marvel entertainment llc as successor to marvel entertainment inc f k a marvel enterprises inc and as agent for members of marvel enterprises inc and subsidiaries group petitioner v commissioner of internal revenue respondent docket no filed date meg was an affiliated_group that filed consolidated_returns on date certain meg member entities filed for bankruptcy under u s c ch and subsequently excluded cancellation of indebtedness cod income from their respective gross incomes under sec_108 for meg’s short taxable_year ending date pursuant to sec_108 meg reduced each member entity’s allocable share of consolidated_net_operating_loss cnol by each member entity’s previously excluded cod income meg carried its successor affiliated_group a dollar_figure cnol and used this amount to offset income of the successor group for its taxable years ending date and r determined deficiencies for and arguing that sec_108 required meg’s tax attribute reduction to occur at the consolidated level rather than at the individual entity level p the successor to meg forward into united_states tax_court reports and as agent for the members of the affiliated_group timely filed a petition disputing r’s determinations held where a member of a consolidated_group has excluded cod income during a consolidated_return_year before the adoption of sec_1_1502-28t temporary income_tax regs fed reg date the nol subject_to reduction pursuant to sec_108 is the entire cnol of the consolidated_group see united dominion indus inc v 532_us_822 mark j silverman michael h salama matthew d lerner and andrew f gordon for petitioner curt m rubin steven n balahtsis and lawrence l davidow for respondent opinion ruwe judge respondent determined deficiencies in peti- tioner’s federal_income_tax for its consolidated taxable return years ending date and of dollar_figure and dollar_figure respectively petitioner’s defi- ciencies result from members of its predecessor consolidated_group filing for bankruptcy under u s c chapter and realizing cancellation of indebtedness cod income for the consolidated group’s short taxable_year ending date certain members of the predecessor consolidated_group excluded the cod income from their respective gross incomes pursuant to sec_108 when subse- quently reducing net_operating_loss nol as required by sec_108 each debtor member of the consolidated_group reduced its allocable share of the group’s consolidated_net_operating_loss cnol by its previously excluded cod income this matter is before the court on the parties’ cross- motions for summary_judgment pursuant to rule the parties have asked this court to decide as a matter of law whether a consolidated group’s nol subject_to reduction under sec_108 for its short taxable_year ending date is the entire cnol of the consolidated_group or a portion of the cnol allocable to each member of the consolidated_group accordingly the only issue before unless otherwise indicated all section references are to the internal_revenue_code code in effect for all relevant years and all rule ref- erences are to the tax_court rules_of_practice and procedure marvel entm’t llc v commissioner the court is the legal question concerning the nol subject_to reduction under sec_108 this is an issue of first impression in this court background at the time the petition was filed the principal_place_of_business for marvel entertainment llc petitioner was in new york new york on date marvel entertainment group inc meg and certain of its operating and inactive subsidi- aries-fleer corp fleer skybox international inc marvel characters inc heroes world distribution inc heroes the asher candy co malibu comics entertainment inc malibu frank h fleer corp and marvel direct mar- keting inc -filed voluntary petitions for relief under chapter of the bankruptcy code with the u s bankruptcy court for the district of delaware at the time of its bankruptcy filings meg and its subsidiaries filed consolidated federal_income_tax returns as members of a consolidated_group of corporations whose common parent was mafco holdings inc on date meg and its subsidiaries became a separate_affiliated_group meg group and filed consolidated federal_income_tax returns for the short taxable years ending date and date on date meg group was acquired by toy biz inc toy biz pursuant to meg group’s fourth amended plan_of_reorganization fourth plan_of_reorganization meg and its subsidiaries became members of a new consolidated_group of which toy biz was the common parent as part of the transaction toy biz changed its name to marvel enter- prises inc in connection with the fourth plan of reorganiza- petitioner is an entertainment company known for its comic book char- acters on date marvel enterprises inc marvel enter- prises merged with its wholly owned subsidiary marvel entertainment inc with marvel enterprises surviving the merger but changing its name to marvel entertainment inc on date marvel entertain- ment inc was acquired by the walt disney co disney and was merged into maverick merger sub llc maverick a delaware limited_liability_company wholly owned by disney upon filing the certificate of merger with the secretary of state for the state of delaware maverick changed its name to marvel entertainment llc united_states tax_court reports tion four meg group members had certain debts eliminated and realized cod income as follows member meg fleer heroes malibu cod income dollar_figure big_number big_number big_number total big_number meg fleer heroes and malibu each excluded its cod income from their respective gross incomes for the short tax- able year ending date pursuant to sec_108 sec_108 provides that the amount excluded under sec_108 shall be applied to reduce tax_attributes starting with any net_operating_loss for the tax- able year and any net_operating_loss_carryover to such taxable_year as of date meg group had a cnol of dollar_figure for purposes of applying sec_108 meg group allocated the cnol among its consolidated_group members as follows member share of cnol meg fleer heroes malibu dollar_figure big_number big_number big_number total 1big_number as of date meg group had a cnol of dollar_figure the record does not explain where the re- maining dollar_figure was allocated on its consolidated federal_income_tax return for the short taxable_year ending date meg group reduced the share of cnol separately attributable to each of meg fleer heroes and malibu by the lesser_of each member’s excluded cod income or each member’s allocable share of cnol as follows allocated cnol excluded cod income reduction of cnol remaining cnol meg fleer heroes malibu dollar_figure big_number big_number big_number dollar_figure big_number big_number big_number dollar_figure big_number big_number big_number dollar_figure -0- -0- big_number total big_number big_number big_number big_number marvel entm’t llc v commissioner meg group joined the marvel group on date and carried forward into the marvel group its remaining dollar_figure cnol cnol carryforward the cnol carryforward was subsequently decreased to dollar_figure on date to reflect the dissolution of fleer respondent examined meg group’s consolidated federal_income_tax return for its short taxable_year ending date and made no adjustments to the claimed cnol carryforward meg group’s cnol carryforward of dollar_figure was used by the marvel group in subsequent years to offset income as follows taxable_year ending cnol carryforward income offset remaining cnol date date date dollar_figure big_number big_number dollar_figure big_number big_number dollar_figure big_number big_number respondent did not examine the marvel group’s consolidated_returns for its taxable years and the marvel group claimed a cnol carryforward of dollar_figure into its taxable_year ending date on date respondent mailed to petitioner a notice_of_deficiency determining deficiencies for petitioner’s taxable years and of dollar_figure and dollar_figure respectively in the notice_of_deficiency respondent challenged the marvel group’s computation of the cnol carryforward and took the position that meg group should properly have reduced its dollar_figure cnol as of date by dollar_figure the total of excluded cod income for meg fleer heroes and malibu this reduction would have resulted in a remaining cnol as of date and carried into the marvel group subject_to the limitations of sec_382 of dollar_figure petitioner timely filed a petition disputing the determinations in the notice_of_deficiency discussion either party may move for summary_judgment regarding all or any part of the legal issues in controversy see rule this amount represents meg group’s original dollar_figure cnol less dollar_figure of total reduction of cnol as of date the cnol carryforward was limited by sec_382 united_states tax_court reports a summary_judgment is intended to expedite litigation and to avoid unnecessary and expensive trials 61_tc_861 summary_judgment is appropriate where the pleadings and other materials 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 a and b 98_tc_518 aff ’d 17_f3d_965 7th cir the bur- den is on the moving party to demonstrate that no genuine dispute as to any material fact remains and that it is entitled to judgment as a matter of law 116_tc_73 in deciding whether to grant summary_judgment the court must con- sider the factual materials and inferences drawn from them in the light most favorable to the nonmoving party 100_tc_32 85_tc_527 however the nonmoving party is required to go beyond the pleadings and by its own affidavits or by the ‘depositions answers to inter- rogatories and admissions on file ’ designate ‘specific facts showing that there is a genuine issue for trial ’ 477_us_317 see also 119_tc_157 115_tc_554 summary_judgment is appropriate in the matter sub judice because the parties agree on all material facts and the only dispute we must resolve is one of law in meg group’s short taxable_year ending date four of its consolidated_group members realized total cod income of dollar_figure resulting from bankruptcy filings under chapter each of the four meg group debtor members excluded the cod income from its respective gross incomes under sec_108 meg group also had a dollar_figure cnol for its short taxable_year ending date under sec_108 meg group allocated a portion of the group’s cnol to each of the four meg group debtor members and reduced the allocated cnol shares by each member’s previously excluded cod income as a result meg group reduced its dollar_figure cnol by dollar_figure of the dollar_figure in excluded cod income the sole issue for decision is whether the nol subject_to reduction under sec_108 is the entire cnol of a marvel entm’t llc v commissioner consolidated_group single-entity approach or a portion of a consolidated group’s cnol allocable to each group member separate-entity approach respondent argues that the ‘nol’ that must be reduced under sec_108 is the entire cnol of a consolidated_group according to respondent the meg group should properly have reduced its dollar_figure cnol as of date by dollar_figure the total of the excluded cod income for each of fleer heroes meg and malibu resulting in a remaining cnol as of date of dollar_figure respondent con- cludes that this method of tax attribute reduction would have result ed in dollar_figure of cnol carryover into the marvel group consolidated_return taxable years ending date and date petitioner argues that the nol subject_to reduction under sec_108 is limited to the share of a consolidated group’s cnol allocable to each member entity specifically petitioner asserts that where a taxpayer that is a member of a consolidated_group excluded cod income from gross_income during a taxable_year ended date pursu- ant to sec_108 the ‘net operating loss’ or ‘net operating loss carryover’ of the taxpayer that was subject_to reduction under sec_108 was the portion of the cnol of the consolidated_group attributable to such member preliminary matter in the notice_of_deficiency respondent challenged meg group’s use of the separate-entity approach and took the position that meg group should properly have reduced its dollar_figure cnol for its short taxable_year ending date by dollar_figure the total of excluded cod income for the four meg group debtor members the single-entity approach advocated by respondent would have resulted in a remaining cnol of dollar_figure for meg group following its short taxable_year ending date although the notice_of_deficiency pertains to petitioner’s and cal- endar tax years the resolution of the instant matter depends on the appropriate method of tax attribute reduction used by meg group for its short taxable_year ending date both parties agree that if the separate-entity approach united_states tax_court reports is proper pursuant to sec_108 petitioner is not liable for any income_tax deficiencies for and on the other hand the parties agree that if the single-entity approach is proper pursuant to sec_108 peti- tioner is liable for the additional tax as set forth in the notice_of_deficiency sec_172 provides that i n determining the amount of any net_operating_loss_carryback or carryover to any tax- able year the necessary computations involving any other taxable_year shall be made under the law applicable to such other taxable_year the law governing the instant matter is the law applicable for the year in which the cod income was excluded by meg fleer heroes and malibu see laney v commissioner tcmemo_1997_403 tax ct memo lexis at t he nature and amount of the carry- over item is determined and redetermined under the law in effect for the year in which the carryover item arose rather than the year s to which the carryover item is car- ried aff ’d without published opinion 168_f3d_482 4th cir accordingly the resolution of this case will be based on the relevant law in effect for petitioner’s short tax- able year ending date applicable law sec_61 generally defines gross_income as all income from whatever source derived this includes income from the discharge_of_indebtedness sec_61 see also 531_us_206 sec_108 provides certain exceptions to this general_rule one of these exceptions provides that cod income is excluded from the taxpayer’s gross_income if the discharge occurs in a title_11_case sec_108 however the price of exclusion is that certain of the taxpayer’s favorable tax_attributes must be reduced to the extent of the excluded cod income sec_108 provides in pertinent part sec_108 reduction of tax_attributes - in general -the amount excluded from gross_income under subparagraph a b or c of subsection a shall be applied to reduce the tax_attributes of the taxpayer as provided in paragraph title governs bankruptcy cases marvel entm’t llc v commissioner tax_attributes affected order of reduction -except as provided in paragraph the reduction referred to in paragraph shall be made in the following tax_attributes in the following order a nol -any net_operating_loss for the taxable_year of the dis- charge and any net_operating_loss_carryover to such taxable_year both parties agree that pursuant to sec_108 meg fleer heroes and malibu correctly excluded their por- tions of dollar_figure of cod income from their respective gross incomes for the short taxable_year ending date the parties also agree that meg group had a dollar_figure cnol for its short taxable_year ending date however the parties disagree over what constitutes a taxpayer’s nol under sec_108 when that tax- payer is a member of a consolidated_group respondent con- tends that the nol subject_to reduction is the consolidated group’s entire cnol petitioner contends that the nol sub- ject to reduction is an allocable portion of cnol attributable to each member of the consolidated_group whether the nol to be reduced under sec_108 is the entire cnol or an allocable portion of the cnol is the sole issue for reso- lution in this case united dominion to resolve the issue in this case we must determine whether a consolidated_group can allocate and apportion its cnol to its consolidated_group members so that each member can have a separate nol subject_to reduction under sec_108 respondent’s primary position is that consoli- dated group members are prohibited from having separate nols unless specifically authorized to do so by a provision of the consolidated_return_regulations respondent asserts that t he question of whether members of a consolidated_group have separate nols was considered and decided by the supreme court in united dominion indus inc v 532_us_822 petitioner contends that united dominion addressed an entirely different ques- tion than the issue before this court a question that had nothing to do with sec_108 united dominion involved the appropriate method for cal- culating product_liability losses pll of an affiliated_group_of_corporations that elected to file a consolidated_return for the years at issue in united dominion ie sec_145 united_states tax_court reports allowed plls to be carried back years rather than the years generally permitted for normal nols a taxpayer’s pll was defined in sec_172 as the lesser_of the taxpayer’s nol for the year and the taxpayer’s allowable deductions attributable to product_liability expenses ple in other words a taxpayer’s pll was the total of its ples limited to the amount of its nol united dominion u s pincite the issue presented in united dominion was how to cal- culate the pll of a consolidated_group eligible for the year carryback under sec_172 the government argued that the pll of a consolidated_group member should be determined using a ‘separate-member’ approach ie com- paring each group member’s ples to that member’s separate nol id pincite the government proposed that a group member’s negative separate_taxable_income should serve as a proxy for that member’s separate nol id pursu- ant to this approach ples incurred by an affiliate with positive separate_taxable_income cannot contribute to a pll eligible for 10-year carryback id pincite therefore under the government’s methodology the taxpayer would have been prevented from taking full advantage of certain group members’ ples the taxpayer argued that the plls for a consolidated_group should be determined using a ‘single-entity’ approach ie comparing the consolidated group’s cnol to the aggregate ples of the group members id pincite the single-entity approach benefited the taxpayer in united dominion because its cnol exceeded its aggregate ples in each of the years at issue thus making all ples eligible for a 10-year carryback the supreme court began its opinion by rejecting the government’s argument that a consolidated_group member’s separate_taxable_income acts as a surrogate for a separate nol thereby allowing a group member’s separate_taxable_income to be compared with its ples in order to determine a separate pll id pincite the court explained por- the court explained that a consolidated_group member’s separate tax- able income excludes several items that an individual taxpayer would nor- mally account for in computing income or loss but which an affiliated_group may tally only at the consolidated level such as capital_gains_and_losses charitable-contribution deductions and dividends-received deduc- marvel entm’t llc v commissioner tions of the consolidated_return_regulations pertaining to consolidated_taxable_income and cnol as follows consolidated_taxable_income cti or alternatively under sec_1_1502-11 and sec_1_1502-21 an affiliated group’s its consolidated_net_operating_loss cnol is determined by taking into account several items the first is the separate_taxable_income sti of each group member a member’s sti whether positive or negative is computed as though the member were a separate corporation ie by netting income and expenses but subject_to several important modi- fications sec_1_1502-12 these modifications require a group member calculating its sti to disregard among other items its capital_gains_and_losses charitable-contribution deductions and dividends- received deductions ibid these excluded items are accounted for on a consolidated basis that is they are combined at the level of the group filing the single return where deductions otherwise attributable to one member say for a charitable_contribution can offset income received by another from a capital_gain for example sec_1 a to f to a consolidated group’s cti or cnol therefore is the sum of each member’s sti plus or minus a handful of items considered on a consolidated basis united dominion u s pincite the supreme court ultimately agreed with the taxpayer holding to that a group’s product_liability_loss must be figured on a consolidated basis in the first instance and not by aggregating product_liability losses separately determined company by company id pincite in arriving at this conclu- sion the court examined the consolidated_return_regulations and emphasized that the code and regulations governing affiliated groups of corporations filing consolidated_returns provide only one definition of nol ‘consolidated’ nol id pincite the court also instructed that a generally applicable concept of a separate nol in the consolidated_return context simply does not exist id pincite the court’s analysis was as follows the first step in applying the definition and methodology of pll to a taxpayer filing a consolidated_return thus requires the calculation of nol as the taxpayer correctly points out the code and regula- tions governing affiliated groups of corporations filing consolidated_returns provide only one definition of nol consolidated nol see sec_1_1502-21 there is no definition of separate nol for a tions united dominion indus inc v 532_us_822 this causes a group member’s separate_taxable_income to be in- flated by eliminating certain deductions or deflated by eliminating certain items of income such as capital_gains id united_states tax_court reports member_of_an_affiliated_group indeed the fact that treasury regula- tions do provide a measure of separate nol in a different context for an affiliated_corporation as to any year in which it filed a separate_return infra pincite underscores the absence of such a measure for an affiliated_corporation filing as a group member given this apparently exclusive definition of nol as cnol in the instance of affiliated entities with a consolidated_return and for reasons developed below infra pincite we think it is fair to say as the taxpayer says that the concept of separate nol simply does not exist brief for petitioner the exclusiveness of nol at the consolidated level as cnol is important here for the following reasons the code’s authorization of consolidated_group treatment contains no indication that for a consoli- dated group the essential relationship between nol and pll will differ from their relationship for a conventional corporate taxpayer nor does any treasury regulation purport to change the relationship in the consolidated context if then the relationship is to remain essentially the same the key to understanding it lies in the regulations’ definition of net_operating_loss exclusively at the consolidated level working back from that ples should be considered first in calculating cnol and they are because any ple of an affiliate affects the calculation of its sti that same ple necessarily affects the cti or cnol in exactly the same way dollar for dollar and because by definition there is no nol measure for a consolidated_return group or any affiliate except cnol ples cannot be compared with any nol to produce pll until cnol has been calculated then and only then in the case of the consolidated filer can total ples be compared with a net_operating_loss in sum comparable treatment of pll in the instances of the usual cor- porate taxpayer and group filing a consolidated_return can be achieved only if the comparison of ples with a limiting loss amount occurs at the consolidated level after cnol has been determined this approach resting on comparable treatment has a further virtue entitled to some weight in case of doubt it is relatively easy to understand and to apply united dominion u s pincite fn ref omitted the court also examined sec_1_1502-79 income_tax regs which apportions a consolidated group’s cnol to members of the group for the purpose of carrying back losses to separate_return years the court acknowledged that sec_1_1502-79 income_tax regs provides a close analogy for a separate member nol but found that this sec_1_1502-79 income_tax regs is the precursor to sec_1 b iv income_tax regs and allows for the allocation or apportion- ment of cnol in limited circumstances under this regulation the amount of cnol that is apportioned to a consolidated_group member is the amount attributable to the member which is the group’s cnol multiplied by a fraction the numerator of the fraction is the separate nol of the member and the denominator is the sum of the separate nols of all group members in such year having such losses marvel entm’t llc v commissioner regulation applies only narrowly to determine carryback and carryforward nols to separate_return years in which the member was not part of the consolidated_group the court reasoned that because no carrybacks to separate_return years were at issue sec_1_1502-79 income_tax regs was inapplicable in calculating the taxpayer’s pll using the separate-entity approach id pincite in describing the inapplicability of the apportionment rules the court stated that sec_1_1502-79 income_tax regs unbakes the cake for only one reason and that reason has no application here id petitioner’s argument that united dominion addresses an issue distinctly different from tax attribute reduction under sec_108 fails to recognize that the supreme court’s deci- sion concerning the proper computation of a consolidated group’s pll could only have been reached by first deter- mining whether members of a consolidated_group have sepa- rate nols we agree with petitioner that united dominion concerned the application of pll carryback rules in the consolidated_group context however a central prerequisite to the supreme court’s decision in united dominion was the legal determination of whether separate nols exist for consolidated_group members where no specific rule provides authority for nol computation on a separate-entity basis despite the fact that the matter currently before the court involves the application of sec_108 a -rather than section 172-the critical issue is identical to that in united dominion whether the pre-2003 consolidated_return regula- tions allow for the separate-entity approach the supreme court in united dominion concluded that a consolidated_group member cannot have a separate nol for a consoli- dated return year unless a specific consolidated_return regu- lation allocates and apportions part of the cnol to that member no such regulation existed for petitioner’s short tax- able year ending date and therefore the proper nol subject_to reduction under sec_108 is peti- tioner’s cnol in applying the supreme court’s holding in united dominion to the matter currently before us we con- clude that the nol subject_to reduction under sec_108 for petitioner’s short tax_year ending date is the consolidated group’s cnol united_states tax_court reports petitioner’s arguments a statutory language despite our conclusion above that united dominion is dis- positive in the instant matter we nonetheless will address petitioner’s remaining arguments petitioner argues that the clear and unambiguous language of sec_108 pertains exclusively to the individual members of a consolidated_group according to petitioner the words the taxpayer in both sec_108 and refer only to the debtor member of a consolidated_group that has excluded cod income as a result of that member’s bankruptcy petitioner therefore reasons that the tax_attributes subject_to reduc- tion under sec_108 cannot include the cnol of the entire affiliated_group because the cnol is not an attribute belonging to an individual member of a consoli- dated group and thus cannot be what is reduced under sec_108 language respondent does not dispute that the statutory language appears to have been written with stand-alone companies in mind however respondent contends that this is a common statutory construct because congress delegated authority to the secretary to promulgate regulations that would make the adjustments necessary to apply general code provisions to groups filing consolidated_returns when the relevant statutory is clear and unambiguous and the statutory scheme is coherent and con- sistent the court’s function is to apply the statute as written and according to its terms 519_us_337 114_tc_324 the statute must be read as a whole and the meaning of a particular portion of a statutory provi- sion must be determined with reference to its context see fda v brown williamson tobacco corp 529_us_120 if a statute is ambiguous or silent we may look to the statute’s legislative_history in an attempt to determine congressional intent 481_us_454 fernandez v commis- sioner t c pincite sec_108 provides in pertinent part that g ross income does not include any amount which but for this subsection would be includible in gross_income by rea- marvel entm’t llc v commissioner son of the discharge in whole or in part of indebtedness_of_the_taxpayer if the discharge occurs in a title_11_case emphasis added sec_108 further provides that t he amount excluded from gross_income shall be applied to reduce the tax_attributes of the taxpayer emphasis added absent an election under sec_108 the taxpayer must first reduce a ny net oper- ating loss for the taxable_year of the discharge and any net_operating_loss_carryover to such taxable_year sec_108 because meg group did not make an election under sec_108 the first tax_attributes subject_to reduction are meg group’s current_year and carryover nols ordinarily a corporation that is not a member of a consoli- dated group computes its nol on a stand-alone basis thus where a corporation with excluded cod income is not a member of a consolidated_group the nol to be reduced is clear however sec_108 does not lend this degree of clarity to the consolidated_return scenario although we agree with the parties that sec_108 appears to have been written in contemplation of stand-alone entities nowhere does the statute specifically define the taxpayer as either a member entity of a consolidated_group or the consolidated_group as a whole furthermore sec_108 does not articu- late whether the tax_attributes subject_to reduction are those at the consolidated level or are those allocable to each member entity although the legislative_history of sec_108 does not include any specific indication of legislative intent concerning the application of sec_108 to consolidated groups it does provide insight into the general purpose of sec_108 the report of the senate committee on finance states that sec_108 is intended to carry out the congressional intent of deferring but eventu- ally collecting within a reasonable period tax on ordinary_income realized from debt_discharge thus in the case of a bankrupt or insolvent_debtor the debt_discharge_amount is applied to reduce the taxpayer’s net operating losses and certain other tax_attributes unless the taxpayer a taxpayer can elect to reduce the basis of any depreciable_property by the amount of debt discharged before reducing the amounts of any other tax_attributes sec_108 meg group did not make such an election united_states tax_court reports elects to apply the amount first to reduce basis in depreciable assets s rept no pincite 1980_2_cb_620 in a notice of proposed rulemaking the department of the treasury succinctly summarized this legislative_history as follows the legislative_history of the bankruptcy_tax_act states that the exclusion of discharge_of_indebtedness cod income from gross_income under sec_108 is intended to promote a debtor’s fresh_start s rep no 96th cong 2d sess 1980_2_cb_620 h_r rep no 96th cong 2d sess the exclusion provided by the statute generally operates however to defer rather than eliminate income_from_discharge_of_indebtedness fed reg date to minimize the potential for permanent exclusion a consolidated_group member that excludes cod income must reduce tax_attributes which would otherwise be available to offset its income a consolidated group’s cnol is a favorable tax attribute that consolidated_group members share in order for the legislative objective of deferral to be accom- plished while the group is intact attribute reduction must be applied to the cnol as a whole and not some lesser portion deemed attributable to the debtor member meg group’s apportionment of its cnol to its consolidated_group mem- bers for purposes of sec_108 attribute reduction pro- duced a result that was inconsistent with the intent of con- gress to defer rather than permanently eliminate cod income thus our decision that united dominion prohibits the separate-entity approach for petitioner’s short taxable_year ending date comports with congress’ intention that cod income be deferred rather than elimi- nated wholesale b sec_1017 argument petitioner also argues that sec_1017 is evidence that congress intended for consolidated groups to use the sepa- rate-entity approach under sec_108 sec_1017 provides a special rule for reducing asset basis under sec_108 in the case of an affiliated_group providing a lookthrough rule that allows for basis_reduction when a member of a consolidated_group holds stock in a subsidiary sec_1017 is cross-referenced in sec_108 marvel entm’t llc v commissioner petitioner argues that sec_1017 demonstrates that con- gress was cognizant of the application of sec_108 in the consolidated_group context and provided specific rules for consolidated groups where the default separate-entity approach was not intended because there is no similar code provision detailing nol reduction for consolidated groups under sec_108 petitioner concludes that congress intended for the separate-entity approach to apply we disagree with petitioner’s argument for the following reasons first as previously discussed the plain language of sec_108 does not demonstrate that congress intended the application of the separate-entity approach as a default rule for tax attribute reduction second the fact that congress enacted a special rule for consolidated groups in sec_1017 is not instructive as to what it intended under sec_108 in our view a more plausible expla- nation for the enactment of sec_1017 was con- gress’ desire to provide specific and immediate relief for consolidated groups in this narrow context accordingly we will refrain from inferring congressional intent based on the mere absence in sec_108 of a rule corollary to sec_1017 c consolidated_return_regulations the law applicable to meg group’s tax attribute reduction also includes the consolidated_return_regulations in effect at that time see sec_1502 providing that the sec- retary shall prescribe regulations that are necessary to deter- mine consolidated groups’ tax_liabilities petitioner argues that these consolidated_return_regulations require the deter- mination of an individual member’s share of the consolidated group’s cnol the code applies to a consolidated_group to the extent that the consolidated_return_regulations do not provide otherwise sec_1_1502-80 income_tax regs a consolidated_group member’s gross_income and deductions for a consolidated_return_year are included in the computation of the entire group’s consolidated_taxable_income or cnol sec_1 a income_tax regs sec_1_1502-21t tem- porary income_tax regs fed reg date sec_1_1502-21t temporary income_tax united_states tax_court reports regs fed reg date provides that when a member of a consolidated_group leaves the group a portion of the group’s cnol is allocated to the departing member in addition sec_1_1502-21t temporary income_tax regs supra applies to apportion a consolidated group’s cnol to group members in certain circumstances in order to carry back losses to pre-consolidated-return years for cod income discharged after date sec_1_1502-28t temporary income_tax regs fed reg date prescribes a hybrid approach that first reduces the tax_attributes of the member entity then applies a lookthrough rule to reduce attributes of the member entity’s subsidiaries and lastly reduces attributes of the consolidated_group with slight modifications this temporary_regulation was adopted as final and effective for cod income discharged after date sec_1_1502-28 income_tax regs petitioner’s argument that the pre-2003 consolidated_return_regulations allow for the separate-entity approach under sec_108 is without merit the matter sub judice involves meg group’s tax_year ending date which is before the commissioner’s issuance of sec_1_1502-28t temporary income_tax regs supra or the adoption of sec_1_1502-28 income_tax regs the pre- consolidated_return_regulations did not specifically articulate how a consolidated_group should reduce its tax_attributes under sec_108 however as previously dis- cussed the supreme court in 532_us_822 found that the pre- consolidated_return_regulations did in fact prohibit the sec_1_1502-21t temporary income_tax regs fed reg date was a temporary_regulation in petitioner’s short taxable_year ending date these post-united dominion regulations appear to follow the invita- tion of the supreme court thus it is true as the government has argued that t he internal_revenue_code vests ample authority in the treasury to adopt consoli- dated return regulations to effect a binding resolution of the question presented in this case brief for united_states to the extent that the government has exercised that authority its actions point to the sin- gle-entity approach as the better answer to the extent the government disagrees it may amend its regulations to provide for a different one united dominion u s pincite marvel entm’t llc v commissioner allocation of separate nols for consolidated_group members unless it was within the ambit of a specific regulatory provi- sion for this reason we are not persuaded by petitioner’s argument to the contrary d temple-inland in an attempt to bolster its position that united dominion has no significance with respect to attribute reduction under sec_108 petitioner cites 68_fedclaims_561 temple-inland involved dam- ages resulting from the government’s breach of a thrift acquisition agreement under which a consolidated_group acquired three failing thrifts id pincite among the damages were the values of lost income_tax deductions caused by the government’s enactment of legislation that eliminated the tax benefits associated with the thrift acquisi- tion agreement id pincite after an examination of the consolidated group’s tax returns for the years at issue the taxpayer and the internal_revenue_service irs entered into a closing_agreement which included agreed-upon amounts for the taxpayer’s bad_debt deductions for the taxable years and id pincite following the execution of the closing_agreement the government disagreed with the taxpayer’s computation of the deductions id pincite the government argued that the group’s consolidated tax_attributes should have been reduced under sec_108 id pincite the u s court of federal claims held for the taxpayer ruling that the closing_agreement between the irs and the taxpayer specifically provided that tax attribute reduction would be limited to the tax_attributes that were generated by the insolvent consoli- dated group members id pincite although the temple-inland court made its determination on the basis of the closing_agreement the court included a footnote stating united dominion dealt with the carryback period for product_liability losses under sec_172 and has nothing to do with s ection id pincite n peti- tioner emphasizes this footnote to support the proposition that united dominion is narrow in scope and ha s no significance with respect to sec_108 petitioner’s reliance on a footnote in temple-inland is mis- placed temple-inland does not address the central issue of united_states tax_court reports whether a cnol can be apportioned among consolidated_group members absent a rule in the consolidated_return_regulations allowing for such apportionment the holding of temple-inland is based on the finality of the closing agree- ment between the irs and the taxpayer and has nothing to do with the application of sec_108 to a member of a consolidated_group for this reason we are unpersuaded by petitioner’s argument that temple-inland limits the application of united dominion to sec_172 e gottesman petitioner alternatively contends that its application of the separate-entity approach should prevail because the method was reasonable under existing law when its consolidated tax_return was filed for petitioner cites 77_tc_1149 in support of the proposition that a taxpayer’s reasonable interpretation will be upheld where the secretary has failed to issue sufficient guidance under the consolidated_return_regulations as evi- dence that the separate-entity approach to attribute reduc- tion was reasonable under the circumstances before united dominion-and thus analogous to gottesman-petitioner cites multiple irs private letter rulings in gottesman the issue was whether the regulations promulgated by the secretary under sec_1502 required accumulated_taxable_income for sec_531 purposes to be calculated on a separate company basis or on a consolidated basis id pincite0 before affiliated corporations filing consolidated_returns were required by the regulations to compute their accumulated_taxable_income on a combined basis for sec_531 purposes id pincite3 the regulations were silent on the issue id pincite5 the secretary proposed_regulations requiring computation on a combined basis in withdrew the proposed_regulations in without explanation and did not issue new proposed_regulations until id pincite we addressed whether it was proper for the taxpayer to apply a separate company method for the taxpayer’s tax years id pincite8 in holding for the taxpayer we stated marvel entm’t llc v commissioner we cannot fault the taxpayer for not knowing what the law was in this area when the commissioner charged by congress to announce the law sec_1502 never decided what it was himself thus we find that the commissioner’s regulations regarding the manner in which the accumulated_earnings_tax was to be imposed on corporations making consolidated_returns were ambiguous during the years at issue this ambiguity was of the commissioner’s making and as such must be held against him the taxpayer’s interpretation of these regulations was reasonable under the circumstances id in gottesman we upheld the taxpayer’s interpretation of the consolidated_return_regulations as reasonable under the circumstances because of an ambiguity in the existing law the ambiguity in the applicable regulations had not been resolved by the supreme court when gottesman was decided however the supreme court in united dominion u s pincite expressly and exclusively defin ed nol as cnol in the consolidated_return context the fact that united dominion was decided in whereas the relevant year for purposes of determining the application of sec_108 and the meaning of nol is is of no consequence because supreme court opinions generally must be given full retro- active effect see 509_us_86 when this court applies a rule_of federal_law to the parties before it that rule is the controlling interpreta- tion of federal_law and must be given full retroactive effect in all cases still open on direct review and as to all events regardless of whether such events predate or postdate our announcement of the rule 590_f3d_87 2d cir citing harper u s pincite miller v commissioner tcmemo_2001_55 tax ct memo lexi sec_65 at when the u s supreme court announces a rule_of law and applies it to the litigants in the case announcing the rule that rule applies retroactively to all other pending cases unless barred by the statute_of_limitations or res_judicata the issue in the current case which was central to the opinion of the supreme court in united dominion is identi- fying the appropriate nol in the consolidated_return con- text although we acknowledge that petitioner’s application of the separate-entity approach in filing its consolidated tax_return was plausible at the time it is contrary to the rule in the consolidated_return_regulations as interpreted by the united_states tax_court reports supreme court in united dominion petitioner’s application of the separate-entity approach for purposes of defining nol not only conflicts with the binding precedent of united dominion but also is the approach specifically rejected by the supreme court in that case because united dominion clarified that a separate nol does not exist in the consoli- dated return regulations there is no remaining ambiguity as to this issue for petitioner’s consolidated_return for the short taxable_year ending date therefore gottesman is inapplicable to the current case regarding petitioner’s argument concerning the irs’ pre- united dominion determinations advocating the separate- entity approach sec_6110 explicitly provides that the irs’ written determinations are not precedential we also note that the private letter rulings and written determina- tions that petitioner cited were issued before the govern- ment’s position in united dominion was rejected by the supreme court in conclusion we find that respondent correctly applied sec_108 in accordance with the supreme court’s opinion in united dominion neither the code nor the applicable consolidated_return_regulations provide authority for an affiliated_group to allocate and apportion cnol to consolidated_group members for purposes of reducing tax_attributes pursuant to sec_108 we hold that for the relevant consolidated_return years in issue the consoli- dated return regulations required that a consolidated group’s entire cnol be treated as the nol subject_to reduction in reaching our decision we have considered all arguments made by the parties and to the extent not mentioned or addressed they are irrelevant or without merit to reflect the foregoing an appropriate order and decision will be entered granting respondent’s motion for summary_judgment and denying petitioner’s motion for summary_judgment f


department of the treasury int ernal revenue service washington d c date o f f i c e o f c h i e f c o u n s e l number release date cc intl br1 tl-n-7092-99 uilc internal_revenue_service national_office field_service_advice memorandum for james e kagy special litigation assistant cc lm mct cin from m grace fleeman assistant to the branch chief cc intl br1 subject this field_service_advice responds to your memorandum dated date and supplemental memorandum dated date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be used or cited as precedent disclosure statement field_service_advice is chief_counsel_advice and is open to public inspection pursuant to the provisions of sec_6110 the provisions of sec_6110 require the service to remove taxpayer identifying information and provide the taxpayer with notice of intention to disclose before it is made available for public inspection sec_6110 and i sec_6110 also authorizes the service to delete information from field_service_advice that is protected from disclosure under u s c sec_552 b and c before the document is provided to the taxpayer with notice of intention to disclose only the national_office function issuing the field_service_advice is authorized to make such deletions and to make the redacted document available for public inspection accordingly the examination appeals or counsel recipient of this document may not provide a copy of this unredacted document to the taxpayer or their representative the recipient of this document may share this unredacted document only with those persons whose official tax_administration duties with respect to the case and the issues discussed in the document require inspection or disclosure of the field_service_advice tl-n-7092-99 legend corporation a corporation b corporation c_corporation d state e political_subdivision f country g month h country i year year year year date date date date date date date q-percent tl-n-7092-99 r-percent dollar_figuret dollar_figureu dollar_figurev dollar_figurew dollar_figurex dollar_figurey dollar_figurez issues to what extent if any is corporation b entitled to benefits under the u s - country i income_tax treaty1 treaty or country i treaty in light of the inconsistent treatment claimed for domestic law purposes and the purpose and intent of the treaty if it is determined that corporation b is entitled to an income exclusion under the treaty may the service deny credit for foreign taxes paid and deemed paid_by corporation b on or with respect to the excluded income is the transaction an outbound transaction that is itself a taxable_event for u s federal tax purposes conclusion sec_1 corporation b is not entitled to benefits under the treaty it has not established that it became a resident of country i within the meaning of the treaty corporation b’s actions in the circumstances of this case permitting the service to invoke the saving clause and tax corporation b as if the treaty had not come into effect furthermore the claimed treaty benefits are inconsistent with 1the convention between country i and the united_states of america with respect to taxes on income and on capital signed at washington d c on tl-n-7092-99 both corporation b’s inclusion on the corporation a group’s consolidated_return and the purpose and intent of the treaty and therefore should be disallowed finally the treaty permits resort to domestic antiabuse doctrines beyond the literal terms of the treaty to deny benefits to avoid abuse of the treaty as a result corporation b is not entitled to any treaty exclusion in year for the dividend it received from corporation c or for its subpart_f_income if corporation b is entitled to an income exclusion under the treaty credit for foreign taxes paid and deemed paid_by corporation b on or with respect to the excluded income may be denied under domestic law the extent to which we may treat the transaction itself as a taxable_event will turn on our ability to establish that the transaction was in substance an outbound transaction the specific consequences depend on whether the transaction results in a single corporation that may claim benefits as a resident of country i or whether the transaction results in the creation of two separate corporations if corporation b is considered to have converted from a domestic to a foreign_corporation by reason of the transaction it should not be included in the parent’s consolidated_return the dividend distributed to its parent in year is includible in income in that year in addition the amount of the investment in earnings in united_states_property determined under sec_956 as a result of the notes between corporation b and corporation a will be included in the income of corporation a under sec_951 to the extent not paid out of previously_taxed_income with no dividends received deduction if the transaction is determined to have resulted in the creation of a second corporate entity and if assets were transferred the transaction has effected a taxable_event no nonrecognition_provision has been shown to apply facts corporation a is a domestic_corporation and the common parent of an affiliated_group_of_corporations filing consolidated federal_income_tax returns on a calendar_year basis the corporation a group is currently under examination for year and year corporation b which was incorporated in state e in year is a wholly owned subsidiary of corporation a that serves as a holding_company for the majority of the corporation a group’s controlled_foreign_corporations corporation c which is incorporated in country g is a wholly owned subsidiary of corporation b corporation c serves as a holding_company for the corporation a group’s european operations in year there was a decision to repatriate dollar_figurez of corporation c’s accumulated_earnings_and_profits to the united_states parent to enable the united_states parent to meet its debt service requirements and to fund tl-n-7092-99 its domestic operations to avoid substantial tax_liability upon the repatriation of such a large sum of income that had not been previously taxed a plan was devised and implemented to corporation c then distributed dollar_figurez in the form of a dividend to corporation b which in turn made the funds available to corporation a through a series of subsequent loans and payments in redemption of its stock the transaction on date corporation b’s board_of directors held a special meeting for the purpose of approving a corporation a stated to the examination team that the purpose behind corporation b’s was to enable it to receive the dividend from corporation c tax free the minutes of the special meeting state that following the transaction the corporation would on date corporation b applied for in political_subdivision f corporation b into political_subdivision f the next day political_subdivision f effective the same day thus under the laws of political_subdivision f corporation b became and remains a political_subdivision f limited_company with all attendant rights and powers tl-n-7092-99 on date corporation b filed under the amended state e law pursuant to the its only known remaining tie to the united_states is its state e charter although the corporation a group’s position is that corporation b retained its status as a domestic_corporation corporation b filed a protective gain_recognition_agreement under sec_367 corporation b’s board_of directors also completed various steps necessary to comply with provisions of the law of political_subdivision f such as amendments to corporation b's certificate of incorporation the appointment of a registered agent and registered office in political_subdivision f and the appointment of an accounting firm to conduct a statutory audit corporation b which had no employees either prior to or subsequent to the transaction appointed corporation d a pre-existing country i subsidiary of corporation a to perform financial corporate and other services on behalf of corporation b the repatriation shortly after the corporation c made a dividend distribution of dollar_figurez paid to corporation b in four separate installments on dates through year the sum of dollar_figurey was withheld by country g on the dividend distribution thus the net dividend received by corporation b was dollar_figurex the withholding_tax was based on the q-percent rate provided by the then- applicable u s -country g income_tax treaty rather than the r-percent rate provided by the then-applicable country i-country g income_tax treaty corporation b immediately loaned dollar_figurew of the net dividend to corporation a via three demand promissory notes paying interest pincite-day libor plu sec_12 basis points the remainder of the net cash dividend from corporation c to corporation b totaling dollar_figurev was immediately loaned by corporation b back to corporation c via a demand promissory note dated date year paying interest at the then- applicable commercial paper rate corporation b then transferred its rights under the loan with corporation c totaling dollar_figurev to corporation a in exchange for a demand promissory note from corporation a to corporation b for the then-country i dollar equivalent and paying interest pincite- day libor plu sec_12 basis points in month h year corporation b transferred corporation a’s outstanding notes to corporation a in exchange for a portion of corporation a’s shares in corporation b the overall effect of this redemption was dividend treatment under u s domestic law we understand that the corporation a group took the position that tl-n-7092-99 corporation b is an includible_corporation and therefore a member of the corporation a group we further understand that corporation a also took the position that the dividend was an intercompany distribution that was not subject_to u s taxation the tax_return the corporation a group filed a consolidated federal_income_tax return for the year calendar_year that included corporation b as a member for the period before and after the transaction although corporation b changed its fiscal_year to end on date we understand that such change was effective for country i tax and financial reporting purposes only for purposes of calculating consolidated_taxable_income corporation b’s separate_taxable_income was reported on a calendar_year basis by applying adjusted entries to corporation b’s fiscal_year income schedule c of the consolidated_return included the dollar_figurez dividend distribution from corporation c to corporation b schedule c also included deemed distributions under subpart_f of dollar_figuret attributable to corporation b’s controlled_foreign_corporations and a sec_78 gross up of dollar_figureu however an offsetting exclusion based on treaty benefits was claimed based on the claim by corporation b that it is a country i resident within the meaning of the treaty the corporation a group claimed a foreign_tax_credit under sec_901 for the country g withholding_tax of dollar_figurey on the dollar_figurez dividend from corporation c the corporation a group also claimed a foreign_tax_credit of dollar_figureu under sec_902 and sec_960 for foreign taxes deemed paid_by corporation b with respect to the dividend and subpart_f_income the corporation a group took the position that it was still entitled to the foreign tax_credits because the treaty is silent as to the treatment of credits linked to income that is taxable only by country i under country i’s the dividend that corporation b received from corporation c was exempt from country i income_tax we understand that the applies only in this case the relevant treaty was the country i-country g income_tax treaty in addition we understand that only a portion of corporation b’s income that was treated as subpart_f_income in the united_states was included on the country i return because country i’s anti-deferral regime does not impose tax to the same extent as the u s subpart_f regime the result is that no tax was paid in the united_states very little tax was paid in country i and foreign tax_credits were tl-n-7092-99 claimed in the united_states for foreign taxes paid or deemed paid on or with respect to income that was excluded from the u s tax_base law and analysis i corporation b is not entitled to the claimed treaty benefits corporation b states that it continued to be classified as a domestic_corporation under sec_7701 after for all code purposes if so it remains subject_to u s federal_income_tax on its worldwide income we also understand that corporation b claims it became a country i corporation under country i law and is fully liable to tax in country i in the absence of the treaty provisions it relied upon corporation b would be fully liable to tax under the domestic rules of both the united_states and country i thus the first issue is the extent if any to which the treaty limits the application of the internal_revenue_code in this case after briefly reviewing the standards of treaty interpretation relevant treaty provisions and technical explanations or other history of the provisions we then consider their application to the facts a summary of treaty provisions the starting point in treaty interpretation is the language of the treaty itself 499_us_530 457_us_176 if the treaty language is clear it is controlling so long as the words do not effect a result that is inconsistent with the intent or expectations of the signatories eastern airlines inc u s pincite sumitomo shoji america inc u s pincite 373_us_49 in order to ensure its fair operation a treaty must be interpreted in a manner that will give effect to the intent of the parties as ascertained from the text context and history of the treaty 470_us_392 254_us_433 a textual analysis of a treaty provision will require review of the context within the treaty of the language being construed thus the interaction of the specific operative language with that of other provisions in the treaty must be considered 479_us_27 sullivan u s pincite the treaty provisions relevant to the taxpayer’s position are the residency rules of article article the miscellaneous rules and saving clause of article and the limitation_on_benefits provisions of article provisions relied upon by the taxpayer a the residency rules tl-n-7092-99 article of the country i treaty defines the term resident stating in paragraph that f or purposes of this convention the term ‘resident’ of a contracting state means any person that under the laws of that state is liable to tax therein by reason of that person’s domicile residence citizenship place of management place of incorporation or any other criterion of a similar nature the technical explanation prepared by the treasury_department in states that t he phrase ‘any other criterion of a similar nature’ includes for u s purposes an election under the code to be treated as a u s resident thus a corporation is a resident_of_the_united_states under paragraph if either i it is incorporated in the united_states or ii it elects under the code to be treated as a u s resident the technical explanation released by the treasury_department on stated in relevant part thus under the if a company qualified as a resident of both country i and the united_states under paragraph of article the company would be treated as a resident of the country in which it had been originally created even if the company was subsequently incorporated in the other country as a result of a company that retains a place of incorporation in the united_states and thus remains a resident_of_the_united_states under article of the treaty may be treated as a resident of country i under the tl-n-7092-99 b article under paragraph of article thus income derived by a resident of country i from outside the united_states is taxable only by country i if it is not dealt with in articles of the treaty other provisions relevant to corporation a’s treaty-based position a saving clause and other miscellaneous rules of article paragraph of article provides that the treaty will not be applied to restrict any benefits that would otherwise be available under the laws of either country the te explains that paragraph of article provides a saving clause that allows each country to tax i its residents and ii in the case of the united_states certain other persons as if the treaty had not come into effect paragraph of article provides a number of exceptions to the saving clause that are not relevant here b limitation_on_benefits tl-n-7092-99 the protocol added a limitation_on_benefits article to the treaty in new article paragraphs of article set forth rules for determining when a country i resident has a sufficient nexus to country i to be entitled to benefits in the united_states the te explains that these rules prevent treaty shopping by limiting the benefits granted by the united_states under the treaty to those persons whose residence in country i is not motivated by the existence of the treaty paragraph as explained by the te b correct application of the treaty requires denial of benefit sec_1 corporation b is not a resident of country i under article under article corporation b became a resident of country i when it was but also remained a resident_of_the_united_states by reason of its place of incorporation in state e because corporation b was a resident of both countries after the transaction it is necessary to consider in article the effect of the first sentence of that paragraph is generally to cede taxing jurisdiction to the united_states as the place in which the entity was originally formed the income that is at issue in this case did not arise in either of the contracting states and is not dealt with in articles of the treaty the language of the states tl-n-7092-99 corporation b’s claim of treaty benefits rests on its interpretation of the of article to award taxing jurisdiction of the income at issue here to country i as explained below even if corporation b’s interpretation of article were accepted we conclude nonetheless that corporation b is not entitled to benefits under article corporation b should be treated as within the meaning of the saving clause the saving clause allows each country to tax its residents as if the treaty had not come into effect in the case of the united_states the saving clause also allows the united_states to continue to tax its citizens and companies thus u s citizens and companies are subject_to u s tax on their worldwide income even if they are treated as residents of country i under article after application of the when corporation b it made an to retain its state e charter thereby retaining its status as a domestic_corporation corporation b’s retention of its state e charter was the basis for its continued inclusion on the corporation a group’s consolidated_return for year and subsequent years the retention of corporation b’s state e charter and corporation b’s subsequent inclusion on the parent’s consolidated_return should be treated as if corporation b is treated as a resident of country i for purposes of the treaty the service may invoke the saving clause and tax corporation b on its worldwide income as if the treaty has not come into effect corporation b may not take inconsistent positions under the treaty and the code the general rules for implementation of the treaty found in article do not permit the corporation a group to treat corporation b as a domestic_corporation for purposes of the code eg for purposes of the consolidated_return and dividends received deduction and simultaneously treat corporation b as a foreign_corporation tl-n-7092-99 for purposes of the treaty as the following portion of the te makes clear article does not authorize a taxpayer to make inconsistent choices between the rules of the code and the rules of the treaty accord revrul_84_17 1984_1_cb_308 construction of the treaty by the agency in the executive branch charged with administration of the treaty is entitled to great weight 366_us_187 restatement 3rd of foreign relations law corporation b is entitled to claim benefits under the treaty as a resident of country i corporation b also is entitled to apply the code and to join the corporation a group consolidated_return if that produces a more favorable result than applying the treaty however article does not permit corporation b to apply the code rules and treaty rules in combination to reach a result that is more favorable than the result under the code or the treaty individually the latter is precisely what occurred by simultaneously claiming treaty benefits as a resident of country i and code benefits as a resident_of_the_united_states corporation b asserted that it could i join the consolidated_return as a domestic_corporation ii include the country g dividend income and therefore claim u s foreign tax_credits with regard to that income but nevertheless iii claim an exemption from u s tax for its country g dividend corporation b’s position under the code is inconsistent with the structure and underlying assumptions of the treaty after application of article a taxpayer that would be considered a resident of both the united_states and country i under each country’s domestic law is a resident of and subject_to full tax_liability in either the united_states or country i but not both under article a taxpayer’s other income from third countries such as country g is taxable only in the country in which the taxpayer is subject_to full tax_liability after application of article as explained by the senate foreign relations committee when the treaty was approved article conversely article gives tl-n-7092-99 country i the sole right to tax income sourced in a third country and paid to a resident of country i to the extent that the language of the treaty is not clear it is also appropriate to refer to the oecd model and official commentary to discern the views of oecd member countries in interpreting language similar to that found in the treaty 104_tc_535 paragraph of the commentary to article other income of the oecd model tax_convention on income and capital explains that when income arises in a third state and the recipient of this income is considered as a resident by both contracting states under their domestic law the application of article will result in the recipient being treated as a resident of one contracting state only and being liable to comprehensive taxation full tax_liability in that state only in this case the other contracting state may not impose tax on the income arising from the third state even if the recipient is not taxed by the state of which he is considered a resident under article because corporation b has chosen to apply the code and to join the corporation a group’s consolidated_return as a domestic_corporation that is liable to u s tax on its worldwide income corporation b should not be allowed simultaneously to obtain benefits under the treaty that are not available to a corporation that is fully liable to tax in the united_states cf 56_tc_588 despite former sec_1504 possessions_corporation could join consolidated_return but only if it did not simultaneously obtain benefits under sec_931 acq 1973_2_cb_1 elastic fabrics of puerto rico v commissioner t c memo 52_tcm_1340 by joining the consolidated_returns petitioner waives any sec_931 benefits to which it would otherwise be entitled acq aod cc-1987-007 corporation b’s inclusion on the consolidated_return for year and subsequent years should be treated as a waiver of any benefits to which corporation b would have been entitled under article the limitation of benefits article and anti-abuse principles of domestic law require denial of benefits that conflict with the purpose and intent of the treaty as explained in the te there was an express intent when article limitation_on_benefits was added to the treaty to limit entitlement to the benefits granted by the united_states to those persons whose residence in country i is not considered to have been motivated by the existence of the treaty corporation a has admitted that corporation b’s residence in country i was motivated solely by the existence of the treaty if corporation b does not satisfy the lob requirements it is not entitled to any benefits under the treaty although we tl-n-7092-99 assume corporation b satisfies the lob requirements in paragraphs of article we recommend that this be confirmed this would require confirmation that corporation b satisfies the so-called base erosion test in article paragraph of article confirms that country i and the united_states may each to allow corporation a to apply the treaty to exclude corporation b’s non-u s source income from the consolidated_return while at the same time claiming foreign tax_credits in the united_states for taxes associated with the excluded income would result in an abuse of the provisions of the treaty therefore it is appropriate to apply domestic law to prevent the abuse the judicial doctrine_of substance over form is a principle of domestic law specifically applicable to thwart abusive transactions such as that in this case courts typically focus on two factors in determining whether to respect any or all aspects of a taxpayer’s chosen form or transaction whether there was a non-tax business_purpose a subjective analysis and whether the transaction had economic_substance beyond the production of tax benefits an objective analysis see 157_f3d_231 3d cir cert_denied 526_us_1017 843_f2d_351 9th cir cert_denied 488_us_824 752_f2d_89 4th cir from the taxpayer's own admission there was no business_purpose or profit_motive for the interposition of the in the repatriation transaction accordingly the transaction may be recast in accordance with its substance ie a taxable dividend to a united_states_shareholder from its controlled_foreign_corporation cfc of previously untaxed income alternatively the dividend could be treated as being paid to corporation b before the transaction it is a well-settled principle of u s law that courts should look beyond the literal language of a provision if reliance on that language would defeat the purpose of the provision 461_us_574 brown v duchesne how 42_f3d_537 9th cir cert_denied 516_us_807 in the treaty context u s courts have long been willing to look beyond the literal terms of a treaty when a taxpayer has claimed benefits that conflict with the purpose and intent of the treaty for example the fifth circuit held in johansson v united_states 386_f2d_809 5th cir that a taxpayer was not entitled to the benefits available under the commercial travelers’ exception under the former u s -switzerland income_tax treaty where the practical reasons for that exemption were not present in the taxpayer’s case the practical reason for the commercial travelers’ exception was to allow corporations of one contracting state to send agents and employees into the other contracting state without subjecting them to tax in the other contracting state tl-n-7092-99 that practical reason was inapplicable where the individual was only technically if at all employed by a paper swiss corporation id pincite similarly the court of claims has denied treaty benefits in instances in which the taxpayer met the literal terms of a relief provision in a treaty under circumstances that did not present the potential harms that the treaty provisions were intended to alleviate see 678_f2d_180 ct_cl compagnie financiere de suez et de l’union parisienne v united_states ct_cl the practical reason for the benefits granted in article is to avoid double_taxation if corporation b is treated as a resident of country i under article its country g dividend and subpart_f_income will be taxable only by country i pursuant to article based on the assumption that a taxpayer will be a resident of only one country or the other article assigns the exclusive right to tax third- country income that is not dealt with in articles to the country in which the taxpayer is resident however there is an implicit assumption that corporation b is not also subject_to full taxing jurisdiction of the united_states if as is the case here corporation b remains a domestic_corporation that is taxable on its worldwide income and entitled to the benefits of inclusion in the consolidated_group that built- in assumption is not present therefore the service should look beyond the literal terms of the treaty and conclude that even if corporation b is treated as a resident of country i for purposes of the treaty the benefits claimed under article should be disallowed that article was never intended to provide benefits under the particular facts and circumstances of this case the saving clause of paragraph of article further supports the conclusion that the united_states retains jurisdiction to tax such a company tl-n-7092-99 ii if corporation b is entitled to an income exclusion under the treaty the foreign tax_credits must be disallowed under domestic law if it is determined that corporation b may simultaneously be treated as a domestic_corporation that is includible on the corporation a group’s consolidated_return and as a nonresident corporation that is entitled under the treaty to exclude its foreign_source_income from the group’s consolidated_taxable_income we believe that credit for foreign taxes paid and deemed paid_by corporation b on or with respect to such excluded income is improper under the authority of 18_tc_1 aff’d in relevant part 205_f2d_335 4th cir aff’d 216_f2d_7 cert_denied 348_us_943 accordingly the service should disallow the claimed credits in reliance on marsman as a protective measure in addition to making the adjustments required by proper application of the treaty which would exclude corporation b from the corporation a group’s consolidated_return or deny it the right to exclude its foreign_source_income from the consolidated_return in marsman prior to date the taxpayer was a nonresident_alien in after becoming a u s resident the taxpayer paid a tax_deficiency to the commonwealth of the philippines that was attributable to income from periods before she was a u s resident the taxpayer claimed the back taxes paid to the philippines as a cash_basis foreign_tax_credit against her u s income_tax_liability for the fourth circuit affirmed the tax court’s holding that despite the taxpayer’s literal entitlement to the credit under the words of the applicable statute no portion of the tax paid to the philippines for periods when the taxpayer was a nonresident was allowable as a foreign_tax_credit in the united_states noting that the supreme court has held that the primary purpose of the foreign_tax_credit is to mitigate the evils of double_taxation the fourth circuit found this purpose will not be served and double_taxation will not be avoided by allowing the credit now sought by the taxpayer because the and philippine income taxes paid_by the taxpayer in were imposed upon income which was never subjected and could not be subjected to the united_states income taxes for the reason that the taxpayer was a nonresident of the united_states until date and the philippine income during these two years was derived from sources outside the united_states emphasis added f 2d pincite because the taxpayer’s nonresident status precluded the united_states from taxing her prior years’ income there was no possibility of double_taxation and the credits were properly disallowed id tl-n-7092-99 marsman is distinguishable from the line of cases holding that a foreign tax imposed in connection with a transaction that does not give rise to income for u s tax purposes may nonetheless be creditable subject_to the limitations of sec_904 see 69_tc_579 acq a o d 139_f2d_865 4th cir i b 47_bta_285 acq 1948_2_cb_1 and brace v commissioner 11_tcm_906 unlike marsman in the cited cases the taxpayers were fully subject_to u s taxing jurisdiction some of their income that was taxed by the foreign jurisdiction was fully or partially exempt from u s tax not on the basis of the taxpayer’s nonresident status but because the applicable code rules determined a different amount of taxable_income marsman is not inconsistent with these cases because its holding is properly construed as limited to denying credits in circumstances where the united_states lacks the jurisdiction to tax income because of the taxpayer’s nonresident status if the corporation a group succeeds in its argument that the united_states has no jurisdiction to tax corporation b’s foreign_source_income by virtue of its nonresident status under article of the treaty then under the principles of marsman the associated taxes are not allowed as a credit as in marsman the taxpayer here is attempting to claim foreign tax_credits while excluding the associated income from tax on the basis of its nonresident status if pursuant to the treaty the united_states has ceded to country i the jurisdiction to tax corporation b on its foreign_source_income by treating it as a nonresident then under marsman corporation b may not claim credit for foreign taxes paid_or_accrued or deemed paid_or_accrued during periods when corporation b claims nonresident status iii the transaction effected an outbound transaction which may have resulted in a taxable_event the may itself be a realization event in one of two ways first if corporation b remains a single corporation after the transaction and succeeds in establishing its status as a resident of country i under the treaty then corporation b should be treated as having become a foreign_corporation for code purposes as well corporation b’s transformation from a domestic_corporation into a foreign_corporation may constitute a taxable transaction to both corporation a and corporation b unless a nonrecognition_provision applies alternatively if the transaction resulted in the creation of two separate corporations and assets are actually transferred the asset transfer is taxable unless a nonrecognition_provision applies regardless of whether corporation b is considered to have remained a single corporation or to have become two separate corporations the corporation a group’s claimed treatment of the transaction is improper tl-n-7092-99 a country i corporate resident status may result in taxable conversion from domestic to foreign status for code purposes sec_7701 provides that when used in title_26 where not otherwise distinctly expressed or manifestly incompatible with the intent thereof the term domestic when applied to a corporation means created or organized in the united_states or under the law of the united_states or of any state emphasis added subject_to the same manifestly incompatible caveat sec_7701 provides that the term foreign when applied to a corporation means a corporation that is not domestic consequently before corporation b corporation b was a domestic_corporation because corporation b was organized solely under state e law after the transaction corporation b possessed both a state e and a political_subdivision f charter and thus was organized under both state e and political_subdivision f law despite being organized in two jurisdictions corporation a asserts that applying the plain language of sec_7701 after the transaction corporation b continued to be a domestic_corporation because corporation b continued to be organized under state e law as explained above we believe that continuing to treat corporation b as a domestic_corporation is correct and that it may be denied the claimed treaty benefits however if a court were to conclude that corporation b is entitled to claim benefits under the country i treaty as a resident of country i we would be faced with the question of which definition in sec_7701 and applies to corporation b and is compatible with the purposes of title_26 the phrase manifestly incompatible in sec_7701 lends authority to the contention that one must depart from the definitions in sec_7701 where not doing so would have been incompatible with the intent of the code see eg 50_tc_837 petitioners were the taxpayers to whom notice was required within the meaning of sec_6212 and sec_6213 and c despite the fact that their wholly-owned subchapter_s_corporation arguably also met the criteria of the definition of taxpayer in sec_7701 which provides that t he term ‘taxpayer’ means any person subject_to any internal revenue tax one may argue that it is manifestly incompatible with the intent and purpose of the consolidated_return rules under sections and the accompanying regulations the dividends received deduction and the subpart_f regime to treat corporation b as a domestic_corporation if its claim for status as a treaty resident of country i is successful because title_26 provides that domestic corporations are taxed on their worldwide income while foreign_corporations generally pay u s tax only on their income effectively connected with a u s trade_or_business and on their u s source income congress enacted an extensive system of rules to ensure that domestic corporate parents cannot use foreign subsidiaries to defer or in certain tl-n-7092-99 cases entirely avoid paying a corporate level tax see eg sections dividends received deduction3 sec_367 and sections subpart_f under the unique set of facts presented in this case if corporation b successfully avoids u s tax by claiming benefits under the treaty as a resident of country i its claimed treatment as a domestic_corporation for code purposes should be examined to determine whether such treatment is compatible with the purpose of the applicable code provision if not compatible with the statute the claimed domestic status should be rejected and corporation b will be deemed to have converted from a domestic to a foreign_corporation numerous code and regulatory provisions establish that the conversion is a realization event4 at both the corporate and shareholder levels and that the should be treated as a transfer of assets and liabilities of corporation b us to corporation b foreign in exchange for corporation b foreign stock followed by a distribution by corporation b us of the corporation b foreign stock to its sole owner corporation a in exchange for corporation a’s corporation b us stock see the discussion below part iiib regarding whether the conversion may nevertheless qualify for nonrecognition treatment 3see eg h_r rep no pincite which states with respect to sec_23 of the revenue bill of the predecessor of current sec_243 that d ividends received by a corporation are allowed as a deduction in computing the net_income of a corporation upon the theory that a corporate tax has already been paid upon the earnings out of which the dividends are distributed where however the distributing_corporation is exempt from tax there is no reason why the dividends should be deducted from the gross_income of the stockholder corporation 4see eg code sec_953 corporation terminating its sec_953 election is treated as a domestic_corporation transferring all of its property to a foreign_corporation in connection with an exchange to which sec_354 applies sec_1_367_a_-1t sec_367 applies to the constructive reorganization and transfer of property from a domestic_corporation to a foreign_corporation that occurs upon the termination of a sec_1504 election revrul_89_103 1989_2_cb_65 deemed conversion of a foreign_corporation into a domestic_corporation by reason of sec_269b treated as a transfer by the foreign_corporation of its assets and liabilities to a new domestic_corporation in exchange for stock in that domestic_corporation followed by a distribution by the foreign_corporation of that stock revrul_88_25 1988_1_cb_116 conversion of country y corporation into a state a corporation under the state a domestication statute treated as a transfer by a foreign_corporation of all its assets and liabilities to a new domestic_corporation in exchange for stock in that domestic_corporation followed by a liquidating_distribution of that domestic_corporation stock cf sec_1_337_d_-4 taxable corporation’s change in status to a tax- exempt entity treated as if the taxable corporation transferred its assets to a tax-exempt_entity tl-n-7092-99 additionally corporation b would be a cfc after the transaction corporation a nevertheless avoids any deemed_distribution under subpart_f from corporation b in year because corporation b would not have been a cfc for an uninterrupted period of days or more during year see code sec_951 because sec_1504 excludes foreign_corporations from the definition of an includible_corporation corporation b would no longer be includible on the consolidated_return as a member of the corporation a group which would only be able to credit foreign taxes paid and deemed paid_by corporation b under sec_902 and sec_960 consequently the year dividend from corporation b to corporation a would not qualify for the exclusion provided by sec_1_1502-3 for intercompany distributions and would be subject_to u s tax with no offsetting dividends received deduction in addition the notes between corporation b and corporation a in year constitute an investment of the cfc’s earnings in united_states_property within the meaning of sec_956 requiring an inclusion in income of corporation a under sec_951 to the extent not paid out of previously_taxed_income b if the transaction resulted in the existence of two separate taxable entities a taxable_event may have occurred whether an organization is an entity separate from its owners to be respected for federal tax purposes is a matter of federal tax law not local law sec_301_7701-1 however federal tax law requires one to determine as a factual matter the status of the entity under state law including its rights and obligations see sec_301_7701-2 thus for federal tax purposes a corporate entity is generally formed when there is a valid incorporation under state law see 410_f2d_888 6th cir 10_tc_616 acq c b the leading case for determining whether a corporation is recognized for federal tax purposes is 319_us_436 moline stands for the proposition that a corporation is a separate taxable entity whether the purpose of its existence is to gain an advantage under the law of the state of incorporation or to serve the creator’s personal or undisclosed convenience so long as that purpose is the equivalent of business activity or is followed by the carrying on of business by the corporation id pincite citations omitted in the present case the transaction may have resulted in two separate corporations one in country i corp b country i and one in state e corp b us first_corporation b was incorporated under the laws of state e in year and is declared by state e to be a body corporate under its laws second pursuant to the transaction political_subdivision f issued a corporate charter to corporation b in year treating it as a body corporate and politic organized under the laws of political_subdivision f further because corp b us was organized under the laws of state e it is a domestic_corporation see code sec_7701 similarly by tl-n-7092-99 reason of its organization in political_subdivision f as a corporate entity with its members having limited_liability corp b country i would be a foreign_corporation see code sec_7701 if these entities are determined to be two corporations which we need not decide here there is a taxable asset transfer if assets are determined to have been moved indeed corporation b itself believed that the transaction may constitute a transfer of assets from a domestic_corporation b to a foreign_corporation b as evidenced by its filing a sec_367 gain_recognition_agreement with respect to the corporation c stock with its tax_return for the tax_year ending date year the year in which the transaction occurred to the extent that corporation b is considered to have transferred assets and liabilities to corp b country i in exchange for corp b country i stock it realized any gain_or_loss in the assets transferred and pursuant to sec_1001 must recognize that gain and loss unless a nonrecognition_provision applies additionally corporation a may be considered to have exchanged its corp b us stock for corp b country i stock and therefore must recognize any gain_or_loss it realized on that exchange unless a nonrecognition_provision applies see code sec_1001 although sec_368 lists general categories of transactions that will be treated as tax-free reorganizations a transaction may qualify as a tax-free reorganization only if the transaction has a valid business_purpose see 293_us_465 sec_1_368-1 -1 c and -2 g the avoidance of federal income taxes is not a valid business_purpose 521_f2d_160 10th cir noting that c ommercial transactions ‘entered upon for no other motive but to escape taxation’ are excluded from pertinent tax statutes citations omitted to date the taxpayer has articulated no purpose for the transaction except avoidance of u s tax when corporation c paid dividends to corporation b based on these facts the transaction could not qualify as a tax-free reorganization because avoidance of u s tax is not a valid business_purpose the precise tax consequences to corporation b resulting from the transaction will vary depending upon several matters that require further factual development first it is important to learn whether the post-transaction assets are owned by corp b us by corp b country i or jointly by both corporations additional information is needed before it can be determined whether the transaction should be treated as a nonrecognition_transaction under subchapter_c including 5tax treatment differs depending on whether corp b country i is treated as a separate foreign_corporation or recharacterized as a separate domestic_corporation pursuant to sec_269b sec_367 will apply to a nonrecognition transfer to corp b country i if it is a foreign_corporation tl-n-7092-99 but not limited to the application of sec_367 or whether it is a taxable transaction such facts include i the corporate name in which the stock certificates of corporation c and other subsidiaries are held ii the location and custody of the certificates iii the allocation of benefits and burdens of such ownership or custody and iv whether there were transfers of corporation b’s stock ownership of foreign subsidiaries in whole or in part in conjunction with the transaction and if so how they were effected and by whom any non-tax purpose for repatriating the cash and the ultimate disposition of the money must be ascertained likewise depending upon whether the stock of corporation c is owned by corp b us corp b country i or jointly and whether corp b country i is treated as a domestic_corporation under sec_269b the federal_income_tax treatment of the dollar_figurez dividend from corporation c will vary to the extent the dividend is considered paid to corp b us it must be reported on the corporation a group’s year consolidated_return to the extent the dividend is considered paid to corp b country i it would be taxable to corp b country i as a separate domestic_corporation because a stapled_entity may not join in the filing of a consolidated_return see notice_89_94 1989_2_cb_416 if you have any further questions please call m grace fleeman assistant to the branch chief branch associate chief_counsel international


id cca_2009042111035425 number release date uilc from ---------------- sent tuesday date am to ----------------- cc ----------------------------------------------------------------------------- subject fw additional stay question --------- counsel does interpret the lifting of the bankruptcy automatic_stay in cases of serial bankruptcy filings pursuant to sec_362 to include the lifting of the stay under sec_362 which is the provision that stays the commencement or continuation of a tax_court proceeding accordingly the service may calculate both the last day to petition the tax_court and the assessment statute expiration date once it determines that the stay has lifted by operation of law as directed in irm again feel free to call or e-mail me if you have any further questions regards --------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------