Framatome Connectors USA, Inc. v. Comm'r of Internal Revenue

Decision Date17 January 2002
Docket NumberNo. 5030–98,9160–99.,5030–98
PartiesFRAMATOME CONNECTORS USA, INC., Presently Known as Framatome Connectors USA Holding Inc., and Subsidiaries, and Burndy Corporation Presently Known as Framatome Connectors USA Inc. Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentFRAMATOME CONNECTORS USA, INC., and Subsidiaries, N.K.A. Framatome Connectors USA Holding Inc., and Subsidiaries, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
CourtU.S. Tax Court

118 T.C. 32
118 T.C. No. 3

FRAMATOME CONNECTORS USA, INC., Presently Known as Framatome Connectors USA Holding Inc., and Subsidiaries, and Burndy Corporation Presently Known as Framatome Connectors USA Inc. Petitioners
v.
COMMISSIONER OF INTERNAL REVENUE, RespondentFRAMATOME CONNECTORS USA, INC., and Subsidiaries, N.K.A. Framatome Connectors USA Holding Inc., and Subsidiaries, Petitioners
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

No. 5030–98

9160–99.

United States Tax Court.

Jan. 17, 2002.


Corporate taxpayer filed petition challenging respondent's deficiency determination because its subsidiary did not qualify as controlled foreign corporation (CFC). The Tax Court, Colvin, J., held that: (1) taxpayer did not hold more than 50 percent of voting power or value of foreign subsidiary's stock, and thus, corporation was not a CFC, and (2) constructive dividend distributed to foreign subsidiary was subject to withholding tax.

Decision for respondent.

[118 T.C. 32]

Controlled Foreign Corporation Issue: In 1992, Burndy–US (B–US), a predecessor of Framatome Connectors USA, Inc., one of the petitioners (Ps), owned 50 percent of the stock of Burndy–Japan (B–J). Furukawa Electric Co. (F) and Sumitomo Electrical Indus., Ltd .(S), each owned 25 percent of the stock of B–J.Ps contend that B–US owned more than 50 percent of the voting power of B–J stock and owned more than 50 percent of the value of B–J stock, and that, as a result, B–J was a controlled foreign corporation (CFC) in 1992 under both sec. 957(a)(1) and (2), I.R.C.Held: B–J was not a CFC in 1992 because B–US did not own more than 50 percent of the voting power of B–J stock or more than 50 percent of the value of B–J stock.Constructive Dividend Issue: In 1993, B–US transferred to Framatome Connectors International (FCI), its French parent, assets worth more than the assets that B–US received from FCI. The parties dispute whether these transfers were constructive dividends paid by B–US in 1993 which are subject to withholding tax under sec. 1442, I .R.C.Held: Transfers by B–US to FCI of assets worth more than the assets B–US received from FCI were constructive dividends which were actually distributed for purposes of the U.S.-France Tax Treaty, Convention With Respect to Taxes on Income and Property, July 28, 1967, U.S.-Fr., 19 U.S.T. 5281, and thus, were subject to withholding tax under sec. 1442, I.R.C.Mark A. Oates, Marc M. Levey, Erika Schaefer Schechter, A. Duane Webber, William S. Garofalo, Kathryn D. Weston–Overbey, and Thomas J. Kinzler, for petitioners.

Theodore J. Kletnick, Jill A. Frisch, Elizabeth Flores, Steven D. Tillem, Murali Balachandran, and Robert T. Bennett, for respondent.

+-----------------------------------------------------------------------------+
                ¦TABLE OF CONTENTS ¦
                +-----------------------------------------------------------------------------¦
                ¦ ¦
                +-----------------------------------------------------------------------------¦
                ¦FINDINGS OF FACT ¦5 ¦
                +-----------------------------------------------------------------------------¦
                ¦ ¦
                +-----------------------------------------------------------------------------¦
                ¦A.¦Petitioners, Their Predecessors, Furukawa, and Sumitomo ¦5 ¦
                +--+-----------------------------------------------------------------------+--¦
                ¦ ¦1.¦The Framatome Companies ¦5 ¦
                +--+--+--------------------------------------------------------------------+--¦
                ¦ ¦2.¦Burndy–US ¦5 ¦
                +--+--+--------------------------------------------------------------------+--¦
                ¦ ¦3.¦Furukawa and Sumitomo ¦7 ¦
                +-----------------------------------------------------------------------------¦
                ¦ ¦
                +-----------------------------------------------------------------------------¦
                ¦B.¦Japanese Ministry of International Trade and Industry ¦7 ¦
                +-----------------------------------------------------------------------------¦
                ¦ ¦
                +-----------------------------------------------------------------------------¦
                ¦C.¦Burndy–Japan ¦8 ¦
                +--+-----------------------------------------------------------------------+--¦
                ¦ ¦1.¦Formation ¦8 ¦
                +--+--+--------------------------------------------------------------------+--¦
                ¦ ¦2.¦Agreements Between Burndy–US, Furukawa, and Sumitomo From 1962 to ¦9 ¦
                ¦ ¦ ¦1973 ¦ ¦
                +--+--+--------------------------------------------------------------------+--¦
                ¦ ¦3.¦1973 Basic Agreement ¦10¦
                +--+--+--------------------------------------------------------------------+--¦
                ¦ ¦4.¦Burndy–Japan's Presidents and Board of Directors ¦12¦
                +--+--+--------------------------------------------------------------------+--¦
                ¦ ¦5.¦1988 Technical Assistance Agreement ¦13¦
                +--+--+--------------------------------------------------------------------+--¦
                ¦ ¦6.¦Burndy–Japan's Independence From Burndy–US ¦14¦
                +--+--+--------------------------------------------------------------------+--¦
                ¦ ¦7.¦Burndy–US's Purchase of 40 Percent of the Stock of Burndy–Japan in ¦15¦
                ¦ ¦ ¦1993 ¦ ¦
                +-----------------------------------------------------------------------------¦
                ¦ ¦
                +-----------------------------------------------------------------------------¦
                ¦D.¦Withholding Tax Issue ¦17¦
                +--+-----------------------------------------------------------------------+--¦
                ¦ ¦1.¦Purchase of TRW Daut & Reitz by Burndy–US ¦17¦
                +--+--+--------------------------------------------------------------------+--¦
                ¦ ¦2.¦Transfer of 40 Percent of Burndy–Japan Stock to Burndy–US in 1993 ¦19¦
                +-----------------------------------------------------------------------------¦
                ¦ ¦
                +-----------------------------------------------------------------------------¦
                ¦OPINION ¦20¦
                +-----------------------------------------------------------------------------¦
                ¦ ¦
                +-----------------------------------------------------------------------------¦
                ¦A.¦Whether Burndy–Japan Was a Controlled Foreign Corporation in 1992 ¦20¦
                +--+-----------------------------------------------------------------------+--¦
                ¦ ¦1.¦Voting Power Test and Stock Value Test ¦20¦
                +--+--+--------------------------------------------------------------------+--¦
                ¦ ¦2.¦Whether Burndy–US Owned More Than 50 Percent of the Total Combined ¦22¦
                ¦ ¦ ¦Voting Power of the Stock of Burndy–Japan ¦ ¦
                +--+--+--------------------------------------------------------------------+--¦
                ¦ ¦3.¦Whether Burndy–US Owned More Than 50 Percent of the Value of ¦47¦
                ¦ ¦ ¦Burndy–Japan Stock ¦ ¦
                +-----------------------------------------------------------------------------¦
                ¦ ¦
                +-----------------------------------------------------------------------------¦
                ¦B.¦Whether Petitioners Are Liable for Withholding Tax ¦52¦
                +--+-----------------------------------------------------------------------+--¦
                ¦ ¦1.¦Contentions of the Parties ¦52¦
                +--+--+--------------------------------------------------------------------+--¦
                ¦ ¦2.¦Whether Burndy–US Transferred Excess Value to FCI in 1993 ¦53¦
                +--+--+--------------------------------------------------------------------+--¦
                ¦ ¦3.¦The U.S.-France Tax Treaty and 1988 Protocol ¦64¦
                +--+--+--------------------------------------------------------------------+--¦
                ¦ ¦4.¦Conclusion ¦67¦
                +-----------------------------------------------------------------------------+
                

[118 T.C. 33]

COLVIN, J.

Respondent determined deficiencies in petitioners' income and withholding taxes and a penalty as follows:

+---------------------------------------------------------------------------+
                ¦Year¦Income tax deficiency¦Sec. 6662 1 penalty¦Withholding tax deficiency¦
                +---------------------------------------------------------------------------¦
                ¦ ¦
                +---------------------------------------------------------------------------¦
                ¦1991¦$1,733,207 ¦$380,298 ¦ ¦
                +---------------------------------------------------------------------------¦
                ¦ ¦
                +---------------------------------------------------------------------------¦
                ¦1992¦753,456 ¦256,626 ¦ ¦
                +---------------------------------------------------------------------------¦
                ¦ ¦
                +---------------------------------------------------------------------------¦
                ¦1993¦24,892,344 ¦4,978,469 ¦$2,700,316 ¦
                +---------------------------------------------------------------------------+
                

[118 T.C. 34]

After concessions, we must decide:

1. Whether Burndy–Japan Ltd. (Burndy–Japan) was a controlled foreign corporation (CFC) of Burndy Corp. (Burndy–US) 1 in 1992. We hold that it was not because Burndy–US did not own more than 50 percent of the voting power of Burndy–Japan stock or more than 50 percent of the value of Burndy–Japan stock in 1992.

2. Whether transfers from Burndy–US and Framatome Connectors USA, Inc. (Framatome US), now known as Framatome Connectors USA Holding, Inc., to Framatome Connectors International (FCI), their parent corporation, of assets worth more than the assets that Burndy–US received from FCI were constructive dividends subject to withholding tax under section 1442. We hold that they were to the extent described below.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found.

A. Petitioners, Their Predecessors, Furukawa, and Sumitomo1. The Framatome Companies

Petitioner Framatome U.S. is a New York corporation, the principal place of business of which was in Connecticut when the petitions were filed. Framatome S.A., a French company, owned 100 percent of FCI, another French company, which owned 100 percent of Framatome U.S. during the years in issue.

Framatome S.A. designed, sold, built, and serviced nuclear power units. Framatome S.A. decided to diversify. Around 1988, Framatome S .A. formed FCI to acquire and hold businesses which manufactured electrical and electronic

[118 T.C. 35]

connectors. Electric utility companies use electrical connectors to connect cables or wires. Manufacturers use electronic connectors in machines, appliances, computers, and electronic products. FCI formed Framatome U.S. in 1988 to acquire all of the outstanding shares of Burndy–US (described next) and its subsidiaries, which manufactured electrical and electronic connectors.

2. Burndy–US

Burndy–US was a predecessor corporation of Framatome U.S. and Framatome...

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