                                       CONTAINER CORPORATION, SUCCESSOR TO INTEREST OF CON-
                                        TAINER HOLDINGS CORPORATION, SUCCESSOR TO INTEREST
                                         OF VITRO INTERNATIONAL CORPORATION, PETITIONER v.
                                          COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
                                                        Docket No. 3607–05.                  Filed February 17, 2010.

                                                   Vitro, a Mexican corporation, charged P—one of its U.S.
                                               subsidiaries—a fee to guarantee P’s debts. R determined a
                                               deficiency for failure to withhold 30 percent of such fees as
                                               ‘‘fixed or determinable annual or periodical’’ income received
                                               from a U.S. source under section 881(a), I.R.C. Held: The
                                               guaranty fees are analogous to payments for a service and
                                               therefore are not U.S. source income. Under sec. 1.861–4,

                                      122




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                                      (122)                 CONTAINER CORP. v. COMMISSIONER                                           123


                                               Income Tax Regs., the source of the service is where the
                                               service is performed. Because the guaranty was provided from
                                               Mexico, fees for the guaranty are Mexican source income.
                                               Thus, P didn’t need to withhold 30 percent of the guaranty
                                               fees under section 881(a), I.R.C.

                                           Emily A. Parker, for petitioner.
                                           Dennis M. Kelly, for respondent.

                                                                                  OPINION

                                        HOLMES, Judge: The Code puts a 30-percent tax on ‘‘fixed
                                      or determinable annual or periodical’’ income received by for-
                                      eign corporations from sources within the United States.
                                      Vitro, S.A. is a Mexican corporation that charged one of its
                                      U.S. subsidiaries a fee to guarantee the subsidiary’s debt to
                                      U.S. lenders. The question presented in this case is whether
                                      that fee is from a source within the United States.

                                                                               Background
                                        In 1901, Vitro, S.A. started making glass bottles for the
                                      local beer makers of Monterrey, Mexico. Over the next cen-
                                      tury, Vitro became one of Mexico’s most successful
                                      businesses, eventually becoming a holding company and the
                                      corporate parent of a large number of consolidated and
                                      unconsolidated subsidiaries. These subsidiaries manufacture
                                      and market a wide range of products, including just about
                                      everything made from glass. Vitro provides administrative
                                      and support services to its Mexican operating subsidiaries
                                      through a wholly owned management subsidiary, Vitro
                                      Corporativo, S.A. (Corporativo).
                                        This case involves Vitro’s glass containers division. The
                                      glass container business is driven by economies of scale—
                                      greater production equals greater profits. And, in the late
                                      1980s, Vitro—already Mexico’s largest manufacturer of glass
                                      containers—decided to expand to the United States. It chose
                                      to enter the market by acquisition, and its targets were two
                                      U.S. companies, Anchor Glass Container Corp. and Latchford
                                      Glass Co. Anchor was the second largest glass container pro-
                                      ducer in the United States and a publicly traded company.
                                      Latchford was a closely held regional glass container pro-
                                      ducer headquartered in California.




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                                      124                134 UNITED STATES TAX COURT REPORTS                                      (122)


                                         Vitro did not have glassmaking plants of its own in the
                                      United States, but had inched into the market by organizing
                                      marketing and distribution subsidiaries. In December 1988,
                                      Vitro reorganized these subsidiaries, and formed Vitro Inter-
                                      national Corp. as their U.S. holding company.
                                         Then, in May 1989, Vitro organized C Holdings Corp. to be
                                      an acquisition company. Vitro merged C Holdings into Con-
                                      tainer Holdings Corp. in April 1990. (We refer to them collec-
                                      tively as Container.) Container’s purpose was to help Vitro
                                      gain control of Anchor and Latchford. As is common in take-
                                      overs, Container then formed a shell corporation to acquire
                                      Anchor’s and Latchford’s stock. The plan was that this
                                      shell—THR Corp.—would get the stock, and then merge with
                                      Anchor and Latchford to form one large operating subsidiary
                                      under Container.
                                         With the targets in sight and its squadron of acquisition
                                      vehicles ready to roll, Vitro next had to arm itself with
                                      financing. But here Vitro ran into a problem common to
                                      Mexican companies in the late ‘80s—an inability to rely on
                                      Mexican financing due to the peso devaluations of 1982 and
                                      1987 which had left even the Mexican government
                                      unfinanceable. This made Vitro unfinanceable, because
                                      Standard & Poor or Moody’s will not give a borrower a
                                      higher credit rating than that of its sovereign. Vitro needed
                                      to look elsewhere. It turned to two U.S. investment banks—
                                      Lazard, Freres & Co. and Donaldson, Lufkin & Jenrette
                                      (DLJ)—for help in negotiating the financing and strategy of
                                      what Vitro expected would be a hostile takeover.
                                         Vitro wanted ultimately to finance the acquisition using a
                                      combination of bank debt, equity, and high-yield (or, as
                                      unwilling corporate targets usually called them, junk) bonds.
                                      But before Vitro could get permanent financing, it needed
                                      bridge financing for the tender offer. (Bridge financing is
                                      short-term financing that aims to provide money for a trans-
                                      action. It is meant to be repaid after a borrower closes the
                                      transaction and can access the capital markets for a mix of
                                      short- and long-term debt and equity financing.) DLJ com-
                                      mitted up to $295 million in bridge financing to Vitro
                                      because DLJ expected that once THR merged into Anchor and
                                      Latchford it would be a creditworthy operating company. DLJ
                                      formed Anchor Bridge Partnership with The Equitable
                                      Companies (DLJ’s corporate parent) and a syndicate of banks




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                                      (122)                 CONTAINER CORP. v. COMMISSIONER                                           125


                                      to make the bridge loan to THR. Lazard and DLJ also lined
                                      up the components of what they expected would be the
                                      permanent financing for the acquisitions: hundreds of mil-
                                      lions of dollars in bank loans and debt securities.
                                         The plan began well. In the summer of 1989, Vitro and
                                      Container started quietly buying Anchor stock on the open
                                      market. Vitro contributed its shares to Container. By the end
                                      of July 1989, Container held 10.1 percent of Anchor’s 14 mil-
                                      lion outstanding shares. Vitro then made a tender offer for
                                      the rest in August 1989. Anchor initially resisted, but after
                                      testing the market for alternatives, surrendered. 1
                                         The sale was set to close on November 2, 1989, but on
                                      October 10, 1989, the junk-bond market collapsed when, in
                                      a completely unrelated development, the management of
                                      United Airlines found it could not finance its leveraged
                                      buyout. Without a market for junk bonds, Vitro’s bridge
                                      financing looked like it might turn into bridge-to-nowhere
                                      financing. What followed was one temporary solution after
                                      another.
                                         Vitro first scrambled to find the money it needed to com-
                                      plete the tender offer:
                                         • On October 29, 1989, a group of banks led by Security
                                      Pacific National Bank loaned THR $139 million. This SPNB
                                      1989 tender offer loan was due in six months.
                                         • On November 2, 1989, THR issued $155 million of senior
                                      subordinated floating rates notes (THR 1989 bridge note) to
                                      Anchor Bridge. The THR 1989 bridge note was due in one
                                      year. 2
                                         • On November 2, 1989, Container made a $128 million
                                      equity contribution to THR in cash and Anchor and Latchford
                                      stock in exchange for THR stock.
                                         • On November 2, 1989, Container loaned $25 million to
                                      THR (THR 1989 bridge loan). Vitro loaned $25 million to Con-
                                      tainer to make the loan to THR. (Vitro 1989 bridge loan.)
                                      Both loans were due in one year.
                                         By the end of 1989, the deal looked like this:

                                        1 In a friendlier takeover, Container also acquired all of Latchford’s stock during 1989. This

                                      deal was much smaller than the Anchor acquisition, only about $41 million, and Latchford was
                                      later merged into Anchor.
                                        2 This THR 1989 bridge note is the one to keep an eye on in the diagrams below.




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                                      126                134 UNITED STATES TAX COURT REPORTS                                      (122)




                                         After the tender offer closed, THR owned 99 percent of
                                      Anchor’s stock. Anchor redeemed the rest for cash in May
                                      1990, which made Anchor a wholly owned subsidiary of THR.
                                      Vitro expected to refinance the SPNB 1989 tender offer loan
                                      and the THR 1989 bridge note as soon as the junk-bond
                                      market stabilized.
                                         Then more bad news shattered any hopes Vitro had of
                                      financing the deal through junk bonds: On February 13,
                                      1990, Drexel Burnham Lambert filed for bankruptcy. Drexel
                                      had created the high-yield bond market, but the market’s col-
                                      lapse took Drexel with it and spurred a shift from debt to
                                      equity in the financing of the takeovers. 3
                                         On May 2, 1990, the SPNB 1989 tender offer loan became
                                      due. Vitro needed more time. To buy some, Vitro refinanced
                                      Anchor’s debt with a loan from the group of banks with SPNB
                                      as their agent. SPNB divided the $268 million debt into two
                                      loans (SPNB 1990 loans):
                                        3 For a summary of Drexel’s collapse see Siconolfi et al., ‘‘Rise and Fall: Wall Street Era Ends

                                      As Drexel Burnham Decides to Liquidate’’, Wall St. J., Feb. 14, 1990, at A1.
                                                                                                                                           Chart1.eps




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                                      (122)                 CONTAINER CORP. v. COMMISSIONER                                           127


                                        • A $208 million term loan to refinance existing Anchor
                                      debt, pay related fees and expenses, and provide working
                                      capital for Anchor.
                                        • A $60 million revolving credit loan to provide working
                                      capital for Anchor and Latchford (SPNB 1990 revolving loan).
                                        The SPNB 1990 loans matured on July 31, 1994, and came
                                      with two conditions:
                                        • Vitro had to contribute $184 million to the capital of THR
                                      through Container to repay the SPNB 1989 tender offer loan,
                                      and repay a portion of principal due on the THR 1989 Bridge
                                      Note as well as the accrued interest.
                                        • SPNB could restrict the amount of other debt allowed at
                                      Anchor and the amount of money that could be paid out of
                                      Anchor to THR.
                                        These conditions affected the THR/Anchor merger. When
                                      THR issued the THR 1989 Bridge Note, it expected to
                                      refinance the note after the merger, but SPNB’s restrictions
                                      would not allow it to move that debt to Anchor as part of any
                                      refinancing. As a result, DLJ and Vitro decided that they
                                      needed to make the indebtedness more marketable if they
                                      were going to refinance the THR 1989 Bridge Note without
                                      Anchor.
                                        Vitro decided that moving the Note to a U.S. subsidiary
                                      outside the Container group would do this. It chose Inter-
                                      national because that company had enough cashflow from its
                                      operations to service at least part of the Note. DLJ requested
                                      that Vitro guarantee the debt as consideration for the
                                      restructuring. Vitro then restructured the Note through a
                                      series of transactions:
                                        • On May 2, 1990, International issued $151 million of
                                      senior notes (International 1990 bridge note) to Anchor
                                      Bridge, with $30 million of principal due December 31, 1990,
                                      $26 million of principal due December 31, 1991, and the
                                      unpaid principal balance due May 1, 1992. International
                                      loaned the proceeds to THR. Vitro guaranteed the Inter-
                                      national 1990 bridge note.
                                        • On May 2, 1990, THR issued a $151 million note (THR
                                      1990 senior note) to International. THR used the proceeds to
                                      repay the balance of the THR 1989 Bridge note. 4 The THR
                                        4 With the THR 1989 bridge note paid, shift attention to this THR 1990 senior note and the

                                      International 1990 Bridge note described above.




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                                      128                134 UNITED STATES TAX COURT REPORTS                                      (122)


                                      1990 senior note was a ‘‘pay-in-kind’’ 5 note because of the
                                      SPNB restrictions on Anchor, and Vitro expected that money
                                      from Anchor would eventually pay the note. The THR 1990
                                      senior note matured April 2, 1995.
                                         • On May 2, 1990, the Vitro 1989 Bridge Loan was con-
                                      verted into equity and canceled.
                                         To make the first payment on the International 1990
                                      Bridge note, International borrowed $31 million from Banca
                                      Serfin (Banca Serfin 1990 loan), a Mexican bank. Vitro
                                      guaranteed International’s obligations under the Banca
                                      Serfin 1990 Loan. The Banca Serfin 1990 Loan matured in
                                      March 1991.
                                         All this work on the financing side of the deal would have
                                      been fruitless without success on the operations side. And
                                      there the initial hopes that Vitro brought to the deal seemed
                                      to be justified. By 1991 the increased production capacity
                                      was having the desired effect, and Vitro’s margins on glass
                                      containers were improving. With higher margins, Anchor
                                      increased its annual cashflow from $100 million to $200 mil-
                                      lion. But with the financial markets still depressed, Vitro
                                      and DLJ agreed that they needed to refinance one more time
                                      before they could finally move the debt to Anchor.
                                         To refinance the debt, International was to issue 21 senior
                                      notes (together, the International 1991 senior notes) worth a
                                      total of $155 million. The problem was that no one expected
                                      International to have sufficient cashflow to make the pay-
                                      ments on the International 1991 senior notes unless THR
                                      made its payments on the THR 1990 senior note. But THR was
                                      not required to make payments; remember, the THR 1990
                                      senior note was a pay-in-kind note. DLJ advised that for
                                      International to take on that amount of debt it would need
                                      some credit support or the notes would not be marketable.
                                         The needed credit support came from Vitro’s guaranty of
                                      the International 1991 senior notes. The guaranty allowed
                                      the note purchasers to collect from Vitro if International
                                      defaulted. Vitro was chosen as guarantor over Anchor
                                      because it had a lower debt-to-equity ratio than Anchor, and
                                      SPNB’s restrictions on Anchor would not allow the latter to be
                                      a guarantor. On March 28, 1991, International issued the
                                        5 A ‘‘pay-in-kind’’ note allows the borrower to increase the principal of the note rather than

                                      pay interest in cash.




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                                      (122)                   CONTAINER CORP. v. COMMISSIONER                                                 129


                                      International 1991 senior notes to a group of U.S. insurance
                                      companies and Vitro guaranteed the notes pursuant to a
                                      guaranty agreement.
                                        Here’s the graphic:




                                      International used the proceeds to repay and cancel the
                                      International 1990 Bridge note and Banca Serfin 1990 Loan.
                                        International made the following guaranty-fee payments to
                                      Vitro on the International 1991 senior notes: 6

                                                Year                                                                           Amount

                                                1992 ......................................................................   $2,309,758
                                                1993 ......................................................................    1,912,867
                                                1994 ......................................................................    2,485,470

                                        It is the tax treatment of these fees that is at issue in this
                                      case. The guaranty agreement set the fee at 1.5 percent of
                                        6 International also paid a guaranty fee for Vitro’s guaranty of the International 1990 Bridge

                                      note, but paid it in 1991, a year not at issue here.
                                                                                                                                                    Chart2.eps




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                                      130                134 UNITED STATES TAX COURT REPORTS                                      (122)


                                      the outstanding principal balance of the notes per year. This
                                      1.5-percent fee was standard—Vitro charged all of its
                                      subsidiaries the same fee no matter the subsidiary’s capital
                                      structure or financial condition. And Vitro’s willingness to
                                      guarantee its subsidiaries’ debt was not limited to Inter-
                                      national: Vitro’s policy was to give a guaranty to any sub-
                                      sidiary whenever it asked for one. The fees were not tied to
                                      the amount of work Vitro did to negotiate or monitor the
                                      guaranty. Vitro’s estatutos (or bylaws) expressly provided
                                      that one of Vitro’s business purposes was to guarantee the
                                      debts of its subsidiaries.
                                         International did not withhold U.S. income taxes from the
                                      fees. And, as expected, it also did not have the cashflow to
                                      make the interest payments on the International 1991 senior
                                      notes. To make those payments, Vitro and Container contrib-
                                      uted almost $80 million in capital to International from 1990
                                      to 1994. But the money didn’t help. At the end of 1993, soft-
                                      drink producers began switching to plastic containers, and in
                                      eighteen months the glass-container industry lost one-third
                                      of its demand. And then a merger of other glass-container
                                      producers knocked Vitro into third place in the U.S. market,
                                      a now-shrinking market where it turned out there was room
                                      for only two players. Anchor’s profits melted into losses. It
                                      filed for bankruptcy in 1997.
                                         The Commissioner’s response to this series of unfortunate
                                      events was to determine that International should have with-
                                      held 30 percent of the guaranty fees it paid to Vitro in 1992–
                                      94. The Commissioner sent Container a notice of deficiency,
                                      and Container timely petitioned us to redetermine its liabil-
                                      ities. Container is a Delaware corporation with its principal
                                      place of business in Texas. We tried the case in Dallas.

                                                                                Discussion
                                         Section 881(a) 7 imposes a 30-percent tax on ‘‘fixed or
                                      determinable annual or periodical’’ (FDAP) income received
                                      from sources within the United States by a foreign corpora-
                                      tion, ‘‘but only to the extent the amount so received is not
                                      effectively connected with the conduct of a trade or business
                                      within the United States.’’ Taxes owed under section 881(a)
                                        7 Unless otherwise noted all section references are to the Internal Revenue Code for the years

                                      in issue. The single Rule reference is to Tax Court Rule of Practice and Procedure 155.




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                                      (122)                 CONTAINER CORP. v. COMMISSIONER                                           131


                                      are generally supposed to be withheld at the source. Sec.
                                      1442(a). Thus, for Container to be liable under section 881(a)
                                      the guaranty fees must be: (1) FDAP income and (2) received
                                      from a U.S. source. See secs. 881(a), 1441(a), (b), 1442(a).
                                         The parties agree that the guaranty fees, paid regularly in
                                      fixed amounts, are FDAP income. 8 The key question in this
                                      case is whether the second requirement is met—was the
                                      source of the guaranty fees the United States or Mexico?
                                         We determine FDAP income’s source by using the rules in
                                      sections 861 to 863. Two rules are especially important here.
                                      The first is for interest—the rule is that the source of
                                      interest is the residence of the obligor. Secs. 861(a)(1),
                                      862(a)(1); sec. 1.861–2, Income Tax Regs. The Commissioner
                                      would like the guaranty fees to be treated as interest,
                                      because International is a U.S. company.
                                         The second rule that’s especially important here is the rule
                                      on services—that rule is that the source of services is where
                                      the services are performed. Secs. 861(a)(3), 862(a)(3); sec.
                                      1.861–4, Income Tax Regs. Container would like the guar-
                                      anty fees to be treated as payments by International for a
                                      service performed by Vitro in Mexico.
                                         The sourcing rules are not comprehensive. If a category of
                                      FDAP is not listed, caselaw tells us to proceed by analogy. In
                                      other words, if the guaranty fees were neither interest nor
                                      payment for services rendered, we would still have to figure
                                      out whether they were more like interest or more like pay-
                                      ment for services rendered (or, possibly, some other category
                                      of FDAP that has a specific sourcing rule). See Hunt v.
                                      Commissioner, 90 T.C. 1289, 1301 (1988); Howkins
                                      v. Commissioner, 49 T.C. 689, 693–95 (1968); Bank of Am. v.
                                      United States, 230 Ct. Cl. 679, 686, 680 F.2d 142, 147 (1982),
                                      affg. in part and revg. in part 47 AFTR 2d 81–652, 81–1 USTC
                                      par. 9161 (Ct. Cl. 1981).
                                      A. Guaranty Fees as Interest
                                       Interest is ‘‘compensation for the use or forbearance of
                                      money.’’ Deputy v. du Pont, 308 U.S. 488, 498 (1940); Sharp
                                        8 The Code defines FDAP income broadly, and includes in it virtually all kinds of income ex-

                                      cept capital gains from the sale of property. See Wodehouse v. Commissioner, 337 U.S. 369, 393–
                                      94 (1949); see also sec. 1.1441–2(a), Income Tax Regs. (defining FDAP income for the years at
                                      issue); sec. 1.881–2(b), Income Tax Regs. (referring to definition of FDAP income in sec. 1.1441–
                                      2, Income Tax Regs.). The current regulations—in effect for payments made after December 31,
                                      2000—define FDAP income in section 1.1441–2(b)(1)(i), Income Tax Regs.




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                                      132                 134 UNITED STATES TAX COURT REPORTS                                      (122)


                                      v. Commissioner, 75 T.C. 21, 24 (1980), affd. 689 F.2d 87 (6th
                                      Cir. 1982). We agree with the parties that Vitro’s guaranty
                                      was not a loan to International, so the guaranty fees are not
                                      interest.
                                      B. Guaranty Fees as Payment for Services
                                         Sections 861(a)(3) and 862(a)(3) specifically source ‘‘labor
                                      or personal services,’’ and Container argues that that is what
                                      Vitro performed for International. Under the Guaranty
                                      agreement, Vitro was required to maintain records and
                                      supply information to the note purchasers. It performed
                                      these acts using Corporativo personnel, facilities, equipment,
                                      and capital—all located in Mexico. Container asks us to find
                                      that the guaranty fees were compensation for these services
                                      and are therefore Mexican source income. See Commissioner
                                      v. Piedras Negras Broad. Co., 127 F.2d 260 (5th Cir. 1942),
                                      affg. 43 B.T.A. 297 (1941); Dillin v. Commissioner, 56 T.C.
                                      228, 244 (1971) (explaining that where the benefits of the
                                      services are received or where a guaranty agreement was
                                      entered into does not affect the source of services).
                                         The Commissioner does not challenge Container’s assertion
                                      that Corporativo performed services, but argues that services
                                      were not the predominant feature of the guaranty and should
                                      be ignored for sourcing purposes. See Bank of Am., 230 Ct.
                                      Cl. at 690, 679 F.2d at 149. Container responds by arguing
                                      that providing services is not a possible feature of a guar-
                                      anty, but that a guaranty is itself a service; indeed, that the
                                      Code and regulations actually refer to guaranties as services.
                                         We’ll therefore analyze Container’s arguments on this
                                      point at some length. They flow from four sections of the
                                      Code or regulations. The first is based on section 1.731–
                                      2(e)(3)(iii), Income Tax Regs., which deals with partnership
                                      distributions. This section does include the words ‘‘services’’
                                      and ‘‘guarantees of obligations,’’ but it does not suggest that
                                      a guaranty is a service. And ‘‘guarantees of obligations’’ is
                                      actually tucked away in a parenthetical listing types of
                                      equity interests. 9 Container’s two other references are also of
                                      little help, 10 but Container also asks us to look at transfer
                                      pricing of services under section 482.
                                           9 This
                                              regulation wasn’t issued until 1996. T.D. 8707, 1997–1 C.B. 128.
                                           10 The
                                               second is section 954(h), which defines a ‘‘lending or finance business’’ as the business
                                      of, among other things, providing guaranties and rendering services or making facilities avail-




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                                      (122)                 CONTAINER CORP. v. COMMISSIONER                                           133


                                         This might be a useful guide. Section 482’s purpose ‘‘is to
                                      ensure that taxpayers clearly reflect income attributable to
                                      controlled transactions, and to prevent the avoidance of taxes
                                      with respect to such transactions.’’ Sec. 1.482–1T(a)(1), Tem-
                                      porary Income Tax Regs., 58 Fed. Reg. 5272 (Jan. 21,
                                      1993). 11 For example, if a U.S. corporation guarantees a loan
                                      made to its foreign subsidiary by a third party without
                                      receiving compensation from the foreign sub, it could avoid
                                      the income it would have incurred had it charged a fee. But
                                      the guaranty adds some value, and the section 482 regula-
                                      tions tell taxpayers that the U.S. parent should recognize the
                                      amount it would have charged had the transaction been
                                      made at arm’s length with an uncontrolled third party. See
                                      sec. 1.482–1T(b), Temporary Income Tax Regs., 58 Fed. Reg.
                                      5272 (Jan. 21, 1993). But this is just a summary of a general
                                      rule. When it comes to deciding whether payments for a
                                      guaranty are services in particular transfer-pricing situa-
                                      tions, the Commissioner has struggled.
                                         In General Counsel Memorandum (GCM) 38499 (Sept. 19,
                                      1980), 12 the Commissioner agreed with a proposed revenue
                                      ruling 13 concluding that the ‘‘guarantee of the parent con-
                                      stitutes the performance of a service for the subsidiary.’’ The
                                      Commissioner used section 1.482–2(b)(7)(v), Example (9),
                                      Income Tax Regs., to reach this result.
                                      Example (9). X is a domestic manufacturing corporation. Y, a foreign sub-
                                      sidiary of X, has decided to construct a plant in Country A. In connection
                                      with the construction of Y’s plant, X draws up the architectural plans for
                                      the plant, arranges the financing of the construction, negotiates with var-

                                      able in connection with providing guaranties. This subsection wasn’t even part of the Code until
                                      1997, see Taxpayer Relief Act of 1997, Pub. L. 105–34, sec. 1175(a), 111 Stat. 990; and its only
                                      relevance to solving the problem we face is that the words ‘‘service’’ and ‘‘guarantee’’ are in the
                                      same subsection. Container also cites a group of cases that hold that guaranty fees are deduct-
                                      ible as ordinary and necessary business expenses under section 162, see, e.g., A. A. & E. B.
                                      Jones Co. v. Commissioner, T.C. Memo. 1960–284; Tulia Feedlot, Inc. v. United States, 3 Cl. Ct.
                                      364 (1983), but do not explain how deductibility makes a guaranty a service.
                                         11 Section 1.482–1T(g)(8), Temporary Income Tax Regs., 58 Fed. Reg. 5282 (Jan. 21, 1993), de-

                                      fines ‘‘controlled transaction’’ as ‘‘any transaction or transfer between two or more members of
                                      the same group of controlled taxpayers.’’ Controlled taxpayers are ‘‘taxpayers owned or con-
                                      trolled directly or indirectly by the same interests.’’ Sec. 1.482–1T(g)(5), Temporary Income Tax
                                      Regs., 58 Fed. Reg. 5282 (Jan. 21, 1993).
                                         12 Although GCMs have no precedential value, they are ‘‘helpful in interpreting the Tax Code

                                      when ‘faced with an almost total absence of case law.’ ’’ Morganbesser v. United States, 984 F.2d
                                      560, 563 (2d Cir. 1993) (quoting Herrmann v. E.W. Wylie Corp., 766 F. Supp. 800, 802–03
                                      (D.N.D. 1991)).
                                         13 The proposed revenue ruling was never published. See Field Service Advice Memoranda,

                                      1995 FSA LEXIS 135 at 16 (May 1, 1995).




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                                      134                134 UNITED STATES TAX COURT REPORTS                                      (122)


                                      ious Government authorities in Country A, invites bids from unrelated
                                      parties for several phases of construction, and negotiates, on Y’s behalf,
                                      the contracts with unrelated parties who are retained to carry out certain
                                      phases of the construction. Although the unrelated parties retained by X
                                      for Y perform the physical construction, the aggregate services performed
                                      by X for Y are such that they, in themselves, constitute a construction
                                      activity. * * * [14]

                                      The proposed revenue ruling also concluded that guaranty
                                      fees should be sourced to the country where the financing is
                                      secured and where the subsidiary resides because that is the
                                      situs of the risk of default. In the General Counsel Memo-
                                      randum, the Commissioner expressed reservations about that
                                      conclusion and suspended further consideration. 15 GCM
                                      38499 (Sept. 19, 1980).
                                         We also have some caselaw. In Centel Commcns. Co. v.
                                      Commissioner, 92 T.C. 612 (1989), affd. 920 F.2d 1335 (7th
                                      Cir. 1990), we decided that the guaranties were not a service,
                                      though in a very different context: A burgeoning telephone
                                      interconnect business got a loan to provide it with operating
                                      funds. Id. at 616. As a condition of the loan, the lender
                                      required guaranties from three of the company’s share-
                                      holders. Id. The shareholders signed the agreements without
                                      compensation, but five years later they received stock war-
                                      rants for their guaranties. Id. at 617–19. The issue we
                                      decided was whether the warrants were given for the
                                      performance of services under section 83(a). Id. at 626. We
                                      held that ‘‘within the meaning of section 83’’ the shareholder
                                      had not performed a service. Id. at 633.
                                         ‘‘[W]ithin the meaning of section 83’’ is the key. We did
                                      characterize the guaranties as ‘‘shareholder/investor actions
                                      to protect their investment * * * [that] as such do not con-
                                      stitute the performance of services.’’ Id. at 632–33. But we
                                         14 At the time of the GCM’s release, the section 482 regulations were in final form. In 1993,

                                      temporary regulations were issued. 58 Fed. Reg. 5263 (Jan. 21, 1993). The final regulations were
                                      issued in 1994, but didn’t go into effect until tax years beginning after October 6, 1994. T.D.
                                      8552, 1994–2 C.B. 93. Throughout the regulation’s final-to-temporary-to-final journey, ‘‘Example
                                      (9)’’ remained unchanged. But that example was removed from section 1.482–2 by T.D. 9278,
                                      2006–2 C.B. 256.
                                         15 Guaranties come up again in section 1.482–9T(b)(3)(ii)(H), Temporary Income Tax Regs., 71

                                      Fed. Reg. 44489 (Aug. 4, 2006). That section excludes guaranties from the ‘‘services cost method’’
                                      of pricing a ‘‘controlled services transaction.’’ Treatment of Services Under Section 482; Alloca-
                                      tion of Income and Deductions From Intangibles; Stewardship Expense, 71 Fed Reg. 44466,
                                      44474 (Aug. 4, 2006). But the Commissioner immediately cautions that the express exclusion
                                      shouldn’t be read as a recognition of a general rule of inclusion: ‘‘[N]o inference is intended by
                                      this exclusion that financial transactions (including guarantees) would otherwise be considered
                                      the provision of services for transfer pricing purposes.’’ Id.




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                                      (122)                 CONTAINER CORP. v. COMMISSIONER                                           135


                                      also stressed that our decision turned on a question of fact:
                                      whether the shareholders got the warrants in exchange for
                                      services rendered as employees or independent contractors.
                                      Id. at 629. The parties agreed the shareholders weren’t
                                      employees, and we found that they were not independent
                                      contractors because they were not in the business of guaran-
                                      teeing loans. Id. at 632. We did not hold that providing a
                                      guaranty is never a service, and noted that we were ana-
                                      lyzing only the language of section 83. An analysis under
                                      that section is quite different from an analysis under the
                                      sourcing rules, but it nevertheless prompted the Commis-
                                      sioner to rethink his position when the problem came up in
                                      the transfer-pricing context again. This time he reasoned
                                      that
                                         The Centel decision increases the litigating hazards * * * . However, we
                                      do not read this case as contradicting the position of the Service as estab-
                                      lished in * * * G.C.M. 38499. Guarantees do not fit comfortably within
                                      normal tax law concepts in a number of areas and, consequently, there are
                                      substantial arguments that can be made against any possible analysis of
                                      guarantees. * * * [1995 WL 1918236 (IRS FSA May 1, 1995).]

                                         All we can conclude from this detour through transfer-
                                      pricing law is that it will not help us reach a reasonable
                                      conclusion on whether guaranties are services under section
                                      861.
                                         So we’ll fall back on the dictionary. The common meaning
                                      of ‘‘labor or personal services’’ implies the continuous use of
                                      human capital, ‘‘as opposed to the salable product of the per-
                                      son’s skill.’’ 16 Under this definition, we find that Container
                                      failed to prove that Corporativo performed sufficient ‘‘labor or
                                      personal services’’ to justify the $6 million International paid
                                      in guaranty fees over three years. Container presented very
                                      little evidence about the specific acts Corporativo performed
                                      and how much time it took to perform them. For example,
                                      Container’s posttrial brief explains that the Guaranty agree-
                                      ment required Vitro to ‘‘take certain actions, confirm certain
                                      facts, provide certain information, and create and supply cer-
                                      tain documents.’’ The Guaranty agreement required only
                                      minimal accountings and reporting to the note purchasers. In
                                      any event, the fees were not tied to the amount of work that
                                        16 See Black’s Law Dictionary 890 and 1180 (8th ed. 2004) (defining ‘‘labor’’ and ‘‘personal

                                      service’’).




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                                      136                134 UNITED STATES TAX COURT REPORTS                                      (122)


                                      Vitro did, but to the amount of the outstanding principal that
                                      Vitro was standing behind. This leads us to hold that Inter-
                                      national did not pay the guaranty fees to Vitro as compensa-
                                      tion for services. The value of Vitro’s guaranty stems ‘‘from
                                      a promise made and not from an intellectual or manual skill
                                      applied.’’ Bank of Am., 47 AFTR 2d at 81–657.
                                         We therefore move on to reasoning by analogy, and ask
                                      whether guaranty payments are more like interest or more
                                      like services.
                                      C. Guaranty Fees as Analogous to Interest or Payments for
                                         Services
                                         When we source FDAP income by analogy, our goal is to
                                      find the ‘‘source of income in terms of the business activities
                                      generating the income or * * * the place where the income
                                      was produced. Thus, the sourcing concept is concerned with
                                      the earning point of income or, more specifically, identifying
                                      when and where profits are earned.’’ Hunt, 90 T.C. at 1301
                                      (citation omitted).
                                         There are only a few examples in the caselaw of sourcing
                                      by analogy. Alimony was the first. The question of its source
                                      arose when a U.S. resident paid alimony to his British ex
                                      from an English bank. We held that the alimony’s source was
                                      the ex-husband’s residence, and not where the funds were
                                      deposited or where the divorce decree was entered. See Man-
                                      ning v. Commissioner, 614 F.2d 815 (1st Cir. 1980), affg. T.C.
                                      Memo. 1979–146; Howkins, 49 T.C. at 694. Taking perhaps
                                      too modern a view of marriage, we reasoned that alimony,
                                      like interest, is not exchanged for property or services. And
                                      since interest is sourced to the residence of the obligor, so too
                                      would we source alimony. Howkins, 49 T.C. at 694.
                                         Another example of sourcing by analogy came from the
                                      Court of Claims in Bank of America. In that case, the court
                                      sourced commissions received by Bank of America from for-
                                      eign banks in connection with transactions involving
                                      commercial letters of credit. Bank of Am., 230 Ct. Cl. at 680–
                                      681, 680 F.2d at 143. The conflict in Bank of America, as in
                                      this case, was whether the commissions should be sourced by
                                      analogy to personal services or to interest. Id. at 686–687,
                                      680 F.2d at 147.




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                                      (122)                 CONTAINER CORP. v. COMMISSIONER                                           137


                                        To understand the holding in Bank of America requires
                                      some background in letters of credit. Such letters make trade
                                      easier by allowing a bank, rather than the seller, to examine
                                      a buyer’s credit. For example, when a U.S. exporter wants to
                                      sell goods to a foreign buyer, assessing the creditworthiness
                                      of the foreign buyer can be a problem. So, instead of having
                                      the seller do it, the buyer requests a letter of credit from a
                                      foreign bank and the foreign bank does the job. If the buyer
                                      is creditworthy, the foreign bank (sometimes called the
                                      opening bank) substitutes its credit for the buyer’s and com-
                                      mits to pay the seller when certain conditions are met, e.g.,
                                      presentment of an inspection certificate and a bill of lading
                                      to the opening bank. After the opening bank pays the seller,
                                      the buyer reimburses it. There are two types of commercial
                                      letters of credit: sight and time. A sight letter of credit obli-
                                      gates the opening bank to pay as soon as the seller meets the
                                      conditions in the letter of credit. A time letter of credit obli-
                                      gates the opening bank to pay on a specific future date if the
                                      conditions were met. See id. at 681, 680 F.2d at 144.
                                        BofA performed four kinds of transactions involving letters
                                      of credit, and charged the opening bank commissions for
                                      three of them. 17 It’s these three, and how the Court of
                                      Claims sourced each of them that are useful here. The first
                                      kind was an acceptance, and BofA received acceptance
                                      commissions in two situations—if BofA determined that the
                                      conditions of a time letter of credit had been met it would
                                      stamp the letter accepted, obligating itself to pay any holder
                                      in due course when the letter came due; or, if an opening
                                      bank with an established line of credit with BofA wanted to
                                      refinance a letter of credit, it would accept a time draft at a
                                      discount to the face amount of the letter of credit.
                                        The Court of Claims began its analysis by noting that both
                                      these types of acceptance transactions are similar to a loan
                                      and that the commissions ‘‘include elements covered by the
                                      interest charges made on direct loans.’’ Id. at 689, 680 F.2d
                                      at 148. The court also held that the predominant feature of
                                      an acceptance transaction was the substitution of BofA’s
                                      credit for that of the opening bank and not the services BofA
                                      performed. Id. at 690, 680 F.2d at 149. These factors led the
                                        17 BofA did not charge the opening bank to advise a letter of credit. It ‘‘advised’’ a letter of

                                      credit by informing the seller that a letter was issued in its favor and forwarding the letter to
                                      the seller.




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                                      138                134 UNITED STATES TAX COURT REPORTS                                      (122)


                                      Court of Claims to source acceptance commissions by analogy
                                      to interest, with the obligor being the opening bank. Id. at
                                      689, 680 F.2d 148.
                                         BofA also received confirmation commissions. It confirmed
                                      sight letters of credit by advising the letter and committing
                                      to pay the letter’s face amount after the seller met its condi-
                                      tions. The opening bank reimbursed BofA by either pre-
                                      paying it or by keeping an account that BofA could debit.
                                      When the opening bank prepaid, BofA didn’t charge a
                                      commission. Otherwise it charged a commission that
                                      reflected its assumption of the risk that the foreign bank
                                      could default. The Court of Claims again found that the
                                      performance of services was a part of the deal but that its
                                      predominant feature was BofA’s substituting its credit for
                                      the opening bank’s. Id. at 691, 680 F.2d at 149–50. The court
                                      also thus sourced confirmation commissions, as it had accept-
                                      ance commissions, by analogy to interest and with the obligor
                                      being the opening bank. Id. at 691–92, 680 F.2d at 150.
                                         Finally, the Court of Claims examined negotiation commis-
                                      sions. Negotiations took place when BofA determined if the
                                      seller met the conditions for payment in the letter of credit.
                                      After BofA performed a negotiation, it would forward the
                                      papers to the opening bank, which would do an independent
                                      check. The Court of Claims found that negotiation commis-
                                      sions were paid for services performed in the United States
                                      and were distinguishable from the other two types of
                                      commission because the only risk that BofA assumed was
                                      that it might improperly determine that the seller met the
                                      conditions. Id. at 692, 680 F.2d at 150.
                                         The Commissioner argues that Bank of America is control-
                                      ling because acceptance and confirmation commissions, like
                                      guaranty fees, are uses of another’s credit and are analogous
                                      to interest. But, as the Commissioner thoughtfully concedes,
                                      the ‘‘use’’ of credit is different in guaranties compared to
                                      acceptance and confirmation of letters of credit. When BofA
                                      confirmed or accepted a letter of credit, it assumed an
                                      unqualified primary legal obligation to pay the seller—it
                                      stepped into the shoes of the opening bank and substituted
                                      its own credit for the opening bank’s. It was, in effect,
                                      making a short-term loan and the commissions approximated
                                      interest. Id. at 688–91, 680 F.2d at 148–50.




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                                      (122)                 CONTAINER CORP. v. COMMISSIONER                                           139


                                         Vitro’s case is different. It was augmenting International’s
                                      credit, not substituting its own. But should this distinction
                                      matter? We conclude that it should, and begin our expla-
                                      nation by examining the effects of a default. When a debtor
                                      defaults on a loan, he is defaulting on an existing primary
                                      obligation. Default causes the creditor to lose the outstanding
                                      principal because he has already extended funds to the
                                      debtor. Interest is the creditor’s compensation for putting his
                                      own money at risk. As in a loan, BofA put its money directly
                                      at risk when it paid the seller, and it charged for the risk—
                                      although it called that charge a ‘‘commission’’ rather then
                                      ‘‘interest’’. Vitro’s obligation was, in contrast, entirely sec-
                                      ondary. Unlike a lender, Vitro was not required to pay out
                                      any of its own money unless and until International
                                      defaulted. And Vitro’s guaranty might not even put its
                                      money at risk after default, because if International
                                      defaulted and Vitro paid the 1991 International senior notes,
                                      it would step into the note purchasers’ shoes and acquire any
                                      rights that they had against International. See Putnam v.
                                      Commissioner, 352 U.S. 82, 85 (1956). Vitro loses only if
                                      International defaults and Vitro repays the 1991 Inter-
                                      national senior notes (which transfers International’s obliga-
                                      tion from the note purchasers to Vitro) and then Inter-
                                      national defaults on the transferred debt.
                                         Vitro’s guaranty therefore lacks a principal characteristic
                                      of a loan because Vitro did not extend funds to International.
                                      To find otherwise would require us to assume that at the
                                      time of the guaranty, the 1991 International senior notes
                                      was somehow a loan to Vitro. Neither party makes this argu-
                                      ment. 18 Vitro’s later choice to subsidize International
                                      through capital contributions—instead of allowing Inter-
                                      national to default—does not affect our analysis. Capital con-
                                      tributions also lack a distinguishing characteristic of a loan—
                                      a promise to repay.
                                         The Commissioner argues, however, that if guaranties are
                                      unlike loans because the guarantor does not have to hand
                                      over his money at the outset, guaranty fees may be like
                                         18 Container makes an alternative argument that Vitro’s guaranty was in the nature of a sur-

                                      ety bond and is subject to tax under section 4371 and not section 881(a), 1441, or 1442. This
                                      argument requires us to disregard the Guaranty agreement as a separate obligation and treat
                                      Vitro as if it were a party to the International 1991 senior notes. We are not persuaded and
                                      find that the Guaranty agreement was a separate and distinct obligation.




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                                      140                134 UNITED STATES TAX COURT REPORTS                                      (122)


                                      interest in some broader sense under Howkins. That case,
                                      the Commissioner argues, held that alimony is analogous to
                                      interest because it is not paid for property or services.
                                      Howkins, 49 T.C. at 694. Reading Howkins this way, how-
                                      ever, is reading it less as a useful analogy than as creating
                                      a default rule. Property and services are listed in sections
                                      861 and 862, so by definition, any unlisted type of income is
                                      not paid for property or services. And if we were to follow
                                      such reasoning without qualification, we would source all
                                      unlisted types of income by analogy to interest. But we read
                                      Howkins more narrowly; we reasoned there that alimony is
                                      analogous to interest because its source is the obligor.
                                      Howkins, 49 T.C. at 693. This logic also reminds us of the
                                      goal of sourcing by analogy: namely, find the location ‘‘of the
                                      business activities generating the income or * * * the place
                                      where the income was produced.’’ Hunt, 90 T.C. at 1301. So
                                      we have to ask if there’s a useful analogy to guaranty fees
                                      that would help us figure out, in some reasonable way, where
                                      they are produced.
                                         International paid Vitro to guarantee the 1991 Inter-
                                      national senior notes. These fees compensated Vitro for
                                      incurring a contingent future obligation to either pay Inter-
                                      national’s debt or make a capital contribution. Vitro was able
                                      to make this promise because it had sufficient Mexican
                                      assets—and its Mexican corporate management had a suffi-
                                      cient reputation for using those assets productively—to aug-
                                      ment International’s credit and enable the long and complex
                                      series of financings we charted at the beginning of this
                                      opinion to keep going as long as it did. So we conclude that
                                      it is Vitro’s promise and its Mexican assets that produced the
                                      guaranty fees. 19
                                         We do not choose International as the source of the income
                                      because the guaranty fees were not like alimony: Alimony is
                                      only an obligation to pay, because once a court orders one
                                      spouse to pay alimony, nothing more is required of the other
                                      spouse. Guaranty fees are different—they are payments for
                                      a possible future action.
                                         We think that makes guaranties more analogous to serv-
                                      ices. Guaranties, like services, are produced by the obligee
                                        19 The parties did not argue the point, but in this sense the guaranty fees were somewhat

                                      analogous to rents or royalties for the use of Vitro’s goodwill, see sec. 862(a)(4), which would
                                      also source them to Mexico rather than the United States.




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                                      (122)                 CONTAINER CORP. v. COMMISSIONER                                           141


                                      and so, like services, should be sourced to the location of the
                                      obligee. See secs. 861(a)(3), 862(a)(3); Hunt, 90 T.C. at 1301.
                                      We realize that we are deciding a close question, but an
                                      analogy to interest has too many shortcomings: Guaranty
                                      fees do not approximate the interest on a loan; Vitro, not
                                      International, produced the guaranty fees; and Vitro’s guar-
                                      anty was not an obligation to pay immediately, but a promise
                                      to possibly perform a future act.

                                                                                Conclusion
                                        We hold that International was not required to withhold
                                      taxes on the guaranty fees that it paid Vitro because those
                                      fees are Mexican source income. The parties settled various
                                      other issues, however, so
                                                                         Decision will be entered under Rule 155.

                                                                               f




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