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Government Argues Bearer Share Regs Are Valid

DEC. 8, 2017

Good Fortune Shipping SA v. Commissioner

DATED DEC. 8, 2017
DOCUMENT ATTRIBUTES

Good Fortune Shipping SA v. Commissioner

GOOD FORTUNE SHIPPING SA,
Petitioner-Appellant
v.
COMMISSIONER OF INTERNAL REVENUE SERVICE,
Respondent-Appellee

[ORAL ARGUMENT NOT YET SCHEDULED]

IN THE UNITED STATES COURT OF APPEALS
FOR THE DISTRICT OF COLUMBIA CIRCUIT

ON APPEAL FROM THE DECISION OF THE UNITED STATES TAX COURT

BRIEF FOR THE APPELLEE

DAVID A. HUBBERT
Deputy Assistant Attorney General

THOMAS J. CLARK
(202) 514-9084
RICHARD CALDARONE
(202) 514-2947
Attorneys
Tax Division
Department of Justice
Post Office Box 502
Washington, D.C. 20044

CERTIFICATE AS TO PARTIES, RULINGS, AND RELATED CASES

A. Parties and Amici. The parties appearing in the Tax Court and in this Court are appellant Good Fortune Shipping SA and appellee the Commissioner of Internal Revenue. No amici or intervenors appeared before the Tax Court, and no amici or intervenors have appeared in this Court.

B. Rulings Under Review. The rulings under review are the opinion entered by Judge Carolyn P. Chiechi on March 28, 2017, and published at 148 T.C. No. 10, and the order and decision entered by Judge Chiechi on March 29, 2017.

C. Related Cases. This case was not previously before this Court or any other appellate court. Counsel is not aware of any related cases currently pending in this Court or in any other court, as provided in D.C. Cir. R. 28(a)(1)(C).


TABLE OF CONTENTS

Certificate as to parties, rulings, and related cases

Table of contents

Table of authorities

Glossary

Statement of jurisdiction

Statement of the issue

Statutes and regulations

Statement of the case

A. Legal background

B. Good Fortune and the notice of deficiency

C. Proceedings in the Tax Court

Summary of argument

Argument

The Tax Court correctly held that the bearer-share regulations are valid

Standard of review

A. The Chevron framework

B. Congress has not addressed the precise question at issue

1. The text of § 883 does not speak to the question on appeal

2. The purpose and history of § 883 support the bearer-share regulations

3. Good Fortune has presented no plausible reason to decide this appeal at Chevron step one

C. The bearer-share regulations are valid under the second step of the Chevron framework

1. The regulations are reasonable and further the purpose of § 883(c)

2. Good Fortune's contrary contentions lack merit

a. Documentary substantiation would not provide the IRS with a reasonable method of determining the true owners of bearer shares

b. The regulations reasonably distinguish between bearer shares and shares owned by intermediaries

c. Good Fortune's proposed analogies lack force

i. The branch profits tax in § 884 is not comparable to the tax on foreign shipping companies

ii. The regulations implementing the Foreign Account Tax Compliance Act do not aid Good Fortune

D. The bearer-share regulations are not arbitrary and capricious

Conclusion

Statutory and regulatory addendum

Certificate of compliance

Certificate of service

TABLE OF AUTHORITIES

Cases:

Anna Jacques Hosp. v. Burwell, 797 F.3d 1155 (D.C. Cir. 2015)

AT&T Corp. v. FCC, 220 F.3d 607 (D.C. Cir. 2000)

Barnes v. Commissioner, 712 F.3d 581 (D.C. Cir. 2013)

Bingler v. Johnson, 394 U.S. 741 (1969)

Cent. States Motor Freight Bureau, Inc. v. ICC, 924 F.2d 1099 (D.C. Cir. 1991)

Chevron U.S.A., Inc. v. NRDC, 467 U.S. 837 (1984)

Commissioner v. Bollinger, 485 U.S. 340 (1988)

Competitive Enter. Inst. v. U.S. Dep't of Transp., 863 F.3d 911 (D.C. Cir. 2017)

DeJesus v. WP Co. LLC, 841 F.3d 527 (D.C. Cir. 2016)

FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120 (2000)

Fourth Inv. LP v. United States, 720 F.3d 1058 (9th Cir. 2013)

Gaughf Props., L.P. v. Commissioner, 738 F.3d 415 (D.C. Cir. 2013)

Gen. Instrument Corp. v. FCC, 213 F.3d 724 (D.C. Cir. 2000)

Goldsmith v. Commissioner, T.C. Memo. 1986-227 (June 5, 1986)

Int'l All. of Theatrical & Stage Employees v. NLRB, 334 F.3d 27 (D.C. Cir. 2003)

M/V Nonsuco, Inc. v. Commissioner, 234 F.2d 583 (4th Cir. 1956)

Mayo Foundation for Medical Education & Research v. United States, 562 U.S. 44 (2011)

Mobil Oil Exploration & Producing Se., Inc. v. United Distrib. Cos., 498 U.S. 211 (1991)

Nat'l Ass'n of Telecommc'ns Officers & Advisors v. FCC, 862 F.3d 18 (D.C. Cir. 2017)

Nat'l Cable & Telecommc'ns Ass'n v. Brand X Internet Servs., 545 U.S. 967 (2005)

Nat'l Min. Ass'n v. Mine Safety & Health Admin., 116 F.3d 520 (D.C. Cir. 1997)

Personal Watercraft Ass'n v. Dep't of Commerce, 48 F.3d 540 (D.C. Cir. 1995)

Pharm. Res. & Mfrs. of Am. v. FTC, 790 F.3d 198 (D.C. Cir. 2015)

Pub. Citizen, Inc. v. U.S. Dep't of Health & Human Servs., 332 F.3d 654 (D.C. Cir. 2003)

Reinecke v. Smith, 289 U.S. 172 (1933)

Scoville v. United States, 250 F.3d 1198 (8th Cir. 2001)

Serono Labs., Inc. v. Shalala, 158 F.3d 1313 (D.C. Cir. 1998)

Soc'y of Plastics Indus., Inc. v. ICC, 955 F.2d 722 (D.C. Cir. 1992)

Transmission Access Policy Study Grp. v. FERC, 225 F.3d 667 (D.C. Cir. 2000)

U.S. Telecom Ass'n v. FCC, 227 F.3d 450 (D.C. Cir. 2000)

Van Hollen, Jr. v. FEC, 811 F.3d 486 (D.C. Cir. 2016)

Statutes:

26 U.S.C. (I.R.C.):

§ 883

§ 883(a)(1)

§ 883(c)

§ 883(c)(1)

§ 883(c)(2)

§ 883(c)(3)

§ 883(c)(4)

§ 884

§ 884(c)(4)(B)

§ 884(d)(2)(a)

§ 884(e)(1)

§ 884(e)(4)

§ 884(e)(4)(B)

§ 887

§ 887(a)

§ 1471

§ 1471(a)-(b)

§ 1471(b)(2)(B)

§ 6213(a)

§ 6214

§ 7442

§ 7482(a)(1)

§ 7805(a)

Marshall Islands Revised Code, title 52, pt. 1, div. 5,

§ 42(2) (2004)

Regulations:

26 C.F.R. (Treas. Reg.):

§ 1.883-1(c)(3)(i)(G)

§ 1.883-2(a)

§ 1.883-3(a)

§ 1.883-4(a)

§ 1.883-4(b)(1)(i)

§ 1.883-4(b)(1)(ii)

§ 1.883-4(c)(1)

§ 1.883-4(c)(3)(i)

§ 1.883-4(d)

§ 1.883-4(d)(1)

§ 1.883-4(d)(4)(i)(C)

§ 1.883-4(d)(4)(i)(D)

§ 1.883-4(d)(4)(1)(E)

§ 1.883-4(d)(4)(v)

§ 1.883-4(d)(4)(v)(A)(1)-(4)

§ 1.883-4(d)(5)

§ 1.1471-5

§ 1.1471-5(f)(1)(i)(C)(2)

§ 1.1471-5(j)

Other authorities:

American Jobs Creation Act of 2004, Pub. L. 108-357, 118 Stat. 1418 (2004)

Black's Law Dictionary (10th ed. 2014)

Branch Profits Tax, 57 Fed. Reg. 41,644-01 (Sept. 11, 1992)

Corporation Returns With Net Income, Form 1120-F, at https://www.irs.gov/statistics/soi-tax-stats-table-11-corporation-returns-with-net-income-form-1120-f

D.C. Cir. R. 28(a)(5)

Exclusions from Gross Income of Foreign Corporations, 65 Fed. Reg. 6065-01 (Feb. 8, 2000)

Exclusions from Gross Income of Foreign Corporations, 67 Fed. Reg. 50,510-01 (Aug. 2, 2002)

Exclusions from Gross Income of Foreign Corporations, 68 Fed. Reg. 51,394-01 (Aug. 26, 2003)

Exclusions from Gross Income of Foreign Corporations 75 Fed. Reg. 56,858-03 (Sept. 17, 2010)

Fed. R. App. P. 13(a)(1)

Foreign Account Tax Compliance Act, Title V, subtitle A of the Hiring Incentives to Restore Employment Act, Pub. L. No. 111-147, §§ 501-35, 124 Stat. 71, 97-115 (Mar. 18, 2010)

H.R. Conf. Rep. 99-841 (1986), 1986-3 C.B. 1 (vol. 4)

H.R. Conf. Rep. 108-755 (2004), reprinted in 2004 U.S.C.C.A.N. 1341

Mertens Law of Federal Income Taxation § 17:20 (2017)

Mertens Law of Federal Income Taxation § 17:21 (2017)

Michael Galley, Flagging interest: ship regulation, owner anonymity, and sub-standard shipping, 14 Mountbatten J. Legal Stud. 87 (2013)

OECD, Behind the Corporate Veil: Using Corporate Entities for Illicit Purposes (2001), https://www.oecd.org/corporate/ca/43703185.pdf

OECD, Harmful Tax Competition: An Emerging Global Issue 30 (1998)

OECD Directorate for Science, Technology & Industry, Maritime Transport Comm., Ownership & Control of Ships (March 2003), at http://www.oecd.org/sti/transport/maritimetransport/17846120.pdf

Restatement (Third) of Trusts

Rev. Proc. 91-12, 1991-1 C.B. 473

Rev. Rul. 2001-48

Rev. Rul. 2008-17

Richard Coles & Edward Watt, Ship Registration: Law and Practice (2d ed. 2009)

S. Rep. 67-275 (1921), 1939-1 C.B. 181

S. Rep. 99-313 (1986), 1986-3 C.B. 1

Small Business, Enterprise & Employment Act 2015, § 84 (U.K.)

Tax Reform Act of 1986, Pub. L. No. 99-514, 100 Stat. 2085

U.S. Model Income Tax Convention, available at https://www.treasury.gov/resource-center/tax-policy/treaties/Documents/Treaty-US%20Model-2016.pdf

GLOSSARY

A.

Appellant's appendix

Br.

Appellant's opening brief

Commissioner

Commissioner of Internal Revenue

Good Fortune

Good Fortune Shipping SA

I.R.C.

Internal Revenue Code (26 U.S.C.)

IRS

Internal Revenue Service

Treas. Reg.

Treasury Regulation (26 C.F.R.)


STATEMENT OF JURISDICTION

On July 18, 2012, the Commissioner of Internal Revenue (“Commissioner”) sent Good Fortune Shipping SA (“Good Fortune”) a notice of deficiency concerning Good Fortune's income tax return for tax year 2007. (A. 12.)1 On October 12, 2012, Good Fortune filed a timely petition seeking redetermination of that deficiency (A. 5-10) in the Tax Court. See 26 U.S.C. (“I.R.C.”) § 6213(a). The Tax Court had jurisdiction over the petition under I.R.C. §§ 6213(a), 6214, and 7442.

On March 29, 2017, the Tax Court entered an order and decision granting summary judgment to the Commissioner and upholding the notice of deficiency. (A. 126.) Good Fortune filed a timely notice of appeal (see A. 4) on June 16, 2017. See Fed. R. App. P. 13(a)(1). This Court has jurisdiction over the appeal under I.R.C. § 7482(a)(1).

STATEMENT OF THE ISSUE

The Internal Revenue Code taxes the U.S. source gross transportation income of foreign corporations, including foreign shippers, but exempts a corporation from that tax if, inter alia, more than half of its shares are owned by individuals who reside in a country that provides a reciprocal exemption to U.S. corporations. See I.R.C. 883 & 887. The question presented in this appeal is whether the Tax Court correctly held that the IRS may permissibly prevent foreign shippers from attempting to satisfy that prerequisite with bearer shares because of the difficulty of determining the ownership of such shares.

STATUTES AND REGULATIONS

Pursuant to D.C. Cir. R. 28(a)(5), pertinent statutes and regulations are set forth in an addendum bound with this brief.

STATEMENT OF THE CASE

A. Legal background

This case involves the contours of an exemption from a tax imposed on, inter alia, the U.S. source gross transportation income of foreign shipping companies. Until 1986, earnings derived by foreign corporations from the operation of ships were exempted from tax if the corporations' vessels were flagged — i.e., registered — in a country that granted “equivalent tax exemptions to U.S. citizens and U.S. corporations.” H.R. Conf. Rep. 99-841, at 597 (1986), 1986-3 C.B. 1, 597 (vol. 4). This exemption applied “without regard to the residence of persons receiving the exemption or whether commerce is conducted in” the country of registry. S. Rep. 99-313, at 340 (1986), 1986-3 C.B. 1, 340.

The registration-based exemption reflected Congress's desire “'to encourage the international adoption of uniform tax laws * * * for the purpose of eliminating double taxation'” in a shipper's home country and country of operation. M/V Nonsuco, Inc. v. Comm'r, 234 F.2d 583, 587 (4th Cir. 1956) (quoting S. Rep. 67-275 (1921), 1939-1 C.B. 181). Congress, however, found that the registration-based exemption “place[d] U.S. persons with U.S.-based transportation * * * at a competitive disadvantage.” S. Rep. 99-313, at 340. The problem was that, although U.S. shippers are required to pay U.S. tax on their income, foreign shippers could adopt a “flag of convenience” — i.e., register their vessels in a country that provided a reciprocal exemption without regard to whether the vessels' owners were residents of the country — to avoid tax altogether. Id. at 340-41.

Congress accordingly tightened the exemption in the Tax Reform Act of 1986, Pub. L. No. 99-514, § 1212, 100 Stat. 2085, 2536. The 1986 Act placed a 4% tax on the U.S. source gross transportation income of nonresident alien individuals and foreign corporations. I.R.C. § 887(a). Congress also amended § 883 by replacing the flagging requirement with two new prerequisites to the exemption from tax in § 883(a)(1). A foreign corporation can qualify for the exemption only if it is “organized in a foreign country” that “grants an equivalent exemption to corporations organized in the United States.” Id. § 883(a)(1). Corporations organized in such a country are nevertheless ineligible for the exemption “if 50 percent or more of the value” of their stock “is owned by individuals who are not residents” of a country providing such a reciprocal exemption.2 Id. § 883(c)(1). For this purpose, “stock owned (directly or indirectly) by or for a corporation, partnership, trust, or estate” is “treated as being owned proportionately” by the entity's individual “shareholders, partners, or beneficiaries.” Id. § 883(c)(4).

As part of a notice-and-comment rulemaking, the IRS promulgated regulations describing how corporations can prove that they satisfy the requirement that more than half of their stock be owned by residents of a country that provides a reciprocal exemption. See Exclusions from Gross Income of Foreign Corporations, 67 Fed. Reg. 50,510-01 (Aug. 2, 2002) (proposed regulations); Exclusions from Gross Income of Foreign Corporations, 68 Fed. Reg. 51,394-01 (Aug. 26, 2003) (final regulations). As relevant here, the regulations define the term “qualified shareholder” to mean individuals or certain other entities that are liable for tax as a resident in countries providing a reciprocal exemption. Treas. Reg. § 1.883-4(b)(1)(i) (2007). And they provide that a corporation must show, inter alia, that “more than 50 percent of the value of its outstanding shares is owned” by qualified shareholders, either directly or indirectly through the application of attribution rules, “for at least half of the number of days in the foreign corporation's taxable year.” Id. § 1.883-4(a).

The regulations treat registered shares, which are “recorded in the issuer's books” (Black's Law Dictionary (10th ed. 2014) (defining “registered security”)), differently from bearer shares, which are owned by the “physical bearer of the stock certificate” and have traditionally had “no recorded ownership information” (id. (defining “bearer stock”)). In the case of registered shares, a corporation may show that its shareholders satisfy the requirement in § 883(c) by submitting detailed documentation substantiating the shareholders' identities and countries of residence. See Treas. Reg. § 1.883-4(d). The regulations that were effective during the 2007 tax year, which is at issue here, prohibited corporations from using bearer shares to qualify for the exemption in § 883(c). See Treas. Reg. § 1.883-4(b)(1)(ii), (c)(1), (d)(1), & (d)(4)(1)(E) (2007). The IRS drew this distinction, and prohibited the use of bearer shares for this purpose, because of “[t]he difficulty of reliably demonstrating the true ownership of such shares.” 67 Fed. Reg. at 50,518; accord 68 Fed. Reg. at 51,399.

In 2004, Congress delayed the effective date of all regulations implementing § 883 by roughly thirteen months. American Jobs Creation Act of 2004, Pub. L. 108-357, § 423, 118 Stat. 1418 (2004). In doing so, Congress expressly recognized that the regulations made the exemption in § 883(a)(1) contingent on corporations' ability to satisfy “certain ownership and related documentation requirements.” H.R. Conf. Rep. 108-755, at 418 (2004), reprinted in 2004 U.S.C.C.A.N. 1341, 1486.

In 2010, the IRS amended its treatment of bearer shares for purposes of the exemption in § 883(a)(1). The amendments allow bearer shares to count toward the requirement in § 883(c) if those shares are either (i) “dematerialized,” in that they are “represented only by book entries” rather than physical certificates, or (ii) “immobilized,” in that “evidence of ownership is maintained on the books and records of the corporate issuer or by a broker or financial institution.” Treas. Reg. § 1.883-1(c)(3)(i)(G) (2010); see also id. § 1.883-4(b)(1)(ii). In making this change, the IRS reiterated that it “has generally been difficult to reliably prove ownership of bearer shares.” Exclusions from Gross Income of Foreign Corporations, 75 Fed. Reg. 56,858-03, 56,860 (Sept. 17, 2010). The IRS noted, however, that dematerialized and immobilized bearer shares had “become increasingly common” and “provide the ability to reliably identify the beneficial owner of bearer shares.” Id. The now-superseded original regulations, not the amended 2010 regulations, apply to this appeal.

B. Good Fortune and the notice of deficiency

Good Fortune is a corporation organized under the laws of the Republic of the Marshall Islands (A. 11), a country that provided, and continues to provide, a reciprocal exemption for purposes of § 883(a)(1) (see Rev. Rul. 2001-48, Table I.A; Rev. Rul. 2008-17, Table I.A). During tax year 2007, all of Good Fortune's shares were in the form of bearer shares. (A. 13-14.) These shares were neither immobilized nor dematerialized; rather, they were issued as physical certificates, and neither Good Fortune itself nor any broker or financial institution maintained any evidence of the ownership of the shares. (Id.)

Good Fortune reported $4,093,375 in U.S. source gross transportation income for tax year 2007. (A. 12.) Good Fortune claimed that this income was not taxable under § 887 because it qualified for the exemption in § 883(a)(1). (Id.) To support that claim, Good Fortune provided documentation purporting to show that all of its shares were indirectly owned by individuals residing in countries that provide a reciprocal exemption to U.S. corporations. (See A. 14-15; see also Dkt. 16, Exs. 3-J–6-J.) It also asserted that the regulations preventing the holders of bearer shares from counting toward the requirement in § 883(c)(1) were invalid. (A. 12.)

The IRS sent Good Fortune a notice of deficiency concerning its 2007 tax year. (A. 12.) That notice reflected the IRS's determination that Good Fortune's U.S. source gross transportation income for 2007 was $3,587,375 rather than $4,093,375. (A. 13.) The notice also reflected the IRS's determination that none of the income could be exempted under § 883(a)(1), because all of Good Fortune's stock had been issued in the form of bearer shares. (Dkt. 16, Ex. 2-J, at 6.) The IRS accordingly determined that Good Fortune had an income tax deficiency of $143,495 for tax year 2007. (Id. at 1.)

C. Proceedings in the Tax Court

Good Fortune then filed a petition in the Tax Court seeking a redetermination of the deficiency for tax year 2007. Good Fortune's petition conceded that Good Fortune cannot qualify for the exemption in § 883(a)(1) under the applicable regulations. (See A. 6-7; see also A. 81.) But the petition alleged that the regulations preventing the consideration of bearer shares — i.e., Treas. Reg. § 1.883-4(b)(1)(ii), (c)(1), (d)(1), & (d)(4)(i)(E) (2007) — are invalid under the test enunciated in Chevron U.S.A., Inc. v. NRDC, 467 U.S. 837 (1984).3 (A. 5-10.) The Commissioner filed a motion for summary judgment, and Good Fortune filed a cross-motion for partial summary judgment, on the basis of stipulated facts. (See A. 1-2.)

The Tax Court granted the Commissioner's motion and denied Good Fortune's motion. (A. 78-126.) Pursuant to the Chevron framework, the Tax Court first considered “'whether Congress has directly spoken to the precise question at issue.'” (A. 100.) The Tax Court held that Congress had not. Congress stated that the exemption turns on the country of residence of the individuals who own a company's stock. (See A. 109.) But Congress did not “explain or otherwise address” the question here — namely, “how to establish ownership by individuals for purposes of section 883(c)(1),” and specifically “how to establish ownership where the shares of the foreign corporation are owned in bearer form.” (Id.)

The Tax Court then turned to the second prong of the Chevron framework and asked whether the IRS's construction of § 883 “is reasonable.” (A. 102.) The court held that it was, for two broad reasons. First, the Tax Court held that the bearer-share regulations in no way conflict with Congress's focus on ownership in § 883(c), because they speak to how ownership may be established rather than to the meaning of ownership itself. (A. 114.)

Second, the court held that Congress's intent “in enacting section 883(c)(1)” was “to ensure that abuse” of the exemption will not occur, and that the bearer-share regulations “set forth a sensible approach to effecting” that intent. (A. 123.) In that regard, the Tax Court noted that, because bearer shares are owned by whoever physically possesses the stock certificates, “the shareholder(s) of the company remain in almost complete anonymity” and that changes in ownership are “completely confidential.” (A. 119-20.) It is accordingly difficult to “'reliably demonstrat[e] the true ownership of [bearer] shares.'” (A. 122 (quoting 67 Fed. Reg. at 50,518).) And the Tax Court noted that this confidentiality has been “a problem in the international community, and specifically in the shipping industry.” (A. 120.)

The Tax Court also noted that Good Fortune's arguments in this case take the same structure as the arguments rejected by the Supreme Court in Mayo Foundation for Medical Education & Research v. United States, 562 U.S. 44 (2011). (See A. 106-08, 112-14.) Mayo concerned a statute specifying that the wages of “students” are exempt from Federal Insurance Contribution Act taxes. (See A. 106 (citing Mayo, 562 U.S. at 47-48).) The Supreme Court held that the statute did not answer the question whether medical residents, who work full time in furtherance of their education, are “students” exempt from the tax. (See A. 106-08.) The Supreme Court further recognized that “'[r]egulation, like legislation, often requires drawing lines,'” and it upheld as reasonable a regulation that improved administrability and avoided wasteful litigation by disallowing individuals with full-time employment from qualifying for the student exemption. (A. 112 (quoting Mayo, 562 U.S. at 59).)

The Tax Court held that the same logic applies here. Congress “did not address” the question at issue. (A. 109.) And the IRS enacted “reasonable” regulations that “provide certainty and resolve the difficult problems of proof associated with establishing ownership of bearer shares” (A. 123).

Good Fortune now appeals.

SUMMARY OF ARGUMENT

The bearer-share regulations should be upheld as a reasonable, context-sensitive implementation of § 883(c). The text of § 883 does not speak to the precise question at issue — namely whether, for purposes of the exemption in § 883, a foreign shipper may use bearer shares to show that more than half of its stock is owned by shareholders who reside in countries providing a reciprocal exemption. As Good Fortune concedes, the statutory text does not even speak to the broader question of how any foreign corporation may prove its entitlement to the exemption. The statute is therefore silent on the question at issue in this case.

Good Fortune nevertheless argues that the bearer-share regulations are inconsistent with the statutory text. But its arguments on that score uniformly rest on either its failure to specify the question at issue on appeal or its failure to distinguish between the question of what constitutes ownership — which is not at issue here — and the question of how, or whether, ownership can be proven.

The purpose and legislative history of § 883 are also relevant to the first step of the Chevron inquiry, and both of those factors support the bearer-share regulations. Congress enacted the exemption in § 883(a)(1) to prevent foreign shippers from claiming the benefits of the exemption unless their shareholders reside in a country that provides a reciprocal exemption. The use of bearer shares poses a direct threat to that congressional goal. Because the ownership of bearer shares is not recorded and is transferred with possession the physical stock certificates, the ownership of such shares is both anonymous and effectively impossible to establish after the fact. Bearer shares would thus render the requirement in § 883(c) unenforceable because claims about the ownership of such shares cannot reasonably be verified — and closely-held shipping companies use bearer shares for owner anonymity. As a result, the bearer-share regulations are consistent with the only pertinent congressional statements, and there is no basis for invalidating the regulations at step one of the Chevron framework.

Because the bearer-share regulations further congressional intent in a reasonable way consistent with the statutory text, they also pass muster under Chevron step two. Although Good Fortune seeks to resist that conclusion in various ways, none is persuasive. Good Fortune attempts to show that documentary evidence of ownership is sufficient, but it has not even begun to demonstrate that statements concerning the holders of bearer shares can be independently verified. Good Fortune's reliance on other regulations in which the IRS has permitted the use of bearer shares is unavailing, because those regulations involve circumstances that are distinguishable.

Finally, Good Fortune's contention that the IRS could restrict the use of bearer shares for purposes of § 883(a)(1) only if it similarly restricted the use of nominees and trustees also lacks force. Although intermediaries such as nominees and trustees can be used to obscure the identity of beneficial owners, intermediaries do not present the problem of easy transferability that inheres in the use of bearer shares. The IRS could therefore reasonably determine that documentary substantiation of the identity of beneficial owners suffices to establish a shipper's entitlement to the exemption in § 883(a)(1) in the context of nominees and trustees, but not in the context of bearer shares.

The bearer-share regulations are not arbitrary and capricious for the same reasons that they represent a reasonable interpretation of § 883. The Tax Court's decision should accordingly be affirmed.

ARGUMENT

The Tax Court correctly held that the bearer-share regulations are valid

Standard of review

This Court reviews the Tax Court's legal conclusions, including its application of the Chevron framework, de novo. See, e.g., Van Hollen, Jr. v. FEC, 811 F.3d 486, 491-92 (D.C. Cir. 2016); Barnes v. Comm'r, 712 F.3d 581, 582 (D.C. Cir. 2013).

A. The Chevron framework

On appeal, Good Fortune does not contend that it can qualify for the exemption in § 883(a)(1) under the governing Treasury Regulations. Good Fortune also does not contend that the IRS's promulgation of those regulations was somehow procedurally deficient or that the Tax Court committed any procedural error. It has therefore forfeited all such arguments (e.g., DeJesus v. WP Co. LLC, 841 F.3d 527, 532 n.1 (D.C. Cir. 2016)), and the sole question on appeal is whether the bearer-share regulations represent a permissible, non-arbitrary implementation of I.R.C. § 883(c).

It is undisputed (see Br. 24) that this Court's review of that question is governed by the two-step Chevron framework. See, e.g., Mayo, 562 U.S. at 55-56; see also I.R.C. § 7805(a) (giving the Secretary of the Treasury authority to “prescribe all needful rules and regulations for the enforcement of” the Internal Revenue Code). Under that framework, “[t]he first step is to determine whether Congress has directly addressed the 'precise question at issue.'” Pharm. Res. & Mfrs. of Am. v. FTC, 790 F.3d 198, 204 (D.C. Cir. 2015) (quoting Chevron, 467 U.S. at 842). In keeping with the deferential nature of the Chevron framework, the scope of this inquiry is “strictly confined, in that the Supreme Court intended that the term 'precise question at issue' be interpreted tightly.” Soc'y of Plastics Indus., Inc. v. ICC, 955 F.2d 722, 727-28 (D.C. Cir. 1992); accord Cent. States Motor Freight Bureau, Inc. v. ICC, 924 F.2d 1099, 1104 (D.C. Cir. 1991) (Ruth Bader Ginsburg, J.). But this Court employs a broad array of tools — comprising “the text, structure, purpose, and history of the statute” — in answering that narrow question. Pharm. Res., 790 F.3d at 205 (internal quotation marks omitted); accord, e.g., FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120, 132-33 (2000).

If Congress has directly addressed the precise question at issue, “'that is the end of the matter, for the court * * * must give effect to the unambiguously expressed intent of Congress.'” Int'l All. of Theatrical & Stage Employees v. NLRB, 334 F.3d 27, 33 (D.C. Cir. 2003) (quoting Chevron, 467 U.S. at 842-83) (alteration omitted). If, in contrast, the statute is either “silent or ambiguous with respect to the precise question at issue,” this Court “proceed[s] to the second step of the Chevron analysis, asking 'whether the agency's answer is based on a permissible construction of the statute.'” U.S. Telecom Ass'n v. FCC, 227 F.3d 450, 457 (D.C. Cir. 2000) (quoting Chevron, 437 U.S. at 843). At that step, the court “afford[s] substantial deference to the agency's interpretation of statutory language.” Id. at 458 (citing Chevron, 437 U.S. at 844). This Court will therefore uphold an agency's interpretation as long as it “is reasonable,” even if “'there may be other reasonable, or even more reasonable, views.'” AT&T Corp. v. FCC, 220 F.3d 607, 621 (D.C. Cir. 2000) (quoting Serono Labs., Inc. v. Shalala, 158 F.3d 1313, 1321 (D.C. Cir. 1998)); accord, e.g., Anna Jacques Hosp. v. Burwell, 797 F.3d 1155, 1172 (D.C. Cir. 2015).

B. Congress has not addressed the precise question at issue

1. The text of § 883 does not speak to the question on appeal

Congress has not directly spoken to the issue on appeal. Tightly drawn, as Chevron requires (see supra p. 17), that question is whether the IRS, in promulgating regulations to enforce § 883(c), may prevent foreign shippers from using bearer shares in an attempt to show that more than half of their stock is owned by residents of certain countries. The statute is silent on that issue. Nothing in the text of § 883 speaks to whether the IRS may or may not prevent shippers, or other corporations, from using bearer shares to prove that they satisfied that ownership requirement.

In fact, as the Tax Court held (A. 109), there is no statutory text that even begins to answer the broader question of what type of proof suffices to show any corporation's entitlement to the exemption, regardless of whether the corporation has issued bearer shares or registered shares. Good Fortune has repeatedly and expressly conceded as much. (See Br. 23; see also, e.g., A. 21-22, 103.) And no other statute fills that gap.

Both common sense and this Court's precedents dictate that, when Congress remains silent on a precise topic, it has not directly spoken to that topic. See, e.g., Nat'l Ass'n of Telecommc'ns Officers & Advisors v. FCC, 862 F.3d 18, 27 (D.C. Cir. 2017); Int'l All. of Theatrical & Stage Employees v. NLRB, 334 F.3d 27, 33 (D.C. Cir. 2003); AT&T Corp., 220 F.3d at 621. Moreover, Good Fortune has conceded (Br. 31) that the IRS may, as part of its general authority to implement the Internal Revenue Code (see I.R.C. § 7805(a)), “issue regulations addressing attribution and proof of ownership.” (See also Br. 41 (the IRS “can deny any exclusion claim under section 883 if it is not satisfied with proof of ownership”).) In short, the issue presented on appeal is both one on which Congress has remained silent and one covered by an express delegation of authority to the IRS. The issue on appeal therefore cannot be decided on the basis of the statutory text alone. See, e.g., Chevron, 467 U.S. at 842.

2. The purpose and history of § 883 support the bearer-share regulations

The legislative history of § 883 also does not speak directly to the question of how shippers or other foreign corporations may prove the ownership of their shares. See H.R. Conf. Rep. 99-841, at II-596–600 (1986); S. Rep. 99-313, at 340-44 (1986). But both that history and the purpose of § 883 are relevant in ways that support the bearer-share regulations.

The legislative history demonstrates that, in enacting § 883(a)(1), Congress intended to prevent shippers from receiving the exemption by using “a flag of convenience in which to register a ship.” S. Rep. 99-313, at 341. Congress implemented that intent by requiring shippers both to be organized in a country providing a reciprocal exemption and to be more than half owned by shareholders residing in such countries. Section 883(c) is therefore, as the Tax Court held (A. 117, 123), an anti-abuse provision.

The bearer-share regulations further that anti-abuse purpose, because the use of bearer shares would give foreign corporations a simple way to circumvent the requirement in § 883(c). Bearer shares are owned by the “physical bearer of the stock certificate.” Black's Law Dictionary (10th ed. 2014). For example, the law of the Marshall Islands — the jurisdiction in which Good Fortune is incorporated — distinguishes between “registered shares” and unregistered “bearer shares,” and it provides that “[t]he transfer of bearer shares shall be by delivery of the certificates.” Marshall Islands Rev. Code, title 52, pt. 1, div. 5, § 42(2) (2004). Bearer shares are thus easy to transfer; a literal handoff will suffice.

This transferability creates a problem. Bearer shares typically have “no recorded ownership information” (Black's Law Dictionary (10th ed. 2014)), meaning that there is no required, reliable source of information concerning who possessed — and therefore owned — the shares at any given point in time. As the IRS explained, this lack of formal records, combined with the transferable nature of bearer shares, makes it very difficult to “reliably demonstrat[e] the true ownership of” such shares at a prior point in time. 67 Fed. Reg. at 50,518; accord 68 Fed. Reg. at 51,399. In fact, some commentators have recognized that it is “practically impossible” to do so. Richard Coles & Edward Watt, Ship Registration: Law and Practice § 5.5, at 56 (2d ed. 2009). The owners of bearer shares are thus, as the Tax Court held (A. 119-20), anonymous. See also, e.g., Ship Registration § 3.7, at 24.

For that reason, it would be easy for a foreign corporation that issues bearer shares to circumvent the requirement in I.R.C. § 883(c). A corporation that would not otherwise qualify for the exemption in § 883(a)(1) could simply state that, during the tax year in question, the shares were owned by residents of a qualifying country. If a corporation did so, the IRS would have no reasonable method of proving or disproving the statement of ownership. It would either have to take the corporation's statement at face value or engage in the fact-intensive, and quite possibly futile, enterprise of attempting to independently verify the location of pieces of paper years in the past. See also, e.g., Goldsmith v. Comm'r, T.C. Memo. 1986-227 (June 5, 1986) (noting lack of evidence concerning movements of bearer shares).4

No matter which option the IRS chose, the requirement in § 883(c) would be essentially unenforceable against corporations that issue bearer shares. That result would be inconsistent with the congressional intent behind § 883(c) — namely, to curb abuse of the prior, registration-based exemption. It would also be inconsistent with the well-established principle that “exemptions from taxation are to be construed narrowly.” Bingler v. Johnson, 394 U.S. 741, 752 (1969).

Moreover, the Tax Court correctly held (A. 121) that the IRS had good reason to worry about the potential abuse of bearer shares in the context of closely held shipping companies. Vessel ownership is loosely regulated, and vessels are often registered in a country with which the vessels' owner lacks any other connection. E.g., OECD Directorate for Science, Technology & Industry, Maritime Transport Comm., Ownership & Control of Ships 6-7 (March 2003), at http://www.oecd.org/ sti/transport/maritimetransport/17846120.pdf. It is undisputed (see Br. 32) that “secretive” closely held shipping companies take advantage of this lack of regulation and use bearer shares as a “mechanism to ensure total anonymity” for their “beneficial owners.” Id. at 4, 8; accord, e.g., Michael Galley, Flagging interest: ship regulation, owner anonymity, and sub-standard shipping, 14 Mountbatten J. Legal Stud. 87, 97 (2013). And this use of bearer shares in the shipping industry facilitates a range of financial crimes — including tax evasion. Ownership & Control of Ships 4; see also OECD, Behind the Corporate Veil: Using Corporate Entities for Illicit Purposes 8, 13-14, 23, 29-31 (2001), at https://www.oecd.org/corporate/ca/43703185.pdf; OECD, Harmful Tax Competition: An Emerging Global Issue 30, 32-33 (1998).5

The IRS's approach of not allowing shippers to use bearer shares to show that the owners of its shares reside in countries that provide a reciprocal exemption accordingly furthers Congress's purposes of narrowing, and preventing abuse of, the exemption in § 883(a)(1). Indeed, without the IRS's restriction on the use of bearer shares, there would be no way to enforce § 883(c) against a significant number of closely held foreign shippers.

Any doubt that Congress approved of the IRS's efforts in this regard is dispelled by its subsequent actions. As noted above, when Congress delayed the effective date of all of the regulations implementing § 883, it expressed its understanding that the regulations required corporations to “satisfy certain ownership * * * requirements” in order to qualify for the exemption. See H.R. Conf. Rep. 108-755, at 418. Nevertheless, Congress decided not to alter § 883 in any respect. That decision implies that Congress approved of the requirements, including the bearer-share regulations. Cf., e.g., Pub. Citizen, Inc. v. U.S. Dep't of Health & Human Servs., 332 F.3d 654, 668 (D.C. Cir. 2003) (Congress implicitly ratifies administrative interpretation when it knows of the interpretation and reenacts a statute without change).

3. Good Fortune has presented no plausible reason to decide this appeal at Chevron step one

Good Fortune's arguments concerning step one of the Chevron framework misapprehend both that framework and the regulations at issue in this appeal.

As shown above (at 19), Good Fortune has repeatedly conceded that the text of § 883 does not directly speak to the types of proof that corporations must present to demonstrate their entitlement to the exemption in § 883(a)(1). Good Fortune nevertheless contends that Congress somehow addressed the question at issue in this case. (See Br. 21-22, 25-31.) In doing so, however, Good Fortune never even attempts to specify what question it believes is at issue in this case. (See id.) That omission is fatal to Good Fortune's argument, because it is settled beyond doubt that the first step of the Chevron framework applies only where Congress has spoken to the “precise” question at issue. E.g., Chevron, 467 U.S. at 842. And although Good Fortune apparently believes that congressional silence is treated differently from statutory ambiguity under Chevron (see Br. 29-30), that belief is incorrect (see supra p. 18).

In any event, Good Fortune's textual argument fails on its own terms. Good Fortune argues that Congress's use of the word “own” in § 883(c) somehow invalidates the bearer-share regulations. (See Br. 29-30, 34-35.) That is not so. As the Tax Court held (A. 109), Congress's statement that the exemption turns on the residency of the individuals who “own[ ]” a corporation's shares (I.R.C. § 883(c)(1)) simply tells the IRS what the test is — the residency of shareholders. It does not tell the IRS how to determine whether that test has been satisfied by any given corporation. In particular, the word “own” does not speak to the questions of whether, and how, a corporation can prove the ownership of bearer shares at a given time.

The bearer-share regulations recognize this distinction between ownership and proof of ownership. The regulations do not take the position that the holders of bearer shares cannot be seen as owning the shares. To the contrary, as the Tax Court noted (A. 114), they recognize that holding bearer shares is a form of ownership. See Treas. Reg. § 1.883-4(b)(1)(ii). The regulations also do not deny that, in the context of bearer shares, “possession equals ownership.” (Br. 30.) Instead, the regulations simply treat the ownership of bearer shares at a prior time as a fact not capable of sufficient proof. See 68 Fed. Reg. at 51,399; 67 Fed. Reg. at 50,518.

Even Good Fortune recognizes that this distinction between ownership and proof of ownership is significant. (See, e.g., Br. 23.) In arguing that this appeal should be resolved at step one of the Chevron framework, however, Good Fortune does not honor this distinction.6 Rather, it commits the very error that it accuses the Tax Court of making: It “wrongly conflate[s] proof of ownership,” which is at issue on this appeal, “with the meaning of ownership,” which is not at issue. (Br. 28; accord Br. 30.)

Furthermore, given the distinction between ownership and proof of ownership, it is irrelevant that § 883(c) does not expressly “disallow any form of ownership.” (Br. 23.) In particular, that silence does not mean that Congress believed all types of ownership were susceptible of proof. The statutory text therefore cannot be seen as barring the regulations at issue.

Good Fortune also invokes the legislative history of § 883 (Br. 35-38), but its arguments on that point are no more persuasive than its arguments about the statutory text. Good Fortune argues that Congress intended § 883(c) to “tighten” the exemption (Br. 37), but as shown above (at 20-26), the bearer-share regulations are fully consistent with that intent. Good Fortune is also not helped by its more specific contention that Congress tied the exemption to the country where a corporation's “ultimate beneficial owners reside” rather than to “the foreign corporation's stock structure.” (Br. 38.) In the case of bearer shares, the IRS has reasonably determined that those two issues are intertwined, because the use of bearer shares makes it effectively impossible to learn the identity — and thus the country of residence — of shareholders. There is accordingly no basis for invalidating the bearer-share regulations under step one of the Chevron framework.

C. The bearer-share regulations are valid under the second step of the Chevron framework

1. The regulations are reasonable and further the purpose of § 883(c)

The bearer-share regulations easily pass muster under the second step of the Chevron framework. As shown above (at 21), Congress enacted § 883(c) as a means of preventing companies from claiming the exemption in § 883(a)(1) on the basis of flags of convenience. As further shown above (at 21-26), the bearer-share regulations further that goal and are based on a permissible construction of the statute. And the IRS's rationale for promulgating those regulations — the difficulty of determining the identity, and thus residence, of the holders of bearer shares — is both context-sensitive and reasonable. The regulations are therefore valid under Chevron. E.g., Van Hollen, Jr., 811 F.3d at 495; AT&T Corp., 220 F.3d at 621.

That conclusion is, as the Tax Court held (A. 112-14), reinforced by the Supreme Court's opinion in Mayo. The taxpayer in Mayo conceded that the IRS had the general authority to enforce the tax exemption for students by distinguishing “between workers who study and students who work.” Mayo, 562 U.S. at 59. The taxpayer nevertheless argued that the IRS could not do so by adopting the bright-line rule that anyone who works full-time is not a student. See id. The Supreme Court “disagree[d],” holding that “[r]egulation, like legislation, often requires drawing lines,” that the line chosen by the IRS prevented burdensome inquiries, and that the agency had put forth reasonable explanations for its choice. Id. at 59-60; see also, e.g., Gaughf Props., L.P. v. Comm'r, 738 F.3d 415, 425 (D.C. Cir. 2013).

The Supreme Court's reasoning transfers directly to this case. Good Fortune, like the taxpayer in Mayo, concedes that the IRS has authority to regulate the topic at issue — here, to distinguish between corporations that have proved the identity and residence of their owners and corporations that have not. (Br. 31.) But Good Fortune, again like the taxpayer in Mayo, argues that it was unreasonable for the IRS to draw a specific line, in this case between alleged owners of bearer shares and the owners of registered shares.

That argument should be rejected for the reasons enunciated by the Supreme Court in Mayo: Regulation involves line-drawing. Contrary to Good Fortune's contention (Br. 40-41), the distinction drawn by the IRS avoids burdensome, quixotic inquiries into the historical ownership of bearer shares (see supra p. 23). And the IRS had good reason for its decision to restrict the use of such shares for purposes of the exemption in § 883(a)(1). (See supra pp. 24-25.)

2. Good Fortune's contrary contentions lack merit

In an attempt to meet its high burden of showing that the bearer-share regulations are unreasonable, Good Fortune repeats its arguments about the text and legislative history of § 883. Those arguments are even less convincing in the deferential context of Chevron step two and should be rejected for the reasons above (at 26-30).

Good Fortune also argues that documentary substantiation is sufficient to cure the problems posed by bearer shares, that registered shares held by nominees and trustees pose precisely the same problem as bearer shares, and that the IRS permits recourse to bearer shares in other, purportedly analogous situations. None of these arguments is persuasive.

a. Documentary substantiation would not provide the IRS with a reasonable method of determining the true owners of bearer shares

Good Fortune's attempt to show that documentary evidence is sufficient to prove the ownership of bearer shares (e.g., Br. 43) is unconvincing. Good Fortune suggests that the documents it provided to the IRS in an attempt to substantiate ownership of its own bearer shares are all that is necessary. (See Br. 50-51.) But those documents — which purport to fulfill the substantiation requirements that apply to registered shares (see Dkt. 16, Exs. 3-J–6-J) — highlight the difficulty of determining the past holders of bearer shares. To be sure, those documents make assertions about the possession, and ownership, of Good Fortune's shares in 2007. But such documents — unlike corporate records listing the owners of registered shares — are merely post hoc assertions, not contemporaneous records of ownership. And the IRS has no reliable means of verifying or refuting those assertions (see supra p. 23) — a conclusion that Good Fortune does not, and cannot, dispute.

The documents attending loans taken out to finance vessels (Br. 48-49) suffer from the same deficiency. Such documents could show the identity of the individual or entity who purchased a vessel. They would nevertheless do nothing to demonstrate the identity of the holder of bearer shares on any given date.

Good Fortune further contends that corporations might have formal records of the ownership of bearer shares even though there is no requirement that they keep such records. (Br. 49-50.) That is true — and the recent increase in the number of corporations switching to immobilized or dematerialized bearer shares underpins the IRS's 2010 amendment allowing such shares to count toward the requirement in § 883(c). See 75 Fed. Reg. at 56,860. But there is no guarantee that all foreign shippers — or even any foreign shipper — using bearer shares kept such books in 2007. To the contrary, Good Fortune has conceded that its own shares were not kept in record form. (A. 13-14.) For these reasons, the IRS's asserted ability to request whatever documents it wants in the course of an audit (Br. 43) is a red herring. For many foreign shippers, no documents will suffice.

Good Fortune also notes (Br. 46) that Revenue Procedure 91-12, the initial guidance issued by the IRS on the exemption in § 883(a)(1), allowed corporations to use bearer shares to prove their entitlement to the exemption if the corporation provided sufficient documentation of ownership. See Rev. Proc. 91-12, § 8.02(3), 1991-1 C.B. 473. But that is of no moment. An agency is permitted to change its mind so long as it explains the change (e.g., Nat'l Cable & Telecommc'ns Ass'n v. Brand X Internet Servs., 545 U.S. 967, 981 (2005)), and there is no dispute that the IRS did so here (see 68 Fed. Reg. at 51,399; 67 Fed. Reg. at 50,518). Furthermore, given that regulations are valid under the second step of the Chevron framework so long as the agency has selected some reasonable regulatory regime, any debate about the relative merits of the bearer-share regulations and Revenue Procedure 91-12 would be academic. See, e.g., AT&T Corp., 220 F.3d at 621.

b. The regulations reasonably distinguish between bearer shares and shares owned by intermediaries

Good Fortune next contends that the bearer-share regulations are unreasonable because, in its view, “proving the ownership of bearer shares is no harder or more difficult tha[n] proving the true owners of” registered “shares held by nominees or trustees.” (Br. 40; see also Br. 32-33, 50-51.) That argument is irrelevant. “'An agency does not have to make progress on every front before it can make progress on any front.'” Nat'l Min. Ass'n v. Mine Safety & Health Admin., 116 F.3d 520, 549 (D.C. Cir. 1997) (quoting Personal Watercraft Ass'n v. Dep't of Commerce, 48 F.3d 540, 544 (D.C. Cir. 1995)); accord, e.g., Competitive Enter. Inst. v. U.S. Dep't of Transp., 863 F.3d 911, 919 n.7 (D.C. Cir. 2017). To the contrary, an agency “'enjoys broad discretion in determining how best to handle related, yet discrete, issues in terms of policies and priorities.'” Competitive Enter. Inst., 883 F.3d at 919 n.7 (quoting Mobil Oil Exploration & Producing Se., Inc. v. United Distrib. Cos., 498 U.S. 211, 230 (1991)). This Court has accordingly refused to strike down regulations “'just because they fail to regulate everything that could be thought to pose any sort of problem.'” Nat'l Min. Ass'n, 116 F.3d at 549 (quoting Personal Watercraft Ass'n, 48 F.3d at 544). The result is that, even if Good Fortune's argument concerning shares held by nominees or trustees were correct, it would provide no basis for invalidating the bearer-share regulations.

In any event, Good Fortune's argument is not correct. It is true that nominees and trustees can be used to hide the true ownership of shares. This is because both nominees and trustees serve as intermediaries between the corporation and the beneficial shareholder. Specifically, nominees hold “'bare legal title to property for the benefit of another'” (Fourth Inv. LP v. United States, 720 F.3d 1058, 1066 (9th Cir. 2013) (quoting Scoville v. United States, 250 F.3d 1198, 1202 (8th Cir. 2001)). Trustees, meanwhile, “hold[ ] legal title to property and administer[ ] it for the benefit of others.” Mertens Law of Federal Income Taxation § 17:21 (2017) (citing Reinecke v. Smith, 289 U.S. 172 (1933)). Both nominees and trustees can therefore be used to obscure the identity of beneficial owners. This problem of owner identification becomes acute in circumstances involving discretionary trusts — i.e., trusts in which the trustee has discretion to distribute income among multiple beneficiaries (Black's Law Dictionary (10th ed. 2014)) — because there is no way for the IRS to know the identity of a beneficial owner of given property before a distribution is made.

For these reasons, the IRS included safeguards against the use of trusts and nominees to obscure shareholders' identities in the regulations implementing § 883. In fact, those regulations provide that shares owned by a discretionary trust generally cannot be used to satisfy the residency-based exemption. See Treas. Reg. § 1.883-4(c)(3)(i). The only exception is for cases in which the identity of the ultimate beneficiary is irrelevant because “all potential beneficiaries” satisfy the requirement in § 883(c). Id.

Other shares held by a nominee or a trustee can be used to establish ownership for purposes of § 883(c) only if the nominee or trustee submits to the IRS detailed statements substantiating the identity of the beneficial owners. See Treas. Reg. § 1.883-4(d)(4)(v). Specifically, nominees and trustees (and other intermediaries) must provide the IRS with an “intermediary ownership statement” signed “under penalties of perjury” disclosing, inter alia, (i) the intermediary's name, country of residence, and principal place of business; (ii) information about the shares owned by the intermediary; and (iii) the beneficial owners' names, addresses, and proportionate interests. Id. § 1.883-4(d)(4)(v)(A)(1)-(4); see also id. § 1.883-4(d)(4)(i)(C)-(E). The corporation claiming the exemption must also retain all ownership statements, and must make them available for inspection on demand, “until the expiration of the statute of limitations for the taxable year” at issue. Id. § 1.883-4(d)(5). Good Fortune's suggestion that the IRS has not implemented safeguards with respect to nominees and trustees (see Br. 33, 45) is accordingly incorrect.

Moreover, the IRS had good reason to place greater restrictions on the use of bearer shares and discretionary trusts than on nominees and other trusts. As shown above (at 21-23), the difficulty of reliably demonstrating the true owners of bearer shares at a prior time stems from the ease in transferring ownership in the shares. Because handing off the physical certificates suffices to transfer ownership of bearer shares, identifying owners at prior times is effectively impossible. The same problem attends discretionary trusts, because there is no way to know which beneficiary of such a trust will receive particular property until a distribution is actually made.

Transfers, however, are more cumbersome in situations involving nominees and trustees. A nominee is an agent of the beneficial owner (e.g., Mertens Law of Federal Income Taxation § 17:20 (citing Comm'r v. Bollinger, 485 U.S. 340 (1988)), with the result that a nominee is very likely to have a relationship with the beneficial owner. Classic examples of nominees include spouses, single-member limited liability corporations, and partnerships controlled by an individual taxpayer. See id. Such relationships are unlikely to change on a regular basis. Thus, although nominees allow any given taxpayer a potential way to conceal stock ownership, they do not do so by allowing for the easy transfer of shares.

The situation is the same with non-discretionary trusts. Trusts are intermediaries and can therefore theoretically be used to cloak the identity of beneficiaries. But trusts typically require some kind of signed writing (See, e.g., Restatement (Third) of Trusts § 10 & cmt. d; id. 22-23), and that requirement prevents beneficiaries from being substituted without a paper trail. Nominees and trusts therefore pose a different problem of shareholder identification than bearer shares.

Further, the problem posed by nominees and trusts, unlike the problem posed by bearer shares, is amenable to a substantiation-based solution. For nominees and trusts, the issue is simply penetrating through the intermediary to the beneficial owner. The IRS could reasonably determine that documentation substantiating the identity and residence of such owners is sufficient for purposes of determining whether the corporation that issued the shares has satisfied the requirement in § 883(c). And the IRS could reasonably do so while also reaching the conclusion that the transferable nature of bearer shares means that substantiation is inappropriate in the context of those shares.

Good Fortune also attempts to draw an analogy between the holders of bearer shares and the owners of registered stock issued by a corporation that itself owns shares in a foreign shipper. (Br. 40.) But indirect ownership of registered stock, unlike bearer shares, presents no problems of owner identification. In Good Fortune's example, the shareholders of the corporation that owns stock in the foreign shipper would be reflected on that corporation's books.

In short, Good Fortune's arguments about registered shares make clear that the IRS has disallowed the use of shares where the owner of the shares cannot be reasonably verified — and has allowed the use of documentation to substantiate ownership in other appropriate cases. That reasonable distinction provides no basis for invalidating the regulations at issue.

c. Good Fortune's proposed analogies lack force

Finally, Good Fortune argues that the bearer-share regulations must be unreasonable because the IRS accepts bearer shares for other purposes. (Br. 38-39.) The IRS, however, had good reason for treating bearer shares differently under § 883 than in the contexts on which Good Fortune relies.

i. The branch profits tax in § 884 is not comparable to the tax on foreign shipping companies

Good Fortune first invokes (Br. 39) the branch profits tax in I.R.C. § 884 — i.e., the additional tax imposed on, among other things, the dividend equivalent amount deemed repatriated by a foreign corporation's U.S. trade or business to its home office. Section 884(e)(1) allows a corporation to receive an exemption from, or a reduction of, the branch profits tax if it is a “qualified resident” of a country with which the United States has an income tax treaty providing for such exemptions or reductions. Section 884(e)(4) then sets out the rules for determining whether a corporation is a qualified resident. In particular, § 884(e)(4)(B) provides that qualified residents include (i) any corporation resident in a treaty country whose stock is publicly traded on a securities market in its country of residence, and (ii) the wholly owned subsidiaries of any such corporation resident in the same country.

The preamble to the regulations implementing § 884(e)(4)(B) states that publicly traded “corporations with bearer shares” can be treated as qualified residents under § 884(e)(4)(B). Branch Profits Tax, 57 Fed. Reg. 41,644-01, 41,648 (Sept. 11, 1992). Good Fortune argues that, if bearer shares can permissibly be used to become a qualified resident under § 884, then corporations seeking the exemption in § 883(a)(1) must also be able to rely on bearer shares.7 (Br. 39.)

That does not follow, because the impetus for the restriction on bearer shares in the context of § 883(a)(1) is absent in the context of § 884. As shown above (at 24-25), the abusive use of bearer shares to hide ownership constitutes a well-recognized problem in the shipping industry. Shippers, however, are not subject to § 884, because their income is categorically excluded from the branch profits tax. See I.R.C. § 884(d)(2)(a). And the companies that seek an exemption or reduction under § 884 do not pose a similar problem of hidden ownership, for two reasons: (i) such companies typically have a fixed place of business or permanent establishment in this country (See, e.g., U.S. Model Income Tax Convention, art. 5, available at https://www.treasury.gov/resource-center/tax-policy/treaties/Documents/Treaty-US%20Model-2016.pdf), and (ii) such companies are largely drawn from the financial industry and other highly-regulated sectors (see Corporation Returns With Net Income, Form 1120-F, at https://www.irs.gov/statistics/soi-tax-stats-table-11-corporation-returns-with-net-income-form-1120-f). It was therefore eminently reasonable for the IRS to preclude the use of bearer shares in the context of the § 883 exemption but not the § 884 exemption.

ii. The regulations implementing the Foreign Account Tax Compliance Act do not aid Good Fortune

On appeal, Good Fortune advances only one other example (Br. 39) of a regulation permitting the use of bearer shares — and has accordingly forfeited any argument based on any other such regulations. E.g., DeJesus, 841 F.3d at 532 n.1. That regulation — Treas. Reg. § 1.1471-5(f)(1)(i)(C)(2) — is even farther afield than the regulations implementing § 884.

Section 1.1471-5 relates to I.R.C. § 1471, which lays out the reporting provisions that apply to foreign financial institutions under the Foreign Account Tax Compliance Act.8 Section 1471 generally gives foreign financial institutions the choice between reporting specified information about accounts held by U.S. taxpayers or paying a withholding tax on certain U.S.-source income. See I.R.C. § 1471(a)-(b). The statute, however, does not apply to several categories of institutions. As relevant here, the reporting provisions do not apply to any foreign financial institution as to which the Secretary of the Treasury has determined that application of § 1471 “is not necessary to carry out the purposes of” the statute. Id. § 1471(b)(2)(B).

The Secretary has exercised that authority to deem various types of foreign financial institutions compliant with § 1471. See Treas. Reg. § 1.1471-5. In particular, the Secretary has determined that “qualified collective investment vehicles” — certain institutions regulated as investment funds in their countries of operations whose customers are not generally covered by the statute — are not subject to § 1471. Id. § 1.1471-5(f)(1)(i)(C). The provision on which Good Fortune relies states that an institution “will not be prohibited from qualifying as a qualified collective investment vehicle solely because it has issued interests in bearer form” so long as it “ceases issuing interests in such form after December 31, 2012, retires all such interests upon surrender, and establishes policies and procedures to redeem or immobilize all such interests prior to January 1, 2017.” Id. § 1.1471-5(f)(1)(i)(C)(2).

That statement cuts against, not in favor of, Good Fortune's position on appeal. By its plain terms, the regulation requires foreign investment funds that wish to be deemed compliant with § 1471 to have ceased issuing bearer shares before the regulation took effect in 2013 (see Treas. Reg. § 1.1471-5(j) (2013)). It also requires foreign investment funds to ensure that any existing bearer shares are redeemed, surrendered, or immobilized. By doing so, the regulation implicitly recognizes that the identity of the funds' customers could not be established if traditional bearer shares were used. That, of course, is the same concern at the root of the regulations at issue here.

Good Fortune nonetheless seeks (Br. 39) to rely on the fact that the regulation implementing § 1471, unlike the regulations implementing § 883, includes a grace period. But that distinction is reasonable. Any company that is a “qualified collective investment vehicle” is, by definition, subject to significant regulation in its home country (see Treas. Reg. § 1.1471-5(f)(1)(i)(C)(2)) — and is thus less likely that a foreign shipper to have anonymous ownership. In addition, in the context of § 1471, the limited allowance for bearer shares covers only whether a foreign financial institution will be deemed compliant with the reporting provisions of FATCA, not whether it is entitled to an exemption from tax. It was therefore entirely appropriate for the IRS to provide foreign financial institutions potentially subject to § 1471, but not foreign corporations subject to § 883(a)(1), with a grace period for eliminating bearer shares.9

D. The bearer-share regulations are not arbitrary and capricious

Good Fortune's last contention is that the bearer-share regulations are arbitrary and capricious. (See Br. 39-51.) “A rule is arbitrary and capricious if the promulgating agency relied on factors which Congress has not intended it to consider, entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise.” E.g., Nat'l Ass'n of Telecommc'ns Officers Advisors, 862 F.3d at 27-28. Review under this test often overlaps with step two of the Chevron framework (Pharm. Research & Mfrs. of Am., 790 F.3d at 209), because “[w]hether a statute is unreasonably interpreted is close analytically to the issue whether an agency's actions under a statute are unreasonable” (Gen. Instrument Corp. v. FCC, 213 F.3d 724, 732 (D.C. Cir. 2000)). And like the second step of the Chevron framework, the test for arbitrary and capricious agency action is “'very deferential'” and “forbids a court from 'substitut[ing] its judgment for that of the agency.'” Van Hollen, Jr., 811 F.3d at 495 (quoting Transmission Access Policy Study Grp. v. FERC, 225 F.3d 667, 714 (D.C. Cir. 2000)) (alteration in original).

In this case, Good Fortune raises no arguments under the arbitrary-and-capricious standard that are unrelated to the Chevron framework; in fact, it treats the arbitrary-and-capricious standard as a subset of that framework, (See Br. 31-51.) For the reasons above (at 32-47), those arguments do not come close to showing that the bearer-share regulations cannot “be ascribed to a difference in view or the product of agency expertise” (Nat'l Ass'n of Telecommc'ns Officers & Advisors, 862 F.3d at 27) or are otherwise arbitrary. The bearer-share regulations should accordingly be upheld as a permissible use of the IRS's regulatory authority.10

CONCLUSION

The order of the Tax Court should be affirmed.

Respectfully submitted,

DAVID A. HUBBERT
Deputy Assistant Attorney General
Richard Caldarone
THOMAS J. CLARK
(202) 514-9084
RICHARD CALDARONE
(202) 514-2947
Attorneys
Tax Division
Department of Justice
Post Office Box 502
Washington, D.C. 20044

DECEMBER 2017


STATUTORY AND REGULATORY ADDENDUM

26 U.S.C. § 883

26 U.S.C. § 887

26 C.F.R. § 1.883-1

26 C.F.R. § 1.883-4


26 U.S.C. § 883. Exclusions from income

(a) Income of foreign corporations from ships and aircraft. — The following items shall not be included in gross income of a foreign corporation, and shall be exempt from taxation under this subtitle:

(1) Ships operated by certain foreign corporations. — Gross income derived by a corporation organized in a foreign country from the international operation of a ship or ships if such foreign country grants an equivalent exemption to corporations organized in the United States.

* * *

(c) Treatment of certain foreign corporations. —

(1) In general. — Paragraph (1) or (2) of subsection (a) (as the case may be) shall not apply to any foreign corporation if 50 percent or more of the value of the stock of such corporation is owned by individuals who are not residents of such foreign country or another foreign country meeting the requirements of such paragraph.

* * *

(4) Stock ownership through entities. — For purposes of paragraph (1), stock owned (directly or indirectly) by or for a corporation, partnership, trust, or estate shall be treated as being owned proportionately by its shareholders, partners, or beneficiaries. Stock considered to be owned by a person by reason of the application of the preceding sentence shall, for purposes of applying such sentence, be treated as actually owned by such person.

26 U.S.C. § 887. Imposition of tax on gross transportation income of nonresident aliens and foreign corporations

(a) Imposition of tax. — In the case of any nonresident alien individual or foreign corporation, there is hereby imposed for each taxable year a tax equal to 4 percent of such individual's or corporation's United States source gross transportation income for such taxable year.

* * *

26 C.F.R. § 1.883-1. Exclusion of income from the international operation of ships or aircraft

(a) General rule. Qualified income derived by a qualified foreign corporation from its international operation of ships or aircraft is excluded from gross income and exempt from United States Federal income tax. Paragraph (b) of this section defines the term qualified income. Paragraph (c) of this section defines the term qualified foreign corporation. Paragraph (f) of this section defines the term international operation of ships or aircraft.

(b) Qualified income. Qualified income is income derived from the international operation of ships or aircraft that —

(1) Is properly includible in any of the income categories described in paragraph (h)(2) of this section; and

(2) Is the subject of an equivalent exemption, as defined in paragraph (h) of this section, granted by the qualified foreign country, as defined in paragraph (d) of this section, in which the foreign corporation seeking qualified foreign corporation status is organized.

(c) Qualified foreign corporation

(1) General rule. A qualified foreign corporation is a corporation that is organized in a qualified foreign country and considered engaged in the international operation of ships or aircraft. The term corporation is defined in section 7701(a)(3) and the regulations thereunder. Paragraph (d) of this section defines the term qualified foreign country. Paragraph (e) of this section defines the term operation of ships or aircraft, and paragraph (f) of this section defines the term international operation of ships or aircraft. To be a qualified foreign corporation, the corporation must satisfy the stock ownership test of paragraph (c)(2) of this section and satisfy the substantiation and reporting requirements described in paragraph (c)(3) of this section. A corporation may be a qualified foreign corporation with respect to one category of qualified income but not with respect to another such category. See paragraph (h)(2) of this section for a discussion of the categories of qualified income.

(2) Stock ownership test. To be a qualified foreign corporation, a foreign corporation must satisfy the publicly-traded test of § 1.883-2(a), the CFC stock ownership test of § 1.883-3(a), or the qualified shareholder stock ownership test of § 1.883-4(a).

(3) Substantiation and reporting requirements

(i) General rule. To be a qualified foreign corporation, a foreign corporation must include the following information in its Form 1120–F, “U.S. Income Tax Return of a Foreign Corporation,” in the manner prescribed by such form and its accompanying instructions —

(A) The corporation's name and address (including mailing code);

(B) The corporation's U.S. taxpayer identification number;

(C) The foreign country in which the corporation is organized;

(D) The applicable authority for an equivalent exemption, for example, the citation of a statute in the country where the corporation is organized, a diplomatic note between the United States and such country, or an income tax convention between the United States and such country in the case of a corporation described in paragraphs (h)(3)(i), (ii) and (iii) of this section;

(E) The category or categories of qualified income for which an exemption is being claimed;

(F) A reasonable estimate of the gross amount of income in each category of qualified income for which the exemption is claimed, to the extent such amounts are readily determinable;

(G) A statement as to whether any shares of the foreign corporation or of any intermediary corporation that are relied on to satisfy any stock ownership test described in paragraph (c)(2) of this section are issued in bearer form and whether the bearer shares are maintained in a dematerialized book-entry system in which the bearer shares are represented only by book entries and no physical certificates are issued or transferred, or in an immobilized book-entry system in which evidence of ownership is maintained on the books and records of the corporate issuer or by a broker or financial institution;

(H) Any other information required under § 1.883-2(f), § 1.883-3(d), or § 1.883-4(e), as applicable; and

(I) Any other relevant information specified in Form 1120–F, “U.S. Income Tax Return of a Foreign Corporation,” and its accompanying instructions.

(ii) Further documentation

(A) General rule. Except as provided in paragraph (c)(3)(ii)(B) of this section, if the Commissioner requests in writing that the foreign corporation provide documentation or substantiate any representations made under paragraph (c)(3)(i) of this section, or under § 1.883-2(f), § 1.883-3(d), or § 1.883-4(e), as applicable, the foreign corporation must provide the requested documentation or substantiation within 60 days of receiving the written request. If the foreign corporation does not provide the requested documentation or substantiation within the 60-day period, but demonstrates that the failure was due to reasonable cause and not willful neglect, the Commissioner may grant the foreign corporation a 30-day extension to provide the requested documentation or substantiation. Whether a failure to provide the documentation or substantiation in a timely manner was due to reasonable cause and not willful neglect shall be determined by the Commissioner based on all the facts and circumstances.

(B) Names and permanent addresses of certain shareholders. If the Commissioner requests the names and permanent addresses of individual qualified shareholders of a foreign corporation, as represented on each individual's ownership statement, to substantiate the requirements of the exception to the closely-held test in the publicly-traded test in § 1.883-2(e), the qualified shareholder stock ownership test in § 1.883-4(a), or the qualified U.S. person ownership test in § 1.883-3(b), the foreign corporation must provide the requested information within 30 days of receiving the written request. If the foreign corporation does not provide the requested information within the 30-day period, but demonstrates that the failure was due to reasonable cause and not willful neglect, the Commissioner may grant the foreign corporation a 30-day extension to provide the requested information. Whether a failure to provide the requested information was due to reasonable cause and not willful neglect shall be determined by the Commissioner based on all the facts and circumstances.

* * *

26 C.F.R. § 1.883-4. Qualified shareholder stock ownership test.

(a) General rule. A foreign corporation satisfies the stock ownership test of § 1.883-1(c)(2) if more than 50 percent of the value of its outstanding shares is owned, or treated as owned by applying the attribution rules of paragraph (c) of this section, for at least half of the number of days in the foreign corporation's taxable year by one or more qualified shareholders, as defined in paragraph (b) of this section. A shareholder may be a qualified shareholder with respect to one category of income while not being a qualified shareholder with respect to another. A foreign corporation will not be considered to satisfy the stock ownership test of § 1.883-1(c)(2) pursuant to this section unless the foreign corporation meets the substantiation and reporting requirements of paragraphs (d) and (e) of this section.

(b) Qualified shareholder

(1) General rule. A shareholder is a qualified shareholder only if the shareholder —

(i) With respect to the category of income for which the foreign corporation is seeking an exemption, is —

(A) An individual who is a resident, as described in paragraph (b)(2) of this section, of a qualified foreign country;

(B) The government of a qualified foreign country (or a political subdivision or local authority of such country);

(C) A foreign corporation that is organized in a qualified foreign country and meets the publicly traded test of § 1.883-2(a);

(D) A not-for-profit organization described in paragraph (b)(4) of this section that is not a pension fund as defined in paragraph (b)(5) of this section and that is organized in a qualified foreign country;

(E) An individual beneficiary of a pension fund (as defined in paragraph (b)(5)(iv) of this section) that is administered in or by a qualified foreign country, who is treated as a resident under paragraph (d)(3)(iii) of this section, of a qualified foreign country; or

(F) A shareholder of a foreign corporation that is an airline covered by a bilateral Air Services Agreement in force between the United States and the qualified foreign country in which the airline is organized, provided the United States has not waived the ownership requirement in the Air Services Agreement, or that the ownership requirement has not otherwise been made ineffective;

(ii) Does not own its interest in the foreign corporation through bearer shares, either directly or by applying the attribution rules of paragraph (c) of this section, unless such bearer shares are maintained in a dematerialized or immobilized book-entry system, as described in § 1.883-1(c)(3)(i)(G); and

(iii) Provides to the foreign corporation the documentation required in paragraph (d) of this section and the foreign corporation meets the reporting requirements of paragraph (e) of this section with respect to such shareholder.

(2) Residence of individual shareholders

(i) General rule. An individual described in paragraph (b)(1)(i)(A) of this section is a resident of a qualified foreign country only if the individual is fully liable to tax as a resident in such country (e.g., an individual who is liable to tax on a remittance basis in a foreign country will not be treated as a resident of that country unless all residents of that country are taxed on a remittance basis only) and, in addition —

(A) The individual has a tax home, within the meaning of paragraph (b)(2)(ii) of this section, in that qualified foreign country for 183 days or more of the taxable year; or

(B) The individual is treated as a resident of a qualified foreign country based on special rules pursuant to paragraph (d)(3) of this section.

(ii) Tax home. For purposes of this section, an individual's tax home is considered to be located at the individual's regular or principal (if more than one regular) place of business. If the individual has no regular or principal place of business because of the nature of his business (or lack of a business), then the individual's tax home is located at his regular place of abode in a real and substantial sense. If an individual has no regular or principal place of business and no regular place of abode in a real and substantial sense in a qualified foreign country for 183 days or more of the taxable year, that individual does not have a tax home for purposes of this section. A foreign estate or trust, as defined in section 7701(a)(31), does not have a tax home for purposes of this section. See paragraph (c)(3) of this section for alternative rules in the case of trusts or estates.

* * *

(c) Rules for determining constructive ownership

(1) General rules for attribution. For purposes of applying paragraph (a) of this section and the exception to the closely-held test in § 1.883-1(d)(3)(ii), stock owned by or for a corporation, partnership, trust, estate, or mutual insurance company or similar entity shall be treated as owned proportionately by its shareholders, partners, beneficiaries, grantors, or other interest holders, as provided in paragraphs (c)(2) through (7) of this section. The proportionate interest rules of this paragraph (c) shall apply successively upward through the chain of ownership, and a person's proportionate interest shall be computed for the relevant days or period taken into account in determining whether a foreign corporation satisfies the requirements of paragraph (a) of this section. Stock treated as owned by a person by reason of this paragraph (c) shall be treated as actually owned by such person for purposes of this section. An owner of an interest in an association taxable as a corporation shall be treated as a shareholder of such association for purposes of this paragraph (c). Stock issued in bearer form will not be treated as owned proportionately by its shareholders unless the shares are maintained in a dematerialized or immobilized book-entry system, as described in § 1.883-1(c)(3)(i)(G).

* * *

(d) Substantiation of stock ownership

(1) General rule. A foreign corporation that relies on this section to satisfy the stock ownership test of § 1.883-1(c)(2), must establish all the facts necessary to satisfy the Commissioner that more than 50 percent of the value of its shares is owned, or treated as owned applying paragraph (c) of this section, by qualified shareholders for the relevant period. If a foreign corporation relies upon bearer shares in the chain of ownership to satisfy one of the stock ownership tests, the foreign corporation must also establish all of the facts necessary to satisfy the Commissioner that such shares are maintained in a dematerialized book-entry system, as described in § 1.883-1(c)(3)(i)(G), for the benefit of the relevant shareholder.

(2) Application of general rule

(i) Ownership statements. Except as provided in paragraph (d)(3) of this section, a person shall only be treated as a qualified shareholder of a foreign corporation if —

(A) For the relevant period, the person completes an ownership statement described in paragraph (d)(4) of this section or has a valid ownership statement in effect under paragraph (d)(2)(ii) of this section;

(B) In the case of a person owning stock in the foreign corporation indirectly through one or more intermediaries (including mere legal owners or recordholders acting as nominees), each intermediary in the chain of ownership between that person and the foreign corporation seeking qualified foreign corporation status completes an intermediary ownership statement described in paragraph (d)(4)(v) of this section or has a valid intermediary ownership statement in effect under paragraph (d)(2)(ii) of this section; and

(C) The foreign corporation seeking qualified foreign corporation status obtains the statements described in paragraphs (d)(2)(i)(A) and (B) of this section.

(ii) Three-year period of validity. The ownership statements required in paragraph (d)(2)(i) of this section shall remain valid until the earlier of the last day of the third calendar year following the year in which the ownership statement is signed, or the day that a change of circumstance occurs that makes any information on the ownership statement incorrect. For example, an ownership statement signed on September 30, 2000, remains valid through December 31, 2003, unless a change of circumstance occurs that makes any information on the ownership statement incorrect.

* * *

(4) Ownership statements from shareholders

(i) Ownership statements from individuals. An ownership statement from an individual is a written statement signed by the individual under penalties of perjury stating —

(A) The individual's name, permanent address, and country where the individual is fully liable to tax as a resident, if any;

(B) If the individual was not a resident of the country for the entire taxable year of the foreign corporation seeking qualified foreign corporation status, each of the foreign countries in which the individual resided and the dates of such residence during the taxable year of such foreign corporation;

(C) If the individual directly owns shares of stock in the corporation seeking qualified foreign corporation status, the name of the corporation, the number of shares in each class of stock of the corporation owned by the individual, whether any such shares are issued in bearer form and maintained in a dematerialized or immobilized book-entry system, as described in § 1.883-1(c)(3)(i)(G), and the period (or periods) in the taxable year of the foreign corporation during which the individual owned the shares;

(D) If the individual directly owns an interest in a corporation, partnership, trust, estate, or other intermediary that directly or indirectly owns stock in the corporation seeking qualified foreign corporation status, the name of the intermediary, the number and class of shares or the amount and nature of the interest that the individual holds in such intermediary, and, if the intermediary is a corporation, whether any such shares are issued in bearer form and maintained in a dematerialized or immobilized book-entry system, as described in § 1.883-1(c)(3)(i)(G), and the period (or periods) in the taxable year of the foreign corporation seeking qualified foreign corporation status during which the individual held such interest;

(E) To the extent known by the individual, a description of the chain of ownership through which the individual owns stock in the corporation seeking qualified foreign corporation status, including the name and address of each intermediary standing between the intermediary described in paragraph (d)(4)(i)(D) of this section and the foreign corporation and whether this interest is owned either directly or indirectly through bearer shares; and

(F) Any other information as specified in guidance published by the Internal Revenue Service (see § 601.601(d)(2) of this chapter).

* * *

(v) Ownership statements from intermediaries

(A) General rule. The foreign corporation seeking qualified foreign corporation status under the shareholder stock ownership test must obtain an intermediary ownership statement from each intermediary standing in the chain of ownership between it and the qualified shareholders on whom it relies to meet this test. An intermediary ownership statement is a written statement signed under penalties of perjury by the intermediary (if the intermediary is an individual) or a person who would be authorized to sign a tax return on behalf of the intermediary (if the intermediary is not an individual) containing the following information —

(1) The name, address, country of residence, and principal place of business (in the case of a corporation or partnership) of the intermediary, and, if the intermediary is a trust or estate, the name and permanent address of all trustees or executors (or equivalent under foreign law), or if the intermediary is a pension fund, the name and permanent address of place of administration of the intermediary;

(2) The information described in paragraphs (d)(4)(i)(C) through (E) of this section (as if the language applied “intermediary” instead of “individual”);

(3) If the intermediary is a nominee for a shareholder or another intermediary, the name and permanent address of the shareholder, or the name and principal place of business of such other intermediary;

(4) If the intermediary is not a nominee for a shareholder or another intermediary, the name and country of residence (within the meaning of paragraph (b)(2) of this section) and the proportionate interest in the intermediary of each direct shareholder, partner, beneficiary, grantor, or other interest holder (or if the direct holder is a nominee, of its beneficial shareholder, partner, beneficiary, grantor, or other interest holder), on which the foreign corporation seeking qualified foreign corporation status intends to rely to satisfy the requirements of paragraph (a) of this section. In addition, such intermediary must obtain from all such persons an ownership statement that includes the period of time during the taxable year for which the interest in the intermediary was owned by the shareholder, partner, beneficiary, grantor or other interest holder. For purposes of this paragraph (d)(4)(v)(A), the proportionate interest of a person in an intermediary is the percentage interest (by value) held by such person, determined using the principles for attributing ownership in paragraph (c) of this section;

(5) If the intermediary is a widely-held corporation with registered shareholders owning less than one percent of the stock of such widely-held corporation, the statement set out in paragraph (d)(4)(v)(B) of this section, relating to ownership statements from widely-held intermediaries with registered shareholders owning less than one percent of such widely-held intermediaries;

(6) If the intermediary is a pension fund, within the meaning of paragraph (b)(5) of this section, the statement set out in paragraph (d)(4)(v)(C) of this section, relating to ownership statements from pension funds;

(7) If the intermediary is a taxable nonstock corporation, within the meaning of paragraph (c)(5) of this section, the statement set out in paragraph (d)(4)(v)(D) of this section, relating to ownership statements from intermediaries that are taxable nonstock corporations; and

(8) Any other information as specified in guidance published by the Internal Revenue Service (see § 601.601(d)(2) of this chapter).

* * *

(5) Availability and retention of documents for inspection. The documentation described in paragraphs (d)(3) and (4) of this section must be retained by the corporation seeking qualified foreign corporation status (the foreign corporation) until the expiration of the statute of limitations for the taxable year of the foreign corporation to which the documentation relates. Such documentation must be made available for inspection by the Commissioner at such time and place as the Commissioner may request in writing.

(e) Reporting requirements. A foreign corporation relying on the qualified shareholder stock ownership test of this section to meet the stock ownership test of § 1.883-1(c)(2) must provide the following information in addition to the information required in § 1.883-1(c)(3) to be included in its Form 1120–F, “U.S. Income Tax Return of a Foreign Corporation,” for each taxable year. The information should be current as of the end of the corporation's taxable year. The information must include the following —

(1) A representation that more than 50 percent of the value of the outstanding shares of the corporation is owned (or treated as owned by reason of paragraph (c) of this section) by qualified shareholders for each category of income for which the exemption is claimed;

(2) With respect to all qualified shareholders relied upon to satisfy the 50 percent ownership test of paragraph (a) of this section, the total number of such qualified shareholders as defined in paragraph (b)(1) of this section; the total percentage of the value of the outstanding shares owned, applying the attribution rules of paragraph (c) of this section, by such qualified shareholders by country of residence or organization, whichever is applicable; and the period during the taxable year of the foreign corporation that such stock was held by qualified shareholders; and

(3) Any other relevant information specified by the Form 1120-F, “U.S. Income Tax Return of a Foreign Corporation,” and its accompanying instructions, or in published guidance by the Internal Revenue Service (see § 601.601(d)(2) of this chapter).

FOOTNOTES

1 Citations to “A. __” are to the appendix filed by Good Fortune. Citations to “Dkt. __” are to items in the Tax Court's docket. References to “Br. __” are to Good Fortune's opening brief.

2 The statute contains different tests that apply to controlled foreign corporations (I.R.C. § 883(c)(2); see also 26 C.F.R. (“Treas. Reg.”) § 1.883-3(a)) and publicly traded corporations (I.R.C. § 883(c)(3); see also Treas. Reg. § 1.883-2(a)). It is undisputed that neither of these tests is relevant here.

3 The petition also sought to challenge related temporary regulations. (See A. 7-8.) But the Tax Court held (A. 95 & n.13), and it is undisputed on appeal, that those temporary regulations are not at issue because they did not apply to Good Fortune's 2007 tax year.

4 Good Fortune argues that Goldsmith shows that the IRS is willing to, and capable of, tracing bearer shares. (Br. 47.) But the Tax Court in Goldsmith ruled against the IRS precisely because the IRS was unable to prove that the taxpayer had ever possessed certain bearer shares. See Goldsmith, T.C. Memo. 1986-227. Goldsmith accordingly exemplifies the rationale for the bearer-share regulations.

5 As a result of these abuses, various countries have recently moved to ban traditional, unregistered bearer shares. See, e.g., Small Business, Enterprise & Employment Act 2015, § 84 (U.K.); Behind the Corporate Veil 30-31; Ship Registration: Law and Practice § 5.5, at 57. The IRS's 2010 amendments to the bearer-share regulations, which allow corporations to rely on immobilized or dematerialized shares, reflect this emerging change. See 75 Fed. Reg. at 56,860.

6 Good Fortune contends that “the Chevron analysis” substantively “shifts” between the two steps, such that the question of ownership governs step one and questions concerning proof of ownership govern step two. (Br. 23.) That curious contention is inconsistent with the bedrock principle that both steps of the inquiry go to “the precise question at issue” in a given case. Chevron, 467 U.S. at 842.

7 In making this argument, Good Fortune erroneously refers to I.R.C. § 884(c)(4)(B) — a provision that does not exist. (Br. 39.) It also erroneously contends that a regulatory preamble published in the Federal Register constitutes “legislative history.” (Id.)

8 See Title V, subtitle A of the Hiring Incentives to Restore Employment Act, Pub. L. No. 111-147, §§ 501-35, 124 Stat. 71, 97-115 (Mar. 18, 2010).

9 In any event, Good Fortune had every opportunity to cease its use of bearer shares before tax year 2007. The IRS first proposed regulations prohibiting the use of bearer shares in the context of § 883 in 2000 (see Exclusions from Gross Income of Foreign Corporations, 65 Fed. Reg. 6065-01 (Feb. 8, 2000)), and the regulations at issue apply to “taxable years of foreign corporations” beginning on or after September 25, 2003 (see 68 Fed. Reg. at 51,394). Good Fortune therefore may not now complain that it lacked sufficient notice to switch to registered shares.

10 If this Court nevertheless reverses the Tax Court, it should not vacate the amended bearer-share regulations enacted in 2010. Those regulations permit the consideration of certain bearer shares in determining a corporation's qualification for the exemption in § 883(a)(1), and the reasonableness of that more flexible regime is not at issue here.

END FOOTNOTES

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