Foreign certificate of deposit

CFC's certificate of deposit from credit card sub not subject to US tax

* The Limited v Commr, CA-6, April 11, 2002

The Sixth Circuit, in reversing the Tax Court, has allowed a related first-- tier US credit card subsidiary to be considered "in the banking business" for purposes of exempting the sale of its certificates of deposit to a fourth-tier foreign subsidiary as a taxable investment in US property. In so holding, the appellate court repeatedly chastised the Tax Court for looking beyond the language of the statute - to legislative history - to support its findings when the taxpayer's position was squarely grounded in the plain meaning of the statute itself.

Definition of banking business

Subpart F generally taxes controlled foreign corporations (CFCs) when they invest their earnings in US property. However, IRC (sec)956(b)(2)(A) excludes deposits with persons carrying on the banking business from the definition of US property.

The Tax Court found that the credit card subsidiary, because it was restricted in its banking functions by US law, was not the type of entity contemplated as a person carrying on the banking business. The appellate court disagreed.

It first found that credit card issuers satisfy the plain language of IRC (sec)956(b)(2)(A). In this case, the taxpayer's credit card subsidiary was a nationally chartered bank issuing credit cards. Its credit, lending and deposit activities were governed by federal banking laws and regs.

* Comment The Tax Court gave great emphasis to the word "the" in the phrase "in the banking business."

The Tax Court found the word "the" qualified the phrase to mean a particularized banking business. Reading meaning into a definite article, the appellate court observed, has been rejected by at least one circuit court and is not the wisest place to begin statutory construction. The appellate court frowned on such a hypertechnical analysis.

The Sixth Circuit also rejected the Tax Court's finding that the entity conducting the banking business must be unrelated to the entity making the deposit. Again, the appellate court chastised the Tax Court for going beyond the plain language of the statute. IRC (sec)956(b)(2)(A) does not contain a related party prohibition.

References: FED (para)(to be reported); FTS (sec)M.-8.122.