Adams Challenge (UK) Ltd. v. Comm'r
| Decision Date | 08 January 2020 |
| Docket Number | 154 T.C. No. 3,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. private limited liability company whose sole income-producing asset for the years at issue was a multi-purpose support vessel. The vessel was chartered by a U.S. company to assist in decommissioning oil and gas wells and removing debris on portions of the U.S. Outer Continental Shelf (OCS) in the Gulf of Mexico. During 2009-2011 petitioner derived gross income of $45 million from the charter.
Foreign corporations are subject to Federal income tax on income "effectively connected with the conduct of a trade or business within the United States." I.R.C. sec. 882(a)(1). Generally, the term "United States" does not include the OCS. See I.R.C. sec. 7701(a)(9). However, I.R.C. sec. 638 provides that, for purposes of applying Federal income tax provisions "with respect to mines, oil and gas wells, and other natural deposits," the term "United States" includes "the seabed and subsoil of those submarine areas" within the OCS.
The bilateral income tax treaty (Treaty) between the United States and the U.K. provides that a U.K. enterprise shall not be subject to Federal income tax unless it conducts business in this country through a U.S. "permanent establishment." Treaty art. 7(1). An enterprise is deemed to have a U.S. permanent establishment "where activities are carried on offshore * * * in connection with the exploration * * * or exploitation * * * of the sea bed and sub-soil and their natural resources." Treaty art. 21(1).
Held: P's activities were conducted on the OCS "with respect to * * * oil and gas wells," I.R.C. sec. 638, and its activities were "related to the * * * exploitation of * * * oil and gas wells," sec. 1.638-1(c)(4), Income Tax Regs. P was therefore engaged in a trade or business within the United States, and its activities were effectively connected with that U.S. trade or business. See I.R.C. sec. 882(a)(1). P's charter income was thus subject to Federal income tax unless exempted by the Treaty.
Held, further, P's activities were carried on offshore "in connection with the * * * exploitation * * * of the sea bed and sub-soil and their natural resources" under article 21 of the Treaty. P is therefore deemed to have a U.S. permanent establishment, and the Treaty does not exempt its charter income from Federal income tax.
Andrius R. Kontrimas and Robert C. Morris, for petitioner.
William D. White, Richard A. Rappazzo, and Russell S. Shieldes, 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 multi-purpose 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 income of about $45 million, most of which it treated as exempt from Federal income tax.
Before the Court are petitioner's motion for summary judgment and a cross-motion for partial summary judgment filed by the Internal Revenue Service (IRS or respondent). These motions require us to decide whether petitioner's charter income 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 Concluding that petitioner's charter income was effectively connected with the conduct of aU.S. trade or business and that it was not exempted by the Treaty, we will grant respondent's motion for partial summary judgment and deny petitioner's motion.
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.
The Challenge Vessel was equipped with state-of-the-art specialized systems. These included a "class 2 dynamic positioning system," a nine-man "saturation diving system," a helipad, and a hydraulic deck crane capable of lifting 100 tons. A dynamic positioning system enables a vessel to maintain a reasonably stationary position above an underwater worksite. The vessel plants transponders on the sea floor, then triangulates data from those transponders to keep its position stable over a particular spot. A saturation diving system enables divers to work at greater depths for longer periods. Divers live in a sealed, pressurized chamber that is lowered to working depth. This permits the divers to be "decompressed" only once at the end of their tour of duty, thus reducing the risk of illness. Saturation diving is a highly specialized form of diving. In 2015 only 336 commercial divers were recognized by the U.S. Coast Guard as regulated saturation divers.3
EPIC Diving & Marine Services, LLC (EPIC), is an oil and gas services company that specializes in decommissioning oil and gas wells and related activities. In early 2009 EPIC was planning to bid on a project in the Gulf of Mexico, but its existing fleet did not have the capacity to complete the project. EPIC chartered the Challenge Vessel to fill this gap. It selected the Challenge Vessel because it was a brand new vessel with the specialized equipment necessary to execute EPIC's intended scope of work.
On May 15, 2009, EPIC and petitioner entered into a standard time charter for the Challenge Vessel. Under a time charter a vessel is hired for an agreed-upon period, as opposed to a voyage charter, where a vessel is hired to complete a particular trip. The charter was memorialized on a standard Baltic and International Maritime Council form. Various addenda were added to the charter during 2009 and 2010, and the Challenge Vessel operated at all times consistently with the terms of the charter as thus revised. At no time were petitioner and EPIC partners or agents of one another.
The charter specified payment to petitioner of a flat daily rate (adjusted from time to time) plus a daily meal fee of $70 for each member of the Challenge Vessel maritime crew.4 Petitioner received this payment regardless of whether the ship was engaged in operations, in transit between work sites, or in port between assignments. The charter initially recited that no taxes were due in the United States. As of October 13, 2010, the charter was amended to state that "Owners [viz., petitioner and its affiliates] are responsible for any taxes, including U.S. taxes owed as a result of income to the Owners under the Charter Party."
The Challenge Vessel had berths for 98 workers. Under the time charter petitioner contracted to provide a marine crew of 28, including the master, mates, engineers, and technical officers. Crew members were furnished by two of peti-tioner's affiliates, Adams Offshore Services, Ltd., and Adams Offshore, WLL, which also supplied engineering, procurement, and technical services relating to the charter. EPIC generally had between 40 and 62 workers on board, including EPIC employees, subcontractors, and representatives of EPIC's clients.
The Challenge Vessel and its marine crew shared responsibility with EPIC for deepwater operations. Crew members were responsible for operation of the hydraulic deck crane and maintenance of all vessel equipment, including the saturation diving system when it was not in active use by EPIC's divers. Although EPIC generally had responsibility for all subsurface operations, the master of the Challenge Vessel was authorized to suspend all diving activity for safety reasons, e.g., because of adverse weather or electrical problems.
EPIC entered into contracts with oil and gas companies to perform various decommissioning services on oil and gas rigs within the OCS. Holders of Federal offshore leases, including the companies with which EPIC contracted, are required to decommission and remove equipment for terminated or non-producing leases and are subject to the decommissioning requirements of the Department of the Interior (Interior Department). See 30 C.F.R. pt. 250, subpt. Q, Decommissioning Activities. Hurricanes during 2004-2008 caused damage to oil and gas facilities in the Gulf of Mexico. In September 2010 the Interior Department issued a notice providing lessees with guidance about their decommissioning obligations in the wake of hurricane damage.5
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 nautical miles of the coast of Louisiana or Texas, within the OCS. The Federal offshore lease underlying each "block" expressly required compliance with the Interior Department's decommissioning regulations, including the removal of all structures upon termination of the lease.
The projects on which the Challenge Vessel worked involved decommissioning of oil and gas facilities, including wells and pipelines. Specific tasks included excavating around damaged rigs, severing metal components from toppled platforms, plugging abandoned wells, and removing metal debris from the seabed. None of the sites was actively producing oil or gas at the time. At most sites active production had ceased several years previously, and at one site no oil or gas was ever produced. At no time did EPIC...
To continue reading
Request your trial