"BMC Software Undermines Purpose of Tax Holiday Law, Microsoft and Medtronic Argue"Tax Notes Today
Steve Dixon commented on the amicus
brief filed in the Fifth Circuit by Medtronic Inc. and Microsoft regarding the U.S. Tax Court's decision in BMC Software Inc. v. Commissioner
. In BMC
, the Tax Court ruled that the Internal Revenue Service properly disallowed a portion of BMC's section 965 dividends because there was related-party indebtedness between BMC and a controlled foreign corporation. That purported indebtedness was the result of a later section 482 transfer pricing adjustment and BMC's election to have the adjustment treated as accounts receivable under Rev. Proc. 99-32. "The amicus
brief is important because it shows that this issue is common among large taxpayers, and it alerts the Fifth Circuit that substantial dollars are at stake," Dixon said. "The amicus
brief also shows that taxpayers made repatriation decisions based on their existing related-party indebtedness in the relevant years. This of course highlights the dilemma that results from the U.S. Tax Court's interpretation -- taxpayers who made repatriation decisions in past years based on all existing facts and circumstances and later have transfer pricing adjustments would be faced with either sacrificing some of their section 965 benefits or forgoing the benefits they would otherwise be afforded under Rev. Proc. 99-32 with respect to those adjustments."
According to Dixon, "Both the taxpayer and amici do more than highlight this dilemma. By relying on the tax law definition of 'indebtedness,' in contrast to the Tax Court's reliance on a dictionary definition of that term, and focusing on the time frame established in the statute, they map out a path the Fifth Circuit can follow to eliminate this dilemma."