                           141 T.C. No. 5



                  UNITED STATES TAX COURT



           BMC SOFTWARE INC. Petitioner v.
    COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 15675-11.                        Filed September 18, 2013.



       R determined that royalty payments from P to its controlled
foreign corporation (CFC) were not arm’s length under I.R.C. sec.
482. P and R then entered into a closing agreement under I.R.C. sec.
7121 making primary adjustments regarding the royalty payments.
The primary adjustments increased P’s income and required P to
conform its accounts with secondary adjustments. P accomplished
the secondary adjustments by electing to establish accounts receivable
under Rev. Proc. 99-32, 1999-2 C.B. 296, rather than treat the
secondary adjustments as deemed capital contributions.

       P had previously repatriated funds from its CFC in transactions
unrelated to the royalty payments or adjustments. P claimed a
corresponding one-time dividends received deduction under I.R.C.
sec. 965. The deduction was subject to certain limitations, including
a reduction for an increased related party indebtedness between P and
its CFC. P claimed the deduction before agreeing to the primary
adjustments or establishing the accounts receivable.
                                        -2-

             R determined that the accounts receivable that were deemed
      established during the testing period constituted an increase in related
      party indebtedness and disallowed a corresponding amount of the
      deduction. R issued a deficiency notice. P filed a petition for
      redetermination.

             P contends that the reduction for related party indebtedness
      applies only to transactions intended to finance dividends. P also
      asserts that the parties agreed in a closing agreement that P avoids any
      Federal income tax consequences from establishing the accounts
      receivable. P also contends that the accounts receivable do not
      constitute related party indebtedness.

             Held: The related party debt rule under I.R.C. sec. 965(b)(3)
      does not apply only to increased indebtedness resulting from
      intentionally abusive transactions.

             Held, further, the election under Rev. Proc. 99-32, supra,
      allows P to avoid the Federal income tax consequences of a deemed
      capital contribution. The repayment is treated as a return of principal
      and interest for all Federal income tax purposes.

            Held, further, the accounts receivable are deemed established
      during the testing period and qualify as increased related party
      indebtedness.



      George Matthew Gerachis, Christine L. Vaughn, and Lina G. Dimachkieh,

for petitioner.

      Daniel L. Timmons, for respondent.
                                           -3-

      KROUPA, Judge: Respondent determined a $13 million1 deficiency in

petitioner’s Federal income tax resulting from his interpretation of section 965,2 a

one-time dividends received deduction for a U.S. corporation. The amount

qualifying for the dividends received deduction is reduced by increased related

party indebtedness under section 965(b)(3) (sometimes, related party debt rule).

We must decide for the first time whether an account receivable established under

Rev. Proc. 99-32, 1999-2 C.B. 296, may constitute increased related party

indebtedness for purposes of the related party debt rule. We hold that it may.

                                 FINDINGS OF FACT

      The parties have stipulated some facts. We incorporate the stipulation of

facts and the accompanying exhibits by this reference. Petitioner’s principal place

of business was Houston, Texas when it filed the petition.

I. Petitioner and Related Entities

      Petitioner is a U.S. corporation that develops and licenses computer

software. Petitioner is the common parent of a group of subsidiaries that joined in

the filing of a consolidated Federal income tax return for the taxable year ended



      1
          All amounts are rounded to the nearest million dollars.
      2
        All section references are to the Internal Revenue Code for the years at
issue, unless otherwise indicated.
                                          -4-

March 31, 2006. Petitioner is also the parent of non-consolidated foreign

affiliates. Petitioner’s wholly-owned BMC Software European Holding (BSEH)3

was a controlled foreign corporation (CFC) under section 957.

II. Transfer Pricing Dispute

      Petitioner and BSEH collaboratively developed software. Two cost-sharing

agreements (CSAs) governed that relationship. Under the CSAs, they co-owned

the software and each held exclusive distribution rights for certain territories.

Petitioner terminated the CSAs by agreement in 2002 and took sole ownership of

the software. Petitioner agreed to pay future royalties to BSEH and licensed to

BSEH the software for distribution. Petitioner paid BSEH royalties required under

the CSAs for 2002 through 2006.

      Respondent examined the Federal income tax returns petitioner filed for

2002 through 2006. Respondent concluded that the royalty payments between

petitioner and BSEH were not arm’s length. Petitioner and respondent entered

into a closing agreement in 2007 increasing petitioner’s income (transfer pricing

closing agreement) by $35 million for 2003, $23 million for 2004, $22 million for

      3
       BSEH indirectly owned 100% of issued and outstanding shares of BMC
Software Europe, an Irish corporation, and directly owned 100% of BMC
Software Mauritius, a Mauritius corporation. Each has been treated as an entity
disregarded by BSEH for Federal income tax purposes. For the purposes of this
matter, we will treat these entities as one and refer only to BSEH.
                                        -5-

2005 and $22 million for 2006 (collectively, primary adjustments). These primary

adjustments represented net reductions in royalties petitioner paid BSEH.

Respondent executed the transfer closing agreement on August 30, 2007.

      The primary adjustments required petitioner to make secondary adjustments

to conform its accounts. Those secondary adjustments would have been treated as

deemed capital contributions from petitioner to BSEH except that petitioner

elected to establish accounts receivable under Rev. Proc. 99-32, supra, for

repayment. To that end, petitioner and respondent entered into another closing

agreement (accounts receivable closing agreement) that established for Federal

income tax purposes interest-bearing accounts receivable from BSEH to petitioner.

Respondent executed the accounts receivable closing agreement also on August

30, 2007. The amounts of the accounts receivable corresponded to the amounts of

the primary adjustments, including an account receivable for $22 million deemed

established on March 31, 2005 and another for $22 million deemed established on

March 31, 2006.

      The accounts receivable bore interest at the applicable Federal rate. The

interest was deductible from BSEH’s taxable income and includible in petitioner’s

taxable income. The parties agreed as follows:
                                         -6-

      BSEH will pay the account receivable, including interest thereon, by
      intercompany payment. Such payment will be free of the Federal
      income tax consequences of the secondary adjustments that would
      otherwise result from the primary adjustment; provided, the payment
      of the balance of the account, after taking into consideration any
      prepayment pursuant to section 4.02 of Rev. Proc. 99-32, is made
      within 90 days after execution of this closing agreement on behalf of
      the Commissioner.

BSEH paid the principal and the interest owed within 90 days of the accounts

receivable closing agreement’s becoming effective.

III. Petitioner’s Repatriation and One-Time Dividends Received Deduction

      Petitioner repatriated from BSEH $721 million invested outside the U.S.

through a series of transactions between June 29, 2005 and March 31, 2006.

Petitioner filed a Form 1120, U.S. Corporation Income Tax Return, for 2006.

Petitioner claimed $709 million (repatriated dividends) as qualifying for the one-

time dividends received deduction under section 965 on Form 8895, One-Time

Dividends Received Deduction for Certain Cash Dividends from Controlled

Foreign Corporations. Petitioner reported its CFC did not have increased

indebtedness to petitioner or a related party between the close of the taxable year,

March 31, 2006, and the close of October 3, 2004 (testing period).4

      4
       The testing period with respect to petitioner is the period between March
31, 2006 and October 3, 2004 because petitioner made the election for the tax year
ending March 31, 2006. As discussed below, the testing period is relevant
                                                                       (continued...)
                                         -7-

      Respondent determined that $43 million of the repatriated dividends was

ineligible for the dividends received deduction. Respondent concluded that the

accounts receivable that were deemed established during the testing period

constituted increased related party indebtedness. The remaining repatriated

dividends qualified for deduction under section 965. Respondent issued the

deficiency notice for 2006, and petitioner timely filed the petition.

                                      OPINION

      We must decide whether accounts receivable that were deemed established

by a closing agreement under Rev. Proc. 99-32, supra, constitute increased related

party indebtedness for purposes of section 965. Respondent concedes that

petitioner did not establish the accounts receivable to fund the repatriated

dividend. Thus, if the related party debt rule applies only to abusive transactions,

as petitioner contends, then respondent incorrectly determined the deficiency. We

consequently will consider the related party debt rule and whether an account

receivable established under Rev. Proc. 99-32, supra, may constitute increased

related party indebtedness.


      4
       (...continued)
because the amount of dividends eligible for deduction under sec. 965 is reduced
by increased indebtedness between the close of the taxable year for which the
election is in effect and October 3, 2004.
                                         -8-

      We then consider whether the parties agreed in the accounts receivable

closing agreement that repayment of the accounts receivable was free from further

Federal income tax consequences. Finally, we consider whether the accounts

receivable that were deemed established during the testing period are taken into

account when determining related party indebtedness.

I. Dividends Received Deduction

      We turn to whether petitioner’s CFC had increased related party

indebtedness as that term is intended in section 965(b)(3). Petitioner asserts that

the related party debt rule applies only where the U.S. shareholder intentionally

finances the dividend through an abusive transaction. Petitioner further argues

that the accounts receivable cannot constitute indebtedness as that term is intended

in section 965(b)(3). Respondent, on the other hand, argues that the accounts

receivable constitute increased related party indebtedness because the related party

debt rule is not limited to intentionally abusive transactions. Consequently,

respondent and petitioner dispute whether accounts receivable are within the scope

of section 965(b)(3) for increased related party indebtedness. To resolve this we

must analyze section 965.
                                         -9-

      A. Statutory Interpretation Principles

      Our principal task when interpreting a statute is to ascertain and give effect

to Congress’ intent. The statutory text is the most persuasive evidence of

Congressional intent. United States v. Am. Trucking Ass’ns, Inc., 310 U.S. 534,

542-543 (1940). The plain language of a statute is ordinarily to be given effect

unless to do so would produce an absurd or futile result, or an unreasonable result

that plainly conflicts with legislative intent. See United States v. Ron Pair Enters.

Inc., 489 U.S. 235, 242 (1989); Wadlow v. Commissioner, 112 T.C. 247, 266

(1999). We consider relevant legal authority and the statute’s purpose and

context. Dolan v. USPS, 546 U.S. 481, 486 (2006). We rely on legislative history

to ascertain congressional intent only if a statute is silent or ambiguous.

Burlington No. R.R. Co. v. Okla. Tax Comm’n, 481 U.S. 454, 461 (1987); Miss.

Poultry Ass’n, Inc. v. Madigan, 992 F.2d 1359, 1364 n.28 (5th Cir. 1993). Our

initial inquiry is therefore whether the language of section 965(b)(3) is so plain as

to permit only one reasonable interpretation to answer that question. See, e.g.,

Robinson v. Shell Oil Co., 519 U.S. 337, 340 (1997).

      B. The Related Party Indebtedness Reduction of Section 965

      We now turn to section 965 to interpret the dividends received deduction

and the related party debt rule. A corporation that is a U.S. shareholder of a CFC
                                        -10-

may elect, for one taxable year, an 85% deduction with respect to certain cash

dividends it receives from its CFC.5 Sec. 965(a). The eligible amount is reduced

by any increase in related party indebtedness during the testing period.6 Sec.

965(b)(3).

      The parties dispute whether Congress meant the related party debt rule to

apply only to increased indebtedness resulting from intentionally abusive

transactions. The related party debt rule provides in pertinent part that

      the amount of dividends which would * * * be taken into account
      under subsection (a) shall be reduced by the excess (if any) of--

                   (A) the amount of indebtedness of the controlled foreign
             corporation to any related person * * * as of the close of the
             taxable year for which the election * * * is in effect, over

                   (B) the amount of indebtedness of the controlled foreign
             corporation to any related person * * * as of the close of
             October 3, 2004.



      5
       The deduction is limited to cash dividends that the U.S. corporation
reinvested in the United States. Sec. 965(b)(2) and (4). Further, the dividends in
excess of $500 million are eligible only if permanently invested outside the United
States. Sec. 965(b)(1).
      6
       Respondent does not dispute that the repatriated dividends satisfied the
other requirements of sec. 965. The repatriated dividends did not exceed the
amount of earnings reported on petitioner’s applicable financial statement to be
permanently reinvested outside the United States. See sec. 965(b)(1)(B).
Petitioner reinvested the repatriated dividends pursuant to a domestic reinvestment
plan. See sec. 965(b)(4).
                                         -11-

Sec. 965(b)(3). Petitioner contends this paragraph incorporates an intent

requirement. We disagree. Increased related party indebtedness is calculated by

determining the difference between the CFC’s “amount of indebtedness” from the

testing period’s beginning and end. The rule does not include an intent

requirement. Congress did not provide any exceptions to this arithmetic formula.

      Petitioner points to flush language Congress later added conferring

authority to issue regulations to prevent transactions that avoid the statute’s

purposes and exclude dividends attributable to a transfer between the U.S.

corporation and its CFC. See Gulf Opportunity Zone Act of 2005, Pub. L. No.

109-135, sec. 403(q)(3), 119 Stat. at 2627. Petitioner argues that this grant of

regulatory authority means Congress intended section 965(b)(3) to prevent only

intentionally abusive transactions. Petitioner also keys on a snippet from the Joint

Committee on Taxation technical explanation7 to suggest that the related party

debt rule applies only in cases in which the transfer is part of an arrangement

undertaken with a principal purpose of avoiding the purposes of the related party




      7
       Petitioner emphasizes the following statement: “It is anticipated that
dividends would be treated as attributable to a related-party transfer of cash or
other property under this authority only in cases in which the transfer is part of an
arrangement undertaken with a principal purpose of avoiding the purposes of the
related-party debt rule of Code section 965(b)(3).”
                                        -12-

debt rule. See 151 Cong. Rec. S14028, S14050-S14051 (daily ed. Dec. 19, 2005).

We disagree with petitioner’s interpretation.

      Congress did not amend the operative language of section 965(b)(3) when it

added the flush language. Nor do we interpret the grant of regulatory authority as

circumscribing the scope of the related party debt rule. Rather, the flush language

conferred on the Secretary the discretion to promulgate supplemental regulations.

A complete reading supports this conclusion.

      The grant of regulatory authority “supplements existing circular cash flow

principles” to stop cash or property transactions that “effectively” fund the

dividend. Id. at S14050. Circular cash flows, by their nature, create a net zero

effect. This result, however, does not mean that all circular cash flow transactions

are abusive. Thus, supplemental regulations were to be aimed at preventing

abusive circular transactions that would not register indebtedness under the

arithmetic formula. Id. This reading is supported by the report’s discussion of

permissible circular transactions. Id. Congress therefore authorized regulations to

distinguish between abusive and permissible circular transactions.

      The flush language therefore does not muzzle the related party debt rule by

adding an intent requirement. Rather, Congress authorized regulations to

supplement the related party debt rule to address abusive circular transactions.
                                        -13-

The grant of regulatory authority is ultimately irrelevant here because the

adjustments and repayment differ from a circular transaction. Thus, the related

party debt rule does not have an intent requirement.

      C. Indebtedness for Purposes of Section 965

      Having determined that the related party debt rule does not include an intent

requirement, we now address whether the accounts receivable are indebtedness

within the meaning of section 965(b)(3). Petitioner contends that the accounts

receivable are not indebtedness.8 In contrast, respondent contends that we should

interpret the term “indebtedness” under general Federal income tax principles. To

do so would mean that the accounts receivable are indebtedness.

      We now consider the meaning of the term “indebtedness” as it is used in

section 965(b)(3). The Commissioner applied the same meaning as that term has

under general Federal income tax principles. See Notice 2005-38, sec. 7.02(a),

2005-1 C.B. 1100, 1111. Respondent contends that the term simply means debt.

We may consider dictionary definitions to understand the meaning that Congress

may have intended. See, e.g., Dixon v. Commissioner, 132 T.C. 55, 76 (2009)


      8
        Respondent determined that the 2005 and 2006 accounts receivable
increased the related party indebtedness for the testing period. The parties agree
that the relevant period is between October 3, 2004 and March 31, 2006, the close
of the taxable year for which the election was in effect.
                                        -14-

(applying dictionary definition of “incurred” for purposes of interpreting section

6673(a)(2)). Indebtedness is defined as “[t]he condition or state of owing money”

or “[s]omething owed; a debt.” Black’s Law Dictionary 783 (8th ed. 2004).

Petitioner does not offer, nor do we contemplate, another reasonable interpretation

in the related party context of section 965(b)(3). And respondent’s definition is

consistent with the term’s plain meaning. We hold that the term “indebtedness” as

it is used in section 965(b)(3) means the condition of owing money or being

indebted.

      We now consider whether an account receivable established under Rev.

Proc. 99-32, supra, falls within that definition. The term “account receivable” is

not defined in Rev. Proc. 99-32, supra, or the accounts receivable closing

agreement. The revenue procedure calls for the taxpayer to establish an “account

receivable” bearing an arm’s-length interest rate. Rev. Proc. 99-32, secs. 1,

4.01(2), 1999-2 C.B. at 297, 299. The CFC must satisfy the account within 90

days of the closing agreement’s becoming effective. Id. sec. 4.01(4). Account

receivable is defined as “[a]n account reflecting a balance owed by the debtor.”

Black’s Law Dictionary 18. Petitioner observed those requirements and included

only the interest payments as income. The characteristics described under Rev.

Proc. 99-32, supra, and petitioner’s treatment of the accounts receivable are
                                         -15-

consistent with the dictionary definition. We hold that accounts receivable

established under Rev. Proc. 99-32, supra, may constitute indebtedness for

purposes of section 965.

      D. Trade Payables Exception

      We next consider petitioner’s argument that the accounts receivable, even if

indebtedness, should nonetheless be exempt from section 965(b)(3) because they

are trade payables. See Notice 2005-38, sec. 7.02(b); Notice 2005-64, sec. 10.08,

2005-2 C.B. 471, 489. The trade payable exception excludes indebtedness that

arises in the ordinary course of a business from sales, leases, licenses or the

rendition of services provided to or for a CFC by a related person from the related

party debt rule. Id. The indebtedness must be actually paid within 183 days. Id.

If the accounts receivable are trade payables, then those amounts could not be

increased related party indebtedness. If not, then the accounts receivable could be

increased related party indebtedness.

      Respondent argues that the accounts receivable are not trade payables

because they were not established in the ordinary course of business or paid within

183 days after the payables were created. We agree. The accounts receivable

were created after a section 482 adjustment rather than resulting from ordinary

business. Further, the relevant accounts receivable were paid more than a year
                                       -16-

after each was deemed established. The trade payables exception does not apply.

The accounts receivable therefore are increased indebtedness.

      E. Related Party Debt Rule Conclusion

      In sum, the related party debt rule does not have an intent requirement. The

accounts receivable may be indebtedness.

II. The Federal Income Tax Consequences of the Accounts Receivable

      We now consider the effect of the accounts receivable closing agreement

provision that the payment would be free of the Federal income tax consequences

of the secondary adjustments that would otherwise result from the primary

adjustment. Petitioner contends that the accounts receivable closing agreement

precludes any further Federal income tax consequences resulting from the

repayment. The accounts receivable therefore would be excluded when

determining the amount of the dividend received deduction. Respondent contends

that the accounts receivable closing agreement provision allows petitioner to

substitute the tax consequences of the debt secondary adjustment for those of the

deemed capital contribution secondary adjustments. Put another way, the accounts

receivable would be established for all Federal income tax purposes with

petitioner avoiding the consequences of the repayment for a deemed capital

contribution. We agree with respondent.
                                           -17-

      The accounts receivable stemmed from the primary adjustment agreed to in

the transfer pricing closing agreement. A primary adjustment under section 482

requires a secondary adjustment to conform a taxpayer’s accounts. Sec. 1.482-

1(g)(3), Income Tax Regs. A secondary adjustment is typically treated as a

dividend or a capital contribution. Id. Thus, petitioner was obligated to conform

its accounts with secondary adjustments.

      The regulations authorize in certain circumstances a taxpayer’s “repayment

of the allocated amount without further income tax consequences.”9 Id. (emphasis

added). And the Commissioner promulgated Rev. Proc. 99-32, supra, for this

purpose. An eligible taxpayer may transfer funds attributable to a primary

adjustment via an account receivable “without the Federal income tax

consequences of the secondary adjustments that would otherwise result from the

primary adjustment.”10 Rev. Proc. 99-32, sec. 2, 1999-2 C.B. at 298. The


      9
        Sec. 1.482-1(g)(3), Income Tax Regs., provides that “[a]ppropriate
adjustments must be made to conform a taxpayer’s accounts to reflect allocations
made under section 482. Such adjustments may include the treatment of an
allocated amount as a dividend or a capital contribution (as appropriate), or, in
appropriate cases, pursuant to such applicable revenue procedures as may be
provided by the Commissioner * * *, repayment of the allocated amount without
further income tax consequences.”
      10
           This provision states in whole that

                                                                     (continued...)
                                        -18-

accounts receivable closing agreement tracked that language by providing that

BSEH’s payment to petitioner would “be free of the Federal income tax

consequences of the secondary adjustments that would otherwise result from the

primary adjustment.” It also provided that it was “determined and agreed” that the

interest-bearing accounts receivable would be established for Federal income tax

purposes. Thus, we must determine the effect of the accounts receivable closing

agreement on the repayment’s collateral consequences.

      We previously concluded that an account receivable established under Rev.

Proc. 65-17, 1965-1 C.B. 833 (the predecessor to Rev. Proc. 99-32, supra), and

after a section 482 adjustment, did not preclude all collateral Federal income tax

consequences. See Schering Corp. v. Commissioner, 69 T.C. 579 (1978). The

taxpayer in Schering was a U.S. corporation that established accounts receivable

by closing agreement to be “free of further Federal income tax consequences.” Id.

      10
        (...continued)
      Absent a United States taxpayer’s election of treatment under this
      revenue procedure, an adjustment under section 482 (the “primary
      adjustment”) entails secondary adjustments to conform the taxpayer’s
      accounts to reflect the primary adjustment. These secondary
      adjustments may result in adverse tax consequences to the taxpayer.
      * * * This revenue procedure allows the United States taxpayer to
      repatriate the cash attributable to a primary adjustment via an account
      without the Federal income tax consequences of the secondary
      adjustments that would otherwise result from the primary adjustment.
      [Rev. Proc. 99-32, sec. 2, 1999-2 C.B. 296, 298.]
                                        -19-

at 580-583. The taxpayer’s CFC declared a dividend to satisfy the account

receivable. Id. at 584. The relevant foreign tax authority treated the CFC’s

payment as a dividend. Id. at 585. The taxpayer claimed a foreign tax credit

under section 901 for the foreign tax paid on the dividend attributable to the

principal and interest. Id. at 588. The Commissioner disallowed the credit

claimed for the tax applied to the principal. Id. The Commissioner argued that the

foreign tax credit was a tax consequence the closing agreement precluded because

the closing agreement did not specifically provide that the taxpayer could claim

the credit for the amount representing the adjustment. Id. at 594-595.

      We disagreed with the Commissioner that the closing agreement precluded

all collateral consequences. Rather, we concluded that the repayment was no

longer considered a deemed dividend for Federal income tax purposes. Id. at 598.

We reasoned that the applicable revenue procedure and corresponding closing

agreement were intended to allow the tax-free repatriation of money allocated to

the taxpayer by section 482. Id. at 595. And, indeed, the taxpayer treated the

repayment as a return of principal and excluded that amount from its income. Id.

at 598.

      Our holding in Schering was predicated on two concepts. First, the closing

agreement characterized the payment for Federal income tax purposes
                                       -20-

notwithstanding the foreign tax authority’s dividend treatment. The

Commissioner and the taxpayer were bound to treat the payment as a return of

principal for all Federal income tax purposes and the repayment was no longer a

dividend. In short, we did not permit inconsistent characterizations for Federal

income tax purposes.

      Second, the closing agreement determined that the taxpayer avoided the tax

consequences of the secondary adjustments absent the election. The collateral

consequences would be determined by applying the characterization for all Federal

income tax purposes. The closing agreement did not preclude all tax

consequences.

      These principles apply to our interpretation of the accounts receivable

closing agreement. We find it significant that “repayment,” not the accounts

receivable, was free of consequences that “would otherwise” result from the

primary adjustment. This indicates that the taxpayer avoids the consequences that

would have resulted absent the election. It is undisputed that the deemed capital

contribution from petitioner to BSEH was a secondary adjustment that would

otherwise have resulted from the primary adjustment. The parties further agree

that an eliminated “Federal income tax consequence” of that secondary adjustment

included the taxable dividend petitioner would have received upon cash payment
                                        -21-

from BSEH equal to the deemed capital contribution. Such a secondary

adjustment would have been subject to tax with the entire amount consequently

included in petitioner’s income. It is this adverse tax consequence that the

election avoided.

      Petitioner also argues that Rev. Proc. 99-32, supra, sets forth procedures that

are equitable and that the secondary accounts receivable adjustments did not, nor

were intended to, fund the repatriated dividends. We agree that the procedures set

forth in Rev. Proc. 99-32, supra, are equitable inasmuch as the taxpayer may avoid

the tax consequences from deemed capital contribution or dividend treatment. See

Schering Corp. v. Commissioner, 69 T.C. at 597. We disagree, however, that the

election allows for inconsistent characterizations for Federal tax purposes. As

previously discussed, petitioner avoided the consequences of the potential

secondary adjustments by agreeing to establish accounts receivable for all Federal

income tax purposes.

      We read the accounts receivable closing agreement to mean that petitioner’s

election relieved it from the tax consequences that would have resulted absent the

election. Further, we hold that the accounts receivable are deemed established for

all Federal tax purposes.
                                        -22-

III. Increased Indebtedness in the Testing Period

      We now address whether there was increased indebtedness during the

testing period because the accounts receivable were deemed established after the

testing period. Petitioner reasons that the deductible amount should not be

retroactively reduced because the accounts receivable were established after

petitioner repatriated the funds. Respondent argues, in contrast, that the parties

agreed that the accounts receivable were deemed established during the testing

period and the amount of dividends eligible for the deduction should accordingly

be reduced. We agree with respondent.

      The Commissioner may enter into a written closing agreement with a

taxpayer relating to the liability of the person for any taxable period ending before

or after the date of the agreement. Sec. 7121; Hudock v. Commissioner, 65 T.C.

351, 362 (1975); sec. 301.7121-1(a), Proced. & Admin. Regs. A closing

agreement relating to a prior taxable period may relate to one or more separate

items affecting the tax liability of the taxpayer. Sec. 301.7121-1(b)(2), Proced. &

Admin. Regs. Some closing agreements decide only specific issues and bind the

parties only as to those issues. See Manko v. Commissioner, 126 T.C. 195,

201-202 (2006); Estate of Magarian v. Commissioner, 97 T.C. 1, 5 (1991).
                                         -23-

        The accounts receivable closing agreement determined for all Federal

income tax purposes that petitioner would establish interest-bearing accounts

receivable from BSEH to petitioner. It further provided that two of the accounts

receivable were deemed to have been established during the testing period. We

therefore hold that the accounts receivable qualify as indebtedness during the

testing period because petitioner and respondent agreed that they were established

then.

IV. Conclusion

        We hold that the accounts receivable constitute indebtedness for the

purposes of section 965(b)(3). We further hold that the accounts receivable

closing agreement permits petitioner to avoid the Federal income tax

consequences that would otherwise have resulted absent establishing the accounts

receivable and does not preclude reducing the dividends received deduction under

section 965(b)(3). We therefore sustain respondent’s determination.

        In reaching these holdings, we have considered all of the parties’ arguments,

and, to the extent not addressed here, we conclude that they are moot, irrelevant or

without merit.
                            -24-

To reflect the foregoing,


                                         Decision will be entered for

                                   respondent.
