TAX COURT REVERSED: CERTIFICATES OF DEPOSIT SOLD TO FOREIGN SUBSIDIARY ARE NOT U.S. PROPERTY.

[7] Taxpayer explained that the sole reason for this transaction was to protect MFE's assets from seizure by the People's Republic of China. Taxpayer believed that because Hong Kong was scheduled to return to China in 1997, China would begin to expropriate all assets in Hong Kong corporations on or before that date. To prevent the expropriation of MFE's assets, MFE created MFE- NV to hold MFE's assets and to act as a layer of protection from asset seizure, As a further shield against the asset expropriation, MFE-NV purchased CDs from WFNNB with $174.9 million that it received from MFE.

[8] While this transfer may have been a good means of removing assets from Hong Kong (and funding WFNNB), it now presents a difficult international tax question. Taxpayer claimed that MFE-NV's purchase of $174.9 million in CDs from WFNNB did not constitute taxable "United States property" under § 956 and thus Taxpayer did not report § 951(a)(1)(B) taxes. Taxpayer argued that the CDs amounted to "deposits with persons carrying on the banking business," which is an exception to "United States property" under § 956(b)(2)(A). The Commissioner disagreed. The Commissioner believed that MFE-NV's purchase of the CDs did not qualify under the § 956(b)(2)(A) exception and therefore was an investment in "United States property" that was taxable under Subpart F of the Internal Revenue Code (I.R.C. §§ 951-64). Consequently, the Commissioner issued a notice of deficiency to Taxpayer. The Commissioner and Taxpayer could not resolve this issue and finally it was litigated before the Tax Court.

[10] The first conclusion is necessary to sustain the deficiency because Subpart F of the Internal Revenue Code generally taxes CFCs when they invest their earnings in "United States property." See I.R.C. § 951(a)(1)(B). However, Section 956(b)(2)(A) excludes "deposits with persons carrying on the banking business" from the definition of "United States property." I.R.C. § 956(b)(2)(A). Thus, if MFE-NV's purchase of CDs from WFNNB is not a "deposit with persons carrying on the banking business," then it is an investment in "United States property."

[11] The second conclusion -- that the CDs should be attributed to MFE and recognized as income by the Taxpayer under § 951(a)(1)(B) -- is also necessary to sustain the deficiency. Section 951(a), which taxes the income of CFCs, does not normally apply to an entity such as MFE-NV, which is a wholly-owned subsidiary of a CFC, and not a CFC itself. Consequently, even if MFE-NV had made investments in "United States property," that income would not have been subject to taxation. However, under temporary regulation § 1.956-1T, if the principal purpose for creating, organizing, or funding MFE-NV were to avoid the application of § 956, then the CDs that MFE-NV purchased would be attributed to MFE. If the CDs were attributed to MFE, which is a CFC, then, building off of the first conclusion, those CDs would be subject to taxation as part of MFE's earnings invested in "United States property."

[12] Thus, for a deficiency to stand, the Commissioner must win the § 956 Issue and the Regulation Issue. The Tax Court resolved both issues in favor of the Commissioner and for that reason upheld the Commissioner's finding of a deficiency.

[14] The Tax Court reaffirmed its conclusion on the § 956 Issue by reading a related-party exception into § 956(b)(2)(A). The Tax Court reasoned that in light of the dividend equivalence theory, a plain reading of § 956(b)(2)(A) would lead to an unreasonable result if the Taxpayer did not need to recognize income on the $174.9 million investment made between its subsidiaries. In general, under the dividend equivalence theory, United States shareholders of CFCs must include in their income the amount of "United States property" owned by the CFC. See S. Rept. No. 87-1881 (1962); 1962 U.S.C.C.A.N. 3297, 3391 ("Generally, earnings brought back to the United States are taxed to the shareholders on the grounds that this is substantially the equivalent of a dividend being paid to them."). The Tax Court interpreted the dividend equivalence theory as also treating a United States shareholder's use of a CFC's earnings as though those earnings were a taxable dividend. To avoid an unreasonable conflict with its understanding of the dividend equivalence theory, the Tax Court required that § 956(b)(2)(A) apply only to investments with an unrelated entity.

[15] In short, by imposing the business-facilitation and the related-party conditions on the § 956(b)(2)(A) exception, the Tax Court held that MFE-NV's purchase of $174.9 million in CDs from WFNNB did not fit the § 956(b)(2)(A) exception to the definition of "United States property."

[19] Different standards of review apply to different components of the Tax Court's decision. The Tax Court's factual determinations are subject to a clearly erroneous standard of review. Kearns v. Comm'r of Internal Revenue, 979 F.2d 1176, 1178 (6th Cir. 1992) ("We generally review the Tax Court's findings of fact on the clearly erroneous standard."); see also Gross v. Comm'r of Internal Revenue, 272 F.3d 333, 342 (6th Cir. 2001). Under this standard, the Tax Court's findings of fact will be overruled only if we are "left with a definite and firm conviction that a mistake has been made." Kearns, 979 F.2d at 1178. Thus, we "must uphold the [T]ax [C]ourt's account of the evidence if it is plausible in light of the record viewed in its entirety." Gross, 272 F.3d at 343. In contrast, the Tax Court's legal conclusions are subject to de novo review. Kearns, 979 F.2d at 1178. When reviewing mixed questions of fact and law, we review the underlying factual determinations under a clearly erroneous standard and the application of the facts to the law under a de novo standard. See Friedman v. Comm'r of Internal Revenue, 216 F.3d 537, 541 (6th Cir. 2000) ("This Court reviews the Tax Court's findings of fact for clear error and its application of law de novo."); MTS Int'l, Inc. v. Comm'r of Internal Revenue, 169 F.3d 1018, 1021 (6th Cir. 1999) ("This court reviews the [T]ax [C]ourt's legal conclusions de novo and its findings of fact under the 'clearly erroneous' standard.").

[20] These standards of review are evaluated against the backdrop of each party's burden of proof in the Tax Court. The Commissioner's determination that a tax deficiency existed is generally presumed to be correct. Kearns, 979 F.2d at 1178. Consequently, a taxpayer bears the burden of proving that the Commissioner's finding of a deficiency is erroneous or arbitrary by a preponderance of the evidence. See I.R.C. Rule 142(a)(1); Kearns, 979 F.2d at 1178.

B. The § 956 Issue

[21] Taxpayer appeals the Tax Court's legal interpretation of the phrase "deposit with persons carrying on the banking business" as used in § 956(b)(2)(A). Because this challenge involves an interpretation of law, we review the Tax Court's decision de novo.

[22] Before interpreting § 956(b)(2)(A), we first review relevant canons of statutory construction. Setting the tone for our statutory analysis is the principle that statutes imposing a tax are construed liberally in favor of the taxpayer. Weingarden v. Comm'r of Internal Revenue, 825 F.2d 1027, 1029 (6th Cir. 1987). With that perspective in mind, we look first to the plain language of the statute. See United States v. Health Possibilities, P.S.C., 207 F.3d 335, 338-39 (6th Cir. 2000) ("The starting point in a statutory interpretation case is the language of the statute itself"); United States v. Ables, 167 F.3d 1021, 1028 (6th Cir. 1999); United States v. Mills, 140 F.3d 630, 633 (6th Cir. 1998). When the text of a statute contains an undefined term, that term receives its ordinary and natural meaning. See Fed. Deposit Ins. Corp. v. Meyer, 510 U.S. 471, 476 (1994); Smith v. United States, 508 U.S. 223, 228 (1993); United States v. Moses, 137 F.3d 894, 899 (6th Cir. 1998); see also Wuebker v. Comm'r of Internal Revenue, 205 F.3d 897, 905 (6th Cir. 2000) (Jones, J., dissenting) (interpreting an undefined term in the Internal Revenue Code in accord with its ordinary meaning). As a further aide in determining the meaning of an undefined term, the maxim of noscitur a sociis -- it is known from its associates -- directs us to look to accompanying words to deduce the undefined word's meaning. See Parker v. Metro. Life Ins. Co., 121 F.3d 1006, 1014 (6th Cir. 1997); see also Kurinsky v. United States, 33 F.3d 594, 597 (6th Cir. 1994). Where this textual analysis fails to produce a conclusive result, or where it leads to ambiguous or unreasonable results, a court may look to legislative history to interpret a statute. See Palmer v. United States (In re Palmer), 219 F.3d 580, 584 (6th Cir. 2000); Hoffman v. Comshare, Inc. (In re Comshare, Inc. Secs. Litig.), 183 F.3d 542, 549 (6th Cir. 1999); Vergos v. Gregg's Enters., Inc., 159 F.3d 989, 990 (6th Cir. 1998). Resort to legislative history is not appropriate, however, if the text of the statute may be read unambiguously and reasonably. Koenig Sporting Goods, Inc. v. Morse Rd. Co. (In, re Koenig Sporting Goods), 203 F.3d 986, 988 (6th Cir. 2000) ("When a statute is unambiguous, resort to legislative history and policy considerations is improper."); Mills, 140 F.3d at 633 ("Only when the language of the legislation is unclear should we look beyond the wording of the statute to the intent of the legislature.").

[24] The parties dispute whether § 956(b)(2)(A)'s reference to "carrying on the banking business" applies to credit card companies like WFNNB. As mentioned above, in construing a statute, a court starts with the plain language. See Health Possibilities, 207 F.3d at 338-39; Ables, 167 F.3d at 1028; Mills, 140 F.3d at 633. Regrettably, that canon of construction by itself provides little help here because neither the Internal Revenue Code nor the United States Code defines the phrase "the banking business." Fortunately, two other canons of construction assist our efforts: (1) undefined terms are construed in accordance with their ordinary and natural meanings and (2) the meaning of an undefined term may be deduced from nearby words under noscitur a sociis.

[27] In light of that definition, WFNNB carries on "the banking business." WFNNB is a nationally chartered bank that issues credit cards. As such, it extends credit and receives payment for those loans. WFNNB also accepts certain deposits. Moreover, WFNNB is regulated by the Office of the Comptroller of Currency and the Federal Reserve. Also, it is insured by the Federal Deposit Insurance Corporation. And, as Taxpayer points out, in light of its national charter, the only business that WFNNB could possibly be engaged in is "the banking business." Thus, under an ordinary and natural reading, WFNNB carries on "the banking business." For those reasons, there is little need to stretch a common understanding of "the banking business" to exclude WFNNB here.

[29] Under a hypertechnical analysis, at odds with a plain language interpretation of the statute, the word "the" as used in "the banking business" at the time Congress enacted § 956(b)(2)(A) may have had two relevant meanings:

[30] Under Definition # 1, "the" refers to "something previously mentioned or clearly understood from the context or situation." For "the" to mean a particularized banking business under Definition #1, the particularized banking business must have been previously mentioned or clearly understood from the context of the situation. Undoubtedly, § 956 makes no prior reference to a specific banking business. Thus, the only way that "the" could fit Definition #1 is if a particularized banking business is clearly understood from the context or the situation. Here, there is no particularized banking business that could be reasonably inferred from the context of the statute. Due to the absence of either a prior reference or a clear contextual meaning, the text of § 956 does not support the use of Definition #1 here.

[31] In contrast, the plain language of § 956(b)(2)(A) supports the use of Definition #2 here. Under Definition #2, "the" modifies adjective-noun phrases, as in the dictionary example, "the seafood industry," to limit the application of the noun to that specified by the adjective. In the example, "the seafood industry," the "industry" referred to is limited to an industry dealing with "seafood." Applying Definition #2 is reasonable here because as used in § 956(b)(2)(A), "the" modifies an adjective-noun phrase, "banking business." And, as with the dictionary example of "the seafood industry," it is also reasonable to read "the" as limiting "business" to a business dealing with "banking." For that reason, the application of Definition #2 is consistent with the plain language of § 956(b)(2)(A).

[32] In short, a hypertechnical analysis of the term "the" suggests that it may be capable of two meanings when used in § 956(b)(2)(A) to modify "banking business." Testing these two potential definitions in context reveals that only Definition #2 can be sensibly applied. Consequently, "the," as used in the context of § 956(b)(2)(A), limits "business" to a business dealing with banking. Because WFNNB is a business dealing with banking (as the Tax Court conceded), WFNNB "carries on the banking business" for purposes of § 956(b)(2)(A).

[34] The Tax Court erred in attributing that implied business- facilitation meaning to the word "the." And, in its zeal "to effectuate the intent of Congress," the Tax Court failed to interpret the plain language of § 956(b)(2)(A). Before the Tax Court read in the complex business-facilitation requirement, it should have instead relied on another principle of statutory interpretation -- statutes imposing a tax should be interpreted liberally in favor of the taxpayer. Weingarden, 825 F.2d at 1029. Thus, rather than force a complex meaning from legislative history, the Tax Court should have instead construed § 956(b)(2)(A) in Taxpayer's favor.

[35] In sum, both the Tax Court's analytical framework and its conclusions regarding the definition of the phrase "carrying on the banking business" are incorrect. Under a correct statutory interpretation, WFNNB is, "carrying on the banking business." Although it is not necessary to look beyond the ordinary meaning of the words in § 956(b)(2)(A) to reach that conclusion, an application of noscitur a sociis confirms that result. For those reasons, WFNNB should be interpreted as "carrying on the banking business" under § 956(b)(2)(A).

[37] Again, the Tax Court abandoned the plain language of § 956(b)(2)(A). Section 956(b)(2)(A) has no related-party prohibition. In fact, the statutory text of § 956 contains a related-party prohibition only in § 956(b)(2)(C) and (F) and (b)(3). If it had intended to impose a related-party prohibition on transfers under § 956(b)(2)(A), Congress could have easily made that prohibition more general or applied it beyond solely those subsections. Congress did not do either. Regardless of its reasons for not doing so, the plain language of § 956(b)(2)(A) has no related-party prohibition, and thus, there is no need to examine legislative history here.

[38] The Tax Court examined legislative history because it found that the Competitive Equality Banking Act made reading § 956(b)(2)(A) without implying a related-party exception unreasonable. The Tax Court explained that had Congress known that banks could constitute related parties when it enacted § 956(b)(2)(A), it would have added a related-party exception to § 956(b)(2)(A). As a matter of policy that argument makes sense, but it is not the Tax Court's role to inject its own policy determinations into the plain language of statutes. Moreover, the Tax Court erred in concluding that a plain language reading -- not applying a related-party exception -- would be unreasonable. The plain text of § 956(b)(2)(A) encourages foreign company investment in domestic banks -- even if those banks are related to the foreign company. While obviously not the policy that the Tax Court would promote were it an über-legislature, interpreting § 956(b)(2)(A) without a related-party prohibition hardly rises to a level of unreasonableness that merits ignoring the plain text of the statute.

[41] No statutory basis exists for applying the § 581 definition of "bank" to the § 956(b)(2)(A) exception. In its first sentence, § 581 expressly states that its definition of "bank" is "[f]or purposes of sections 582 and 584." I.R.C. § 581. With that restriction, it is clear that Congress was not providing a general definition of "bank," but rather a specialized definition that applied only to certain statutory sections.

[42] Other sections of the Tax Code support this interpretation. At the time of the January 28 Transfer, several code sections had specifically adopted the § 581 definition of the word "bank." See, e.g., I.R.C. § 165(l)(3)(A); I.R.C. § 246A(c)(3)(B)(i); I.R.C. § 271(a); I.R.C. § 279(c)(5)(A); I.R.C. § 465(c)(7)(D)(iv); I.R.C. § 542(c)(2); I.R.C. § 585(a)(2)(A); I.R.C. § 593(d)(1)(B)(11); I.R.C. § 1281(b)(1)(C); I.R.C. § 6032; I.R.C. § 6695(f); I.R.C. § 7512(b). By so doing, those sections implicitly recognized that the § 581 definition would not apply without the express incorporation of that definition. Because § 956 does not adopt the § 581 definition, no statutory basis exists for applying the § 581 definition to § 956(b)(2)(A).

[43] Although the Tax Code never suggests that the § 581 definition of "bank" applies to § 956(b)(2)(A), the Commissioner argues that under Revenue Ruling 70-385, the § 581 definition governs § 956(b)(2)(A). Revenue rulings are one of the four ways that the IRS can publicly memorialize its interpretations of the Tax Code. See Bankers Life & Cas. Co. v. United States, 142 F.3d 973, 978 (7th Cir. 1998). The other three methods are regulations issued pursuant to a specific congressional directive; regulations issued under the IRS's general authority to interpret tax laws; and private letter rulings. Id. Revenue rulings do not apply as broadly as regulations, nor as narrowly as private letter rulings. See id.; see also True Oil Co. v. Comm'r of Internal Revenue, 170 F.3d 1294, 1304 (10th Cir. 1999) (explaining that revenue rulings "do not have the same force and effect as treasury regulations and consequently are not binding on this court"). Rather, revenue rulings are typically the IRS's response to a hypothetical situation and as such are authoritative and binding on the IRS. See Bankers Life, 142 F.3d at 978 ("Revenue rulings typically contain the IRS's interpretation of how the law applies to a set of hypothetical facts. Revenue rulings do not have broad application like regulations, but the IRS does consider them authoritative and binding."). Although binding on the IRS, revenue rulings are interpretive rulings by an administrative agency that do not require notice and comment and consequently are not binding on courts. See id.; see also Babin v. Comm'r of Internal Revenue, 23 F.3d 1032, 1038 (6th Cir. 1994) ("Revenue rulings are not binding on this court."). Nevertheless, as the informed opinion of a specialized agency, this Circuit has treated revenue rulings as having persuasive authority. See Babin, 23 F.3d at 1038 ("[B]ecause revenue rulings express the studied view of the IRS, whose duty is to carry out the provisions of the Internal Revenue Code, they are entitled to some deference."); Constantino v. TRW, Inc., 13 F.3d 969, 981 (6th Cir. 1994) ("Unlike the regulations, IRS rulings do not have the force of law and are merely persuasive authority."); Kinnie v. United States, 994 F.2d 279, 286 (6th Cir. 1993); see also CenTra, Inc. v. United States, 953 F.2d 1051, 1056 (6th Cir. 1992); cf United States v. Cleveland Indians Baseball Co., 532 U.S. 200, 220 (2001) (refraining from deciding the level of deference due revenue rulings, but explaining that because the revenue rulings at issue reflected the IRS's long standing interpretation of its own regulations, that interpretation "attracts substantial judicial deference"). However, because revenue rulings often provide the IRS's interpretation of a hypothetical set of facts, courts should not extend the scope of a revenue ruling beyond the hypothetical situation presented. See Babin, 23 F.3d at 1038 ("[W]e need not accord a revenue ruling any deference, where, as here, the revenue ruling fails to address the relevant issue on appeal.").

[44] In light of these principles, Revenue Ruling 70-385 does not apply here. Revenue Ruling 70-385 contemplated a very different factual situation than the present case. In 70-385, the IRS considered the question of whether deposits with foreign financial institutions constituted "persons carrying on the banking business." See Rev. Rul. 70-385, 1970-2 C.B. 156. Because it was not clear under United States law whether the foreign financial institutions were "carrying on the banking business," the IRS applied the § 581 definition of "bank" to determine which foreign financial institutions fit the § 956(b)(2)(A) exception. See id. From the scope of 70-385, none of the hypothetical f6reign financial institutions that the IRS considered had national bank charters, nor were they regulated by the Office of the Comptroller of Currency and the Federal Reserve, nor were they insured by the FDIC, as WFNNB is. Quite plainly, WFNNB is not one of the foreign financial institutions that the IRS contemplated when it issued 70-385. Thus, while 70-385 concludes that the §581 definition of "bank" is helpful in determining whether foreign financial corporations are "carrying on the banking business," it provides no reason to extend its application to nationally chartered banks. Thus, the hypothetical question that the IRS answered in 70-385 is factually distinct from the present situation. For that reason, we do not expand 70-385 to apply to domestic financial institutions.

[45] This conclusion is reinforced by a court's duty to interpret statutes in conformity with their plain language. As explained above, it makes little sense to stretch the ordinary meaning of an undefined term. Under an ordinary and normal reading, WFNNB, which engages in the business of banking, carries on "the banking business" for purposes of § 956(b)(2)(A). In this case, especially, we decline to extend the meaning of "the banking business" to impose a definition of "bank" that (1) Congress never expressly intended apply and (2) that the IRS never considered as applying to nationally chartered banks. Thus, as the Tax Court did before us, we reject the Commissioner's argument that the § 581 definition of "bank" applies to the phrase "carrying on the banking business" in § 956(b)(2)(A).

[47] As with the I.R.C. § 581 definition of "bank," there is no statutory basis for applying the 12 U.S.C. § 1841(c)(2)(F) exclusion of "bank" to I.R.C. § 956(b)(2)(A). Congress created exceptions to the definition of "bank" in § 1841(c)(2)(F) only for purposes of Chapter 12 of the United States Code. See 12 U.S.C. § 1841(c). For that reason, the 12 U.S.C. § 1841(c)(2)(F) exclusion does not govern I.R.C. § 956(b)(2)(A).

[48] Despite the lack of statutory authority for applying the § 1841(c)(2)(F) exclusion, the Commissioner urges us to apply it anyway. The Commissioner argues that in light of the § 1841(c)(2)(F) limitations on WFNNB's banking activities, WFNNB is not a full-service bank, and, therefore, should not be viewed as "carrying on the banking business" under § 956(b)(2)(A).

[49] That argument should not prevail. If we were to adopt that reasoning, then any non-full-service bank would be excluded from "carrying on the banking business." Moreover, if we were to abide strictly by the § 1841(c)(2) definitions, then United States branches of foreign banks, federal savings associations, and federal savings banks would not be considered banks. See 12 U.S.C. § 1841(c)(2)(A)-(B); see also 12 U.S. C. § 1841(j). Under that reading, CFC deposits with United States branches of foreign banks, federal savings associations, and federal savings banks would likewise not qualify as exceptions to "United States property," and would be taxable. By excluding those entities, the Commissioner's proposed application of § 1841(c)(2)(F) conflicts too greatly with an ordinary and normal understanding of what it means to be "carrying on the banking business."

[50] In short, because there is no legal basis for applying the 12 U.S.C. § 1841(c)(2)(F) exclusion here and because doing so conflicts with an ordinary and normal reading of the phrase "the banking business," the exclusion should not control the phrase "the banking business" as used in I.R.C. § 956(b)(2)(A).

[52] While the Commissioner's arguments all support the conclusion that it is improbable that the January 28 Transfer would have occurred between unrelated parties, that argument is tangential to the question of whether the CDs that MFE-NV purchased from WFNNB were "deposits" under § 956(b)(2)(A). Thus, the question of whether independent parties would have engaged in the January 28 Transfer is not the issue here. Rather, the question is whether the CDs, i.e., the certificates of deposit, that MFE-NV purchased from WFNNB constituted "deposits." Because the term "deposit" is not defined for purposes of § 956(b)(2)(A), we look to its ordinary meaning. Rather than belabor this point with dictionary definitions, we think that it is sufficiently clear that certificate of deposit constitutes a "deposit" absent a specialized definition of "deposit." For that reason, we reject the Commissioner's final argument on the § 956 Issue as well.