Court Opinion

ID: 4472408
Source: CourtListenerOpinion
Date Created: 2020-01-13 23:24:59.742865+00
Date Added: 2024-06-11T13:39:41.673207
License: Public Domain

Beghe, J., concurring: Having joined the majority opinion, I write separately in an effort to provide some additional support. I don’t disassociate myself from the majority’s expansive interpretation and application of section 702 and the regulation thereunder. The rationale of Rev. Rui. 86-138, 1986-2 C.B. 84 (although revenue rulings are not binding on this Court, see, e.g., Stark v. Commissioner, 86 T.C. 243, 250-251 (1986)), properly can be extended to support the majority’s conclusion that sections 702(a) and 703(a) should be interpreted to prevent the interposition of an entity that has no U.S. income tax liability from disrupting the conduit regimes of subpart F and subchapter K. However, if a literalistic interpretative approach to section 702(a) and section 1.702-l(a)(8)(ii), Income Tax Regs., were to be applied in this case (as the other concurrences and the dissent would do), the operative facts would be outside sections 702 and 703, and there would be no occasion to have recourse to those sections. The preamble of section 702(a) defines the field of coverage of subsections (a) and (b) of section 702 as situations in which a partner is “determining his [here its] income tax”. That condition has arguably not been satisfied in this case because, as the concurrences and dissent point out, Brown Cayman has no U.S. income tax liability. Under a consistent application of their interpretative approach, we are therefore forced outside of subchapter K and thrown back to the common law of Federal taxation.1 It seems to me that the cases cited and summarized at pp. 117-119 of the majority opinion are grounded in longstanding notions of mutual agency that antedate and transcend the argument whether the aggregate or entity theory of partnership is to prevail in a particular tax case that is governed by subchapter K. If the issue is to be posed in terms of entity vs. aggregate, however, as the parties chose to do, it is appropriate to look to the intention of the applicable statutory provisions outside subchapter K (here, subpart F) for guidance about which approach is appropriate. See American Law Institute, Federal Income Tax Project, Subchapter K: Proposals on the Taxation of Partners 452, 523-532 (1984); Youngwood & Weiss, “Partners and Partnerships — Aggregate v. Entity Outside of Subchapter K”, 48 Tax Law. 39, 40-43 (1994).2  The dissent uses inappropriate authorities to support its conclusion that the entity theory must be applied to reach what would properly be characterized as a “bizarre” result under subpart F. Youngwood & Weiss, supra at 40. Authorities which “determined that partnership level characterization was necessary to ascertain matters such as the existence of a trade or business, the existence of a profit motive and the characterization of gain or loss with regard to partnership property”, id. at 57, have no bearing on a case such as this, “where the character of the income must be determined at the level where the income is recognized”, id. It also bears pointing out that United States v. Basye, 410 U.S. 441, 448 (1973), quoted by the dissent as adopting the entity theory, does no more than illustrate that “it is not always possible for partnership income to be allocated to specific partners before it is included in income” and that “Any tax system that permitted * * * [an escrow] arrangement to defer the reporting of income would be fatally flawed. Basye simply recognized this principle in the partnership context.” American Law Institute, Federal Income Tax Project, Sub-chapter K: Proposals on the Taxation of Partners 525 (1984). Finally, in further support of the third leg of the majority opinion: As this writer observed in Fort Howard Corp. v. Commissioner, 103 T.C. 345, 377 n.2 (1994) (Beghe, J., dissenting), the logical relationship that should be focused on to establish the connection is “the logic of events’ that has to do with cause and effect relationships and necessary connections or outcomes.” In the case at hand, all Brinco income was earned commission income, and there is no difficulty in tracing Brown Cayman’s distributive share of that income into its hands. There is no competing other kind of income or activity at the Brinco level that displaces to any extent the direct cause and effect relationship between the income-earning activities of Brinco’s other partners and the characterization of Brown Cayman’s distributive share of Brinco income derived from those activities. Swift, J., agrees with this concurring opinion.  The force of this observation is not blunted by sec. 1.952 — 2(a)(1) and (c), Income Tax Regs., which instructs us to determine the amount of gross income of a foreign corporation under subpt. F by treating it “as a domestic corporation taxable under section 11 and by applying the principles of section 61 and the regulations thereunder” and which do not include subch. K in the list of subchapters that do not apply in determining the applicability of subpt. F. By the express literal terms of the introductory language of sec. 702(a), subch. K does not apply for the purpose of determining the character under subpt. F of the income of a corporation that has no U.S. income tax liability, whereas sec. 702(c) arguably does apply for the purpose of determining the amount of a foreign corporation’s gross income under subpt. F. Subch. K is therefore no impediment to the application of an aggregate approach under general principles of tax law, nor does it weaken the third leg of the majority’s argument.    Reliance on the good sense of judges to do the right thing should make it unnecesary to provide a presumption, by Code, regulation, or ruling, that the aggregate approach should generally be favored. The new partnership antiabuse regulations, sec. 1.701-2(h), Income Tax Regs., make clear that they do not limit the preexisting and continuing applicability of nonstatutory principles and other statutory and regulatory authorities to challenge transactions.