In a case of first impression, Tax Court holds that Rev. Proc. 99-32 accounts receivable constitute debt for Section 965 purposes

September 2013

Overview

Addressing the issue for the first time, the Tax Court has held in BMC Software Inc. v. Commissioner, 141 T.C. No. 5 (Sept. 18, 2013), that an account receivable established under Rev. Proc. 99-32 may constitute increased related-party indebtedness for purposes of the Section 965(b)(3) related-party debt rule. Under that rule, the amount qualifying for the one-time Section 965 dividends received deduction (DRD) is reduced by increased related-party indebtedness.

While narrowly addressing the interpretation of Section 965, the court’s decision regarding the appropriate federal income tax treatment of accounts receivable established under Rev. Proc. 99-32 represents an important case of first impression affecting taxpayers electing such treatment for cash repatriations resulting from transfer pricing adjustments.  The decision also could have important implications regarding other Code sections for taxpayers that elect Rev. Proc. 99-32 treatment.  The decision therefore should be of substantial interest to all US multinational entities.

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