Tax Court's Taisei case sheds light on the definition of "permanent establishment."

EXECUTIVE SUMMARY

Foreign corporations resident in a country that has a tax treaty with the U.S. can avoid Federal income tax on effectively connected income if they do not have a U.S. permanent establishment. Even if they do have a permanent establishment, business profits are exempt if they are not attributable to such establishment. This article focuses on the definition of a "permanent establishment" and examines agency relationships that can result in permanent establishment status. Further, it analyzes Taisei Fire and Marine Insurance Co., Ltd., a recent Tax Court decision that elucidated the distinction between dependent and independent agents in the treaty context.

Foreign corporations resident in a country with which the U.S. has an income tax treaty generally can avoid Federal income tax on effectively connected income (ECI) if they have no permanent establishment in the U.S. U.S. income tax treaties, which generally override the Code, typically provide that a resident of the treaty jurisdiction is exempt from Federal income tax(1) on business profits except to the extent attributable to a permanent establishment maintained by the resident in the U.S. "Business profits" are generally defined to include ECI from commercial activities.

This article analyzes the definition of a "permanent establishments," with particular emphasis on agency relationships that can result in permanent establishment status. Much-needed guidance regarding the distinction between dependent and independent agents in the treaty context was recently provided by the Tax Court in Taisei Fire and Marine Insurance Co., Ltd.(2)

Taxation of ECI Under the Code

Absent treaty protection, under Sec. 882 (a) (1), foreign corporations are subject to Federal corporate income tax on taxable income effectively connected with the conduct of a U.S. trade or business. The threshold determination of whether a foreign corporation's activities in the U.S. rise to the level of a trade or business is subjective, with little guidance provided in the Code or regulations. Case law has held foreign corporations to be engaged in the conduct of a U.S. trade or business based on activities that are "considerable, continuous and regular."(3) In general, the quantum of activity or presence in the U.S. needed to trigger trade or business status is much less than that needed to constitute a permanent establishment.

Under Sec. 864(c) (3), foreign corporations engaged in the conduct of a U.S. trade or business have ECI with regard to U.S.- source income from the sale of inventory or performance of services (the "residual force of attraction" doctrine). In addition, certain foreign-source income may also be ECI under Sec. 864(c) (4) (B) (iii), to the extent attributable to a foreign corporation's U.S. office. For example, U.s.-source ECI would arise if a foreign corporation engaged in the conduct of a U.S. trade or business sold goods into the U.S. with title and risk of loss(4) passing to the purchaser there. On the other hand, if title and risk of loss were to pass to the purchaser outside the U.S., such income would be foreign-source, not ECI. However, if the foreign seller maintained an office in the U.S. to which such income were attributable, it would generally be treated as ECI under Sec. 864(c) (4) (B). Income is attributable to a U.S. office of the taxpayer under Sec. 864(c) (5) (B) if the office is a material factor in the realization of the income and the income is realized in the ordinary course of the trade or business carried on through that office. According to Regs. Sec. 1.864-6(b) (2) (iii), this may occur, for example, if the U.S. office participates in the solicitation, negotiation or conclusion of the sales contract or performs other significant services necessary for the consummation of the sale that are not the subject of a separate agreement between the seller and the buyer.

As was noted, for foreign-source income from the sale of goods to be ECI, the foreign person must have a U.S. office to which such income is attributable. In certain instances, a U.S. office of a dependent agent (or subsidiary acting in the capacity of a dependent agent) can be attributed to the foreign principal. For this purpose, a dependent agent's office may be attributed to its foreign principal under Sec. 864(c) (5) (A) if the agent (1) has the authority to negotiate and conclude contracts in the name of the foreign principal and regularly exercises that authority or (2) has a stock of merchandise belonging to the foreign principal from which orders are regularly filled on its behalf. In contrast, an independent agent's office will not be attributed to the foreign principal, regardless of the agent's contractual authority or maintenance of inventory. Regs. Sec. 1.864-7(d) (3) (i) defines an independent agent as a "general commission agent, broker, or other agent of an independent status acting in the ordinary course of his business...and for compensation, sells goods or merchandise consigned or entrusted to his possession, management and control for that purpose by or for the owner of such goods...." Regs. Sec. 1.864-7(d) (3) (ii) states that die determination as to whether an agent is dependent or independent is made regardless of whether the principal or the agent directly or indirectly owns stock of the other entity.

An important exception under Sec. 864(c) (4) (B) (iii) applies when goods are sold by a foreign corporation for use outside the U.S. and a foreign office of the taxpayer also materially participated in the sale; in such instance, the participation by the U.S. office is neutralized by the foreign office's participation.

Taxation of Business Profits

Under U.S. Income Tax Treaties

As noted above, Federal income tax on business profits can be avoided by a foreign corporation when: 1. the foreign corporation is resident in a country with which the U.S. has an income tax treaty ("foreign resident"), 2. the foreign resident satisfies any limitation on benefits (LOB) article contained in the treaty, 3. the foreign resident's presence within the U.S., either directly or through agents, is not a permanent establishment as defined in the relevant income tax treaty, and 4. the foreign resident elects to be taxable under the treaty rather than the Code.(5)

Alternatively, if the foreign resident has a permanent establishment in the U.S., only that portion of its business profits attributable to the permanent establishment would be subject to Federal income tax in accordance with the treaty. In certain instances, the business profits attributable to a permanent establishment may be less than the amount of ECI otherwise taxable under the Code.(6)

Resident of Treaty Jurisdiction and LOB Articles

The starting point in determining whether a foreign corporation may be entitled to tax treaty benefits is to determine whether the foreign corporation is a resident of the treaty country, as defined in the particular treaty. Most tax treaties generally provide that a foreign corporation will be a resident of the treaty country if it is incorporated in the foreign jurisdiction. Some treaties define "residence" as the place where corporate management is located; some provide that flowthrough entities (e.g., foreign partnerships) are treated as residents of the treaty jurisdiction only to the extent that the flowthrough entity's income is taxable to beneficial owners resident in the treaty country.

Most recently concluded U.S. income tax treaties contain an LOB article designed to restrict "treaty shopping," which occurs when a resident of a country that has no income tax treaty with the U.S. attempts to avoid Federal income tax on business profits by interposing a corporate intermediary resident in a treaty jurisdiction to conduct business operations in the U.S. without a permanent establishment. Absent restrictions on using this type of tax-motivated structure, bilateral income tax treaties negotiated solely between the U.S. and a particular treaty partner could, in practice, become a tax treaty with the world.

LOB articles typically provide that treaty benefits will be available to corporate residents of the treaty country only if (1) shares of the corporate resident are publicly traded on an exchange located in the U.S. or the treaty country, or more than 50% of the beneficial ownership (e.g., vote and value) of the corporate resident is ultimately held by individuals resident in the U.S. or the treaty country (shareholder test); and (2) less than 50% of the corporate resident's income is used to make deductible payments (e.g., interest, royalties, etc.) to residents of third countries (base erosion test).

Example: A Saudi Arabian individual forms a Dutch intermediary

corporation to conduct business operations in the U.S.

without a permanent establishment. In general, the Dutch

intermediary would not avoid Federal income tax by claiming

benefits of the current U.S.-Netherlands Income Tax

Treaty; although the Dutch corporation might be a resident

of the Netherlands based on its place of incorporation, it

would fail the shareholder test contained in the LOB article(7)

of that treaty and, accordingly, be denied treaty benefits

unless other qualifications contained in that article were satisfied.

Defining "Permanent Establishment"

U.S. income tax treaties typically provide two ways in which a permanent establishment can be deemed to exist: (1) a fixed facility in the U.S. or (2) a dependent agent in the U.S. having and habitually exercising an authority to conclude contracts in the principal's name.

Fixed facility: A permanent establishment includes a fixed place of business through which the resident carries on industrial or commercial activity. This definition contains three essential elements:

1. Place of business: A "place of business" is typically defined as a branch, office, factory, warehouse, etc. It is not necessary for the place of business to be owned or rented by the foreign resident; in certain cases, an office of another person (e.g., a subsidiary or unrelated customer of the foreign resident) may be treated as the foreign resident's place of business. According to the 1977 and 1992 O.E.C.D. Revised Model Double Tax Convention on Income and Capital, Comments to Art. 5 ("O.E.C.D. Commentary"), this occurs, for example, if U.S. office space of another person is made available to the foreign resident on a constant basis, regardless of whether rent is charged for such use.

2. Fixed: The O.E.C.D. Commentary provides that, for a place of business to constitute a permanent establishment, it must be located at a distinct geographical situs, with a certain degree of permanence. For example, a foreign resident's rented showroom space in the U.S. on a temporary basis for a trade show intended to last two weeks would not likely constitute a fixed place of business, for lack of permanence. On the other hand, a facility maintained for an entire year at a single location would be sufficiently fixed.

The initial intent of the foreign resident in establishing a facility controls in determining whether the facility will be fixed - i.e., when a place of business is initially established with an intent of indefinite duration, it may constitute a permanent establishment even though it actually exists for a very short period of time because of an unexpected and premature termination. On the other hand, according to the O.E.C.D. Commentary, a place of business that, at the outset, is intended only for temporary duration, but is actually maintained for an extended period of time, may retrospectively be deemed a fixed place of business.

3. Business activity carried on through the fixed place of business: A fixed place of business may constitute a permanent establishment if the foreign resident carries on business activity through the facility. This would occur, according to the O.E.C.D. Commentary, if personnel of the foreign resident (e.g., employees or dependent agents) perform such activity, regardless of whether such personnel have authority to conclude contracts on the foreign resident's behalf.

Most importantly, U.S. tax treaties contain numerous exceptions to the definition of a fixed facility permanent establishment. Common exceptions include the following: * A facility used solely for the purpose of storage, display or delivery of goods or merchandise belonging to the resident. This would cover, for example, a U.S. warehouse maintained by a foreign resident solely to display goods available for sale or to store inventory awaiting shipment to customers. However, this exception would not be available if the facility also engaged in solicitation activities, as this would exceed the limited scope of the exception. * A facility used solely to purchase goods or merchandise for the resident (e.g., a U.S. purchasing office). However, this exception would not be available if the U.S. office also engaged in purchasing activities on behalf of another person. * A facility used solely for the collection of information for the resident. This would include a U.S. office maintained solely to obtain information concerning U.S. market conditions for transmission to the foreign resident's head office. * A facility used solely for advertising, the supply of information, the conduct of scientific research or similar activities that have a preparatory or auxiliary character for the resident.

The decisive criterion as to whether an activity of a fixed place of business has a "preparatory or auxiliary" character is whether or not the activity forms an essential and significant part of the activity of the enterprise as a whole. A fixed facility whose general purpose is identical to the general purpose of the whole enterprise has no preparatory or auxiliary activity. Under the O.E.C.D. Commentary, a fixed facility used to manage an enterprise will not be regarded as preparatory or auxiliary, because managerial activity exceeds this level. Determining whether the character of certain activities is preparatory or auxiliary to the business of an enterprise is subjective and difficult to resolve with any degree of certainty. As a result, this exception is generally relied on only as a last resort.

Dependent agent with authority to conclude contracts: Regardless of whether a foreign resident has a fixed facility in the U.S., it may have a permanent establishment in the U.S. by virtue of a dependent agent acting in the U.S. on its behalf if such agent has, and habitually exercises, an authority to conclude contracts in the resident's name. An independent agent, however, will not be treated as a permanent establishment of the foreign resident, regardless of whether the agent has the authority to conclude contracts on the resident's behalf

Critical to the determination of whether a foreign resident's relationships with its subsidiaries, affiliates and unrelated parties in the U.S. constitute a permanent establishment are (1) the classification of such parties as agents of the foreign resident, (2) the subclassification of such agents as dependent or independent and (3) whether such dependent agents have, and habitually exercise, an authority to conclude contracts in the principal's name.

1. Agency relationship: Essentially, an "agent" is one who acts on behalf another party, referred to as the "principal." Black's Law Dictionary(8) defines an agent, in part, as "[a] business representative, whose function is to bring about, modify, affect, accept performance of, or terminate contractual obligations between [the] principal and third persons." Although an employer-employee relationship is considered a principal-agent relationship, many other business relationships with related and unrelated parties, including commission sales agents and consignees, may also constitute agency relationships, depending on the economic and contractual arrangement between the parties.

2. Dependent vs. independent agent: Although classification of an agent as dependent or independent vis-a-vis its principal may be critical in determining the principal's U.S. tax liability, little guidance is offered in U.S. tax treaties, except for the typical treaty definition of an independent agent (discussed above). Moreover, U.S. tax treaties commonly provide that a parent-subsidiary relationship between a foreign corporation and its U.S. agent is generally not taken into account in determining whether the agent is dependent or independent, although a subsidiary would be treated as a dependent agent of its parent if it in fact acted in that capacity.

The O.E.C.D. Commentary describes an independent agent as one who is independent of the enterprise, both legally and economically. Whether a person is legally independent of the enterprise depends on the extent of the obligations the person has vis-a-vis the enterprise. When a person's commercial activities for die enterprise are subject to detailed instructions or to comprehensive control by it, the person cannot be regarded as legally independent. Economic independence of an agent focuses on the extent of entrepreneurial risks borne by the agent.

3. "Authority" to conclude contracts: As indicated above, a dependent agent will be treated as a permanent establishment of the principal only if the agent has and habitually exercises in the U.S. authority to conclude contracts in the principal's name. An agent that concludes contracts in the name of the principal without express authority to do so may nevertheless be treated under common law agency principles as having "apparent authority" if the principal does not object to such unauthorized conduct, and, in effect, manifests consent or acquiescence through silence.(9) Thus,permanent establishment status cannot be avoided simply by prohibiting an agent "on paper" from concluding contracts in the name of the principal if, in practice, the agent habitually does so, without the principal's objection.

Selling Goods Into the U.S. Without

a Permanent Establishment

Buy-sell relationship: If a foreign manufacturer (P) were to engage in a buy-sell relationship with a U.S. related or unrelated distributor, the distributor would generally be acting on its own behalf as reseller and not as P's agent, foreclosing the possibility of a permanent establishment by reason of an agency relationship. However, if the distributor is P's wholly owned subsidiary and is granted an exclusive U.S. distribution contract, the IRS may assert that the subsidiary is, in substance, acting as a dependent agent of P, increasing the risk of permanent establishment status. This risk would be heightened if P controlled the resale prices charged by the subsidiary, retained inventory risks (e.g., obsolescence, damage, etc.) while the goods were in the subsidiary's hands, and otherwise maintained detailed control over the subsidiary's selling activities.

Bona fide commission agent. Perhaps the simplest way to sell into the U.S. market without creating a permanent establishment is to sell through a "bona fide commission agent" of independent status. U.S. income tax treaties protect foreign principals from having a permanent establishment based on their relationship with independent agents that act in the ordinary course of their business, regardless of the agent's authority to conclude contracts in the foreign principal's name.(10) Unfortunately, U.S. treaties do not provide guidance as to the meaning of bona fide commission agent, but a commission agent would seem to qualify if the agent represents several principals, is not subject to detailed control in the manner in which it performs its functions (other than the result thereof), and assumes the normal business risks and expenses of its own operations.

Consignment sales: A foreign manufacturer can structure consignment sales arrangement with an unrelated or wholly owned U.S. distributor without creating a permanent establishment by virtue of an agency relationship.

For example, in Rev. Rid. 63-113,(11) a foreign manufacturer resident in a treaty jurisdiction sold goods at arm's-length prices to an unrelated U.S. distributor on a consignment basis. Title to the goods passed from the manufacturer to the distributor (and immediately from the distributor to its ultimate customer) when and if the distributor made a sale of such goods. Although legal tide to the goods remained with the manufacturer until sale by the distributor, risk of their loss from damage, destruction, theft or loss while in transit and prior to sale by the distributor was assumed by the distributor. In ruling that the arrangement was, in effect, a seller-purchaser relationship rather than an agency relationship (thus precluding permanent establishment status), the following factors were emphasized: * Goods ordered by the distributor were shipped on its behalf and at its expense. * The distributor was entitled to move the goods held on consignment from time to time to such locations as it desired without the manufacturer's notice or consent. * The distributor bore the cost of insurance of the consigned goods with loss payable to the manufacturer. * On request, the distributor furnished the manufacturer with an inventory of goods held on consignment, but was not obligated to account to the manufacturer for the sales proceeds it received. * The distributor was under no obligation to purchase the consigned goods, and the manufacturer retained the right to recall such goods prior to sale by the distributor. * The distributor sold the goods in its own name to its customers.

In Rev. Rul. 76-322,(12) the facts were similar, except that the U.S. distributor was wholly owned by the foreign treaty resident. Despite the parent-subsidiary relationship between the foreign manufacturer and distributor, the IRS favorably ruled the relationship to be one of seller-purchaser rather than agency, hence avoiding a permanent establishment. The ruling emphasized the following: * The U.S. distributor "determined" its own resale prices.(13) * The foreign manufacturer also sold its products to other unrelated and independent distributors in the U.S., thus avoiding an exclusive agency relationship with its subsidiary.

Taisei

In Taisei, the Tax Court provided much-needed guidance on the distinction between a dependent agent and an independent agent in the context of U.S. income tax treaties. The importance of the decision centers around its analysis of the legal and economic independence tests, both of which must be satisfied to establish independence of an agent for tax treaty purposes.

In Taisei, the taxpayers were four publicly held Japanese property and casualty insurance companies with a principal place of business in Japan. In addition to writing direct insurance in Japan, the taxpayers also wrote reinsurance policies ceded to them by other insurance and reinsurance companies, some of which were located in the U.S.

Each of the taxpayers granted authority to two or three different U.S. agents, including Fortress Re, Inc. (Fortress), a domestic corporation, to underwrite reinsurance and perform various U.S. activities in managing these policies on the taxpayers' behalf. Fortress was owned by several U.S. individuals who had total control over its daily operations. Fortress operated its business from an office rented in the U.S. and paid all of its own operating expenses.

Fortress was described as a "reinsurance underwriting manager." Pursuant to substantially similar separate management agreements concluded between Fortress and each of the taxpayers, Fortress was authorized to act as agent of each company to underwrite, retrocede and manage reinsurance on each company's behalf in the U.S. Fortress was also responsible for, and had total control over, handling and disposing of all claims relating to such reinsurance.

It was undisputed that Fortress had (and habitually exercised) authority to conclude contracts in the taxpayers' names, which would cause the taxpayers to have a permanent establishment under the U.S.-Japan Income Tax Treaty if Fortress were the taxpayers' dependent agent.

The U.S.-Japan Income Tax Treaty does not define "dependent" or "independent" agent, but provides in Art. 2(2) that any term used in the treaty that is not defined therein is interpreted by application of the laws of the country whose taxes are at stake (here, the U.S.). Moreover, in interpreting treaty language, the courts focus on the intent and shared expectations of the treaty partners when originally negotiating the treaty.(14)

Because Art. 9(4) and (5) of the 1971 U.S.-Japan Income Tax Treaty contained language regarding dependent and independent agents identical to that contained in the 1963 O.E.C.D. Draft [Model] Convention (1963 Model), the Tax Court in Taisei cited the 1963 Model, Art. 5, Comment 15, which contained guidance on the definition of a dependent agent. That Comment defines dependent agents as those who are "dependent, both from the legal and economic points of view, upon the enterprise for which they carry on business dealings." (Emphasis added.) Although this Comment appears to require both legal and economic dependence for classification as a dependent agent, the court held the true intention of the drafters of the 1963 Model was that a dependent agent is one who is either(15) legally or economically dependent on his principal. This intention was confirmed by the 1977 Model Comments.

In distinguishing a dependent from an independent agent, the court noted that the 20 factors commonly used by the IRS to distinguish employees from independent contractors(16) were of limited use. According to the court, Fortress clearly was not an employee of the taxpayers, and thus, had to be an independent contractor.(17) As an independent contractor, the issue was whether Fortress was properly classified as a dependent or independent agent by application of the legal and economic independence tests.

1. Legal independence test/comprehensive control: In measuring an agent's legal independence from its principal, one looks to reference the extent of the obligations the agent has vis-a-vis the enterprise. When an agent's commercial activities for an enterprise are subject to detailed instructions or to comprehensive control by it, the agent cannot be regarded as independent of the enterprise.(18)

In holding that Fortress was not subject to sufficient control by the taxpayers and was therefore legally independent from them, the court noted the following factors: * The taxpayers owned no stock in Fortress,(19) and no representative of any of them was a director, officer or employee of Fortress. * Fortress had complete discretion to conduct the reinsurance business on the taxpayers' behalf. * Fortress made all day-to-day decisions regarding its operations. * Fortress did not act exclusively for one principal; rather, it acted independently, in the ordinary course of its business, for several principals.(20) * The IRS's assertion that the taxpayers exercised comprehensive control over Fortress by "pooling" together as a family of Japanese insurance companies acting in concert was unfounded.

2. Economic independence test/entrepreneurial risk: In holding that Fortress was economically independent from the taxpayers, the court noted the following: * Fortress represented several insurance companies on a nonexclusive basis and was not required to obtain the taxpayers' approval to represent additional insurance companies. * Fortress had no guarantee of revenues; it incurred its own operating expenses, and therefore was not protected from loss. * While Fortress was entitled to a percentage of gross premiums written, it had the burden of acquiring sufficient business to produce the gross premiums. * Fortress earned over $27 million in gross income during 1986 to 1988 from its agency relationship with the taxpayers. The court noted this is not the kind of sum paid to a subservient company."

Conclusion

It is somewhat surprising that the IRS chose to litigate Taisei, because the facts appeared so taxpayer favorable. Apparently, the IRS insisted on litigating the case because of the $13.2 million potential deficiency at stake. Had the Service chosen to litigate a case in which the facts were not so taxpayer favorable, the holding might well have been different.

Despite the favorable holding in Taisei, it does not provide any reassurance to foreign multinationals doing business in the U.S. through agents who are significantly legally and economically dependent. Additional controversy in this area is likely, given the IRS's perception that foreign corporations engaged in U.S. business activities are not paying their fair share of income taxes. Nevertheless, if such corporations qualify for treaty benefits by avoiding a U.S. permanent establishment, their fair share of Federal income tax will be zero.

(1) Most U.S. income tax treaties do not cover state income taxes. Thus, foreign corporations exempt by treaty from Federal income tax on business profits may, be subject to state income or franchise taxes. State tax law must be reviewed to determine the state tax consequences. (2) Taisei Fire and Marine Insurance Co., Ltd., 104 TC No. 27 (1995), acq. IRB 1995-44, 4. (3) Jan C. Lewenhaupt, 20 TC 151 (1953). (4) For Federal tax purposes, title and risk of loss are generally treated as passing to the purchaser based on the shipping terms used in the documents. For example, if the shipping terms were "Free on Board (F.O.B.) destination," title and risk of loss would he deemed to pass to the purchaser at the port of destination; if "F.O.B. origin" were used, title and risk of loss would be treated as passing at the place of shipment. (5) In such case, the foreign resident is required to file Form 1120F, U.S. Income Tax Return of a Foreign Corporation, together with Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701 (b), which requires disclosure of the treaty-based return position. Substantial penalties may be asserted for failure to comply with the disclosure requirement; see Secs. 6114 and 6712. (6) The residual force of attraction doctrine of Sec. 864(c) (3), which to automatically treats certain U.S.-source income as ECI, does not apply for treaty purposes in determining income attributable to a permanent. establishment. Thus, the mere fact that title to goods passes in the U.S. does not cause U.S.-source ECI to be treated as attributable to a permanent establishment; rather, the focus is generally on or whether the activities of the U.S. permanent establishment are a material. factor in the realization of the income. (7) U.S.-Netherlands Income Tax Treaty, Art. 26. (8) Black's Law Dictionary (West, 6th ed., 1990), p, 63. (9) Restatement (Second) of Agency, [subsections] 8,26,27 and 43. (10) See, e.g., Re;,. Ruls. 55-617, 1955-2 CB 774, and 56-594, 1956-2 CB 1126. (11) Rev. Rul. 63-113, 1963-1 CB 410. (12) Rev. Rul. 76-322, 1976-2 CB 487. (13) If a wholly owned, nonexclusive U.S. distributor were to substantially lower its resale prices in an effort to obtain a larger market share, the manufacturer might instruct the related distributor to refrain from this practice. Otherwise, unrelated U.S. distributors of the foreign manufacturer would likely terminate their relationship with the manufacturer. Thus, it may be somewhat questionable whether the related distributor in Rev. Rul. 76-322, id., really determined its own resale prices. (14) See, e.g., Tedd N. Crow, 85 TC 376 (1985), quoting Andre Maximov, 299 F2d 565 (2d Cir. 1962) (9 AFTR2D 762, 62-1 USTC [pagragraph] 9279). (15) In Taisei, note 2, at n. 9, the Tax Court noted that "and" can mean "or," based on precedent that extends back to the Bible, Exodus 21:15. Reference to Black's Law Dictionary, note 8, p. 86, which confirms this construction of the word "and," might have been more relevant (or, at the very least, more recent). (16) See Rev. Rul. 87-41, 1987-1 CB 296. (17) To further confuse matters, the opinion mistakenly refers to the taxpayers as the independent contractors, rather than Fortress. (18) 1977 Model Comments, Comment 37. (19) According to Art. 9(6) of the U.S.-Japan Income Tax Treaty, the fact that a resident of the U.S. is a related person with respect to a resident of Japan is not to be taken into account in determining whether the Japanese resident has a permanent establishment in the U.S. On the other hand, the Tax Court noted, the lack of stock ownership by the taxpayers in Fortress did not automatically result in the conclusion that Fortress was legally independent from the taxpayers, although it was a factor to consider. (20) In this regard, the court cited Regs. Sec. 1.864-7(d) (3), which defines an "independent agent" for purposes of determining whether an office of an agent may be attributed to its principal in the context of measuring a foreign person's ECI. This regulation provides that when an agent who is otherwise independent acts in such capacity exclusively, or almost exclusively, for one principal, the facts and circumstances of each case will be considered in determining whether the agent, while acting in that capacity, can be classified as an independent agent. Although the Taisei court did not opine whether this regulation applies in the treaty context, it noted that it would be irrelevant in any event, because Fortress acted for several principals.