CWT Farms, Inc. v. C.I.R., 84-8012
| Decision Date | 19 March 1985 |
| Docket Number | No. 84-8012,84-8012 |
| Citation | 755 F.2d 790 |
| Parties | -1207, 85-1 USTC P 9277 CWT FARMS, INC. and CWT International, Inc., Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. |
| Court | U.S. Court of Appeals — Eleventh Circuit |
W. Woodrow Stewart, Steven A. Cornelison, Gainesville, Ga., for petitioners-appellants.
Glenn L. Archer, Jr., Asst. Atty. Gen., Michael L. Paup, David English Carmack, Tax Division, U.S. Dept. of Justice, Washington, D.C., for respondent-appellee.
Appeal from the Decision of the United States Tax Court.
Before HENDERSON and HATCHETT, Circuit Judges, and NICHOLS *, Senior Circuit Judge.
In this case, we affirm the United States Tax Court's, 79 T.C. 86, determination that CWT International, Inc. did not qualify for tax treatment as a domestic international sales corporation.
CWT Farms, Inc. (Farms) and CWT International (International) are Georgia corporations with their principal places of business in Gainesville, Georgia. Twin Oaks Hatchery, Inc. (Twin Oaks), a domestic poultry producer, organized Farms in 1958 as a sales outlet for its excess broiler chickens for export to the Caribbean and Central and South America. International is the wholly-owned subsidiary of Farms. Farms created International as a commission agent for its export sales to take advantage of the tax savings provided for domestic international sales corporations (DISC). The election to treat International as a DISC was filed on September 7, 1972. Twin Oaks also owns Helen Feed Store, Inc. (Helen Feed).
During the years in question, 1975, 1976, and 1977, Farms paid International commissions earned by International as a commission agent DISC. 1 From 1974 to 1976, International made three loans to Farms: each loan was evidenced by a demand promissory note. Although the notes were not identified as "producer's loans," the books and records of International placed each of these loans under the heading "producer's loans." 2 Each of the notes was In determining the maximum statutory amounts that International could lend to Farms as producer's loans, Farms aggregated its export-related assets with those of Helen Feed and Twin Oaks. 4 Included in this aggregation was an expenditure of $90,377.44 incurred by Twin Oaks for research and experimental costs connected with its ISA VEDETTE flocks in 1976. Farms did not file written statements electing to aggregate the export related assets of its controlled group with International's tax returns for the years 1975, 1976, and 1977. In November, 1978, however, Farms gave the election statements to the revenue agent examining Farms's returns.
renewed within five years of making of the loans, and each renewal note had a fixed, stated maturity date. 3 Further, the renewal notes of December 1, 1979, and September 1, 1981, stated that they were producer's loans
On May 28, 1980, the Commissioner filed a Notice of Deficiency determining that International was not a qualified DISC for the taxable years 1975, 1976, and 1977, because it failed to satisfy the qualified export assets test of 26 U.S.C.A. Sec. 992(a)(1)(B) (1982). 5 This determination was based on the findings that International's loans to Farms were not producer's loans under 26 U.S.C.A. Sec. 993(d) (1982), and that the commissions receivable that Farms owed International were not qualified export assets because they were not paid in a timely manner pursuant to Treas.Reg. Secs. 1.993-2(d)(2) and 1.994-1(e)(3)(i). 6 Farms and International appeal. They contend (1) that they complied or substantially complied with the provisions of 26 U.S.C.A. Sec. 993(d)(1)(B) relating to producer's loans, and (2) that Treas.Reg. Secs. 1.993-2(d)(2) and 1.994-1(e)(3) are invalid as (a) conditions added to an unambiguous statute, (b) devoid of legislative authority, (c) contradictory of 26 U.S.C.A. Sec. 992(a)(1)(B), (d) invalidly retroactive, and (e) unreasonable.
As a result of these findings, International was disqualified as a DISC for the taxable years 1975, 1976, and 1977. 7 Farms and International each filed a petition for redetermination of deficiencies in federal corporate income taxes in the United States Tax Court. On July 19, 1982, the Tax Court ruled against them, finding that the demand notes, even as renewed, were not producer's loans. Consequently, International did not qualify as a DISC because 95 percent of its assets were not qualified export assets. The Tax Court, therefore, found it unnecessary to determine whether any of the other requirements for DISC qualification were met. Farms and International, however, filed a motion for reconsideration asking for a determination of whether the commissions receivable due International were qualified export assets. Under the statutes and regulations, International could qualify as a DISC if Farms made a "deficiency distribution to its shareholders in an amount equal to the fair market value of those assets which are not qualified export assets." 26 U.S.C.A. Sec. 992(c)(1) (1982). The Tax Court granted the motion for reconsideration and held tht the commissions receivable were not qualified export assets because they were not paid within sixty days after close of the taxable year as required by Treas.Reg. Secs. 1.993-2(d)(2) and 1.994-1(e)(3)(i)
DOMESTIC INTERNATIONAL SALES CORPORATIONS (DISC)
Congress enacted DISC legislation in 1971 to provide tax incentives for United States firms to increase their exports.
This is important not only because of its stimulative effect but also to remove a present disadvantage of U.S. companies engaged in export activities through domestic corporations. Presently, they are treated less favorably than those which manufacture abroad through the use of foreign subsidiary corporations. United States corporations engaging in export activities are taxed currently on their foreign earnings at the full U.S. corporate income tax rate regardless of whether these earnings are kept abroad or repatriated. In contrast, U.S. corporations which produce and sell abroad through foreign subsidiaries generally can postpone payment of U.S. tax on these foreign earnings so long as they are kept abroad.
H.R.Rep. No. 533, 92d Cong., 1st Sess. ---, reprinted in 1971 U.S.Code Cong. & Ad.News 1825, 1872. A corporation which qualifies as a DISC is not taxable on its profits. Further, the shareholders are only taxable currently on a portion of such profits, the other portion being tax deferred until withdrawn from the DISC or until the corporation ceases to qualify as a DISC. The statutory provisions establishing the DISC scheme are set out at 26 U.S.C.A. Secs. 991-997 (1982).
Of the five qualifying factors for a DISC, the factor relating to "qualified export Farms and International contend that they have complied with both the statutes and the regulations relating to producer's loans. They contend that a "stated maturity date not more than 5 years from the date of the loan," 26 U.S.C.A. Sec. 993(d)(1)(B), in a demand note is either the date of demand or the date the note is executed, if the loan is paid within five years. They argue that such a reading of the stated maturity date language is consistent with the purpose of the five-year maturity date requirement. This purpose, they argue, is to test the loans to determine whether they are qualified producer's loans under the borrower's limitation of 26 U.S.C.A. Sec. 993(d)(2) and under the increased investment limitation of 26 U.S.C.A. Sec. 993(d)(3). They further argue that the demand notes in this case comply with the statutory purpose: by renewing the notes within the five-year period, all three notes were subjected to a retesting under the borrower's limitation and increased investment requirements under the procedures established in Treas.Reg. Sec. 1.993-4(d). 9 Alternatively, Farms and International contend that substantial compliance is the necessary threshold for satisfaction of the DISC requirements; they argue that they have substantially complied.
assets" is brought into question in this case. The qualified export assets test requires that 95 percent of the adjusted assets of the corporation (the DISC) must be "qualified export assets" for the taxable year. Qualified export assets may include a variety of assets including inventory facilities, accounts receivable, and producer's loans to the parent corporation. A loan is a producer's loan, and thus an asset, if it satisfies 26 U.S.C.A. Sec. 993(d) and Treas.Reg. Sec. 1.993-4(a)(4). 8
The Tax Court held (1) that when International accepted the demand notes as evidence of its loans to Farms, the loans did not qualify as producer's loans at the time they were made, (2) the loans could not at renewal be qualified as producer's loans, and (3), therefore, International was not a qualified DISC. As authority, the Tax Court cites the plain meaning of section 993(d)(1)(B) and the legislative history of the DISC statutes.
The plain meaning of 26 U.S.C.A. Sec. 993(d)(1) is clear: A loan evidenced by a note must have a stated maturity date of not more than five years from the date of the execution of the loan, and such loan must be designated as a producer's loan in order to qualify as a producer's loan and as a qualified export asset. Farms and International's argument that they have complied with this provision has no factual basis. While the loans made to Farms and International were identified in the books of International as producer's loans, they neither had a stated maturity date of not more than five years from the date of the loan, nor were they designated as producer's loans on the face of the notes.
Farms and International argue further, however, that they have substantially complied with the requirements for qualification of producer's loans. The substantial compliance, they reason, is achieved through execution of the loans consistent with Congr...
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