## Facts

- Brown Group, Inc. was the parent of an affiliated group filing consolidated U.S. returns and imported footwear, including from Brazil.
- Brown Group owned Brown Group International, Inc. (BGII), which wholly owned Brown Cayman Ltd., a Cayman Islands corporation treated as a controlled foreign corporation (CFC).
- Brown Cayman held an 88% partnership interest in Brinco, a Cayman Islands partnership formed to act as purchasing agent for Brown Group’s Brazilian footwear imports.
- Brinco earned commissions equal to 10% of purchase amounts; total commissions for the year at issue were about $1.12 million.
- The Commissioner determined a deficiency of $388,992.85 for the consolidated tax year ended November 1, 1986, asserting Brown Cayman’s distributive share of Brinco income was Subpart F income (foreign base company sales income) includible under I.R.C. § 951(a).

## Issues

1. Whether Brown Cayman’s distributive share of Brinco’s commission income was foreign base company sales income (FBCSI) under pre-1987 I.R.C. § 954(d)(1), including the “related person” requirement of § 954(d)(3).
2. Whether, for Subpart F characterization, the income should be analyzed at the partner level (aggregate approach) rather than at the partnership level (entity approach).
3. If the income is Subpart F income, whether it must be included in the U.S. shareholder’s gross income under I.R.C. § 951(a).

## Decision

- The Tax Court (en banc) held for the Commissioner.
- The court concluded Brown Cayman’s distributive share of Brinco’s commission income constituted FBCSI under § 954(d)(1).
- The court treated the partnership as a conduit for Subpart F purposes, determining character at the partner level and “looking through” Brinco to Brown Cayman’s circumstances.
- The court held the “related person” condition was satisfied when the transaction was viewed through Brown Cayman’s relationship with the affiliated group for whom Brinco performed purchasing services.
- The court sustained inclusion of the income under § 951(a), thereby sustaining the deficiency.

## Legal Principles

- For Subpart F purposes, a CFC partner’s distributive share of partnership income may be characterized by an aggregate (conduit) approach, treating the partner as directly earning its share.
- Commission income from purchasing-agent activities can fall within FBCSI where it is derived “in connection with” the purchase and sale of personal property meeting § 954(d)(1)’s statutory conditions.
- The “related person” requirement in pre-1987 § 954(d)(3) may be satisfied through a look-through analysis when the partnership’s activities are conducted on behalf of persons related to the CFC partner.
- Once income is classified as Subpart F income of a CFC, I.R.C. § 951(a) requires inclusion in the gross income of the CFC’s U.S. shareholder for the applicable year.

## Conclusion

The Tax Court held that Brown Cayman’s distributive share of Brinco’s purchasing-agent commissions was foreign base company sales income and therefore Subpart F income required to be included in the U.S. shareholder’s gross income under I.R.C. § 951(a).


Brown Grp., Inc. & Subsidiaries v. Comm’r of Internal Revenue, 104 T.C. 105 (1995)