BMC software: a hidden holding on the weight afforded to published guidance.

AuthorLardinois, Ryan

On March 13,2015, the Fifth Circuit's decision in BMC Software Inc., 780 F.3d 669 (5th Cir. 2015), seemingly involved a narrow income repatriation issue. However, a deeper analysis of the decision sheds light on a much broader issue with significant importance to all tax practitioners: How much weight should a court give to IRS published guidance? IRS published guidance with meaningful explanation and analysis not contrary to the Internal Revenue Code may be given significant deference. IRS published guidance that lacks explanation and analysis is afforded no precedential weight.

The Facts

During the tax year ended March 31, 2006, BMC Software Inc. (BMC) deducted $603 million under Sec. 965 through the repatriation of dividends paid to BMC by its wholly owned foreign subsidiary, BMC Software European Holding (BSEH). Congress enacted Sec. 965 to allow U.S. parent corporations to take a one-time 85% deduction on certain dividends paid to the U.S. parent by the U.S. parent's wholly owned foreign subsidiary. However, the Sec. 965 deduction is limited if there is related-party indebtedness between the U.S. parent and the foreign subsidiary.

Sec. 965(b)(3) prevents the U.S. parent from "round-tripping" by loaning cash to the foreign subsidiary to fund the repatriated Sec. 965 dividends back to the U.S. parent. As such, dividends paid by the foreign subsidiary that would otherwise be eligible for a deduction under Sec. 965 are reduced by any increase in related-party indebtedness during the Sec. 965(b)(3) testing period. The testing period begins on Oct. 3, 2004, the effective date of Sec. 965, and ends on the last day of the U.S. parent's tax year in which the dividend was paid. The testing date with regard to the dividends paid by BSEH to BMC ended March 31,2006.

On Nov. 27,2007, under Rev. Proc. 99-32, BMC and the IRS executed an unrelated transfer-pricing closing agreement that resulted in the creation of two accounts receivable in favor of BMC, payable by BSEH. The closing agreement provided that the accounts receivable had establishment dates of March 31,2005, and March 31,2006. The transfer-pricing closing agreement did not outline any impact the agreement had on Sec. 965(b)(3).

In 2011, the IRS issued BMC a notice of tax deficiency of approximately $13 million for the 2006 tax year on the grounds that the accounts receivable established under the transfer-pricing closing agreement between BMC and the IRS constituted related-party...

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