American Air Filter Co. v. Comm'r of Internal Revenue
| Decision Date | 12 October 1983 |
| Docket Number | Docket Nos. 2252–81,21800–81. |
| Citation | 81 T.C. 709,81 T.C. No. 43 |
| Parties | AMERICAN AIR FILTER COMPANY, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
(1) P was a U. S. shareholder of wholly owned controlled foreign corporations I, IF, and UK. P intended to receive minimum distributions from each of I and IF for 1974 pursuant to sec. 963, I.R.C. 1954. Because of a clerical oversight, the required election statement was not filed with P's 1974 return; one was provided to the Commissioner during the audit of P's 1974 return. Held, P effectively elected to receive minimum distributions from I and IF for 1974 pursuant to sec. 963.
(2) P also did not file for 1974 the required statement to elect the 180-day distribution period (sec. 1.963–3(g)(2), Income Tax Regs.) but, in other ways, indicated an intention to make such election. Held, P effectively elected the 180-day distribution period for 1974.
(3) On March 17, 1975, within 180 days following the close of I's 1974 taxable year, I declared a dividend equivalent to $995,000, the amount P believed it necessary to receive from I pursuant to sec. 963. The dividend was not paid until April 14, 1975, more than 180 days after the close of I's 1974 taxable year. Held, the distribution which P received from I on April 14, 1975, was not made within the 180-day period and may not be applied toward I's minimum distribution for 1974, but it may be applied toward I's deficiency distribution for 1975.
(4) In 1971, IF borrowed 14,900,000 Swiss francs from SFE. The loan agreement provided that the liability could be converted into one payable in other currencies under specified conditions. In 1973, IF repaid a portion of the debt and converted the balance into a different foreign currency. In 1974, IF converted the liability into one payable in U. S. dollars. Held, IF realized a loss on the 1974 conversion of the SFE loan from a liability payable in foreign currency to a liability payable in U. S. dollars.
(5) P believed that it had properly elected, on I's behalf, to use the completed contract method of accounting beginning in 1974. The election was never received by the Commissioner who accounted for I's earnings on the percentage of completion method. P now accepts the Commissioner's adjustment but wishes to have a deficiency distribution made to comply with the minimum distribution requirement of sec. 963. Held, p may not receive a deficiency distribution to satisfy its 1974 minimum distribution requirements, since only a part of the deficiency was due to the misunderstanding over the use of the completed contract method.
(6) UK accrued its 1975 and 1976 British tax liabilities for U. S. tax purposes even though those liabilities were temporarily deferred. P accepts the Commissioner's disallowance of such tax liabilities but, as a result of such adjustment, seeks to change its method of computing the minimum distribution under sec. 963. Held, P may modify its group election for 1975 and 1976 and receive deficiency distributions for such years on a chain basis, since it acted reasonably in accruing the British tax liabilities. John S. Nolan and Victor Thuronyi, for the petitioner.
Richard E. Trogolo, for the respondent.
The Commissioner determined the following deficiencies in the petitioner's Federal income taxes:
+---------------------------------+
¦Taxable year ended ¦Deficiency ¦
+--------------------+------------¦
¦ ¦ ¦ ¦
+------+-------------+------------¦
¦Oct. ¦31, 1974 ¦$601,634.68 ¦
+------+-------------+------------¦
¦Oct. ¦31, 1977 ¦1,399,920.00¦
+------+-------------+------------¦
¦Oct. ¦2, 1978 ¦452,058.00 ¦
+---------------------------------+
After concessions by the parties, the issues remaining for decision are: (1) Whether the petitioner, American Air Filter Company, Inc., effectively elected to receive minimum distributions from two of its foreign subsidiaries for 1974 pursuant to section 963 of the Internal Revenue Code of 19541; (2) if so, whether the petitioner effectively elected the 180-day distribution period ( section 1.963–3(9)(2), Income Tax Regs.) for such year; (3) whether a distribution which American Air Filter received from AAF-International, S.A., on April 14, 1975, was “made” within the distribution period as required by section 1.963–3(c)(1), (g), Income Tax Regs.; (4) whether AAF-International Finance, N.V., realized a loss in 1974 upon its conversion of a liability payable in foreign currency into one payable in U. S. dollars; (5) whether reasonable cause exists to permit the petitioner to receive a deficiency distribution to satisfy its 1974 minimum distribution requirements ( section 1.963–3 (b)(1)(iii), Income Tax Regs.); and (6) whether reasonable cause exists to permit the petitioner to modify its group election for 1975 and 1976 and receive deficiency distributions for such years on a chain basis ( section 1.963–1 (c)(3)(ii), Income Tax Regs.).
Some of the facts have been stipulated, and those facts are so found.
The petitioner, American Air Filter Company, Inc. (AAF), is a corporation organized under the laws of Delaware with its principal office in Louisville, Ky., at the time it filed its petitions in this case. AAF timely filed its Federal corporate income tax returns for its taxable years ended October 31, 1974, 1975, 1976, and 1977, and October 2, 1978, with the Internal Revenue Service Center, Memphis, Tenn. A taxable year shall be identified by the calendar year in which it ended.
During the years in issue, AAF was a global concern with subsidiaries throughout the world. In such years, AAF had at least 22 foreign subsidiaries, including AAF International, S.A. (Int), a wholly owned Swiss subsidiary whose taxable year ended on September 30, AAF-International Finance. N.V. (Intfin), a wholly owned Netherlands Antilles subsidiary whose taxable year ended on October 31, and AAF-Ltd. (Great Britain) (AAF-UK), a wholly owned United Kingdom subsidiary whose taxable year also ended on October 31. AAF and its subsidiaries were accrual method taxpayers.
AAP first elected to exclude the subpart F income of its controlled foreign corporations, pursuant to the minimum distribution rules of section 963, for its 1964 taxable year. AAF filed written statements electing to receive minimum distributions for 1964 through 1973 and for 1975 and 1976. Lewis Schloemer was the officer of AAF who was in charge of AAF's tax department. Mr. Schloemer and AAF's other officers intended to file a written section 963 election with the 1974 return. In its request for an extension of time to file its 1974 return, dated April 8, 1975, and filed with AAF's 1974 return, AAF stated that the extension was necessary in part to collect “the information required with respect to the income from controlled foreign corporations, and the related computations of a minimum distribution.” Believing that section 963 had been elected, AAF's officers included on AAF's 1974 return the following payments which AAF received in 1975:
+--------------------------------+
¦Payor ¦Date received ¦Amount ¦
+-------+---------------+--------¦
¦ ¦ ¦ ¦
+-------+---------------+--------¦
¦Int ¦Apr. 14, 1975 ¦$995,000¦
+-------+---------------+--------¦
¦Intfin ¦June 10, 1975 ¦247,000 ¦
+--------------------------------+
These payments represented the amounts of the required first-tier distribution from Int and Intfin under the circumstances as the officers of AAF then believed them to be. No amount was included on AAF's 1974 return as subpart F income of Int or Intfin.
Because of an oversight on the part of AAF's officers, employees, and accountants, no written election statement was filed with AAF's 1974 return. Mr. Schloemer was unaware of this omission until after the Commissioner commenced an audit of AAF's 1974 return. Agent Schaller, who conducted the audit, told Mr. Schloemer that no election statement had been filed with the 1974 return. When Mr. Schloemer could not find a file copy of the statement, he had one prepared showing the election which Mr. Schloemer thought AAF had made. He submitted this document to Agent Schaller.
AAF filed information returns for each of its foreign subsidiaries with its 1974 return. Such information returns consisted of 22 Forms 3646, Income from Controlled Foreign Corporation, and 22 Forms 2952, Information Return with Respect to Controlled Foreign Corporations. All the Forms 3646, including those filed for Int and Intfin, stated that no section 963 election had been made. Such statements on the forms for Int and Intfin were erroneous and were due to carelessness in the preparation and review of the forms. Other portions of the Forms 3646 were completed in a manner inconsistent with the negative answer concerning the section 963 election.
Minimum distributions were to be made within 60 days after the close of the controlled foreign corporation's taxable year unless the parent elected an extended 180-day period. Sec. 1.963–3(g), Income Tax Regs. Such an election was to be filed with the parent's return. AAF expressly elected the 180-day period on the minimum distribution election statements filed with its 1964, 1965, and 1966 returns. AAF did not expressly elect the 180-day distribution period on its returns for 1967 through 1973, but the Commissioner, who audited the returns for such years, did not challenge AAF's use of the 180-day period. The proper amount of the minimum distribution could not be determined without the information contained on the financial statements of Int and Intfin. Such information was not available within 60 days after the close of Int's taxable year on September 30 or Intfin's on October 31. AAF received the minimum distributions for 1969, 1970, and 1971 in February or March of the following year.
Int's board of directors consisted of Jesse...
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