Extraterritorial Income Transition Rule Allowed Continued Benefits (DWA Holdings LLC, CA-FC)

An animated film company could receive tax benefits for transactions entered into in 2005 and 2006 under the extraterritorial income transition rule. The transition rule provided reduced ETI benefits for years 2005 and 2006, as part of the ETI regime repeal. Therefore, the Claims Court erred in holding that the transition rule did not apply to income recognized after 2006 under the taxpayer’s long-term distribution contract. Rather, the statute applied transitional relief to ETI generated from transactions entered into in 2005 and 2006. It did not matter when the income was recognized.

Extraterritorial Income Transition Rule

The ETI transition rule took a transaction, rather than income-based approach, in providing transitional relief. The plain language of the statute provided decreased benefits for transactions entered into in 2005 and 2006. The statute used the word “transaction” and made no reference to income earned during those years. Also, under the last antecedent canon of statutory construction the word transaction, not income, preceded the phrase “during 2005 or 2006.”

Also, other ETI repeal provisions of the AJCA adopted a transaction-based approach. In contrast, the transitional rule for the tax benefit for domestic production activities, which replaced the ETI regime, employed an income-recognition approach. This indicated that Congress was aware of, and intended to use, different approaches. Additionally, the IRS’s continued use of Form 8873, Extraterritorial Income Exclusion, for taxpayers to claim transitional benefits for transactions entered into before December 31, 2004, supported the transaction-based approach. Although the form related to a different ETI transition rule, the form had not been obsoleted. Moreover, it was not plausible that Congress employed a transaction-based approach for one rule and an income-based approach for another.

Reversing and remanding a FedCl decision, 2016-2 ustc ¶50,433.


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