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In her column last Monday, Lee Sheppard criticized Judge Holmes of the Tax Court for, as she put it, “strain[ing] to find a reason to hold for the taxpayer” in the recent case of Container Corp. v. Comm’r, 134. T.C. No. 5. (For our prior discussion of this case, see here. For the text of the opinion, see here.) According to Ms. Sheppard, Judge Holmes "appears to have assumed equitable powers in deciding" the case, and "the tax law is the worse for it."
The basic issue in Container Corp. was whether guarantee fees paid by a U.S. corporation to its Mexican parent in respect of a debt guarantee provided by the parent should be treated as U.S.-source income (and therefore subject to withholding tax on payment to the Mexican parent). Because the rules for sourcing income don't address how guarantees are to be treated, the court framed its analysis as whether the guarantee fees were more like interest (which is sourced to the location of the borrower) or more like services (which are sourced to the location of the provider).
Ms. Sheppard excoriated Judge Holmes for even contemplating that a debt guarantee could be treated as a service. To her, it "[s]ounds pretty obvious" that the parent corporation was simply protecting its investment in the subsidiary, not providing a service to the subsidiary.
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 ...