No Supreme Court Review of $75 Million Tax After Loan Guarantees

The Supreme Court decided not to hear a partnership’s legal challenge to Treasury regulations and more than $75 million in taxes.

In its Supreme Court petition, SIH Partners LLLP challenged not just the regulations but also the IRS’s decision not to apply the lower 15% tax rate for dividends or perform a further analysis under a revenue ruling. The high court denied the petition in a Jan. 13 order.

The $75 million was part of an IRS tax bill of about $380 million on the partnership, an affiliate of Susquehanna International Holdings Inc., after its two controlled foreign corporations and several other Susquehanna affiliates guaranteed a loan of about $1.5 billion from Merrill Lynch to investment firm SIG, another Susquehanna affiliate. The IRS deems foreign corporations “controlled,” or “CFCs,” when U.S. shareholders own more than 50% of the stock’s voting power at some point in the taxable year.

CFC applicable earnings are normally only taxed at the time of distributions to U.S. shareholders, but 1964 regulations related to tax code Section 956 create a tax when a CFC guarantees a loan for a U.S. entity. Each CFC domestic shareholder is taxed proportionally based either on the loan’s full amount or on the CFC’s accumulated, undistributed applicable earnings at the time of the loan guarantee—whichever is lesser.

SIH Partners argued the regulations are irrational violations of administrative law, particularly given how they can tax a CFC based on the full loan amount when it may be one of many entities that guaranteed the loan.

The IRS told the Supreme Court that the regulations mirror statutory language that’s meant to guard against forms of abuse—such as when a U.S. affiliate induces an outside lender to loan it money by directing its CFC to guarantee the loan, “thus indirectly using the CFC’s untaxed earnings without having the CFC loan it the funds directly.”

In earlier proceedings, the U.S. Court of Appeals for the Third Circuit affirmed a U.S. Tax Court ruling upholding the tax bill, noting a close parallel between the regulations and Section 956(d).

“The almost word-for-word match keeps the IRS’s terse explanation in line with the general principle that the more a regulation departs from a statute, the more an agency must explain itself,” said a three-judge Third Circuit panel.

The case is SIH Partners, LLLP v. Comm’r, U.S., No. 19-435, 1/13/20.