The U.S. Tax Court today granted motions for summary judgment for the IRS, finding the taxpayers’ controlled foreign corporation (CFC) in Hong Kong was not a domestic corporation or a qualified foreign corporation and thus that the CFC’s distribution to the taxpayers was not “qualified dividend income” but was taxable to the taxpayers at ordinary income rates. The Tax Court also found that the taxpayers had received a constructive dividend from a Cypriot CFC on the cancellation of an account receivable balance owned to that CFC.
The case is: Smith v. Commissioner, 151 T.C. No. 5 (September 18, 2018). Read the 53-page Tax Court opinion [PDF 189 KB]
The purpose of this report is to provide text of the Tax Court’s opinion.
The taxpayers, during 2008 and 2009 owned (through a pair of domestic grantor trusts and an S corporation) controlled foreign corporations (CFCs) incorporated in Hong Kong and later in Cyprus.
The IRS determined deficiencies for the 2008 and 2009 tax years of approximately $6.3 million and $18.7 million, respectively, based on findings that:
The Tax Court today, on cross-motions for summary judgment concluded that:
The Tax Court found that one issue—whether the Cypriot CFC was a “qualified foreign corporation” based on a residency certificate issued by the Cyprus Ministry of Finance—was not appropriate for summary judgment because there were “genuine disputes of material fact concerning the CFC’s residency” and thus whether the $57.1 million dividend paid in 2009 was “qualified dividend income.”
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