Opinion ID: 65391
Heading Depth: 2
Heading Rank: 1

Heading: Statute and Regulation

Text: The central issue in this appeal is whether the vessels Tidewater time chartered to its customers qualify as export property. We turn first to the relevant provision of the I.R.C. and the relevant treasury regulation that control our analysis. The FSC provisions define export property as follows: § 927(a) Export property. For purposes of this subpart (1) In general. The term export property means property (A) manufactured, produced, grown, or extracted in the United States by a person other than a FSC, (B) held primarily for sale, lease, or rental in the ordinary course of trade or business, by, or to, a FSC, for direct use, consumption, or disposition outside the United States, and (C) not more than 50% of the fair market value of which is attributable to articles imported into the United States. 26 U.S.C. § 927(a) (2000). In this case, the parties agree that the vessels meet the requirements of § 927(a)(1)(A) and (a)(1)(C). Only § 927(a)(1)(B) is in question, as the definition of export property goes on to state: (2) Excluded property. The term export property shall not include (A) property leased or rented by a FSC [or through a commission FSC] for use by any member of a controlled group of corporations of which such FSC is a member .... Id. The Tidewater entities that own the vessel and operate the vessel are members of a controlled group of corporations with Tidewater FSC. Therefore this provision excludes the Tidewater vessels as export property. However, a gloss in the treasury regulations on this statutory exclusion provides Tidewater with a basis for an argument that these vessels are indeed export property: (2) Property leased to a member of controlled group(I) In general. Property leased to a person (whether or not the FSC) which is a member of the same controlled group as the lessor constitutes export property for any period of time only if during the period (A) The property is held for sublease or is subleased, by the person to a third person for the ultimate use of the third person. (B) The third person is not a member of the controlled group; and (C) The property is used predominantly outside the United States by the third person. Temp. Treas. Reg. § 1.927(a)-1T(f)(2) (1998). The bareboat charter of the vessel from the vessel owner to the Tidewater operating company amounts to a lease, so if the Time Charter to the customer is a sublease, Tidewater is entitled to the deduction. Therefore, the question narrows to whether the Time Charter to the customer is a sublease.