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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.
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Text of the decision is in TaxCore.
Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.
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