For over 50 years, Bloomberg BNA’s renowned flagship daily news service, Daily Tax Report® has helped leading practitioners and policymakers stay on the cutting edge of taxation and...
By Erin McManus
Nov. 22 — Analog Devices Inc. gets to keep the entire $880 million deduction it claimed for dividends received from a foreign subsidiary ( Analog Devices, Inc. v. Commissioner , 147 T.C. No. 15, T.C., No. 17380-12, 11/22/16 ).
The Internal Revenue Service argued that accounts receivable for royalty payments owed by the subsidiary, which was based in Ireland and incorporated in the Netherlands, were actually related-party debt that would reduce the allowed deduction by $138 million, resulting in a $22.1 million deficiency and $4 million penalty for Analog.
The tax code doesn’t require that accounts receivable be treated as related-party debt. Analog and the IRS didn’t agree in an audit closing agreement that the treatment of the accounts receivable for royalty payments to Analog from the subsidiary created such indebtedness, the U.S. Tax Court ruled in a division opinion Nov. 22.
Analog and the IRS didn’t express an intent in the closing agreement as to whether the accounts receivable were related-party debt that would reduce the dividends received deduction under tax code Section 965(b)(3), Chief Judge L. Paige Marvel said, applying rules of contract interpretation.
The parties’ intent was to reconcile the cash accounts of Analog and the subsidiary with their adjusted tax positions as the result of a transfer pricing primary adjustment under tax code Section 482. “The parties signed a closing agreement that enumerated specific tax consequences, and section 965 wasn’t specifically enumerated,” Marvel said.
Judge David Gustafson dissented, saying that when Analog agreed to the phrase “for all Federal tax purposes,” the “wording was not foisted on an unrepresented or unsuspecting taxpayer.”
In issuing the opinion, the Tax Court reversed its previous decision on the issue in BMC Software, Inc. v. Commissioner. The Tax Court’s original BMC decision was overturned by a federal appeals court in 2015. Marvel acknowledged that the Tax Court wasn’t bound by the U.S. Court of Appeals for the Fifth Circuit’s ruling overturning BMC, because the present case would be appealable to a different circuit.
“On balance, we conclude that the importance of reaching the right result in this case outweighs the importance of following our precedent,” Marvel said.
Judges John O. Colvin, Joseph Robert Goeke and Richard T. Morrison joined Gustafson in the dissent.
Kenneth B. Clark, James P. Fuller, Jennifer L. Fuller, Andrew J. Kim and Larissa B. Neumann represented Analog. Michele J. Gormley and Curt M. Rubin represented the commissioner.
To contact the reporter on this story: Erin McManus in Washington at firstname.lastname@example.org
To contact the editor responsible for this story: Meg Shreve at email@example.com
Text of the decision is in TaxCore.
Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)