t c no united_states tax_court sih partners lllp explorer partner corporation tax_matters_partner petitioner v commissioner of internal revenue respondent docket no filed date s was the u s shareholder of two cfcs that guaranteed loans made to a u_s_person r determined that s must include in its gross_income for the tax years in issue the cfcs’ applicable_earnings pursuant to sec_951 and sec_956 r’s determination relied on regulations promulgated under sec_956 regulations r also determined that the amounts included in s’s gross_income should be taxed as ordinary_income p contends that the regulations are invalid and that in the absence of valid regulations r’s determination cannot be sustained if we sustain r’s determination of the amounts included under sec_951 and sec_956 p contends that the amounts should be taxed as qualified_dividend_income under sec_1 held the regulations are valid and r correctly determined that s must include in gross_income the cfcs’ applicable_earnings for the tax years in issue held further the amounts included in p’s gross_income pursuant to sec_951 and sec_956 are not qualified_dividend_income under sec_1 mark d lanpher robert a rudnick and kristen m garry for petitioner jeffrey b fienberg richard a rappazzo and julie ann p gasper for respondent opinion cohen judge on date respondent issued two notices of final_partnership_administrative_adjustment fpaas to explorer partner corp explorer corp as tax_matters_partner for sih partners lllp sihp for tax years and in the fpaas respondent determined that sihp has income inclusions under sec_951 and sec_956 of dollar_figure and dollar_figure for and respectively in the fpaas respondent also determined that the income inclusions for sihp are not qualified_dividend_income eligible for the preferential tax_rate under sec_1 the issues for consideration are whether sihp has income inclusions under sec_951 and sec_956 in amounts equal to the respective applicable_earnings of two of its controlled_foreign_corporations because these entities guaranteed loans that merrill lynch made to susquehanna international group llp sig and if sihp has income inclusions under sec_951 and sec_956 whether the income inclusions are qualified_dividend_income under sec_1 these issues are before the court on the parties’ cross-motions for summary_judgment pursuant to rule unless otherwise indicated all section references are to the internal_revenue_code code in effect for the tax years in issue and all rule references are to the tax_court rules_of_practice and procedure summary_judgment is intended to expedite litigation and avoid unnecessary and expensive trials fla peach corp v commissioner 90_tc_678 summary_judgment may be granted with respect to all or any part of the legal issues in controversy if the pleadings answers to interrogatories depositions admissions and any other acceptable materials together with the affidavits or declarations if any show that there is no genuine dispute as to any material fact and that a decision may be rendered as a matter of law rule b respondent contends that no genuine issue of material fact exists with respect to either issue petitioner challenges the validity of the regulations on which respondent relied in making the determinations in the fpaas and it contends that if we conclude that the regulations are invalid then summary_judgment in its favor is appropriate if those regulations are not invalid then petitioner contends that issues of material fact remain in dispute as to whether respondent properly applied the regulations to the facts and circumstances of this case we conclude that all facts material to the court’s disposition of the cross-motions for summary_judgment can be drawn from the parties’ stipulations and are not reasonably in dispute background we state the stipulated facts in greater detail than may be necessary so that the record is complete formation of sihp explorer corp a delaware corporation is an s_corporation for federal_income_tax purposes during the tax years in issue explorer corp had the following shareholders eric brooks brooks joel greenberg greenberg arthur dantchik dantchik and jeffrey yass yass from the beginning of through date brooks greenberg dantchik yass and a fifth individual andrew frost frost were the sole shareholders of susquehanna international holdings inc sih inc sih inc a delaware corporation incorporated in was an s_corporation for federal_income_tax purposes in date sih inc redeemed frost’s shares on or after date brooks greenberg dantchik and yass were the remaining shareholders of sih inc on or after date brooks greenberg dantchik and yass transferred the stock of sih inc to explorer corp following the transfer sih inc converted to a limited_liability_company which was disregarded as an entity separate from its owner for federal_income_tax purposes and changed its name to susquehanna international holdings llc sih llc the steps of these transactions were treated together as a reorganization under sec_368 on date sihp was formed as a delaware partnership on or about date explorer corp transferred sih llc to sihp in exchange for a ownership_interest in sihp explorer corp is the tax_matters_partner for sihp from on or about date through the end of tax years and five s_corporations owned the remaining of sihp in varying ownership percentages brooks greenberg dantchik yass and a fifth individual mark dooley dooley each owned of one of the s_corporations sig us and international affiliates during the tax years in issue brooks greenberg dantchik yass dooley and frost owned collectively and through certain entities of the interest in sig sig and its u s affiliates together sig us constitute an investment firm that trades directly and through various affiliates most listed financial products and asset classes sig us trades these products primarily through broker-dealers registered with the u s securities_and_exchange_commission during the tax years in issue sihp owned indirectly certain of sig’s international affiliates sihl and sehl from on or about date to on or about date sih inc owned of the stock of susquehanna ireland holdings limited sihl a corporation organized under the laws of ireland from on or about date to on or about date sih llc owned of sihl’s stock through sih llc an entity disregarded for federal_income_tax purposes sihp was treated as owning of sihl’s stock on date sihl was acquired by susquehanna europe holdings limited sehl a corporation newly organized under the laws of ireland and whose tax residency was in luxembourg in connection with the acquisition sihl elected to be classified as a disregarded_entity for federal_income_tax purposes this acquisition and election together constituted a reorganization under sec_368 from date through date sihp owned sehl through sih llc and other entities disregarded for federal_income_tax purposes from the beginning of tax_year until its reorganization sihl was a controlled_foreign_corporation cfc within the meaning of sec_957 sihp was a united_states_shareholder under sec_951 with respect to sihl that owned within the meaning of sec_958 of sihl’s stock from its organization and throughout tax years and sehl was also a cfc sihp was a u s shareholder of sehl that owned of sehl’s stock sehl is the successor to sihl together sihl sehl sts from on or about date to on or about date sih inc owned of the stock of susquehanna trading services inc sts a company organized under the laws of the cayman islands that was treated as a corporation for federal_income_tax purposes from on or about date through date sih llc owned the stock of sts through sih llc sihp was treated as owning sts’s stock during tax years and sts was a cfc sihp was a u s shareholder with respect to sts that owned within the meaning of sec_958 of sts’ stock loan received by sig before sig and its affiliates had a longstanding relationship with the brokerage firm merrill lynch merrill lynch acted as prime broker to sig and its affiliates as prime broker merrill lynch cleared securities and commodities transactions in which sig and its affiliates engaged and it held as custodian for sig and its affiliates the resulting security and commodity positions from such trading merrill lynch provided margin loans to sig and its affiliates and it held a security_interest in the assets that sig and its affiliates maintained in accounts at merrill lynch the notes on date sig issued three notes payable to certain merrill lynch affiliates sig notes the seventh amended and restated promissory note in the amount of dollar_figure billion between sig as borrower and merrill lynch international mli as lender the amended and restated promissory note in the amount of dollar_figure million between sig and merrill lynch professional clearing corp ml pro and together with mli merrill lynch and the second amended and restated promissory note in the amount of dollar_figure million between sig and ml pro the sig notes evidenced dollar_figure5 billion in aggregate borrowing separate and apart from the margin loans that merrill lynch provided in the ordinary course of its role as sig’s prime broker the guaranties on date sig also executed jointly with its affiliates the amended and restated guarantee and security_agreement argsa pursuant to the argsa entities guaranteed the sig notes sihl and sts were two of the guarantors of the sig notes under the argsa the remaining guarantors were either domestic entities or entities disregarded for federal_income_tax purposes on date sehl executed a joinder agreement in which sehl acknowledged that it was a party to and guarantor under the argsa certain sig affiliates under the argsa also pledged their assets as collateral for the sig notes sihl sehl and sts were neither pledgors nor pledged entities under the argsa under the argsa each guarantor assumed joint_and_several_liability for the full payment of the sig notes the argsa included a pro_rata provision under which if any guarantor made any payment or suffered any loss pursuant to its guaranty then it became entitled to contribution payments from the remaining guarantors the provision stated that each nonpaying guarantor would be required to contribute to the paying guarantor an amount equal to its pro_rata share of any such payment the argsa defined a given guarantor’s pro_rata share of any payment as the ratio of funds that the guarantor had received from affiliates since the date of the argsa to the aggregate amount of all funds that all guarantors had received from affiliates during the same period the sig notes remained outstanding through date as of that date dollar_figure5 billion in principal remained outstanding on the sig notes sig fully repaid the sig notes as of date no guarantor was ever called upon to pay any amount due under the sig notes pursuant to its obligations under the argsa cfcs’ earnings profits and distributions sihl sehl as of date sihl had accumulated_earnings_and_profits of dollar_figure between january and march of sihl distributed dollar_figure to sih inc before sih inc ’s reorganization under sec_368 for tax_year sihl sehl generated together current_earnings_and_profits of dollar_figure as of date sehl had accumulated_earnings_and_profits of dollar_figure for tax_year sehl had a deficit in current_earnings_and_profits of dollar_figure sehl did not make any distributions in sts as of date sts had accumulated_earnings_and_profits of dollar_figure as of that date dollar_figure was previously_taxed_earnings_and_profits as described in sec_959 for tax_year sts generated current_earnings_and_profits of dollar_figure as of date sts had accumulated_earnings_and_profits of dollar_figure for sts generated dollar_figure of current_earnings_and_profits sts did not make any distributions in either or income inclusions determined by respondent respondent determined in the fpaas that sihp had income inclusions pursuant to sec_951 for the tax years in issue as a result of sihl sehl’s and sts’ guaranties of the sig notes the fpaas stated that the inclusions were from the investment of earnings in u s property by the cfcs discussion i the amount included under sec_951 and sec_956 in the ordinary case foreign_source_income earned by a cfc is not subject_to u s taxation until it is repatriated in the form of a dividend or other distribution to the cfc’s u s shareholders sec_881 and sec_882 59_tc_338 see also s rept no pincite 1962_3_cb_703 however under sec_951 a u s shareholder must include in gross_income for the current taxable_year its pro_rata share of certain items attributable to the cfc regardless of whether any distribution was actually made this includes the amount determined under sec_956 see sec_951 and b the amount determined under sec_956 with respect to a u s shareholder for the taxable_year is the lesser_of the shareholder’s pro_rata share of the average amount of united_states_property held by the cfc during the taxable_year less the amount of any previously_taxed_earnings_and_profits described in sec_959 with respect to that shareholder or the shareholder’s pro_rata share of the cfc’s applicable_earnings as described in sec_956 sec_956 generally the amount taken into account with respect to any property that is united_states_property under sec_956 is its adjusted_basis reduced by any liability to which the property is subject id flush language sec_956 defines united_states_property that will cause an inclusion for a u s shareholder if held directly or indirectly by the cfc during the taxable_year united_states_property includes a tangible_property located in the united_states b the stock of a domestic_corporation c the obligation of a united_states_person and d certain intangible_property acquired or developed by the cfc for use in the united_states sec_956 sec_956 provides a list of exceptions for items that would otherwise qualify as united_states_property under sec_956 property specifically excepted from the definition of united_states_property includes eg obligations of the united_states and property located in the united_states which is purchased in the united_states for export to or use in foreign countries see sec_956 and b sec_956 provides that a cfc shall under regulations prescribed by the secretary be considered as holding an obligation of a united_states_person if the cfc is a pledgor or guarantor of such obligation regulations prescribe in general when a cfc’s pledge or guaranty will be considered the same as holding the underlying obligation and the amount of any obligation considered to be held for purposes of determining the amount of united_states_property held by the cfc as a result of its pledge or guaranty see eg sec_1_956-1 sec_1_956-2 income_tax regs as in effect for the tax years in issue sec_1_956-2 income_tax regs provides that any obligation of a united_states_person with respect to which a controlled_foreign_corporation is a pledgor or guarantor shall be considered for purposes of sec_956 to be united_states_property held by such controlled_foreign_corporation emphasis added under regulations that address indirect pledges and guaranties a cfc whose assets serve even though indirectly as security for the performance of an obligation of a united_states_person will be considered a pledgor or guarantor of that obligation sec_1_956-2 income_tax regs a cfc is not treated as holding united_states_property under the general_rule of sec_1_956-2 income_tax regs if it makes a pledge or guaranty of an obligation of a united_states_person and that person is a mere conduit in a financing_arrangement sec_1_956-2 income_tax regs sec_1_956-1 income_tax regs provides rules for determining the amount attributable to united_states_property taken into account under sec_956 and sec_1_956-1 income_tax regs provides the rule for pledges and guaranties as in effect for the tax years in issue sec_1_956-1 income_tax regs provides that the amount taken into account with respect to any pledge or guarantee shall be the unpaid principal_amount on the applicable determination_date of the obligation with respect to which the controlled_foreign_corporation is a pledgor or guarantor emphasis added respondent contends that the applicable regulations and the undisputed facts of this case support the determined income inclusions without the need for additional fact finding it is undisputed that the cfcs guaranteed obligations the sig notes of a united_states_person sig and that sihp was during the tax years in issue a u s shareholder that owned or was considered as owning of both cfcs’ stock respondent contends that the general_rule of sec_1_956-2 income_tax regs applies to the cfcs’ guaranties and the cfcs are accordingly considered to have held the underlying obligations under sec_956 respondent contends that the amount of the united_states_property considered held by each cfc equaled the unpaid principal amounts of the sig notes as of the close of each quarter for which the cfcs remained guarantors see sec_1 e income_tax regs the sig notes remained outstanding and the cfcs remained guarantors under the argsa from date at least through date respondent contends that the amounts determined under sec_956 that should be included in sihp’s gross_income under sec_951 are limited in this case to the cfcs’ respective applicable_earnings for the tax years in issue the average unpaid principal amounts of the sig notes during the tax years in issue exceeded the cfcs’ applicable_earnings for those years as calculated under sec_956 the parties have stipulated the cfcs’ applicable_earnings for the tax years in issue petitioner contends and respondent does not dispute that sec_956 is not self-executing and that the applicability of sec_951 and the amount of the income inclusions at issue can be determined only by reference to regulations promulgated by the department of the treasury treasury specifically sec_1_956-2 and sec_1_956-1 income_tax regs petitioner’s principal argument on which its motion for summary_judgment rests is that these regulations are invalid petitioner contends that in the absence of valid regulations the income inclusions determined by respondent cannot be sustained ii validity of regulations petitioner contends that the subject regulations are arbitrary and capricious under principles of administrative law it contends that in the process of promulgating the regulations treasury failed to engage in reasoned decisionmaking or to provide a reasoned explanation for the agency’s actions see 463_us_29 it further contends that the regulations are arbitrary and capricious in substance and the rules embodied therein represent an unreasonable policy choice in light of the delegating statute and its legislative_history see 467_us_837 respondent contends that the regulations are entitled to deference under chevron and are valid summary_judgment is an appropriate vehicle for determining the validity of regulations see eg altera corp subs v commissioner 145_tc_91 to address petitioner’s arguments we must review in detail the history of the subject regulations a relevant legislative_history and administrative record revenue act of treasury promulgated the regulations at issue following the passage of the revenue act of act pub_l_no sec_12 sec_76 stat pincite which enacted sec_951 and sec_956 as part of subpart_f of part iii subchapter_n chapter of the code subpart_f as amended pursuant to sec_951 u s shareholders were required to include in gross_income their pro_rata shares of a cfc’s increase_in_earnings_invested_in_united_states_property with that amount determined under the provisions of sec_956 united_states_property was defined in sec_956 and included the same four categories of property including obligations of united_states persons provided for currently under sec_956 sec_956 a - f excepted certain items or transactions from the definition of united_states_property sec_956 concerning the treatment of cfc pledges and guaranties of obligations of united_states persons was identical to the provision currently enacted as sec_956 the code sections making up subpart_f sec_951 through were enacted in response to perceived abuses by u s taxpayers through the use of cfcs see 60_tc_917 in subpart_f congress has singled out a particular class of taxpayers u s shareholders whose degree of control_over their foreign_corporation allows them to treat the corporation’s undistributed_earnings as they see fit generally congress intended that sec_951 and sec_956 would operate to prevent the repatriation of income to the united_states in a manner which does not subject it to u s taxation h_r rept no pincite 1962_3_cb_405 the report of the senate_finance_committee accompanying the act noted that g enerally untaxed cfc earnings_invested_in_united_states_property are taxed to u s shareholders on the grounds that the use of such funds for domestic investment is a benefit which is substantially the equivalent of a dividend being paid to them s rept no supra pincite c b pincite congress provided specific exceptions under sec_956 because in its belief these items although technically investments in domestic property constituted normal commercial transactions without the intention to permit the cfc’s funds to remain in the united_states indefinitely s rept no supra pincite c b pincite proposed and final regulations on date treasury issued a notice of proposed rulemaking which set forth and solicited public comment on a package of regulations proposed under sec_955 sec_956 and sec_957 fed reg date written comments received in connection with the proposed rulemaking included some relating to the proposed_regulations under sec_956 none of these comments raised concerns specifically as to the rules for pledges and guaranties in sec_1_956-2 and sec_1_956-1 proposed income_tax regs fed reg date the american bar association section of taxation submitted one comment that referenced the general_rule as to the treatment of pledges and guaranties and which suggested that the proposed exception for guaranties made pursuant to conduit arrangements should be broadened a public hearing was held on date on date treasury adopted as final the proposed_regulations under sec_956 subject_to certain changes t d c b part the preamble to the treasury_decision stated the final regulations were promulgated to conform the income_tax regulations to sec_956 of the internal_revenue_code of as added by sec_12 of the revenue act of and stated they were adopted a fter consideration of all such relevant matter as was presented by interested persons regarding the rules proposed id the treasury_decision stated that the regulations were issued under the authority contained in sec_7805 id c b part pincite sec_1 c and e income_tax regs were adopted substantially unchanged from the proposed_regulations the exception for cfc guaranties made pursuant to conduit financing arrangements was extensively revised and broadened compare sec_1_956-2 proposed income_tax regs fed reg date with t d c b part pincite statutory amendments the omnibus_budget_reconciliation_act_of_1993 obra pub_l_no 107_stat_312 modified the structure and operating rules of sec_956 h_r rept no pincite 1993_3_cb_167 sec_951 and sec_956 were amended to read in their current forms see obra secs a c stat pincite obra did not amend substantively the code sections defining united_states_property or requiring generally that pledgors or guarantors of obligations of united_states persons be treated as holding such property obra redesignated sec_956 defining united_states_property and c relating to pledges and guaranties as sec_956 and d respectively but otherwise it reenacted those two provisions fully for the tax years in issue the rules under sec_1_956-2 and sec_1_956-1 income_tax regs were the same as the final rules adopted in b analysis under principles of administrative law legislative rules and apa sec_553 a distinction is drawn in administrative law between interpretive and substantive or legislative agency rules an interpretive rule merely clarifies or explains preexisting substantive law or regulations 61_f3d_170 3d cir a legislative rule by contrast creates rights assigns duties or imposes obligations the basic tenor of which is not already outlined in the law itself 34_f3d_1255 3d cir quoting 965_f2d_1175 1st cir legislative rules unlike interpretive rules have the force and effect of law 441_us_281 see also 327_f3d_223 3d cir the regulations at issue are legislative rules the adjustments determined for sihp’s income can only be sustained on the basis that the regulations properly apply to the cfcs’ guaranties and we would be unable to determine whether and in what amount the guaranties should cause an income inclusion for sihp for the tax years in issue absent the rules expressed in the regulations thus they impose obligations not specifically outlined in the governing statute in promulgating the regulations treasury invoked sec_7805 under which it is delegated authority to prescribe all needful rules and regulations for the enforcement of the code such regulations carry the force of law and the code imposes penalties for failing to follow them see altera corp v commissioner t c pincite legislative rules because they create new law rights or duties are subject_to the notice and comment requirements of the administrative_procedure_act apa u s c sec_553 414_f3d_486 3d cir pursuant to apa sec_553 and c an agency promulgating regulations by informal rulemaking must publish a notice of proposed rulemaking in the federal_register provide interested persons an opportunity to participate through submission of written data views or arguments and a fter consideration of the relevant matter presented incorporate in the rules adopted a concise general statement of their basis and purpose these procedures are intended to assist judicial review and to provide fair treatment for persons affected by a rule 567_f2d_9 d c cir the administrative record reflects that treasury’s rulemaking for the legislative rules at issue complied with the requirements of apa sec_553 petitioner does not dispute that the agency properly promulgated the regulations by notice and comment nevertheless we reach a determination as to this issue and it is relevant insofar as petitioner contends that the agency’s procedures in promulgating the regulations were inadequate petitioner contends that treasury failed to satisfy the reasoned decisionmaking requirement and the reasoned explanation requirement procedural requirements beyond notice and comment congress may provide in the governing statute that rules thereunder are to be promulgated pursuant to more formal procedures than those required under apa sec_553 see apa sec_553 sec_556 sec_557 see also 406_us_742 however absent a specific congressional directive the supreme court has held that generally speaking apa sec_553 established the maximum procedural requirements which congress was willing to have the courts impose upon agencies in conducting rulemaking procedures vt yankee nuclear power corp v natural res def council inc 435_us_519 see also fcc v fox television stations inc 556_us_502 the apa sets forth the full extent of judicial authority to review executive agency action for procedural correctness there may be circumstances that justify a court in overturning agency action because of a failure to employ procedures beyond those required by apa sec_553 however such circumstances are extremely rare vt yankee u s pincite apa sec_706 provides that a reviewing court shall in all cases hold unlawful and set_aside agency action that is arbitrary capricious an abuse_of_discretion or otherwise not in accordance with law pursuant to this standard an agency must articulate a satisfactory explanation for its action state farm u s pincite we must determine in the light of that explanation whether the agency’s decision was based on a consideration of the relevant factors and whether there has been a clear error of judgment 419_us_281 quoting 401_us_402 abrogated on other grounds by 430_us_99 the scope of our review is a narrow one and the court is not empowered to substitute its judgment for that of the agency id although a court cannot provide a reasoned basis for the agency’s decision if the agency itself did not provide one a court must uphold a decision of less than ideal clarity if the agency’s path may reasonably be discerned id pincite petitioner relies on state farm in arguing that an agency is bound in every case to meet the reasoned decisionmaking and reasoned explanation requirements and that treasury’s procedures failed to satisfy these requirements in respect of the final rules adopted for pledges and guaranties in state farm the supreme court held that an agency’s decision to rescind a prior regulation was arbitrary and capricious under apa sec_706 in so holding the supreme court concluded that the agency’s action was arbitrary and capricious because it failed to present an adequate basis and explanation for its decision state farm u s pincite the supreme court wrote normally an agency rule would be arbitrary and capricious if the agency has relied on factors which congress has not intended it to consider entirely failed to consider an important aspect of the problem offered an explanation for its decision that runs counter to the evidence before the agency or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise id pincite treasury’s actions in promulgating the regulations at issue must be set_aside if its procedures failed to satisfy the general standard under apa sec_706 however the facts surrounding the agency action in state farm are inapposite and the concerns that led the court in that case to review more stringently the agency’s process are not presented here the agency action in state farm u s pincite represented a clear and abrupt reversal in agency policy and the earlier policy was supported by a substantial body of facts developed by the agency itself a number of facts continued strongly to support the initial rule over the rescission and it was significant in the court’s view that congress intended all agency findings under the governing statute to be supported by ‘substantial evidence on the record’ id pincite the court stated that an agency changing its course must supply a reasoned analysis id pincite quoting 444_f2d_841 d c cir moreover the court found that the agency’s decision to rescind the rule failed to consider an obvious modification that would have left the rule in place and continued to promote the statute’s purpose see id pincite congress had expressly stated its intention that safety shall be the overriding consideration in the issuance of standards under the governing statute and the court suggested the agency may have given improper weight to other factors in its analysis id pincite under the circumstances in state farm the supreme court concluded that the agency must provide a more extensive reasoned analysis and explanation in order to demonstrate that its actions were not arbitrary capricious or otherwise not in accordance with the law in remanding the matter to the agency the court stated that in the light of specific limitations of the record the agency’s explanation was not sufficient to enable us to conclude that the rescission was the product of reasoned decisionmaking id pincite the court rejected the notion that in reviewing the agency’s action under apa sec_706 it was impos ing additional procedural requirements upon the agency state farm u s pincite citing vt yankee u s the regulations at issue did not reverse previously settled agency policy and they were not promulgated contrary to facts or analysis that supported a different outcome treasury’s rulemaking in this case differs fundamentally from the agency action in state farm because treasury’s decision did not and could not purport to rely on findings_of_fact treasury’s actions promulgating the rules for pledges and guaranties reflect at most the implementation of a policy judgment the administrative record reflects that no substantive alternatives to the final rules were presented for treasury’s consideration during the rulemaking process the agency did not act arbitrarily or capriciously by failing to address contrary viewpoints or findings_of_fact that were never developed or presented petitioner contends that the regulations are not the product of reasoned decisionmaking because treasury failed to consider during the rulemaking important aspect s of the problem associated with cfc pledges and guaranties see id pincite petitioner provides a list of factors that it contends are relevant as to whether a given cfc guarantee can be considered a repatriation of earnings petitioner contends that the agency was obligated under the governing statute to weigh and balance these factors and possibly others to promulgate rules consistent with the underlying purposes of sec_956 we do not agree that an on-the-record consideration of any particular factors is required for rulemaking under sec_956 the plain text of the statute does not require the agency to engage in a process of balancing or to provide an analysis of its decisionmaking based on the factors that petitioner identifies congress stated clearly in the statute that any cfc guarantor of any obligation of a united_states_person shall be considered as holding the underlying obligation with respect to other issues concerning guaranties that are not addressed expressly in the statute for example the amount of united_states_property that the cfc should be treated as holding by reason of its guaranty congress used broad delegative terms in sec_956 generally we would not impose additional procedural requirements on any administrative_proceeding without a clear indication that congress intended additional procedures to be observed apart from the text of the statute nothing in the statute’s legislative_history directs treasury to promulgate rules in consideration of whether a particular guaranty causes an effective repatriation or in consideration of economic realities as petitioner sees them the purpose underlying sec_956 generally is to prevent the repatriation of income h_r rept no supra pincite c b pincite that is substantially the equivalent of a dividend to the u s shareholder s rept no supra pincite c b pincite however we find no support for the proposition that congress intended rulemaking under sec_956 to focus minutely on economic factors which may or may not indicate in what amount a particular guaranty constitutes a repatriation of earnings we do not conclude that congress intended the amount deemed effectively repatriated to be an important aspect of the problem associated with guaranties that treasury was bound to consider or give special weight to in promulgating rules under the statute see state farm u s pincite the preamble to the final rules stated that they were intended to conform the income_tax regulations to sec_956 which they clearly and straightforwardly do put simply the statute at issue and the rules adopted did not require treasury to engage in the level of detailed empirical analysis that the court in state farm found was integral to the rulemaking petitioner’s focus on the reasoned decisionmaking and reasoned explanation requirements as it understands those requirements to be taken from state farm is misplaced treasury’s rulemaking complied with the requirements of notice and comment under apa sec_553 apa sec_706 imposes in addition a general ‘procedural’ requirement of sorts by mandating that an agency take whatever steps it needs to provide an explanation that will enable the court to evaluate the agency’s rationale at the time of decision 496_us_633 we conclude that treasury’s procedures in this case satisfied this general requirement and were not arbitrary or capricious the agency’s path may reasonably be discerned bowman transp u s pincite treasury’s proposed and final rules concerning cfc pledges and guaranties sought to implement the clear wording of the statute and to equate the treatment of these transactions with the treatment of items of united_states_property under the statute the generally applicable rule in sec_1_956-2 income_tax regs that any obligation of a united_states_person with respect to which a cfc is a guarantor shall be treated as united_states_property held by the cfc restates in essence the text of the statute the agency made no clear error in judgment by adopting the rule that it did rather than undertaking to consider a more nuanced rule_of the sort petitioner advocates to govern a deemed effective repatriation as we have said the statute makes no mention of an effective repatriation standard and we can find no grounds for imposing such a standard the rule for the amount of united_states_property considered held by reason of a pledge or guaranty likewise adheres to the text of the statute under sec_1_956-1 income_tax regs the amount treated as held by the cfc for its guaranty will in most cases equal the amount the cfc would have been treated as holding had it held the underlying obligation ie the principal_amount of the obligation the general_rule under sec_956 is that the amount of any united_states_property taken into account is its adjusted_basis and ordinarily a lender takes a basis in a loan equal to the unpaid principal_amount treasury’s decisionmaking was uncomplicated but that does not mean the administrative process was arbitrary or otherwise deficient under the standard articulated in apa sec_706 no comments significant or otherwise were raised by interested parties during the rulemaking as a reviewing court we cannot demand that an agency engage in and document an exhaustive review of hypothetical aspect s of the problem that no one has raised and which congress has not asked the agency to consider so long as an agency’s rationale can reasonably be discerned and that rationale coincides with the agency’s authority and obligations under the relevant statute a reviewing court may not broadly require an agency to consider all policy alternatives in reaching decision state farm u s pincite petitioner cites certain agency documents a field_service_advice memorandum fsa and a notice of proposed rulemaking nprm to argue that respondent and treasury have themselves recognized that the regulations at issue are inadequate these documents acknowledge that the regulations prescribe no treatment for situations in which multiple cfcs guarantee the same obligation the fsa noted that where multiple cfcs of the same u s shareholder have guaranteed the same obligations computing the income inclusion under the current rules may produce strange results field_service_advice date similarly the preamble to the nprm explains that t o the extent that the cfcs have sufficient earnings_and_profits there could be multiple sec_951 inclusions with respect to the same obligation that exceed in the aggregate the unpaid principal_amount of the obligation fed reg date the preamble also stated that treasury and respondent were considering prescribing new regulations to allocate the amount of the obligation among the relevant cfcs so as to eliminate the potential for multiple inclusions and instead limit the aggregate inclusions to the unpaid principal_amount of the obligation id petitioner contends that these statements constitute a functional admission that whether and how regulations under sec_956 should apply to situations involving multiple guarantors are questions that were never considered by the existing regulatory scheme in treasury issued final regulations without proposing or adopting any additional provisions to limit the income inclusion in cases of multiple guarantors t d 2016_48_irb_751 see crestek inc v commissioner t c __ __ n slip op pincite date discussing nprm and final regulations the documents that petitioner cites are nonprecedential and we would not rely on them for a point of law even if we found their reasoning applicable and persuasive see sec_6110 a written_determination may not be used or cited as precedent 108_tc_107 proposed_regulations accorded no more weight than a litigating position in any event the specific situation addressed in both documents is distinguishable from petitioner’s case the income inclusions that respondent determined for sihp do not exceed the unpaid principal_amount of the guaranteed obligations we also cannot agree that an agency’s recognition that regulations make no provision for or may produce strange results under particular circumstances is an admission of their inadequacy as a matter of administrative law treasury is authorized to reconsider and revise regulations under the code provided that adequate procedures are employed and the agency’s decision to revisit the rules for pledges and guaranties should not be taken as evidence that the current rules are in some way procedurally defective on the basis of the administrative record we conclude that treasury’s decisionmaking was based on a consideration of relevant factors under the statute and there was no clear error in judgment the agency’s procedures in promulgating the regulations at issue were sufficient we would not invalidate them on that basis the agency’s construction of the statute the regulations reflect treasury’s determination that sec_956 supports and congress intended a broad rule which treats any cfc guarantor of any nonexcepted obligation of a united_states_person as holding united_states_property equal to the principal value of the obligation guaranteed ordinarily a court reviews an agency’s substantive construction of a statute the agency is charged with administering under the two-step test provided in chevron the deferential standard under chevron is appropriate when it appears that congress delegated authority to the agency generally to make rules carrying the force of law and that the agency interpretation claiming deference was promulgated in the exercise of that authority 562_us_44 quoting 533_us_218 the applicability of chevron_deference does not turn on whether congress’s delegation of authority was general or specific id t he ultimate question is whether congress would have intended and expected courts to treat the regulation as within or outside its delegation to the agency of ‘gap-filling’ authority id pincite quoting 551_us_158 congress intended to delegate to treasury the authority to promulgate rules under sec_956 having the force and effect of law and its rulemaking was an exercise within the statutory grant of authority id quoting long island care u s pincite treasury promulgated the regulations pursuant to an express directive in the governing statute and pursuant to the general rulemaking authority established in sec_7805 as the agency was bound to do for legislative rules it followed procedures prescribed under apa sec_553 it is fair to assume congress contemplates administrative action with the effect of law when it provides for a relatively formal administrative procedure tending to foster fairness and deliberation mead u s pincite and the use of notice and comment by the agency is a ‘significant’ sign that a rule merits chevron_deference mayo found u s pincite quoting mead u s pincite- the regulations are properly analyzed under chevron under step one of chevron u s pincite we ask whether congress has directly spoken to the precise question at issue if the intent of congress is clear that is the end of the matter id here neither party contends that congress has spoken directly as to the relevant issues ie when and in what amount a cfc will be considered to hold united_states_property under sec_956 as a result of its guaranty of an obligation of a united_states_person the statute provides only that a pledge or guaranty shall be treated as holding the underlying obligation under regulations prescribed by the secretary sec_956 none of the ordinary tools of statutory construction leads us to conclude that congress has clearly expressed its intent as to what form those regulations should take or the substance that should be reflected in them see city of arlington v fcc 569_us_290 where as here the statute does not address the question at issue step two of chevron u s pincite asks only whether the agency’s position is based on a permissible construction of the statute in respect of a legislative_regulation we will defer to the agency’s construction of the statute unless it is ‘arbitrary and capricious in substance or manifestly contrary to the statute’ mayo found u s pincite if the agency’s choice represents a reasonable accommodation of conflicting policies that were committed to the agency’s care by the statute we should not disturb it unless it appears from the statute or its legislative_history that the accommodation is not one that congress would have sanctioned chevron u s pincite quoting 367_us_374 petitioner contends that the regulations under sec_956 cannot pass the deferential test under chevron step two because the rules embodied therein are an unreasonable policy choice in the light of the statute and its legislative_history petitioner contends that congress was only concerned in sec_956 with investments in u s property that repatriate earnings and that a cfc’s guaranty of an obligation of a united_states_person is not necessarily a transaction that repatriates earnings petitioner argues that whether and the degree to which any given guarantee can be considered to have repatriated earnings are necessarily fact-specific questions which will depend on the ‘facts and circumstances’ of the transaction treasury’s regulations do not inquire whether a particular guaranty has effectively repatriated earnings_of the cfc to its u s shareholders the generally applicable rules treat any cfc guarantor as holding united_states_property equal to the full unpaid principal_amount of the obligation petitioner argues that the regulations are too blunt and too mechanical and fail to reasonably implement the nuanced approach for pledges and guaranties that it contends congress intended the general rules for the treatment of pledges and guaranties are not at odds with the wording of the statute nothing in the plain text of sec_956 indicates that any particular pledge or guaranty shall not be treated as holding the underlying obligation or directs that the amount considered to be held should be only the amount that can be deemed to be repatriated that congress provided guaranties should be treated under regulations prescribed by the secretary does not establish as petitioner contends that treasury was bound to devise a more nuanced or facts-and-circumstances approach for such transactions special operating rules for the treatment of pledges and guaranties as united_states_property would be required in any event because the general_rule in the statute for the amount of united_states_property considered held by the cfc could not apply with respect to a pledge or guaranty see sec_956 flush language eg a guarantor ordinarily takes no basis in the guaranty we also cannot conclude as petitioner contends that the rules promulgated by the agency are contrary to congress’ intent congress generally intended that sec_956 should cause income inclusions where cfc funds are directed to invest in united_states_property for the benefit of its u s shareholders such that those funds are effectively repatriated for use by the shareholders a cfc’s guaranty of a u s shareholder’s or related party’s debt clearly benefits the u s shareholder and nothing in the statute or its legislative_history suggests that congress expected treasury to craft ad hoc exceptions based on some sort of facts-and-circumstances test from the legislative_history of sec_956 it appears congress itself thought extensively about which transactions should be treated the same as repatriations of cfcs’ earnings congress has provided for numerous exceptions to the definition of united_states_property and it has added and removed exceptions over time to reflect its evolving conception of what should or should not require an income inclusion as an investment of earnings in united_states_property see tax reform act of pub_l_no sec_1021 sec_90 stat pincite9 deficit_reduction_act_of_1984 pub_l_no sec_801 stat pincite taxpayer_relief_act_of_1997 pub_l_no sec a stat pincite american_jobs_creation_act_of_2004 pub_l_no sec_407 sec_118 stat pincite9 some of these exceptions effect the application of sec_956 for example by providing that certain obligations are not to be included within the definition of united_states_property see sec_956 f j l see also fed reg date t he general exceptions to the definition of united_states_property would apply to the obligation treated as held by the cfc by reason of its guaranty however congress has never undertaken to amend or provide exceptions to sec_956 directly congress’ decision to leave the terms of sec_956 unchanged may reflect its understanding that a cfc ordinarily would not be directed by its shareholders to provide a guaranty unless the guaranty was necessary and of value to the borrower and the shareholders petitioner argues extensively that the regulations cause income inclusions for u s shareholders contrary to commercial and economic reality petitioner in particular criticizes the regulations for failing to address circumstances in which a cfc is one of several guarantors of a single obligation petitioner contends that if multiple guaranties support the underlying obligation then no one could reasonably conclude that the entire unpaid principal was obtained solely as a result of the cfc ’s guarantee petitioner also points out that in situations where as here multiple cfcs have guaranteed the same obligation the regulations will treat each cfc as holding united_states_property equal to the full unpaid principal_amount of the obligation the regulations therefore could allow under certain circumstances which are not present here multiple arguably duplicative income inclusions that exceed in the aggregate the principal value of the obligation even accepting petitioner’s arguments concerning economic reality and the strange results that the regulations may yield under particular circumstances it must be said that an agency is not required to take account of and make special accommodation for every scenario in which its rules may apply regulation like legislation often requires drawing lines mayo found u s pincite undoubtedly as petitioner has shown alternatives exist to and improvements might be imagined for the generally applicable rules for cfc pledges and guaranties nevertheless we do not sit as a committee of revision to perfect the administration of the tax laws 389_us_299 and we will uphold regulations that have a reasonable basis in the statutory history even where the taxpayer’s challenge to a regulation’s policy has logical force 434_us_528 the role of the judiciary in cases of this sort begins and ends with assuring that the commissioner’s regulations fall within his authority to implement the congressional mandate in some reasonable manner correll u s pincite the regulations implemented a reasonable interpretation of sec_956 ie that in the ordinary case a pledgor or guarantor should be treated as holding the underlying obligation exceptions are provided for direct and indirect transactions in the statute and in the regulations and taken as a whole treasury’s rules are a reasoned approach to determining when and in what amount a guaranty should be treated as an investment_in_united_states_property under sec_956 it is not manifestly contrary to the statute or unreasonable that the agency would choose a broad baseline rule for pledges and guaranties as opposed to a less administrable case-by-case approach certainly nothing in sec_956 indicates that any particular type of pledge or guaranty should not be treated as holding the obligation or directs that the amount considered to be held should be only the amount that can be deemed to be repatriated on the basis of our own exhaustive review we conclude that at no point in the extensive legislative_history of sec_956 has congress expressed a desire that inclusions for guaranties be determined case by case we uphold the validity of sec_1_956-2 and sec_1_956-1 income_tax regs treasury promulgated these regulations by procedures that satisfy the requirements of the apa and the substance of the regulations is based on a permissible construction of sec_956 entitled to deference under chevron while neither antiquity nor contemporaneity with a statute is a condition of a regulation’s validity it is relevant to petitioner’s case that the contested regulations had existed for nearly years at the time the cfcs executed the guaranty transaction at issue see 517_us_735 congress reenacted sec_956 unamended in obra at which time congress had revisited in depth the operating rules under sec_956 congress expressed no concerns as to the current rules governing pledges and guaranties which strongly suggests that it did not view treasury’s construction of sec_956 as unreasonable or contrary to the law’s purpose see 499_us_554 iii petitioner’s other contentions petitioner contends that in the event we conclude as we have that the regulations are valid we should not grant respondent’s motion for summary_judgment it contends that respondent’s proposed application of the regulations determining income inclusions of the full amount of the cfcs’ applicable_earnings is inconsistent with the purpose of sec_956 it contends that an examination of facts and circumstances beyond those identified by respondent as dispositive is necessary to determine whether in substance the cfcs’ guaranties repatriated earnings in the amounts of the asserted inclusions petitioner avers and submits affidavits of its officers in support of the following facts sig and its domestic affiliates maintained assets in accounts at merrill lynch of approximately twice the value of the sig notes merrill lynch never indicated during negotiations that sig required additional credit support from entities that held assets outside of merrill lynch the cfcs had combined net assets of dollar_figure million at the time the sig notes were executed which was not enough to satisfy repayment of the sig notes and merrill lynch requested that the cfcs sign the argsa only because it wanted to ring fence the sig affiliates from which it could seek repayment in the event of a default and to prevent leakage of assets held in merrill lynch accounts petitioner contends that these facts show the cfcs’ guaranties had no substantial effect on sig’s ability as a credit matter to receive the funds represented by the sig notes petitioner contends that the cfcs’ earnings had nothing to do with merrill lynch’s decision to lend to sig neither sec_956 nor the regulations inquire into the relative importance that a creditor attaches to a guaranty crestek inc v commissioner t c at __ slip op pincite a guarantor’s precise financial condition or the likelihood that it would be able to make good on its guaranty are irrelevant in determining under the regulations whether the guaranty gives rise to an investment_in_united_states_property id at __ slip op pincite the regulations applicable in this case provide categorically that any obligation of a united_states_person with respect to which the cfc is a guarantor shall be considered united_states_property held by the cfc in the amount equal to the unpaid principal they make no provision for reducing the sec_956 inclusion by reference to the guarantor’s financial strength or its relative creditworthiness id at __ n slip op pincite- in effect petitioner asks us to insert into the regulations an added requirement that the facts and circumstances should demonstrate an actual repatriation has occurred in respect of the amounts guaranteed petitioner contends that a facts-and-circumstances analysis is warranted because the regulations as promulgated do not provide any special treatment for guaranties of obligations for which there are multiple guarantors petitioner contends that we are required under these circumstances to apportion the amount of u s property held by each cfc guarantor among themselves and the remaining guarantors the pledgors and the obligor the rules do not allow apportioning a guaranteed obligation among guarantors or the obligor and the statute does not require that the rules implement an approach focusing strictly on the amount of an obligation that a particular guarantor effectively repatriates the cfcs both gave their guaranties of obligations of a united_states_person and the regulations accordingly treat each as holding united_states_property equal to the unpaid principal of those obligations we cannot ignore or alter regulations that are an authoritative and reasonable interpretation of the governing statute the amounts determined under sec_956 are capped by the statute at the cfcs’ applicable_earnings for the tax years in issue those amounts are not in dispute and do not exceed the value of the underlying obligations lastly petitioner contends that the structure of the argsa and related agreements should affect our application of the rules to the guaranties in this case petitioner argues that the most a given cfc could be deemed to have ‘invested’ in u s property is that amount for which it agreed to be ultimately responsible and pursuant to their rights of contribution under the pro_rata provision petitioner avers that the cfcs would have been entitled to approximately reimbursement for any amounts paid as a result of the guaranties petitioner fails to explain how the related agreements should affect our analysis we cannot view the pro_rata provision as offsetting the cfcs’ guaranties the cfcs undertook unlimited guaranties for full payment of the sig notes and first and foremost the cfcs would have been legally obligated to make any such payments out of their own earnings_and_profits their rights to contribution from other guarantors were subsidiary to their obligations under the guaranties it is questionable whether in the event that they had been required to make payments pursuant to their guaranties the cfcs would have been seriously inclined to enforce the pro_rata provision against their commonly owned affiliates petitioner vigorously contends that many pledges and guaranties and particularly the guaranties at issue are not necessary for the receipt of the loan by the borrower and for that reason a cfc guarantor should not be automatically treated as repatriating earnings for use by its u s shareholders petitioner’s argument however highlights the solution to the predicament in which it now finds itself if a guaranty by a cfc is unnecessary then it need not be made and the application and effects of the regulations under sec_956 will be avoided this court has issued previously two opinions concerning income inclusions determined under the provisions of sec_956 and the subject regulations 68_tc_979 and crestek inc v commissioner t c __ date in neither case did the taxpayer challenge the validity of the regulations the dearth of caselaw on this topic is unsurprising because as petitioner acknowledges the rules promulgated for pledges and guaranties lend themselves to easy tax planning petitioner may not undo the effects of its transaction because in this particular instance the generally applicable rules generate an outcome that is unfavorable to it the regulations apply and support the income inclusions that respondent determined for sihp under sec_951 and sec_956 we sustain respondent’s determinations in the fpaas that sihp has income inclusions for the tax years in issue equal to the cfcs’ applicable_earnings iv applicable tax_rate the remaining issue for our consideration involves the tax_rate applicable to sihp’s income inclusions petitioner contends that any amount included in sihp’s gross_income attributable to sihl sehl’s guaranty should be qualified_dividend_income under sec_1 respondent determined in the fpaas that the income inclusions were not qualified_dividend_income and are properly taxed as ordinary_income as enacted in the jobs and growth tax relief reconciliation act of pub_l_no sec_302 sec_117 stat pincite sec_1 provides preferential tax_rates for qualified_dividend_income qualified_dividend_income includes dividends received during the taxable_year from qualified foreign_corporations sec_1 a qualified_foreign_corporation is generally either a corporation incorporated in a possession_of_the_united_states or a corporation eligible for the benefits of a comprehensive_income_tax_treaty with the united_states sec_1 sts was organized under the laws of the cayman islands which has no comprehensive_income_tax_treaty with the united_states respondent asserts that sts was not a qualified_foreign_corporation during the tax years in issue and petitioner does not contend otherwise accordingly we will consider only whether any income inclusion attributable to sihl sehl’s guaranty may be taxed at the preferential rates under sec_1 this court has held previously that income inclusions required under sec_951 and sec_956 do not constitute qualified_dividend_income under sec_1 137_tc_174 aff’d 722_f3d_306 5th cir in rodriguez v commissioner t c pincite the cfc owned real and tangible_personal_property located in the united_states and we held that an income inclusion under sec_951 was not a dividend to the cfc’s u s shareholders as that term is defined in sec_316 we reasoned that the sec_951 inclusion involves no change in ownership of corporate property and the inclusion arises not from any distribution_of_property by the cfc but rather from its investment of earnings in specified property id petitioner contends that our result in rodriguez should not control here petitioner contends that the holding in rodriguez applied specifically to cfc investments in real or tangible united_states_property which did not result in any distribution because the cfc continued to hold the property and the shareholders received no property petitioner argues that in this case the justification for the income inclusions was a deemed investment in property which necessarily involve d a constructive or deemed_distribution in the form of the cash that sig received from merrill lynch petitioner contends that we should distinguish rodriguez as being decided narrowly on its facts and conclude in this case that deemed or constructive dividends were paid out of the cfcs’ earnings_and_profits to which sec_1 may apply we find no merit in the distinctions that petitioner attempts to draw from rodriguez there is no reason to differentiate between an investment in tangible united_states_property under sec_956 and what petitioner terms a deemed investment by reason of a guaranty under sec_956 in either case the u s shareholder obtains the use and benefit of domestic property through the use of cfc earnings when a cfc guarantees a loan the shareholder or a related_party benefits from the use of loan proceeds but the cfc has not distributed its earnings any more than if it had used the earnings to purchase tangible_property in this case as in rodriguez no distribution_of_property occurred from the cfcs to their u s shareholder simply put no transfer of ownership from corporation to shareholder occurred with respect to any property if we decline to interpret rodriguez as being decided narrowly on its facts then petitioner contends in the alternative that rodriguez was decided incorrectly petitioner contends that in rodriguez we disregarded our own precedent that the taxation of undistributed cfc earnings is justified because investments in united_states_property may be treated the same as deemed or constructive dividends petitioner cites 60_tc_917 a case in which we upheld the constitutionality of sec_951 and in which we wrote that sec_951 has the stated objective of treating a controlled foreign corporation’s increase in earnings invested in u s property as if it were a dividend paid to the corporation’s shareholders id pincite the fact that sec_951 in operation treats a cfc’s investment_in_united_states_property as if it were a dividend in no way establishes that the income inclusions required for shareholders thereunder actually are dividends for general purposes of the code see rodriguez v commissioner t c pincite see also klein v commissioner t c __ __ slip op pincite date muncy v commissioner tcmemo_2017_83 concluding that the distinction between ‘as if’ and ‘as’ is significant in rodriguez v commissioner t c pincite we found ample reason to conclude that absent express provision congress did not intend such inclusions to be considered dividends we cited code sections that provide under limited circumstances and for limited purposes that sec_951 inclusions should be treated the same as dividends we concluded that such careful legislative design would be rendered superfluous and unnecessary if contrary to well-established tenets of statutory construction we determined that sec_951 gives rise to a dividend in the ordinary course id see also rodriguez v commissioner f 3d pincite i f all sec_951 inclusions constituted qualified dividends then statutory provisions specifically designating certain inclusions as dividends would amount to surplusage we also concluded that the structure of sec_956 particularly as it has evolved over time strongly indicates that inclusions for investments in united_states_property do not constitute dividends under the code rodriguez v commissioner t c pincite see also rodriguez v commissioner f 3d pincite t he original version of sec_956 specifically stated that congress did not intend amounts calculated thereunder to constitute dividends it does not appear that the omission of this language from the new version of the statute was intended to change the treatment of amounts calculated under sec_956 we conclude that the rationale in rodriguez applies with equal force to the income inclusions at issue which were determined under sec_951 and sec_956 the income inclusions for the cfcs’ guaranties were not dividends received by sihp and accordingly they are not qualified_dividend_income under sec_1 absent a showing that some other characterization should apply under the code any income included in sihp’s gross_income for the tax years in issue should be treated as ordinary_income we have considered all arguments made and to the extent not mentioned we conclude that they are moot irrelevant or without merit to reflect the foregoing an order and decision will be entered granting respondent’s motion for summary_judgment and denying petitioner’s motion for summary_judgment


t c no united_states tax_court alan beckley and virginia johnston beckley petitioners v commissioner of internal revenue respondent docket no filed date petitioner wife lent funds to a corporation in which petitioner husband was a shareholder the corporation used the borrowed funds to develop a working model of web-based video conferencing software the corporation however had financial problems and was dissolved and the working model was transferred to a second corporation in which petitioner husband was a shareholder in and the second corporation made payments to petitioner wife petitioners treated a portion of the payments petitioner wife received as taxable interest_income and the balance as nontaxable repayment of funds petitioner wife lent the first_corporation on audit of petitioners’ returns respondent did not adjust petitioners’ treatment of the payments petitioner wife received from the second corporation as taxable interest_income and as nontaxable repayment of loan principal but respondent also treated percent of the payments petitioner wife received as taxable constructive distributions to petitioner husband from the second corporation held no portion of the payments petitioner wife received from the second corporation are also taxable to petitioner husband as constructive corporate_distributions steven m cyr for petitioners wesley f mcnamara for respondent swift judge respondent determined deficiencies in petitioners’ joint federal income taxes and penalties as follows year deficiency dollar_figure big_number penalty sec_6662 dollar_figure big_number the issue for decision is whether percent of interest and loan principal that petitioner virginia beckley virginia received in and also should be treated as taxable constructive corporate_distributions to petitioner alan beckley alan unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure findings_of_fact some of the facts have been stipulated and are so found at the time the petition was filed petitioners resided in oregon on date alan and robert ebert ebert incorporated computer tools inc ct as an oregon corporation for the purpose of developing computer services for graphic designers alan served as president of ct and ebert served as secretary alan and ebert were each 50-percent shareholders in ct during through ct often was short of funds for operations and for development of business products and ct borrowed from virginia at least dollar_figure using those funds ct developed a working model of web-based video conferencing software working model because of management problems ct was dissolved in on date virtualdesign net inc vdn was incorporated as a c_corporation under oregon law to succeed to ct’s business and to continue developing business products from vdn’s incorporation in until sometime in ebert was chief_executive_officer ceo of and a 50-percent_shareholder in the record does not indicate whether ct was incorporated as a c or as an s_corporation vdn alan was a vdn director and shareholder but the record does not establish alan’s percentage stock ownership_interest in vdn as vdn ceo ebert had sole signing authority over vdn’s corporate bank accounts in ct transferred the working model to vdn although the working model constituted a valuable asset to vdn the record does not indicate whether vdn paid ct any cash for the working model ct never made any repayments on the dollar_figure loan it received from virginia and although vdn received the working model from ct vdn did not execute a written loan assumption_agreement with regard to ct’s loan repayment obligation to virginia upon ct’s dissolution virginia did not make a claim against ct for repayment of the funds she lent to ct when vdn acquired the working model from ct virginia did not treat her loan to ct as a worthless loan and virginia did not claim an ownership_interest in the working model petitioners claim that alan owned only percent of vdn’s stock respondent claims that alan owned percent of vdn’s stock under or law after its dissolution in ct retained the authority to conduct business appropriate to winding up and liquidating its affairs or rev stat sec in and alan was employed by and received wages from vdn virginia was not employed by and did not perform any services for vdn in and vdn had no current or accumulated_earnings_and_profits and alan had no tax basis in his vdn stock in and vdn paid virginia dollar_figure and dollar_figure respectively the parties have stipulated and we find that vdn paid those funds to virginia as payment on her loan to ct in new management gained control of vdn and alan and ebert were terminated at a meeting of vdn’s new management vdn executives stated that they did not believe vdn was obligated to pay any additional funds to virginia and that vdn would not do so vdn’s new management did not ask virginia to return any portion of the funds it had paid her in and on a form 1099-int interest_income that vdn mailed to virginia and to respondent in early vdn characterized dollar_figure of the dollar_figure that it had paid to virginia in as interest vdn did not report the dollar_figure balance on the form 1099-int and treated it at the time as a nontaxable repayment of loan principal that did not need to be reported on the form int vdn did not report any portion of the dollar_figure as a corporate distribution to alan on a form 1099-misc miscellaneous income that vdn mailed to virginia and to respondent in early vdn reported the dollar_figure it had paid to virginia in as nonemployee compensation no portion of the dollar_figure or the dollar_figure that vdn paid virginia in and respectively was reported to respondent on a form 1099-div dividends and distributions as a corporate distribution to alan on its corporate federal_income_tax returns for both and vdn deducted as nonemployee compensation the dollar_figure and the dollar_figure it paid to virginia in each year vdn claimed no interest_expense_deduction with regard to any portion of the funds it paid to virginia in and consistent with the form 1099-int they received from vdn on their joint individual federal_income_tax return petitioners reported dollar_figure of the dollar_figure virginia received from vdn in as interest_income and petitioners treated the balance as a nontaxable repayment of loan principal for purposes of their joint individual federal_income_tax return petitioners treated the dollar_figure that virginia received from vdn in as a nontaxable repayment of loan principal petitioners reported no interest_income with respect to the dollar_figure virginia received from vdn in further on their and joint federal_income_tax returns petitioners reported no corporate distribution from vdn to alan with respect to the payments virginia received from vdn the schedule below reflects the payments virginia received from vdn vdn’s treatment of the payments to virginia on the forms vdn mailed to virginia and to respondent vdn’s treatment of the payments on its corporate federal_income_tax returns and petitioners’ treatment of the payments virginia received from vdn on or for purposes of their joint individual federal_income_tax returns payments virginia received dollar_figure big_number year vdn’s forms loan prin comp expense deduct loan int vdn’s corporate fed tax returns comp expense deduct loan prin loan int petitioners’ fed tax returns loan prin comp income int loan dollar_figure dollar_figure -- -- -- dollar_figure -- -- -- -- dollar_figure big_number dollar_figure big_number dollar_figure -- -- -- on audit of vdn’s returns for and respondent disallowed the above compensation expense deductions claimed by vdn and respondent determined that the total payments vdn made to virginia in and in constituted nondeductible constructive distributions to alan and to ebert--50 percent to alan and percent to ebert on audit of petitioners’s returns respondent did not adjust the manner in which petitioners on their joint federal_income_tax returns for and reported the payments virginia received from vdn ie for dollar_figure of interest_income and dollar_figure of loan principal and for no interest_income respondent however treated one-half of the payments virginia received from vdn ie dollar_figure in and dollar_figure in also as corporate_distributions taxable as capital_gain to alan under respondent’s audit theory vdn’s payments to virginia on her loan to ct were made without any legal_obligation to do so and only on the basis of a personal moral obligation of alan and ebert to repay virginia accordingly respondent concludes that with respect to the payments vdn made to virginia no deduction was allowable to vdn ie neither a compensation expense deduction nor an interest_expense_deduction and that although the payments virginia received represented to virginia taxable interest_income and nontaxable repayment of loan principal they also represented to alan and to ebert taxable constructive corporate_distributions opinion where corporations pay personal expenses of shareholders the shareholders may be treated as having received constructive distributions to the extent of the value thereof to the shareholders 725_f2d_1183 9th cir falsetti v commissioner the record does not indicate whether respondent actually audited ebert’s returns and charged ebert with constructive corporate_distributions with regard to any portion of the payments vdn made to virginia t c 73_tc_980 smith v commissioner tcmemo_1995_410 shareholders may be charged with constructive distributions even though the corporate payments are made to third parties and not directly to the shareholders broad v commissioner tcmemo_1990_317 hufnagle v commissioner tcmemo_1986_119 paoli v commissioner tcmemo_1985_196 as stated respondent made no adjustment to virginia’s taxable_income with respect to the payments virginia received from vdn and respondent acknowledges that if ct rather than vdn had made the payments to virginia petitioners’ reporting thereof on their and joint federal_income_tax returns would be accepted without additional adjustment the facts before us do not support respondent’s theory that vdn’s payments to virginia were made to satisfy only personal moral obligations of alan and of ebert although vdn did not execute a written loan assumption_agreement the facts establish that vdn effectively purchased the working model from ct that vdn assumed at least part of ct’s obligation to repay virginia’s loan to ct and that vdn’s payments to virginia related thereto vdn received the working model ct had developed with the funds borrowed from virginia vdn made the payments to virginia as payment on virginia’s loan to ct for vdn reported to virginia and to respondent that the payments represented interest and principal on virginia’s loan hj builders inc v commissioner tcmemo_2006_278 illustrates a typical constructive corporate distribution to a shareholder in hj builders inc a corporation made lease payments on an automobile used by the wife of the owner of the corporation the lease payments were treated as constructive corporate_distributions to the shareholder husband the wife who used the corporate automobile had no creditor or employee relationship with the corporation which would otherwise explain the lease payments in contrast the payments herein were made by vdn to virginia in connection with the precedent creditor relationship virginia had with ct to which vdn at least in part succeeded the payments herein are explained by that financial relationship the facts before us do not justify a layer of taxation to petitioners with regard to the vdn payments virginia received from vdn beyond the interest_income that petitioners reported in his posttrial brief respondent argues for the first time that even if vdn had agreed to repay virginia funds ct borrowed from her because there was no written_agreement relating to that obligation under oregon’s statute_of_frauds vdn’s obligation would not be enforceable generally under oregon’s statute_of_frauds an agreement to be responsible for or to assume a debt obligation of another will be treated as unenforceable if the agreement is not evidenced by a writing or rev stat sec_41 b however an agreement to assume a debt obligation of another may be excepted from oregon’s statute_of_frauds and may be enforced if assumption of the debt obligation was part of a purchase of the debtor’s property sandgren v cain lumber co p or feldman v mcguire p or further part performance--conduct between the parties that corroborates the existence of an oral agreement--may cause an oregon court to enforce an oral agreement if unjust enrichment would occur if the oral agreement were not enforced 474_fsupp2d_1192 d or oral agreement to make royalty payments golden v golden p 2d or oral agreement for sale of home although no written_agreement existed reflecting vdn’s obligation to repay virginia vdn’s conduct in actually making payments to virginia which related to virginia’s loan to ct and to ct’s transfer of the working model to vdn establish the loan repayment character of the payments and the principal and interest nature thereof in addition the form 1099-int that vdn mailed to virginia and to respondent for reflected that dollar_figure represented interest on a loan when vdn acquired the working model from ct the development of which had been made possible by the funds virginia lent to ct vdn received the benefit of virginia’s loan and vdn would be unjustly enriched if vdn did not repay the loan for federal_income_tax purposes the oregon statute_of_frauds does not prevent us from concluding that the funds virginia received from vdn in and constituted nothing more than interest and repayment of loan principal no portion of the funds virginia received from vdn should be treated as constructive corporate_distributions and taxed as capital_gain to alan the penalties respondent determined are moot to reflect the foregoing decision will be entered under rule vdn’s reporting on it sec_2001 and sec_2002 federal_income_tax returns of the payments to virginia as nonemployee compensation appears to have been a self-serving attempt by vdn to deduct the full amounts paid to virginia