The LIMITED, INC., and consolidated subsidiaries, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee., United States Court of Appeals, Sixth Circuit., 286 F.3d 324, No. 00-2245., April 11, 2002
The LIMITED, INC., and consolidated subsidiaries, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
United States Court of Appeals, Sixth Circuit.
286 F.3d 324
April 11, 2002.
Argued: Jan. 25, 2002.
Decided and Filed: April 11, 2002.
Joel V. Williamson (briefed), Roger J. Jones (argued and briefed), Russell R. Young (briefed), Mayer, Brown & Platt, Chicago, IL, James P. Fuller (briefed), Jennifer L. Fuller (briefed), Kenneth B. Clark (briefed), William F. Colgin (briefed), Fenwick & West, Palo Alto, CA, for Petitioner-Appellant.
Stuart L. Brown, Internal Revenue Ser╜vice, Office of Chief Counsel, Washington, DC, Teresa E. McLaughlin (argued and briefed), Donald B. Tobin (briefed), U.S. Department of Justice, Appellate Section Tax Division, Washington, DC, for Re╜spondent-Appellee.
Stephen D. Gardner (briefed), Kronish, Lieb, Weiner & Hellman, New York, NY, for Amicus Curiae.
Before: JONES, * DAUGHTREY, and COLE, Circuit Judges.
* This opinion was submitted to the court prior to Judge Nathaniel R. Jones' departure from the court effective March 31, 2002.
COLE, Circuit Judge.
Petitioner-appellant, The Limited, Inc. ("Taxpayer"), is one of the largest special╜ty retailers in the United States. As the common parent of a group of affiliated corporations, Taxpayer filed a consolidated income tax return for the taxable year ending on January 30, 1993 (the "1993 Tax Year"). The Commissioner of Internal Revenue informed Taxpayer of several de╜ficiencies in its federal income tax returns for two tax years, including the 1993 Tax Year. Taxpayer and the Commissioner set╜tled all of their differences except for a dispute regarding Taxpayer's subsidiary credit card company's sale of $174.9 million in certificates of deposit to a subsidiary of one of Taxpayer's controlled foreign corpo╜rations. In a two-step decision, the Tax Court concluded that Taxpayer should have recognized the purchase of $174.9 million in certificates of deposit as a tax╜able investment in "United States proper╜ty" under I.R.C. ╖╖ 951 and 956. First, the Tax Court held that the ╖ 956(b)(2)(A) exception to the definition of "United States property" for "deposits with per╜sons carrying on the banking business" does not apply because the subsidiary credit card company did not carry on the banking business. Second, and equally vi╜tal to its judgment, the Tax Court held that under temporary regulation ╖ 1.956-1T, the $174.9 million in certificates of deposit should have been attributed to Taxpayer's controlled foreign corporation because the principal purpose for the cre╜ation, organization, or funding of the con╜trolled foreign corporation's subsidiary was to avoid the application of ╖ 956. Taxpayer appealed both grounds for the Tax Court's decision. The Tax Court erred in its analysis of ╖ 956, and on that basis, we reverse its judgment.
The disputed transaction was a January 28, 1993 wire-exchange of cash for inter╜est-bearing certificates of deposit (the "January 28 Transfer"). Three of Taxpay╜er's subsidiaries were involved in the Janu╜ary 28 Transfer: Mast Industries (Far East), Ltd. ("MFE"), MFE (Netherlands Antilles) N.V. ("MFE-NV"), and the World Financial Network National Bank ("WFNNB").
MFE is a Hong Kong corporation that operates throughout Asia, manufacturing or obtaining garments for sale in Taxpay╜er's stores. MFE is a third-tier subsidiary of Taxpayer, and under I.R.C. ╖ 957(a), MFE constitutes a controlled foreign cor╜poration (a "CFC") of Taxpayer. For sev╜eral years before the close of the 1993 Tax Year, MFE had accumulated and not dis╜tributed approximately $330 million in earnings and profits.
MFE-NV is a Netherlands Antilles cor╜poration created in January 1993, at the end of the 1993 Tax Year. MFE-NV is a fourth-tier subsidiary of Taxpayer and is wholly owned by MFE. Its corporate pur╜poses include "engaging in group financing activities and providing for a means of investing and reinvesting liquid assets and funds." Consistent with those purposes, shortly after it was created, MFE-NV re╜ceived a $175 million capital contribution from MFE.
WFNNB is a credit card company that issues credit cards to customers of Tax╜payer's stores. Taxpayer wholly owns WFNNB. As a condition of being owned by a non-bank, WFNNB complies with 12 U.S.C. ╖ 1841(c)(2)(F), which requires that it (i) engage in only credit card operations; (ii) not accept demand deposits or deposits that the depositor may withdraw by check or similar means for payment to third parties or others; (iii) not accept any sav╜ings or time deposit of less than $100,000; (iv) maintain no more than one office that accepts deposits; and (v) not engage in the business of making commercial loans. WFNNB is also a nationally chartered bank, authorized to carry on the business of banking under the laws of the United States. Consequently, WFNNB is regu╜lated by the Office of the Comptroller of Currency, the Federal Deposit Insurance Company, and the Board of Governors of the Federal Reserve.
The January 28, 1993 Transfers
The January 28 Transfer was a two-part transaction between MFE, MFE-NV, and WFNNB. In the first part, MFE wired $175 million to MFE-NV. In the second part, MFE-NV used $174.9 million to pur╜chase eight certificates of deposit with an annual yield of 3.14% (the "CDs") from WFNNB.
Taxpayer explained that the sole reason for this transaction was to protect MFE's assets from seizure by the People's Repub╜lic of China. Taxpayer believed that be╜cause Hong Kong was scheduled to return to China in 1997, China would begin to expropriate all assets in Hong Kong corpo╜rations on or before that date. To prevent the expropriation of MFE's assets, MFE created MFE-NV to hold MFE's assets and to act as a layer of protection from asset seizure. As a further shield against the asset expropriation, MFE-NV pur╜chased CDs from WFNNB with $174.9 million that it received from MFE.
While this transfer may have been a good means of removing assets from Hong Kong (and funding WFNNB), it now pres╜ents a difficult international tax question. Taxpayer claimed that MFE-NV's pur╜chase of $174.9 million in CDs from WFNNB did not constitute taxable "Unit╜ed States property" under ╖ 956 and thus Taxpayer did not report ╖ 951(a)(1)(B) taxes. Taxpayer argued that the CDs amounted to "deposits with persons carry╜ing on the banking business," which is an exception to "United States property" un╜der ╖ 956(b)(2)(A). The Commissioner disagreed. The Commissioner believed that MFE-NV's purchase of the CDs did not qualify under the ╖ 956(b)(2)(A) excep╜tion and therefore was an investment in "United States property" that was taxable under Subpart F of the Internal Revenue Code (I.R.C. ╖╖ 951-64). Consequently, the Commissioner issued a notice of defi╜ciency to Taxpayer. The Commissioner and Taxpayer could not resolve this issue and finally it was litigated before the Tax Court.
The Two Underlying Tax Issues
Two conclusions are necessary to sustain the Commissioner's finding of a tax defi╜ciency: (1) that MFE-NV's purchase of CDs was not a deposit with persons carry╜ing on the banking business under ╖ 956(b)(2)(A) (the " ╖ 956 Issue") and (2) that under temporary regulation ╖ 1.956-1T, the principal purpose for creating, or╜ganizing, or funding MFE-NV was to avoid the application of ╖ 956 (the "Regu╜lation Issue").
The first conclusion is necessary to sus╜tain the deficiency because Subpart F of the Internal Revenue Code generally taxes CFCs when they invest their earnings in "United States property." See I.R.C. ╖ 951(a)(1)(B). However, Section 956(b)(2)(A) excludes "deposits with per╜sons carrying on the banking business" from the definition of "United States prop╜erty." I.R.C. ╖ 956(b)(2)(A). Thus, if MFE-NV's purchase of CDs from WFNNB is not a "deposit with persons carrying on the banking business," then it is an investment in "United States proper╜ty,)
The second conclusion-that the CDs should be attributed to MFE and recog╜nized as income by the Taxpayer under ╖ 951(a)(1)(B)-is also necessary to sus╜tain the deficiency. Section 951(a), which taxes the income of CFCs, does not nor╜mally apply to an entity such as MFE-NV, which is a wholly-owned subsidiary of a CFC, and not a CFC itself. Consequently, even if MFE-NV had made investments in "United States property," that income would not have been subject to taxation. However, under temporary regulation ╖ 1.956-1T, if the principal purpose for creating, organizing, or funding MFE-NV were to avoid the application of ╖ 956, then the CDs that MFE-NV purchased would be attributed to MFE. If the CDs were attributed to MFE, which is a CFC, then, building off of the first conclusion, those CDs would be subject to taxation as part of MFE's earnings invested in "Unit╜ed States property."
Thus, for a deficiency to stand, the Com╜missioner must win the ╖ 956 Issue and the Regulation Issue. The Tax Court re╜solved both issues in favor of the Commis╜sioner and for that reason upheld the Commissioner's finding of a deficiency.
The Tax Court's Treatment of the ╖ 956 Issue
On the ╖ 956 Issue, the Tax Court con╜cluded that MFE-NV's purchase of CDs from WFNNB was not a "deposit with persons carrying on the banking business," and therefore did not constitute an invest╜ment in "United States property." The Tax Court interpreted the use of the defi╜nite article, "the," in the phrase "carrying on the banking business" as indicating "a purpose to particularize the activity." In deciding which particularized business ac╜tivity Congress was referring to in ╖ 956(b)(2)(A), the Tax Court relied on the language of the statute and legislative his╜tory. Based on those sources, the Tax Court reasoned that the phrase, "the bank╜ing business," as used in ╖ 956(b)(2)(A), applied only to deposits with banks offer╜ing banking services that facilitate the United States business activities of CFCs-the "business facilitation" ratio╜nale. Because WFNNB, as a credit card company, was restricted from engaging in business facilitation aspects of banking by 12 U.S.C. ╖ 1841(c)(2)(F), the Tax Court concluded that MFE did not purchase CDs from "persons carrying on the banking business."
The Tax Court reaffirmed its con╜clusion on the ╖ 956 Issue by reading a related-party exception into ╖ 956(b)(2)(A). The Tax Court reasoned that in light of the dividend equivalence theory, a plain reading of ╖ 956(b)(2)(A) would lead to an unreasonable result if the Taxpayer did not need to recognize income on the $174.9 million investment made between its subsidiaries. In general, under the dividend equivalence theory, United States shareholders of CFCs must include in their income the amount of "United States property" owned by the CFC. See S. Rept. No. 87-1881 (1962); 1962 U.S.C.C.A.N. 3297, 3391 ("Generally, earn╜ings brought back to the United States are taxed to the shareholders on the grounds that this is substantially the equivalent of a dividend being paid to them."). The Tax Court interpreted the dividend equivalence theory as also treating a United States shareholder's use of a CFC's earnings as though those earnings were a taxable divi╜dend. To avoid an unreasonable conflict with its understanding of the dividend equivalence theory, the Tax Court re╜quired that ╖ 956(b)(2)(A) apply only to investments with an unrelated entity.
In short, by imposing the business-facili╜tation and the related-party conditions on the ╖ 956(b)(2)(A) exception, the Tax Court held that MFE-NV's purchase of $174.9 million in CDs from WFNNB did not fit the ╖ 956(b)(2)(A) exception to the definition of "United States property."
The Tax Court's Treatment of the Regulation Issue
In deciding the Regulation Issue, the Tax Court concluded that temporary regu╜lation ╖ 1.956-1T applied to the January 28 Transaction. Temporary regulation ╖ 1.956-1T(b)(4) provides that a CFC indi╜rectly holds investments in "United States property" where one of its subsidiaries makes investments in "United States prop╜erty" and one of the principal purposes for creating, organizing, or funding the subsid╜iary was to avoid the application of ╖ 956. As a finding of fact, the Tax Court con╜cluded that a principal purpose behind the creation, organization, or funding of MFE-NV was to avoid the application of ╖ 956. Taxpayer's witnesses stated that the sole reason behind the creation of MFE-NV was to shield MFE's assets from Chinese expropriation. But, the Tax Court did not believe Taxpayer's expropriation justifica╜tion for the creation of MFE-NV. For the Tax Court, the smoking gun was the following portion of the cross-examination testimony of Timothy B. Lyons, Taxpay╜er's Vice President of Tax during the years in question:
Question: Okay. Were there any-was there ever any consideration of-I take it there was no consideration giv╜en to the possibility of forming a do╜mestic subsidiary of MFE.
Answer: To do what?
Question: To provide the extra layer of protection in ownership, in place of╜ - rather than forming MFE N.V., was there any consideration given to form╜ing MFE U.S.?
Answer: It didn't really accomplish any╜thing from the asset protection side because it was still an ownership of the-a Hong Kong subsidiary, but, at the same time, then there is no question that it would have been deemed a dividend or something at that point.
(Emphasis added.) Based on Lyons's acknowledgment that a domestic subsidiary of MFE, such as the hypothetical MFE US, would be taxed for purchasing the CDs, the Tax Court inferred that MFE-NV was created to avoid paying tax on the purchase of the CDs. Thus, the Tax Court concluded that the CDs held by MFE-NV were attributable to MFE.
Taxpayer appeals both bases for the Tax Court's opinion. It argues that the Tax Court erred in its interpretation of the phrase "carrying on the banking business" because neither the business-facilitation requirement nor the related-party excep╜tion that the Tax Court read into ╖ 956(b)(2)(A) are appropriate interpreta╜tions of the statute. In contesting the Regulation Issue, Taxpayer explains that its sole purpose for creating MFE NV was asset protection and not to avoid ╖ 956. If either of these arguments prevails, the Tax Court judgment must be reversed.
The Commissioner's Arguments
The Commissioner urges us to affirm the Tax Court judgment for the reasons offered by the Tax Court. In addition, the Commissioner argues that the Tax Court's resolution of the ╖ 956 Issue should be affirmed for three reasons: (1) the defini╜tion of "bank" under I.R.C. ╖ 581 coupled with Revenue Ruling 70-385 excludes WFNNB as a "bank," thus WFNNB was not "carrying on the banking business"; (2) the fact that WFNNB is outside of the definition of "bank" in 12 U.S.C. ╖ 1841(c)(2)(F) means that WFNNB was not "carrying on the banking business"; and (3) the $174.9 million that MFE NV paid for the CDs does not constitute a "deposit" under ╖ 956 because that trans╜action would not have taken place between independent investors on the open market. After considering all of the arguments be╜fore us, we conclude that the Tax Court erred in deciding the ╖ 956 Issue and on that basis we reverse its judgment.
A. ═ Standard of Review and Burden of Proof
Different standards of review ap╜ply to different components of the Tax Court's decision. The Tax Court's factual determinations are subject to a clearly er╜roneous standard of review. Kearns v. Comm'r of Internal Revenue, 979 F.2d 1176, 1178 (6th Cir.1992) ("We generally review the Tax Court's findings of fact on the clearly erroneous standard."); see also Cross v. Comm'r of Internal Revenue, 272 F.3d 333, 342 (6th Cir.2001). Under this standard, the Tax Court's findings of fact will be overruled only if we are "left with a definite and firm conviction that a mistake has been made." Kearns, 979 F.2d at 1178. Thus, we "must uphold the [T]ax [C]ourt's account of the evidence if it is plausible in light of the record viewed in its entirety." Cross, 272 F.3d at 343. In contrast, the Tax Court's legal conclusions are subject to de novo review. Kearns, 979 F.2d at 1178. When reviewing mixed questions of fact and law, we review the underlying factual determinations under a clearly erroneous standard and the appli╜cation of the facts to the law under a de novo standard. See Friedman v. Comm'r of Internal Revenue, 216 F.3d 537, 541 (6th Cir.2000) ("This Court reviews the Tax Court's findings of fact for clear error and its application of law de novo."); MTS Int'l, Inc. v. Comm'r of Internal Revenue, 169 F.3d 1018, 1021 (6th Cir.1999) ("This court reviews the [T]ax [C]ourt's legal con╜clusions de novo and its findings of fact under the `clearly erroneous' standard.").
These standards of review are eval╜uated against the backdrop of each party's burden of proof in the Tax Court. The Commissioner's determination that a tax deficiency existed is generally presumed to be correct. Kearns, 979 F.2d at 1178. Consequently, a taxpayer bears the burden of proving that the Commissioner's finding of a deficiency is erroneous or arbitrary by a preponderance of the evidence. See I.R.C. Rule 142(a)(1); Kearns, 979 F.2d at 1178.
B. The ╖ 956 Issue
Taxpayer appeals the Tax Court's legal interpretation of the phrase "deposit with persons carrying on the banking busi╜ness" as used in ╖ 956(b)(2)(A). Because this challenge involves an interpretation of law, we review the Tax Court's decision de novo.
Before interpreting ╖ 956(b)(2)(A), we first review relevant canons of statutory construction. Setting the tone for our statutory analysis is the principle that statutes imposing a tax are construed liberally in favor of the taxpayer. ═ Weingarden v. Comm'r of Internal Revenue, 825 F.2d 1027, 1029 (6th Cir. 1987). With that perspective in mind, we look first to the plain language of the statute. See United States v. Health Possibilities, P.S.C., 207 F.3d 335, 338-39 (6th Cir.2000) ("The starting point in a statutory interpretation case is the language of the statute itself."); United States v. Ables, 167 F.3d 1021, 1028 (6th Cir.1999); United States v. Mills, 140 F.3d 630, 633 (6th Cir.1998). When the text of a statute contains an undefined term, that term receives its ordinary and natural meaning. See Fed. Deposit Ins. Corp. v. Meyer, 510 U.S. 471, 476, 114 S.Ct. 996, 127 L.Ed.2d 308 (1994); Smith v. United States, 508 U.S. 223, 228, 113 S.Ct. 2050, 124 L.Ed.2d 138 (1993); United States v. Moses, 137 F.3d 894, 899 (6th Cir.1998); see also Wuebker v. Comm'r of Internal Revenue, 205 F.3d 897, 905 (6th Cir.2000) (Jones, J., dissenting) (interpreting an undefined term in the Internal Revenue Code in accord with its ordinary meaning). As a further aide in determining the meaning of an undefined term, the maxim of noscitur a sociis - it is known from its associates - directs us to look to accompanying words to deduce the undefined word's meaning. See Parker v. Metro. Life Ins. Co., 121 F.3d 1006, 1014 (6th Cir.1997); see also Kurinsky v. United States, 33 F.3d 594, 597 (6th Cir.1994). Where this textual analysis fails to produce a conclusive result, or where it leads to ambiguous or unreasonable results, a court may look to legislative history to interpret a statute. See Palmer v. United States (In re Palm╜er), 219 F.3d 580, 584 (6th Cir.2000); Hoff╜man v. Comshare, Inc. (In re Comshare, Inc. Secs. Litig.), 183 F.3d 542, 549 (6th Cir.1999); Vergos v. Gregg's Enters., Inc., 159 F.3d 989, 990 (6th Cir.1998). Resort to legislative history is not appropriate, however, if the text of the statute may be read unambiguously and reasonably. Koe╜nig Sporting Goods, Inc. v. Morse Rd. Co. (In re Koenig Sporting Goods), 203 F.3d 986, 988 (6th Cir.2000) ("When a statute is unambiguous, resort to legislative history and policy considerations is improper."); Mills, 140 F.3d at 633 ("Only when the language of the legislation is unclear should we look beyond the wording of the statute to the intent of the legislature.").
1. ═ It Is Improper to Impute the Busi╜ness Facilitation Meaning to ╖ 956(b)(2)(A).
The parties disagree over whether the CDs that MFE NV purchased from WFNNB constitute "deposits with persons carrying on the banking business." The Tax Court interpreted the word "the" in "the banking business" as referring to a particularized banking business and exam╜ined legislative history to discern which particular banking business Congress in╜tended ╖ 956 to govern. The Tax Court's conclusion was incorrect because the phrase "persons carrying on the banking business" has an ordinary and natural meaning wherein credit card companies, such as WFNNB, constitute "persons car╜rying on the banking business." However, if the use of the word "the" is capable of two distinct meanings, it is more appropri╜ate to interpret "the" as limiting the "busi╜ness" to that of "banking." Under that reading, WFNNB still "carries on the banking business." Because a plain lan╜guage reading of ╖ 956(b)(2)(A) is neither ambiguous nor unreasonable, there is no need to look to legislative history here.
The parties dispute whether ╖ 956(b)(2)(A)'s reference to "carrying on the banking business" applies to credit card companies like WFNNB. As men╜tioned above, in construing a statute, a court starts with the plain language. See Health Possibilities, 207 F.3d at 338-39; Ables, 167 F.3d at 1028; Mills , 140 F.3d at 633. Regrettably, that canon of construc╜tion by itself provides little help here be╜cause neither the Internal Revenue Code nor the United States Code defines the phrase "the banking business." Fortu╜nately, two other canons of construction assist our efforts: (1) undefined terms are construed in accordance with their ordi╜nary and natural meanings and (2) the meaning of an undefined term may be deduced from nearby words under nosci╜tur a sociis.
a. ═ Construing Undefined Terms in Accordance with Their Ordinary and Natural Meanings, WFNNB Is "Carrying on the Banking Business."
When a word is not defined by statute, courts construe the undefined term in ac╜cord with its ordinary or natural meaning. See Meyer, 510 U.S. at 476, 114 S.Ct. 996; Smith, 508 U.S. at 228, 113 S.Ct. 2050; Moses, 137 F.3d at 899. Because there is no dispute that WFNNB carries on a "business," we do not focus on that term. Rather, we turn to the term "banking" and note that at the time Congress enacted ╖ 956(b)(2)(A), it was commonly defined as:
the business of a bank, orig. restricted to money changing and now devoted to taking money on deposit subject to check or draft, loaning money and credit (as by discounting notes and bills), issu╜ing drafts and any other associated form or general dealing in money or credit.
Webster's Third New International Dictio╜nary 172 (Philip Babcock Gove, ed., 1961).
In light of that definition, WFNNB car╜ries on "the banking business." WFNNB is a nationally chartered bank that issues credit cards. As such, it extends credit and receives payment for those loans. WFNNB also accepts certain deposits. Moreover, WFNNB is regulated by the Office of the Comptroller of Currency and the Federal Reserve. Also, it is insured by the Federal Deposit Insurance Corpo╜ration. And, as Taxpayer points out, in light of its national charter, the only busi╜ness that WFNNB could possibly be en╜gaged in is "the banking business." Thus, under an ordinary and natural reading, WFNNB carries on "the banking busi╜ness." For those reasons, there is little need to stretch a common understanding of "the banking business" to exclude WFNNB here.
b. ═ Using Noscitur a Sociis to Inter╜pret ╖ 956(b)(2)(A), WFNNB Is "Carrying on the Banking Busi╜ness."
Rather than conduct the above plain-language analysis, the Tax Court focused on the term "the" in the phrase "the bank╜ing business." Reading meaning into a definite article has been rejected by at least one other circuit and it is hardly the wisest place to begin statutory interpreta╜tion. See Georgetown Univ. Hosp. v. Sul╜livan , 934 F.2d 1280, 1284 n. 4 (D.C.Cir. 1991) (refusing to use distinctions between "the" and "an" in interpreting a statute because that approach was "overly formal╜istic and inconsistent with Supreme Court case law"). Nevertheless, even if the term "the" is capable of two meanings, under noscitur a sociis , only one meaning makes sense in the context of ╖ 956(b)(2)(A).
Under a hypertechnical analysis, at odds with a plain language interpretation of the statute, the word "the" as used in "the banking business" at the time Congress enacted ╖ 956(b)(2)(A) may have had two relevant meanings:
Webster's Third New International Dictio╜nary 2368 (Philip Babcock Gove, ed., 1961). The Tax Court considered only Definition # 1 and concluded that "the" had to refer to a particularized banking business. But, from Definition # 2, it is also possible that "the" is a function word used to limit the noun "business" to mean only "banking business." In deciding which of these two definitions should apply, we look to nearby words in the statute.
Under Definition # 1, "the" refers to "something previously mentioned or clear╜ly understood from the context or situa╜tion." For "the" to mean a particularized banking business under Definition # 1, the particularized banking business must have been previously mentioned or clearly un╜derstood from the context of the situation. Undoubtedly, ╖ 956 makes no prior reference to a specific banking business. Thus, the only way that "the" could fit Definition # 1 is if a particularized banking business is clearly understood from the context or the situation. Here, there is no particular╜ized banking business that could be rea╜sonably inferred from the context of the statute. Due to the absence of either a prior reference or a clear contextual mean╜ing, the text of ╖ 956 does not support the use of Definition # 1 here.
In contrast, the plain language of ╖ 956(b)(2)(A) supports the use of Defini╜tion # 2 here. Under Definition # 2, "the" modifies adjective-noun phrases, as in the dictionary example, "the seafood industry," to limit the application of the noun to that specified by the adjective. In the example, "the seafood industry," the "industry" re╜ferred to is limited to an industry dealing with "seafood." Applying Definition # 2 is reasonable here because as used in ╖ 956(b)(2)(A), "the" modifies an adjective-noun phrase, "banking business." And, as with the dictionary example of "the sea╜food industry," it is also reasonable to read "the" as limiting "business" to a business dealing with "banking." For that reason, the application of Definition # 2 is consis╜tent with the plain language of ╖ 956(b)(2)(A).
In short, a hypertechnical analysis of the term "the" suggests that it may be capable of two meanings when used in ╖ 956(b)(2)(A) to modify "banking busi╜ness." Testing these two potential defini╜tions in context reveals that only Definition # 2 can be sensibly applied. Consequent╜ly, "the," as used in the context of ╖ 956(b)(2)(A), limits "business" to a busi╜ness dealing with banking. Because WFNNB is a business dealing with bank╜ing (as the Tax Court conceded), WFNNB "carries on the banking business" for pur╜poses of ╖ 956(b)(2)(A).
c. ═ The Tax Court Erred in Examining Legislative History.
Rather than resolve this dispute through an ordinary and natural reading of ╖ 956(b)(2)(A) or by considering which def╜inition of "the" should have controlled, the Tax Court raced to the legislative history of ╖ 956 to support its particularized defi╜nition of "the." From the Senate and House Reports covering the enactment of ╖ 956, the Tax Court concluded that the exceptions to the definition of "United States property" were meant to apply "only where the property located in the United States is ordinary and necessary to the active conduct of the foreign corpora╜tion's business or substantially the same trade or business." (quoting H.R.Rep. No. 87-1447 at 65 (1962) (emphasis added by the Tax Court)). Under this reading, the Tax Court concluded that "the" referred to a particular banking business that aids the domestic business activities of CFCs.
The Tax Court erred in attributing that implied business-facilitation meaning to the word "the." And, in its zeal "to effec╜tuate the intent of Congress," the Tax Court failed to interpret the plain lan╜guage of ╖ 956(b)(2)(A). Before the Tax Court read in the complex business-facili╜tation requirement, it should have instead relied on another principle of statutory interpretation-statutes imposing a tax should be interpreted liberally in favor of the taxpayer. Weingarden, 825 F.2d at 1029. Thus, rather than force a complex meaning from legislative history, the Tax Court should have instead construed ╖ 956(b)(2)(A) in Taxpayer's favor.
In sum, both the Tax Court's analytical framework and its conclusions regarding the definition of the phrase "carrying on the banking business" are incorrect. Un╜der a correct statutory interpretation, WFNNB is "carrying on the banking busi╜ness." Although it is not necessary to look beyond the ordinary meaning of the words in ╖ 956(b)(2)(A) to reach that conclusion, an application of noscitur a sociis confirms that result. For those reasons, WFNNB should be interpreted as "carrying on the banking business" under ╖ 956(b)(2)(A).
2. ═ The Tax Court Erred in Finding an Implied Related Party Prohibi╜tion in ╖ 956(b)(2)(A).
Another basis for the Tax Court's resolution of the ╖ 956 Issue was its find╜ing of an implied related-party prohibition in ╖ 956(b)(2)(A). Under the Tax Court's reading of ╖ 956(b)(2)(A), "deposits with persons carrying on the banking business" are excepted from the definition of "United States property" only if the "persons car╜rying on the banking business" are unre╜lated to the entity making the deposit. The Tax Court reached this conclusion, which contradicts the plain meaning of ╖ 956(b)(2)(A), based on legislative history of the 1976 amendments to ╖ 956(b)(2)(F) and (G). In creating these new exceptions to the definition of "United States property" in 1976, Congress explicitly limited the ╖ 956(b)(2)(F) exception to transfers be╜tween unrelated corporations. See Tax Reform Act of 1976, Pub.L. No. 94-455 (1976); I.R.C. ╖ 956(b)(2)(F). The legisla╜tive history explained that United States shareholders of a CFC should not be able to use the earnings of the CFC without paying tax. S.Rep. No. 94-938, at 226 (1976), reprinted in 1976 U.S.C.C.A.N. 3439, 3656. Because this enactment took place before the Competitive Equality Banking Act, which permitted credit card banks to be owned by non-banks, the Tax Court believed that Congress never con╜sidered the possibility that a CFC would make a transfer to a domestic subsidiary bank. Moreover, the Tax Court reasoned that it makes little sense to permit depos╜its with a related bank, but prohibit investments in a related corporation. To avoid rendering Congress's intent to impose a related-party prohibition meaningless after the enactment of the Competitive Equality Banking Act, the Tax Court reasoned that the related-party prohibition in ╖ 956(b)(2)(F) must apply to ╖ 956(b)(2)(A)'s reference to "deposits with a person carrying on the banking busi╜ness." The Tax Court erred in its analy╜sis.
Again, the Tax Court abandoned the plain language of ╖ 956(b)(2)(A). Section 956(b)(2)(A) has no related-party prohibi╜tion. In fact, the statutory text of ╖ 956 contains a related-party prohibition only in ╖ 956(b)(2)(C) and (F) and (b)(3). If it had intended to impose a related-party prohibi╜tion on transfers under ╖ 956(b)(2)(A), Congress could have easily made that pro╜hibition more general or applied it beyond solely those subsections. Congress did not do either. Regardless of its reasons for not doing so, the plain language of ╖ 956(b)(2)(A) has no related-party prohi╜bition, and thus, there is no need to exam╜ine legislative history here.
The Tax Court examined legislative his╜tory because it found that the Competitive Equality Banking Act made reading ╖ 956(b)(2)(A) without implying a related-party exception unreasonable. The Tax Court explained that had Congress known that banks could constitute related parties when it enacted ╖ 956(b)(2)(A), it would have added a related-party exception to ╖ 956(b)(2)(A). As a matter of policy that argument makes sense, but it is not the Tax Court's role to inject its own policy determinations into the plain language of statutes. Moreover, the Tax Court erred in concluding that a plain language read╜ing-not applying a related-party exception-would be unreasonable. The plain text of ╖ 956(b)(2)(A) encourages foreign company investment in domestic banks-even if those banks are related to the foreign company. While obviously not the policy that the Tax Court would promote were it an uber-legislature, interpreting ╖ 956(b)(2)(A) without a related-party pro╜hibition hardly rises to a level of unreason╜ableness that merits ignoring the plain text of the statute.
3. ══ The Commissioner's Reasons for Resolving the ╖ 956 Issue in Its Favor Are Not Convincing.
Possibly sensing that the Tax Court's reasons for interpreting the phrase "carry╜ing on the banking business" are inade╜quate, the Commissioner offers three al╜ternative bases for concluding that WFNNB was not "carrying on the banking business." First, the Commissioner ar╜gues that the definition of "bank" under I.R.C. ╖ 581 coupled with Revenue Ruling 70-385 should be read to exclude WFNNB as a "bank"; thus, WFNNB cannot carry on "the banking business." Second, the Commissioner contends that because the definition of "bank" in 12 U.S.C. ╖ 1841(c)(2)(F) excludes credit card com╜panies, such as WFNNB, WFNNB cannot "carry on the banking business." Finally, the Commissioner submits that the CDs (i.e., the certificates of deposit ) that MFE NV received from WFNNB should not be considered "deposits" under ╖ 956(b)(2)(A). Each of these arguments fails.
a. ═ Neither the Definition of "Bank" in I.R.C. ╖ 581 Nor Revenue Rul╜ing 70-385 Apply Here.
The Commissioner argues that the definition of "bank" in I.R.C. ╖ 581 controls here and excludes WFNNB as "a person carrying on the banking business." The Commissioner relies upon Revenue Ruling 70-385, which applied the ╖ 581 definition of "bank" to ╖ 956(b)(2)(A) exceptions in the context of foreign banks. See Rev. Rul. 70-385, 1970-2 C.B. 156. The Commissioner's argument is incorrect for three reasons: (1) there is no statutory basis for applying the ╖ 581 definition of "bank" to the ╖ 956(b)(2)(A) exception; (2) Revenue Ruling 70-385 is not binding on this Court and is at best persuasive au╜thority; and (3) given its scope, Revenue Ruling 70-385 does not apply here.
No statutory basis exists for applying the ╖ 581 definition of "bank" to the ╖ 956(b)(2)(A) exception. In its first sen╜tence, ╖ 581 expressly states that its defi╜nition of "bank" is "[f]or purposes of sec╜tions 582 and 584." I.R.C. ╖ 581. With that restriction, it is clear that Congress was not providing a general definition of "bank," but rather a specialized definition that applied only to certain statutory sec╜tions.
Other sections of the Tax Code support this interpretation. At the time of the January 28 Transfer, several code sections had specifically adopted the ╖ 581 defini╜tion of the word "bank." See, e.g., I.R.C. ╖ 165(l)(3)(A); I.R.C. ╖ 246A(c)(3)(B)(i); I.R.C. ╖ 271(a); I.R.C. ╖ 279(c)(5)(A); I.R.C. , ╖ 465(c)(7)(D)(iv); I.R.C. ╖ 542(c)(2); I.R.C. ╖ 585(a)(2)(A); I.R.C. ╖ 593(d)(1)(B)(h); I.R.C. ╖ 1281(b)(1)(C); I.R.C. ╖ 6032; I.R.C. ╖ 6695(f); I.R.C. ╖ 7512(b). By so doing, those sections implicitly recognized that the ╖ 581 defini╜tion would not apply without the express incorporation of that definition. Because ╖ 956 does not adopt the ╖ 581 definition, no statutory basis exists for applying the ╖ 581 definition to ╖ 956(b)(2)(A).
Although the Tax Code never suggests that the ╖ 581 definition of "bank" applies to ╖ 956(b)(2)(A), the Com╜missioner argues that under Revenue Rul╜ing 70-385, the ╖ 581 definition governs ╖ 956(b)(2)(A). Revenue rulings are one of the four ways that the IRS can publicly memorialize its interpretations of the Tax Code. See Bankers Life & Cas. Co. v. United States, 142 F.3d 973, 978 (7th Cir. 1998). The other three methods are regu╜lations issued pursuant to a specific con╜gressional directive; regulations issued under the IRS's general authority to inter╜pret tax laws; and private letter rulings. Id. Revenue rulings do not apply as broad╜ly as regulations, nor as narrowly as pri╜vate letter rulings. See id.; see also True Oil Co. v. Comm'r of Internal Revenue, 170 F.3d 1294, 1304 (10th Cir.1999) (ex╜plaining that revenue rulings "do not have the same force and effect as treasury reg╜ulations and consequently are not binding on this court"). Rather, revenue rulings are typically the IRS's response to a hypo╜thetical situation and as such are authori╜tative and binding on the IRS. See Bank╜ers Life, 142 F.3d at 978 ("Revenue rulings typically contain the IRS's interpretation of how the law applies to a set of hypothet╜ical facts. Revenue rulings do not have broad application like regulations, but the IRS does consider them authoritative and binding."). Although binding on the IRS, revenue rulings are interpretive rulings by an administrative agency that do not re╜quire notice and comment and consequent╜ly are not binding on courts. See id.; see also Babin v. Comm'r of Internal Reve╜nue, 23 F.3d 1032, 1038 (6th Cir.1994) ("Revenue rulings are not binding on this court."). Nevertheless, as the informed opinion of a specialized agency, this Circuit has treated revenue rulings as having persuasive authority. See Babin, 23 F.3d at 1038 ("[B]ecause revenue rulings express the studied view of the IRS, whose duty is to carry out the provisions of the Internal Revenue Code, they are entitled to some deference."); Costantino v. TRW Inc., 13 F.3d 969, 981 (6th Cir.1994) ("Unlike the regulations, IRS rulings do not have the force of law and are merely persuasive authority."); Kinnie v. United States, 994 F.2d 279, 286 (6th Cir.1993); see also Cen╜Tra, Inc. v. United States, 953 F.2d 1051, 1056 (6th Cir.1992); cf . United States v. Cleveland Indians Baseball Co., 532 U.S. 200, 220, 121 S.Ct. 1433, 149 L.Ed.2d 401 (2001) (refraining from deciding the level of deference due revenue rulings, but ex╜plaining that because the revenue rulings at issue reflected the IRS's longstanding interpretation of its own regulations, that interpretation "attracts substantial judicial deference"). However, because revenue rulings often provide the IRS's interpreta╜tion of a hypothetical set of facts, courts should not extend the scope of a revenue ruling beyond the hypothetical situation presented. See Babin, 23 F.3d at 1038 ("[W]e need not accord a revenue ruling any deference, where, as here, the revenue ruling fails to address the relevant issue on appeal.").
In light of these principles, Revenue Ruling 70-385 does not apply here. Reve╜nue Ruling 70-385 contemplated a-very different factual situation than the present case. In 70-385, the IRS considered the question of whether deposits with foreign financial institutions constituted "persons carrying on the banking business." See Rev. Rul. 70-385, 1970-2 C.B. 156. Be╜cause it was not clear under United States law whether the foreign financial institu╜tions were "carrying on the banking busi╜ness," the IRS applied the ╖ 581 definition of "bank" to determine which foreign fi╜nancial institutions fit the ╖ 956(b)(2)(A) exception. See id. From the scope of 70-385, none of the hypothetical foreign finan╜cial institutions that the IRS considered had national bank charters, nor were they regulated by the Office of the Comptroller of Currency and the Federal Reserve, nor were they insured by the FDIC, as WFNNB is. Quite plainly, WFNNB is not one of the foreign financial institutions that the IRS contemplated when it issued 70-385. Thus, while 70-385 concludes that the ╖ 581 definition of "bank" is helpful in determining whether foreign financial cor╜porations are "carrying on the banking business," it provides no reason to extend its application to nationally chartered banks. Thus, the hypothetical question that the IRS answered in 70-385 is factual╜ly distinct from the present situation. For that reason, we do not expand 70-385 to apply to domestic financial institutions.
This conclusion is reinforced by a court's duty to interpret statutes in conformity with their plain language. As explained above, it makes little sense to stretch the ordinary meaning of an undefined term. Under an ordinary and normal reading, WFNNB, which engages in the business of banking, carries on "the banking business" for purposes of ╖ 956(b)(2)(A). In this case, especially, we decline to extend the meaning of "the banking business" to im╜pose a definition of "bank" that (1) Con╜gress never expressly intended apply and (2) that the IRS never considered as ap╜plying to nationally chartered banks. Thus, as the Tax Court did before us, we reject the Commissioner's argument that the ╖ 581 definition of "bank" applies to the phrase "carrying on the banking busi╜ness" in ╖ 956(b)(2)(A).
b. ═ The 12 U.S.C. ╖ 1841(c)(2)(F) Ex╜ception to the Definition of "Bank" Does Not Govern What Constitutes "the Banking Busi╜ness" under I.R.C. ╖ 956(b)(2)(A).
In another attempt to salvage the Tax Court's ruling on the ╖ 956 Issue, the Commissioner argues that because WFNNB complies with the 12 U.S.C. ╖ 1841(c)(2)(F) restrictions, WFNNB does not carry on the banking business. Gener╜ally, non-banks cannot own banks, but non╜banks can own credit card companies that comply with ╖ 1841(c)(2)(F) because those credit card companies are excluded from the ╖ 1841(c)(1) definition of "bank." See 12 U.S.C. ╖ 1841(c)(2)(F). Relying on the fact that WFNNB is not a "bank" under ╖ 1841(c)(2)(F), the Commissioner con╜tends that WFNNB is not "carrying on the banking business." Essentially, through this argument, the Commissioner tries for a second time to import a definition of "bank" from elsewhere in the United States Code to control the phrase "the banking business" as used in I.R.C, ╖ 956(b)(2)(A). The Commissioner fails in this attempt as well.
As with the I.R.C. ╖ 581 definition of "bank," there is no statutory basis for applying the 12 U.S.C. ╖ 1841(c)(2)(F) ex╜clusion of "bank" to I.R.C. ╖ 956(b)(2)(A). Congress created exceptions to the defini╜tion of "bank" in ╖ 1841(c)(2)(F) only for purposes of Chapter 12 of the United States Code. See 12 U.S.C. ╖ 1841(c). For that reason, the 12 U.S.C. ╖ 1841(c)(2)(F) exclusion does not govern I.R.C. ╖ 956(b)(2)(A).
Despite the lack of statutory authority for applying the ╖ 1841(c)(2)(F) exclusion, the Commissioner urges us to apply it anyway. The Commissioner argues that in light of the ╖ 1841(c)(2)(F) limitations on WFNNB's banking activities, WFNNB is not a full-service bank, and, therefore, should not be viewed as "carrying on the banking business" under ╖ 956(b)(2)(A).
That argument should not prevail. If we were to adopt that reasoning, then any non-full-service bank would be excluded from "carrying on the banking business." Moreover, if we were to abide strictly by the ╖ 1841(c)(2) definitions, then United States branches of foreign banks, federal savings associations, and federal savings banks would not be considered banks. See 12 U.S.C. ╖ 1841(c)(2)(A)-(B); see also 12 U.S.C. ╖ 1841(j). Under that reading, CFC deposits with United States branches of foreign banks, federal savings associa╜tions, and federal savings banks would likewise not qualify as exceptions to "Unit╜ed States property," and would be taxable. By excluding those entities, the Commis╜sioner's proposed application of ╖ 1841(c)(2)(F) conflicts too greatly with an ordinary and normal understanding of what it means to be "carrying on the bank╜ing business."
In short, because there is no legal basis for applying the 12 U.S.C. ╖ 1841(c)(2)(F) exclusion here and because doing so con╜flicts with an ordinary and normal reading of the phrase "the banking business," the exclusion should not control the phrase "the banking business" as used in I.R.C. ╖ 956(b)(2)(A).
c. ═ The Certificates of Deposit Are "Deposits" under ╖ 956(b)(2)(A).
The last argument that the Com╜missioner raises against the application of ╖ 956(b)(2)(A) is that the CDs that MFE-NV purchased from WFNNB were not "deposits" within the meaning of the phrase "deposits with persons carrying on the banking business." The Commissioner argues that because the transfer of CDs never would have taken place on the open market between independent parties, it should not be permitted to qualify as a "deposit" under ╖ 956(b)(2)(A). In sup╜port of this argument the Commissioner references several aspeets of the January 28 Transfer that would have discouraged independent parties: WFNNB's assets and equity were too small in relation to the amount of the CDs; WFNNB would not have been able to raise large amounts of private funds because it had no commercial customers or any branch network; as a credit card company for Taxpayer's retail stores, WFNNB was forced to accept large numbers of small outstanding balances, which stunted its loan quality and its lines of credit; WFNNB carried off-balance sheet credit card liabilities of almost eight times its total assets; and the 3.1% inter╜est rate was below the market rate. With those facts in mind, the Commissioner urges us to apply the step-transaction doc╜trine. Through that approach of examin╜ing each step of the January 28 Transfer, the Commissioner contends that the Janu╜ary 28 Transfer is a taxable repatriation of offshore MFE profits and not a "deposit."
While the Commissioner's arguments all support the conclusion that it is improba╜ble that the January 28 Transfer would have occurred between unrelated parties, that argument is tangential to the question of whether the CDs that MFE-NV pur╜chased from WFNNB were "deposits" under ╖ 956(b)(2)(A). Thus, the question of whether independent parties would have engaged in the January 28 Transfer is not the issue here. Rather, the question is whether the CDs, i.e., the certificates of deposit, that MFE-NV purchased from WFNNB constituted "deposits." Because the term "deposit" is not defined for pur╜poses of ╖ 956(b)(2)(A), we look to its ordi╜nary meaning. Rather than belabor this point with dictionary definitions, we think that it is sufficiently clear that a certificate of deposit constitutes a "deposit" absent a specialized definition of "deposit." For that reason, we reject the Commissioner's final argument on the ╖ 956 Issue as well.
In short, The Tax Court erred in its determination of the ╖ 956 Issue. On that basis alone, the judgment of the Tax Court cannot stand, and we need not consider the Regulation Issue. Therefore, we RE╜VERSE the judgment of the Tax Court.