Case Name: Brown Group, Inc. and Subsidiaries, Petitioner v. Commissioner of Internal Revenue, Respondent
Court: United States Tax Court
Jurisdiction: United States
Decision Date: 1995-01-25
Citations: 104 T.C. 105
Docket Number: Docket No. 104-92
Parties: Brown Group, Inc. and Subsidiaries, Petitioner v. Commissioner of Internal Revenue, Respondent
Judges: Hamblen, Parker, Cohen, Swift, Parr, and Beghe, JJ., agree with this majority opinion.
Reporter: Reports of the Tax Court of the United States
Volume: 104
Pages: 105–140

Head Matter:
Brown Group, Inc. and Subsidiaries, Petitioner v. Commissioner of Internal Revenue, Respondent
Docket No. 104-92.
Filed January 25, 1995.
Harold G. Blatt, Juan D. Keller, and Philip B. Wright, for petitioner.
James A. Kutten and Richard A. Witkowski, for respondent.
An opinion in this case was filed on Apr. 12, 1994, Brown Group, Inc. v. Commissioner, 102 T.C. 616 (1994). That opinion was subsequently withdrawn and reassigned to this Division for reconsideration.

Opinion:
Halpern, Judge:
Petitioner is the common parent corporation of an affiliated group of corporations making a consolidated return of income (the affiliated group). Respondent determined a deficiency of $388,992.85 in the income tax liability of the affiliated group for its taxable year ended November 1, 1986.
The only issue in dispute is whether Brown Cayman, Ltd.'s (Brown Cayman's) share of partnership income from Brinco, a Cayman Islands partnership, is subpart F income, includable in the gross income of a member of the affiliated group under section 951(a). We hold that it is.
Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the year in issue. All Rule references are to the Tax Court Rules of Practice and Procedure.
FINDINGS OF FACT
A trial was held on March 9, 1993. Petitioner called no witnesses. Respondent called one: Theodore Prestí. The parties had stipulated certain facts, however, and the facts stipulated are so found. The stipulation of facts and attached exhibits is incorporated herein by this reference. The following summarizes the facts relied on by us in reaching our decision.
Petitioner Brown Group, Inc. (sometimes Brown Group), is a New York corporation. At the time the petition herein was filed, petitioner's principal place of business was in St. Louis, Missouri. The following diagram facilitates an understanding of the relationships of the parties involved:
Throughout 1985 and 1986, Brown Group had divisions that sold footwear at the retail and wholesale levels, manufactured footwear, and imported footwear. Brown Group manufactured footwear in the United States and imported footwear from, among other countries, Brazil.
Brown Group International (International), a Delaware corporation, was incorporated in 1985, as a wholly owned subsidiary of Brown Group. Throughout 1985 and 1986, International was a U.S. shareholder of Brown Cayman within the meaning of section 951(b).
Brown Cayman, a Cayman Islands corporation, was incorporated in 1985. Brown Cayman was a controlled foreign corporation within the meaning of section 957(a) at all times relevant to this case.
T.P. Cayman, Ltd. (T.P. Cayman), a Cayman Islands corporation, was incorporated in March 1985.
Pidge, Inc., is a Missouri corporation; the date of its incorporation is not contained in the record.
Brinco, a partnership within the meaning of section 7701, and the regulations thereunder, was formed in the Cayman Islands in March 1985. The partners of Brinco, and their percentage interests in the net profits and losses of Brinco, were Brown Cayman, 88 percent, T.P. Cayman, 10 percent, and an individual, Delcio Birck (Birck), 2 percent.
Prior to the formation of Brinco, Brown Group utilized independent agents to purchase footwear manufactured in Brazil. At that time, Birck, a Brazilian citizen, and Prestí, a U.S. citizen, were employed by a company, Michelle Manard, which purchased footwear manufactured in Brazil on behalf of Brown Group and others. Michelle Manard "officially" charged Brown Group a 7-percent commission, although occasionally that rate was greater. Brinco was formed, among other reasons, to attract Prestí and Birck to source Brazilian footwear exclusively for the Brown Group companies and to consolidate Brown Group's Brazilian buying power. Brinco was structured as a partnership, among other reasons, because: (1) Presti's salary requirements could not be satisfied within Brown Group's existing payroll structure, (2) it allowed Prestí and Birck to have some entrepreneurial interest in Brinco's operations, and (3) it permitted the partners to avoid Brazilian currency controls and currency fluctuations.
During 1985 and 1986, Brinco acted as purchasing agent for International with respect to footwear manufactured in Brazil. The footwear so imported was sold primarily in the United States. Prestí was the managing partner of Brinco. As such, he was responsible for the design, manufacture, and quality control of the footwear. He also supervised Brinco's operations within Brazil.
The Brown Group companies paid Brinco a 10-percent commission for acting as their purchasing agent for footwear manufactured in Brazil. The commission was based on the purchase price of the footwear. Brinco's 1985 commission income for acting as purchasing agent for the Brown Group companies was $1,119,970. The Brown Group companies included the commissions paid to Brinco in their costs of goods sold.
Pursuant to negotiations among the Brinco partners, because of the uncertainty of first-year profits, for the 7-month period ending November 2, 1985, T.P. Cayman received guaranteed payments totaling $151,662 ($21,666 a month for 7 months), instead of its share of partnership profits called for in the Brinco partnership agreement. After making guaranteed payments to T.P. Cayman, Brinco's partnership net earnings for 1985 totaled $917,465, which were distributed as follows:
$897,281 Brown Cayman OO
20,184 Birck CvJ
In 1986, T.P. Cayman received its share of partnership profits as called for in the Brinco partnership agreement (and no guaranteed payments).
Brinco was dissolved on October 31, 1987. At that time, Presti became executive vice president of International, and Birck, as an independent agent, continued to source footwear for the Brown Group companies on a commission basis.
Respondent determined that Brown Cayman's distributive share of Brinco's earnings is foreign base company sales income, includable as subpart F income in the gross income of International.
OPINION
I. Introduction
For all relevant periods, the parties have stipulated that (1) Brown Cayman was a "controlled foreign corporation" (CFC) within the meaning of section 957(a) and (2) International was a "United States shareholder" of Brown Cayman within the meaning of section 951(b). Accordingly, International must include in its gross income its pro rata share (100 percent) of any "subpart F income" of Brown Cayman. See sec. 951(a). Subpart F income is defined in section 952 to include an item called "foreign base company income". Sec. 951(a)(2). Foreign base company income, in turn, is defined in section 954(a) to include "foreign base company sales income". Sec. 954(a)(2). Foreign base company sales income includes, among other things: "income (whether in the form of profits, commissions, fees, or otherwise) derived in connection with the purchase of personal property from any person on behalf of a related person" where the goods are both produced and sold for use outside the country in which the CFC is incorporated. Sec. 954(d)(1). The term "related per son" is defined in section 954(d)(3). It is clear that International was a related person with regard to Brown Cayman. See sec. 954(d)(3) ("such person is a corporation which controls the controlled foreign corporation"). It also is clear that Brinco earned commission income by arranging for the purchase of footwear by International. Brinco was a partnership of which Brown Cayman was a partner. Brown Cayman was entitled to share in the income of Brinco. Pursuant to section 702, Brown Cayman was required to take into account its distributive share of that income. The narrow question we must answer is whether Brown Cayman had income "(whether in the form of profits, commissions, fees, or otherwise) derived in connection with the purchase of personal property from any person on behalf of a related person". See sec. 954(d)(1). We believe that it did.
II. Arguments of the Parties
A. Petitioner's Argument
Petitioner argues as follows: under section 954(d)(3), as in effect for the year in issue, Brinco was not a related person with regard to Brown Cayman or International. Absent such a relationship, Brown Cayman's distributive share of Brinco's income cannot be subpart F income with respect to Brown Cayman or International. Alternatively, the character of the income in question is determined at the partnership (Brinco) level, by treating Brinco as a separate entity. Consequently, the income in question is that of Brinco, not Brown Cayman. Thus, the income cannot be foreign base company sales income of Brown Cayman.
B. Respondent's Argument
Respondent agrees that, under section 954(d)(3), as in effect for the year in issue, Brinco was not a related person with regard to Brown Cayman or International. Respondent's argument is as follows: The aggregate theory of partnerships should apply in this case because that theory furthers the purposes of subpart F. Under the aggregate theory, Brown Cayman's distributive share of Brinco's income must be treated as foreign base company sales income and, consequently, subpart F income. International, the U.S. shareholder of Brown Cayman, must include its pro rata share (100 percent) of Brown Cayman's subpart F income in its gross income under section 951(a). Respondent has not argued that Brinco is a sham.
III. Analysis
A. Introduction
Substantially, we agree with respondent. We believe that a close reading of the regulations under subpart F, a consideration of the structure and language of subchapter K (the partnership provisions), Congress' purpose in enacting sub-part F, and certain language of section 954(d)(1) compel the result that respondent advocates.
B. Subpart F Regulations
Section 954 deals with the computation of foreign base company income, of which foreign base company sales income is a component. Sec. 954(a)(2). Section 1.954A-1, Income Tax Regs., deals with the computation of foreign base company income for taxable years of a CFC beginning after 1975 and before 1987. See sec. 1.954A-l(a), Income Tax Regs.; sec. 1.954-0T(a)(2), Temporary Income Tax Regs. Section 1.954A-1(c), Income Tax Regs., states in pertinent part:
For purposes of section 954 and this section, foreign base company sales income as defined in § 1.954-3 shall be taken into account in determining foreign base company income after allowance for deductions properly allocable to such [category] of income. For determination of gross income and deductions for purposes of section 954, see section 952 and the regulations thereunder.
Section 1.952-2(a)(l), Income Tax Regs., states in pertinent part:
the gross income of a foreign corporation for any taxable year shall, subject to the special rules of paragraph (c) of this section, be determined by treating such foreign corporation as a domestic corporation taxable under section 11 and by applying the principles of section 61 and the regulations thereunder.
Paragraph (c)(1) of section 1.952-2, Income Tax Regs., states that, as a general rule, certain subchapters of chapter 1 of the Code shall not apply. Subchapter K, chapter 1, subtitle A of the Code, sections 701 through 761 (subchapter K), is not among the excluded subchapters. Thus, by implication, subchapter K is applicable.
Section 1.952-3(a), Income Tax Regs., describes the computations that a U.S. shareholder of a CFC must make in connection with the application of section 954 and the subsequent application of section 952. Paragraph (b) of section 1.952-3, Income Tax Regs., states the general rule. That rule is that the U.S. shareholder must determine the subpart F income of the CFC by, among other things, determining the foreign base company sales income of the CFC.
Section 1.954-3(a)(l)(i), Income Tax Regs., mirroring the statute, states that foreign base company sales income of a CFC includes, among other things, commission income derived in connection with the purchase of personal property from any person on behalf of a related person.
In summary, the cited provisions of the regulations lay out a scheme under which the U.S. shareholder of a CFC must determine the foreign base company sales income of the CFC (including the described commission income) under most of the rules applicable to a domestic corporation determining its tax liability under section 11, including the rules of sub-chapter K.
C. Subchapter K
Subchapter K deals with the taxation of partners and partnerships.
Section 701 provides that a partnership as such shall not be subject to the income tax. Persons carrying on business as partners are liable for income tax only in their separate or individual capacities.
Section 702(a) provides that, in determining a partner's income tax, each partner must take into account separately the partner's distributive share of items enumerated in section 702(a)(1) through (8). Under section 702(a)(7), a partner must take into account separately those items of income, gain, loss, deduction, or credit prescribed by regulations.
Section 1.702-l(a)(8)(ii), Income Tax Regs., provides that each partner must take into account separately the partner's distributive share of any partnership item that, if separately taken into account by any partner, would result in an income tax liability for that partner different from that which would result if that partner did not take the item into account separately.
Section 702(b) provides that the character of any item included in a partner's distributive share under paragraphs (1) through (7) of section 702(a) is determined as if such item were realized directly from the source from which realized by the partnership, or incurred in the same manner as incurred by the partnership. Section 1.702-l(b), Income Tax Regs., provides, in pertinent part:
The character in the hands of a partner of any item of income, gain, loss, deduction, or credit described in section 702(a)(1) through [7] shall be determined as if such item were realized directly from the source from which realized by the partnership or incurred in the same manner incurred by the partnership.
Section 703(a)(1) provides that a partnership shall separately state the items described in section 702(a) in computing its taxable income.
Brown Cayman, a partner of Brinco, is a foreign corporation and, apparently, has no Federal income tax liability. Nevertheless, International, a U.S. shareholder with respect to Brown Cayman, must take into account its pro rata share of Brown Cayman's subpart F income. See sec. 951(a). Applying Federal income tax principles, International must compute those items of Brown Cayman's income that constitute subpart F income. See sec. 1.952-2(a), Income Tax Regs. Unless items that constitute, for instance, foreign base company sales income are separately stated, International will be unable to make that computation. Since, under section 951(a), International is taxed directly on its pro rata share of Brown Cayman's subpart F income, we must look to International's tax liability to determine whether Brinco must separately state items, such as commission income, that could constitute foreign base company sales income. To give effect to section 702(a)(7) and section 1.702-l(a)(8)(ii), Income Tax Regs., and to avoid frustrating the purpose of Congress in enacting subpart F, Brinco must separately state its commission income.
D. Subpart F
1. Purpose
Subpart F contradicts the general rule that the shareholders of a corporation defer paying a tax on the income earned by the corporation until such income is distributed to them, usually in the form of a dividend. Subpart F was designed to remove the tax deferral benefits of certain offshore operations that Congress considered to be "tax haven" devices; i.e., foreign operations that were artificially structured to take advantage of a low (or zero) rate of foreign tax. S. Rept. 1881, 87th Cong., 2d Sess. (1962), 1962-3 C.B. 707, 784. (S. Rept. 1881 accompanied H.R. 10650, which became the Revenue Act of 1962, Pub. L. 87-834, 76 Stat. 960, which added subpart F.)
2. Conduit Approach
It is important to keep in mind the method that Congress chose to meet its objectives: subpart F imposes a conduit scheme with regard to subpart F income. Subpart F income is taxed currently to U.S. shareholders notwithstanding that no distribution of such income is made. See sec. 951. The parallel with subchapter K is obvious. Congress chose to minimize (perhaps even eliminate) the entity character of the CFC in order to tax U.S. shareholders as if they had earned directly the subpart F income earned by the CFC. It would be ironic, indeed, if one could defeat the clearly expressed intent of Congress to tax the income from the activities involved here by engaging in those activities though a form of doing business that not only is taxed on a conduit basis but whose non-tax-law character often resembles an aggregate of per sons doing business together (as mutual agents) rather than an entity.
3. Facts at Hand
The facts of this case show that the formation of Brinco did not significantly change the way Brown Group (through International) imported shoes manufactured in Brazil. Prestí and Birck still continued to do the actual commission agent work. They did it, however, as partners (directly or indirectly) in Brinco. Under the prior arrangement, Brown Group had paid a 7-percent commission to Michelle Manard, Prestí and Birck's employer. Ostensibly, Brown Group raised its commission rate to 10 percent. However, as the owner, indirectly, of Brown Cayman, a partner in Brinco, Brown Group, was entitled to receive back the bulk of that 10 percent and, apparently, realized a net savings. Had Brown Cayman hired Prestí and Birck as employees, or otherwise engaged them as agents, and collected directly from Brown Group or International a commission agent's fee, it would be clear that at least the net amount retained by Brown Cayman would be foreign base company sales income.
The law of partnerships in the Cayman Islands is derived from the law of partnerships in England. See Davies, The Legal System of the Cayman Islands 89, 188-194 (1989). Compare Partnership Law, 1983 (Cayman Islands) with Partnership Act, 1890, 53 & 54 Vic., c. 39 (Eng.). English law lends itself to the view that Brown Cayman, as a partner of Brinco, acting on its own behalf, and through its partners (its agents), did function as a commission agent. The facts seem ripe for the application of subpart F. A contrary result would lead to just the type of siphoning of profits that Congress was concerned with when it subjected foreign base company sales income to the conduit treatment of subpart F. But cf. MCA Inc. v. United States, 685 F.2d 1099, 1104—1105 (9th Cir. 1982) (remedy for loophole in subpart F "lies in new legislation, not judicial improvisation").
E. Aggregate Versus Entity
1. Introduction
To effectuate the purpose of Congress in enacting subpart F, we will require Brinco to state separately its commission income under section 703. What we are doing might be characterized as emphasizing the "aggregate" or "conduit" nature of Brinco, a partnership, over its "entity" nature. We have pursued a technical road in our analysis, and have avoided framing the issue in terms of aggregate versus entity. Nevertheless, and particularly in light of petitioner's argument that Brinco should be treated as a separate entity, we will address the aggregate versus entity question briefly.
2. Dual Nature
Authorities on partnership taxation have stated that sub-chapter K does not espouse either the aggregate or the entity theory of partnerships, but rather blends the two theories. 1 McKee Nelson & Whitmire, Federal Taxation of Partnerships and Partners (hereafter McKee et al.), par. 1.02 (2d ed. 1990). We agree. Compare sec. 751 with sec. 741. Moreover, for purposes of interpreting provisions of the Code not contained in subchapter K, a partnership also may be treated either as an aggregate of its partners or as an entity distinct from its partners. Compare Clasel v. Commissioner, 79 T.C. 424, 433-434 (1982) (aggregate approach of regulations under section 267 appropriate) with Madison Gas & Elec. Co. v. Commissioner, 72 T.C. 521, 564 (1979), affd. 633 F.2d 512 (7th Cir. 1980) (business of partnership, a business separate from the business of the partners). The treatment of partnerships in each context must be determined on the basis of the characterization most appropriate for the situation. See H. Conf. Rept. 2543, 83d Cong., 2d Sess. (1954), 1954 U.S.C.C.A.N. 5280. H. Rept. 2543 accompanied H.R. 8300, 83d Cong., 2d Sess., which became the Internal Revenue Code of 1954.
3. Appropriate Emphasis
For the reasons set forth above in our discussion of subpart F, we believe that, to accomplish the purposes of Congress in enacting subpart F, the aggregate nature of Brinco as a partnership must be emphasized. We are not here dealing with the computation of Brinco's income but with the consequence to Brinco's partners stemming from their rights under the partnership agreement to share in that income. The relationship between the entity approach to the computation of partnership income found in sections 703 and 706 and the aggregate approach applied to the taxation of that income found in sections 701, 702, and 704 has been described by the Supreme Court as follows:
For [the purpose of calculating partnership income], the partnership is regarded as an independently recognizable entity apart from the aggregate of its partners. Once its income is ascertained and reported, its existence may be disregarded since each partner must pay a tax on a portion of the total income as if the partnership were merely an agent or conduit through which the income passed. [United States v. Basye, 410 U.S. 441, 448 (1973); fn. ref. omitted.]
McKee et al. have characterized the Supreme Court's analysis as follows:
This analysis of the statute embodies a very clear and sharply defined separation between (1) the treatment of a partnership as a separate entity for purposes of determining its income, and (2) the taxation of partnership income, as so determined, to the partners under the conduit approach. [1 McKee et al., supra par. 9.01[2], at 9-6.]
4. Application of Entity-Aggregate Distinction in Practice
Indeed, an examination of cases requiring an entity (partnership) level determination of income shows that, once such determination is made, the partnership is ignored and the individual partners take account of such income as if they had earned it directly. E.g., Pleasant Summit Land Corp. v. Commissioner, 863 F.2d 263, 272 (3d Cir. 1988), affg. in part and revg. in part T.C. Memo. 1987-469 ("After the partnership's income and deductions are calculated and reported, it is a conduit through which income and deductions are distributed to individual partners."); Davis v. Commissioner, 74 T.C. 881, 905-906 (1980), affd. 746 F.2d 357 (6th Cir. 1984) (capital gains determined at partnership level retain that characterization at partner level).
Notwithstanding such shift in emphasis from an entity view at the partnership level to an aggregate view at the partner level, any characterization of the partnership's activity with regard to an item generally persists. For instance, in Goodwin v. Commissioner, 75 T.C. 424 (1980), affd. without published opinion, 691 F.2d 490 (3d Cir. 1982), the taxpayer argued that we should inquire as to trade or business activity at his, the partner's, level to characterize certain deductions taken by the partnership. We declined, requiring him to treat his distributive share of the expenses as a nondeductible startup cost associated with the formátion of a new (partnership) business. We held: "in the context of section 162, the character of the deductions, i.e., whether they were incurred in the course of a trade or business, must be resolved at the partnership level." Id. at 437.
Pertinent to the question at hand, we, and other courts, have attributed to a partner the activities and even the property of a partnership to determine whether, by virtue of such activity or property, the partner had a particular status important for determining some aspect of the partner's Federal income tax status. In Unger v. Commissioner, 936 F.2d 1316 (D.C. Cir. 1991), affg. T.C. Memo. 1990-15, the question was whether a Canadian resident, a limited partner in a Massachusetts partnership, was taxable on his distributive share of a certain capital gain realized by the partnership. The question turned on whether the partner maintained a "permanent establishment" within the United States. For purposes of the case, the term "permanent establishment" meant an office or other fixed place of business. The court held that, since the partnership maintained a permanent office in Boston, the taxpayer had a permanent establishment in the United States by virtue of his interest in the partnership offices. Id. at 1320; Donroy, Ltd. v. United States, 301 F.2d 200 (9th Cir. 1962) (similar, but with emphasis on the agency nature of the general partner's relationship to a limited partner); Johnston v. Commissioner, 24 T.C. 920, 923 (1955) (permanent place of business in the United States by virtue of partnership interest); Cantrell & Cochrane, Ltd. v. Commissioner, 19 B.T.A. 16, 24 (1930) (whether U.K. corporation, a member of a "syndicate" with an office and a place of business in the United States, and engaging in a trade or business in the United States, either itself engaged in a trade or business in the United States or had any office or place of business therein: "In the eye of the law at least it was present here as a party to the conduct of the business of the 'syndicate' through which it established a place of business within the United States for doing a part of its business."). The situation here is analogous. Brown Cayman should be put into the shoes of Brinco for determining whether Brown Cayman was earning commission income on sales by third parties to International.
F. "[I]n connection with"
Our analysis has relied heavily on the provisions of sub-chapter K. Indeed, that is the path that the parties have taken, and it is supported by the weight of commentary that the issue has generated. Before addressing one final argument of petitioner, we wish to point out that certain words of section 954(d)(1), as recently interpreted by this Court, lend support to our analysis. As stated earlier, the term "foreign base company sales income" is defined in section 954(d)(1). In pertinent part (with emphasis added), the definition includes:
income (whether in the form of profits, commissions, fees, or otherwise) derived in connection with the purchase of personal property from any person on behalf of a related person [Emphasis added.]
Recently, we had the opportunity to construe the phrase "in connection with" as used in section 162(k)(l). Fort Howard Corp. v Commissioner, 103 T.C. 345, 351 (1994). In Fort Howard Corp., we observed that words in a revenue act should be interpreted in their ordinary, everyday sense. Id. at 351. We stated that the phrase "in connection with" had been, and should be, interpreted broadly. Id. at 352. We said that the phrase means "associated with, or related". Id. We consulted a dictionary, and said: "Events or elements are 'connected' when they are 'logically related' to each other." Id. (quoting Webster's Third New World Dictionary (1986)). That relationship exists here. Brown Cayman was a cfc. Its distributive share of partnership profits was, by design and reality, connected to and dependent on purchases made on behalf of a party related to Brown Cayman.
G. Brinco as a Related Person
Finally, we wish to dispose of one argument made by petitioner: viz, that, for the year in question, Brinco was not a related person with regard to Brown Cayman or International. That is true; nonetheless, it is irrelevant. Nothing here turns on whether Brinco is a related person with regard to either Brown Cayman or International. We are dealing here with that part of the definition of foreign base company sales income that involves "the purchase of personal property from any person on behalf of a related person". Sec. 954(d)(1). The inquiry is whether Brown Cayman, through Brinco, purchased footwear on behalf of International. International is the related person, and there is no argument about that. The only possible entity here that can be a controlled foreign corporation is Brown Cayman. As stated, nothing turns on whether Brinco is a related person.
It is true that the definition of related person in section 954(d)(3) was amended in 1986 to include partnerships controlled by or controlling a CFC within the definition of related persons with regard to such CFC. Tax Reform Act of 1986, Pub. L. 99-514, sec. 1221(e)(1), 100 Stat. 2085, 2553-2554. Nevertheless, the relevant definition of what constitutes foreign base company sales income ("income derived in connection with the purchase of personal property from any person on behalf of a related person") was not amended. Sec. 954(d)(1) (emphasis added). Nothing here was purchased on behalf of Brinco; indeed, Brinco did the purchasing on behalf of International.
IV. Conclusion
For the reasons stated, we find that Brown Cayman had commission income derived in connection with the purchase of personal property from any person on behalf of International. We hold that such income is foreign base company sales income under section 954(d)(1) and that International must include in its gross income subpart F income as determined by respondent.
Decision will be entered for respondent.
Reviewed by the Court.
Hamblen, Parker, Cohen, Swift, Parr, and Beghe, JJ., agree with this majority opinion.
Wells, J., did not participate in the consideration of this opinion.
The parties have stipulated that petitioner's "taxable period" was a 52-53 week year ending on the Saturday nearest to Oct. 31. They have stipulated the same with regard to Brown Group International, Inc., and Brinco, discussed infra. They have stipulated that Brown Cayman, Ltd., also discussed infra, had a "taxable period" ending Nov. 30.
On brief, petitioner states: "The Brinco partnership earned commission income by arranging for the purchase of footwear by Brown Group International, Inc., from third parties for consumption primarily within the United States. The property was manufactured, and sold for use or consumption, outside the Cayman Islands, which was Brinco's and Brown Cayman, Ltd's, country of incorporation, [sic]."
Por purposes of applying the rules of subpt. F, Brown Cayman is, with some modification, treated as if it were a domestic corporation taxable under sec. 11 and by applying the principles of sec. 61 and the regulations thereunder. See sec. 1.952 — 2(a)(1), Income Tax Regs. Subch. K of the Code (containing provisions dealing with the taxation of partners and partnerships) is applicable. See par. (c)(1) of sec. 1.952-2, Income Tax Regs. Consider also the additional discussion at sec. III. B., infra.
See infra note 6.
As in the United States, partnerships under English law sometimes are best understood in terms of an entity model and sometimes in terms of an aggregate model. Rather than using the terms "entity" and "aggregate", however, English partnerships are viewed either in a commercial notion or a legal notion. The commercial notion, in which the partnership is seen as an entity, stems from the business efficiencies that can be achieved if a firm is viewed as separate from those persons who make up the firm. Lindley & Banks on Partnership 26 (16th ed. 1990). Under the legal notion of partnership, the "firm is not generally recognized as distinct from the partners composing it." Id. at 27. When addressing the nature of the relationship between or among partners, English law appears to tend towards the aggregate model. For example:
Every member of an ordinary partnership is at one and the same time both a principal and an agent. As a principal, he is bound by what he does himself and by what his co-partners do on behalf of the firm, provided what they do falls within the limits of their authority; as an agent, he binds them by what he does for the firm, provided he keeps within the limits of his authority. [7d]
Despite, perhaps, a greater emphasis on the aggregate view (relative to the United States, particularly under the Revised Uniform Partnership Act), English courts will employ either view depending upon the circumstances of a particular case. Lindley & Banks on Partnership 26. There seems little doubt that English partnership law would be susceptible to the conclusion that Brown Cayman, as a partner of Brinco, acting on its own behalf, and through its partners (its agents), functioned as a commission agent.
Davis & Lainoff, "U.S. Taxation of Foreign Joint Ventures", 46 Tax Law Rev. 165, 273-274 (1991) (emphasizing the aggregate nature of the partnership rather than relying strictly on sec. 702); Fox & Daubi, "Rev. Rul. 89-72: Foreign Base Company Sales Income Earned by Partnerships", 18 Tax Mgmt. Inti. J. 297 (July 14, 1989) (determination of character at partnership level); Shakow, "How Now Brown K?", 63 Tax Notes 1761 (1994); cf. 1 McKee et al., Federal Taxation of Partnerships and Partners, supp. par. 9.01[3][b], at 59-22 (2d ed. 1990).
But cf. our decision in Huntsman v. Commissioner, 91 T.C. 917, 919-920, (1988) ("in light of legislative history of section 461(g), a limited reading of the term 'in connection with the purchase or improvement' is appropriate here"), revd. 905 F.2d 1182 (11th Cir. 1990).