October 28, 2010
The taxpayer has filed its answering brief in Container (attached below), arguing that guarantee fees paid to its Mexican parent were properly analogized to a payment for services and therefore sourced to Mexico. The taxpayer reasons that the government’s analogy to interest on a loan is misdirected because the guarantor does not advance any funds. All it does is “stand[ ] by to pay,” which is in the nature of a service, and it is the Mexican parent’s assets – located in Mexico – that give it the ability to serve as a guarantor. The taxpayer also maintains that the government’s position conflicts with the Tax Court’s factual findings to the extent that the government argues that the parent was a lender in substance because it expected the U.S. subsidiary to default.
The taxpayer disputes the government’s assertion that the relevant precedents support the interest analogy. With respect to the commissions paid for letters of credit in the Bank of America case, the taxpayer argues that “Bank of America was not being paid for substituting its credit for that of the foreign bank, but for substituting its money.” Accordingly, the taxpayer reasons, the commissions in Bank of America were logically analogized to interest, but a different result is called for in Container where the guarantor did not furnish any money. The taxpayer also distinguishes the Centel decision involving stock warrants as resting on factual findings specific to that case. It further contends that the Fifth Circuit should disregard the observation in Centel that Bank of America rejects analogizing guaranties to services, because that observation is “both dicta and incorrect.”