## Facts

- Central de Gas de Chihuahua, S.A. (Central) was a Mexican corporation that owned tractors and trailers.
- In 1990, Central rented the equipment to another Mexican corporation, Hidro Gas de Juarez, S.A. (Hidro), but Hidro paid no rent.
- Central and Hidro were under common control within the meaning of I.R.C. § 482.
- Hidro used the equipment to transport liquefied petroleum gas from points in the United States to the Mexican border area for sale to Pemex.
- Central did not file a U.S. federal income tax return for 1990.
- The IRS made a jeopardy assessment and determined a deficiency under I.R.C. § 881, based on a § 482 allocation to Central of the equipment’s fair rental value (initially higher, later agreed by the parties to be $1,125,000 for 1990).
- The parties filed cross-motions for partial summary judgment on whether § 881 can apply when the income is created by a § 482 allocation rather than an actual rent payment; other issues (e.g., sourcing amount and alternative § 882 theory) were reserved.

## Issues

1. Whether I.R.C. § 881’s 30% tax on U.S.-source FDAP income of a foreign corporation applies to rental income allocated under I.R.C. § 482 when no rent was actually paid.
2. Whether a § 482 allocation of arm’s-length rent may be treated as an “amount received” (i.e., a deemed payment) for § 881 purposes.

## Decision

- The Tax Court granted the Commissioner’s motion for partial summary judgment and denied Central’s cross-motion.
- Section 881 does not require an actual cash payment; a § 482 allocation of fair rental value may constitute income subject to § 881.
- The allocated amount retained its character as rent and its U.S.-source character to the extent the property was used in the United States.
- Issues concerning the proper amount allocable to U.S. use and the Commissioner’s alternative argument under § 882 were left for later proceedings.

## Legal Principles

- I.R.C. § 482 authorizes the IRS to allocate arm’s-length income among commonly controlled entities to prevent tax evasion and clearly reflect income, including allocating rent where property is used rent-free.
- For I.R.C. § 881, U.S.-source FDAP income (including rents) may be taxable on a gross basis to a foreign corporation even if the income arises from a deemed, not actual, intercompany payment created by a § 482 adjustment.
- A § 482 allocation establishes the amount of income that should be recognized and does not change the character of the income; allocated rent remains rent.
- Rents from tangible property are U.S.-source to the extent the property is used in the United States, supporting § 881 treatment when the use occurs in the United States.

## Conclusion

The Tax Court held that § 881 liability can be triggered by a § 482 allocation of U.S.-source rental income between commonly controlled foreign corporations, even when no rent is actually paid, because the allocation is treated as a deemed payment and thus an amount received for § 881 purposes.


Central de Gas de Chihuahua, S.A. v. Commissioner, 102 T.C. 515 (1994)