Page 328 - TaxAdviser_2022

TAX TRENDS

Before addressing the substance foreign source] categories under section
of AptarGroup’s arguments, the Tax 904(d) and supplement other rules pro- Gains & Losses
Court explained that under the canons vided in [sections -9T], 1.861-10T, and
of statutory interpretation, a court is 1.861-11T.” According to AptarGroup, Dispute remains over whether
required to give the text of a regulation the language of the first clause of the couple sold house due to
its plain meaning and, in doing so, look sentence means that Temp. Regs. Sec. poor health
at the particular text of the regulation 1.861-12T did not apply where, as in its On a motion for partial summary judg-
at issue and the design of the regula- situation, the stock of a CFC produces ment, the Tax Court held that the tax-
tion as a whole. Also, a court should U.S.-source income, because U.S.-source payers did not qualify under Sec. 121(a)
interpret the text to avoid conflict with income is not income in a separate limi- to exclude gain from a house they sold,
the statute. tation category under Sec. 904. because the IRS showed that there is
AptarGroup claimed that in its situ- The Tax Court, however, found that no genuine dispute that the taxpayers
ation, the consistency rule did not apply. this interpretation was belied by the did not use the house as their principal
It first argued it did not apply because second clause of the sentence referring residence for at least two of the five
the election of the modified gross to “supplemental other rules,” which the years preceding the sale. However, the
income method to apportion interest court concluded establishes a purpose court also held that there was a genuine
expense by a CFC is an exception to independent of Sec. 904, a conclusion factual dispute on the issue of whether,
the consistency requirement. Consider- that it found was bolstered by changes under Sec. 121(c)(2)(B), the sale was by
ing Temp. Regs. Sec. 1.861-9T(f)(3) made to Temp. Regs. Sec. 1.861-12T in reason of a change in the health of one
in its entirety, the Tax Court found it T.D. 9882 that clarify that the regula- of the taxpayers.
clear that the election is not an excep- tion applies for all operative sections,
tion to the consistency requirement but not just Sec. 904(d). Background
rather the consistency requirement is a Thus, the Tax Court determined that Steven and Catherine Webert were
condition of the election. According to AptarGroup’s use of the asset method married in 2004. In 2005, they pur-
the court, the modified gross income to characterize its AGH Lux stock chased a house on Mercer Island, near
method is an exception to the general was inconsistent with the proper ap- Seattle. In that year, Catherine was
rule that the asset method must be used plication of Temp. Regs. Sec. 1.861-9T. diagnosed with cancer. The cancer
for asset characterization, and the con- Because AGH Lux elected to use the and the numerous associated health
sistency requirement is imposed because modified gross income method to ap- problems that she later suffered caused
an election to use the modified gross portion interest expense, AptarGroup her to incur excessive medical bills and
income method for interest expense ap- was required to characterize its AGH reduced her ability to work. This caused
portionment is allowed. Lux stock using the modified gross an extended period of financial hardship
AptarGroup also argued that income method. for the Weberts.
whether the consistency requirement The Weberts lived in the house
applied in its case depended on whether Reflections until 2009 and then moved to another
the then-existing version of Temp. Regs. As this case shows, the distinction home owned by Steven, and they put
Sec. 1.861-12T applied. The Tax Court between a regulatory amendment that the Mercer Island house up for sale.
disagreed, finding that Temp. Regs. adds something to a regulation that was Due to the housing crash, they were
Sec. 1.861-12T only supplemented not already there and one that merely unable to sell the house and eventually
Temp. Regs. Sec. 1.861-9T(f)(3), clarifies existing language can be murky. began renting it. In 2015, they were
which imposed an independent consis- AptarGroup argued in its brief that the finally able to sell the house, realizing
tency requirement. changes to Temp. Regs. Sec. 1.861-12T a gain of $194,752. In 2016, the We-
Additionally, the Tax Court rejected expanded the coverage of the regulation berts divorced.
AptarGroup’s further argument that so that it applied to more than just Sec. On a joint return for 2015, the We-
Temp. Regs. Sec. 1.861-12T only ap- 904(d) apportionment. The Tax Court, berts reported the sale of the Mercer
plied to Sec. 904(d) apportionment, on the other hand, took the position Island house on Schedule D, Capital
based on the first sentence of Temp. in its opinion that the changes merely Gains and Losses, but they excluded the
Regs. Sec. 1.861-12T(a). That sentence clarified that it applied to supplement gain on the sale from their gross income
states that it applies to “[apportion] ex- other operative sections. under Sec. 121(a). They also reported
penses under an asset method to income AptarGroup Inc., 158 T.C. No. 4 the rental income for the home on
in the various separate limitation [i.e., (2022) Schedule E, Supplemental Income and

48 June 2022 The Tax Adviser