Container Corporation v. Commissioner

134 T.C. 22 (2010)

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Container Corporation v. Commissioner

United States Tax Court
134 T.C. 22 (2010)

JC

Facts

[Editor’s Note: The casebook excerpt lists the page for this case as 22, but the page number is 122.] This matter arose when Vitro, a Mexican corporation that made glass beer bottles, attempted to extend its operations in America. Vitro Corporativo, S.A., the corporate entity that provided administrative and support services to its various subsidiaries, took aim at a pair of US target corporations for a potential hostile takeover. Vitro had no American glassmaking plants but had American marketing and distributing subsidiaries. These subsidiaries were eventually placed under the umbrella of Vitro International Corp. (International), the business’s American holding company. Vitro then organized C Holdings Corp. as an acquisitions company. C Holdings was later merged into Container Holdings Corp. (Container) (plaintiff). Ultimately, Vitro had difficulty with financing because of issues with the Mexican peso. Vitro connected with a pair of investment banks willing to commit large bridge-financing amounts to Vitro. When the junk-bond market collapsed, these American investment banks asked Vitro to guarantee the debt. Vitro moved some of its debt to International, an American subsidiary, and Vitro ultimately guaranteed International’s debt. International issued a series of notes to the US insurance companies that Vitro guaranteed. International made three payments to Vitro on the notes, with the guarantee agreement setting the fee at 1.5 percent of the outstanding principal balance of the notes per year. The three payments totaled about $6.7 million. International did not withhold US income taxes from those fees, and when soft-drink producers largely switched from glass to plastic containers, the US corporation went bankrupt. The Commissioner of Internal Revenue (the commissioner) (defendant) found that International should have withheld 30 percent of the fees paid to Vitro. The parties agreed that the guarantee fees were 26 U.S.C. § 881(a) fixed, determinable, annual, or periodical (FDAP) income. The issue was whether the source of the guarantee fees was the United States (in which case the fees were taxable at 30 percent as FDAP income) or Mexico (in which case the fees were not taxable). Container argued that Vitro was compensated for labor or personal services, which would make the guarantee fees sourced from Mexico, the site of the obligor. The commissioner argued that any services under the guarantee were not the predominant feature and must be ignored for servicing purposes and that the guarantees were more analogous to interest payments, which would be sourced from the United States, the site of the payor.

Rule of Law

Issue

Holding and Reasoning (Holmes, J.)

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