                                            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 adjust-
                                              ments as deemed capital contributions. P had previously repa-

                                     224




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                                     (224)                 BMC SOFTWARE INC. v. COMMISSIONER                                      225


                                                   triated 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.
                                                   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 con-
                                                   sequences 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.
                                        KROUPA, Judge: Respondent determined a $13 million 1
                                     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 quali-
                                     fying 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.
                                           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.




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                                     226                 141 UNITED STATES TAX COURT REPORTS                                   (224)

                                                                         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 consoli-
                                     dated Federal income tax return for the taxable year ended
                                     March 31, 2006. Petitioner is also the parent of non-consoli-
                                     dated foreign affiliates. Petitioner’s wholly-owned BMC Soft-
                                     ware 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 relation-
                                     ship. Under the CSAs, they co-owned the software and each
                                     held exclusive distribution rights for certain territories. Peti-
                                     tioner 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 peti-
                                     tioner 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 2005 and $22
                                     million for 2006 (collectively, primary adjustments). These
                                     primary adjustments represented net reductions in royalties
                                       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 pur-
                                     poses of this matter, we will treat these entities as one and refer only to
                                     BSEH.




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                                     (224)                 BMC SOFTWARE INC. v. COMMISSIONER                                      227


                                     petitioner paid BSEH. Respondent executed the transfer
                                     closing agreement on August 30, 2007.
                                        The primary adjustments required petitioner to make sec-
                                     ondary adjustments to conform its accounts. Those secondary
                                     adjustments would have been treated as deemed capital con-
                                     tributions 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 tax-
                                     able income and includible in petitioner’s taxable income.
                                     The parties agreed as follows:
                                           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 bal-
                                           ance 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. Peti-
                                     tioner claimed $709 million (repatriated dividends) as quali-
                                     fying for the one-time dividends received deduction under




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                                     228                 141 UNITED STATES TAX COURT REPORTS                                   (224)


                                     section 965 on Form 8895, One-Time Dividends Received
                                     Deduction for Certain Cash Dividends from Controlled For-
                                     eign 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
                                        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 repatri-
                                     ated dividends qualified for deduction under section 965.
                                     Respondent issued the deficiency notice for 2006, and peti-
                                     tioner 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 peti-
                                     tioner 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 indebt-
                                     edness.
                                        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.
                                       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 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.




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                                     (224)                BMC SOFTWARE INC. v. COMMISSIONER                                      229


                                     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. Peti-
                                     tioner 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 indebt-
                                     edness 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.
                                           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 con-
                                     flicts with legislative intent. See United States v. Ron Pair
                                     Enters. Inc., 489 U.S. 235, 242 (1989); Wadlow v. Commis-
                                     sioner, 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 his-
                                     tory to ascertain congressional intent only if a statute is
                                     silent or ambiguous. Burlington N.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).




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                                     230                  141 UNITED STATES TAX COURT REPORTS                                   (224)


                                           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 cor-
                                     poration that is a U.S. shareholder of a CFC 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.
                                             [Sec. 965(b)(3).]

                                     Petitioner contends this paragraph incorporates an intent
                                     requirement. We disagree. Increased related party indebted-
                                     ness 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 trans-
                                     actions that avoid the statute’s purposes and exclude divi-
                                     dends attributable to a transfer between the U.S. corporation
                                     and its CFC. See Gulf Opportunity Zone Act of 2005, Pub. L.
                                       5 The deduction is limited to cash dividends that the U.S. corporation re-

                                     invested in the United States. Sec. 965(b)(2), (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 ex-
                                     ceed 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).




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                                     (224)                BMC SOFTWARE INC. v. COMMISSIONER                                      231


                                     No. 109–135, sec. 403(q)(3), 119 Stat. at 2627. Petitioner
                                     argues that this grant of regulatory authority means Con-
                                     gress intended section 965(b)(3) to prevent only intentionally
                                     abusive transactions. Petitioner also keys on a snippet from
                                     the Joint Committee on Taxation technical explanation 7 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 debt rule. See 151 Cong. Rec. S14028, S14050–
                                     S14051 (daily ed. Dec. 19, 2005). We disagree with peti-
                                     tioner’s interpretation.
                                        Congress did not amend the operative language of section
                                     965(b)(3) when it added the flush language. Nor do we inter-
                                     pret the grant of regulatory authority as circumscribing the
                                     scope of the related party debt rule. Rather, the flush lan-
                                     guage conferred on the Secretary the discretion to promul-
                                     gate supplemental regulations. A complete reading supports
                                     this conclusion.
                                        The grant of regulatory authority ‘‘supplements existing
                                     circular cash flow principles’’ to stop cash or property trans-
                                     actions 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 regula-
                                     tions were to be aimed at preventing abusive circular trans-
                                     actions that would not register indebtedness under the arith-
                                     metic formula. Id. This reading is supported by the report’s
                                     discussion of permissible circular transactions. Id. Congress
                                     therefore authorized regulations to distinguish between abu-
                                     sive 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. The
                                     grant of regulatory authority is ultimately irrelevant here
                                     because the adjustments and repayment differ from a cir-
                                       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).’’




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                                     232                  141 UNITED STATES TAX COURT REPORTS                                   (224)


                                     cular 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 under-
                                     stand the meaning that Congress may have intended. See,
                                     e.g., Dixon v. Commissioner, 132 T.C. 55, 76 (2009) (applying
                                     dictionary definition of ‘‘incurred’’ for purposes of interpreting
                                     section 6673(a)(2)). Indebtedness is defined as ‘‘[t]he condi-
                                     tion 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 estab-
                                     lished under Rev. Proc. 99–32, supra, falls within that defini-
                                     tion. The term ‘‘account receivable’’ is not defined in Rev.
                                     Proc. 99–32, supra, or the accounts receivable closing agree-
                                     ment. The revenue procedure calls for the taxpayer to estab-
                                     lish 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,
                                           8 Respondent
                                                     determined that the 2005 and 2006 accounts receivable in-
                                     creased 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.




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                                     (224)                BMC SOFTWARE INC. v. COMMISSIONER                                      233


                                     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. Peti-
                                     tioner 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 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 serv-
                                     ices provided to or for a CFC by a related person from the
                                     related party debt rule. Id. The indebtedness must be actu-
                                     ally 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 receiv-
                                     able could be increased related party indebtedness.
                                       Respondent argues that the accounts receivable are not
                                     trade payables because they were not established in the ordi-
                                     nary 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 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.




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                                     234                  141 UNITED STATES TAX COURT REPORTS                                   (224)


                                     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 con-
                                     tends that the accounts receivable closing agreement provi-
                                     sion allows petitioner to substitute the tax consequences of
                                     the debt secondary adjustment for those of the deemed cap-
                                     ital contribution secondary adjustments. Put another way,
                                     the accounts receivable would be established for all Federal
                                     income tax purposes with petitioner avoiding the con-
                                     sequences of the repayment for a deemed capital contribu-
                                     tion. We agree with respondent.
                                        The accounts receivable stemmed from the primary adjust-
                                     ment 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, peti-
                                     tioner was obligated to conform its accounts with secondary
                                     adjustments.
                                        The regulations authorize in certain circumstances a tax-
                                     payer’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 attrib-
                                     utable to a primary adjustment via an account receivable
                                           9 Sec.   1.482–1(g)(3), Income Tax Regs., provides that
                                           [a]ppropriate adjustments must be made to conform a taxpayer’s ac-
                                           counts 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 Com-
                                           missioner * * *, repayment of the allocated amount without further in-
                                           come tax consequences.




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                                     (224)                 BMC SOFTWARE INC. v. COMMISSIONER                                      235


                                     ‘‘without the Federal income tax consequences of the sec-
                                     ondary adjustments that would otherwise result from the pri-
                                     mary adjustment.’’ 10 Rev. Proc. 99–32, sec. 2, 1999–2 C.B. at
                                     298. The 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 ‘‘deter-
                                     mined and agreed’’ that the interest-bearing accounts receiv-
                                     able would be established for Federal income tax purposes.
                                     Thus, we must determine the effect of the accounts receiv-
                                     able closing agreement on the repayment’s collateral con-
                                     sequences.
                                        We previously concluded that an account receivable estab-
                                     lished under Rev. Proc. 65–17, 1965–1 C.B. 833 (the prede-
                                     cessor 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. cor-
                                     poration that established accounts receivable by closing
                                     agreement to be ‘‘free of further Federal income tax con-
                                     sequences.’’ Id. at 580–583. The taxpayer’s CFC declared a
                                     dividend to satisfy the account receivable. Id. at 584. The rel-
                                     evant 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 divi-
                                     dend 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
                                           10 This   provision states in whole that
                                           [a]bsent a United States taxpayer’s election of treatment under this rev-
                                           enue procedure, an adjustment under section 482 (the ‘‘primary adjust-
                                           ment’’) entails secondary adjustments to conform the taxpayer’s accounts
                                           to reflect the primary adjustment. These secondary adjustments may re-
                                           sult in adverse tax consequences to the taxpayer. * * * This revenue
                                           procedure allows the United States taxpayer to repatriate the cash at-
                                           tributable to a primary adjustment via an account without the Federal
                                           income tax consequences of the secondary adjustments that would other-
                                           wise result from the primary adjustment. [Rev. Proc. 99–32, sec. 2,
                                           1999–2 C.B. 296, 298.]




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                                     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 cor-
                                     responding closing agreement were intended to allow the tax-
                                     free repatriation of money allocated to the taxpayer by sec-
                                     tion 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 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 repay-
                                     ment was no longer a dividend. In short, we did not permit
                                     inconsistent characterizations for Federal income tax pur-
                                     poses.
                                        Second, the closing agreement determined that the tax-
                                     payer avoided the tax consequences of the secondary adjust-
                                     ments absent the election. The collateral consequences would
                                     be determined by applying the characterization for all Fed-
                                     eral income tax purposes. The closing agreement did not pre-
                                     clude 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 con-
                                     sequences that ‘‘would otherwise’’ result from the primary
                                     adjustment. This indicates that the taxpayer avoids the con-
                                     sequences that would have resulted absent the election. It is
                                     undisputed that the deemed capital contribution from peti-
                                     tioner 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 tax-
                                     able dividend petitioner would have received upon cash pay-
                                     ment 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




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                                     (224)                BMC SOFTWARE INC. v. COMMISSIONER                                      237


                                     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 proce-
                                     dures 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 character-
                                     izations for Federal tax purposes. As previously discussed,
                                     petitioner avoided the consequences of the potential sec-
                                     ondary adjustments by agreeing to establish accounts receiv-
                                     able for all Federal income tax purposes.
                                        We read the accounts receivable closing agreement to
                                     mean that petitioner’s election relieved it from the tax con-
                                     sequences that would have resulted absent the election. Fur-
                                     ther, we hold that the accounts receivable are deemed estab-
                                     lished for all Federal tax purposes.
                                     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 retro-
                                     actively reduced because the accounts receivable were estab-
                                     lished 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 agree-
                                     ment 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




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                                     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).
                                        The accounts receivable closing agreement determined for
                                     all Federal income tax purposes that petitioner would estab-
                                     lish interest-bearing accounts receivable from BSEH to peti-
                                     tioner. 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 indebted-
                                     ness for the purposes of section 965(b)(3). We further hold
                                     that the accounts receivable closing agreement permits peti-
                                     tioner to avoid the Federal income tax consequences that
                                     would otherwise have resulted absent establishing the
                                     accounts receivable and does not preclude reducing the divi-
                                     dends received deduction under section 965(b)(3). We there-
                                     fore 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.
                                        To reflect the foregoing,
                                                                          Decision will be entered for respondent.

                                                                               f




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