- 38 -
Furthermore, we agree with petitioner that section 842(b)
attributes a fictional amount of income to petitioner's U.S.
branch that is not based on its own activities but rather on the
investment performance achieved by domestic insurance companies.
Respondent contends that section 842(b) does not violate the
separate-entity principle because the formula therein uses
petitioner's liabilities to determine the assets petitioner might
be expected to hold if it were a separate entity. Whether the
hypothetical amount of assets calculated pursuant to section
842(b) represents a reasonable estimate of the amount of assets
petitioner would hold if it were a separate entity misses the
point; that amount is simply extraneous to petitioner's
operations. Section 842(b) incorporates domestic insurance
industry data via the domestic yield or company's worldwide
earnings data via the worldwide yield, all of which are
extraneous to the operations of petitioner's U.S. permanent
establishment. We are not persuaded that the separate-entity
principle is satisfied merely by starting with the real facts as
they relate to petitioner's permanent establishment but then
incorporating extraneous data that is inconsistent with that
principle. Cf. Ostime (Inspector of Taxes) v. Australian Mutual
Provident Society, [1960] AC 459 (United Kingdom case with a
similar business profits article stating that "the worldwide
investment income, which forms the first stage of the * * *
Page: Previous 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 NextLast modified: May 25, 2011