FIFTH CIRCUIT AFFIRMS TIME CHARTER AGREEMENTS QUALIFY FOR FOREIGN SALES CORPORATION ACT TREATMENT.

W. EUGENE DAVIS, Circuit Judge:

The United States of America appeals from the district court's grant of summary judgment in favor of Tidewater Inc. and its related entities. The issue in this tax case is whether Tidewater, which owns and operates a fleet of vessels serving the energy industry, is entitled to certain FSC tax benefits under the Internal Revenue Code. The resolution of this issue depends on whether the time charter of Tidewater's vessels to energy industry customers should be considered a "lease" or a "service agreement." We agree with the district court that the time charters should be considered more like a lease or sublease than a service agreement and affirm the district court's judgment.

The operating company allocated the income received under the Time Charter between the leasing component and the service component of the Time Charter. The Time Charter was silent as to any such allocation.² Tidewater entered into hundreds of these Time Charters, five of which are in the record. Tidewater Foreign Sales Corporation ("Tidewater FSC") acted as a commission agent for these transactions and Tidewater paid Tidewater FSC a commission on the amount allocated to the leasing component of the Time Charter.

The provisions of the I.R.C. relating to Foreign Sales Corporations ("FSC")³ allow qualified taxpayers to deduct commissions paid to a FSC. The income derived from these commissions is then taxable to the FSC at a favorable rate. To qualify for these tax benefits, the FSC must derive the commissions from income generated by the sale or lease of "export property." Based on its conclusion that the Time Chartered vessels qualified as "export property," Tidewater deducted the commissions paid to Tidewater FSC on its 1998 - 2000 tax returns, and Tidewater FSC claimed the favorable rate on the commissions on its returns.

The IRS contended that the vessels were not "export property" under the FSC provisions, and that therefore the favorable tax treatment was inapplicable. For this reason, the IRS disallowed Tidewater's commission deductions for 1998 - 2000. Tidewater paid the calculated deficiencies and filed this suit. Tidewater FSC filed protective refund claims and joined in this suit. It argued in the alternative, that if Tidewater was not allowed to deduct the commissions paid to Tidewater FSC, Tidewater FSC was not required to include those commissions in its taxable income.

The parties filed cross-motions for summary judgment. Tidewater argued that the Time Charter has attributes of both a service contract and a lease, and that the lease aspects of the contract are sufficient to allow the vessels to be classified as export property. The government argued that the Time Charter is a service contract. The district court agreed with Tidewater and granted its summary judgment motion. The district court reasoned that the FSC provisions contemplated hybrid contracts, and that having both elements of a lease and a service contract did not prevent the Time Charter from being characterized as a lease. It concluded that the vessels met the definition of export property, and that Tidewater's deductions were proper. The United States now appeals.

The central issue in this appeal is whether the vessels Tidewater time chartered to its customers qualify as "export property." We turn first to the relevant provision of the I.R.C. and the relevant treasury regulation that control our analysis. The FSC provisions define export property as follows:

However, a gloss in the treasury regulations on this statutory exclusion provides Tidewater with a basis for an argument that these vessels are indeed export property:

B. Standard of Review

We review the district court's grant of summary judgment de novo. Patterson v. Mobil Oil Corp., 335 F.3d 476, 485 (5th Cir. 2003). Summary judgment is proper if it can be shown "that there is no genuine issue as to any material fact." FED. R. CIV. P. 56(c). "On cross-motions for summary judgment, we review each party's motions independently, viewing the evidence and inferences in the light most favorable to the nonmoving party." Ford Motor Co. v. Tex. Dep't of Transp., 264 F.3d 493, 499 (5th Cir. 2001). The parties agree that no question of fact is presented in this case and that the sole issue presented is legal.

C. Criteria to Use in Determining Status of Vessels

In determining whether the vessels qualify as "export property," we look to the governing statute, § 927, and the regulation interpreting the statute. On its face, the governing regulation allows Tidewater and Tidewater FSC the benefit of the FSC deduction if "the property is held for sublease or is subleased, by the person to a third person for the ultimate use of the third person." Temp. Treas. Reg. § 1.927(a)-1T(f)(2)(A)(1998). The statute, § 927(a)(1)(B), requires that the property be held "primarily" for lease in order to qualify as export property. While the language of the treasury regulation does not contain the word "primarily," the regulation cannot change the terms of the statute. See Nalle v. Comm'r, 55 F.3d 189, 193 & n.11 (5th Cir. 1995) ("[I]f a regulation obviously altered the scope of the relevant statute, the Commissioner should have known that such a regulation was invalid." (citing Comm'r v. Acker, 361 U.S. 87, 92-94 (1959) (parenthetical omitted))). The definition of export property carried forward in the regulations implicitly retains the word "primarily." Therefore, our analysis will focus on whether the vessels were held by the Tidewater operating company primarily for sublease to a third party.

Although the relationship of the parties in this case is controlled by the contracts between the parties, we begin with a consideration of the generally accepted definitions of the terms in play. "As a general matter, the term 'lease' means a transfer of the right to possession and use of goods for a term in return for consideration." 19 WILLISTON ON CONTRACTS § 53:18 (4th ed. 1991). A service contract is defined simply as "a contract to perform a service. . . ." BLACK'S LAW DICTIONARY 324 (7th ed. 1999). A time charter is defined generally as "[a] charter for a specified period, rather than for a specific task or voyage; a charter under which the ship owner continues to manage and control the vessel, but the charterer designates the ports of call and the cargo carried." Id. at 229. As opposed to a voyage charter, which is for one voyage from point A to point B, a time charter is "an arrangement of some permanency." GRANT GILMORE & CHARLES L. BLACK, JR., THE LAW OF ADMIRALTY, § 4-14, at 229 (2d ed. 1975).

While these general definitions are a logical starting point, the terms of the Time Charter itself controls the critical question as to whether the Time Charter is more like a lease or a service agreement. Under the Tidewater Time Charter, the customer can direct the vessel to undertake any voyage permitted by the terms of the agreement. The Time Charter covers a named vessel with specified capabilities, and while Tidewater has the right to provide a substitute vessel at any time, the customer must give its reasonable consent.⁴ If the substitute vessel is not acceptable, the customer can refuse to accept it. The full capacity of the vessel is placed at the customer's disposal for use as it sees fit, and the customer can require special towing or anchor handling equipment or modify the vessel. In sum, the customer is given the full use of the vessel and the right to direct the vessel in all respects: when and where the vessel should go, the cargo it should carry, the passengers to be transported, and in other ways as set forth in the Time Charter.

The government argues that the provisions of 26 U.S.C. § 7701(e) provide the proper framework for determining if the Time Charter is more like a lease or a service contract. Section 7701 is entitled "Definitions," and § 7701(e) provides criteria for determining when a contract should be treated as a lease. Based on legislative history, Tidewater argues that § 7701(e) does not apply to the FSC provisions and that it only applies to investment tax credit issues. Tidewater's argument is inconsistent with the plain language of the statute. which states that the provisions apply for purposes of chapter 1. When the plain language of a statute is unambiguous, there is no need to resort to legislative history for aid in its interpretation. See Peavy v. WFAA-TV, Inc., 221 F.3d 158, 169 (5th Cir. 2000). Here, the prefatory language of § 7701 clearly requires its application to all parts of Chapter 1, which includes the FSC provisions. Section 7701(e) reads:

Before applying these individual factors to the Time Charter and considering any other relevant factors, we observe that § 7701(e) establishes a balancing test. This requires us to consider all pertinent information and determine whether, on balance, the Time Charter is more like a lease or a service contract. Section 7701(e) gives no guidance as to the weight to be given to these factors: that determination is left to the court's discretion.

D. Application of § 7701(e)

Thus under the Time Charter, the customer had control of the vessel in the most important sense of the word. While the crew retained control over the details of routine operation and maintenance of the vessel, this type of control is far less important than the type of control exercised by the customer. Therefore, this factor weighs in favor of the Time Charter being a lease.

Thus, under the facts of this case, we are satisfied that control is the most important criterion enumerated in § 7701(e)(1), and that the significant control the time charterer exercises makes the Time Charter more like a lease than a service agreement. If a Tidewater employee leased a vehicle from Avis and operated it himself, this contract, like a bareboat charter, would be a classic lease. If, on the other hand, the vehicle was leased with a driver employed by Avis, and the car and driver were at the beck and call of the lessee, the control the of lessee over the vehicle in this latter arrangement is reduced very little, and is still more like a lease than a service agreement. We see very little difference in principle between the lease of a car with a driver and Tidewater's Time Charter.

Therefore, when we weigh the § 7701(e) factors in this light, we conclude that the Time Charter is more like a lease than a service agreement. The district court's order granting summary judgment is therefore

AFFIRMED.

² The amount attributed to the leasing component was paid by the Tidewater operating company to the vessel owner as charter hire on the bareboat charter.

³ 26 U.S.C. §§ 921-927. The provisions were repealed in November 2000.

⁴ "The Owners shall be entitled at any time, whether before delivery or at any other time during the Charter Period, to provide a substitute vessel, subject to the Charterer's prior approval, which shall not be unreasonably withheld." Part II, Clause 18, Time Charter.

⁵ The Time Charter refers to the Tidewater operating company as "Owner" and the third party customer as "Charterer." "[T]he Vessel shall be delivered by the Owners free of cargo and with clean tanks at any time between the date stated in Box 5 and the date specified in Box 6 at the port or place stated in Box 7 where the Vessel can safely lie always a float." Part II, Clause 2(a), Time Charter.

⁶ "The Vessel shall be redelivered on the expiration or earlier termination of this Charter Party free of cargo and with clean tanks at the port of place as stated in Box 8(I) or such other port or place as may be mutually agreed." Part II, Clause 2(d), Time Charter.

⁷ "The Owners shall provide and pay for all provisions, wages and all other expenses of the Master, Officers and Crew. . . ." Part II, Clause 7, Time Charter.

⁸ Part II, Clause 5(a), Time Charter ("The Vessel shall be employed in offshore activities which are lawful in accordance with the law of the place of the Vessel's flag and/or registration and of the place of operation"), Part II, Clause 6(d), Time Charter ("The Vessel will be operated and the services hereunder will be rendered as requested by the Charterers, subject always to the exclusive right of the Owners or the Master of the Vessel to determine whether operation of the Vessel may be safely undertaken."), Part II, Clause 20, Time Charter ("The Vessel shall not be ordered nor bound to enter without the Owners' written permission" any dangerous port.).

⁹ "The Charterers shall have the option of laying up the Vessel at an agreed safe port or place for all or any portion of the Charter Period in which case the Hire hereunder shall continue to be paid. . . ." Part II, Clause 5(d), Time Charter. One of the five sample Time Charters, that for the Regent Seahorse, eliminates this provision, however it retains all other provisions regarding control of the vessel. The period of this Time Charter was only for three days. Even if we were to examine only this contract, the elimination of this one provision in a contract of this duration would not change our conclusion that the contract is a lease.

¹⁰ "The Charterers may terminate this Charter Party at any time by giving the Owners written notice as stated in Box 15 and by paying the settlement statement stated in Box 14and the demobilisation charge stated in Box 16 . . ." Part II, Clause 26(a), Time Charter.

¹¹ "The Charterers shall have the option of subletting, assigning or loaning the Vessel to any person or company not competing with the Owners, subject to the Owners' prior approval which shall not be unreasonably withheld. . . ." Part II, Clause 17(a), Time Charter.

¹² "The Charterers shall have the option of, at their expense, making structural alterations to the Vessel or installing additional equipment with the written consent of the Owners which shall not be unreasonably withheld. . . ." Part II, Clause 23, Time Charter. The Time Charter for the Gulf Squall eliminates this provision, however, the elimination of this one provision does not, in our view, lessen the control of the customer over the vessel. See supra note 10.

¹³ "The Owners shall provide and pay for all other expenses of the Master, Officers and Crew; all maintenance and repair of the Vessel's hull . . .; also, except as otherwise provided in this Charter Party, for all insurance on the Vessel." Part II, Clause 7, Time Charter.

¹⁴ "Owners shall not be responsible for loss of, damage to, or any liability arising out anything towed by the Vessel, any cargo laden upon or carried by the Vessel or her tow, the property of the Charterers or of their contractors and sub-contractors." Part II, Clause 12(b),Time Charter.

¹⁵ Upon request by the customer, the equipment was placed on the vessel at Tidewater's expense. If the equipment was damaged or unusable due to any reason other than Tidewater's negligence, "the Charterers shall either provide, or direct the Owners to provide, an equivalent replacement at the Charterers' expense." Part II, Clause 7(b), Time Charter.

¹⁶

¹⁷ "Hire shall not cease in the event of the Vessel being prevented from working as aforesaid as a result of:

¹⁸ Tidewater argues that we should look to the previous "two-contract" arrangement used by Tidewater before it employed the 1989 form of Time Charter as evidence that the Time Charter is more like a lease. Under the previous system, the customer entered into two contracts with Tidewater entities: one bareboat charter was entered into between the owning entity and the customer, and a separate contract for services was entered into between the customer and the operating entity. Tidewater argues that while the paperwork has changed, the substance of the arrangement with the customer is unchanged. However, Tidewater and the customer have modified the structure of the transaction by eliminating the bare boat charter to the customer. "[W]hile a taxpayer is free to organize his affairs as he chooses, nevertheless, once having done so, he must accept the tax consequences of his choice." Comm'r v. Nat'l Alfalfa Dehydrating & Milling Co., 417 U.S. 134, 149 (1974). We must evaluate the tax consequences of the arrangement as it was structured for the years in question.