Document Type

Article

Publication Date

7-22-1991

Abstract

The United States appeals from a judgment entered in the United States District Court for the Northern District of New York (McAvoy, J.), finding that R.E. Dietz Corporation ("Taxpayer") was entitled to a refund of taxes and interest overpaid for the years 1981, 1982 and 1983. Pursuant to section 7422 of the Internal Revenue Code and 28 U.S.C. § 1346(a)(1), Taxpayer commenced this action seeking a refund in the amount of $454,650.30 paid after the Internal Revenue Service ("IRS") determined that certain interest income earned by Taxpayer's controlled foreign corporation, R.E. Dietz Company, Ltd. ("Dietz"), in "offshore" bank accounts should be included in the gross income of Taxpayer under 26 U.S.C. § 951.[1] Dietz is a controlled foreign corporation as defined by I.R.C. § 957, because more than fifty percent of its stock is owned by Taxpayer. In the notice of deficiency, the IRS informed Taxpayer that interest income earned by Dietz in 1981, 1982 and 1983 was not income that Taxpayer was entitled to exclude from its tax return under former I.R.C. § 954(b)(4), which allowed for the exclusion of income earned by a controlled foreign corporation under certain circumstances.

After a two-day bench trial, the district court held that Taxpayer was entitled to the benefit of the exclusion under I.R.C. § 954(b)(4). The government's principal contentions on appeal are that the district court was required to defer to the IRS deficiency determination, setting it aside only if the IRS acted arbitrarily, and that the district court erred in finding that none of the significant purposes of establishing the "offshore" accounts included a substantial reduction in income taxes. We hold that the determination of the Commissioner that the Taxpayer was not entitled to avail itself of the exclusion under I.R.C. § 954(b)(4) may not be disturbed unless arbitrary or unreasonable. We also hold that, although the district court applied an erroneous standard of review, the record supports its conclusion that the Commissioner's determination was unreasonable.

Comments

939 F.2d 1 (1991)

R.E. DIETZ CORPORATION, Plaintiff-Appellee,

v.\ UNITED STATES of America, Defendant-Appellant.

No. 1438, Docket 90-6274. United States Court of Appeals, Second Circuit.

Argued May 9, 1991.

Decided July 22, 1991.

New York Law School location: File #1229, Box #128

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