SIH Partners LLLP v. Commissioner of Internal Revenue, 011818 FEDTAX, 3427-15
| Opinion Judge | COHEN, Judge |
| Party Name | SIH PARTNERS LLLP, EXPLORER PARTNER CORPORATION, TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Attorney | Mark D. Lanpher, Robert A. Rudnick, and Kristen M. Garry, for petitioner. Jeffrey B. Fienberg, Richard A. Rappazzo, and Julie Ann P. Gasper, for respondent. |
| Case Date | January 18, 2018 |
| Court | U.S. Tax Court |
S was the U.S. shareholder of two CFCs that guaranteed loans made to a U.S. person. R determined that S must include in its gross income for the tax years in issue the CFCs' applicable earnings pursuant to I.R.C. secs. 951(a)(1)(B) and 956(d). R's determination relied on regulations promulgated under I.R.C. sec. 956 (regulations). R also determined that the amounts included in S's gross income should be taxed as ordinary income.
P contends that the regulations are invalid and that in the absence of valid regulations R's determination cannot be sustained. If we sustain R's determination of the amounts included under I.R.C. secs. 951(a)(1)(B) and 956(d), P contends that the amounts should be taxed as qualified dividend income under I.R.C. sec. 1(h)(11).
Held: The regulations are valid, and R correctly determined that S must include in gross income the CFCs' applicable earnings for the tax years in issue.
Held,
further, the amounts included in P's gross income pursuant to I.R.C. secs. 951(a)(1)(B) and 956(d) are not qualified dividend income under I.R.C. sec. 1(h)(11).
Mark D. Lanpher, Robert A. Rudnick, and Kristen M. Garry, for petitioner.
Jeffrey B. Fienberg, Richard A. Rappazzo, and Julie Ann P. Gasper, for respondent.
OPINION
COHEN, Judge
On November 10, 2014, respondent issued two notices of final partnership administrative adjustment (FPAAs) to Explorer Partner Corp. (Explorer Corp.) as tax matters partner for SIH Partners LLLP (SIHP) for tax years 2007 and 2008. In the FPAAs respondent determined that SIHP has income inclusions under sections 951(a)(1)(B) and 956 of $375, 392, 988 and $1, 697, 247 for 2007 and 2008, respectively. In the FPAAs respondent also determined that the income inclusions for SIHP are not qualified dividend income eligible for the preferential 15% tax rate under section 1(h)(11).
The issues for consideration are: (1) whether SIHP has income inclusions under sections 951(a)(1)(B) and 956 in amounts equal to the respective applicable earnings of two of its controlled foreign corporations because these entities guaranteed loans that Merrill Lynch made to Susquehanna International Group, LLP (SIG), and (2) if SIHP has income inclusions under sections 951(a)(1)(B) and 956, whether the income inclusions are qualified dividend income under section 1(h)(11). These issues are before the Court on the parties' cross-motions for summary judgment pursuant to Rule 121. Unless otherwise indicated, all section references are to the Internal Revenue Code (Code) in effect for the tax years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
Summary judgment is intended to expedite litigation and avoid unnecessary and expensive trials. Fla. Peach Corp. v. Commissioner, 90 T.C. 678, 681 (1988). Summary judgment may be granted with respect to all or any part of the legal issues in controversy "if the pleadings, answers to interrogatories, depositions, admissions, and any other acceptable materials, together with the affidavits or declarations, if any, show that there is no genuine dispute as to any material fact and that a decision may be rendered as a matter of law." Rule 121(b). Respondent contends that no genuine issue of material fact exists with respect to either issue. Petitioner challenges the validity of the regulations on which respondent relied in making the determinations in the FPAAs, and it contends that if we conclude that the regulations are invalid then summary judgment in its favor is appropriate. If those regulations are not invalid, then petitioner contends that issues of material fact remain in dispute as to whether respondent properly applied the regulations to the facts and circumstances of this case. We conclude that all facts material to the Court's disposition of the cross-motions for summary judgment can be drawn from the parties' stipulations and are not reasonably in dispute.
Background
We state the stipulated facts in greater detail than may be necessary so that the record is complete.
Formation of SIHP
Explorer Corp., a Delaware corporation, is an S corporation for Federal income tax purposes. During the tax years in issue Explorer Corp. had the following shareholders: Eric Brooks (Brooks), Joel Greenberg (Greenberg), Arthur Dantchik (Dantchik), and Jeffrey Yass (Yass).
From the beginning of 2007 through March 2007, Brooks, Greenberg, Dantchik, Yass, and a fifth individual, Andrew Frost (Frost), were the sole shareholders of Susquehanna International Holdings, Inc. (SIH Inc.). SIH Inc., a Delaware corporation incorporated in 1999, was an S corporation for Federal income tax purposes. In March 2007 SIH Inc. redeemed Frost's shares. On or after March 31, 2007, Brooks, Greenberg, Dantchik, and Yass were the remaining shareholders of SIH Inc.
On or after April 2, 2007, Brooks, Greenberg, Dantchik, and Yass transferred the stock of SIH Inc. to Explorer Corp. Following the transfer, SIH Inc. converted to a limited liability company, which was disregarded as an entity separate from its owner for Federal income tax purposes, and changed its name to Susquehanna International Holdings, LLC (SIH LLC). The steps of these transactions were treated together as a reorganization under section 368(a)(1)(F).
On April 2, 2007, SIHP was formed as a Delaware partnership. On or about April 3, 2007, Explorer Corp. transferred SIH LLC to SIHP in exchange for a 1% ownership interest in SIHP. Explorer Corp. is the tax matters partner for SIHP.
From on or about April 3, 2007, through the end of tax years 2007 and 2008 five S corporations owned the remaining 99% of SIHP in varying ownership percentages. Brooks, Greenberg, Dantchik, Yass, and a fifth individual, Mark Dooley (Dooley), each owned 100% of one of the S corporations.
SIG U.S. and International Affiliates
During the tax years in issue Brooks, Greenberg, Dantchik, Yass, Dooley, and Frost owned collectively and through certain entities 100% of the interest in SIG. SIG and its U.S. affiliates (together, SIG US) constitute an investment firm that trades, directly and through various affiliates, most listed financial products and asset classes. SIG U.S. trades these products primarily through broker-dealers registered with the U.S. Securities and Exchange Commission. During the tax years in issue SIHP owned indirectly certain of SIG's international affiliates.
SIHL and SEHL
From on or about January 1, 2007, to on or about April 2, 2007, SIH Inc. owned 100% of the stock of Susquehanna Ireland Holdings Limited (SIHL), a corporation organized under the laws of Ireland. From on or about April 3, 2007, to on or about December 3, 2007, SIH LLC owned 100% of SIHL's stock. Through SIH LLC (an entity disregarded for Federal income tax purposes) SIHP was treated as owning 100% of SIHL's stock.
On December 4, 2007, SIHL was acquired by Susquehanna Europe Holdings Limited (SEHL), a corporation newly organized under the laws of Ireland and whose tax residency was in Luxembourg. In connection with the acquisition, SIHL elected to be classified as a disregarded entity for Federal income tax purposes. This acquisition and election together constituted a reorganization under section 368(a)(1)(F). From December 4, 2007, through December 31, 2008, SIHP owned SEHL through SIH LLC and other entities disregarded for Federal income tax purposes.
From the beginning of tax year 2007 until its reorganization SIHL was a controlled foreign corporation (CFC) within the meaning of section 957(a). SIHP was a "United States shareholder" under section 951(b) with respect to SIHL that owned within the meaning of section 958(a) 100% of SIHL's stock. From its organization and throughout tax years 2007 and 2008, SEHL was also a CFC. SIHP was a U.S. shareholder of SEHL that owned 100% of SEHL's stock. SEHL is the successor to SIHL (together, SIHL/SEHL).
STS
From on or about January 1, 2007, to on or about April 2, 2007, SIH Inc. owned 100% of the stock of Susquehanna Trading Services, Inc. (STS), a company organized under the laws of the Cayman Islands that was treated as a corporation for Federal income tax purposes. From on or about April 3, 2007, through December 31, 2008, SIH LLC owned the stock of STS. Through SIH LLC, SIHP was treated as owning STS's stock.
During tax years 2007 and 2008 STS was a CFC. SIHP was a U.S. shareholder with respect to STS that owned within the meaning of section 958(a) 100% of STS' stock.
Loan Received by SIG
Before 2007, SIG and its affiliates had a longstanding relationship with the brokerage firm Merrill Lynch. Merrill Lynch acted as prime broker to SIG and its affiliates. As prime broker, Merrill Lynch cleared securities and commodities transactions in which SIG and its affiliates engaged, and it held as custodian for SIG and its affiliates the resulting security and commodity positions from such trading. Merrill Lynch provided margin loans to SIG and its affiliates, and it held a security interest in the assets that SIG and its affiliates maintained in accounts at Merrill Lynch.
The Notes
On October 2, 2007, SIG issued three notes payable to certain Merrill Lynch affiliates (SIG notes): (1) the Seventh Amended and Restated Promissory Note in the amount of $1.4 billion between SIG as borrower and Merrill Lynch International (MLI) as lender; (2) the Amended and Restated Promissory Note in the amount of $75 million between SIG and Merrill Lynch Professional Clearing Corp. (ML Pro, and together with MLI, Merrill Lynch); and (3) the Second Amended and Restated Promissory...
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