Academic journal article Journal of Accountancy

Brown Group Decision Reversed

Academic journal article Journal of Accountancy

Brown Group Decision Reversed

Article excerpt

The Tax Court reversed its original decision in Brown Group, Inc. v. Commissioner, ruling that a controlled foreign corporation's (CFC) distributive share of income from a foreign partnership be treated as if it was directly earned by the CFC and, therefore, characterized as subpart F income.

Generally, foreign income earned by a foreign corporation is not subject to U.S. tax until it is repatriated as a dividend to U.S. shareholders. An exception under subpart F of the Internal Revenue Code says a U.S. shareholder must include the pro rata share of the CFC's subpart F income in gross income. Subpart F income includes passive income and certain income earned outside a CFC's country of origin. The specific type of subpart F income involved in Brown Group was foreign base company sales income, or income from the sale of property that was manufactured and sold or purchased for use outside the country in which the CFC was organized.

Brown Group owned 100% of Brown Cayman, a Cayman Islands corporation. Brown Cayman was a CFC and owned 88% of a Cayman Islands partnership known as Brinco. Brinco was formed as an agent to purchase Brazilian-made footwear for Brown Group member companies. These companies paid Brinco a 10% commission for purchases.

In its initial opinion, the court ruled that the entity theory should apply in characterizing Brinco's commission income. This theory respects the separate legal existence of a partnership and characterizes income at the partnership level. …

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