Dover Corporation and Subsidiaries v. Commissioner of Internal Revenue, No. 12821-00 (U.S.T.C. 5/5/2004)

• Decision Date: 05 May 2004
• Docket Number: No. 12821-00.,12821-00.
• Parties: DOVER CORPORATION AND SUBSIDIARIES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Tax Court

Page 1

DOVER CORPORATION AND SUBSIDIARIES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 12821-00.

United States Tax Court.

Filed May 5, 2004.

D and H, United Kingdom corporations, were controlled foreign corporations with respect to P. H was a wholly owned subsidiary of D. In 1997, D sold the stock of H to an unrelated third party. In 1999, P requested that H be granted an extension of time to retroactively elect to be treated as a "disregarded entity" pursuant to sec. 301.7701-3, Proced. & Admin. Regs., effective "immediately prior to" D's sale of the H stock. R granted the requested extension of time on Mar. 31, 2000. H's retroactive disregarded entity election was filed on or about Oct. 10, 1999. Pursuant to that election, there was, for Federal tax purposes, a deemed sec. 332, I.R.C., liquidation of H followed immediately by D's deemed sale of H's assets, rather than a sale by D of the H stock.

Held: In light of R's administrative guidance pertaining to the tax effects of a liquidation governed by secs. 332 and 381, I.R.C., D's deemed sale of H's assets constitutes a sale of property used in D's trade or business within the meaning of sec. 1.954-2(e)(3)(ii) through (iv), Income Tax Regs., with the result that D's gain on that sale does not constitute Subpart F (foreign personal holding company) income to P pursuant to sec. 954(c)(1)(B)(iii), I.R.C. Rauenhorst v. Commissioner, 119 T.C. 157 (2002), applied.

Robert D. Whoriskey, George Pompetzki, Eduardo A. Cukier, and Linda Galler, for petitioner.

Lyle B. Press, for respondent.

OPINION

HALPERN, Judge:

Dover Corporation (petitioner) is the common parent of an affiliated group of corporations making a consolidated return of income (the group or affiliated group). By notice of deficiency dated September 14, 2000 (the notice), respondent determined deficiencies in Federal income tax for the group for its 1996 and 1997 taxable (calendar) years in the amounts of $9,329,596 and $24,422,581, respectively. All but one of the adjustments that gave rise to those determinations have been settled, and this report addresses the sole remaining issue, which involves an interaction between the so-called check-the-box regulations and the definition of foreign personal holding company income (FPHCI); viz, whether the deemed sale of assets immediately following their deemed receipt (pursuant to the check-the-box regulations) from a disregarded foreign entity gives rise to FPHCI.

Unless otherwise stated, all section references are to the Internal Revenue Code in effect for 1997, the year at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.

Background

Introduction

This case was submitted for decision without trial pursuant to Rule 122. Facts stipulated by the parties are so found. The stipulation of facts filed by the parties, with attached exhibits, is included herein by this reference. Respondent objects, on the grounds of relevance, to 26 exhibits referenced in certain of the stipulations. See the discussion infra section IV.

Petitioner is a Delaware corporation, whose shares are publicly traded and which maintains its principal place of business in New York, New York.

Business Activities of the Affiliated Group

Together, the affiliated group is a diversified industrial manufacturer, producing through its members and foreign subsidiaries a broad range of products and sophisticated manufacturing equipment for other industries and businesses. During and prior to 1997, the group's business activities were divided into five business groups, one of which was known as Dover Elevator.

Dover Elevator

Dover Elevator, like each of the other business groups, was managed by a headquarters corporation, Dover Elevator International, Inc. (DEI), a domestic corporation. However, not all of the corporations that constituted Dover Elevator were direct or indirect subsidiaries of DEI. During 1997, DEI's United Kingdom (UK) elevator business was conducted by Hammond & Champness Limited (H&C), a UK corporation engaged in the business of installing and servicing elevators. H&C was wholly owned by a UK holding company, Dover U.K. Holdings Limited (Dover UK), which was wholly owned by a Delaware corporation, Delaware Capital Formation (DCF), which, finally, was wholly owned by petitioner.

Sale of H&C

On June 30, 1997, Dover UK and petitioner entered into an agreement with Thyssen Industrie Holdings U.K. PLC (Thyssen), a German corporation registered in England and Wales, and its German parent, Thyssen Industrie AG, for the sale by Dover UK to Thyssen of the entire issued share capital of H&C (the agreement or stock sale agreement). The agreement provided that it and other specified documents and agreements relating to the sale were to be held in escrow until the "Escrow Release Date" (July 11, 1997), by which time it was anticipated that the purchaser would have "completed its due diligence inquiries, and * * * determined that it does wish to proceed with * * * [the sale]" (the "escrow condition"). Dover UK, as "Vendor", also agreed to accomplish certain document deliveries and undertakings by July 11, at which time Thyssen, as "Purchaser", was required to "satisfy the consideration for the Shares". Dover UK also agreed to carry on the H&C business "in the normal course without any interruption" between June 30 and July 11, 1997. On July 11, 1997, Thyssen notified Dover UK that the escrow condition had been satisfied, and (we assume, since there is no stipulation) the purchase price was received by Dover.¹

Petitioner obtained an opinion of UK counsel dated July 3, 2001, that, as a matter of English law, beneficial title to the H&C shares passed from Dover UK to Thyssen on July 11, 1997, when the escrow condition was satisfied.

Retroactive Election To Treat H&C as a Disregarded Entity

By letter dated December 3, 1998, petitioner, on behalf of its (then) former indirect subsidiary, H&C, requested that respondent grant an extension of time, pursuant to sections 301.9100-1(c) and 301.9100-3, Proced. & Admin. Regs., for H&C to file a retroactive election to be a disregarded entity for Federal tax purposes (the request for 9100 relief). Specifically, petitioner requested: "H&C be granted an extension of time to make an election: (a) * * * to be disregarded as an entity separate from its owner for U.S. tax purposes and (b) effective immediately prior to the sale of stock in H&C by Dover UK to Thyssen UK."² In the request for 9100 relief, petitioner stated that the date of the sale was June 30, 1997, and, on the Form 8832, Entity Classification Election (Form 8832), attached to the request for 9100 relief, it set forth June 30, 1997, as the proposed effective date of the election.

Initially, respondent was reluctant to grant the request for 9100 relief, in large part, because, in respondent's view, petitioner should not be entitled to benefits it might claim resulted from the disregarded entity election; i.e., the avoidance of FPHCI on the deemed sale of the H&C assets. However, after representatives of petitioner and respondent conferred, and petitioner made a supplemental submission, respondent, on March 31, 2000, granted the requested relief. Specifically, respondent granted to H&C "an extension of time for making the election to be disregarded as an entity separate from its owner for federal tax purposes, effective immediately prior to the sale on * * * [June 30, 1997³], until 60 days following the date of this letter." Respondent, however, added the following caveat:

no inference should be drawn from this letter that any gain from the sale of * * * [H&C's] assets immediately following its election to be disregarded as an entity separate from its owner gives rise to gain that is not foreign personal holding company income as defined in section 954(c)(1)(B) of the Internal Revenue Code.

On or about October 10, 1999, H&C made an election on Form 8832 to be disregarded as a separate entity. The Form 8832 specifies that the election is to be effective beginning June 30, 1997.

Discussion

I. Introduction

This case presents an issue of first impression and, insofar as we are aware, the first occasion that any court has had to opine on the impact of the so-called check-the-box regulations on the application of a specific provision of the Internal Revenue Code of 1986 (the Code), in this case, section 954(c)(1)(B)(iii) (defining, in part, FPHCI).⁴

II. Code and Regulations

A. The Code

The provision of the Code principally at issue is section 954. Section 954 is found in subpart F of part III, subchapter N, chapter 1, subtitle A of the Code (Subpart F), which encompasses sections 951-964. Subpart F is concerned with controlled foreign corporations (CFCs). Neither party disputes that, in 1997, both Dover UK and H&C (up until it became a disregarded entity) were CFCs, as that term is defined in section 957(a). Section 951 provides that each United States shareholder of a CFC shall include in gross income certain amounts, including "his pro rata share * * * of the * * * [CFC's] subpart F income" for the taxable year. Sec. 951(a)(1)(A)(i).⁵ Subpart F income includes "foreign base company income (as determined under section 954)". Sec. 952(a)(2). Pursuant to section 954(a)(1), foreign base company income includes FPHCI, which is defined, in pertinent part, in section 954(c) as follows:

(c) Foreign Personal Holding Company Income.—

(1) In general.—For purposes of subsection (a)(1), the term "foreign personal holding company income" means the portion of the gross income which consists of:

* * * * * * *

(B) Certain property transactions.—The excess of gains over losses from the sale or exchange of property—

* * * * * * *

(iii) which does not give rise to any income.

B. The Regulations

1. Regulations Under Section 954(c)(1)(B)(iii)

In pertinent part, section 1.954-2(e)(3), Income Tax Regs., which defines "property that does not...