H Enterprises Intl. v. CIR ( 1999 )

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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No. 98-3259
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H Enterprises International, Inc., *
and Subsidiaries, *
*
Appellant, * On Appeal from the
* United States Tax Court.
v. *
* [To Be Published]
*
Commissioner of Internal Revenue, *
*
Appellee. *
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Submitted: May 10, 1999
Filed: July 27, 1999
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Before RICHARD S. ARNOLD, FAGG, and BOWMAN, Circuit Judges.
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PER CURIAM.
This is an income-tax case. Two issues are presented: whether H Enterprises
International, Inc., is entitled to a dividends-received deduction with respect to certain
distributions made to it by a subsidiary, Waldorf Corporation; and whether Waldorf is
entitled to an interest deduction for certain indebtedness incurred by it.
The Commissioner asserts, and the Tax Court held, that H Enterprises was not
entitled to the dividends-received deduction because, under Section 246A of the
Internal Revenue Code, 26 U.S.C. § 246A, the dividends had been received with
respect to debt-financed portfolio stock. The Commissioner also asserts, and the Tax
Court also held, that Waldorf is not entitled to an interest deduction because the
indebtedness in question was incurred to purchase tax-exempt obligations.
What makes this case unusual is the fact that the indebtedness in question was
incurred by Waldorf, while the portfolio stock and the tax-exempt obligations were
purchased by its parent, H Enterprises. The funds with which these purchases were
made came from dividends paid by Waldorf to H Enterprises, and the money to pay the
dividends came from indebtedness incurred by Waldorf. At all relevant times,
H Enterprises owned either all the stock, or all the voting stock, of Waldorf.
Under Section 265(a)(2) of the Code, 26 U.S.C. § 265(a)(2), an interest
deduction is disallowed if the indebtedness on which the interest is paid was "incurred
or continued to purchase or carry obligations the interest on which is wholly exempt"
from federal income tax. The Tax Court found that Waldorf's purpose in incurring the
indebtedness was to enable H Enterprises to purchase the tax-exempt obligations. This
finding is not clearly erroneous. With respect to the dividends-received issue, the Tax
Court found that Waldorf's indebtedness was directly attributable to H Enterprises'
investment in the stock on which the dividends were paid. See 26 U.S.C.
§ 246A(d)(3)(A). "[T]he dominant objective in incurring the 1987
indebtedness . . . [was] to make a cash distribution to [H Enterprises] in order to allow
[H Enterprises] to purchase tax-exempt obligations and domestic shares."
H Enterprises, International, Inc., 75 T.C.M. 1948, 1952, T. C. Memo. 1998-97
(1998).1 Further, the Court held, answering the central question of law presented by
1
The Hon. James Halpern, Judge. This opinion relied substantially on an earlier
opinion of the Tax Court in the same case, denying a motion for summary judgment.
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this case, that the fact that the indebtedness was incurred by a company (Waldorf)
different from the company (H Enterprises) that purchased the tax-exempt obligations
and portfolio stock was not fatal to the Commissioner's position. Waldorf was at all
times controlled by H Enterprises, and both the incurring of the indebtedness and the
payment of the dividend by Waldorf to H Enterprises was in accordance with a
preplanned sequence.
The appellants have presented clear and substantial arguments in support of their
position that the Tax Court's holdings should be reversed. Nonetheless, after careful
study of the briefs and hearing argument, we are not persuaded. We believe the Tax
Court's opinions comprehensively and correctly set out the relevant facts and the law.
There is nothing to be gained by our elaborating on those opinions. We therefore
affirm the judgment of the Tax Court, substantially for the reasons stated in its
opinions. See 8th Cir. R. 47B.
Affirmed.
A true copy.
Attest:
CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.
H Enterprises, International, Inc., 105 T.C. 71 (1995) (Scott, J.).
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