SCOTUS Reports

Tag: Section 902

  • Brunswick International, Ltd. v. Commissioner, 96 T.C. 410 (1991): Sourcing Foreign Tax Credits for Dividends from Subsidiaries

    Brunswick International, Ltd. v. Commissioner, 96 T. C. 410 (1991)

    Dividends from foreign subsidiaries must be sourced to specific years for foreign tax credit calculations, following the reverse chronological order of accumulated profits.

    Summary

    In Brunswick International, Ltd. v. Commissioner, the Tax Court addressed how to source foreign taxes paid by a foreign subsidiary for the purpose of calculating the U. S. parent’s foreign tax credit under Section 902. The court rejected the taxpayer’s ‘aggregate’ approach, which sought to claim credits for all taxes paid by the subsidiary since its inception. Instead, it upheld the IRS’s method of sourcing dividends to specific years of accumulated profits, in reverse chronological order. This decision was grounded in the statutory language and prior case law, emphasizing the importance of year-by-year analysis to prevent credit for taxes paid on income not distributed as dividends. The ruling has significant implications for how multinational corporations structure their operations and claim foreign tax credits.

    Facts

    Brunswick International, Ltd. (BIL), a wholly owned subsidiary of a U. S. corporation, owned 99. 99% of Sherwood Medical Industries, Ltd. (SMIL), a UK corporation. SMIL operated branches in France and Germany and paid foreign taxes over the years. In 1982, BIL sold SMIL’s stock, recognizing a gain treated as a dividend of $5,302,833 under Section 1248. The dispute centered on how to calculate the foreign tax credit for this dividend, with BIL arguing for an aggregate approach to claim credits for all taxes paid by SMIL, while the IRS advocated for sourcing the dividend to specific years of accumulated profits.

    Procedural History

    The case was submitted fully stipulated to the Tax Court. The court considered the parties’ arguments on the sourcing of foreign taxes for the purpose of calculating the foreign tax credit under Section 902. The court’s decision was the first instance of this specific issue being adjudicated, relying on statutory interpretation and prior case law to reach its conclusion.

    Issue(s)

    1. Whether the foreign tax credit for a dividend from a foreign subsidiary should be calculated using an aggregate approach, considering all taxes paid by the subsidiary since its inception?
    2. Whether the foreign tax credit should be sourced to specific years of accumulated profits in reverse chronological order?

    Holding

    1. No, because the aggregate approach is inconsistent with Section 902(c)(1) and prior case law, which require sourcing dividends to specific years of accumulated profits.
    2. Yes, because Section 902(c)(1) mandates sourcing dividends to the most recent accumulated profits first, in reverse chronological order, and the IRS’s method aligns with this requirement.

    Court’s Reasoning

    The court’s decision was based on the interpretation of Section 902(c)(1), which requires dividends to be sourced to the most recent accumulated profits first. The court cited American Chicle Co. v. United States and H. H. Robertson Co. v. Commissioner, emphasizing the need for a year-by-year analysis to determine which foreign taxes are creditable. The court rejected BIL’s aggregate approach, which would have allowed credit for taxes paid on income not distributed as dividends, as contrary to the statute and case law. The court also considered the legislative purpose of avoiding double taxation and achieving equivalence between subsidiaries and branches but found that these goals do not override the statutory requirement for sourcing dividends to specific years. The court noted that Congress’s later adoption of an aggregate approach for post-1986 years did not retroactively change the law for earlier years.

    Practical Implications

    This decision requires multinational corporations to carefully consider the timing of dividend distributions from foreign subsidiaries to maximize foreign tax credits. The year-by-year sourcing method can result in the loss of credits for taxes paid in earlier years if dividends are not distributed promptly. Corporations must plan their operations and dividend policies with this in mind. The ruling also highlights the importance of understanding the interplay between U. S. tax laws and the operations of foreign subsidiaries. Subsequent cases, such as those applying the post-1986 pooling method, have distinguished this ruling, but it remains relevant for pre-1987 transactions. Legal practitioners must advise clients on the potential for permanent loss of foreign tax credits if dividends are not sourced properly under the pre-1987 rules.

  • First Chicago Corp. v. Commissioner, 96 T.C. 421 (1991): Aggregation of Shareholdings in Consolidated Groups for Foreign Tax Credit Purposes

    First Chicago Corp. v. Commissioner, 96 T. C. 421 (1991)

    A consolidated group of corporations cannot aggregate their shareholdings to meet the 10% voting stock requirement for claiming a foreign tax credit under section 902.

    Summary

    First Chicago Corporation and its subsidiaries sought to aggregate their shareholdings in a Dutch bank to claim a foreign tax credit under section 902 of the Internal Revenue Code. The Tax Court held that neither section 902 nor the consolidated return regulations allowed such aggregation. The court also found that the subsidiaries were not acting as agents for the parent company in holding the shares. This decision clarifies that each corporation within a consolidated group must individually meet the 10% ownership threshold to claim the credit, impacting how multinational corporations structure their foreign investments and tax planning.

    Facts

    First Chicago Corporation (P) and its subsidiaries, including First National Bank of Chicago (S), owned shares in N. V. Slavenburg’s Bank (F), a Dutch bank. The shares were distributed among S and its affiliates to maximize voting power due to F’s voting restrictions. P and its subsidiaries filed consolidated tax returns and claimed foreign tax credits under section 902 based on dividends received from F. The IRS disallowed these credits, asserting that no single entity within the group owned at least 10% of F’s voting stock as required by section 902.

    Procedural History

    The IRS issued a notice of deficiency to P for the 1983 tax year, disallowing the foreign tax credit claims. P filed a petition with the U. S. Tax Court. The court considered the case and issued its opinion on March 7, 1991, ruling against P’s aggregation of shareholdings and its agency argument.

    Issue(s)

    1. Whether section 902 of the Internal Revenue Code permits a consolidated group of corporations to aggregate their shareholdings to meet the 10% voting stock requirement for claiming a foreign tax credit.
    2. Whether the consolidated return regulations under section 1502 allow aggregation of shareholdings for the same purpose.
    3. Whether the subsidiaries of First Chicago Corporation acted as agents for the parent company in holding the shares of the foreign corporation.

    Holding

    1. No, because section 902 requires that a single domestic corporation own at least 10% of the voting stock of the foreign corporation to claim the credit.
    2. No, because the consolidated return regulations do not permit aggregation of shareholdings to meet the section 902 requirement.
    3. No, because the subsidiaries were not acting as agents of the parent company within the meaning of Commissioner v. Bollinger, and thus their shareholdings could not be attributed to the parent.

    Court’s Reasoning

    The court analyzed the plain language of section 902, which specifies that a “domestic corporation which owns at least 10 percent of the voting stock” of a foreign corporation is eligible for the credit. The court rejected the argument that the legislative history supported aggregation, noting that Congress had not included such a provision in the statute. The court also examined the consolidated return regulations under section 1502, finding them ambiguous but ultimately concluding that they did not override the clear requirement of section 902. The court further considered the agency argument under Commissioner v. Bollinger, finding that the subsidiaries did not meet the criteria for being genuine agents of the parent company. The court emphasized the need for “unequivocal evidence of genuineness” in the agency relationship, which was lacking in this case.

    Practical Implications

    This decision has significant implications for multinational corporations filing consolidated tax returns. It clarifies that each member of a consolidated group must individually meet the 10% ownership threshold to claim a foreign tax credit under section 902. This ruling may affect how corporations structure their foreign investments, potentially leading to restructuring to concentrate ownership in a single entity to meet the threshold. It also underscores the importance of understanding the limitations of the consolidated return regulations and the strict criteria for establishing an agency relationship for tax purposes. Subsequent cases, such as those involving similar foreign tax credit issues, have referenced this decision in their analysis.

  • Vulcan Materials Co. v. Commissioner, 96 T.C. 410 (1991): Calculating Indirect Foreign Tax Credits for U.S. Shareholders of Mixed Corporations

    Vulcan Materials Company and Subsidiaries, Petitioner v. Commissioner of Internal Revenue, Respondent, 96 T. C. 410, 1991 U. S. Tax Ct. LEXIS 13, 96 T. C. No. 13 (1991)

    In calculating indirect foreign tax credits under Section 902, only the portion of a foreign corporation’s accumulated profits allocable to U. S. shareholders should be considered in the denominator of the credit formula.

    Summary

    Vulcan Materials Co. challenged the IRS’s calculation of its indirect foreign tax credit under Section 902 for dividends received from Tradco-Vulcan Co. , Ltd. (TVCL), a mixed corporation in Saudi Arabia. The issue was whether the term ‘accumulated profits’ in the denominator of the Section 902 formula should include all of TVCL’s profits or only those allocable to U. S. shareholders, given that Saudi tax law only taxed the portion of profits attributable to non-Saudi shareholders. The U. S. Tax Court held that ‘accumulated profits’ should be limited to the portion allocable to U. S. shareholders, aligning the indirect credit with the objectives of avoiding double taxation and treating foreign subsidiaries similarly to branches.

    Facts

    Vulcan Materials Co. owned 48% of TVCL, a Saudi Arabian corporation, with the remaining shares split between other U. S. corporations and a Saudi Arabian company, Tradco. TVCL’s profits were allocated to shareholders based on their ownership percentages. Under Saudi law, only the portion of TVCL’s profits allocable to non-Saudi shareholders was subject to Saudi income tax, while the portion allocable to Saudi shareholders was subject to a capital tax called Zakat. In 1984, Vulcan received dividends from TVCL and claimed an indirect foreign tax credit under Section 902. The IRS calculated the credit using TVCL’s total accumulated profits in the denominator, while Vulcan argued that only the portion of profits allocable to U. S. shareholders should be used.

    Procedural History

    The IRS determined a deficiency in Vulcan’s 1984 federal income tax, leading Vulcan to petition the U. S. Tax Court. The court addressed the sole issue of the proper calculation of the indirect foreign tax credit under Section 902, considering the interpretation of ‘accumulated profits’ in the formula.

    Issue(s)

    1. Whether the term ‘accumulated profits’ in the denominator of the Section 902 formula should include all of TVCL’s profits or only the portion allocable to U. S. shareholders, given the unique structure of Saudi tax law?

    Holding

    1. No, because the court determined that ‘accumulated profits’ under Section 902 should be limited to the portion of TVCL’s profits allocable to U. S. shareholders, in line with the objectives of the foreign tax credit and to avoid double taxation.

    Court’s Reasoning

    The court analyzed the statutory language of Section 902, finding it ambiguous regarding whether ‘accumulated profits’ should include all profits or only those subject to foreign tax. The court looked to the objectives of the foreign tax credit, as articulated in United States v. Goodyear Tire & Rubber Co. , to avoid double taxation and treat foreign subsidiaries similarly to branches. The court reasoned that using only the portion of profits allocable to U. S. shareholders in the denominator aligned with these objectives, as it would prevent double taxation on the U. S. shareholders’ share of profits. The court rejected the IRS’s argument that Goodyear required using all profits, noting that Goodyear addressed the methodology for calculating income, not the apportionment of profits. The court also found support for its interpretation in prior rulings and examples where the IRS had used a sourcing method for profits.

    Practical Implications

    This decision provides clarity on the calculation of indirect foreign tax credits under Section 902 for U. S. shareholders of mixed corporations in countries with unique tax structures. It emphasizes that the denominator of the credit formula should reflect only the portion of foreign corporation profits allocable to U. S. shareholders, ensuring that the credit accurately offsets the foreign taxes borne by those shareholders. This ruling may influence how similar cases are analyzed, particularly those involving mixed corporations and differential tax treatment of shareholders. It also highlights the importance of considering the economic burden of foreign taxes in apportioning indirect credits, which may impact tax planning and compliance strategies for multinational corporations. Subsequent cases may need to address how this ruling applies to other countries with similar tax regimes.

  • Carborundum Co. v. Commissioner, 58 T.C. 909 (1972): Calculating Indirect Foreign Tax Credits with Grossed-Up Dividends

    Carborundum Co. v. Commissioner, 58 T. C. 909 (1972)

    The grossed-up dividend, including the foreign tax deemed paid, should be used as the numerator in calculating the indirect foreign tax credit under section 902(a).

    Summary

    Carborundum Co. elected to treat dividends from its UK subsidiaries as grossed-up under the US-UK tax treaty, including the UK standard tax in its US gross income and claiming a direct credit. The issue was whether the grossed-up amount should be used in calculating the indirect credit for the UK profits tax under section 902(a). The Tax Court held that the grossed-up dividend should be used as the numerator in the calculation, reasoning that the purpose of section 902(a) is to credit foreign taxes on income taxable in the US, and the gross amount was included in US income due to the treaty election.

    Facts

    Carborundum Co. , a US corporation, owned all the stock of two UK subsidiaries. In 1961 and 1962, the subsidiaries paid dividends to Carborundum, which elected under the US-UK tax treaty to include the UK standard tax in its US gross income and claim a direct foreign tax credit. Carborundum also sought an indirect credit under section 902(a) for the UK profits tax paid by the subsidiaries, using the grossed-up dividend amount as the numerator in the calculation.

    Procedural History

    The Commissioner determined deficiencies in Carborundum’s 1961 and 1962 income taxes, arguing that only the amount actually received should be used in the section 902(a) calculation. Carborundum filed a petition in the US Tax Court, which held in favor of Carborundum, sustaining its method of calculation.

    Issue(s)

    1. Whether the grossed-up dividend, including the UK standard tax deemed paid by Carborundum under the tax treaty, should be used as the numerator in calculating the indirect foreign tax credit under section 902(a)?

    Holding

    1. Yes, because the purpose of section 902(a) is to provide a credit for foreign taxes on income taxable in the US, and the grossed-up amount was included in US income due to the treaty election.

    Court’s Reasoning

    The Tax Court reasoned that the grossed-up dividend should be used as the numerator in the section 902(a) calculation because the purpose of the statute is to credit foreign taxes on income taxable in the US. By electing to treat the UK standard tax as paid under the treaty, Carborundum included the gross amount in its US income, and thus a larger portion of the foreign income became taxable in the US. The court rejected the Commissioner’s argument that the treaty election only applied to the direct credit under section 901, holding that it also affected the section 902(a) calculation. The court noted that if Carborundum had directly paid the UK standard tax, the gross amount would clearly be the numerator, and the treaty election put Carborundum in the same position as if the tax had been withheld from the dividend. The court also observed that the 1962 amendments to section 902, which were not applicable to this case, indicated Congress’s intent to increase the indirect credit when foreign taxes are included in US income.

    Practical Implications

    This decision clarifies that when a US corporation elects to gross-up dividends under a tax treaty, the grossed-up amount should be used in calculating the indirect foreign tax credit under section 902(a). This ruling benefits US corporations with foreign subsidiaries by allowing them to maximize their foreign tax credits when they elect to include foreign taxes in US income. The decision also highlights the interplay between tax treaties and the US tax code, demonstrating how treaty elections can affect the calculation of credits under domestic law. Practitioners should carefully consider the impact of treaty elections on both direct and indirect foreign tax credits when advising clients on international tax planning. This case has been cited in subsequent decisions and IRS guidance related to the calculation of foreign tax credits under section 902.