UNITED STATES TAX COURT



SIH PARTNERS LLLP, EXPLORER PARTNER CORPORATION, TAX
              MATTERS PARTNER, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



 Docket No. 3427-15.                         Filed January 18, 2018.



        S was the U.S. shareholder of two CFCs that guaranteed loans
 made to a U.S. person. R determined that S must include in its gross
 income for the tax years in issue the CFCs’ applicable earnings
 pursuant to I.R.C. secs. 951(a)(1)(B) and 956(d). R’s determination
 relied on regulations promulgated under I.R.C. sec. 956 (regulations).
 R also determined that the amounts included in S’s gross income
 should be taxed as ordinary income.

        P contends that the regulations are invalid and that in the
 absence of valid regulations R’s determination cannot be sustained.
 If we sustain R’s determination of the amounts included under I.R.C.
 secs. 951(a)(1)(B) and 956(d), P contends that the amounts should be
 taxed as qualified dividend income under I.R.C. sec. 1(h)(11).

        Held: The regulations are valid, and R correctly determined
 that S must include in gross income the CFCs’ applicable earnings for
 the tax years in issue.
                                       -2-

            Held, further, the amounts included in P’s gross income
      pursuant to I.R.C. secs. 951(a)(1)(B) and 956(d) are not qualified
      dividend income under I.R.C. sec. 1(h)(11).



      Mark D. Lanpher, Robert A. Rudnick, and Kristen M. Garry, for petitioner.

      Jeffrey B. Fienberg, Richard A. Rappazzo, and Julie Ann P. Gasper, for

respondent.



                                    OPINION


      COHEN, Judge: On November 10, 2014, respondent issued two notices of

final partnership administrative adjustment (FPAAs) to Explorer Partner Corp.

(Explorer Corp.) as tax matters partner for SIH Partners LLLP (SIHP) for tax years

2007 and 2008. In the FPAAs respondent determined that SIHP has income

inclusions under sections 951(a)(1)(B) and 956 of $375,392,988 and $1,697,247

for 2007 and 2008, respectively. In the FPAAs respondent also determined that

the income inclusions for SIHP are not qualified dividend income eligible for the

preferential 15% tax rate under section 1(h)(11).

      The issues for consideration are: (1) whether SIHP has income inclusions

under sections 951(a)(1)(B) and 956 in amounts equal to the respective applicable
                                         -3-

earnings of two of its controlled foreign corporations because these entities

guaranteed loans that Merrill Lynch made to Susquehanna International Group,

LLP (SIG), and (2) if SIHP has income inclusions under sections 951(a)(1)(B) and

956, whether the income inclusions are qualified dividend income under section

1(h)(11). These issues are before the Court on the parties’ cross-motions for

summary judgment pursuant to Rule 121. Unless otherwise indicated, all section

references are to the Internal Revenue Code (Code) in effect for the tax years in

issue, and all Rule references are to the Tax Court Rules of Practice and

Procedure.

      Summary judgment is intended to expedite litigation and avoid unnecessary

and expensive trials. Fla. Peach Corp. v. Commissioner, 

, 681 (1988).

Summary judgment may be granted with respect to all or any part of the legal

issues in controversy “if the pleadings, answers to interrogatories, depositions,

admissions, and any other acceptable materials, together with the affidavits or

declarations, if any, show that there is no genuine dispute as to any material fact

and that a decision may be rendered as a matter of law.” Rule 121(b). Respondent

contends that no genuine issue of material fact exists with respect to either issue.

Petitioner challenges the validity of the regulations on which respondent relied in

making the determinations in the FPAAs, and it contends that if we conclude that
                                         -4-

the regulations are invalid then summary judgment in its favor is appropriate. If

those regulations are not invalid, then petitioner contends that issues of material

fact remain in dispute as to whether respondent properly applied the regulations to

the facts and circumstances of this case. We conclude that all facts material to the

Court’s disposition of the cross-motions for summary judgment can be drawn from

the parties’ stipulations and are not reasonably in dispute.

                                    Background

      We state the stipulated facts in greater detail than may be necessary so that

the record is complete.

Formation of SIHP

      Explorer Corp., a Delaware corporation, is an S corporation for Federal

income tax purposes. During the tax years in issue Explorer Corp. had the

following shareholders: Eric Brooks (Brooks), Joel Greenberg (Greenberg),

Arthur Dantchik (Dantchik), and Jeffrey Yass (Yass).

      From the beginning of 2007 through March 2007, Brooks, Greenberg,

Dantchik, Yass, and a fifth individual, Andrew Frost (Frost), were the sole

shareholders of Susquehanna International Holdings, Inc. (SIH Inc.). SIH Inc., a

Delaware corporation incorporated in 1999, was an S corporation for Federal

income tax purposes. In March 2007 SIH Inc. redeemed Frost’s shares. On or
                                       -5-

after March 31, 2007, Brooks, Greenberg, Dantchik, and Yass were the remaining

shareholders of SIH Inc.

      On or after April 2, 2007, Brooks, Greenberg, Dantchik, and Yass

transferred the stock of SIH Inc. to Explorer Corp. Following the transfer, SIH

Inc. converted to a limited liability company, which was disregarded as an entity

separate from its owner for Federal income tax purposes, and changed its name to

Susquehanna International Holdings, LLC (SIH LLC). The steps of these

transactions were treated together as a reorganization under section 368(a)(1)(F).

      On April 2, 2007, SIHP was formed as a Delaware partnership. On or about

April 3, 2007, Explorer Corp. transferred SIH LLC to SIHP in exchange for a 1%

ownership interest in SIHP. Explorer Corp. is the tax matters partner for SIHP.

      From on or about April 3, 2007, through the end of tax years 2007 and 2008

five S corporations owned the remaining 99% of SIHP in varying ownership

percentages. Brooks, Greenberg, Dantchik, Yass, and a fifth individual, Mark

Dooley (Dooley), each owned 100% of one of the S corporations.

SIG US and International Affiliates

      During the tax years in issue Brooks, Greenberg, Dantchik, Yass, Dooley,

and Frost owned collectively and through certain entities 100% of the interest in

SIG. SIG and its U.S. affiliates (together, SIG US) constitute an investment firm
                                         -6-

that trades, directly and through various affiliates, most listed financial products

and asset classes. SIG US trades these products primarily through broker-dealers

registered with the U.S. Securities and Exchange Commission. During the tax

years in issue SIHP owned indirectly certain of SIG’s international affiliates.

      SIHL and SEHL

      From on or about January 1, 2007, to on or about April 2, 2007, SIH Inc.

owned 100% of the stock of Susquehanna Ireland Holdings Limited (SIHL), a

corporation organized under the laws of Ireland. From on or about April 3, 2007,

to on or about December 3, 2007, SIH LLC owned 100% of SIHL’s stock.

Through SIH LLC (an entity disregarded for Federal income tax purposes) SIHP

was treated as owning 100% of SIHL’s stock.

      On December 4, 2007, SIHL was acquired by Susquehanna Europe

Holdings Limited (SEHL), a corporation newly organized under the laws of

Ireland and whose tax residency was in Luxembourg. In connection with the

acquisition, SIHL elected to be classified as a disregarded entity for Federal

income tax purposes. This acquisition and election together constituted a

reorganization under section 368(a)(1)(F). From December 4, 2007, through

December 31, 2008, SIHP owned SEHL through SIH LLC and other entities

disregarded for Federal income tax purposes.
                                      -7-

      From the beginning of tax year 2007 until its reorganization SIHL was a

controlled foreign corporation (CFC) within the meaning of section 957(a). SIHP

was a “United States shareholder” under section 951(b) with respect to SIHL that

owned within the meaning of section 958(a) 100% of SIHL’s stock. From its

organization and throughout tax years 2007 and 2008, SEHL was also a CFC.

SIHP was a U.S. shareholder of SEHL that owned 100% of SEHL’s stock. SEHL

is the successor to SIHL (together, SIHL/SEHL).

      STS

      From on or about January 1, 2007, to on or about April 2, 2007, SIH Inc.

owned 100% of the stock of Susquehanna Trading Services, Inc. (STS), a

company organized under the laws of the Cayman Islands that was treated as a

corporation for Federal income tax purposes. From on or about April 3, 2007,

through December 31, 2008, SIH LLC owned the stock of STS. Through SIH

LLC, SIHP was treated as owning STS’s stock.

      During tax years 2007 and 2008 STS was a CFC. SIHP was a U.S.

shareholder with respect to STS that owned within the meaning of section 958(a)

100% of STS’ stock.
                                         -8-

Loan Received by SIG

      Before 2007, SIG and its affiliates had a longstanding relationship with the

brokerage firm Merrill Lynch. Merrill Lynch acted as prime broker to SIG and its

affiliates. As prime broker, Merrill Lynch cleared securities and commodities

transactions in which SIG and its affiliates engaged, and it held as custodian for

SIG and its affiliates the resulting security and commodity positions from such

trading. Merrill Lynch provided margin loans to SIG and its affiliates, and it held

a security interest in the assets that SIG and its affiliates maintained in accounts at

Merrill Lynch.

      The Notes

      On October 2, 2007, SIG issued three notes payable to certain Merrill Lynch

affiliates (SIG notes): (1) the Seventh Amended and Restated Promissory Note in

the amount of $1.4 billion between SIG as borrower and Merrill Lynch

International (MLI) as lender; (2) the Amended and Restated Promissory Note in

the amount of $75 million between SIG and Merrill Lynch Professional Clearing

Corp. (ML Pro, and together with MLI, Merrill Lynch); and (3) the Second

Amended and Restated Promissory Note in the amount of $10 million between

SIG and ML Pro. The SIG notes evidenced $1.485 billion in aggregate borrowing
                                        -9-

separate and apart from the margin loans that Merrill Lynch provided in the

ordinary course of its role as SIG’s prime broker.

      The Guaranties

      On October 2, 2007, SIG also executed jointly with its affiliates the

Amended and Restated Guarantee and Security Agreement (ARGSA). Pursuant to

the ARGSA, 39 entities guaranteed the SIG notes. SIHL and STS were two of the

guarantors of the SIG notes under the ARGSA. The remaining 37 guarantors were

either domestic entities or entities disregarded for Federal income tax purposes.

On December 8, 2007, SEHL executed a Joinder Agreement, in which SEHL

acknowledged that it was a party to and guarantor under the ARGSA. Certain SIG

affiliates under the ARGSA also pledged their assets as collateral for the SIG

notes. SIHL/SEHL and STS were neither pledgors nor pledged entities under the

ARGSA.

      Under the ARGSA each guarantor assumed joint and several liability for the

full payment of the SIG notes. The ARGSA included a “pro rata provision” under

which if any guarantor made any payment or suffered any loss pursuant to its

guaranty, then it became entitled to contribution payments from the remaining

guarantors. The provision stated that each nonpaying guarantor would be required

to contribute to the paying guarantor an amount equal to its “pro rata share” of any
                                       - 10 -

such payment. The ARGSA defined a given guarantor’s “pro rata share” of any

payment as the ratio of funds that the guarantor had received from affiliates since

the date of the ARGSA to the aggregate amount of all funds that all guarantors had

received from affiliates during the same period.

      The SIG notes remained outstanding through December 31, 2008. As of

that date, $1.285 billion in principal remained outstanding on the SIG notes. SIG

fully repaid the SIG notes as of December 22, 2011. No guarantor was ever called

upon to pay any amount due under the SIG notes pursuant to its obligations under

the ARGSA.

CFCs’ Earnings & Profits and Distributions

      SIHL/SEHL

      As of January 1, 2007, SIHL had accumulated earnings and profits of

$360,694,422. Between January and March of 2007, SIHL distributed

$359,600,000 to SIH Inc., before SIH Inc.’s reorganization under section

368(a)(1)(F). For tax year 2007 SIHL/SEHL generated together current earnings

and profits of $293,565,145.

      As of January 1, 2008, SEHL had accumulated earnings and profits of

$294,659,567. For tax year 2008 SEHL had a deficit in current earnings and

profits of $148,430,260. SEHL did not make any distributions in 2008.
                                         - 11 -

      STS

      As of January 1, 2007, STS had accumulated earnings and profits of

$84,164,022. As of that date, $3,625,469 was previously taxed earnings and

profits, as described in section 959(c)(2). For tax year 2007 STS generated current

earnings and profits of $1,426,209.

      As of January 1, 2008, STS had accumulated earnings and profits of

$85,590,231. For 2008 STS generated $1,697,247 of current earnings and profits.

STS did not make any distributions in either 2007 or 2008.

Income Inclusions Determined by Respondent

      Respondent determined in the FPAAs that SIHP had income inclusions

pursuant to section 951(a)(1) for the tax years in issue as a result of SIHL/SEHL’s

and STS’ guaranties of the SIG notes. The FPAAs stated that the inclusions were

from the “investment of earnings in U.S. property” by the CFCs.

                                      Discussion

I.    The Amount Included Under Sections 951(a)(1)(B) and 956

      In the ordinary case, foreign source income earned by a CFC is not subject

to U.S. taxation until it is repatriated in the form of a dividend or other distribution

to the CFC’s U.S. shareholders. Secs. 881 and 882; Dave Fischbein Mfg. Co. v.

Commissioner, 

, 353 (1972); see also S. Rept. No. 87-1881, at 78
                                         - 12 -

(1962), 1962-3 C.B. 703, 784. However, under section 951(a), a U.S. shareholder

must include in gross income for the current taxable year its pro rata share of

certain items attributable to the CFC, regardless of whether any distribution was

actually made. This includes “the amount determined under section 956”. See

sec. 951(a)(1)(A) and (B).

      The amount determined under section 956 with respect to a U.S. shareholder

for the taxable year is the lesser of: (1) the shareholder’s pro rata share of the

average amount of “United States property” held by the CFC during the taxable

year (less the amount of any previously taxed earnings and profits described in

section 959(c)(1)(A) with respect to that shareholder) or (2) the shareholder’s pro

rata share of the CFC’s “applicable earnings” as described in section 956(b)(1).

Sec. 956(a). Generally the amount taken into account with respect to any property

that is United States property under section 956(a) is its adjusted basis, reduced by

any liability to which the property is subject. 

      Section 956(c) defines United States property that will cause an inclusion

for a U.S. shareholder if held directly or indirectly by the CFC during the taxable

year. United States property includes: (A) tangible property located in the United

States; (B) the stock of a domestic corporation; (C) the obligation of a United

States person; and (D) certain intangible property acquired or developed by the
                                        - 13 -

CFC for use in the United States. Sec. 956(c)(1). Section 956(c)(2) provides a list

of exceptions for items that would otherwise qualify as United States property

under section 956(c)(1). Property specifically excepted from the definition of

United States property includes, e.g., obligations of the United States and property

located in the United States which is purchased in the United States for export to,

or use in, foreign countries. See sec. 956(c)(2)(A) and (B).

      Section 956(d) provides that a CFC “shall, under regulations prescribed by

the Secretary, be considered as holding an obligation of a United States person if

* * * [the CFC] is a pledgor or guarantor of such obligation.” Regulations

prescribe in general (1) when a CFC’s pledge or guaranty will be considered the

same as holding the underlying obligation and (2) the amount of any obligation

considered to be held, for purposes of determining the amount of United States

property held by the CFC as a result of its pledge or guaranty. See, e.g., secs.

1.956-1(e)(2), 1.956-2(c)(1), Income Tax Regs.

      As in effect for the tax years in issue, section 1.956-2(c)(1), Income Tax

Regs., provides that “any obligation * * * of a United States person * * * with

respect to which a controlled foreign corporation is a pledgor or guarantor shall be

considered for purposes of section 956(a) * * * to be United States property held

by such controlled foreign corporation.” (Emphasis added.) Under regulations
                                        - 14 -

that address “indirect” pledges and guaranties, a CFC whose assets serve (even

though indirectly) as security for the performance of an obligation of a United

States person will be considered a pledgor or guarantor of that obligation. Sec.

1.956-2(c)(2), Income Tax Regs. A CFC is not treated as holding United States

property under the general rule of section 1.956-2(c)(1), Income Tax Regs., if it

makes a pledge or guaranty of an obligation of a United States person and that

person “is a mere conduit in a financing arrangement.” Sec. 1.956-2(c)(4), Income

Tax Regs.

      Section 1.956-1(e), Income Tax Regs., provides rules for determining the

amount attributable to United States property taken into account under section

956, and section 1.956-1(e)(2), Income Tax Regs., provides the rule for pledges

and guaranties. As in effect for the tax years in issue, section 1.956-1(e)(2),

Income Tax Regs., provides that “the amount taken into account with respect to

any pledge or guarantee * * * shall be the unpaid principal amount on the

applicable determination date of the obligation with respect to which the

controlled foreign corporation is a pledgor or guarantor.” (Emphasis added.)

      Respondent contends that the applicable regulations and the undisputed

facts of this case support the determined income inclusions without the need for

additional fact finding. It is undisputed that the CFCs guaranteed obligations (the
                                        - 15 -

SIG Notes) of a United States person (SIG) and that SIHP was during the tax years

in issue a U.S. shareholder that owned or was considered as owning 100% of both

CFCs’ stock. Respondent contends that the general rule of section 1.956-2(c)(1),

Income Tax Regs., applies to the CFCs’ guaranties and the CFCs are accordingly

considered to have held the underlying obligations under section 956(d).

Respondent contends that the amount of the United States property considered

held by each CFC equaled the unpaid principal amounts of the SIG notes as of the

close of each quarter for which the CFCs remained guarantors. See sec. 1.956-

1(e)(2), Income Tax Regs. The SIG notes remained outstanding and the CFCs

remained guarantors under the ARGSA from October 7, 2007, at least through

December 31, 2008.

      Respondent contends that the amounts determined under section 956 that

should be included in SIHP’s gross income under section 951(a)(1)(B) are limited

in this case to the CFCs’ respective applicable earnings for the tax years in issue.

The average unpaid principal amounts of the SIG notes during the tax years in

issue exceeded the CFCs’ applicable earnings for those years as calculated under

section 956(b)(1). The parties have stipulated the CFCs’ applicable earnings for

the tax years in issue.
                                        - 16 -

      Petitioner contends, and respondent does not dispute, that section 956(d) is

not self-executing and that the applicability of section 951(a)(1)(B) and the

amount of the income inclusions at issue can be determined only by reference to

regulations promulgated by the Department of the Treasury (Treasury),

specifically sections 1.956-2(c)(1) and 1.956-1(e)(2), Income Tax Regs.

Petitioner’s principal argument, on which its motion for summary judgment rests,

is that these regulations are invalid. Petitioner contends that in the absence of

valid regulations the income inclusions determined by respondent cannot be

sustained.

II.   Validity of Regulations

      Petitioner contends that the subject regulations are arbitrary and capricious

under principles of administrative law. It contends that in the process of

promulgating the regulations Treasury failed to engage in reasoned

decisionmaking or to provide a reasoned explanation for the agency’s actions. See

Motor Vehicle Mfrs. Ass’n of the U.S. v. State Farm Mut. Auto Ins. Co., 

(1983). It further contends that the regulations are “arbitrary and capricious in

substance” and the rules embodied therein “represent an unreasonable policy

choice in light of the delegating statute and its legislative history.” See Chevron

U.S.A. Inc. v. Natural Res. Def. Council, Inc., 

(1984). Respondent
                                         - 17 -

contends that the regulations are entitled to deference under Chevron and are

valid.

         Summary judgment is an appropriate vehicle for determining the validity of

regulations. See, e.g., Altera Corp. & Subs. v. Commissioner, 

(2015).

To address petitioner’s arguments, we must review in detail the history of the

subject regulations.

         A.    Relevant Legislative History and Administrative Record

               1.    Revenue Act of 1962

         Treasury promulgated the regulations at issue following the passage of the

Revenue Act of 1962 (1962 Act), Pub. L. No. 87-834, sec. 12, 76 Stat. at 1006,

which enacted sections 951 and 956 as part of subpart F of part III, subchapter N,

chapter 1 of the 1954 Code (subpart F) as amended. Pursuant to section

951(a)(1)(B) U.S. shareholders were required to include in gross income their pro

rata shares of a CFC’s “increase in earnings invested in United States property”,

with that amount determined under the provisions of section 956. United States

property was defined in section 956(b)(1) and included the same four categories of

property (including obligations of United States persons) provided for currently

under section 956(c)(1). Section 956(b)(2)(A)-(F) excepted certain items or

transactions from the definition of United States property. Section 956(c),
                                       - 18 -

concerning the treatment of CFC pledges and guaranties of obligations of United

States persons, was identical to the provision currently enacted as section 956(d).

      The Code sections making up subpart F (sections 951 through 964) were

enacted in response to perceived abuses by U.S. taxpayers through the use of

CFCs. See Dougherty v. Commissioner, 

, 928 (1973) (“In subpart F,

Congress has singled out a particular class of taxpayers, U.S. shareholders, whose

degree of control over their foreign corporation allows them to treat the

corporation’s undistributed earnings as they see fit.”). Generally Congress

intended that sections 951(a)(1)(B) and 956 would operate “to prevent the

repatriation of income to the United States in a manner which does not subject it to

U.S. taxation.” H.R. Rept. No. 87-1447, at 58 (1962), 1962-3 C.B. 405, 462. The

report of the Senate Finance Committee accompanying the 1962 Act noted that

“[g]enerally” untaxed CFC earnings invested in United States property are taxed to

U.S. shareholders on the grounds that the use of such funds for domestic

investment is a benefit, which “is substantially the equivalent of a dividend being

paid to them.” S. Rept. No. 87-1881, supra at 88, 1962-3 C.B. at 794. Congress

provided specific exceptions under section 956(b)(2) because in its belief these

items, although technically investments in domestic property, constituted “normal

commercial transactions without the intention to permit the [CFC’s] funds to
                                       - 19 -

remain in the United States indefinitely”. S. Rept. No. 87-1881, supra at 88,

1962-3 C.B. at 794.

            2.     Proposed and Final Regulations

      On April 11, 1963, Treasury issued a Notice of Proposed Rulemaking,

which set forth and solicited public comment on a package of regulations

proposed under sections 955, 956, and 957(c). 28 Fed. Reg. 3515 (Apr. 11, 1963).

Written comments received in connection with the proposed rulemaking included

some relating to the proposed regulations under section 956. None of these

comments raised concerns specifically as to the rules for pledges and guaranties in

sections 1.956-2(c)(1) and 1.956-1(e)(2), Proposed Income Tax Regs., 28 Fed.

Reg. 3549, 3550 (Apr. 11, 1963). The American Bar Association Section of

Taxation submitted one comment that referenced “the general rule as to the

treatment of pledges and guaranties”, and which suggested that the proposed

exception for guaranties made pursuant to “conduit arrangements” should be

broadened. A public hearing was held on June 20, 1963.

      On February 20, 1964, Treasury adopted as final the proposed regulations

under section 956, subject to certain changes. T.D. 6704, 1964-1 C.B. (Part 1)

284. The preamble to the Treasury Decision stated the final regulations were

promulgated “to conform * * * [the Income Tax Regulations] to section 956 of the
                                       - 20 -

Internal Revenue Code of 1954, as added by section 12(a) of the Revenue Act of

1962” and stated they were adopted “[a]fter consideration of all such relevant

matter as was presented by interested persons regarding the rules proposed”. 

Decision stated that the regulations were issued under the authority

contained in section 7805. 

(Part 1) at 296. Sections 1.956-

2(c)(1) and 1.956-1(e)(2), Income Tax Regs., were adopted substantially

unchanged from the proposed regulations. The exception for CFC guaranties

made pursuant to conduit financing arrangements was extensively revised and

broadened. Compare sec. 1.956-2(c)(2), Proposed Income Tax Regs., 28 Fed.

Reg. 3550 (Apr. 11, 1963), with T.D. 6704, 1964-1 C.B. (Part 1) at 293-294.

            3.     Statutory Amendments

      The Omnibus Budget Reconciliation Act of 1993 (OBRA), Pub. L. No. 103-

66, 107 Stat. 312, modified the “structure and operating rules” of section 956.

H.R. Rept. No. 103-111, at 692 (1993), 1993-3 C.B. 167, 268. Sections

951(a)(1)(B) and 956(a) were amended to read in their current forms. See OBRA

secs. 13232(a), (c), 107 Stat. at 501-502. OBRA did not amend substantively the

Code sections defining United States property or requiring generally that pledgors

or guarantors of obligations of United States persons be treated as holding such

property. OBRA redesignated section 956(b) (defining United States property)
                                        - 21 -

and (c) (relating to pledges and guaranties) as section 956(c) and (d), respectively,

but otherwise it reenacted those two provisions fully. For the tax years in issue the

rules under sections 1.956-2(c)(1) and 1.956-1(e)(2), Income Tax Regs., were the

same as the final rules adopted in 1964.

      B.     Analysis Under Principles of Administrative Law

             1.     Legislative Rules and APA Section 553(b)

      A distinction is drawn in administrative law between interpretive and

substantive (or legislative) agency rules. An interpretive rule merely clarifies or

explains preexisting substantive law or regulations. Elizabeth Blackwell Health

Ctr. for Women v. Knoll, 

, 181 (3d Cir. 1995). A legislative rule, by

contrast, “creates rights, assigns duties, or imposes obligations, the basic tenor of

which is not already outlined in the law itself”. Dia Navigation Co. v. Pomeroy,

, 1264 (3d Cir. 1994) (quoting La Casa Del Convaleciente v.

Sullivan, 

, 1178 (1st Cir. 1992)). Legislative rules, unlike

interpretive rules, have “the force and effect of law”. Chrysler Corp. v. Brown,

, 303 (1979); see also Chao v. Rothermel, 

, 227 (3d Cir.

2003).

      The regulations at issue are legislative rules. The adjustments determined

for SIHP’s income can only be sustained on the basis that the regulations properly
                                        - 22 -

apply to the CFCs’ guaranties, and we would be unable to determine whether and

in what amount the guaranties should cause an income inclusion for SIHP for the

tax years in issue absent the rules expressed in the regulations. Thus they

“impose[ ] obligations” not specifically outlined in the governing statute. In

promulgating the regulations Treasury invoked section 7805, under which it is

delegated authority to “prescribe all needful rules and regulations for the

enforcement of” the Code. Such regulations carry the force of law, and the Code

imposes penalties for failing to follow them. See Altera Corp. v. Commissioner,

.

      Legislative rules, because they “create new law, rights, or duties”, are

subject to the notice and comment requirements of the Administrative Procedure

Act (APA), 5 U.S.C. sec. 553(b) (2012). SBC Inc. v. FCC, 

, 497 (3d

Cir. 2005). Pursuant to APA sec. 553(b) and (c) an agency promulgating

regulations by informal rulemaking must (1) publish a notice of proposed

rulemaking in the Federal Register, (2) provide “interested persons an opportunity

to participate * * * through submission of written data, views, or arguments”, and

(3) “[a]fter consideration of the relevant matter presented, * * * incorporate in the

rules adopted a concise general statement of their basis and purpose.” These

procedures are intended to assist judicial review and “to provide fair treatment for
                                        - 23 -

persons affected by a rule.” Home Box Office, Inc. v. FCC, 

, 35 (D.C.

Cir. 1977).

      The administrative record reflects that Treasury’s rulemaking for the

legislative rules at issue complied with the requirements of APA sec. 553(b).

Petitioner does not dispute that the agency properly promulgated the regulations

by notice and comment. Nevertheless, we reach a determination as to this issue,

and it is relevant insofar as petitioner contends that the agency’s procedures in

promulgating the regulations were inadequate. Petitioner contends that Treasury

failed to satisfy “the reasoned decisionmaking requirement and the reasoned

explanation requirement”.

              2.   Procedural Requirements Beyond Notice and Comment

      Congress may provide in the governing statute that rules thereunder are to

be promulgated pursuant to more formal procedures than those required under

APA sec. 553(b). See APA secs. 553(c), 556, 557; see also United States v.

Allegheny-Ludlum Steel Corp., 

, 756-757 (1972). However, absent a

specific congressional directive the Supreme Court has held “that generally

speaking * * * [APA sec. 553(b)] established the maximum procedural

requirements which Congress was willing to have the courts impose upon agencies

in conducting rulemaking procedures.” Vt. Yankee Nuclear Power Corp. v.
                                       - 24 -

Natural Res. Def. Council, Inc., 

, 524 (1978); see also FCC v. Fox

Television Stations, Inc., 

, 513 (2009) (the APA “sets forth the full

extent of judicial authority to review executive agency action for procedural

correctness”). There may be circumstances that “justify a court in overturning

agency action because of a failure to employ procedures beyond those required by

* * * [APA sec. 553(b)]”; however, “such circumstances * * * are extremely rare.”

Vt. 

.

      APA sec. 706(2)(A) provides that a reviewing court shall in all cases hold

unlawful and set aside agency action that is “arbitrary, capricious, an abuse of

discretion, or otherwise not in accordance with law”. Pursuant to this standard an

agency must “articulate a satisfactory explanation for its action.” State 

. We must determine in the light of that explanation whether the

agency’s decision “was based on a consideration of the relevant factors and

whether there has been a clear error of judgment.” Bowman Transp., Inc. v.

Arkansas-Best Freight Sys., Inc., 

, 285 (1974) (quoting Citizens to

Pres. Overton Park, Inc. v. Volpe, 

, 416 (1971), abrogated on other

grounds by Califano v. Sanders, 

(1977)). The scope of our review “is

a narrow one” and “the court is not empowered to substitute its judgment for that

of the agency.” 

court cannot provide a reasoned basis for the
                                       - 25 -

agency’s decision if the agency itself did not provide one, a court must “uphold a

decision of less than ideal clarity if the agency’s path may reasonably be

discerned.” 

      Petitioner relies on State Farm in arguing that an agency is bound in every

case to meet “the reasoned decisionmaking and reasoned explanation

requirements” and that Treasury’s procedures failed to satisfy these requirements

in respect of the final rules adopted for pledges and guaranties. In State Farm the

Supreme Court held that an agency’s decision to rescind a prior regulation was

arbitrary and capricious under APA sec. 706(2)(A). In so holding the Supreme

Court concluded that the agency’s action was arbitrary and capricious because it

“failed to present an adequate basis and explanation” for its decision. State 

. The Supreme Court wrote:

      Normally, an agency rule would be arbitrary and capricious if the
      agency has relied on factors which Congress has not intended it to
      consider, entirely failed to consider an important aspect of the
      problem, offered an explanation for its decision that runs counter to
      the evidence before the agency, or is so implausible that it could not
      be ascribed to a difference in view or the product of agency expertise.
      * * * [Id. at 43.]

      Treasury’s actions in promulgating the regulations at issue must be set aside

if its procedures failed to satisfy the general standard under APA sec. 706(2)(A).

However, the facts surrounding the agency action in State Farm are inapposite,
                                         - 26 -

and the concerns that led the Court in that case to review more stringently the

agency’s process are not presented here.

      The agency action in State 

, represented a clear and

abrupt reversal in agency policy, and the earlier policy was supported by a

substantial body of facts developed by the agency itself. A number of facts

continued strongly to support the initial rule over the rescission, and it was

significant in the Court’s view that Congress intended all agency findings under

the governing statute to be “supported by ‘substantial evidence on the record’”.

47-48. The Court stated that “an agency changing its course must

supply a reasoned analysis”. 

(quoting Greater Boston Television Corp. v.

FCC, 

, 852 (D.C. Cir. 1970)). Moreover, the Court found that the

agency’s decision to rescind the rule failed to consider an obvious modification

that would have left the rule in place and continued to promote the statute’s

purpose. See 

Congress had expressly stated its intention that “safety

shall be the overriding consideration in the issuance of standards” under the

governing statute, and the Court suggested the agency may have given improper

weight to other factors in its analysis. 

      Under the circumstances in State Farm, the Supreme Court concluded that

the agency must provide a more extensive reasoned analysis and explanation in
                                         - 27 -

order to demonstrate that its actions were not arbitrary, capricious, or otherwise

not in accordance with the law. In remanding the matter to the agency the Court

stated that in the light of specific “limitations of the record” the agency’s

explanation was “not sufficient to enable us to conclude that the rescission was the

product of reasoned decisionmaking”. 

The Court rejected the notion

that in reviewing the agency’s action under APA sec. 706(2)(A) it was

“impos[ing] additional procedural requirements upon the agency.” State 

(citing Vt. Yankee, 

).

      The regulations at issue did not reverse previously settled agency policy,

and they were not promulgated contrary to facts or analysis that supported a

different outcome. Treasury’s rulemaking in this case differs fundamentally from

the agency action in State Farm because Treasury’s decision did not (and could

not) purport to rely on findings of fact. Treasury’s actions promulgating the rules

for pledges and guaranties reflect at most the implementation of a policy

judgment. The administrative record reflects that no substantive alternatives to the

final rules were presented for Treasury’s consideration during the rulemaking

process. The agency did not act arbitrarily or capriciously by failing to address

contrary viewpoints or findings of fact that were never developed or presented.
                                         - 28 -

      Petitioner contends that the regulations are not the product of reasoned

decisionmaking because Treasury failed to consider during the rulemaking

“important aspect[s] of the problem” associated with CFC pledges and guaranties.

See 

Petitioner provides a list of factors that it contends are relevant as to

“whether a given CFC guarantee can be considered a repatriation of earnings”.

Petitioner contends that the agency was obligated under the governing statute to

weigh and balance these factors (and possibly others) to promulgate rules

consistent with “the underlying purposes of section 956”.

      We do not agree that an on-the-record consideration of any particular

factors is required for rulemaking under section 956(d). The plain text of the

statute does not require the agency to engage in a process of balancing or to

provide an analysis of its decisionmaking based on the factors that petitioner

identifies. Congress stated clearly in the statute that any CFC guarantor of any

obligation of a United States person “shall * * * be considered as holding” the

underlying obligation. With respect to other issues concerning guaranties that are

not addressed expressly in the statute (for example, the amount of United States

property that the CFC should be treated as holding by reason of its guaranty),

Congress used broad delegative terms in section 956(d). Generally we would not

impose additional procedural requirements on any administrative proceeding
                                        - 29 -

without a clear indication that Congress intended additional procedures to be

observed.

      Apart from the text of the statute, nothing in the statute’s legislative history

directs Treasury to promulgate rules in consideration of whether a particular

guaranty causes an effective repatriation or in consideration of “economic

realities” as petitioner sees them. The purpose underlying section 956 generally is

“to prevent the repatriation of income”, H.R. Rept. No. 87-1447, supra at 58,

1962-3 C.B. at 462, that is “substantially the equivalent of a dividend” to the U.S.

shareholder, S. Rept. No. 87-1881, supra at 88, 1962-3 C.B. at 794. However, we

find no support for the proposition that Congress intended rulemaking under

section 956(d) to focus minutely on economic factors, which may or may not

indicate in what amount a particular guaranty constitutes a repatriation of

earnings. We do not conclude that Congress intended the amount deemed

effectively repatriated to be an “important aspect of the problem” associated with

guaranties that Treasury was bound to consider or give special weight to in

promulgating rules under the statute. See State 

.

      The preamble to the final rules stated that they were intended “to conform”

the Income Tax Regulations to section 956, which they clearly and

straightforwardly do. Put simply, the statute at issue and the rules adopted did not
                                       - 30 -

require Treasury to engage in the level of detailed empirical analysis that the Court

in State Farm found was integral to the rulemaking. Petitioner’s focus on the

“reasoned decisionmaking and reasoned explanation requirements” as it

understands those requirements to be taken from State Farm is misplaced.

      Treasury’s rulemaking complied with the requirements of notice and

comment under APA sec. 553(b). APA sec. 706(2)(A) imposes in addition a

“general ‘procedural’ requirement of sorts by mandating that an agency take

whatever steps it needs to provide an explanation that will enable the court to

evaluate the agency’s rationale at the time of decision.” Pension Benefit Guar.

Corp. v. LTV Corp., 

, 654 (1990). We conclude that Treasury’s

procedures in this case satisfied this general requirement and were not arbitrary or

capricious. The agency’s path “may reasonably be discerned”. Bowman 

.

      Treasury’s proposed and final rules concerning CFC pledges and guaranties

sought to implement the clear wording of the statute and to equate the treatment of

these transactions with the treatment of items of United States property under the

statute. The generally applicable rule in section 1.956-2(c)(1), Income Tax Regs.,

that “any obligation” of a United States person with respect to which a CFC is a

guarantor shall be treated as United States property held by the CFC, restates in
                                        - 31 -

essence the text of the statute. The agency made no clear error in judgment by

adopting the rule that it did, rather than undertaking to consider a more nuanced

rule of the sort petitioner advocates to govern a deemed effective repatriation. As

we have said, the statute makes no mention of an effective repatriation standard,

and we can find no grounds for imposing such a standard.

      The rule for the amount of United States property considered held by reason

of a pledge or guaranty likewise adheres to the text of the statute. Under section

1.956-1(e)(2), Income Tax Regs., the amount treated as held by the CFC for its

guaranty will in most cases equal the amount the CFC would have been treated as

holding had it held the underlying obligation (i.e., the principal amount of the

obligation). The general rule under section 956(a) is that the amount of any

United States property taken into account is its adjusted basis, and ordinarily a

lender takes a basis in a loan equal to the unpaid principal amount.

      Treasury’s decisionmaking was uncomplicated, but that does not mean the

administrative process was arbitrary or otherwise deficient under the standard

articulated in APA sec. 706(2)(A). No comments, significant or otherwise, were

raised by interested parties during the rulemaking. As a reviewing court, we

cannot demand that an agency engage in and document an exhaustive review of

hypothetical “aspect[s] of the problem” that no one has raised and which Congress
                                        - 32 -

has not asked the agency to consider. So long as an agency’s rationale can

reasonably be discerned and that rationale coincides with the agency’s authority

and obligations under the relevant statute, a reviewing court may not “broadly

require an agency to consider all policy alternatives in reaching decision.” State

.

      Petitioner cites certain agency documents, a 2002 field service advice

memorandum (FSA) and a 2015 notice of proposed rulemaking (2015 NPRM), to

argue that respondent and Treasury “have themselves recognized that the

regulations at issue are inadequate”. These documents acknowledge that the

regulations prescribe no treatment for situations in which multiple CFCs guarantee

the same obligation. The FSA noted that where multiple CFCs of the same U.S.

shareholder have guaranteed the same obligations, computing the income

inclusion under the current rules may produce “strange results”. Field Service

Advice 200216022 (Jan. 8, 2002). Similarly, the preamble to the 2015 NPRM

explains that “[t]o the extent that the CFCs have sufficient earnings and profits,

there could be multiple section 951 inclusions with respect to the same obligation

that exceed, in the aggregate, the unpaid principal amount of the obligation.” 80

Fed. Reg. 53062 (Sept. 2, 2015). The preamble also stated that Treasury and

respondent were considering prescribing new regulations “to allocate the amount
                                       - 33 -

of the obligation among the relevant CFCs so as to eliminate the potential for

multiple inclusions and, instead, limit the aggregate inclusions to the unpaid

principal amount of the obligation.” 

that these statements

constitute “a functional admission” that whether and how regulations under

section 956(d) should apply to situations involving multiple guarantors “are

questions that were never considered by the existing regulatory scheme.” In 2016

Treasury issued final regulations without proposing or adopting any additional

provisions to limit the income inclusion in cases of multiple guarantors. T.D.

9792, 2016-48 I.R.B. 751; see Crestek, Inc. v. Commissioner, 149 T.C. __, __ n.8

(slip op. at 29-30) (July 27, 2017) (discussing 2015 NPRM and 2016 final

regulations).

      The documents that petitioner cites are nonprecedential, and we would not

rely on them for a point of law even if we found their reasoning applicable and

persuasive. See sec. 6110(k)(3) (a written determination may not be used or cited

as precedent); Gen. Dynamics Corp. v. Commissioner, 

, 120 (1997)

(proposed regulations accorded no more weight than a litigating position). In any

event, the specific situation addressed in both documents is distinguishable from

petitioner’s case. The income inclusions that respondent determined for SIHP do

not exceed the unpaid principal amount of the guaranteed obligations. We also
                                        - 34 -

cannot agree that an agency’s recognition that regulations make no provision for

or may produce strange results under particular circumstances is an admission of

their “inadequacy” as a matter of administrative law. Treasury is authorized to

reconsider and revise regulations under the Code (provided that adequate

procedures are employed), and the agency’s decision to revisit the rules for

pledges and guaranties should not be taken as evidence that the current rules are in

some way procedurally defective.

      On the basis of the administrative record we conclude that Treasury’s

decisionmaking was based on a consideration of relevant factors under the statute

and there was no clear error in judgment. The agency’s procedures in

promulgating the regulations at issue were sufficient. We would not invalidate

them on that basis.

            3.        The Agency’s Construction of the Statute

      The regulations reflect Treasury’s determination that section 956(d)

supports and Congress intended a broad rule which treats any CFC guarantor of

any (nonexcepted) obligation of a United States person as holding United States

property equal to the principal value of the obligation guaranteed. Ordinarily a

court reviews an agency’s substantive construction of a statute the agency is

charged with administering under the two-step test provided in Chevron. The
                                         - 35 -

deferential standard under Chevron is appropriate “when it appears that Congress

delegated authority to the agency generally to make rules carrying the force of law,

and that the agency interpretation claiming deference was promulgated in the

exercise of that authority.” Mayo Found. for Med. Educ. & Research v. United

States, 

, 57 (2011) (quoting United States v. Mead Corp., 

, 226-227 (2001)). The applicability of Chevron deference “does not turn on

whether Congress’s delegation of authority was general or specific.” 

question is whether Congress would have intended, and expected, courts

to treat [the regulation] as within, or outside, its delegation to the agency of

‘gap-filling’ authority.” 

(quoting Long Island Care at Home, Ltd. v.

Coke, 

, 173-174 (2007)).

      Congress intended to delegate to Treasury the authority to promulgate rules

under section 956(d) having the force and effect of law, and its rulemaking was an

exercise “within the statutory grant of authority”. 

Island 

). Treasury promulgated the regulations pursuant to an express

directive in the governing statute and pursuant to the general rulemaking authority

established in section 7805. As the agency was bound to do for legislative rules, it

followed procedures prescribed under APA sec. 553(b). “It is fair to assume * * *

Congress contemplates administrative action with the effect of law when it
                                        - 36 -

provides for a relatively formal administrative procedure tending to foster * * *

fairness and deliberation”, 

, and the use of notice and

comment by the agency is “a ‘significant’ sign that a rule merits Chevron

deference”, Mayo 

(quoting 

-

231). The regulations are properly analyzed under Chevron.

      Under step one of 

, we ask “whether Congress has

directly spoken to the precise question at issue.” “If the intent of Congress is

clear, that is the end of the matter”. 

party contends that Congress

has spoken directly as to the relevant issues, i.e., when and in what amount a CFC

will be considered to hold United States property under section 956 as a result of

its guaranty of an obligation of a United States person. The statute provides only

that a pledge or guaranty shall be treated as holding the underlying obligation

“under regulations prescribed by the Secretary”. Sec. 956(d). None of the

ordinary tools of statutory construction leads us to conclude that Congress has

clearly expressed its intent as to what form those regulations should take or the

substance that should be reflected in them. See City of Arlington v. FCC, 

, 296 (2013).

      Where, as here, the statute does not address the question at issue, step two

of 

, asks only whether the agency’s position “is based on
                                         - 37 -

a permissible construction of the statute”. In respect of a legislative regulation we

will defer to the agency’s construction of the statute “unless it is ‘arbitrary and

capricious in substance, or manifestly contrary to the statute’.” Mayo 

. If the agency’s choice “represents a reasonable accommodation of

conflicting policies that were committed to the agency’s care by the statute, we

should not disturb it unless it appears from the statute or its legislative history that

the accommodation is not one that Congress would have sanctioned.” 

(quoting United States v. Shimer, 

, 383 (1961)).

      Petitioner contends that the regulations under section 956(d) cannot pass the

deferential test under Chevron step two because the rules embodied therein are an

unreasonable policy choice in the light of the statute and its legislative history.

Petitioner contends that Congress “was only concerned in section 956 with

investments in U.S. property that repatriate earnings” and that a CFC’s guaranty of

an obligation of a United States person is not “necessarily a transaction that

repatriates earnings”. Petitioner argues that “whether and the degree to which any

given guarantee * * * can be considered to have repatriated earnings are

necessarily fact-specific questions, which will depend on the ‘facts and

circumstances’ of the transaction”.
                                        - 38 -

      Treasury’s regulations do not inquire whether a particular guaranty has

“effectively repatriated” earnings of the CFC to its U.S. shareholders. The

generally applicable rules treat any CFC guarantor as holding United States

property equal to the full unpaid principal amount of the obligation. Petitioner

argues that the regulations are “too blunt” and “too mechanical” and fail to

reasonably implement the “nuanced approach” for pledges and guaranties that it

contends Congress intended.

      The general rules for the treatment of pledges and guaranties are not at odds

with the wording of the statute. Nothing in the plain text of section 956(d)

indicates that any particular pledge or guaranty shall not be treated as holding the

underlying obligation or directs that the amount considered to be held should be

only the amount that can be deemed to be repatriated. That Congress provided

guaranties should be treated “under regulations prescribed by the Secretary” does

not establish, as petitioner contends, that Treasury was bound to devise a more

nuanced or facts-and-circumstances approach for such transactions. Special

operating rules for the treatment of pledges and guaranties as United States

property would be required in any event, because the general rule in the statute for

the amount of United States property considered held by the CFC could not apply
                                        - 39 -

with respect to a pledge or guaranty. See sec. 956(a) (flush language) (e.g., a

guarantor ordinarily takes no basis in the guaranty).

      We also cannot conclude as petitioner contends that the rules promulgated

by the agency are contrary to Congress’ intent. Congress generally intended that

section 956 should cause income inclusions where CFC funds are directed to

invest in United States property for the benefit of its U.S. shareholders, such that

those funds are effectively repatriated for use by the shareholders. A CFC’s

guaranty of a U.S. shareholder’s (or related party’s) debt clearly benefits the U.S.

shareholder, and nothing in the statute or its legislative history suggests that

Congress expected Treasury to craft ad hoc exceptions based on some sort of

facts-and-circumstances test. From the legislative history of section 956 it appears

Congress itself thought extensively about which transactions should be treated the

same as repatriations of CFCs’ earnings.

      Congress has provided for numerous exceptions to the definition of United

States property, and it has added and removed exceptions over time to reflect its

evolving conception of what should or should not require an income inclusion as

an investment of earnings in United States property. See Tax Reform Act of 1976,

Pub. L. No. 94-455, sec. 1021(a), 90 Stat. at 1618-1619; Deficit Reduction Act of

1984, Pub. L. No. 98-369, sec. 801(d)(8), 98 Stat. at 996-997; Taxpayer Relief Act
                                        - 40 -

of 1997, Pub. L. No. 105-34, sec. 1173(a), 111 Stat. at 988-989; American Jobs

Creation Act of 2004, Pub. L. No. 108-357, sec. 407(a), 118 Stat. at 1498-1499.

Some of these exceptions effect the application of section 956(d); for example, by

providing that certain obligations are not to be included within the definition of

United States property. See sec. 956(c)(2)(C), (F), (J), (L); see also 80 Fed. Reg.

53061 (Sept. 2, 2015) (“[T]he general exceptions to the definition of United States

property would apply to the obligation treated as held by the CFC [by reason of its

guaranty].”). However, Congress has never undertaken to amend or provide

exceptions to section 956(d) directly. Congress’ decision to leave the terms of

section 956(d) unchanged may reflect its understanding that a CFC ordinarily

would not be directed by its shareholders to provide a guaranty unless the guaranty

was necessary and of value to the borrower and the shareholders.

      Petitioner argues extensively that the regulations cause income inclusions

for U.S. shareholders contrary to “commercial and economic reality”. Petitioner in

particular criticizes the regulations for failing to address circumstances in which a

CFC is one of several guarantors of a single obligation. Petitioner contends that if

multiple guaranties support the underlying obligation then no one could

reasonably conclude that “the entire unpaid principal was obtained [solely] as a

result of the CFC[’s] guarantee”. Petitioner also points out that in situations where
                                        - 41 -

(as here) multiple CFCs have guaranteed the same obligation the regulations will

treat each CFC as holding United States property equal to the full unpaid principal

amount of the obligation. The regulations therefore could allow under certain

circumstances (which are not present here) multiple, arguably duplicative income

inclusions that exceed in the aggregate the principal value of the obligation.

      Even accepting petitioner’s arguments concerning economic reality and the

“strange results” that the regulations may yield under particular circumstances, it

must be said that an agency is not required to take account of and make special

accommodation for every scenario in which its rules may apply. “Regulation, like

legislation, often requires drawing lines.” Mayo 

.

Undoubtedly, as petitioner has shown, alternatives exist to (and improvements

might be imagined for) the generally applicable rules for CFC pledges and

guaranties. Nevertheless, “we do not sit as a committee of revision to perfect the

administration of the tax laws”, United States v. Correll, 

, 306-307

(1967), and we will uphold regulations that have a reasonable basis in the statutory

history even where the taxpayer’s challenge to a regulation’s policy has “logical

force”, Fulman v. United States, 

, 536 (1978). “The role of the

judiciary in cases of this sort begins and ends with assuring that the
                                        - 42 -

Commissioner’s regulations fall within his authority to implement the

congressional mandate in some reasonable manner.” 

.

      The regulations implemented a reasonable interpretation of section 956(d),

i.e., that in the ordinary case a pledgor or guarantor should be treated as holding

the underlying obligation. Exceptions are provided for direct and indirect

transactions in the statute and in the regulations, and taken as a whole Treasury’s

rules are a reasoned approach to determining when and in what amount a guaranty

should be treated as an investment in United States property under section 956. It

is not manifestly contrary to the statute or unreasonable that the agency would

choose a broad baseline rule for pledges and guaranties as opposed to a less

administrable case-by-case approach. Certainly nothing in section 956(d)

indicates that any particular type of pledge or guaranty should not be treated as

holding the obligation or directs that the amount considered to be held should be

only the amount that can be deemed to be repatriated. On the basis of our own

exhaustive review we conclude that at no point in the extensive legislative history

of section 956 has Congress expressed a desire that inclusions for guaranties be

determined case by case.

      We uphold the validity of sections 1.956-2(c)(1) and 1.956-1(e)(2), Income

Tax Regs. Treasury promulgated these regulations by procedures that satisfy the
                                         - 43 -

requirements of the APA, and the substance of the regulations is based on a

permissible construction of section 956(d) entitled to deference under Chevron.

       While “neither antiquity nor contemporaneity with [a] statute is a condition

of [a regulation’s] validity”, it is relevant to petitioner’s case that the contested

regulations had existed for nearly 50 years at the time the CFCs executed the

guaranty transaction at issue. See Smiley v. Citibank (S.D.), N. A., 

,

740 (1996). Congress reenacted section 956(d) unamended in OBRA, at which

time Congress had revisited in depth the operating rules under section 956.

Congress expressed no concerns as to the current rules governing pledges and

guaranties, which strongly suggests that it did not view Treasury’s construction of

section 956(d) as unreasonable or contrary to the law’s purpose. See Cottage Sav.

Ass’n v. Commissioner, 

, 561 (1991).

III.   Petitioner’s Other Contentions

       Petitioner contends that in the event we conclude, as we have, that the

regulations are valid, we should not grant respondent’s motion for summary

judgment. It contends that respondent’s proposed application of the regulations,

determining income inclusions of the full amount of the CFCs’ applicable

earnings, is inconsistent with the purpose of section 956. It contends that an

examination of facts and circumstances beyond those identified by respondent as
                                        - 44 -

dispositive is necessary to determine whether “in substance” the CFCs’ guaranties

repatriated earnings in the amounts of the asserted inclusions.

      Petitioner avers and submits affidavits of its officers in support of the

following facts: (1) SIG and its domestic affiliates maintained assets in accounts

at Merrill Lynch of approximately twice the value of the SIG notes; (2) Merrill

Lynch never indicated during negotiations that SIG required “additional credit

support” from entities that held assets outside of Merrill Lynch; (3) the CFCs had

combined net assets of $240 million at the time the SIG notes were executed,

which was not enough to satisfy repayment of the SIG notes; and (4) Merrill

Lynch requested that the CFCs sign the ARGSA only because it wanted to “ring

fence” the SIG affiliates from which it could seek repayment in the event of a

default and to prevent “leakage” of assets held in Merrill Lynch accounts.

Petitioner contends that these facts show the CFCs’ guaranties had no substantial

effect on SIG’s ability “as a credit matter” to receive the funds represented by the

SIG notes. Petitioner contends that the CFCs’ earnings had nothing to do with

Merrill Lynch’s decision to lend to SIG.

      Neither section 956(d) nor the regulations inquire into the relative

importance that a creditor attaches to a guaranty. Crestek, Inc. v. Commissioner,

149 T.C. at __ (slip op. at 25-26). A guarantor’s precise financial condition or the
                                         - 45 -

likelihood that it would be able to make good on its guaranty are irrelevant in

determining under the regulations whether the guaranty gives rise to an investment

in United States property. Id. at __ (slip op. at 28). The regulations applicable in

this case provide categorically that any obligation of a United States person with

respect to which the CFC is a guarantor shall be considered United States property

held by the CFC in the amount equal to the unpaid principal. They make no

provision for reducing the section 956 inclusion by reference to the guarantor’s

financial strength or its relative creditworthiness. Id. at __ & n.8 (slip op. at 29-

30).

       In effect, petitioner asks us to insert into the regulations an added

requirement that the facts and circumstances should demonstrate “an actual

repatriation has occurred” in respect of the amounts guaranteed. Petitioner

contends that a facts-and-circumstances analysis is warranted because the

regulations as promulgated do not provide any special treatment for guaranties of

obligations for which there are multiple guarantors. Petitioner contends that we

are required under these circumstances “to apportion the amount of U.S. property

* * * held by each CFC guarantor among themselves and the remaining

guarantors, the pledgors, and the obligor.”
                                        - 46 -

      The rules do not allow apportioning a guaranteed obligation among

guarantors or the obligor, and the statute does not require that the rules implement

an approach focusing strictly on the amount of an obligation that a particular

guarantor effectively repatriates. The CFCs both gave their guaranties of

obligations of a United States person, and the regulations accordingly treat each as

holding United States property equal to the unpaid principal of those obligations.

We cannot ignore or alter regulations that are an authoritative and reasonable

interpretation of the governing statute. The amounts determined under section 956

are capped by the statute at the CFCs’ applicable earnings for the tax years in

issue. Those amounts are not in dispute and do not exceed the value of the

underlying obligations.

      Lastly, petitioner contends that the structure of the ARGSA “and related

agreements” should affect our application of the rules to the guaranties in this

case. Petitioner argues that “the most a given CFC could be deemed to have

‘invested’ in U.S. property is that amount * * * for which it agreed to be ultimately

responsible”, and pursuant to their rights of contribution under the pro rata

provision petitioner avers that the CFCs “would have been entitled to

approximately 100% reimbursement for any amounts paid” as a result of the
                                        - 47 -

guaranties. Petitioner fails to explain how the related agreements should affect our

analysis.

      We cannot view the pro rata provision as offsetting the CFCs’ guaranties.

The CFCs undertook unlimited guaranties for full payment of the SIG notes, and

first and foremost the CFCs would have been legally obligated to make any such

payments out of their own earnings and profits. Their rights to contribution from

other guarantors were subsidiary to their obligations under the guaranties. It is

questionable whether, in the event that they had been required to make payments

pursuant to their guaranties, the CFCs would have been seriously inclined to

enforce the pro rata provision against their commonly owned affiliates.

      Petitioner vigorously contends that many pledges and guaranties, and

particularly the guaranties at issue, are not necessary for the receipt of the loan by

the borrower, and for that reason a CFC guarantor should not be automatically

treated as repatriating earnings for use by its U.S. shareholders. Petitioner’s

argument, however, highlights the solution to the predicament in which it now

finds itself: If a guaranty by a CFC is unnecessary, then it need not be made; and

the application and effects of the regulations under section 956(d) will be avoided.

      This Court has issued previously two opinions concerning income

inclusions determined under the provisions of section 956(d) and the subject
                                        - 48 -

regulations, Ludwig v. Commissioner, 

(1977), and Crestek, Inc. v.

Commissioner, 149 T.C. __ (July 27, 2017). In neither case did the taxpayer

challenge the validity of the regulations. The dearth of caselaw on this topic is

unsurprising, because, as petitioner acknowledges, the rules promulgated for

pledges and guaranties lend themselves to easy tax planning. Petitioner may not

undo the effects of its transaction because in this particular instance the generally

applicable rules generate an outcome that is unfavorable to it.

      The regulations apply and support the income inclusions that respondent

determined for SIHP under sections 951(a)(1)(B) and 956. We sustain

respondent’s determinations in the FPAAs that SIHP has income inclusions for the

tax years in issue equal to the CFCs’ applicable earnings.

IV.   Applicable Tax Rate

      The remaining issue for our consideration involves the tax rate applicable to

SIHP’s income inclusions. Petitioner contends that any amount included in

SIHP’s gross income attributable to SIHL/SEHL’s guaranty should be “qualified

dividend income” under section 1(h)(11). Respondent determined in the FPAAs

that the income inclusions were not qualified dividend income and are properly

taxed as ordinary income.
                                          - 49 -

      As enacted in the Jobs and Growth Tax Relief Reconciliation Act of 2003,

Pub. L. No. 108-27, sec. 302, 117 Stat. at 760, section 1(h)(11) provides

preferential tax rates for qualified dividend income. Qualified dividend income

includes dividends received during the taxable year from “qualified foreign

corporations”. Sec. 1(h)(11)(B)(i)(II). A qualified foreign corporation is

generally either a corporation incorporated in a possession of the United States or

a corporation eligible for the benefits of a comprehensive income tax treaty with

the United States. Sec. 1(h)(11)(C)(i).

      STS was organized under the laws of the Cayman Islands, which has no

comprehensive income tax treaty with the United States. Respondent asserts that

STS was not a qualified foreign corporation during the tax years in issue, and

petitioner does not contend otherwise. Accordingly, we will consider only

whether any income inclusion attributable to SIHL/SEHL’s guaranty may be taxed

at the preferential rates under section 1(h)(11).

      This Court has held previously that income inclusions required under

sections 951(a)(1)(B) and 956 do not constitute qualified dividend income under

section 1(h)(11). Rodriguez v. Commissioner, 

(2011), aff’d, 

(5th Cir. 2013). In Rodriguez v. Commissioner, 

, the

CFC owned real and tangible personal property located in the United States, and
                                        - 50 -

we held that an income inclusion under section 951 was not a “dividend” to the

CFC’s U.S. shareholders, as that term is defined in section 316(a). We reasoned

that the section 951 inclusion involves no change in ownership of corporate

property and the inclusion arises not from any distribution of property by the CFC

but rather from its investment of earnings in specified property. 

that our result in Rodriguez should not control here.

Petitioner contends that the holding in Rodriguez applied specifically to CFC

investments in real or tangible United States property, which did not result in any

distribution because the CFC continued to hold the property and the shareholders

received no property. Petitioner argues that in this case the justification for the

income inclusions was a “deemed investment” in property, which “necessarily

involve[d] a constructive or deemed distribution” in the form of the cash that SIG

received from Merrill Lynch. Petitioner contends that we should distinguish

Rodriguez as being decided narrowly on its facts and conclude in this case that

deemed or constructive dividends were paid out of the CFCs’ earnings and profits,

to which section 1(h)(11) may apply.

      We find no merit in the distinctions that petitioner attempts to draw from

Rodriguez. There is no reason to differentiate between an investment in tangible

United States property under section 956(c)(1)(A) and what petitioner terms a
                                       - 51 -

“deemed investment” by reason of a guaranty under section 956(d). In either case

the U.S. shareholder obtains the use and benefit of domestic property through the

use of CFC earnings. When a CFC guarantees a loan, the shareholder or a related

party benefits from the use of loan proceeds; but the CFC has not distributed its

earnings any more than if it had used the earnings to purchase tangible property.

In this case, as in Rodriguez, no distribution of property occurred from the CFCs

to their U.S. shareholder. Simply put, no transfer of ownership from corporation

to shareholder occurred with respect to any property.

      If we decline to interpret Rodriguez as being decided narrowly on its facts,

then petitioner contends in the alternative that Rodriguez was decided incorrectly.

Petitioner contends that in Rodriguez we disregarded our own precedent that the

taxation of undistributed CFC earnings is justified because investments in United

States property may be treated the same as deemed or constructive dividends.

Petitioner cites Dougherty v. Commissioner, 

, a case in which we

upheld the constitutionality of section 951(a)(1)(B) and in which we wrote that

section 951(a)(1)(B) “has the stated objective of treating a controlled foreign

corporation’s increase in earnings invested in U.S. property as if it were a dividend

paid to the corporation’s shareholders.” 

                                        - 52 -

      The fact that section 951 in operation treats a CFC’s investment in United

States property “as if it were a dividend” in no way establishes that the income

inclusions required for shareholders thereunder actually are dividends for general

purposes of the Code. See Rodriguez v. Commissioner, 

; see

also Klein v. Commissioner, 149 T.C. __, __ (slip. op. at 17-23) (October 3,

2017); Muncy v. Commissioner, T.C. Memo. 2017-83 (concluding that “the

distinction between ‘as if’ and ‘as’ is significant”). In Rodriguez v.

Commissioner, 

, we found ample reason to conclude that, absent

express provision, Congress did not intend such inclusions to be considered

dividends. We cited Code sections that provide under limited circumstances and

for limited purposes that section 951 inclusions should be treated the same as

dividends. We concluded that such careful legislative design would be rendered

superfluous and unnecessary if (contrary to well-established tenets of statutory

construction) we determined that section 951(a)(1)(B) gives rise to a dividend in

the ordinary course. Id.; see also Rodriguez v. 

(“[I]f all section 951 inclusions constituted qualified dividends, then statutory

provisions specifically designating certain inclusions as dividends would amount

to surplusage.”). We also concluded that the structure of section 956, particularly

as it has evolved over time, strongly indicates that inclusions for investments in
                                       - 53 -

United States property do not constitute dividends under the Code. Rodriguez v.

Commissioner, 

; see also Rodriguez v. 

(“[T]he original version of section 956 specifically stated that Congress did

not intend amounts calculated thereunder to constitute dividends. * * * It does not

appear that the omission of this language from the new version of the statute was

intended to change the treatment of amounts calculated under section 956.”).

      We conclude that the rationale in Rodriguez applies with equal force to the

income inclusions at issue, which were determined under sections 951(a)(1)(B)

and 956(d). The income inclusions for the CFCs’ guaranties were not dividends

received by SIHP, and accordingly they are not qualified dividend income under

section 1(h)(11). Absent a showing that some other characterization should apply

under the Code, any income included in SIHP’s gross income for the tax years in

issue should be treated as ordinary income.
                                       - 54 -

      We have considered all arguments made, and, to the extent not mentioned,

we conclude that they are moot, irrelevant, or without merit. To reflect the

foregoing,


                                                An order and decision will be

                                          entered granting respondent’s motion for

                                          summary judgment and denying

                                          petitioner’s motion for summary

                                          judgment.