The government has filed its reply brief in Container, and the parties will now await an order assigning a date for oral argument. The parties’ respective arguments were well delineated in the opening briefs, and the reply brief does not shed much additional light on the issue. The government emphasizes that it has never argued that guarantee fees are interest; instead it argues that they are more analogous to interest than to a payment for services. And, disputing the taxpayer’s argument, the government reiterates that this analogy is supported by the two most relevant cases, Bank of America and Centel.
The reply brief notes that Congress addressed this issue for future years in the Small Business Jobs Act of 2010. (This legislation is briefly discussed in our first post on the Container case.) Quoting the Blue Book, the reply brief asserts that the new legislation “‘effect[s] a legislative override’ of the Tax Court’s opinion in this case,” providing that a guarantee fee paid by a domestic corporation “is now expressly considered to be income from a United States source.”
We note that the practical implications of the new statute and the Container decision can differ from country to country depending on treaty provisions. The November 8 edition of Tax Analysts’ Tax Notes Today reported on a speech given by Robert Driscoll, a technical adviser at the IRS Large Business and International Division. It quoted Mr. Driscoll as saying that withholding and taxation of guarantee fees could depend on treaty provisions if the guarantor is a qualified resident of a treaty country. Specifically, if the guarantee fee can be categorized as “other income” under the treaty, Mr. Driscoll is quoted as saying, the payment “from a U.S. [subsidiary] to its foreign parent guarantor would not be U.S.-source income and thus would not be subject to withholding.” That statement is imprecise since “other income” provisions of treaties typically do not directly address sourcing. What Mr. Driscoll appears to be indicating is the IRS’s view that the “other income” provisions of treaties could preclude the U.S. from taxing guarantee fee income, even if that income is technically characterized as U.S.-source income under the new law (or, presumably, under prior law if the government prevails in Container). That would lead to the same tax result as a practical matter as a determination that the fees are not U.S.-source income.