Int'l Multifoods Corp. v. Comm'r of Internal Revenue
| Citation | 108 T.C. 579,108 T.C. No. 26 |
| Decision Date | 18 June 1997 |
| Docket Number | No. 11643–92.,11643–92. |
| Parties | INTERNATIONAL MULTIFOODS CORPORATION AND AFFILIATED COMPANIES v. COMMISSIONER OF INTERNAL REVENUE |
| Court | United States Tax Court |
OPINION TEXT STARTS HERE
David R. Brennan, John K. Steffen, Susan B. Grupe, and Nathan P. Zietlow, for petitioner.
Jack Forsberg, for respondent.
On March 26, 1992, respondent determined deficiencies in petitioner's Federal income taxes as follows:
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¦¦Taxable Year Ended ¦Deficiency ¦
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¦¦ ¦ ¦
++--------------------+------------¦
¦¦Feb. 28, 1987 ¦$2,962,380 ¦
++--------------------+------------¦
¦¦Feb. 29, 1988 ¦3,592,402 ¦
++--------------------+------------¦
¦¦ ¦ ¦
+----------------------------------+
Petitioner paid these deficiencies following receipt of its notice of deficiency and on June 1, 1992, filed a petition with this Court claiming an overpayment of income tax for each year.
In International Multifoods Corp. v. Commissioner, 108 T.C. 25, (1997), we disposed of several issues in this case. In an order accompanying the release of our opinion, we granted respondent's motion to sever and hold the sole remaining issue in abeyance. This remaining issue requires us to decide whether the loss realized by petitioner on its sale of the stock of Paty S.A.-Produtos Alimenticios, Ltda.,1 on March 31, 1987, is to be sourced in the United States for purposes of computing petitioner's foreign tax credit limitation under section 904(a).2
We severed this issue because the Department of the Treasury (Treasury) issued proposed regulations on July 8, 1996, involving the allocation of losses realized on the disposition of stock (the stock loss regulations). The summary to the proposed regulations stated that “The regulations are necessary to modify existing guidance with respect to stock losses.” 61 Fed.Reg. 35696 (July 8, 1996). Pursuant to the proposed regulations, losses realized on the disposition of stock of a corporation in which the taxpayer owns a 10–percent or greater interest generally would be sourced in the residence of the seller. Sec. 1.865–2(a)(1), Proposed Income Tax Regs., 61 Fed.Reg. 35698 (July 8, 1996). With respect to losses realized on the disposition of all other personal property, the proposed regulations provide that section 1.861–8, Income Tax Regs., or other administrative pronouncements will continue to apply. Sec. 1.865–1, Proposed Income Tax Regs., 61 Fed.Reg. 35698 (July 8, 1996). If the proposed regulations are finalized in their current form, petitioner would be permitted to elect retroactively to source its Paty stock loss in the United States. See sec. 1.865–2(a)(1), (e)(2)(i), Proposed Income Tax Regs., 61 Fed.Reg. 35698–35700 (July 8, 1996).
In his motion to sever issue, filed on July 19, 1996, respondent stated: “At this time, respondent is hopeful that the proposed regulations will be finalized during the beginning of the 1997 calendar year.” On March 3, 1997, respondent filed a status report, which indicated that the stock loss regulations had not yet been finalized. On March 5, 1997, we ordered respondent to file, on or before May 12, 1997, an additional status report with respect to the finalization of these regulations.
On March 13, 1997, petitioner filed a Motion for Court to Decide Paty Loss Issue. In its motion, petitioner stated that on the basis of respondent's March 3, 1997, status report, “it does not appear that there is any specific date by which the proposed regulations are targeted to be issued as a Treasury Decision.” Petitioner also argued that despite respondent's acknowledgment that the adoption of the proposed regulations in their current form would decide the Paty stock loss issue in petitioner's favor, Petitioner maintained that “The prejudice is compounded by the fact that the Petitioner has not only paid the full amount of the determined deficiencies and interest thereon in the present case, it has overpaid the deficiencies and interest based upon the settlement of other issues.” On April 29, 1997, respondent filed a Notice of Objection to Petitioner's Motion for Court to Decide Paty Loss Issue, in which respondent contended that “It is in the interest of judicial economy for the Court to continue to hold the PATY stock loss issue in abeyance pending a further status report by the respondent regarding the finalization of the stock loss regulations.” In a status report filed May 12, 1997, respondent informed the Court that the proposed regulations were still not finalized.
We agree with petitioner that the time has come to decide this issue. In granting respondent's motion to sever, we relied, in large part, upon respondent's statement that he was “hopeful” that the proposed regulations would be finalized by the beginning of 1997. It is now over 10 years since the enactment of section 865(j)(1) directing the Secretary to promulgate regulations regarding this issue. However, as of the date of issuance of this opinion, the regulations still remain in proposed form. Petitioner has already paid the deficiencies determined in the notice of deficiency and is entitled to a decision on the merits.
Some of the facts have been stipulated and are so found. At the time its petition was filed, petitioner maintained its principal place of business in Minneapolis, Minnesota. Damca International Corp. (Damca) was a wholly owned subsidiary of petitioner and joined in the filing of petitioner's consolidated Federal income tax return for the taxable year ended February 29, 1988.
Petitioner and Damca owned 100 percent of the outstanding stock of Multifoods Alimentos, Ltda. (MAL). On February 22, 1979, MAL acquired 85 percent of the outstanding stock of Paty. MAL and Paty were Brazilian “limitadas” organized under the laws of the Federal Republic of Brazil.
Paty was a regional pasta manufacturer, which marketed its products in the greater Rio de Janeiro area. Petitioner acquired an indirect interest in Paty, because it believed Paty would be a profitable investment. Through that investment, petitioner sought to expand its presence in Latin America and provide its stock with more appeal to the stockholding community.
By February 1982, petitioner and MAL had acquired the remaining 15 percent of the stock outstanding in Paty. On February 29, 1984, the Paty stock which MAL held was distributed to petitioner and Damca upon MAL's liquidation. During its fiscal year 1986, petitioner transferred all but one share of its Paty stock to Damca.
Pursuant to a Quota Purchase Agreement,3 entered into on March 30, 1987, petitioner and Damca sold their stock in Paty to Borden, Inc., and its Panamanian subsidiary Borden S.A. Borden, Inc., acquired one share of Paty stock, and Borden S.A., acquired the remaining 1,597,135,239 shares. The closing of the transaction occurred at Borden, Inc.'s, offices in New York, New York, on March 31, 1987.
Petitioner sold Paty because it proved to be an unprofitable investment, principally due to price controls imposed by the Brazilian Government. With the exception of the taxable year ended February 29, 1980, Paty never generated net income for any year subsequent to MAL's acquisition of an interest in Paty. At the time of sale, Paty had a net deficit in earnings of $5,053,076. Neither petitioner nor Damca received any dividends from Paty.
Damca realized a loss of $3,922,310 upon the sale of its Paty stock. Of that amount, petitioner reported only $3,772,310 as a loss due to a $150,000 error in calculating losses. On its U.S. Corporation Income Tax Return (Form 1120) for the taxable year ended February 29, 1988, petitioner reported the loss as a U.S. source loss in computing its foreign tax credit limitation. Respondent determined that the loss from the sale of the Paty stock must be sourced outside the United States.
OPINIONThe sole issue for decision is whether the loss realized by petitioner on the sale of its Paty stock is to be sourced in the United States for purposes of determining petitioner's foreign tax credit limitation under section 904(a).
Enacted as part of the Tax Reform Act of 1986, Pub.L. 99–514, sec. 1211(a); 100 Stat.2085, 2533, section 865 provides that income from the sale of noninventory personal property generally will be sourced at the residence of the seller.4 In explaining the purpose behind the passage of section 865, the House report stated:
Source rules for sales of personal property should reflect the location of the economic activity generating the income at issue or the place of utilization of the assets generating that income. In addition, source rules should operate clearly without the necessity for burdensome factual determinations, limit erosion of the U.S. tax base and, in connection with the foreign tax credit limitation, generally not treat as foreign income any income that foreign countries do not or should not tax.
Although the title passage rule operates clearly, it is manipulable. It allows taxpayers to treat sales income as foreign source income simply by passing title to the property sold offshore even though the sales activities may have taken place in the United States. In such cases, the foreign tax credit limitation may be artificially inflated. In addition, foreign countries are unlikely to tax income on a title passage basis. Thus, the title passage rule gives U.S. persons the ability to create foreign source income that is not subject to any foreign tax, and that may ultimately be sheltered from U.S. tax with unrelated excess foreign tax credits. In addition, it gives foreign persons the ability to generate income that should be subject to U.S. tax.
Because the residence of the seller generally is...
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