Tax Court holds foreign partnership income is subpart F income: Brown decision reversed.

• Author: Andrews, James F.

In a reviewed opinion, the Tax Court held income earned by a foreign partnership and received by an affiliated group member is subpart F income includible in the member's gross income under Sec. 951(a) as foreign base company sales income.

Background: Brown I

In 1985 and 1986, Brown Group Inc. (BG), a New York corporation, had divisions that sold footwear at the retail and wholesale levels, and manufactured and imported footwear. BG manufactured footwear in the U.S. and imported footwear from Brazil.

Ownership structure

BG owned 100% of the stock of Brown Group International (International), a domestic subsidiary that in turn owned 100% of the stock of Brown Cayman Ltd. (BCL), a Cayman Islands corporation. International was a U.S. shareholder of BCL within the meaning of Sec. 951(b), and BCL was a controlled foreign corporation (CFC) within the meaning of Sec. 957(a). BCL owned 88% of Brinco, a partnership that acted as a purchasing agent for BG for footwear manufactured in Brazil. The remaining 12% of Brinco was owned by Ted Presti (10%), a U.S. citizen, through a two-tier structure of corporations, i.e., T.P. Cayman Ltd. (TPCL) and TPCL's parent, and Delcio Birck (2%), a citizen of Brazil.

Presti and Birck worked for a company that bought Brazilian shoes on behalf of BG, and BG formed Brinco with Presti and Birck to smooth out the purchasing and importation process. BG paid Brinco a 10% commission for acting as its Brazilian purchasing agent.

From approximately April through November 1985, TPCL received guaranteed payments totaling $151,662, instead of its share of partnership profits called for in the Brinco partnership agreement. After making guaranteed payments to TPCL, Brinco's net partnership earnings totaled about $917,000, of which $897,000 was distributed to BCL and $20,000 distributed to Birck. In 1986, TPCL received its share of partnership profits as called for in the Brinco partnership agreement.

At the end of October 1987 Brinco was dissolved. Presti became executive vice president of International, while Birck, as an independent agent, continued to source footwear for BG on a commission basis.

The IRS determined that BCL's distributive share of Brinco's earnings was foreign base company sales income currently includible as subpart F income in International's gross income; BG challenged...