Black & Decker v. Commissioner

T.C. Memo 1991-557 (1991)

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Black & Decker v. Commissioner

United States Tax Court
T.C. Memo 1991-557 (1991)

Facts

Black & Decker Corporation (Black & Decker) (plaintiff) experienced a $7,883.132 worthless stock year for the taxable year ending on September 27, 1981. Black & Decker’s stock in a wholly owned foreign subsidiary became worthless, which prompted the loss. Black & Decker was an American corporation that controlled a substantial part of the American market for power and professional tools. After Japanese companies began making inroads in the American tool market, Black & Decker decided to enter the Japanese market. In 1972, Black & Decker established Nippon Black & Decker (NBD) as a wholly owned foreign subsidiary to make, sell, import, export, and repair tools in Japan. At that time, for Japan to allow foreign entities into their market was rare, but an exception was made for NBD. However, by 1981, having made little progress, NBD had operated at a loss for all but two years of the subsidiary’s existence. NBD had not paid any dividends, but Black & Decker did intend to make a profit with NBD. In 1981, Black & Decker abandoned NBD’s operations and liquidated its assets, which resulted in the $7.8 million worthless stock loss. The primary question was whether the loss was a deduction from US- or foreign-source income in calculating foreign-source taxable income for purposes of the § 904 foreign tax credit limitation. The income tax regulations required a taxpayer to allocate deductions to a class of gross income and then, if needed, apportion those deductions between the statutory grouping of gross income (foreign-source income) and the residual grouping of income (US-source income). Black & Decker argued that its worthless stock loss should be entirely allocable to sources within the US or, in the alternative, partly allocable to such US sources. Black & Decker argued that its primary purpose with NBD was not to generate income but to protect and promote income from its American sales of products. Black & Decker also argued that because it made no dividends, the loss should not be classified with dividend income and that Black & Decker’s stock loss was comparable to a stock capital gain. The Commissioner of Internal Revenue (the commissioner) (defendant) argued that Black & Decker intended to make an income and that Black & Decker’s worthless stock was allocable to foreign-source income and, more specifically, to dividend income.

Rule of Law

Issue

Holding and Reasoning (Colvin, J.)

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