SCOTUS Reports

Tag: Outer Continental Shelf

  • FMC Corp. v. Commissioner, 100 T.C. 595 (1993): When DISC Export Receipts Must Be Aggregated and the Definition of ‘Outside the United States’

    FMC Corp. v. Commissioner, 100 T. C. 595 (1993)

    The decision clarifies that DISC export receipts must be aggregated when a taxpayer controls multiple DISCs, and that the Outer Continental Shelf is considered within the United States for DISC purposes.

    Summary

    FMC Corp. challenged the IRS’s determination on the tax treatment of its DISC operations. The case addressed whether industrial cranes used on oil platforms in the Gulf of Mexico qualified as used ‘outside the United States’ for DISC benefits, and whether FMC was required to aggregate export receipts from multiple DISCs for calculating deemed distributions. The Tax Court held that the cranes were not used outside the U. S. , as the Outer Continental Shelf is considered part of the U. S. for DISC purposes. Additionally, FMC was required to aggregate export receipts from all its DISCs to prevent manipulation of the deemed distribution calculations, even if it resulted in double-counting.

    Facts

    FMC Corp. manufactured industrial cranes sold through its DISC, FMC Export Corp. , to U. S. companies for use on oil platforms in the Gulf of Mexico’s Outer Continental Shelf. FMC also owned other DISCs and had sold several manufacturing divisions to unrelated parties. The IRS disallowed FMC’s deduction of commissions paid to FMC Export, arguing the cranes were not used outside the U. S. and required FMC to aggregate export receipts from all its DISCs for deemed distribution calculations.

    Procedural History

    FMC filed a petition in the U. S. Tax Court challenging the IRS’s determination of deficiencies in its corporate income taxes for several years. The court considered three issues related to DISC provisions after the parties settled other issues.

    Issue(s)

    1. Whether industrial cranes used on oil drilling platforms attached to the Outer Continental Shelf in the Gulf of Mexico were used ‘outside the United States’ for DISC purposes.
    2. Whether FMC is required to aggregate base period export receipts of a DISC it acquired in 1976 with those of other DISCs it owned for calculating deemed distributions.
    3. Whether FMC must include in its base period export receipts the receipts generated by manufacturing businesses it sold during the years in issue with those of other DISCs it continued to own.

    Holding

    1. No, because the cranes were used on the Outer Continental Shelf, which is considered part of the United States under the relevant tax code provisions.
    2. Yes, because the aggregation requirement applies whenever a taxpayer controls multiple DISCs during the current year, preventing manipulation of deemed distribution calculations.
    3. Yes, because after a separation of ownership between a DISC and its underlying trade or business, both the new owner of the business and the owner of the DISC must include the DISC’s base period export receipts in their calculations, despite potential double-counting.

    Court’s Reasoning

    The court interpreted the statutory language to determine that the use of cranes on oil platforms on the Outer Continental Shelf did not qualify as ‘outside the United States’ under Section 993(c)(1)(B), as Section 638 includes the Outer Continental Shelf within the U. S. for activities related to natural deposits. For the DISC aggregation issue, the court emphasized that Section 995(e)(8) requires aggregation of export receipts from all controlled DISCs to prevent mismatching of current and base period receipts, regardless of the underlying business’s status. The court also upheld the regulation requiring double-counting of base period export receipts post-separation of ownership, as supported by the legislative history of Section 995(e)(9), to prevent manipulation of deemed distribution calculations.

    Practical Implications

    This decision affects how companies structure their DISC operations and calculate deemed distributions. It clarifies that equipment used on the Outer Continental Shelf does not qualify for DISC benefits as ‘export property. ‘ Taxpayers must aggregate export receipts from all controlled DISCs to prevent tax planning that could manipulate deemed distribution calculations. The ruling also confirms that double-counting of export receipts is permissible to prevent tax avoidance through the separation of DISC ownership from the underlying business. Subsequent cases have applied these principles to similar DISC arrangements and tax planning strategies.

  • Texas Instruments v. Commissioner, 98 T.C. 628 (1992): Investment Tax Credit Eligibility for Licensed Seismic Data Tapes

    Texas Instruments Incorporated and Its Consolidated Subsidiaries v. Commissioner of Internal Revenue, 98 T. C. 628 (1992)

    The Investment Tax Credit (ITC) is not available for the original speculative data tapes used to produce copies for sale, even if the copies are used by customers for exploration on the Outer Continental Shelf.

    Summary

    Texas Instruments sought an Investment Tax Credit for costs related to creating seismic data tapes used in oil and gas exploration on the Outer Continental Shelf. The tapes were stored outside the U. S. more than 50% of the time. The Tax Court ruled that while the tapes were tangible personal property, they were not eligible for the ITC because Texas Instruments did not use them directly for exploration purposes; instead, they licensed the data to customers who used the copies. The decision hinged on the distinction between the original tapes and the copies used by customers, emphasizing that only the latter were used for the statutorily defined purposes.

    Facts

    Texas Instruments, through its subsidiaries Geophysical Service Incorporated and Geophysical Service Inc. , collected and processed seismic data on the Outer Continental Shelf. This data was recorded on magnetic tapes, which were then used to create copies sold to oil companies under nonexclusive licenses. The original tapes were stored in Canada more than 50% of the time during the years in question. Texas Instruments did not claim the ITC on its tax return but later sought it in court.

    Procedural History

    Texas Instruments filed a petition in the U. S. Tax Court to claim the ITC for the costs of creating the seismic data tapes. The Tax Court, after reviewing the case, issued a decision that the original tapes were not eligible for the ITC.

    Issue(s)

    1. Whether the speculative data tapes constituted tangible personal property under section 48 of the Internal Revenue Code.
    2. Whether the speculative data tapes were used for the purpose of exploring for resources on the Outer Continental Shelf, making them eligible for the ITC under section 48(a)(2)(B)(vi).

    Holding

    1. Yes, because the speculative data tapes were tangible media on which the seismic data was recorded, following the precedent set in Texas Instruments Inc. v. United States.
    2. No, because the original tapes were not used directly by Texas Instruments for exploration purposes but were used to produce copies sold to customers who used them for exploration.

    Court’s Reasoning

    The court applied the precedent from Texas Instruments Inc. v. United States, which held that seismic data tapes and films are tangible personal property because their value is dependent on their physical manifestation. However, the court distinguished the use of the original tapes from the copies. The original tapes were used by Texas Instruments to produce copies for sale, while the copies were used by customers for exploration. The court emphasized that for the ITC, the property must be used by the taxpayer for the statutorily defined purposes, not merely by the end-user. The court also considered congressional reports and regulatory interpretations, concluding that an ultimate use test was not supported by the statute or its legislative history.

    Practical Implications

    This decision clarifies that for ITC eligibility, the focus is on the use of the property by the taxpayer, not the end-user. Companies involved in similar data licensing should carefully consider the distinction between their use of original data storage media and the use of copies by customers. This ruling may affect how businesses structure their data collection and licensing agreements to optimize tax benefits. Subsequent cases have cited this decision in distinguishing between the use of original property and copies for tax credit purposes, reinforcing the need for direct use by the taxpayer claiming the credit.