Adams Challenge (UK) Ltd. v. Comm'r
| Decision Date | 21 January 2021 |
| Docket Number | 156 T.C. No. 2,Docket No. 4816-15. |
| Parties | ADAMS CHALLENGE (UK) LIMITED, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
P is a U.K. corporation whose sole income-producing asset for the years at issue was a multipurpose support vessel. The vessel was chartered by a U.S. firm to assist in decommissioning oil and gas wells and removing debris on portions of the U.S. Outer Continental Shelf in the Gulf of Mexico. During 2009 and 2010 P derived from the charter gross income of about $32 million, which was effectively connected with the conduct of a U.S. trade or business. See Adams Challenge (UK) Ltd. v. Commissioner, 154 T.C. 37 (2020).
P did not file a Federal income tax return for 2009 or 2010. On April 9, 2014, R prepared and subscribed returns for P for these years. See I.R.C. sec. 6020(b). In November 2014, R issued P a notice of deficiency determining (among other things) that P was entitled to no deductions or credits for 2009 or 2010 because it had failed to file returns. See I.R.C. sec. 882(c)(2). In February 2015 P petitioned this Court for redetermination. In February 2017 P submitted to R protective returns for 2009 and 2010.
P filed a motion for partial summary judgment challenging R's disallowance of deductions and credits and urging that R's action violated the business profits and the nondiscrimination articles of the bilateral income tax treaty between the United States and the U.K. (Treaty). R filed a cross-motion urging that disallowance of deductions and credits in these circumstances is consistent with both I.R.C. sec. 882(c)(2) and the Treaty.
Held: Under I.R.C. sec. 882(c)(2), P is not entitled to the benefit of deductions or credits because it did not submit "returns" for 2009 and 2010 until after R had prepared and subscribed returns for it.
Held, further, I.R.C. sec. 882(c)(2) as thus interpreted does not violate either the business profits article or the nondiscrimination article of the Treaty.
Andrius R. Kontrimas and Robert C. Morris, for petitioner.
William D. White, Richard A. Rappazzo, Russell S. Shieldes, and Timothy L. Smith, for respondent.
LAUBER, Judge: Petitioner is a company incorporated under the laws of the United Kingdom (U.K.). For the tax years at issue petitioner's only income-producing asset was a multipurpose support vessel. A U.S. firm chartered petitioner's vessel to perform work decommissioning oil and gas wells and removing hurricane-related debris on portions of the U.S. Outer Continental Shelf (OCS) in the Gulf of Mexico. From this charter petitioner during 2009-2011 earned gross income of about $45 million. In a prior Opinion we held that this income was "effectively connected" with the conduct of a U.S. trade or business and was subject to tax under the Internal Revenue Code (Code)1 and the bilateral income tax treaty between the United States and the U.K. (Treaty).2 See Adams Challenge (UK) Ltd. v. Commissioner, 154 T.C. 37 (2020).
Currently before the Court is a second round of cross-motions for partial summary judgment. Petitioner did not file Federal income tax returns for 2009 and 2010 until February 2017. That was more than two years after the Internal Revenue Service (IRS or respondent) had prepared returns for it under section 6020(b) and issued the notice of deficiency on which this case is based. Invoking section 882(c)(2) and the case law and regulations interpreting it, respondent contends that petitioner is not entitled to any deductions or credits against its gross income for 2009 and 2010. Petitioner contends that the regulations are invalidunder Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (1984), and that respondent's refusal to allow deductions and credits in these circumstances violates the business profits and the nondiscrimination articles of the Treaty. Concluding that respondent has the better side of both arguments, we will grant his motion for partial summary judgment and deny petitioner's.
The following facts are based on the parties' motion papers, the stipulation of facts, and the attached exhibits. During the tax years at issue petitioner had its registered office and mailing address in Northampton, England.
Petitioner was formed in 2006 as a private limited liability company under U.K. law. It is a subsidiary of a Bermuda entity wholly owned by Khalifa A. Algosaibi Diving and Marine Technical Services Co., a Saudi Arabian branch of a Bahraini entity. Petitioner is the registered owner of a multipurpose support vessel, the M.V. Adams Challenge (Challenge Vessel), which was placed in service on January 1, 2009. During 2009-2011 the Challenge Vessel was petitioner's only income-producing asset.
EPIC Diving & Marine Services, LLC (EPIC), is an oil and gas services company that specializes in decommissioning oil and gas wells and related activities. On May 15, 2009, EPIC and petitioner entered into a standard time charter for the Challenge Vessel. During 2009-2011 EPIC used the Challenge Vessel for work on 11 projects in various "blocks" within the Gulf of Mexico. Each project site was within 200 miles of the coast of Louisiana or Texas, within the OCS.
In 2009 the IRS initiated a compliance program with respect to foreign vessels operating on the OCS, particularly in the Gulf of Mexico. The IRS identified the owners, operators, and classification of such vessels using a product supplied by Lloyd's Register Group, Ltd. Employing a satellite-enabled tracking service, the IRS determined the number of days the vessels operated on the OCS. And employing data supplied by Workboat, which publishes the average day charter rates for different types of offshore service vessels, the IRS estimated the annual income earned by specific foreign ships, including the Challenge Vessel.
On October 18, 2013, the IRS issued petitioner a Notice of Jeopardy Assessment and Right of Appeal (jeopardy notice) assessing tax, penalties, and interest totaling $23,780,625 for 2009-2011. The IRS made the jeopardy assessment because it believed that petitioner's charter with EPIC had expired and that the Challenge Vessel's departure from U.S. taxing jurisdiction would leave petitioner with no assets subject to collection. The IRS accordingly concluded that collection of the tax would be endangered if regular assessment and collection procedures were followed. See sec. 6861(a).
On November 5, 2013, petitioner protested the jeopardy notice. It attached to its protest a subsequent time charter with EPIC, which showed that the Challenge Vessel would remain in the Gulf of Mexico through October 2016. Concluding that petitioner was not intending to depart from U.S. territorial waters, the Appeals Office directed that the jeopardy assessment be abated. It explained that "this determination reflects only the abatement of the jeopardy assessment and does not affect any further determination" regarding petitioner's tax liability.
At the time of the jeopardy notice petitioner had not filed U.S. income tax returns for any years. On December 13, 2013, it filed with the IRS office in Houston, Texas, a Form 1120-F, U.S. Income Tax Return of a Foreign Corporation, for 2011. Having received no return from petitioner for 2009 or 2010, the IRS on April 9, 2014, prepared and subscribed returns for petitioner for those years. See secs. 6020(b), 7701(a)(11)(B).3
On November 25, 2014, the IRS sent petitioner a notice of deficiency for 2009-2011. As relevant here, the notice determined that petitioner had effectively connected income of $13,595,167 for 2009 and $19,135,125 for 2010 and that petitioner was entitled to no deductions or credits for either year because it hadfailed to file returns. On February 20, 2015, petitioner timely petitioned this Court for redetermination.
Two years later, petitioner submitted protective returns for 2009 and 2010. These returns, received by the Ogden Service Center on February 15, 2017, reported no income or deductions and left most lines blank. In an attachment to each return petitioner explained:
ADAMS Challenge * * * does not believe that it had any income effectively connected with the conduct of a trade or business within the United States during this tax year, and is currently litigating this issue in the United States Tax Court * * *. However, in the unlikely event that it is determined that ADAMS Challenge * * * had gross income which is effectively connected with the conduct of a [U.S.] trade or business * * * , ADAMS Challenge * * * files this Form 1120-F solely to protect its right to receive the benefit of the deductions and credits attributable to such gross income.
The purpose of summary judgment is to expedite litigation and avoid costly, unnecessary, and time-consuming trials. See FPL Grp., Inc. & Subs. v. Commissioner, 116 T.C. 73, 74 (2001). We may grant summary judgment regarding an issue as to which there is no genuine dispute of material fact and a decision may be rendered as a matter of law. Rule 121(b); Elec. Arts, Inc. & Subs. v. Commissioner, 118 T.C. 226, 238 (2002). The sole question presented at this stage of the proceedings is whether respondent erroneously determined that petitioner should be allowed no deductions or credits for 2009 and 2010.4
In support of his position respondent relies on section 882(c)(2), judicial decisions interpreting that provision and its predecessors, and a regulation promulgated in 1990. See sec. 1.882-4(a)(3)(i), Income Tax Regs. Petitioner challenges the validity of that regulation and urges that respondent's position is inconsistent with the Treaty. The parties have filed cross-motions for summary judgment on these questions, and we find that they may be adjudicated summarily.
The Code generally allows a deduction for expenses incurred in the operation of a trade or business. See sec. 162(a). The "income tax deduction is a matter of legislative...
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