The IRS assessed a tax deficiency against a company that had entered into a swap-and-assign transaction to help repatriate funds into the United States. The company had relied on a long-standing IRS interpretation, but the IRS, and subsequently a federal court, said that the transaction should have been taxed as lump-sum income rather than income taxable over a period of years. That decision was appealed to the Third Circuit.
The NAM filed an amicus brief on 9/7/2010 urging the Third Circuit to reverse. We focused on the need to determine whether assets such as a swap receivable are "United States property" under Section 956 of the Internal Revenue Code. If they are not, a separate IRS notice (Notice 89-21) requires that the income be amortized and taxes paid over the life of the contract. We also argued that Section 956 is a provision that reflects Congress' judgment about which types of assets had sufficient nexus, or connection, to the United States to merit taxing the U.S. shareholders of the foreign corporation that owned the assets. A court should not substitute its own policy judgment about what should constitute U.S. property for the judgment of Congress. The complicated provisions of the Internal Revenue Code attempt to balance conflicting congressional goals, and it is not the role of the courts to attempt to discern an overarching policy that might help them override the language enacted by Congress.
On June 20, 2011, the Third Circuit affirmed the trial court's judgment. It found that the transaction was properly characterized as a loan and that the IRS does not have to treat similarly-situated taxpayers consistently. Although another company engaged in a similar transaction and the IRS issued a Field Service Advice declining to tax it, that advice was merely guidance for the IRS auditors, and not an assurance for the taxpayer.