May 6, 2014
The taxpayer has filed its response brief in the Federal Circuit in the MassMutual case. See our previous coverage here. With respect to the primary issue of whether its policyholder dividend guarantee was a “fixed liability” within the meaning of the “all events test,” the taxpayer relies heavily on Washington Post Co. v. United States, 405 F.2d 1279 (Ct. Cl. 1969). (The Court of Claims was the predecessor court to the Federal Circuit and its pre-1982 decisions are binding precedent in the Federal Circuit.) According to the taxpayer, Washington Post establishes that “a company can fix a liability to an existing class of beneficiaries, even though the class composition may change before the liability is ultimately satisfied.” In contrast to the government’s brief, the taxpayer does not dwell at length on the Supreme Court’s decisions in Hughes Properties and General Dynamics, but argues that both of those cases are fully consistent with the more-directly-on-point decision in Washington Post.
The brief also addresses the Second Circuit’s decision in New York Life, arguing that the cases are distinguishable. (The Second Circuit had suggested a distinction, but without great conviction, suggesting that it believed the Court of Federal Claims was wrong in MassMutual.) The critical difference, according to the taxpayer, is that “New York Life addressed thousands of separate liabilities to individual policyholders, any one of which could cease to be a policyholder at any time,” whereas MassMutual involves a guarantee to “a class of policyholders” that “does not depend on identifying individual policyholder liability.” Finally, the taxpayer rejects the government’s argument that the dividend guarantees were “illusory,” stating that the trial court correctly ruled that “Board resolutions can fix liability.”
With respect to the second issue of whether the liability fell within the “recurring item exception,” the taxpayer argues that its position comports with “the only sound interpretation of the regulation.” It further argues that the government’s administrative deference argument is waived for failure to raise it below and, in any event, fails because the government is seeking deference to what is no more “than a convenient litigating position” that has not been shown to have been approved at any level by IRS or Treasury.
The taxpayer’s brief is linked below. Also linked below is the government’s brief in opposition to the petition for certiorari filed by the taxpayer in New York Life. That petition was denied by the Supreme Court on April 28.
May 5, 2014
The taxpayer filed its reply brief in the BMC Software case last week. As in its opening brief, BMC cites Fifth Circuit precedent for the tax law definition of “indebtedness” as an “existing unconditional and legally enforceable obligation to pay.” BMC argues that it is undisputed that the accounts receivable created under Rev. Proc. 99-32 do not meet that definition—they neither existed nor were legally enforceable during the testing period for related-party indebtedness under section 965. (BMC observes that instead of disputing this point, the Commissioner tried to distinguish that case law, much of which comes from the debt-equity context. And BMC points out that the Commissioner’s argument implies different definitions of “indebtedness” may apply depending on the posture of the case.) In our first post on this case, we speculated that the outcome in this case may depend on whether the Tax Court took the legal fictions in Rev. Proc. 99-32 too far. That issue lurks beneath this definitional dispute: That the accounts receivable are deemed to have arisen during the testing period does not settle whether those accounts were “indebtedness” during the testing period.
BMC then turns to the closing agreement, which makes no mention of section 965 or the term “indebtedness.” BMC therefore relies on the legal principle that closing agreements must be construed to bind the parties “only to the matters expressly agreed upon.” BMC also addresses the Commissioner’s other arguments based on the closing agreement.
Finally, BMC makes a strong policy argument against the result in the Tax Court. BMC observes that the Commissioner concedes that the clear purpose of the related-party-indebtedness rule in section 965 is that it is meant to ensure “that a dividend funded by a U.S. shareholder, directly or indirectly, and that does not create a net repatriation of funds, is ineligible for the benefits” of section 965. Of course, no taxpayer could fund a dividend by way of deemed accounts receivable created after the dividend was paid. Therefore, BMC concludes, the case does not implicate the underlying purpose of the related-party-indebtedness rule under section 965.
We will provide updates once oral arguments are scheduled.