(CN) – The owner of a fleet of ships chartered by offshore oil companies is entitled to tax breaks, the 5th Circuit ruled. A three-judge panel held that Tidewater Inc. and its subsidiaries do not have to refund deductions to the Internal Revenue Service.
Tidewater charters ships to affiliated operating companies, and those operating companies then charter the vessels to customers, mostly oil companies. The operators also provide customers with crews to man the ships.
Tidewater Foreign Sales Corporation (FSC) acts as a commission agent for the time charters, receiving commissions from Tidewater for the leasing component.
Tax code allows qualified taxpayers to deduct commissions paid to a foreign sales corporation, so long as the commissions stem from income generated by the sale or lease of “export property.” The FSC can then claim a favorable tax rate on income from the commissions.
Tidewater deducted the commissions paid to Tidewater FSC on its 1998-2000 tax returns, and Tidewater FSC claimed the favorable rate on its returns.
But the IRS contended that the vessels were not “export property” and made Tidewater refund the deductions, prompting litigation.
The federal appeals court in New Orleans sided with the plaintiffs, saying the vessels qualify as “export property.”
Judge Davis said the time charter is more like a lease than a service agreement, because the customer “maintains control over every aspect of the use of the vessel.”
“The bareboat charter of the vessel from the vessel owner to the Tidewater operating company amounts to a lease, so if the Time Charter to the customer is a sublease, Tidewater is entitled to the deduction,” Davis wrote.