Briefing Completed in SIH Partners

The final briefs have now been filed in the SIH Partners case.  The government’s response to the taxpayer’s opening brief is long, but hammers extensively on one point — namely, that the regulation is “categorical” in establishing that a loan guarantee issued by a CFC will be treated as taxable.  (The word “categorical” appears 29 times in the government’s brief.).  And the government maintains that this “bright-line” rule flows directly from the statutory text.  Given that premise, the government is able to give most of the taxpayer’s arguments short shrift.

In particular, the government says that the settled legal landscape made it easy for tax planners.  If the taxpayer chose to use its CFC to guarantee the loan, then it should accept the predictable tax consequences of that choice, rather than allegedly seeking a “sea change” in the governing rules that would replace a bright-line rule with a facts and circumstances inquiry.  Whether or not the loan guarantee reflects something like an “actual repatriation,” or was actually necessary for credit purposes, or is affected by other guarantors are all “wholly irrelevant” in the government’s view.  

The government similarly disposes of the taxpayer’s administrative law argument.  It states that the statutory text established a categorical rule and the commenters did not argue that Treasury should adopt a non-categorical rule; therefore, the relatively sparse explanation for the regulation was not problematic.  In the government’s words, “that an explanation is brief does not mean that it is inadequate.”  Interestingly, the government goes on to make a fallback argument that it acknowledges was not presented to the Tax Court.  It argues that, even if the regulation is invalid for failure to comply with the APA, the outcome of the case would not change because the statute is “self-executing,” and therefore the statute itself would make the loan guarantee a taxable event.

Finally, the government states that the taxpayer has provided no sound reason for the court not to follow Rodriguez and other lower court decisions that reach the same result, and therefore the taxpayer is not entitled to be taxed at the lower qualified dividend rate.

The taxpayer begins its reply brief by citing to a notice of proposed rulemaking issued 11 days before the government’s brief was filed.  The proposed regulations would “reduce the amount determined under section 956” in certain instances in light of the Tax Cuts and Jobs Act.  The taxpayer argues that the reasoning in the notice contradicts the government’s position because the notice describes the IRS’s “longstanding practice” as trying to “conform the application of section 956 to its purpose,” and thus to try to achieve symmetry between section 956 taxation and actual repatriations of earnings.

Apart from the new proposed regulations, the taxpayer argues that the statutory language governing guarantees did not establish a categorical rule, but rather left the proper tax treatment to be determined by regulation.  Therefore, Treasury had to make a choice and was required to explain the bright-line choice that it made.  And similarly, regulation was required, and the statute cannot be treated as self-executing.  

With respect to the dividend rate issue, the taxpayer urges the court not to follow Rodriguez.  In that connection, it states that the Rodriguez court mistakenly believed that Congress specifically designates when section 951 inclusions are to be treated as dividends, when in fact there are Treasury regulations that treat inclusions as dividends without specific statutory authorization.