Focus on Tax Controversy - Spring 2015

In This Issue:

- Fifth Circuit Ruling in BMC Software, Inc. v. Comm’r. Is Good News for Taxpayers

- When Is a Second Inspection Not a Second Inspection?

- Captive Insurance Litigation: Key 2014 Cases

- Excerpt from Fifth Circuit Ruling in BMC Software, Inc. v. Comm’r. Is Good News for Taxpayers:

The U.S. Court of Appeals for the Fifth Circuit recently overturned the U.S. Tax Court in a case that could have created significant additional hurdles for taxpayers electing to create an account receivable under Rev. Proc. 99-32. If the Tax Court’s decision had been upheld, or if another circuit holds otherwise, many taxpayers could be forced to make a difficult decision: accept the implications of a secondary adjustment, such as a dividend inclusion or the imposition of withholding tax, or face a potential deficiency arising from the retroactive creation of a receivable under one of several statutory provisions. Rev. Proc. 99-32 was designed to ameliorate the negative consequences of a secondary adjustment. It should not be interpreted to require a taxpayer to navigate between a rock and a hard place.

In BMC Software, Inc. v. Comm’r., 115 AFTR 2d 2015-1092 (5th Cir. 2015), BMC signed a transfer pricing closing agreement to correct its net overpayment for royalties from its foreign subsidiary, BSEH. This income should have been taxable income retained by BMC, but in fact had been paid to BSEH. Pursuant to the closing agreement, BMC agreed to a primary adjustment for each tax year from 2003 to 2006, increasing its taxable income by approximately $102 million in total. However, the $102 million remained in the cash accounts of BSEH. Therefore, a secondary adjustment had to be made to explain the cash in the accounts of BSEH and to conform the tax accounts to the cash accounts.