BMC Software, Inc. v. Commissioner: U.S. Court of Appeals Rejects IRS Attempt to Apply Closing Agreement Retroactively to Support an Unrelated Proposed Adjustment to Tax

Sullivan & Cromwell LLP - March 19, 2015
Download

From 2003 to 2006, U.S. corporations were entitled, in certain circumstances, to elect a one-time dividends-received deduction for dividends from controlled foreign corporations. BMC Software, Inc. made this election for its 2006 tax year and received a dividend from a foreign subsidiary. In connection with a subsequent transfer-pricing audit, BMC agreed that it overpaid royalties to the foreign subsidiary that paid the dividend. Under guidance provided by the IRS, BMC elected to treat the overpaid amounts as accounts receivables from the foreign subsidiary that related back to earlier years. Although BMC did not create the receivables until 2007, the IRS argued that the receivables should be treated as in place in 2006, thereby reducing BMC’s dividends-received deduction for 2006. The U.S. Tax Court agreed with the IRS, and BMC appealed. The U.S. Court of Appeals for the Fifth Circuit reversed the Tax Court and held that the receivables did not reduce BMC’s dividends-received deduction for 2006.