BMC Software Inc. v. Commissioner

BMC SOFTWARE INC., PETITIONER v. COMMISSIONER OF
INTERNAL REVENUE, RESPONDENT
Docket No. 15675–11. Filed September 18, 2013.

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

224

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 (224) BMC SOFTWARE INC. v. COMMISSIONER 225

triated funds from its CFC in transactions unrelated to the
royalty payments or adjustments. P claimed a corresponding
one-time dividends received deduction under I.R.C. sec. 965.
The deduction was subject to certain limitations, including a
reduction for an increased related party indebtedness between
P and its CFC. P claimed the deduction before agreeing to the
primary adjustments or establishing the accounts receivable.
R determined that the accounts receivable that were deemed
established during the testing period constituted an increase
in related party indebtedness and disallowed a corresponding
amount of the deduction. R issued a deficiency notice. P filed
a petition for redetermination. P contends that the reduction
for related party indebtedness applies only to transactions
intended to finance dividends. P also asserts that the parties
agreed in a closing agreement that P avoids any Federal
income tax consequences from establishing the accounts
receivable. P also contends that the accounts receivable do not
constitute related party indebtedness. Held: The related party
debt rule under I.R.C. sec. 965(b)(3) does not apply only to
increased indebtedness resulting from intentionally abusive
transactions. Held, further, the election under Rev. Proc. 99–
32, supra, allows P to avoid the Federal income tax con-
sequences of a deemed capital contribution. The repayment is
treated as a return of principal and interest for all Federal
income tax purposes. Held, further, the accounts receivable
are deemed established during the testing period and qualify
as increased related party indebtedness.

George Matthew Gerachis, Christine L. Vaughn, and Lina
G. Dimachkieh, for petitioner.
Daniel L. Timmons, for respondent.
KROUPA, Judge: Respondent determined a $13 million 1
deficiency in petitioner’s Federal income tax resulting from
his interpretation of section 965, 2 a one-time dividends
received deduction for a U.S. corporation. The amount quali-
fying for the dividends received deduction is reduced by
increased related party indebtedness under section 965(b)(3)
(sometimes, related party debt rule). We must decide for the
first time whether an account receivable established under
Rev. Proc. 99–32, 1999–2 C.B. 296, may constitute increased
related party indebtedness for purposes of the related party
debt rule. We hold that it may.
1 All
amounts are rounded to the nearest million dollars.
2 All
section references are to the Internal Revenue Code for the years
at issue, unless otherwise indicated.

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 226 141 UNITED STATES TAX COURT REPORTS (224)

FINDINGS OF FACT

The parties have stipulated some facts. We incorporate the
stipulation of facts and the accompanying exhibits by this
reference. Petitioner’s principal place of business was
Houston, Texas when it filed the petition.
I. Petitioner and Related Entities
Petitioner is a U.S. corporation that develops and licenses
computer software. Petitioner is the common parent of a
group of subsidiaries that joined in the filing of a consoli-
dated Federal income tax return for the taxable year ended
March 31, 2006. Petitioner is also the parent of non-consoli-
dated foreign affiliates. Petitioner’s wholly-owned BMC Soft-
ware European Holding (BSEH) 3 was a controlled foreign
corporation (CFC) under section 957.
II. Transfer Pricing Dispute
Petitioner and BSEH collaboratively developed software.
Two cost-sharing agreements (CSAs) governed that relation-
ship. Under the CSAs, they co-owned the software and each
held exclusive distribution rights for certain territories. Peti-
tioner terminated the CSAs by agreement in 2002 and took
sole ownership of the software. Petitioner agreed to pay
future royalties to BSEH and licensed to BSEH the software
for distribution. Petitioner paid BSEH royalties required
under the CSAs for 2002 through 2006.
Respondent examined the Federal income tax returns peti-
tioner filed for 2002 through 2006. Respondent concluded
that the royalty payments between petitioner and BSEH
were not arm’s length. Petitioner and respondent entered
into a closing agreement in 2007 increasing petitioner’s
income (transfer pricing closing agreement) by $35 million
for 2003, $23 million for 2004, $22 million for 2005 and $22
million for 2006 (collectively, primary adjustments). These
primary adjustments represented net reductions in royalties
3 BSEH indirectly owned 100% of issued and outstanding shares of BMC

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

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petitioner paid BSEH. Respondent executed the transfer
closing agreement on August 30, 2007.
The primary adjustments required petitioner to make sec-
ondary adjustments to conform its accounts. Those secondary
adjustments would have been treated as deemed capital con-
tributions from petitioner to BSEH except that petitioner
elected to establish accounts receivable under Rev. Proc. 99–
32, supra, for repayment. To that end, petitioner and
respondent entered into another closing agreement (accounts
receivable closing agreement) that established for Federal
income tax purposes interest-bearing accounts receivable
from BSEH to petitioner. Respondent executed the accounts
receivable closing agreement also on August 30, 2007. The
amounts of the accounts receivable corresponded to the
amounts of the primary adjustments, including an account
receivable for $22 million deemed established on March 31,
2005 and another for $22 million deemed established on
March 31, 2006.
The accounts receivable bore interest at the applicable
Federal rate. The interest was deductible from BSEH’s tax-
able income and includible in petitioner’s taxable income.
The parties agreed as follows:
BSEH will pay the account receivable, including interest thereon, by
intercompany payment. Such payment will be free of the Federal income
tax consequences of the secondary adjustments that would otherwise
result from the primary adjustment; provided, the payment of the bal-
ance of the account, after taking into consideration any prepayment
pursuant to section 4.02 of Rev. Proc. 99–32, is made within 90 days
after execution of this closing agreement on behalf of the Commissioner.

BSEH paid the principal and the interest owed within 90
days of the accounts receivable closing agreement’s becoming
effective.
III. Petitioner’s Repatriation and One-Time Dividends
Received Deduction
Petitioner repatriated from BSEH $721 million invested
outside the U.S. through a series of transactions between
June 29, 2005 and March 31, 2006. Petitioner filed a Form
1120, U.S. Corporation Income Tax Return, for 2006. Peti-
tioner claimed $709 million (repatriated dividends) as quali-
fying for the one-time dividends received deduction under

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 228 141 UNITED STATES TAX COURT REPORTS (224)

section 965 on Form 8895, One-Time Dividends Received
Deduction for Certain Cash Dividends from Controlled For-
eign Corporations. Petitioner reported its CFC did not have
increased indebtedness to petitioner or a related party
between the close of the taxable year, March 31, 2006, and
the close of October 3, 2004 (testing period). 4
Respondent determined that $43 million of the repatriated
dividends was ineligible for the dividends received deduction.
Respondent concluded that the accounts receivable that were
deemed established during the testing period constituted
increased related party indebtedness. The remaining repatri-
ated dividends qualified for deduction under section 965.
Respondent issued the deficiency notice for 2006, and peti-
tioner timely filed the petition.

OPINION

We must decide whether accounts receivable that were
deemed established by a closing agreement under Rev. Proc.
99–32, supra, constitute increased related party indebtedness
for purposes of section 965. Respondent concedes that peti-
tioner did not establish the accounts receivable to fund the
repatriated dividend. Thus, if the related party debt rule
applies only to abusive transactions, as petitioner contends,
then respondent incorrectly determined the deficiency. We
consequently will consider the related party debt rule and
whether an account receivable established under Rev. Proc.
99–32, supra, may constitute increased related party indebt-
edness.
We then consider whether the parties agreed in the
accounts receivable closing agreement that repayment of the
accounts receivable was free from further Federal income tax
consequences. Finally, we consider whether the accounts
receivable that were deemed established during the testing
period are taken into account when determining related
party indebtedness.
4 The testing period with respect to petitioner is the period between

March 31, 2006 and October 3, 2004 because petitioner made the election
for the tax year ending March 31, 2006. As discussed below, the testing
period is relevant because the amount of dividends eligible for deduction
under sec. 965 is reduced by increased indebtedness between the close of
the taxable year for which the election is in effect and October 3, 2004.

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I. Dividends Received Deduction
We turn to whether petitioner’s CFC had increased related
party indebtedness as that term is intended in section
965(b)(3). Petitioner asserts that the related party debt rule
applies only where the U.S. shareholder intentionally
finances the dividend through an abusive transaction. Peti-
tioner further argues that the accounts receivable cannot
constitute indebtedness as that term is intended in section
965(b)(3). Respondent, on the other hand, argues that the
accounts receivable constitute increased related party indebt-
edness because the related party debt rule is not limited to
intentionally abusive transactions. Consequently, respondent
and petitioner dispute whether accounts receivable are
within the scope of section 965(b)(3) for increased related
party indebtedness. To resolve this we must analyze section
965.
A. Statutory Interpretation Principles
Our principal task when interpreting a statute is to
ascertain and give effect to Congress’ intent. The statutory
text is the most persuasive evidence of congressional intent.
United States v. Am. Trucking Ass’ns, Inc., 310 U.S. 534,
542–543 (1940). The plain language of a statute is ordinarily
to be given effect unless to do so would produce an absurd
or futile result, or an unreasonable result that plainly con-
flicts with legislative intent. See United States v. Ron Pair
Enters. Inc., 489 U.S. 235, 242 (1989); Wadlow v. Commis-
sioner, 112 T.C. 247, 266 (1999). We consider relevant legal
authority and the statute’s purpose and context. Dolan v.
USPS, 546 U.S. 481, 486 (2006). We rely on legislative his-
tory to ascertain congressional intent only if a statute is
silent or ambiguous. Burlington N.R.R. Co. v. Okla. Tax
Comm’n, 481 U.S. 454, 461 (1987); Miss. Poultry Ass’n, Inc.
v. Madigan, 992 F.2d 1359, 1364 n.28 (5th Cir. 1993). Our
initial inquiry is therefore whether the language of section
965(b)(3) is so plain as to permit only one reasonable
interpretation to answer that question. See, e.g., Robinson v.
Shell Oil Co., 519 U.S. 337, 340 (1997).

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B. The Related Party Indebtedness Reduction of Section 965
We now turn to section 965 to interpret the dividends
received deduction and the related party debt rule. A cor-
poration that is a U.S. shareholder of a CFC may elect, for
one taxable year, an 85% deduction with respect to certain
cash dividends it receives from its CFC. 5 Sec. 965(a). The
eligible amount is reduced by any increase in related party
indebtedness during the testing period. 6 Sec. 965(b)(3).
The parties dispute whether Congress meant the related
party debt rule to apply only to increased indebtedness
resulting from intentionally abusive transactions. The related
party debt rule provides in pertinent part that
the amount of dividends which would * * * be taken into account under
subsection (a) shall be reduced by the excess (if any) of—
(A) the amount of indebtedness of the controlled foreign corporation
to any related person * * * as of the close of the taxable year for
which the election * * * is in effect, over
(B) the amount of indebtedness of the controlled foreign corporation
to any related person * * * as of the close of October 3, 2004.
[Sec. 965(b)(3).]

Petitioner contends this paragraph incorporates an intent
requirement. We disagree. Increased related party indebted-
ness is calculated by determining the difference between the
CFC’s ‘‘amount of indebtedness’’ from the testing period’s
beginning and end. The rule does not include an intent
requirement. Congress did not provide any exceptions to this
arithmetic formula.
Petitioner points to flush language Congress later added
conferring authority to issue regulations to prevent trans-
actions that avoid the statute’s purposes and exclude divi-
dends attributable to a transfer between the U.S. corporation
and its CFC. See Gulf Opportunity Zone Act of 2005, Pub. L.
5 The deduction is limited to cash dividends that the U.S. corporation re-

invested in the United States. Sec. 965(b)(2), (4). Further, the dividends in
excess of $500 million are eligible only if permanently invested outside the
United States. Sec. 965(b)(1).
6 Respondent does not dispute that the repatriated dividends satisfied

the other requirements of sec. 965. The repatriated dividends did not ex-
ceed the amount of earnings reported on petitioner’s applicable financial
statement to be permanently reinvested outside the United States. See sec.
965(b)(1)(B). Petitioner reinvested the repatriated dividends pursuant to a
domestic reinvestment plan. See sec. 965(b)(4).

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No. 109–135, sec. 403(q)(3), 119 Stat. at 2627. Petitioner
argues that this grant of regulatory authority means Con-
gress intended section 965(b)(3) to prevent only intentionally
abusive transactions. Petitioner also keys on a snippet from
the Joint Committee on Taxation technical explanation 7 to
suggest that the related party debt rule applies only in cases
in which the transfer is part of an arrangement undertaken
with a principal purpose of avoiding the purposes of the
related party debt rule. See 151 Cong. Rec. S14028, S14050–
S14051 (daily ed. Dec. 19, 2005). We disagree with peti-
tioner’s interpretation.
Congress did not amend the operative language of section
965(b)(3) when it added the flush language. Nor do we inter-
pret the grant of regulatory authority as circumscribing the
scope of the related party debt rule. Rather, the flush lan-
guage conferred on the Secretary the discretion to promul-
gate supplemental regulations. A complete reading supports
this conclusion.
The grant of regulatory authority ‘‘supplements existing
circular cash flow principles’’ to stop cash or property trans-
actions that ‘‘effectively’’ fund the dividend. Id. at S14050.
Circular cash flows, by their nature, create a net zero effect.
This result, however, does not mean that all circular cash
flow transactions are abusive. Thus, supplemental regula-
tions were to be aimed at preventing abusive circular trans-
actions that would not register indebtedness under the arith-
metic formula. Id. This reading is supported by the report’s
discussion of permissible circular transactions. Id. Congress
therefore authorized regulations to distinguish between abu-
sive and permissible circular transactions.
The flush language therefore does not muzzle the related
party debt rule by adding an intent requirement. Rather,
Congress authorized regulations to supplement the related
party debt rule to address abusive circular transactions. The
grant of regulatory authority is ultimately irrelevant here
because the adjustments and repayment differ from a cir-
7 Petitioner emphasizes the following statement: ‘‘It is anticipated that

dividends would be treated as attributable to a related-party transfer of
cash or other property under this authority only in cases in which the
transfer is part of an arrangement undertaken with a principal purpose of
avoiding the purposes of the related-party debt rule of Code section
965(b)(3).’’

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 232 141 UNITED STATES TAX COURT REPORTS (224)

cular transaction. Thus, the related party debt rule does not
have an intent requirement.
C. Indebtedness for Purposes of Section 965
Having determined that the related party debt rule does
not include an intent requirement, we now address whether
the accounts receivable are indebtedness within the meaning
of section 965(b)(3). Petitioner contends that the accounts
receivable are not indebtedness. 8 In contrast, respondent
contends that we should interpret the term ‘‘indebtedness’’
under general Federal income tax principles. To do so would
mean that the accounts receivable are indebtedness.
We now consider the meaning of the term ‘‘indebtedness’’
as it is used in section 965(b)(3). The Commissioner applied
the same meaning as that term has under general Federal
income tax principles. See Notice 2005–38, sec. 7.02(a), 2005–
1 C.B. 1100, 1111. Respondent contends that the term simply
means debt. We may consider dictionary definitions to under-
stand the meaning that Congress may have intended. See,
e.g., Dixon v. Commissioner, 132 T.C. 55, 76 (2009) (applying
dictionary definition of ‘‘incurred’’ for purposes of interpreting
section 6673(a)(2)). Indebtedness is defined as ‘‘[t]he condi-
tion or state of owing money’’ or ‘‘[s]omething owed; a debt.’’
Black’s Law Dictionary 783 (8th ed. 2004). Petitioner does
not offer, nor do we contemplate, another reasonable
interpretation in the related party context of section
965(b)(3). And respondent’s definition is consistent with the
term’s plain meaning. We hold that the term ‘‘indebtedness’’
as it is used in section 965(b)(3) means the condition of owing
money or being indebted.
We now consider whether an account receivable estab-
lished under Rev. Proc. 99–32, supra, falls within that defini-
tion. The term ‘‘account receivable’’ is not defined in Rev.
Proc. 99–32, supra, or the accounts receivable closing agree-
ment. The revenue procedure calls for the taxpayer to estab-
lish an ‘‘account receivable’’ bearing an arm’s-length interest
rate. Rev. Proc. 99–32, secs. 1, 4.01(2), 1999–2 C.B. at 297,
8 Respondent
determined that the 2005 and 2006 accounts receivable in-
creased the related party indebtedness for the testing period. The parties
agree that the relevant period is between October 3, 2004 and March 31,
2006, the close of the taxable year for which the election was in effect.

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299. The CFC must satisfy the account within 90 days of the
closing agreement’s becoming effective. Id. sec. 4.01(4).
Account receivable is defined as ‘‘[a]n account reflecting a
balance owed by the debtor.’’ Black’s Law Dictionary 18. Peti-
tioner observed those requirements and included only the
interest payments as income. The characteristics described
under Rev. Proc. 99–32, supra, and petitioner’s treatment of
the accounts receivable are consistent with the dictionary
definition. We hold that accounts receivable established
under Rev. Proc. 99–32, supra, may constitute indebtedness
for purposes of section 965.
D. Trade Payables Exception
We next consider petitioner’s argument that the accounts
receivable, even if indebtedness, should nonetheless be
exempt from section 965(b)(3) because they are trade
payables. See Notice 2005–38, sec. 7.02(b); Notice 2005–64,
sec. 10.08, 2005–2 C.B. 471, 489. The trade payable exception
excludes indebtedness that arises in the ordinary course of a
business from sales, leases, licenses or the rendition of serv-
ices provided to or for a CFC by a related person from the
related party debt rule. Id. The indebtedness must be actu-
ally paid within 183 days. Id. If the accounts receivable are
trade payables, then those amounts could not be increased
related party indebtedness. If not, then the accounts receiv-
able could be increased related party indebtedness.
Respondent argues that the accounts receivable are not
trade payables because they were not established in the ordi-
nary course of business or paid within 183 days after the
payables were created. We agree. The accounts receivable
were created after a section 482 adjustment rather than
resulting from ordinary business. Further, the relevant
accounts receivable were paid more than a year after each
was deemed established. The trade payables exception does
not apply. The accounts receivable therefore are increased
indebtedness.
E. Related Party Debt Rule Conclusion
In sum, the related party debt rule does not have an intent
requirement. The accounts receivable may be indebtedness.

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II. The Federal Income Tax Consequences of the Accounts
Receivable
We now consider the effect of the accounts receivable
closing agreement provision that the payment would be free
of the Federal income tax consequences of the secondary
adjustments that would otherwise result from the primary
adjustment. Petitioner contends that the accounts receivable
closing agreement precludes any further Federal income tax
consequences resulting from the repayment. The accounts
receivable therefore would be excluded when determining the
amount of the dividend received deduction. Respondent con-
tends that the accounts receivable closing agreement provi-
sion allows petitioner to substitute the tax consequences of
the debt secondary adjustment for those of the deemed cap-
ital contribution secondary adjustments. Put another way,
the accounts receivable would be established for all Federal
income tax purposes with petitioner avoiding the con-
sequences of the repayment for a deemed capital contribu-
tion. We agree with respondent.
The accounts receivable stemmed from the primary adjust-
ment agreed to in the transfer pricing closing agreement. A
primary adjustment under section 482 requires a secondary
adjustment to conform a taxpayer’s accounts. Sec. 1.482–
1(g)(3), Income Tax Regs. A secondary adjustment is typically
treated as a dividend or a capital contribution. Id. Thus, peti-
tioner was obligated to conform its accounts with secondary
adjustments.
The regulations authorize in certain circumstances a tax-
payer’s ‘‘repayment of the allocated amount without further
income tax consequences.’’ 9 Id. (emphasis added). And the
Commissioner promulgated Rev. Proc. 99–32, supra, for this
purpose. An eligible taxpayer may transfer funds attrib-
utable to a primary adjustment via an account receivable
9 Sec. 1.482–1(g)(3), Income Tax Regs., provides that
[a]ppropriate adjustments must be made to conform a taxpayer’s ac-
counts to reflect allocations made under section 482. Such adjustments
may include the treatment of an allocated amount as a dividend or a
capital contribution (as appropriate), or, in appropriate cases, pursuant
to such applicable revenue procedures as may be provided by the Com-
missioner * * *, repayment of the allocated amount without further in-
come tax consequences.

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‘‘without the Federal income tax consequences of the sec-
ondary adjustments that would otherwise result from the pri-
mary adjustment.’’ 10 Rev. Proc. 99–32, sec. 2, 1999–2 C.B. at
298. The accounts receivable closing agreement tracked that
language by providing that BSEH’s payment to petitioner
would ‘‘be free of the Federal income tax consequences of the
secondary adjustments that would otherwise result from the
primary adjustment.’’ It also provided that it was ‘‘deter-
mined and agreed’’ that the interest-bearing accounts receiv-
able would be established for Federal income tax purposes.
Thus, we must determine the effect of the accounts receiv-
able closing agreement on the repayment’s collateral con-
sequences.
We previously concluded that an account receivable estab-
lished under Rev. Proc. 65–17, 1965–1 C.B. 833 (the prede-
cessor to Rev. Proc. 99–32, supra), and after a section 482
adjustment, did not preclude all collateral Federal income
tax consequences. See Schering Corp. v. Commissioner, 69
T.C. 579 (1978). The taxpayer in Schering was a U.S. cor-
poration that established accounts receivable by closing
agreement to be ‘‘free of further Federal income tax con-
sequences.’’ Id. at 580–583. The taxpayer’s CFC declared a
dividend to satisfy the account receivable. Id. at 584. The rel-
evant foreign tax authority treated the CFC’s payment as a
dividend. Id. at 585. The taxpayer claimed a foreign tax
credit under section 901 for the foreign tax paid on the divi-
dend attributable to the principal and interest. Id. at 588.
The Commissioner disallowed the credit claimed for the tax
applied to the principal. Id. The Commissioner argued that
the foreign tax credit was a tax consequence the closing
agreement precluded because the closing agreement did not
10 This provision states in whole that
[a]bsent a United States taxpayer’s election of treatment under this rev-
enue procedure, an adjustment under section 482 (the ‘‘primary adjust-
ment’’) entails secondary adjustments to conform the taxpayer’s accounts
to reflect the primary adjustment. These secondary adjustments may re-
sult in adverse tax consequences to the taxpayer. * * * This revenue
procedure allows the United States taxpayer to repatriate the cash at-
tributable to a primary adjustment via an account without the Federal
income tax consequences of the secondary adjustments that would other-
wise result from the primary adjustment. [Rev. Proc. 99–32, sec. 2,
1999–2 C.B. 296, 298.]

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 236 141 UNITED STATES TAX COURT REPORTS (224)

specifically provide that the taxpayer could claim the credit
for the amount representing the adjustment. Id. at 594–595.
We disagreed with the Commissioner that the closing
agreement precluded all collateral consequences. Rather, we
concluded that the repayment was no longer considered a
deemed dividend for Federal income tax purposes. Id. at 598.
We reasoned that the applicable revenue procedure and cor-
responding closing agreement were intended to allow the tax-
free repatriation of money allocated to the taxpayer by sec-
tion 482. Id. at 595. And, indeed, the taxpayer treated the
repayment as a return of principal and excluded that amount
from its income. Id. at 598.
Our holding in Schering was predicated on two concepts.
First, the closing agreement characterized the payment for
Federal income tax purposes notwithstanding the foreign tax
authority’s dividend treatment. The Commissioner and the
taxpayer were bound to treat the payment as a return of
principal for all Federal income tax purposes and the repay-
ment was no longer a dividend. In short, we did not permit
inconsistent characterizations for Federal income tax pur-
poses.
Second, the closing agreement determined that the tax-
payer avoided the tax consequences of the secondary adjust-
ments absent the election. The collateral consequences would
be determined by applying the characterization for all Fed-
eral income tax purposes. The closing agreement did not pre-
clude all tax consequences.
These principles apply to our interpretation of the accounts
receivable closing agreement. We find it significant that
‘‘repayment,’’ not the accounts receivable, was free of con-
sequences that ‘‘would otherwise’’ result from the primary
adjustment. This indicates that the taxpayer avoids the con-
sequences that would have resulted absent the election. It is
undisputed that the deemed capital contribution from peti-
tioner to BSEH was a secondary adjustment that would
otherwise have resulted from the primary adjustment. The
parties further agree that an eliminated ‘‘Federal income tax
consequence’’ of that secondary adjustment included the tax-
able dividend petitioner would have received upon cash pay-
ment from BSEH equal to the deemed capital contribution.
Such a secondary adjustment would have been subject to tax
with the entire amount consequently included in petitioner’s

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income. It is this adverse tax consequence that the election
avoided.
Petitioner also argues that Rev. Proc. 99–32, supra, sets
forth procedures that are equitable and that the secondary
accounts receivable adjustments did not, nor were intended
to, fund the repatriated dividends. We agree that the proce-
dures set forth in Rev. Proc. 99–32, supra, are equitable
inasmuch as the taxpayer may avoid the tax consequences
from deemed capital contribution or dividend treatment. See
Schering Corp. v. Commissioner, 69 T.C. at 597. We disagree,
however, that the election allows for inconsistent character-
izations for Federal tax purposes. As previously discussed,
petitioner avoided the consequences of the potential sec-
ondary adjustments by agreeing to establish accounts receiv-
able for all Federal income tax purposes.
We read the accounts receivable closing agreement to
mean that petitioner’s election relieved it from the tax con-
sequences that would have resulted absent the election. Fur-
ther, we hold that the accounts receivable are deemed estab-
lished for all Federal tax purposes.
III. Increased Indebtedness in the Testing Period
We now address whether there was increased indebtedness
during the testing period because the accounts receivable
were deemed established after the testing period. Petitioner
reasons that the deductible amount should not be retro-
actively reduced because the accounts receivable were estab-
lished after petitioner repatriated the funds. Respondent
argues, in contrast, that the parties agreed that the accounts
receivable were deemed established during the testing period
and the amount of dividends eligible for the deduction should
accordingly be reduced. We agree with respondent.
The Commissioner may enter into a written closing agree-
ment with a taxpayer relating to the liability of the person
for any taxable period ending before or after the date of the
agreement. Sec. 7121; Hudock v. Commissioner, 65 T.C. 351,
362 (1975); sec. 301.7121–1(a), Proced. & Admin. Regs. A
closing agreement relating to a prior taxable period may
relate to one or more separate items affecting the tax
liability of the taxpayer. Sec. 301.7121–1(b)(2), Proced. &
Admin. Regs. Some closing agreements decide only specific

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 238 141 UNITED STATES TAX COURT REPORTS (224)

issues and bind the parties only as to those issues. See
Manko v. Commissioner, 126 T.C. 195, 201–202 (2006);
Estate of Magarian v. Commissioner, 97 T.C. 1, 5 (1991).
The accounts receivable closing agreement determined for
all Federal income tax purposes that petitioner would estab-
lish interest-bearing accounts receivable from BSEH to peti-
tioner. It further provided that two of the accounts receivable
were deemed to have been established during the testing
period. We therefore hold that the accounts receivable qualify
as indebtedness during the testing period because petitioner
and respondent agreed that they were established then.
IV. Conclusion
We hold that the accounts receivable constitute indebted-
ness for the purposes of section 965(b)(3). We further hold
that the accounts receivable closing agreement permits peti-
tioner to avoid the Federal income tax consequences that
would otherwise have resulted absent establishing the
accounts receivable and does not preclude reducing the divi-
dends received deduction under section 965(b)(3). We there-
fore sustain respondent’s determination.
In reaching these holdings, we have considered all of the
parties’ arguments, and, to the extent not addressed here, we
conclude that they are moot, irrelevant or without merit.
To reflect the foregoing,
Decision will be entered for respondent.

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