Container Corp. v. Comm’r, 134 T.C. No. 5 (2010)

By David Shakow

In a decision that will not simplify the convoluted taxation of financial products, the Tax Court held, in Container Corp. v. Comm’r, 134 T.C. No. 5 (2010) that guarantee fees paid by a U.S. company to its Mexican parent were properly treated as non-U.S. source income and therefore not subject to U.S. withholding taxes. (For the text of the decision, see here.) Arguing that the guarantee fees were more akin to interest paid on a loan (which would be treated as U.S.-source income), the IRS analogized the guarantee payments to acceptance and confirmation commissions like those at issue in Bank of America v. United States, 680 F.2d 142 (Ct. Cl. 1982), which treated such commissions like interest. The Tax Court rejected the analogy, however, because the Mexican company in this case was simply augmenting the credit of its U.S. subsidiary, not becoming primarily liable for the underlying debt as in Bank of America. Though recognizing that its distinction between guarantee fees and acceptance commissions might be viewed as a distinction without a difference, the court nevertheless concluded that the provision of a guarantee was more akin to a service and therefore was properly sourced outside the United States.

The difficulty faced by the Tax Court in distinguishing between guarantee fees and acceptance commissions reflects the problems courts generally face when dealing with financial products, where equivalent economic arrangements can be structured through the use of instruments that produce different tax results. (For a classic example, the “put-call parity theorem,” which demonstrates the equivalence of owning a share of stock and the right to put it, on the one hand, and an option to buy the stock along with a riskless zero-coupon bond, on the other, see the following article the following article by Professor Knoll.) The court’s discussion of interest and financial products in this case may prove useful in analyzing the tax treatment of other financial products.

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