Court Opinion

ID: 4333461
Source: CourtListenerOpinion
Date Created: 2018-11-14 01:12:30.751251+00
Date Added: 2024-06-11T14:20:08.096132
License: Public Domain

117 T.C. No. 7

                UNITED STATES TAX COURT

TEXTRON INC. AND SUBSIDIARY COMPANIES, Petitioner v.
    COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 20643-98.                    Filed August 21, 2001.

     P, a domestic corporation, acquired substantially
all of the stock of A, a foreign corporation. The
Federal Trade Commission (FTC) contemporaneously filed
a complaint in U.S. District Court seeking to enjoin
P’s acquisition and control of A pending resolution of
potential restraint of trade issues. Pursuant to the
court’s order, P transferred its A stock to a voting
trust pending the FTC’s consideration of the issues.
The trust had an independent trustee who held and voted
the stock without influence by P. The trustee was
directed to, and did, operate A independently of P and
as an active competitor of P. P was the trust’s only
beneficiary.
     Held: Sec. 951(a), I.R.C., does not include A’s
subpt. F income in P’s income because P did not own the
A shares after the transfer.
     Held, further, sec. 951(a), I.R.C., includes A’s
subpt. F income in the trust’s income which, under
secs. 671 and 677(a), I.R.C., must be recognized by P.
                                 - 2 -

     James P. Fuller, Kenneth B. Clark, and David L. Forst, for

petitioner.

     Nancy B. Herbert, Ruth M. Spadaro, and Jeffrey L. Bassin,

for respondent.

                                OPINION

     LARO, Judge:     This matter is before the Court on cross-

motions for partial summary judgment.     See Rule 121.1   Petitioner

petitioned the Court to redetermine respondent’s determination of

deficiencies of $5,083,201, $1,783,938, $244,211, $1,152,171,

$14,011,513, and $68,811 in its Federal income tax for its

taxable years ended January 2, 1988, December 31, 1988, December

30, 1989, December 29, 1990, December 28, 1991, and January 2,

1993, respectively.

     Following our disposition of the other issue in this case,

see Textron Inc. & Sub. Cos. v. Commissioner, 115 T.C. 104

(2000), we must decide whether petitioner’s 1989 through 1992

income includes the “subpart F income” (defined infra p. 12) of

Avdel PLC (Avdel), a controlled foreign corporation (CFC).      We

hold it does.

     1
       Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for the years in issue. Rule
references are to the Tax Court Rules of Practice and Procedure.
                                 - 3 -

                            Background

     Textron, Inc. (Textron), is a corporation whose principal

place of business was in Providence, Rhode Island, when the

petition was filed.   In early 1989, Textron acquired

substantially all of the stock of Avdel, a public limited company

organized under the laws of the United Kingdom.    Avdel’s shares

were traded on the London Stock Exchange.    By February 21, 1989,

Textron had acquired more than 95 percent of Avdel’s stock.

     On February 21, 1989, the Federal Trade Commission (FTC)

filed a complaint in the U.S. District Court for the District of

Columbia (the District Court).    The complaint sought to enjoin

Textron’s acquisition and control of Avdel and its assets until

potential restraint of trade issues could be resolved.    One day

later, the District Court issued a temporary restraining order

(the TRO) providing that Textron was “temporarily restrained and

enjoined from * * * assuming or exercising any form of direction

or control over the assets or operations of Avdel”.     The District

Court issued the TRO for the purposes

     of assuring that Avdel will remain viable and
     competitive with Textron; of maintaining the businesses
     of Textron and Avdel separate from and independent of
     one another; [and] of continuing the state of
     competition between Textron and Avdel * * * to the same
     extent as if Textron and Avdel were in all respects
     separate and independent business entities.

The TRO stated, at section IV, that “All rights to exercise

voting power with respect to the Avdel shares held by Textron
                              - 4 -

shall be vested in a trustee, who shall be appointed by the Court

and who shall act in accordance with the Voting Trust Agreement”.

The TRO specifically barred Textron from exercising any voting

rights with respect to the Avdel shares.

     The District Court terminated the TRO and superseded it by a

preliminary injunction order dated March 2, 1989 (the order).    As

relevant herein, the order stated, at section II, that it was

entered for the purposes:

     of maintaining the status quo ante pendente lite by
     allowing Textron to retain, subject to the terms of
     this Order, any Avdel shares it may have acquired prior
     to the entry of this Order, and any Avdel shares it may
     henceforth acquire, pending consideration on the merits
     by the Federal Trade Commission; of assuring that Avdel
     will remain viable and competitive with Textron; of
     maintaining the businesses of Textron and Avdel
     separate from and independent of one another; [and] of
     continuing the state of competition between Textron and
     Avdel * * * to the same extent as if Textron and Avdel
     were in all respects separate and independent entities
     * * *.

     The order specifically enjoined Textron “from assuming or

exercising any form of direction or control over Avdel PLC,

except as provided by this Order.”    The order stated, at section

IV, that

     For the term of this Order Textron shall not exercise
     any voting power, influence, or control, directly or
     indirectly, with respect to the conduct of Avdel or the
     shares of Avdel held by it. All rights to exercise
     voting power with respect to the Avdel shares held by
     Textron shall be vested in a trustee, who shall be
     appointed by the Court and who shall act in accordance
     with the Voting Trust Agreement * * * [and] use his
     best business judgment in exercising such voting trust
                                - 5 -

     power * * * in a manner consistent with the purpose and
     requirements of this Order.

  The order also stated, at section V, that,

     Textron shall not exercise nor attempt to exercise
     direction or control over, or influence or attempt to
     influence directly or indirectly, the conduct of
     Avdel’s business during the term of this Order. Avdel
     shall be maintained as a separate corporate entity with
     an independent Board of Directors. In no event shall
     any director, officer, employee, agent or
     representative of Textron become or remain a member of
     Avdel’s Board of Directors or become or remain an
     officer of Avdel. Nor may any director, officer,
     employee, agent or representative of Avdel become or
     remain a member of Textron’s Board of Directors or
     become or remain an officer of Textron.

     On March 13, 1989, Textron and Patricia P. Bailey (Ms.

Bailey) entered into an agreement (the voting trust agreement)

which created a voting trust (voting trust) with respect to the

Avdel shares, pursuant to the requirements of the order.    The

voting trust agreement named Ms. Bailey, an attorney from

Washington, D.C., as trustee.   Before serving as trustee, Ms.

Bailey had been a Commissioner of the FTC from October 1979

through May 1988.

     Ms. Bailey understood that, in general, her role as trustee

was to ensure that Avdel remained financially healthy and

functioned independently of any control of Textron and as a

vigorous competitor of Textron.   The voting trust agreement, at

section 3, directed Ms. Bailey to hold, personally or through an

agent, the certificates representing all shares of Avdel stock

acquired by Textron.   She did so in her capacity as trustee and
                               - 6 -

was precluded by section 4(c) from having any beneficial interest

in those shares.   The voting trust agreement, at section 4(c),

stated that, other than the trustee, “No * * * person shall have

any voting right in respect of the [Avdel] Stock so long as this

Agreement is in effect.”   Throughout the term of the voting trust

agreement, Ms. Bailey held all Avdel stock certificates.

     The voting trust agreement, at section 4(a), stated that the

trustee would “in his [sic] sole discretion, subject to the

provisions of this section * * * have the duty to exercise all

voting rights of the [Avdel] Stock, including the right to vote

the Stock on all matters upon which the holders of the Stock are

entitled to vote.”   The voting trust agreement barred Textron

from exercising any voting rights with respect to the Avdel

shares and from having any control over the Avdel board of

directors.   Moreover, the voting trust agreement, at section

4(f), stated that “The Trustee shall take all steps to ensure

that Avdel competes as vigorously with Textron as it would should

there be no relationship between Textron and Avdel.”

     The voting trust agreement, at section 8(a), further

provided that

     Textron shall be entitled to receive from time to time
     payments equal to the amount of any cash dividends if
     the trustee, in his [sic] sole discretion, believes
     payment of such dividends would be prudent. Such
     payments shall be made by the Trustee as soon as
     practicable after the receipt of the dividends. In
     lieu of receiving cash dividends and paying them to
                               - 7 -

     Textron, the Trustee may instruct Avdel in writing to
     pay the cash dividends directly to Textron.

Section 8(b) required the trustee to hold for the benefit of

Textron any shares of Avdel stock received as dividends.

Section 8(c) provided that the trustee would receive all proceeds

of a sale or exchange of Avdel’s assets or stock and, after

deducting the associated expenses, pay the amounts to Textron.

Section 8(d) provided that any other distributions with respect

to Avdel’s stock would be distributed to Textron.

     The order and voting trust agreement were in force from

their effective dates throughout the end of the period at issue

(the last day of petitioner’s 1992 taxable year).   The order and

voting trust agreement terminated pursuant to a decision and

order issued by the FTC on May 6, 1994.

     During the period that the order and the voting trust

agreement were in effect, Ms. Bailey, Textron, and Avdel complied

with the provisions of the order and the voting trust agreement.

In accordance with the voting trust agreement, the trustee

surrendered to Avdel the Avdel stock received from Textron, and

Avdel issued new stock certificates registered in the name of Ms.

Bailey.   Ms. Bailey exercised the voting rights of the shares of

Avdel stock in accordance with the order and the voting trust

agreement.   Throughout the period at issue, Avdel had four

directors, one of whom was Ms. Bailey.
                               - 8 -

     No director, officer, employee, agent, or representative of

Textron was a member of Avdel’s board of directors or an officer

of Avdel at any time during the period at issue.   No director,

officer, employee, agent, or representative of Avdel was a member

of Textron’s board of directors or an officer of Textron at any

time during the period at issue.   Throughout the period at issue,

Avdel’s board of directors and officers ran the Avdel business.

Textron had no influence or control over the running of the Avdel

business.   During that time, Avdel’s board of directors

determined Avdel’s dividend policy, and Textron had no influence

or control over that policy.

     Throughout the period at issue, Avdel’s board of directors

and officers had complete control over the reorganization,

consolidation, and liquidation of companies in the Avdel group.

Textron had no influence or control over these types of

restructuring.   There was no contact of any kind between any

officer or director of Textron and any officer or director of

Avdel that was not supervised personally by Ms. Bailey.    Few such

contacts occurred, and business matters were not discussed.

While the order was in effect, Avdel’s board of directors had

complete control over the compensation of Avdel’s officers.     In

this regard, Avdel hired a third-party consultant to advise on

matters of compensation.   Textron had no influence or control

over the compensation of Avdel’s officers.
                                 - 9 -

     Textron did not acquire Avdel to serve as a “tax haven

device”.

                             Discussion

     The current issue, before the Court on cross-motions for

partial summary judgment, is one of first impression.   It

involves the interaction of the rules relating to CFCs contained

in subpart F (subpart F) of subchapter N (i.e., sections 951

through 963) and the rules relating to grantor trusts contained

in subpart E (subpart E) of subchapter J (i.e., sections 671

through 679).   The relevant provisions of subpart F are sections

951(a) and (b) and 958(b).   The relevant provisions of subpart E

are sections 671, 672(a) and (b), and 677(a).   We set forth the

relevant text of these provisions in an appendix.

     Each party asserts that it is entitled to partial summary

judgment on the subject issue.    Respondent argues that Textron is

considered the owner of the Avdel shares under subpart E and,

hence, a United States shareholder (U.S. shareholder) under

subpart F whose income includes Avdel’s subpart F income.

Petitioner argues that Textron is not a U.S. shareholder under

subpart F.   Petitioner asserts that a taxpayer is a U.S.

shareholder for that purpose only if the taxpayer can vote the

shares of the CFC.   Petitioner points out that Textron could not

vote Avdel’s shares and concludes that Textron was not required

to include in its income Avdel’s subpart F income.
                               - 10 -

     Respondent argues alternatively that the voting trust was

both a grantor trust under subpart E and a U.S. shareholder under

subpart F.   Respondent asserts that Textron is the voting trust’s

grantor and, in accordance with subpart E, must include in its

income any Avdel subpart F income realized by the trust.

Petitioner replies that subpart E was not intended to be applied

in the manner suggested by respondent.

     A. Summary Judgment

     Summary judgment is intended to expedite litigation and

avoid unnecessary and expensive trials of phantom factual issues.

P & X Mkts., Inc. v. Commissioner, 106 T.C. 441, 443 (1996),

affd. without published opinion 139 F.3d 907 (9th Cir. 1998).

Summary judgment is appropriate where there is no genuine issue

as to any material fact and a decision may be rendered as a

matter of law.    Rule 121(b); P & X Mkts., Inc. v. Commissioner,

supra at 443.    In deciding whether to grant summary judgment, the

Court must consider the factual materials and inferences drawn

from them in the light most favorable to the nonmoving party.

Bond v. Commissioner, 100 T.C. 32, 36 (1993); Naftel v.

Commissioner, 85 T.C. 527, 529 (1985).

     The parties agree that for the purpose of deciding these

cross-motions there are no genuine issues of material fact and

that the Court may decide the issue as a matter of law.    This
                               - 11 -

case is ripe for disposition of that issue by partial summary

judgment.

     B.   Subpart F

     In order to explain the issue before the Court, it is

necessary to set out an overview of the operation of subpart F.

Before 1962, the income of a foreign corporation, even one owned

by a U.S. shareholder, generally was not subject to U.S. tax if

the income was earned outside the United States and not

repatriated as a dividend.   Some domestic corporations,

therefore, would keep a foreign subsidiary’s earnings in a “tax

haven” country in order to defer U.S. tax until the money was

repatriated.   See Office of Tax Policy, U.S. Dept. of Treasury,

Doc. 2001-492, The Deferral of Income Earned through U.S.

Controlled Foreign Corporations:   A Policy Study 13 (2000).    To

curtail that practice, Congress added subpart F to the Code by

way of section 12 of the Revenue Act of 1962, Pub. L. 87-834, 76

Stat. 1006.    See also H. Rept. 1447, 87th Cong., 2d Sess. (1962),

1962-3 C.B. 405, 461; S. Rept. 1881, 87th Cong., 2d Sess. (1962),

1962-3 C.B. 707, 784.   See generally Yoder, 926-2d Tax Mgmt.

(BNA), “Subpart F–General”, at A-3 (2000), for a detailed

discussion of the background to and legislative history of

subpart F.    Subpart F generally requires that a U.S. shareholder

include in its gross income its pro rata share of subpart F

income derived by a CFC.   Sec. 951(a).   Subpart F requires this
                                - 12 -

result even if the subpart F income is not actually distributed.

See Vetco, Inc. v. Commissioner, 95 T.C. 579, 586-587 (1990).

       The object of subpart F is to tax currently specified

earnings of foreign corporations that are, in the aggregate,

controlled by U.S. shareholders.     The scope of subpart F,

however, is limited.    It applies primarily to the types of income

described in section 952 (subpart F income).      Secs. 951(a) and

952.    Moreover, it affects only foreign corporations that are

controlled by certain U.S. shareholders and, in those cases,

applies only to those U.S. shareholders who own a requisite

percentage of a CFC’s voting power.      Secs. 951(b), 957(a).

       Our analysis of whether a taxpayer who is a shareholder in a

foreign corporation must include subpart F income in the

taxpayer’s income starts with a determination of whether the

foreign corporation is a CFC.     A CFC is any foreign corporation

more than 50 percent of whose stock, either by voting power or

value, is owned directly, indirectly, or constructively by U.S.

shareholders.    Sec. 957(a).   The parties agree that Avdel is a

CFC.

       We next address the question of whether the taxpayer is a

U.S. shareholder subject to the inclusion of subpart F income

under section 951(a).    The phrase “U.S. shareholder” is a term of

art that finds its meaning in section 951(b).      Our reading of

that text in conjunction with our reading of section 951(a)
                               - 13 -

reveals that not every U.S. shareholder in a CFC is subject to

section 951(a).    Section 951(a) applies only to a taxpayer “who

owns (within the meaning of section 958(a)) stock in such

corporation [the CFC] on the last day, in such year, on which

such corporation is a controlled foreign corporation”.      As

opposed to the broadly inclusive text of section 951(b), where

direct, indirect, and constructive ownership is considered,

section 951(a) requires that the shares be directly owned or

indirectly owned within the meaning of section 958(a) for the

inclusion to be required.    Section 958(a) attributes only stock

owned through foreign entities to its indirect domestic owner.

Thus, a taxpayer who owns no stock through a foreign entity is

subject to the inclusion of subpart F income under section 951(a)

only if the taxpayer is a U.S. shareholder who directly owns

stock in the CFC.

     Here, such is not the case.    Textron did not directly own

the Avdel shares.    The voting trust did.     Ms. Bailey, as trustee

of the voting trust, held all of the Avdel shares that Textron

had purchased and owned them in her capacity as the voting

trust’s trustee.    While Textron is considered to own those shares

under section 958(b), which incorporates by reference section 318

(with amendments),2 Textron did not own those shares either

     2
         Sec. 318 in relevant part provides:

                                                        (continued...)
                                 - 14 -

directly or indirectly within the meaning of sections 951(a) and

958(a).

     Respondent argues that constructive ownership of the Avdel

shares under the grantor trust rules, specifically section

677(a), satisfies the direct or indirect ownership requirement of

section 951(a).   We disagree.       Our comparison of the language in

     2
      (...continued)
     SEC. 318. CONSTRUCTIVE OWNERSHIP OF STOCK.

               (a) General Rule.--For purposes of those
          provisions of this subchapter to which the rules
          contained in this section are expressly made
          applicable--

                    *       *    *      *    *    *    *

                    (2) Attribution from partnerships,
               estates, trusts, and corporations.--

                    *       *    *      *    *    *    *

                           (B) From trusts.--

                             (i) Stock owned, directly
                        or indirectly, by or for a
                        trust * * * shall be
                        considered as owned by its
                        beneficiaries in proportion to
                        the actuarial interest of such
                        beneficiaries in such trust.

                             (ii) Stock owned,
                        directly or indirectly, by or
                        for any portion of a trust of
                        which a person is considered
                        the owner under subpart E of
                        part I of subchapter J
                        (relating to grantors and
                        others treated as substantial
                        owners) shall be considered as
                        owned by such person.
                                - 15 -

section 951(a) and (b) reveals that Congress was acutely aware of

the various ways that a taxpayer could be considered to be an

owner of an asset.    By incorporating the constructive ownership

rules into section 951(b) (by reference to section 958(b), which,

in turn, references section 318(a)), and excluding the

constructive ownership rules from section 951(a) (by choosing not

to include a comparable reference), Congress prescribed a

specific meaning for the term “owns” in section 951(a).    See also

S. Rept. 1881, 87th Cong., 2d Sess. (1962), 1962-3 C.B. 703, 943-

944 (legislative history helps to make clear how direct and

indirect ownership, on the one hand, are distinguished from

constructive ownership, on the other hand, for purposes of the

gross income inclusion required by subpart F).    In a case such as

this, where “a statute limits a thing to be done in a particular

mode, it [the statute] includes the negative of any other mode.”

Botany Worsted Mills v. United States, 278 U.S. 282, 289 (1929).

This principle of statutory construction, which reflects an

ancient maxim “expressio unius est exclusio alterius” (the

expression of one thing is to the exclusion of the other), is

applicable here.     See Natl. R.R. Passenger Corp. v. Natl.

Association of R.R. Passengers, 414 U.S. 453, 458 (1974); see

also Natl. Truck Equip. Association v. Natl. Highway Traffic

Safety Admin., 972 F.2d 669, 674 (6th Cir. 1992) (“In

interpreting silence, we keep in mind the statutory canon
                              - 16 -

expressio unius est exclusio alterius”).     We decline respondent’s

invitation to extend the operation of section 677(a) to the facts

at hand to treat Textron as the owner of the Avdel shares for the

purpose of section 951(a).

     C.   Application of Subpart F to the Voting Trust and Subpart
          E to Textron

     Domestic trusts are generally taxable entities whose taxable

income is computed in the same manner as that of individuals.

Sec. 641.   Generally speaking, an arrangement will be treated as

a trust under the Internal Revenue Code if it can be shown that

the purpose of the arrangement is to vest in a trustee

responsibility for the protection and conservation of property

for one or more beneficiaries who cannot share in the discharge

of this responsibility and, therefore, are not associates in a

joint enterprise for the conduct of business for profit.     Sec.

301.7701-4, Proced. & Admin. Regs.     An arrangement, therefore,

will be classified as a trust for Federal income tax purposes if

it is a bona fide transaction that involves a trustee, a

beneficiary, and trust property (res).     See Bibby v.

Commissioner, 44 T.C. 638 (1965); see also Estate of Wedum v.

Commissioner, T.C. Memo. 1989-184 (“The elements of a valid

express trust * * * are:   (1) a designated trustee subject to

enforceable duties, (2) a designated beneficiary vested with

enforceable rights, and (3) a definite trust res wherein the
                              - 17 -

trustee’s title and estate is separated from the vested

beneficial interest of the beneficiary.”).

     Following our review of the record before us, including

especially our reading of the voting trust agreement, we conclude

that the voting trust meets each of the requirements necessary to

establish a trust for Federal income tax purposes.   The District

Court ordered the creation of the voting trust upon the joint

motion of Textron and the FTC so that Textron could retain

beneficial ownership of Avdel while the FTC reviewed the

potential restraint of trade issues.   Textron settled the Avdel

shares into the voting trust, and the trustee assumed ownership

of the shares in accordance with the obligations set forth in the

voting trust agreement.   Textron was the voting trust’s sole

beneficiary; i.e., Textron was the only contributor of property

to the voting trust, and Textron was the only holder of a

beneficial interest in the trust property under the voting trust

agreement.

     Respondent asserts that the voting trust is a grantor trust

that in each of the subject years realized subpart F income

attributable to its ownership of the Avdel shares.   Respondent

also asserts that Textron is the grantor of the trust and, as

such, must recognize the trust’s subpart F income under subpart

E.   We agree with both of these assertions.   First, we find that

Avdel was a CFC and that the voting trust owned directly (and had
                              - 18 -

the ability to vote without restriction) more than 10 percent of

Avdel’s voting power.   For the purpose of subpart F, a “United

States person” is defined in section 957(c), and the voting trust

is a domestic trust that is included in that definition.3    Sec.

7701(a)(30).   Given the fact that Avdel is a CFC and that the

voting trust is a U.S. person possessing more than 10 percent of

Avdel’s voting power, we conclude that the voting trust is a U.S.

shareholder under section 951(b).

     As discussed above, section 951(a) requires that a taxpayer

who is a U.S. shareholder include in its gross income a pro rata

share of the subpart F income attributable to its shareholding in

a CFC.   Here, prima facie, the voting trust must include a pro

rata share of Avdel’s subpart F income in its gross income.

Subpart E, however, provides an exception to the general rule

that trusts are taxable on their income.   Under these provisions,

“when a grantor who has certain powers in respect of trust

property that are tantamount to dominion and control over such

property, the Code ‘looks through’ the trust form and deems such

grantor or other person to be the owner of the trust property and

attributes the trust income directly to such person.”   Estate of

O’Connor v. Commissioner, 69 T.C. 165, 178 (1977).

     3
       Petitioner does not argue that the voting trust is
properly characterized as a foreign trust.
                               - 19 -

     Section 677(a) treats as an owner of a trust a grantor who

retains certain rights to income from the trust.   Section 671

provides that the deemed owner of the trust, rather than the

trust, is currently taxed on the trust’s income.   The grantor is

considered the owner of the trust or of a portion of the trust

“if he has retained any interest which might, without the

approval or consent of an adverse party, enable him to have the

income from that portion distributed to him at some time either

actually or constructively”.   Sec. 1.677(a)-1(c), Income Tax

Regs.   An “adverse party” is one who has a substantial beneficial

interest in the trust which would be adversely affected by the

exercise or nonexercise of the power that he, she, or it

possesses respecting the trust.   Sec. 672(a).

     Pursuant to section 677(a), Textron is considered to be the

grantor of a grantor trust; to wit, the voting trust.    Textron

was entitled, subject to the exercise of the trustee’s

discretion, to payments of income from the voting trust equal to

the amounts of cash dividends distributed to the trust by Avdel.

Textron also was entitled to payments from the voting trust of

any money or property received through any other distributions by

Avdel to the trust.   Textron also was the only holder of a

beneficial interest in either the income or the corpus of the

voting trust.   Given the additional fact that the trustee, the

only other person associated with the trust, was not an “adverse
                              - 20 -

party” within the meaning of that term (e.g., she had no

beneficial interest in the voting trust), we conclude that

Textron was entitled to income of the trust without the approval

or consent of an adverse party.   Accordingly, we hold that the

voting trust is properly classified as a grantor trust.4

     The consequence of classifying the voting trust as a grantor

trust is that Textron is considered to be the owner of the trust.

As such, Textron, and not the voting trust, must include the

trust’s Avdel subpart F income in its (Textron’s) gross income.

Sec. 671.   We disagree with petitioner that subpart E was not

meant to apply to the facts at hand.   We do not find in the text

or policy of the applicable statutes an exception that would

insulate petitioner from taxation.

     We hold that the subpart F income attributable to the

ownership of the Avdel shares is properly includable in Textron’s

income by virtue of the combined operation of subpart F (which

requires inclusion of that income in the voting trust’s income)

     4
       The fact that Textron could not vote the Avdel shares is
of no concern to us for purposes of sec. 677.
                              - 21 -

and subpart E (which requires that the income be included in

Textron’s income).   Accordingly,

                               An order will be issued granting

                          respondent’s motion for partial summary

                          judgment and denying petitioner’s motion

                          for partial summary judgment, and

                          decision will be entered under Rule 155.
                          - 22 -

                         APPENDIX

SEC. 671. TRUST INCOME, DEDUCTIONS, AND CREDITS
          ATTRIBUTABLE TO GRANTORS AND OTHERS AS
          SUBSTANTIAL OWNERS.

     Where it is specified in this subpart that the
grantor or another person shall be treated as the owner
of any portion of a trust, there shall then be included
in computing the taxable income and credits of the
grantor or the other person those items of income,
deductions, and credits against tax of the trust which
are attributable to that portion of the trust to the
extent that such items would be taken into account
under this chapter in computing taxable income or
credits against the tax of an individual. Any
remaining portion of the trust shall be subject to
subparts A through D. No items of a trust shall be
included in computing the taxable income and credits of
the grantor or of any other person solely on the
grounds of his dominion and control over the trust
under section 61 (relating to definition of gross
income) or any other provision of this title, except as
specified in this subpart.

SEC. 672.   DEFINITIONS AND RULES.

     (a) Adverse Party.--For purposes of this subpart,
the term “adverse party” means any person having a
substantial beneficial interest in the trust which
would be adversely affected by the exercise or
nonexercise of the power which he possesses respecting
the trust. A person having a general power of
appointment over the trust property shall be deemed to
have a beneficial interest in the trust.

     (b) Nonadverse Party.--For purposes of this
subpart, the term “nonadverse party” means any person
who is not an adverse party.

            *   *    *    *    *     *   *

SEC. 677.   INCOME FOR BENEFIT OF GRANTOR.

     (a) General Rule.--The grantor shall be treated as
the owner of any portion of a trust, whether or not he
is treated as such owner under section 674, whose
                         - 23 -

income without the approval or consent of any adverse
party is, or, in the discretion of the grantor or a
nonadverse party, or both, may be--

          (1) distributed to the grantor or the
     grantor’s spouse;

          (2) held or accumulated for future
     distribution to the grantor or the grantor’s
     spouse; or

          (3) applied to the payment of premiums
     on policies of insurance on the life of the
     grantor or the grantor’s spouse (except
     policies of insurance irrevocably payable for
     a purpose specified in section 170(c)
     (relating to definition of charitable
     contributions)).

This subsection shall not apply to a power the exercise
of which can only affect the beneficial enjoyment of
the income for a period commencing after the occurrence
of an event such that the grantor would not be treated
as the owner under section 673 if the power were a
reversionary interest; but the grantor may be treated
as the owner after the occurrence of the event unless
the power is relinquished.

            *   *    *    *    *    *    *

SEC. 951.   AMOUNTS INCLUDED IN GROSS INCOME OF UNITED
            STATES SHAREHOLDERS.

     (a) Amounts Included.--

          (1) In general.--If a foreign
     corporation is a controlled foreign
     corporation for an uninterrupted period of 30
     days or more during any taxable year, every
     person who is a United States shareholder (as
     defined in subsection (b)) of such
     corporation and who owns (within the meaning
     of section 958(a)) stock in such corporation
     on the last day, in such year, on which such
     corporation is a controlled foreign
     corporation shall include in his gross
     income, for his taxable year in which or with
                   - 24 -

which such taxable year of the corporation
ends--

          (A) the sum of--

               (i) his pro rata
          share (determined under
          paragraph (2)) of the
          corporation’s subpart F
          income for such year,

               (ii) his pro rata
          share (determined under
          section 955(a)(3) as in
          effect before the
          enactment of the Tax
          Reduction Act of 1975) of
          the corporation’s
          previously excluded
          subpart F income
          withdrawn from investment
          in less developed
          countries for such year,
          and

               (iii) his pro rata
          share (determined under
          section 955(a)(3)) of the
          corporation’s previously
          excluded subpart F income
          withdrawn from foreign
          base company shipping
          operations for such year;
          and

          (B) his pro rata share
     (determined under section
     956(a)(2)) of the corporation’s
     increase in earnings invested in
     United States property for such
     year (but only to the extent not
     excluded from gross income under
     section 959(a)(2)).

     (2) Pro rata share of subpart F income.--
The pro rata share referred to in paragraph
(1)(A)(i) in the case of any United States
shareholder is the amount--
                   - 25 -

          (A) which would have been
     distributed with respect to the
     stock which such shareholder owns
     (within the meaning of section
     958(a)) in such corporation if on
     the last day, in its taxable year,
     on which the corporation is a
     controlled foreign corporation it
     had distributed pro rata to its
     shareholders an amount (i) which
     bears the same ratio to its subpart
     F income for the taxable year, as
     (ii) the part of such year during
     which the corporation is a
     controlled foreign corporation
     bears to the entire year, reduced
     by

          (B) the amount of
     distributions received by any other
     person during such year as a
     dividend with respect to such
     stock, but only to the extent of
     the dividend which would have been
     received if the distribution by the
     corporation had been the amount (i)
     which bears the same ratio to the
     subpart F income of such
     corporation for the taxable year,
     as (ii) the part of such year
     during which such shareholder did
     not own (within the meaning of
     section 958(a)) such stock bears to
     the entire year.

     (3) Limitation on pro rata share of
previously excluded subpart F income
withdrawn from investment.--For purposes of
paragraph (1)(A)(iii), the pro rata share of
any United States shareholder of the
previously excluded subpart F income of a
controlled foreign corporation withdrawn from
investment in foreign base company shipping
operations shall not exceed an amount--

          (A) which bears the same ratio
     to his pro rata share of such
                          - 26 -

            income withdrawn (as determined
            under section 955(a)(3)) for the
            taxable year, as

                 (B) the part of such year
            during which the corporation is a
            controlled foreign corporation
            bears to the entire year.

          (4) Limitation on pro rata share of
     investment in United States property.- For
     purposes of paragraph (1)(B), the pro rata
     share of any United States shareholder in the
     increase of the earnings of a controlled
     foreign corporation invested in United States
     property shall not exceed an amount (A) which
     bears the same ratio to his pro rata share of
     such increase (as determined under section
     956(a)(2)) for the taxable year, as (B) the
     part of such year during which the
     corporation is a controlled foreign
     corporation bears to the entire year.

     (b) United States Shareholder Defined.--For
purposes of this subpart, the term “United States
shareholder” means, with respect to any foreign
corporation, a United States person (as defined in
section 957(c)) who owns (within the meaning of section
958(a)), or is considered as owning by applying the
rules of ownership of section 958(b), 10 percent or
more of the total combined voting power of all classes
of stock entitled to vote of such foreign corporation.

                 *    *    *    *    *      *    *

SEC. 958.   RULES FOR DETERMINING STOCK OWNERSHIP.

     (a)    Direct and Indirect Ownership.--

          (1) General rule.--For purposes of this
     subpart (other than sections 955(b)(1)(A) and
     (B), 955(c)(2)(A)(ii), and 960(a)(1)), stock
     owned means

                 (A) stock owned directly, and

                 (B) stock owned with the
            application of paragraph (2).
                   - 27 -

     (2) Stock ownership through foreign
entities.--For purposes of subparagraph (B)
of paragraph (1), stock owned, directly or
indirectly, by or for a foreign corporation,
foreign partnership, or foreign trust or
foreign estate (within the meaning of section
7701(a)(31)) shall be considered as being
owned proportionately by its shareholders,
partners, or beneficiaries. Stock considered
to be owned by a person by reason of the
application of the preceding sentence shall,
for purposes of applying such sentence, be
treated as actually owned by such person.

     *    *    *    *    *    *    *

     (b) Constructive Ownership.--For
purposes of sections 951(b), 954(d)(3),
956(b)(2), and 957, section 318(a) (relating
to constructive ownership of stock) shall
apply to the extent that the effect is to
treat any United States person as a United
States shareholder within the meaning of
section 951(b), to treat a person as a
related person within the meaning of section
954(d)(3), to treat the stock of a domestic
corporation as owned by a United States
shareholder of the controlled foreign
corporation for purposes of section
956(b)(2), or to treat a foreign corporation
as a controlled foreign corporation under
section 957, except that--

          (1) In applying paragraph
     (1)(A) of section 318(a), stock
     owned by a nonresident alien
     individual (other than a foreign
     trust or foreign estate) shall not
     be considered as owned by a citizen
     or by a resident alien individual.

          (2) In applying subparagraphs
     (A), (B), and (C) of section
     318(a)(2), if a partnership,
     estate, trust, or corporation owns,
     directly or indirectly, more than
     50 percent of the total combined
     voting power of all classes of
              - 28 -

stock entitled to vote of a
corporation, it shall be considered
as owning all the stock entitled to
vote.

     (3) In applying subparagraph
(C) of section 318(a)(2), the
phrase “10 percent” shall be
substituted for the phrase “50
percent” used in subparagraph (C).

     (4) Subparagraphs (A), (B),
and (C) of section 318(a)(3) shall
not be applied so as to consider a
United States person as owning
stock which is owned by a person
who is not a United States person.