## Facts

- Dover Corporation filed consolidated U.S. returns and indirectly owned Dover UK, a U.K. controlled foreign corporation (CFC).
- Dover UK wholly owned Hammond & Champness Ltd. (H&C), also a U.K. CFC engaged in installing and servicing elevators.
- In 1997, Dover UK sold all H&C stock to Thyssen, an unrelated buyer.
- In 1999, Dover sought and obtained IRS relief to make H&C’s “check-the-box” election retroactive to immediately before the 1997 stock sale, treating H&C as a disregarded entity for U.S. tax purposes.
- The retroactive election recharacterized the transaction for U.S. tax purposes as a deemed § 332 liquidation of H&C into Dover UK, followed immediately by Dover UK’s deemed sale of H&C’s assets.
- Dover reported the resulting gain as excluded from foreign personal holding company income (FPHCI) under Treas. Reg. § 1.954-2(e)(3)(ii)–(iv) (property used or held for use in the CFC’s trade or business), producing no Subpart F inclusion.
- The IRS issued deficiency determinations for 1996 and 1997; the only remaining dispute was whether the deemed asset-sale gain was FPHCI under I.R.C. § 954(c)(1)(B)(iii).
- The case was submitted on a stipulated record under Tax Court Rule 122.

## Issues

1. Whether, after a retroactive disregarded-entity election causing a deemed § 332 liquidation, the CFC parent’s deemed sale of the former subsidiary’s operating assets is treated as a sale of property used in the parent CFC’s trade or business under Treas. Reg. § 1.954-2(e)(3)(ii)–(iv).
2. Whether the gain from that deemed asset sale is excluded from FPHCI, and therefore not includible as Subpart F income to the U.S. shareholder under I.R.C. § 954(c)(1)(B)(iii).

## Decision

- The Tax Court held for Dover.
- The court concluded that Dover UK’s deemed sale of H&C’s assets constituted a sale of property used in Dover UK’s trade or business within Treas. Reg. § 1.954-2(e)(3)(ii)–(iv).
- As a result, Dover UK’s gain on the deemed asset sale was not FPHCI and did not create a Subpart F inclusion to Dover under § 954(c)(1)(B)(iii).
- The court relied on IRS administrative guidance concerning the effects of liquidations under §§ 332 and 381 and applied the principle from Rauenhorst v. Commissioner that the IRS may be constrained by its own published guidance.

## Legal Principles

- A retroactive entity-classification election can cause a deemed § 332 liquidation and related deemed transactions for U.S. tax characterization.
- In a § 332 liquidation, IRS administrative guidance under §§ 332 and 381 may treat the parent as succeeding to and continuing the liquidated subsidiary’s trade or business for relevant federal tax characterizations.
- Under Treas. Reg. § 1.954-2(e)(3)(ii)–(iv), gain from sale of property used or held for use in a CFC’s trade or business may be excluded from FPHCI, even when the sale is deemed to occur immediately after a deemed liquidation.
- The IRS cannot, in litigation, disavow applicable published administrative guidance where the taxpayer’s position follows that guidance (Rauenhorst principle).

## Conclusion

The Tax Court held that, because the retroactive disregarded-entity election produced a deemed § 332 liquidation and Dover UK was treated under IRS liquidation guidance as continuing H&C’s business, the deemed sale of H&C’s operating assets fell within the business-property exception to FPHCI, eliminating the asserted Subpart F inclusion.


Dover Corp. v. Comm’r, 122 T.C. 324 (2004)