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Tax Blawg

Tax Talk for Tax Pros

Introduction

Welcome to TaxBlawg, a resource for news and analysis of current legal issues facing tax practitioners. Although blawg.com identifies nearly 1,400 active “blawgs,” including 20+ blawgs related to taxation and estate planning, the needs of tax professionals have received surprisingly little attention. The Wall Street Journal's Tax Blog gives “tips and advice for filers,” and Paul Caron’s legendary TaxProf Blog is an excellent clearinghouse for academic and policy-oriented news. Yet, tax practitioners still lack a dedicated resource to call their own. For those intrepid souls, we offer TaxBlawg, a forum of tax talk for tax pros.

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Container Corp. v. Comm'r, 134 T.C. No. 5 (2010)

In a decision that will not simplify the convoluted taxation of financial products, the Tax Court held, in Container Corp. v. Comm’r, 134 T.C. No. 5 (2010) that guarantee fees paid by a U.S. company to its Mexican parent were properly treated as non-U.S. source income and therefore not subject to U.S. withholding taxes. (For the text of the decision, see here.) Arguing that the guarantee fees were more akin to interest paid on a loan (which would be treated as U.S.-source income), the IRS analogized the guarantee payments to acceptance and confirmation commissions like those at issue in Bank of America v. United States, 680 F.2d 142 (Ct. Cl. 1982), which treated such commissions like interest. The Tax Court rejected the analogy, however, because the Mexican company in this case was simply augmenting the credit of its U.S. subsidiary, not becoming primarily liable for the underlying debt as in Bank of America. Though recognizing that its distinction between guarantee fees and acceptance commissions might be viewed as a distinction without a difference, the court nevertheless concluded that the provision of a guarantee was more akin to a service and therefore was properly sourced outside the United States.

The difficulty faced by the Tax Court in distinguishing between guarantee fees and acceptance commissions reflects the problems courts generally face when dealing with financial products, where equivalent economic arrangements can be structured through the use of instruments that produce different tax results. (For a classic example, the "put-call parity theorem," which demonstrates the equivalence of owning a share of stock and the right to put it, on the one hand, and an option to buy the stock along with a riskless zero-coupon bond, on the other, see the following article the following article by Professor Knoll.) The court’s discussion of interest and financial products in this case may prove useful in analyzing the tax treatment of other financial products.

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    David Shakow has specialized in federal taxation for over 30 years.  He has been a professor at the University of Pennsylvania Law School since 1982; was Deputy Tax Legislative Counsel in the U.S. Treasury from 1980-1981; and has ...