Opinion ID: 15677
Heading Depth: 3
Heading Rank: 1

Heading: Qualified Chain Member

Text: 22 The Stanfords contend that section 952(c)(1)(C)'s statutory language, its legislative history, and a current treasury regulation example support their view that Guardian Services is a qualified chain member of Guardian Bank's and that Guardian Services' deficits in earnings and profits are deductible against Guardian Bank's subpart F income. We disagree. As always, we commence our analysis by examining the plain language of the relevant statute, G.M. Trading Corp., 121 F.3d at 981, which in this case is section 952(c)(1)(C). In the absence of any ambiguity, our examination is confined to the words of the statute, which are assumed to carry their ordinary meaning. Id. 23 Section 952(c)(1)(C)(ii) defines the term qualified chain member. It provides that a deficit corporation (here, Guardian Services) 8 is a qualified chain member vis-a-vis a CFC with offsettable subpart F income (here, Guardian Bank) if (1) the deficit corporation is organized under the laws of the same foreign country as the CFC, and (2) either one of the two conditions set forth in subparagraphs (I) and (II) of section 952(c)(1)(C)(ii) is satisfied. I.R.C. § 952(c)(1)(C)(ii). In this case, both Guardian Bank and Guardian Services were organized under the laws of Montserrat. As such, resolution of the qualified chain member issue depends solely on whether either of the conditions set forth in subparagraphs (I) and (II) was satisfied. 24 Under subparagraphs (I) and (II), a deficit corporation is a qualified chain member vis-a-vis a CFC with offsettable subpart F income only if the CFC owns all the stock of the deficit corporation, or if the deficit corporation owns all the stock of the CFC. I.R.C. § 952(c)(1)(C)(ii). Specifically, subparagraphs (I) and (II) provide that the deficit corporation is a qualified chain member of the CFC only if (1) all of the deficit corporation's stock is owned by the CFC either directly or through 1 or more corporations other than the common parent, I.R.C. § 952(c)(1)(C)(ii)(I); or (2) all of the stock of the CFC is owned by the deficit corporation either directly or through 1 or more corporations other than the common parent, I.R.C. § 952(c)(1)(C)(ii)(II). 9 25 In this case, neither Guardian Bank nor Guardian Services owned the other's stock directly. Hence, the relevant question becomes whether Guardian Bank or Guardian Services owned indirectly all of the other's stock in a way that satisfies the requirements of section 952(c)(1)(C)(ii). 10 In other words, the issue of whether Guardian Services is a qualified chain member with respect to Guardian Bank turns on whether Guardian Bank or Guardian Services owned 100 percent of the other's stock through 1 or more corporations other than the common parent. I.R.C. § 952(c)(1)(C)(ii). Of course, in this case, such qualifying ownership could flow only through Stanford Financial, which directly owned all of the stock of both Guardian Bank and Guardian Services. 26 We agree with the Tax Court's final conclusion--that Guardian Services is not a qualified chain member with respect to Guardian Bank and thus its deficit in earnings and profits cannot be used to reduce Guardian Bank's subpart F income. Under the plain language of section 952(c)(1)(C)(ii), a deficit corporation is a qualified chain member vis-a-vis a CFC with offsettable subpart F income only if one completely owns the other directly (not applicable in this case) or through one or more corporations other than the common parent.  I.R.C. § 952(c)(1)(C)(ii) (emphasis added). As such, any qualifying indirect relationship between a CFC and a deficit corporation cannot flow through the common parent [corporation]. 11 In this case, involving a simple tripartite structure, Guardian Services would be deemed to be an indirect owner of Guardian Bank only through their common parent corporation, Stanford Financial. Likewise, Guardian Bank would be deemed to be an indirect owner of Guardian Services only through the same common parent corporation. Accordingly, read in the light of ordinary understanding, the other than the common parent language of section 952(c)(1)(C) prevents Guardian Services from being a qualified chain member with respect to Guardian Bank. 12 Because a plain reading of the statute precludes reaching a contrary result in this case, we need not conduct an analysis of the statute's legislative history. See Nalle v. Commissioner, 997 F.2d 1134, 1140 (5th Cir.1993). 13 The Tax Court correctly held that the Stanfords could not reduce Guardian Bank's subpart F income by the deficits in earnings and profits of Guardian Services. 14