Filed: Apr. 29, 1997
Latest Update: Nov. 14, 2018
Summary: 108 T.C. No. 17 UNITED STATES TAX COURT ROBERT A. STANFORD AND SUSAN STANFORD, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 103-94. Filed April 29, 1997. Held: For 1990, (1) subpart F income of a controlled foreign corporation may not be reduced by deficits in earnings and profits of a controlled foreign sister corporation; and (2) on the particular facts of this case, subpart F income of a controlled foreign corporation may not be reduced by deficits in earnings and pr
Summary: 108 T.C. No. 17 UNITED STATES TAX COURT ROBERT A. STANFORD AND SUSAN STANFORD, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 103-94. Filed April 29, 1997. Held: For 1990, (1) subpart F income of a controlled foreign corporation may not be reduced by deficits in earnings and profits of a controlled foreign sister corporation; and (2) on the particular facts of this case, subpart F income of a controlled foreign corporation may not be reduced by deficits in earnings and pro..
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108 T.C. No. 17
UNITED STATES TAX COURT
ROBERT A. STANFORD AND SUSAN STANFORD, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 103-94. Filed April 29, 1997.
Held: For 1990, (1) subpart F income of
a controlled foreign corporation may not be
reduced by deficits in earnings and profits
of a controlled foreign sister corporation;
and (2) on the particular facts of this case,
subpart F income of a controlled foreign
corporation may not be reduced by deficits in
earnings and profits of a controlled foreign
parent corporation.
Salvador E. Rodriguez and Maxime Louis Bouthillette, for
petitioners.
Lillian D. Brigman and Susan Sample, for respondent.
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SWIFT, Judge: Respondent determined a deficiency in, an
addition to tax on, and an accuracy-related penalty on
petitioners' 1990 joint Federal income tax as follows:
Accuracy-Related
Addition to Tax Penalty
Deficiency Sec. 6651(a)(1) Sec. 6662(a)
$423,531 $101,585 $84,706
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for 1990, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
All references to petitioner are to Robert A. Stanford.
The issues for decision are whether subpart F income of a
controlled foreign corporation may be reduced by deficits in
earnings and profits of a controlled foreign sister corporation
and whether subpart F income of a controlled foreign corporation
may be reduced by deficits in earnings and profits of a
controlled foreign parent corporation.
FINDINGS OF FACT
Many of the facts have been stipulated and are so found.
During the year in issue, petitioners were U.S. citizens and
resided in Houston, Texas.
In the mid-1980's, favorable laws in the crown colony of
Montserrat, British West Indies, made it relatively easy and
profitable for individuals to establish and to operate private
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banks and related companies in Montserrat.
Under the laws of Montserrat, petitioner in 1985, 1986, and
1987, respectively, formed Guardian International Bank Ltd.
(Guardian Bank), Guardian International Investment Services Ltd.
(Guardian Services), and Stanford Financial Group Inc. (Stanford
Financial), as controlled foreign corporations for the purposes
of engaging in offshore banking and other activities.
By 1990, petitioner owned 95 percent of the shares of stock
in Stanford Financial. Stanford Financial, in turn, owned nearly
100 percent of the shares of stock in Guardian Bank and Guardian
Services. Thus, by 1990, Guardian Bank and Guardian Services
were brother/sister subsidiary corporations owned by Stanford
Financial as the parent corporation.
More specifically, on December 12, 1985, petitioner formed
Guardian Bank as a Montserrat corporation for the purpose of
engaging in certain offshore banking activities. Upon its
formation, petitioner and petitioner’s father each owned 50
percent of the shares of stock in Guardian Bank.
In its articles of association or charter, Guardian Bank's
stated business purpose to engage in the business of banking was
defined broadly and included administrative, management, and
marketing functions relating to the business of banking, as
follows:
(1) To carry on the business of Banking in all its branches
and to transact and do all matters and things incidental
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thereto, or which may at any time hereafter, at any place
where the company shall carry on business, be usual in
connection with the business of banking or dealing in money
or security for money.
* * * * * * *
(8) To act as agents for the sale and purchase of any
stocks, shares or securities, or for any other monetary or
mercantile transaction.
* * * * * * *
(12) To contract for public and private loans, and to
negotiate and issue the same.
* * * * * * *
(24) To act as managing agents for other bodies or persons,
whether corporate or not, to conduct enterprises and manage
ventures of all types on their behalf.
(25) To carry on any other business which may seem to * * *
[Guardian Bank] capable of being conveniently carried on in
connection with any business of * * * [Guardian Bank] or
calculated directly to enhance the value of or render more
profitable any of * * * [Guardian Bank’s] property or
assets.
* * * * * * *
(41) To do all such other things which are incidental or
* * * [that Guardian Bank] may think conducive to the
attainment of the above objects or any of them.
In January of 1986, Guardian Bank obtained a banking license
required under the laws of Montserrat authorizing it to engage in
business as an offshore investment or agency bank. Guardian Bank
itself did not accept cash deposits from customers, nor did it
maintain for its customers savings or checking accounts. When
Guardian Bank’s customers desired to deposit funds with a bank in
Montserrat, the funds would be transferred in the customers'
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names to bank accounts with commercial banks in Montserrat with
which Guardian Bank maintained correspondent relationships.
On October 16, 1986, petitioner formed Guardian Services as
a Montserrat corporation for the stated purpose, as indicated in
its articles of association or charter, of engaging primarily in
real estate transactions and real estate development.
The charter of Guardian Services makes no mention of
Guardian Bank or of Stanford Financial.
Under a written service agreement between Guardian Bank and
Guardian Services, Guardian Services provided marketing and
advertising services to Guardian Bank. The service agreement
does not indicate that Guardian Services was to act as a nominee
of or agent for Guardian Bank. The service agreement specified
only that Guardian Services would perform routine marketing
activities, such as the dissemination of information regarding
Guardian Bank's activities. Nowhere in the service agreement is
Guardian Services granted the authority to act in the name of or
for the account of, or to bind by its actions, Guardian Bank.
Guardian Services held itself out to the public as a separate
affiliate of Guardian Bank, and when asked by customers of
Guardian Bank for financial statements, Guardian Services
presented its own financial statements to the customers, not the
financial statements of Guardian Bank.
On February 3, 1987, Stanford Financial was incorporated as
a Montserrat corporation. Upon incorporation of Stanford
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Financial, substantially all of the shares of stock in Guardian
Bank and in Guardian Services were transferred to Stanford
Financial, and, as explained, Guardian Bank and Guardian Services
became related to each other as brother/sister corporations with
Stanford Financial as the parent corporation.
In its articles of association or charter, Stanford
Financial's stated purpose was to act as a holding company and to
provide administrative and management services, as follows:
(1) (a) To carry on the business of a Holding Company
and to undertake and transact all kinds of agency
business.
* * * * * * *
(3) To take part in the formation, management,
supervision or control of the business or operations of
any company or undertaking, and for that purpose to
appoint and remunerate any directors, accountants, or
other experts or agents.
* * * * * * *
(5) To act as managers or to direct the management of
any * * * businesses or of any corporations or firms or
on behalf of any person carrying on any * * *
businesses and to act as directors of any company or as
members of the boards of management of any corporations
carrying on any such businesses.
Stanford Financial's articles of association or charter also
authorized Stanford Financial to engage in the business of
banking. There is no reference in Stanford Financial's charter
to Guardian Bank or to Guardian Services.
During 1989 and 1990, pursuant to a service agreement that
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allegedly existed between Guardian Bank and Stanford Financial,
Stanford Financial provided administrative and management
services to Guardian Bank. Stanford Financial provided no
services to any other company.
Guardian Bank, Guardian Services, and Stanford Financial
shared an office in Montserrat. Also, Guardian Bank maintained
an administrative office in Mexia, Texas, and a representative
office in Houston, Texas. Guardian Services maintained a
representative office in Miami, Florida, and Stanford Financial
maintained a representative office in Mexia, Texas.
A separate set of books and records was maintained for each
of Guardian Bank, Guardian Services, and Stanford Financial.
Under Montserrat law, neither Guardian Services nor Stanford
Financial obtained banking licenses, and therefore neither
presumedly was permitted to engage directly in banking activity
on behalf of Guardian Bank.
Because some banks in Montserrat engaged in disreputable
banking practices, in the late 1980's, the Montserrat Government
began considering and adopting policies and legislation
restricting the activity of foreign owned banks in Montserrat.
Specifically, the Montserrat Government began considering
legislation that would preclude direct ownership of banks by
foreign individuals and that would restrict direct marketing by
or on behalf of foreign owned banks that were based in
Montserrat.
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Actual legislation in Montserrat, however, restricting
activity of foreign owned banks and precluding ownership in
Montserrat of banks by foreign individuals was not enacted until
1991.
In September of 1989, Hurricane Hugo struck Montserrat
bringing with it 200-mile-an-hour winds that destroyed much of
the island, including the shared office in Montserrat of Guardian
Bank, Guardian Services, and Stanford Financial. All of the
furniture in the office was destroyed, including a safe
containing records of Guardian Bank, Guardian Services, and
Stanford Financial.
On October 25, 1990, petitioners filed their 1989 joint
Federal income tax return.
On March 18, 1991, petitioner filed a 1990 corporate Federal
income tax return of Stanford Financial (Form 1120F), and on
September 19, 1991, pursuant to automatic 6-month extensions of
time for filing, petitioner filed 1990 corporate Federal income
tax returns of Guardian Bank and of Guardian Services (Forms
1120F).
Petitioners requested and apparently received an automatic
extension of time to file until August 15, 1991, their 1990 joint
Federal income tax return. The evidence does not indicate when
petitioners mailed to respondent their 1990 joint Federal income
tax return. Although petitioners apparently signed their 1990
joint Federal income tax return on November 5, 1991, respondent
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did not receive this return, along with a further extension
request, until February 28, 1992.
On their 1990 joint Federal income tax return, petitioners
reported subpart F income of, among other entities, Guardian Bank
and deficits in the earnings and profits of Guardian Services and
Stanford Financial, as follows:
Deficits In
Subpart F Income Earnings & Profits
Guardian Bank $2,789,722 ---
Guardian Services --- ($1,251,891)
Stanford Financial --- ($ 154,474)
Total $2,789,722 ($1,406,365)
As indirect owners of Guardian Bank and as required under
section 951, petitioners reported on their 1990 joint Federal
income tax return the above $2,789,722 subpart F income of
Guardian Bank. On their 1990 joint Federal income tax return,
petitioners also reduced this subpart F income of Guardian Bank
by the above $1,406,365 total deficits in the 1990 earnings and
profits of Guardian Services and of Stanford Financial.
On their 1990 joint Federal income tax return, petitioners
also reported a $615,890 net operating loss carryforward
deduction from 1989, which net operating loss arose, in part,
from petitioners’ reduction of reported 1989 $580,483 subpart F
income of Guardian Bank by reported $385,386 total deficits in
1989 earnings and profits of Guardian Services and of Stanford
Financial.
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On audit, respondent disallowed petitioners' use for 1990 of
the $1,406,365 total deficits in earnings and profits of Guardian
Services and of Stanford Financial to reduce the $2,789,722
subpart F income of Guardian Bank.
Respondent also reduced the $615,890 net operating loss that
petitioners carried forward from 1989 based on the disallowance
of petitioners' use of the $385,386 total 1989 deficits in
earnings and profits of Guardian Services and Stanford Financial
to reduce the 1989 $580,483 subpart F income of Guardian Bank.
For 1990, respondent determined against petitioners a late
filing addition to tax under section 6651(a)(1) and an accuracy-
related penalty under section 6662(a).
OPINION
Under subpart F of the Code, certain income (subpart F
income) of U.S. controlled foreign corporations (CFC's) is to be
included in income of U.S. shareholders of the CFC's regardless
of whether the CFC's income is distributed currently to the U.S.
shareholders. Sec. 951(a).
Under section 952(d), as applicable through 1986, U.S.
shareholders with subpart F income were permitted to reduce
subpart F income of profitable CFC's by deficits in earnings and
profits of unprofitable CFC's that were part of a chain of
controlled foreign corporations. This rule was referred to as
the "chain deficit rule". As applicable through 1986, deficits
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in earnings and profits of CFC’s could be used to reduce subpart
F income of U.S. shareholders regardless of the manner by which
the profitable and the unprofitable CFC's were related to each
other within the chain (i.e., regardless of whether the
profitable and the unprofitable CFC's had a parent/subsidiary or
a brother/sister relationship). Also, deficits in earnings and
profits of CFC’s could be used to reduce subpart F income of U.S.
shareholders regardless of whether the various CFC’s within the
chain were engaged in similar or related business activity.1
In 1986, section 952(d) was repealed, effective for any year
ending after 1986. Tax Reform Act of 1986, Pub. L. 99-514, sec.
1
Sec. 952(d), as applicable through 1986, provided, in part,
as follows:
(d) Special Rule in Case of Indirect Ownership.--For
purposes of subsection (c) [limitation on Subpart F income],
if--
(1) a United States shareholder owns * * *
[directly or indirectly] stock of a foreign
corporation, and by reason of such ownership owns * * *
[directly or indirectly] stock of any other foreign
corporation, and
(2) any of such foreign corporations has a deficit
in earnings and profits for the taxable year,
then the earnings and profits for the taxable year of each
such foreign corporation which is a controlled foreign
corporation shall, with respect to such United States
shareholder, be properly reduced to take into account any
deficit described in paragraph (2) in such manner as the
Secretary shall prescribe by regulations.
See also sec. 1.952-1(d)(2), Income Tax Regs., as in effect
through 1986.
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1221(f), 100 Stat. 2554. The repeal was based generally on
Congress' belief that the chain deficit rule in section 952(d)
allowed U.S. taxpayers to shelter through CFC's excessive amounts
of tax haven income from current U.S. tax. See H. Conf. Rept.
99-841, at 621-626 (1986), 1986-3 C.B. (Vol. 4) 473, 621-626.
In 1988, a new and revised chain deficit rule was enacted,
retroactive to any year ending after 1986. Sec. 952(c)(1)(C);
Technical and Miscellaneous Revenue Act of 1988 (TAMRA), Pub. L.
100-647, sec. 1012(i)(25)(A), 102 Stat. 3512. The TAMRA version
of the chain deficit rule is the rule that governs in this case
for 1990. The chain deficit rule, as enacted in 1988, provided
new restrictions on the use of deficits in earnings and profits
of CFC's to reduce subpart F income of profitable CFC's owned by
U.S. shareholders.
In particular, under TAMRA, the new chain deficit rule
provides that, in order to reduce subpart F income of profitable
CFC's by deficits in earnings and profits of unprofitable CFC's,
the profitable and unprofitable CFC's must satisfy a new
"qualified chain member" rule and subpart F income of the
profitable CFC's must be attributable to the same qualified
activity to which deficits in earnings and profits of the
unprofitable CFC's are attributable. Sec. 952(c)(1)(B) and (C).
CFC's constitute qualified chain members under section
952(c)(1)(C) only where the CFC's are related to each other
directly or indirectly through a single, straight-line chain of
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corporations, as in a parent-subsidiary relationship and not
where the CFC's are related to each other through a common
parent, as in a brother-sister relationship. Section
952(c)(1)(C) provides, in part, as follows--
(C) Certain deficits of member of the same chain of
corporations may be taken into account.--
(i) In general.--A controlled foreign corporation
may elect to reduce the amount of its subpart F income
for any taxable year which is attributable to any
qualified activity by the amount of any deficit in
earnings and profits of a qualified chain member for a
taxable year ending with (or within) the taxable year
of such controlled foreign corporation to the extent
such deficit is attributable to such activity. * * *
(ii) Qualified chain member.--For purposes of this
subparagraph, the term "qualified chain member" means,
with respect to any controlled foreign corporation, any
other corporation which is created or organized under
the laws of the same foreign country as the controlled
foreign corporation but only if--
(I) all the stock of such other corporation
* * * is owned at all times during the taxable
year in which the deficit arose (directly or
through 1 or more corporations other than the
common parent) by such controlled foreign
corporation * * * [or vice versa]. [Emphasis
added.]
With regard to the "same qualified activity" requirement of
the TAMRA chain deficit rule, the business activity of the
profitable and the unprofitable CFC's must arise from one of the
same specified types of activity listed in section
952(c)(1)(B)(iii), as follows:
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(iii) Qualified activity.--For purposes of this
paragraph, the term "qualified activity" means any
activity giving rise to--
(I) foreign base company shipping income,
(II) foreign base company oil related income,
(III) foreign base company sales income,
(IV) foreign base company services income,
(V) in the case of a qualified insurance
company, insurance income or foreign personal
holding company income, or
(VI) in the case of a qualified financial
institution, foreign personal holding company
income.
In summary, as the TAMRA chain deficit rule applies for
1990, subpart F income of profitable CFC's may only be reduced by
deficits in earnings and profits of unprofitable CFC's if each of
the CFC's is part of a "qualified chain" and if the subpart F
income of the profitable CFC's and the deficits in the earnings
and profits of the unprofitable CFC's relate to the same
qualified activity.
We first address the legal issue of whether Guardian Bank
and Guardian Services, as brother/sister corporations, qualify
under the TAMRA chain deficit rule as members of the same
qualified chain. Respondent contends that Guardian Bank and
Guardian Services do not qualify as qualified chain members
because petitioner's ownership interest in Guardian Bank and
Guardian Services runs through a common parent corporation
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(namely, Stanford Financial), which relationship, respondent
argues, is expressly excluded from the definition of a qualified
chain.
Petitioners' argument that Guardian Bank and Guardian
Services qualify under the chain benefit rule of section
952(c)(1)(C) turns largely on one word in section
952(c)(1)(C)(ii). As indicated above, the cited statutory
language makes reference to "the" common parent, and petitioners
argue that the language "the" common parent should be construed
to mean "the U.S. shareholders", not the foreign parent
corporation (namely, not Stanford Financial).
Petitioners also rely on Treasury regulations applicable to
the prior version of section 952, and thus applicable through the
end of 1986, that have never been declared obsolete and that
permitted the use of deficits in the earnings and profits of
CFC's to reduce subpart F income of sister CFC's.
We believe the statutory language to be clear. In the
instant case, Guardian Bank and Guardian Services are related to
each other as brother/sister corporations only through Stanford
Financial, the common parent. Consequently, Guardian Services
does not constitute a "qualified chain member" with respect to
Guardian Bank, and petitioners are not permitted to use deficits
in earnings and profits of Guardian Services to reduce subpart F
income of Guardian Bank.
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The portion of the regulations on which petitioners rely
(namely, sec. 1.952-1(d)(2)(ii), Income Tax Regs.) and which is
inconsistent with section 952(c)(1)(C)(ii), as amended in 1988
and as applicable to 1990, is not applicable to years such as
1990 for which the new TAMRA chain deficit rule is applicable.
This portion of the regulations construes the prior law and has
not been amended to take account of the new chain deficit rule.
The statutory language of section 952(c)(1)(C) expressly
disqualifies as “qualified chain members” CFC’s that are related
to each other through a common parent corporation (i.e., that are
related as brother/sister corporations).
With regard to deficits in earnings and profits of Stanford
Financial, respondent acknowledges that Guardian Bank and
Stanford Financial, as subsidiary/parent corporations, qualify as
members of a "qualified chain" under section 952(c)(1)(C)(ii), as
enacted by TAMRA and as applicable to 1990. Respondent also
acknowledges that the subpart F income of Guardian Bank
constitutes foreign personal holding company income and that
Guardian Bank constitutes a qualified financial institution
because Guardian Bank was actively engaged in the activity of
banking and financing under section 952(c)(1)(B)(iii)(VI) and
952(c)(1)(B)(vi). Respondent argues, however, that Stanford
Financial was not also engaged in the banking, financing, or
similar business, but in the management business.
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Section 1.864-4(c)(5)(i), Income Tax Regs., dealing with
foreign sources of income, describes those activities that are
indicative of banking, financing, and similar businesses, as
follows:
(i) Definition of banking, financing, or similar business.--
* * * * * * *
(a) Receiving deposits of funds from the public,
(b) Making personal, mortgage, industrial, or other
loans to the public,
(c) Purchasing, selling, discounting, or negotiating
for the public on a regular basis, notes, drafts, checks,
bills of exchange, acceptances, or other evidences of
indebtedness,
(d) Issuing letters of credit to the public and
negotiating drafts drawn thereunder,
(e) Providing trust services for the public, or
(f) Financing foreign exchange transactions for the
public.
The above description of the business of banking and finance --
originally contained in the foreign tax credit regulations of
section 904 (sec. 1.904-4(c)(1), Income Tax Regs.) -- applies
generally to CFC’s for purposes of the “same or similar activity”
requirement of the TAMRA section 952 chain deficit rule. See S.
Rept. 100-445, at 275-276 (1988).
Petitioners argue, among other things, that employees of
Stanford Financial were involved on behalf of Guardian Bank, in
bank management, the filing of bank regulatory compliance
reports, and other duties incidental, necessary, and similar to
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the banking activity of Guardian Bank.
The credible evidence before us, however, is sparse and
establishes only that Stanford Financial performed administrative
and management support services for Guardian Bank. It does not
establish that Stanford Financial engaged in any banking or
financing activity described in section 1.864-4(c)(5)(i), Income
Tax Regs. Administrative and management services of the
generalized type conducted by Stanford Financial do not qualify
as banking or financing activity for this purpose. Stanford
Financial did not have a banking license.
Petitioners also argue that Stanford Financial provided
services to Guardian Bank "similar" to the business of banking.
We are not persuaded on this record that the administrative and
management services performed by Stanford Financial for Guardian
Bank qualify as activities similar to those of a banking or
financing business.
The manner by which petitioner structured the ownership
relationship between Guardian Bank, Guardian Services, and
Stanford Financial, as petitioners allege, may have related to
anticipated changes in the laws of Montserrat relating to
banking. On the evidence before us, however, anticipated changes
in Montserrat law do not provide a sufficient basis to ignore
differences between the banking activity of Guardian Bank and the
administrative and management activities of Stanford Financial.
We conclude that Stanford Financial was not engaged in a
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banking, financing, or similar business and therefore that the
subpart F income of Guardian Bank may not be reduced by deficits
in the earnings and profits of its parent corporation, Stanford
Financial.
In the alternative, petitioners cite Commissioner v.
Bollinger, 485 U.S. 340 (1988), and National Carbide Corp. v.
Commissioner,
336 U.S. 422 (1949), and petitioners argue that
Guardian Services and Stanford Financial should be treated as
mere agents of Guardian Bank and that Guardian Services' and
Stanford Financial's 1989 and 1990 deficits in earnings and
profits should simply be treated as expenses or losses of
Guardian Bank.
Under Montserrat law, neither Guardian Services nor
Stanford Financial obtained banking licenses and therefore
neither presumedly was permitted to engage directly in banking
activity on behalf of Guardian Bank.
As we have found, in its advertisements, Guardian Services
represented that it was an "affiliate" of Guardian Bank, not a
nominee or agent thereof. The employees of Guardian Services
provided customers of Guardian Bank with Guardian Services’ own
financial statements and not those of Guardian Bank. The service
agreement between Guardian Bank and Guardian Services did not
indicate that Guardian Services was a nominee or agent of
Guardian Bank. The service agreement specified only that
Guardian Services would perform marketing activities for Guardian
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Bank. Nowhere in the service agreement is Guardian Services
granted the authority to act in the name of or for the account
of, or to bind by its actions, Guardian Bank.
Petitioners' 1990 joint Federal income tax return indicates
no agency relationship between Guardian Bank and Guardian
Services.
With regard to Stanford Financial, the evidence does not
indicate that Stanford Financial ever acted specifically in the
name of or for the account of Guardian Bank, nor that it ever
bound Guardian Bank by its actions.
Stanford Financial performed services for Guardian Bank of
an administrative and management nature.
The alleged service agreement between Guardian Bank and
Stanford Financial is insufficient to establish the existence of
an agency relationship between Guardian Bank and Stanford
Financial.
Based on our analysis of the evidence before us, we conclude
that neither Guardian Services nor Stanford Financial is properly
to be regarded as an agent of Guardian Bank; rather they are to
be regarded as separate entities. Accordingly, their separate
deficits in earnings and profits are not to be treated as
expenses or losses of Guardian Bank.
Addition to Tax and Accuracy-Related Penalty
Section 6651(a)(1) imposes an addition to tax for taxpayers'
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failure to timely file income tax returns by the due date of the
returns unless that failure is due to reasonable cause. To
establish reasonable cause, taxpayers must show that they
exercised ordinary business care and prudence but were still
unable to file their returns by the due date. Sec. 301.6651-
1(c)(1), Proced. & Admin. Regs. Whether the untimely filing of
tax returns is due to reasonable cause raises a question of fact.
Denenburg v. United States, 920 F.2d 301, 303 (5th Cir. 1991).
Section 6662(d) imposes a penalty for substantial
understatements of tax but provides that the amount of any
understatements shall be reduced by that portion that is
attributable to either (1) the tax treatment of any item for
which there was substantial authority or (2) any item if the
relevant facts affecting the item's tax treatment are adequately
disclosed in the returns or in statements attached to the
returns. Sec. 6662(d)(2)(B).
Petitioners argue that the delay in filing their 1990 joint
Federal income tax return was due to reasonable cause based on
the destruction by Hurricane Hugo of records of Guardian Bank,
Guardian Services, and Stanford Financial that were necessary to
properly prepare and file their 1990 joint Federal income tax
return and that extra time was needed to reconstruct these
records.
Petitioners, however, offer no argument regarding the
4-month delay between November 5, 1991, the day they signed their
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1990 joint Federal income tax return and February 28, 1992, the
day respondent received the return.
We note that even though Hurricane Hugo occurred in
September of 1989, on October 25, 1990, petitioners were able to
file their 1989 joint Federal income tax return and, in the fall
of 1991, petitioner was able to file the 1990 Federal corporate
income tax returns of Guardian Bank, Guardian Services, and
Stanford Financial. Consequently, it appears that the records
arguably destroyed by Hurricane Hugo had been reconstructed by
the fall of 1991. Petitioners, however, failed to file their
1990 joint Federal income tax return until February 28, 1992,
more than 5 months after records that petitioners needed to
complete their 1990 joint Federal income tax return apparently
had become available. Petitioners’ argument based on the
destruction of records, therefore, does not provide reasonable
cause for the untimely filing of their 1990 joint Federal income
tax return.
With respect to the accuracy-related penalty, respondent
argues that no substantial authority existed for petitioners to
use deficits in earnings and profits of Guardian Services and
Stanford Financial to reduce the subpart F income of Guardian
Bank.
If the Court concludes that petitioners' interpretation of
the chain deficit rule and petitioners' application of that rule
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to their CFC's are rejected, petitioners argue that because the
relevant provisions of section 952 are so technical and unclear,
it was not unreasonable for them to have adopted the
interpretation they utilized in preparing and filing their 1990
joint Federal income tax return. Petitioners also argue that
they satisfied the disclosure rules and provided sufficient
information on their 1990 joint Federal income tax return
regarding their CFC's to put respondent on notice of the basis
for their claimed tax treatment of their subpart F income.
We agree with respondent that no substantial authority
existed to support petitioners' reading of section 952.
With respect to disclosure, we agree with respondent that
petitioners failed adequately to disclose facts necessary for
respondent to determine the proper tax treatment of the subpart F
income reported on petitioners' 1990 joint Federal income tax
return.
We sustain respondent's impositions of the addition to tax
for petitioners' untimely filing of their 1990 joint Federal
income tax return and the accuracy-related penalty.
To reflect the foregoing,
Decision will be entered
for respondent.
