphasis added). 

Here, the Stanfords did considerably more than present their reasonable cause argument by

implication through case cites; they “identified [it] by name,” and even “advocated [it].” Id. For

instance, in their original petition to the Tax Court, the Stanfords asserted error in the

Commissioner’sfinding that they“substantiallyunderstated income withoutsubstantial authority and

without reasonable cause.” (emphasis added). In their trial memorandum, the Stanfords listed five

distinct issues, one of which was “[w]hether [they] substantially understated income without

substantial authority and without reasonable cause, and are liable for the penalty under I.R.C. §

6662(a).” (emphasis added). During opening arguments, (1) the Stanfords’ counsel (a) stated that

“the issuesin controversy in this case [include] . . . whether [the Stanfords] substantially understated

income without substantial authority and without reasonable cause, and (b) averred that “the

accuracy-related penalty . . . does not apply here [because] the evidence will show that [the

Stanfords] exercised due care in the development of the position they elected . . . [on] their return;”

and (2) the Commissioner’s counsel, recognizing reasonable cause to be an issue, contended that

“[the Stanfords made] no reasonable attempt to comply with the law.” (emphasis added). As

discussed above, at trial the Stanfords’ counsel elicited testimony (1) from Stanford establishing that

he regularly relied on tax practitioners, particularlyFailing, for tax advice and return preparation; and

(2) from Failing establishing his (Failing’s) (a) expertise in tax law and (b) the reasoning he followed

to reach the tax position advanced on the Stanfords’ joint return. Indeed, such evidence could only

be relevant to the reasonable cause issue, asthe only other issue in dispute concerning the penalty —

i.e., whether substantial authority existed for the Stanfords’ tax position — would be resolved, had

we reached it, under an objective standard, see Treas. Reg. § 1.6662-4(d)(2); in other words, the

Stanfords’reliance on Failing’s expertise would be immaterial to resolving the “substantial authority”

issue. Finally, the parties post-trial pleadings continued to address the reasonable cause issue. The

Stanfords’ post-trialbrieflisted the issue as contested, while theCommissioner’s argued that a finding

of reasonable cause was unwarranted due to the Stanfords’ level of education and investment

experience. In their post-trial reply brief, the Stanfords responded:

[The] Commissioner ignores the engagement of a highly qualified

Certified Public Accountant in reviewing case law, the Regulations, the Internal Revenue Code and the legislative history. These facts and circumstances are

replete in the trialrecord and adequately cited in the originalBrief for Petitioner. The Commissioner

relies solely on the fact that Mr. Stanford and his Certified Public Accountant were highly educated

and so phisticated as evidence of Petitioners’ bad faith and unreasonableness. The Commissioner

offered no evidence through testimony that the Taxpayers did not act in good faith as provided by

the Internal Revenue Code. The record is replete with Taxpayers’ good faith and reasonable cause

and the relevant facts supporting this view are adequately cited in the original Brief for Petitioner.

(emphasis added). In his appellate brief, the Commissioner acknowledges that questioning Stanford

about his “education and level of business sophistication. . . went to the issue of reasonable cause.”

Under these circumstances, we find that (1) the Stanfordssufficientlypressed theirreasonable

cause argument in the Tax Court — i.e., by raising it in their pleadings and introducing relevant

evidence at trial — and thus did not waive it, see Sealy Power, Ltd. v. Commissioner, 46 F.3d 382,

22
398-99 (5th Cir. 1995) (although trial focused on a different issue, issue of non-deductibility of

certain expenses not waived by Commissioner where Final Partnership Administrative Adjustment

disallowed expenses; Commissioner raised non-deductibility issue in trial memorandum; partnership

addressed the issue in its own trial memorandum; and Commissioner mentioned issue in opening

argument); United States v. Blakeman, 997 F.2d 1084, 1093-94 (5th Cir. 1992), cert. denied, 510

U.S. 1042, 114 S.Ct. 687, 126 L.Ed.2d 654 (1994) (although taxpayer did not raise I.R.C. § 7520

issue at trial, issue not waived where taxpayer raised it in proposed findings of fact and conclusions

oflaw and resolution of issue did not require presentation of evidence); Laney v. Commissioner, 674

F.2d 342, 350-351 (5th Cir. 1982) (although taxpayersfailed to plead recapture argument before the

Tax Court, issue not waived because taxpayers included it in their trial memorandum to the court);

(2) the Tax Court was capable of addressing the Stanfords’ argument when ruling on their claims;

and (3) the Tax Court’sfailure to do so does not operate to the Stanfords’ detriment, see Laney, 674

F.2d at 351 (“Although the TaxCourt did not addressthe issue, itsfailure should not unfairly penalize

the [taxpayer].”). 

23

III.

In summary, we hold that (1) because Guardian Servicesis not a qualified chain member with

respect to Guardian Bank, the Tax Court correctly sustained the Commissioner’s determination that

the Stanfords may not offset GuardianBank’ssubpart F income by the deficitsin earnings and profits

of Guardian Services; (2) because the deficits in earnings and profits of Stanford Financial are not

attributable to the same qualified activity to which Guardian Bank’ssubpart F income is attributable,

the TaxCourt correctlysustained theCommissioner’s determinationthat theStanfordsmaynot offset

Guardian Bank’s subpart F income by the deficits in earnings and profits of Stanford Financial; and

(3) because the Stanfords had reasonable cause and acted in good faith with respect to the

understatement of tax resulting from the disallowance of the aforementioned offsets, the Tax Court

incorrectly sustained the Commissioner’s determination that the Stanfords are liable for an accuracyrelated penalty under section 6662(a). Accordingly, we VACATE the Stanfords’ underpayment of
24

tax penalty and AFFIRM the Tax Court’s judgment in all other respects. 
BENAVIDES, J., concurring in part and dissenting in part:

I agree with my colleagues t hat Guardian Services is not a qualified chain member with

respect to Guardian Bank and that Guardian Services’ deficits therefore cannot be used to offset

Guardian Bank’s subpart F income for tax purposes. I also agree that the Stanfords had reasonable

cause and acted in good faith with respect to the understatement of their 1990 tax liability and

consequentlyshould not be assessed an accuracy-related penalty. I concur in the majority’s reasoning

in reaching those conclusions and write separately only to voice my dissent on the issue of whether

the deficits ofStanford Financialwere “attributable to” the qualified activity of Guardian Bank within

the meaning of 26 U.S.C. § 952(c)(1)(C)(i). I would hold that Stanford Financial’s deficits were

attributable to the qualified activity of Guardian Bank, and that the Stanfords therefore should be

allowed to offset the income of the latter by the losses of the former.

It is undisputed that Stanford Financial is a qualified chain member with respect to Guardian

Bank, that Stanford Financial generated deficits of $154,474 during the 1990 tax year as a result of

providing administrative and management services to Guardian Bank, and that those services

supported a “qualified activity” (banking) within the meaning of 26 U.S.C. § 952(c)(1)(B)(iii). Thus,

the only question before us is whether those deficits are attributable to that qualified activity. The

majority defines “attributable to” to mean “due to, caused by, or generated by”--a definition I accept.

I do not, however, believe it is significant that the Stanfords say Stanford Financial’s deficits were

“driven solely by” and “directed solely to” Guardian Bank’s qualified activity rather than using the

words “due to, caused by, or generated by.” It seems clear that their point is that administrative and

management services are “attributable to” the activity they support and thisseemsto me, as a matter

of the plain meaning of the phrase, to be true. The majority seems to be construing the phrase
26

“attributable to” so strictly as to implicitly require that deficits offset pursuant to § 952(c)(1)(C)(i)

be generated by an entity itself engaged in a qualified activity--a view which I believe misreads the

provision. Because I believe that the costs of administrative and management services provided in

support of a qualified activity are caused by a qualified activity, I would find that the Stanfordsshould

be allowed to use the deficits of Stanford Financial to offset the profits of Guardian Bank for

purposes of computing their 1990 tax liability.