Unionbancal Corp. v. Comm'r of Internal Revenue, 11364–97.

• Decision Date: 22 October 1999
• Docket Number: No. 11364–97.,11364–97.
• Citation: 113 T.C. No. 22,113 T.C. 309
• Parties: UNIONBANCAL CORPORATION, F.K.A. Union Bank, Successor in Interest to Standard Chartered Holdings, Inc. and Includable Subsidiaries, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

113 T.C. 309

113 T.C. No. 22

UNIONBANCAL CORPORATION, F.K.A. Union Bank, Successor in Interest to Standard Chartered Holdings, Inc. and Includable Subsidiaries, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

No. 11364–97.

United States Tax Court.

Oct. 22, 1999.

Frederick R. Chilton, Jr. and Paolo M. Dau, for petitioner.

Cynthia K. Hustad, for respondent.

THORNTON, J.

In 1984, P was part of a controlled group of corporations. On its 1984 Federal income tax return, P reported an $11.6 million loss resulting from P's sale of a loan portfolio to its United Kingdom parent corporation, SC–UK. United States and United Kingdom competent authorities subsequently determined that the actual loss was $87.9 million. Pursuant to a settlement agreement for the 1984 taxable year, R allowed P to deduct $2.3 million of the loss on its 1984 return. The remaining loss was deferred pursuant to sec. 267(f), I.R.C. R determined that under sec. 1.267(f)–1T(c)(6), Temporary Income Tax Regs., 49 Fed.Reg. 46998 (Nov. 30, 1984), P was not entitled to deduct the deferred loss in 1988 when it left the controlled group before the loan portfolio had been disposed of outside the controlled group. Instead, R determined that under sec. 1.267(f)–1T(c)(7), Temporary Income Tax Regs., supra, SC–UK's basis in the loan portfolio was increased by the amount of the deferred loss. The United Kingdom has declined to allow SC–UK a stepped-up basis in the loan portfolio.

In 1995, R replaced the temporary regulations under sec. 267(f), I.R.C., with final regulations, effective prospectively. The final regulations operate to restore a deferred loss under sec. 267(f), I.R.C., to the seller when it leaves the controlled group, even if the loss property has not been disposed of outside the controlled group. R denied P's request for elective retroactive application of the final regulations.

Held: Sec. 1.267(f)–1T(c)(6), Temporary Income Tax Regs., supra, is valid. P is not entitled to deduct the $85.6 million loss deferred under sec. 267(f), I.R.C.

Held: Sec. 1.267(f)–1T(c)(6), Temporary Income Tax Regs., supra, does not violate Article 24, paragraph (5) of the United States–United Kingdom Income Tax Treaty, Dec. 31, 1975, 31 U.S.T. 5668.

Held: R's refusal to allow P to elect retroactive application of the 1995 final regulations under sec. 267, I.R.C., is permissible under sec. 7805(b), I.R.C.

Respondent determined a deficiency in petitioner's corporate Federal income tax for the taxable year ending October 31, 1988, in the amount of $1,676,690. The only issue before the Court is whether respondent erred in refusing to allow petitioner a deduction in the amount of $85,612,820 (representing losses previously deferred pursuant to section 267(f) and arising from petitioner's 1984 sale of certain loans to a member of the same controlled group) when petitioner left its controlled group in 1988.¹ This question turns on the validity of section 1.267(f)–1T(c)(6), Temporary Income Tax Regs., 49 Fed.Reg. 46998 (Nov. 30, 1984), and the application of section 7805(b).

The parties submitted this case fully stipulated in accordance with Rule 122. The stipulation of facts is incorporated herein by this reference.

FINDINGS OF FACT

Petitioner is a California corporation, with its principal office in San Francisco, California. As described in more detail below, in 1984 petitioner belonged to a controlled group of corporations that included its indirect United Kingdom parent corporation.² In 1984, petitioner sold a loan portfolio to its indirect United Kingdom parent corporation, realizing a loss of $87.9 million. Respondent determined that petitioner was permitted to deduct $2.3 million of the losses in taxable year 1984, but pursuant to section 267(f) was required to defer additional losses associated with the sale. In 1988, petitioner left the controlled group, which still held the loan portfolio. Respondent denied petitioner's claim for a deduction in taxable year 1988 for the remaining amount of the loss associated with the sale of the loan portfolio (i.e., $85.6 million).

Organizational Structure and History

On October 31, 1988, and at all prior times relevant hereto, Standard Chartered Holdings, Inc. (Standard Chartered) was the sole shareholder of Union Bancorp, which in turn was the sole shareholder of Union Bank, a U.S. corporation. Standard Chartered Overseas Holdings, Ltd. (SCOH), a United Kingdom corporation, owned all of the stock in Standard Chartered. Standard Chartered Bank (Standard Chartered–U.K.), a United Kingdom corporation, owned all of the stock in SCOH. Therefore, Standard Chartered–U.K. was the indirect parent of Union Bank.

On October 31, 1988, SCOH sold all its stock in Standard Chartered to California First Bank, an unrelated party. On November 1, 1988, Standard Chartered and its subsidiaries, Union Bancorp and Union Bank, were liquidated into California First Bank. California First Bank then changed its name to Union Bank.

On April 1, 1996, BanCal Tri–State Corp., a Delaware corporation and parent of The Bank of California, merged into Union Bank, with Union Bank surviving. Union Bank transferred all the assets of its banking business to The Bank of California, and Union Bank then changed its name to petitioner's present name, UnionBanCal Corp.

The 1984 Sale of the Loan Portfolio

On December 31, 1984, Union Bank sold to Standard Chartered–U.K. loans that it had made to various foreign countries (the loan portfolio). The sales price was $422,985,520. The face value of the loan portfolio was $434,557,415.

On October 31, 1988, when SCOH sold all its stock in Standard Chartered to California. First Bank, the loan portfolio had not been disposed of outside of the controlled group. Standard Chartered–U.K. transferred the loan portfolio outside of the controlled group in 1989.

Tax Treatment of the Loan Portfolio Sale for Taxable Year 1984

On its 1984 corporate Federal income tax return, petitioner claimed a loss of $11,571,895 in connection with the sale of the loan portfolio, corresponding to the difference between petitioner's basis in the loan portfolio ($434,557,415) and the sales price ($422,985,520). In 1995, in the course of respondent's Appeals Office review of the audit determinations for the 1984 taxable year, petitioner filed an amended Federal income tax return for its 1984 taxable year, claiming a revised loss of $84,079,067 on the sale of the loan portfolio to Standard Chartered–U.K. Respondent denied this affirmative adjustment.

Petitioner and respondent reached a partial appeals settlement for taxable year 1984, under which respondent allowed petitioner a loss deduction in 1984 in the amount of $2,314,379, which represented 20 percent of the loss claimed on petitioner's original 1984 return. Remaining losses associated with the sale of the loan portfolio were deferred pursuant to section 267(f). ³

Tax Treatment of the Loan Portfolio Deferred Loss for Taxable Year 1988

On its Federal income tax return for taxable year 1988, petitioner originally claimed no deduction for any loss resulting from the sale of the loan portfolio in 1984. Instead, as previously discussed, petitioner initially sought to deduct such losses with respect to its 1984 taxable year. The settlement of its 1984 taxable year having resulted in an allowance for that year of only $2,314,379 of the losses, petitioner sought an affirmative adjustment for its 1988 taxable year, claiming that losses deferred from the 1984 loan portfolio sale should be restored to petitioner on October 31, 1988, when it left the Standard Chartered controlled group. Respondent disallowed petitioner's claim.

The Competent Authority Process

For United Kingdom income tax purposes, Standard Chartered–U.K. claimed losses with respect to the loan portfolio predicated on the loan portfolio's having a United Kingdom tax basis of $422,985,520. In examining Standard Chartered–U.K.'s tax returns for 1984 and certain subsequent years, the United Kingdom Inland Revenue determined that Standard Chartered–U.K.'s tax basis in the loan portfolio was overstated and consequently that its allowable losses therefrom should be reduced for United Kingdom income tax purposes.

In 1996, petitioner requested competent authority assistance to resolve the value of the loan portfolio on December 31, 1984, the amount of the loss realized on that date upon the sale of the loan portfolio, and the proper treatment of the loss realized. The United States Competent Authority and the United Kingdom Competent Authority agreed that the value of the loan portfolio on December 31, 1984, was $346,630,214 and that petitioner's loss on the sale was $87,927,200. The competent authorities were unable, however, to resolve the tax treatment of this loss. The United States would not withdraw its adjustment disallowing the loss to petitioner. In addition, the United Kingdom would not allow Standard Chartered–U.K. to increase its basis in the loan portfolio to reflect the loss disallowed petitioner for U.S. income tax purposes.

Petitioner has not returned to Standard Chartered–U.K. the excess of the amount received from it for the loan portfolio over the value of the loan portfolio as determined under the competent authority process.⁴

OPINION

Section 267(a)(1) generally disallows losses from the sale or exchange of property between related parties, as defined in section 267(b). If a loss is disallowed under section 267(a)(1), subsection (d) generally provides a corresponding reduction in the amount of any gain the related purchaser must recognize on a subsequent resale of the property.⁵

Section 267(f) prescribes special rules for losses incurred on the sale or exchange of property between related taxpayers that are members of the same controlled group.⁶ Section 267(f)(2) provides:

(2) Deferral (rather than denial) of loss from sale or exchange between members.—In the case of any loss from the sale or exchange of...