Int'l Tel. v. Comm'r of Internal Revenue
| Decision Date | 09 July 1981 |
| Docket Number | Docket No. 7990-75. |
| Citation | 77 T.C. 60 |
| Parties | * INTERNATIONAL TELEPHONE v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Petitioners are an affiliated group of corporations which filed a consolidated return in 1965.
1. Held, members of the group which had foreign source gross income but incurred foreign source operating losses must be included in calculating petitioners' consolidated foreign source taxable income for purposes of the foreign tax credit limitation.
2. Held, deductions resulting from service fee and interest payments by members of the group to other members should be apportioned to foreign source gross income in determining the consolidated foreign source taxable income of the group for purposes of the foreign tax credit limitations without regard to the treatment of the income as domestic or foreign source by the payee.
S and S', wholly owned subsidiaries of P, acquired substantially all of the assets of T and T', respectively, in sec. 368(a)(1)(C), I.R.C. 1954, reorganizations, using P stock. Both T and T' had convertible debentures outstanding. As part of the reorganizations, S and S', respectively, assumed liability on the principal of T and T' debentures, respectively, and P agreed to convert the debentures into its stock on the same terms the debenture holders would have been entitled to had they converted into T or T' stock immediately prior to the reorganization. P acquired T and T' debentures from the holders in exchange for P stock. S retired the T debentures by paying P the principal amount of the debentures. P contributed the T' debentures to the capital of S'. Held, the conversions into P stock after the reorganization by the debenture holders and the subsequent retirement of the debentures by S and the contribution by P of the debentures to the capital of S' were not part of the plans of reorganization. Held, further: The basis of the debentures to P is deemed the purchase price paid by S to P and the deemed purchase price by S' to P. Sec. 1.1502-41A(b), Income Tax Regs. Thus, P realized no gain or loss on the retirement of the debentures. Held, further, petitioners failed to meet their burden of proof that any loss on the retirement of the debentures was realized by either S or S'. Stephen D. Gardner, Abraham N. M. Shashy, Jr., and Robert A. Kagan, for the petitioners.
Joan Ronder Domike, for the respondent.
Respondent determined a deficiency in petitioners' income tax for 1965 of $885,064. Concessions have been made by both parties, but several issues remain. The first two, relating to the limitation on the foreign tax credit, are:
(1) Whether the foreign source operating losses of certain foreign corporations, affiliated with International Telephone & Telegraph Corp. (ITT) and included in a consolidated return filed by that corporation and its affiliates (ITT Group), must be taken into account in determining the consolidated foreign source taxable income of the group.
(2) Whether certain deductions resulting from service fee and interest payments by members of the ITT Group to other members of that group during the taxable year should be allocated to domestic source gross income or should be apportioned to foreign source gross income, according to the gross-to-gross method, in determining the consolidated foreign source taxable income of the group.
The other issues presented, relating to convertible debentures of two subsidiaries of ITT which were exchanged for ITT stock and subsequently retired by the subsidiaries, are:
(1) Whether the exchanges for, and subsequent retirement of, the debentures by the subsidiaries were an integral part of the plans of reorganizations under section 368(a)(1)(C)1 under which ITT acquired the subsidiaries and were therefore nonrecognizable transactions.
(2) If not, whether ITT or its subsidiaries recognized any loss thereby.
This case was submitted as fully stipulated pursuant to Rule 122, and the stipulation of facts and exhibits are incorporated herein by this reference.
ITT, a Delaware corporation with its principal place of business in New York, N.Y., is the common parent of the ITT Group, an affiliated group of domestic corporations as defined in section 1504(a). Petitioners other than ITT were includable corporations, as defined in section 1504(b), of said affiliated group.
The ITT Group timely filed a consolidated Federal income tax return with the Internal Revenue Service, Manhattan District, showing no tax liability.
Issue 1. Foreign Tax Credit—-Foreign Operating Losses
During the taxable year 1965, members of the ITT Group realized both domestic source gross income and foreign source gross income.2 See secs. 861(a) and 862(a). With respect to the foreign source gross income, various members of the ITT Group paid, or are deemed to have paid, foreign income taxes for which the ITT Group elected to claim a foreign tax credit, subject to the overall foreign tax credit limitation of section 904(a). See also sec. 1.1502-43A(c)(2), Income Tax Regs. The foreign tax credit is structured so as to mitigate the burdens of double taxation of foreign income of domestic corporations ( American Chicle Co. v. United States, 316 U.S. 450, 451 (1942)), in a manner “designed to prevent the amount of foreign taxes credited from offsetting U.S. tax on the taxpayer's domestic income.” Grunebaum v. Commissioner, 50 T.C. 710, 717 (1968), affd. 420 F.2d 332 (2d Cir. 1970).
(hereinafter sometimes referred to as the pertinent fraction), where the U.S. tentative tax is the liability computed without the benefit of any credit under section 901. Theo. H. Davies & Co. v. Commissioner, 75 T.C. 443, 444 (1980).
where the tentative tax is the group's U.S. tax liability calculated without the benefit of the foreign tax credit and the denominator is “consolidated taxable income” as defined in section 1.1502-31A, Income Tax Regs. It is the determination of the numerator which is in dispute in both foreign tax credit issues before us.
Several members of the ITT Group which had foreign source gross income for the taxable year incurred foreign source operating losses. Petitioners did not include these foreign source operating loss members in calculating their consolidated foreign source taxable income (the numerator of the pertinent fraction) for purposes of the foreign tax credit limitation under section 904(a)(2). Respondent determined that the ITT Group should have included these foreign source operating losses in the numerator of the pertinent fraction in order properly to calculate its foreign tax credit limitation.6
In arguing that we should exclude from the numerator those members of the ITT Group which incurred foreign source operating losses, petitioners primarily rely upon the last sentence of Rev. Rul. 72-281, 1972-1 C.B. 285. This ruling discusses the computation of the consolidated limitation on the foreign tax credit, under the regulations effective only for those taxable years beginning after December 31, 1965 (see note 6 below), where a member of the affiliated group incurs expenses not definitely allocable to either foreign or domestic gross income. The last paragraph of the ruling concludes:
Accordingly, for purposes of computing the consolidated limitation on the foreign tax credit, the numerator of the applicable limiting fraction, under section 904(a) of the Code (consolidated taxable income from foreign sources), should be determined by allocating expenses of each member of the group which cannot be allocated to some item or class of domestic or foreign sources income on the ratio of foreign gross income to total gross income of each company of the group (separate company ratio). Thus, gross income and expenses of members of the group that do not have income from foreign sources are not included in this computation.
Petitioners argue that the last sentence requires us to conclude that those members without foreign source taxable income should be excluded from the numerator of the pertinent fraction. In so doing, petitioners take the sentence out of context and ignore the remainder of the ruling, which makes it clear that the computation referred to...
To continue reading
Request your trial
-
Vahlsing Christina Corporation v. Commissioner
...an essential part of the reorganization that are to be so treated. * * * Emphasis added. See also International Telephone & Telegraph v. Commissioner Dec. 38,048, 77 T. C. 60, 76 (1981), affd. 83-1 USTC ¶ 9278 per curiam 704 F. 2d 252 (2d Cir. 1983). Petitioners have simply not convinced us......
-
Reynolds Metals Co. v. Comm'r of Internal Revenue, 24939–93.
...exceeded the principal of the exchanged debentures. Held, P is not entitled to a capital loss deduction. International Telephone & Telegraph v. Commissioner, 77 T.C. 60 (1981), supplemented by77 T.C. 1367,affd. per curiam704 F.2d 252 (2d Cir.1983), distinguished.OPINIONTENNENWALD, Judge: Re......
-
J.E. Seagram Corp., F.K.A. v. Comm'r of Internal Revenue
...as described in section 1.368–2(g), Income Tax Regs., quoted above, is one of substantial elasticity. See International Tel. & Tel. Corp. v. Commissioner, 77 T.C. 60, 75 (1981), affd. per curiam 704 F.2d 252 (2d Cir.1983). One commentator has stated that The courts, and the Service where it......
-
Johnson v. Comm'r of Internal Revenue
...the doctrine is inapposite here. Petitioner had no obligation whatever to tender his stock to MRC. Cf. International Telephone & Telegraph Corp. v. Commissioner, 77 T.C. 60, 76 (1981). Although the recapitalization and subsequent sale of Alleghany's stock to MRC may have been “steps so inte......