United States Tax Court

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163 T.C. No. 4

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES,

Petitioner

COMMISSIONER OF INTERNAL REVENUE,

Respondent

—————

Docket No. 8435-23.

Filed August 26, 2024.

—————

I.R.C. § 245A, which was enacted by the Tax Cuts

and Jobs Act (TCJA), Pub. L. No. 115-97, § 14101, 131 Stat.

2054, 2189 (2017), provides a deduction (DRD) for certain

dividends received by a U.S. corporation from certain

foreign corporations. Given its formulation, the DRD had

the potential to interact with existing I.R.C. § 78. As in

effect before the TCJA, I.R.C. § 78 provided that, for

taxpayers who claimed foreign tax credits, a specified

amount “shall be treated for purposes of this title (other

than [I.R.C. §] 245) as a dividend received by such domestic

corporation from the foreign corporation.” TCJA amended

I.R.C. § 78 to provide that amounts treated as dividends

under I.R.C. § 78 do not qualify for the DRD under I.R.C.

§ 245A. But in certain circumstances, TCJA’s amendments

to I.R.C. § 78 did not take effect until a tax year starting

after I.R.C. § 245A took effect.

Relying on this effective date mismatch, for fiscal

year 2018, P claimed the DRD for an amount it treated as

a dividend under I.R.C. § 78. In its Motion for Partial

Summary Judgment, P argues that it is entitled to the

DRD for this amount plus an additional amount alleged in

its Petition. R disagrees in his own Cross-Motion for

Partial Summary Judgment. Additionally, R argues in the

alternative that, if we find P is entitled to the DRD for

Served 08/26/24

amounts treated as dividends under I.R.C. § 78, then I.R.C.

§ 245A(d)(1) limits the foreign tax credits to which P would

otherwise be entitled.

Held: P is entitled under I.R.C. § 245A to a

deduction for amounts properly treated as dividends under

I.R.C. § 78 for its 2018 tax year.

Held, further, Treas. Reg. § 1.78-1 does not alter this

conclusion because it cannot contravene the clear statutory

text.

Held, further, I.R.C. § 245A(d)(1) disallows foreign

tax credits to the extent they are attributable to amounts

P properly treats as dividends under I.R.C. § 78 and

deducts under I.R.C. § 245A.

Held, further, P’s Motion will be granted in part, and

R’s Motion will be granted in part.

—————

Jean A. Pawlow, Andrew C. Strelka, Eric J. Konopka, and Alexandra B.

Clionsky Kelly, for petitioner.

Andrew M. Tiktin, David J. Berke, Meenu Kapai, Usha Ravi, and H.

Clifton Bonney, Jr., for respondent.

OPINION

TORO, Judge: We must address in this deficiency case two

questions of first impression: (1) how do two effective date provisions

enacted by the Tax Cuts and Jobs Act (TCJA), Pub. L. No. 115-97, 131

Stat. 2054 (2017), and an existing provision of the Internal Revenue

Code (section 78) 1 interact and (2) how does a new Code provision

1 Unless otherwise indicated, statutory references are to the Internal Revenue

Code, Title 26 U.S.C. (I.R.C. or Code), in effect at all relevant times, regulation

references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all

relevant times, and Rule references are to the Tax Court Rules of Practice and

Procedure.

enacted by the TCJA (section 245A) actually apply? We answer both

questions by following the plain text of the relevant provisions.

Congress enacted the TCJA in 2017. Among other things, the

TCJA added to the Code new section 245A, which allows a domestic

corporation a deduction for certain dividends received from foreign

subsidiaries. Section 245A applies to “distributions made after . . .

December 31, 2017.” TCJA § 14101(f), 131 Stat. at 2192.

Because the deduction under section 245A applies to dividends

received by a domestic corporation from a foreign corporation, it had the

potential to interact with existing section 78. As in effect before the

adoption of the TCJA, that section provided that, for taxpayers who

claimed foreign tax credits, a specified amount “shall be treated for

purposes of this title (other than section 245) as a dividend received by

such domestic corporation from the foreign corporation.”

Recognizing that section 245A might otherwise allow a taxpayer

who claims foreign tax credits to deduct a dividend that section 78 would

have deemed the taxpayer to receive, the TCJA amended section 78 to

preclude that result. But, instead of using the same effective date that

it applied to section 245A, the TCJA amended section 78 for “taxable

years of foreign corporations beginning after December 31, 2017, and . . .

taxable years of United States shareholders in which or with which such

taxable years of foreign corporations end.” TCJA § 14301(d), 131 Stat.

at 2225.

For some taxpayers—including those with foreign subsidiaries

with fiscal years (that is, foreign subsidiaries whose taxable years do not

run from January 1 to December 31 of each year)—this effective date

mismatch created a window during which section 245A was in effect, but

the amendments to section 78 were not. The question before us is

whether, during that window, section 245A provided one such taxpayer,

Varian Medical Systems, Inc. (Varian), a deduction for a dividend that

it was deemed to receive under section 78.

Seeking partial summary judgment, the Commissioner argues

that, despite the disparate effective dates, Varian cannot claim a

deduction for its section 78 dividend because section 245A permits a

deduction only for dividends that are actually distributed (or treated as

distributed) from earnings, and, in the Commissioner’s view, section 78

dividends do not satisfy this requirement.

Alternatively, the

Commissioner argues that Treasury Regulation § 1.78-1, as amended

June 21, 2019, disallows the deduction.

Varian disagrees, arguing that the operative text of section 245A

permits the deduction and that no other provision prohibits it. Varian

also argues that Treasury Regulation § 1.78-1 is invalid because it

purports to apply amended section 78 to a period starting before the

effective date provided in the TCJA. It therefore seeks partial summary

judgment in its favor.

Because a plain reading of the statutory text authorizes the

deduction under section 245A, we will grant Varian’s Motion for Partial

Summary Judgment. Relatedly, we will deny the Commissioner’s CrossMotion for Partial Summary Judgment insofar as he asks us to conclude

that Varian cannot claim a deduction under section 245A for any

section 78 dividend.

The Commissioner also argues that, if Varian is entitled to the

deduction, section 245A(d)(1) limits the amount of foreign tax credits

Varian may claim. We agree with the Commissioner on this point and

therefore will grant his Motion in part.

Background

The following facts are derived from the parties’ pleadings and

Motion papers. They are stated solely for the purpose of ruling on the

Motions before us and not as findings of fact in this case. See Rowen v.

Commissioner, 156 T.C. 101, 103 (2021) (reviewed).

Originally founded in 1948, Varian is the parent company of a

consolidated group of medical device and software manufacturers. Its

principal place of business is in Palo Alto, California.

Varian operates through corporations in many different

countries, at least some of which are controlled foreign corporations

(CFCs) as that term is defined in section 957(a). Varian and its CFCs

are fiscal year taxpayers, meaning their taxable years do not end on

December 31. See I.R.C. § 441(a), (d), (e). As relevant for this case, the

fiscal year of Varian and its CFCs started on September 30, 2017, and

ended on September 28, 2018 (2018 Year).

Varian filed a consolidated federal income tax return for the 2018

Year. On the return, Varian elected to claim foreign tax credits for

foreign taxes that it was deemed to pay under section 960 and was

therefore required to “gross up” its taxable income under section 78 by

reporting a dividend of approximately $159 million. Varian also claimed

a deduction of approximately $60 million under section 245A in

connection with the dividend it was treated as receiving under section 78

from its first tier CFCs.

The Commissioner examined Varian’s tax return and issued

Varian a Notice of Deficiency in which, among other things, he

disallowed Varian’s claimed deduction under section 245A. The

Commissioner also increased Varian’s section 78 dividend by nearly

$1.9 million. 2 The Commissioner further determined, in the alternative,

that if Varian was entitled to deduct its section 78 dividend under

section 245A, then “I.R.C. § 245A(d) would disallow any foreign tax

credits attributable to that amount. Accordingly, [Varian’s] foreign tax

credits [would] be reduced by approximately $6,362,356.”

Varian timely petitioned our Court for a redetermination of the

Commissioner’s determinations. In its Petition, Varian alleged that the

disallowance of its section 245A deduction was erroneous. Varian also

alleged for the first time that it is entitled to additional section 245A

deductions (on top of those claimed in its return) of approximately

$100 million, primarily related to the portion of its section 78 dividend

arising from its lower tier CFCs.

On September 27, 2023, Varian filed the Motion for Partial

Summary Judgment now before us. In its Motion, Varian asks us to

determine as a matter of law that it is entitled to a deduction under

section 245A for its section 78 dividend for the 2018 Year. On

December 4, 2023, the Commissioner filed his own Cross-Motion for

Partial Summary Judgment asking for, in effect, the opposite

conclusion. Further briefing ensued, and we held a hearing on the

Motions on May 17, 2024. After the U.S. Supreme Court issued its

decision in Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244, 2273

(2024), overruling Chevron, U.S.A., Inc. v. Natural Resources Defense

Council, Inc., 467 U.S. 837 (1984), we sought the parties’ views on the

impact of the Loper Bright decision on this case, which they provided on

July 29, 2024.

2 Varian does not dispute this adjustment.

Discussion

Summary Judgment Standard

The purpose of summary judgment is to expedite litigation and

avoid costly, time-consuming, and unnecessary trials. Fla. Peach Corp.

v. Commissioner, 90 T.C. 678, 681 (1988). The Court may grant

summary judgment when there is no genuine dispute as to any material

fact and a decision may be rendered as a matter of law. Rule 121(a)(2);

Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff’d, 17

F.3d 965 (7th Cir. 1994). In deciding whether to grant summary

judgment, we construe factual materials and inferences drawn from

them in the light most favorable to the adverse party. Sundstrand

Corp., 98 T.C. at 520.

The parties generally agree with respect to the relevant facts, and

there is no dispute that we may resolve their Motions as a matter of law.

II.

Legal Principles

We begin by considering some legal principles established more

than 100 years ago.

Historical Background

The United States has long taxed the worldwide income of its

citizens and domestic corporations. See, e.g., Cook v. Tait, 265 U.S. 47,

56 (1924). This policy choice creates the potential for double taxation—

that is, taxation of the same income by both the United States and

another country. See AptarGroup Inc. v. Commissioner, 158 T.C. 110,

112 (2022).

To address the risk of double taxation, since 1919 the law has

allowed U.S. citizens and domestic corporations to elect to claim a credit

for income tax paid to a foreign country. See Revenue Act of 1918, ch. 18,

§ 238(a), 40 Stat. 1057, 1080–81; see also Burnet v. Chi. Portrait Co., 285

U.S. 1, 12 (1932). The law also permitted U.S. corporations that were

shareholders in foreign corporations to claim foreign tax credits for

certain taxes paid by the foreign corporations. See Revenue Act of 1918,

ch. 18, § 240(c), 40 Stat. at 1082 (subsequently revised and eventually

codified at I.R.C. § 902 by the Internal Revenue Code of 1954, ch. 736,

§ 902, 68A Stat. 1, 286); Am. Chicle Co. v. United States, 316 U.S. 450,

453–54 (1942); see also United States v. Goodyear Tire & Rubber Co.,

493 U.S. 132, 135 (1989). But, while this system eliminated double tax

in some situations, it also led to disparate treatment of U.S. corporations

that conducted business through foreign branches rather than foreign

subsidiaries. See Anderson, Clayton & Co. v. United States, 562 F.2d

972, 982 n.21 (5th Cir. 1977). We explain by way of a simplified

example. 3

Imagine that USCo was a U.S. corporation that earned income in

the United States and also operated a foreign branch in Country A. The

foreign branch was not a separate entity from USCo for federal tax

purposes, so its earnings were immediately taxable to USCo in the

United States. See Columbian Rope Co. v. Commissioner, 42 T.C. 800,

817 (1964).

If USCo’s foreign branch had $100 of earnings in Country A, then

all $100 would have been immediately taxable to USCo in the United

States. Assuming a 20% U.S. corporate tax rate, USCo preliminarily

would have owed $20 in U.S. tax. If, however, Country A also taxed the

earnings at 15%, then USCo would instead have paid $15 of tax to

Country A and would have been entitled to a $15 credit against its U.S.

tax. The $15 credit would have offset USCo’s preliminary tax liability

of $20 in the United States, with the ultimate result that USCo would

have owed $5 in U.S. tax.

Now consider AmCo, another U.S. corporation that operated in

Country A. But, rather than using a branch, AmCo operated through a

foreign subsidiary (F Sub). Unlike a foreign branch, F Sub would have

been a separate entity from AmCo for U.S. tax purposes, and its

earnings from Country A generally would have been taxable to AmCo

only when repatriated in the form of a dividend (or otherwise attributed

to AmCo). See Anderson, Clayton & Co., 562 F.2d at 976; Whirlpool Fin.

Corp. & Consol. Subs. v. Commissioner, 154 T.C. 142, 151–53 (2020)

(citing Textron Inc. & Sub. Cos. v. Commissioner, 117 T.C. 67, 73 (2001)),

aff’d, 19 F.4th 944 (6th Cir. 2021); Vetco Inc. & Subs. v. Commissioner,

95 T.C. 579, 585 (1990).

If F Sub earned $100 in Country A, and, as in the foreign branch

example, Country A imposed $15 of tax on those earnings, F Sub would

have $85 to distribute to AmCo. And AmCo would owe $17 of U.S. tax

on that distribution ($85 × 20% = $17). Note that AmCo’s U.S. tax

liability would have been lower than USCo’s ($17 versus $20). Like

3 The example is for illustrative purposes only and does not reflect all the

complexities of the foreign tax credit.

USCo, however, AmCo would still have been able to credit the full $15

of tax that F Sub paid to Country A, leaving it with a net U.S. tax

liability of $2 ($3 less than USCo). 4

Thus, AmCo, operating through a foreign subsidiary, would have

had a better tax outcome than USCo, operating through a foreign

branch. While foreign tax credits eliminated double tax on Country A

earnings in both cases, AmCo had less U.S. taxable income than USCo,

and thus a larger proportionate credit, because it received only after-tax

earnings from Country A. Considering this outcome to be inappropriate,

Congress set out to eliminate the disparate taxation of foreign earnings

as part of its comprehensive changes to the international tax system in

1962.

Addition of Section 78

In 1962, Congress enacted the Revenue Act of 1962, Pub. L.

No. 87-834, 76 Stat. 960. The Act adopted new section 78 to address the

perceived disparity highlighted above. 5 See Revenue Act of 1962, § 9(b),

76 Stat. at 1001. Section 78 read as follows:

Sec. 78. Dividends received from certain foreign

corporations by domestic corporations choosing foreign tax

credit.

If a domestic corporation chooses to have the

benefits of subpart A of part III of subchapter N (relating

to foreign tax credit) for any taxable year, an amount equal

to the taxes deemed to be paid by such corporation under

section 902(a)(1) (relating to credit for corporate

stockholder in foreign corporation) or under section

960(a)(1)(C) (relating to taxes paid by foreign corporation)

4 For a more complete and complex example, see the Report of the Senate

Finance Committee on the Revenue Act of 1962 (1962 Senate Finance Committee

Report), which set out reasons for enacting section 78. S. Rep. No. 87-1881, at 66–67

(1962), reprinted in 1962 U.S.C.C.A.N. 3297, 3368–70.

5 The Act also introduced subpart F of part III, subchapter N of chapter 1 of

subtitle A of the Code. Revenue Act of 1962, § 12(a), 76 Stat. at 1006. Historically, the

so-called subpart F provisions have required significant U.S. shareholders of CFCs to

pay current U.S. tax on investment income and other types of mostly “portable” income

earned through the foreign corporations. TBL Licensing LLC v. Commissioner, 158

T.C. 1, 27 n.18 (2022), aff’d, 82 F.4th 12 (1st Cir. 2023). For a general discussion of

subpart F, see Boris I. Bittker & James S. Eustice, Federal Income Taxation of

Corporations & Shareholders ¶ 15.61 (2020), Westlaw FTXCORP.

for such taxable year shall be treated for purposes of this

title (other than section 245) as a dividend received by such

domestic corporation from the foreign corporation.

Revenue Act of 1962, § 9(b), 76 Stat. at 1001.

Returning to our simplified example, after the adoption of section

78, if AmCo were to claim foreign tax credits for the $15 it was deemed

to pay to Country A, then section 78 would treat AmCo as if it received

an additional $15 dividend from F Sub for the year. See Champion Int’l

Corp. v. Commissioner, 81 T.C. 424, 427 (1983) (“The effect [of section

78 was] to treat the domestic corporation as though it had received a

distribution out of the foreign corporation’s before-tax profits and then

paid the foreign income tax thereon itself.”). Therefore, instead of

reporting $85 of taxable income, AmCo would report $100 of taxable

income, just like USCo (the $85 actual dividend from F Sub plus the $15

deemed dividend under section 78). See H.H. Robertson Co. v.

Commissioner, 59 T.C. 53, 77 n.13 (1972) (“As a consequence of sec. 78

‘gross-up,’ the total profits of the foreign corporation in respect of a

particular dividend would be taken into account for U.S. tax purposes

. . . .”), aff’d, 500 F.2d 1399 (3d Cir. 1974) (unpublished table decision).

Accordingly, after applying its foreign tax credits, AmCo would owe $5

in U.S. tax (($100 × 20%) – $15 = $5), again like USCo. The adoption of

section 78 thus eliminated the perceived tax benefit to U.S. corporations

operating through foreign subsidiaries. 6

After the enactment of section 78, the Department of the Treasury

and the Internal Revenue Service (together, Treasury) adopted the first

regulation under section 78. See T.D. 6805, 1965-1 C.B. 38, 30 Fed. Reg.

3208 (Mar. 9, 1965). In relevant part, the regulation explained that “[a]

section 78 dividend shall be treated as a dividend for all purposes of the

Code, except that it shall not be treated as a dividend under section 245,

relating to dividends received from certain foreign corporations, or

increase the earnings and profits of the domestic corporation.” Treas.

Reg. § 1.78-1(a) (1965). The regulation also explained that section 78

dividends are treated as received in the same taxable year in which the

U.S. corporation (1) received the dividend of foreign earnings upon

which it was deemed to pay foreign taxes or (2) included in its subpart

Report.

6 Again, for a more complete example, see the 1962 Senate Finance Committee

F income amounts for which it had deemed paid foreign taxes under

section 960. Treas. Reg. § 1.78-1(d) (1965).

Section 78 remained virtually unchanged for more than 50 years

until Congress’s sweeping changes to the international tax system in

2017. These changes form the basis of the dispute in this case.

2017 Tax Cuts and Jobs Act

Among other things, the TCJA made significant changes to how

the United States taxes income that a domestic corporation earns

outside the United States. See Moore v. United States, 144 S. Ct. 1680,

1685 (2024). “The primary goal was to encourage Americans who

controlled foreign corporations to invest earnings from their foreign

investments back in the United States instead of abroad.” Id. at 1685–

86.

As relevant here, the TCJA moved the United States from the

worldwide system of taxation described above to a partial territorial tax

system. See id. In simplified terms, under a partial territorial system,

certain income a domestic corporation earns from subsidiaries operating

outside the United States generally is eliminated from the U.S. taxable

base through a deduction. 7

As part of this transition, the TCJA enacted a one-time tax

referred to as the Mandatory Repatriation Tax (MRT). TCJA § 14103,

131 Stat. at 2195–208 (codified at I.R.C. § 965); see also Moore, 144 S. Ct.

at 1686. The MRT generally required that certain accumulated foreign

earnings held by CFCs, but not repatriated to the U.S. shareholders, be

included in the U.S. shareholders’ subpart F income and taxed at a

lower-than-normal rate. See TCJA § 14103, 131 Stat. at 2195–208;

Moore, 144 S. Ct. at 1686.

New Section 245A

Key to this case, the TCJA enacted new section 245A, granting

U.S. corporations a deduction for the foreign-source portion of any

dividends they received from certain foreign corporations. TCJA

7 This is in contrast to a worldwide system, under which income from

subsidiaries operating outside the United States is first included in U.S. taxable

income, with any increase in tax fully or partially offset with foreign tax credits. See

AptarGroup Inc., 158 T.C. at 112.

§ 14101(a), 131 Stat. at 2189–90. The operative rule of section 245A was

included in subsection (a), which reads as follows:

Sec. 245A. Deduction for foreign source-portion of

dividends received by domestic corporations from specified

10-percent owned foreign corporations.

(a) In general.—In the case of any dividend received

from a specified 10-percent owned foreign corporation by a

domestic corporation which is a United States shareholder

with respect to such foreign corporation, there shall be

allowed as a deduction an amount equal to the foreignsource portion of such dividend.

Section 245A also provides rules for calculating the foreign-source

portion of dividends that a U.S. corporation may deduct from its income,

see I.R.C. § 245A(c), as well as a rule limiting the foreign tax credit “with

respect to any dividend” for which section 245A permits a deduction

(which we will discuss later), see I.R.C. § 245A(d). 8

As relevant here, the TCJA made new section 245A effective for

“distributions made after . . . December 31, 2017.” TCJA § 14101(f), 131

Stat. at 2192.

Amendment to Section 78

To reflect new section 245A and other changes the TCJA made to

the Code, Congress also amended section 78 to read:

Sec. 78. Gross up for deemed paid foreign tax credit.

If a domestic corporation chooses to have the

benefits of subpart A of part III of subchapter N (relating

to foreign tax credit) for any taxable year, an amount equal

to the taxes deemed to be paid by such corporation under

subsections (a), (b), and (d) of section 960 (determined

without regard to the phrase “80 percent of” in subsection

(d)(1) thereof) for such taxable year shall be treated for

purposes of this title (other than sections 245 and 245A) as

8 Relatedly, the TCJA amended section 246(c), which generally prohibits the

section 245A deduction “in respect of any dividend on any share of stock” that the

taxpayer has held for an insufficient period. See TCJA § 14101(b), 131 Stat. at 2191.

There is no dispute in this case that Varian satisfied the relevant holding period.

a dividend received by such domestic corporation from the

foreign corporation.

TCJA § 14301(c), 131 Stat. at 2222. In relevant part, the revised statute

no longer references section 902, which the TCJA eliminated, see TCJA

§ 14301(a), 131 Stat. at 2221, and mirrors changes Congress made to

section 960, see TCJA § 14301(b), 131 Stat. at 2221–22. In addition, it

provides that section 78 dividends are not treated as dividends for

purposes of section 245A.

Congress gave the amendments made to section 78, as well those

made to sections 902 and 960, a different effective date from that used

for section 245A. Specifically, it applied the amendments “to taxable

years of foreign corporations beginning after December 31, 2017, and to

taxable years of United States shareholders in which or with which such

taxable years of foreign corporations end.” TCJA § 14301(d), 131 Stat.

at 2225. This meant that the amendments to section 78 (and sections

902 and 960) had different effective dates based on whether a taxpayer

and its foreign subsidiaries use a calendar year tax year (January 1 to

December 31) or a fiscal year tax year (e.g., July 1 to June 30). 9

III.

Varian’s Entitlement to the Section 245A Deduction

We now consider whether, in light of these rules, Varian is

entitled to deduct an amount equal to its section 78 dividend for the 2018

Year. For the reasons set out below, we conclude that it is.

Statutory Analysis

We begin with the familiar maxim “that courts must presume

that a legislature says in a statute what it means and means in a statute

what it says there.” Conn. Nat’l Bank v. Germain, 503 U.S. 249, 253–54

(1992). It is after all “the sole function of the courts—at least where the

disposition required by the text is not absurd—‘. . . to enforce [plain

9 On January 2, 2019, the Chairman of the House Ways and Means Committee

released a Tax Technical and Clerical Corrections Act Discussion Draft addressing

various “technical and clerical corrections” related to the TCJA. Chairman Kevin

Brady, Committee on Ways and Means, U.S. House of Representatives, Tax Technical

and Clerical Corrections Act Discussion Draft (Jan. 2, 2019), https://republicanswaysandmeansforms.house.gov/uploadedfiles/tax_technical_and_clerical_corrections_

act_discussion_draft.pdf. The draft included a proposed fix for the effective date

mismatch between new section 78 and section 245A, id. at 73, but Congress never acted

on the proposal. We draw no inference from this congressional inaction. See Alexander

v. Sandoval, 532 U.S. 275, 292–93 (2001).

statutory text] according to its terms.’” Hartford Underwriters Ins. Co.

v. Union Planters Bank, N.A., 530 U.S. 1, 6 (2000) (quoting United States

v. Ron Pair Enters., Inc., 489 U.S. 235, 241 (1989)). And when “Congress

includes particular language in one section of a statute but omits it in

another section of the same Act, it is generally presumed that Congress

acts intentionally and purposely in the disparate inclusion or exclusion.”

Cheneau v. Garland, 997 F.3d 916, 920 (9th Cir. 2021) (quoting INS v.

Cardoza-Fonseca, 480 U.S. 421, 432 (1987)). Applying these principles

here produces a clear result.

As discussed above, section 245A allows a U.S. corporation to

deduct an amount equal to the foreign-source portion of “any dividend

received from a specified 10-percent owned foreign corporation” in which

it “is a United States shareholder with respect to such foreign

corporation.” I.R.C. § 245A(a) (emphasis added). To calculate the

foreign-source portion, the U.S. corporation must apply a ratio. I.R.C.

§ 245A(c)(1). 10

In this case, the parties do not dispute that Varian is a “United

States shareholder” of specified 10% owned foreign corporations. But

they disagree as to whether Varian’s section 78 dividend qualifies as a

“dividend [it] received” within the meaning of section 245A(a). We

conclude that it does.

Most significantly, the text of section 78 could hardly be clearer

on this point. It states, in relevant part, that the amount Varian

includes under section 78 “shall be treated for purposes of this title

(other than section 245 [which is not at issue here]) as a dividend

received . . . from the foreign corporation.” I.R.C. § 78 (emphasis added).

And section 245A(a) authorizes taxpayers to deduct “any dividend

received from a specified 10-percent owned foreign corporation.” Thus,

the relevant text in the two provisions is effectively identical.

10 Section 245A(c)(1) provides as follows:

Sec. 245A(c). Foreign-source portion.—For purposes of this section—

(1) In general.—The foreign-source portion of any dividend

from a specified 10-percent owned foreign corporation is an amount

which bears the same ratio to such dividend as—

(A) the undistributed foreign earnings of the specified

10-percent owned foreign corporation, bears to

(B) the total undistributed earnings of such foreign

corporation.

Moreover, section 78 specifies that the amount to which it applies

is treated as a dividend for purposes of the entire Code with just one

exception. That exception is section 245, a provision not relevant here.

The Commissioner’s longstanding regulations reiterated this rule until

their amendment in 2019. See Treas. Reg. § 1.78-1(a) (1965) (“A section

78 dividend shall be treated as a dividend for all purposes of the Code,

except that it shall not be treated as a dividend under section 245,

relating to dividends received from certain foreign corporations, or

increase the earnings and profits of the domestic corporation.”

(Emphasis added.)). 11

To summarize, section 78 provides that Varian must treat the

amount to which section 78 applies as a dividend received from its

foreign subsidiaries for all relevant purposes of the Code, and

section 245A(a) provides a deduction for the foreign-source portion of

any dividend received from such subsidiaries. The obvious conclusion is

that section 245A and section 78, read together, authorize Varian to

deduct its section 78 dividend for the 2018 Year. And no other provision

in effect for that year disallows the deduction. Rather, we agree with

Varian that the disparate effective dates for new section 245A and the

amendments to section 78 resulted in a gap period in which its section 78

dividend qualified for a deduction under section 245A.

The Commissioner’s Arguments

The Commissioner advances several arguments explaining why

he thinks this result is incorrect. None alters the result here.

Section 78 Dividends as Distributions

The Commissioner’s primary argument is that section 78

dividends are not qualifying dividends for purposes of section 245A

because they are not “distributed (or treated as distributed) out of [a

foreign corporation’s] earnings to the U.S. shareholder.” Resp’t’s Br. in

Support of Cross-Mot. Summ. J. (Resp’t’s Br.) 21. The Commissioner

bases his argument on the effective date provision under the TCJA,

which states that section 245A applies to “distributions made after . . .

December 31, 2017.” TCJA § 14101(f), 131 Stat. at 2192. The

Commissioner also points to section 245A(c)(2)(A), which, in describing

how to calculate the foreign-source portion of a dividend, refers to “the

11 For reasons we discuss later, the Commissioner’s revised regulation does not

change the result here. See infra Part III.B.4.

taxable year . . . in which the dividend is distributed.”

Commissioner’s argument fails for at least five reasons.

But the

Operative Rule in Section 245A

First, the operative rule in section 245A sets out the conditions

for deductibility, but says nothing about distributions. Rather, it says

simply that the deduction is available “[i]n the case of any dividend

received,” I.R.C. § 245A(a) (emphasis added), essentially mirroring the

text of section 78. We are not inclined to read the reference to

“distributions” in the effective date provision to add another unstated

requirement to the operative rule. Similarly, the references in

section 245A(c)(2) to the “year . . . in which the dividend is distributed”

and the “dividends distributed during [the] taxable year” simply explain

how to compute the foreign-source portion of a dividend for purposes of

section 245A. And the computation works just fine for section 78

dividends: one simply treats the section 78 dividend as the dividend for

purposes of applying the instructions, as section 78 mandates. We

disagree that a computation that may easily be applied to a section 78

dividend somehow shows that section 78 dividends cannot qualify for

the deduction.

Meaning of “Dividend”

Second, even if we did read a distribution requirement into

section 245A(a), we would conclude that a deemed dividend under

section 78 satisfies the requirement. Recall that a section 78 dividend

is treated as a dividend for purposes of the entire Code, with one

inapplicable exception. A dividend is a distribution, both under the

statutory definition of the term and its ordinary meaning. The former,

found at section 316(a), states that, “[f]or purposes of this subtitle [which

includes section 245A], the term ‘dividend’ means any distribution of

property made by a corporation to its shareholders . . . out of its earnings

and profits accumulated after February 28, 1913, or . . . its earnings and

profits of the taxable year.” And there are many examples of the latter.

See, e.g., Dividend, Black’s Law Dictionary (11th ed. 2019) (defining

“dividend” as “[a] portion of a company’s earnings or profits distributed

pro rata to its shareholders”); Dividend, Random House Webster’s

College Dictionary (2001) (defining “dividend” as “a sum paid to

shareholders out of company earnings”); Dividend, Webster’s New

International Dictionary of the English Language (2d ed. 1959) (defining

“dividend” as “[a] sum of money or quantity of commodities to be divided

and distributed”). Therefore, if section 78 requires a taxpayer to deem

a dividend received from a foreign corporation, that dividend would also

be deemed to be distributed by the foreign corporation, satisfying any

implicit requirement in section 245A. 12 Cf. Rawat v. Commissioner,

108 F.4th 891, 896 (D.C. Cir. 2024) (“[A]lthough a definitional provision

is typically used to give meaning to a defined term, rather than . . . to

give meaning to the language of the definition, such a provision works

both ways: if a statute defines ‘house’ as ‘an enclosed structure used as

a residence,’ one would be hard-pressed to say that the statute’s use

elsewhere of the phrase ‘an enclosed structure used as a residence’

means anything but ‘house.’”), rev’g T.C. Memo. 2023-14.

Coordinated Statutory Amendments

Third, coordinating amendments that Congress made to other

Code sections in the TCJA confirm that a dividend or deemed dividend—

without an express provision for a distribution—suffices to qualify for

the deduction under section 245A. These amendments establish that

either (1) no distribution requirement exists, or (2) alternatively, any

distribution requirement is satisfied by a dividend or a deemed dividend.

Section 1248(j)

We turn initially to section 1248, a provision that applies when a

U.S. person who meets certain ownership requirements sells or

exchanges stock in a foreign corporation. Section 1248(a) generally

provides that the gain recognized on the sale or exchange of the stock

“shall be included in the gross income of such person as a dividend.” Put

simply, section 1248(a) provides a recharacterization rule that treats a

portion of the gain from the sale as a dividend inclusion for the seller.

See, e.g., Joel D. Kuntz & Robert J. Peroni, U.S. International Taxation

¶ B6.02[2][b] (2024), Westlaw USIT WGL.

The TCJA coordinated section 1248 with section 245A by adding

section 1248(j). See TCJA § 14102(a)(1), 131 Stat. at 2192. New

12 To the extent there are any questions about how the timing of a section 78

dividend squares with the effective date of section 245A, the Commissioner has not

raised them. Therefore, the Commissioner has forfeited the argument. See Rowen,

156 T.C. at 115–16 (legal argument not raised in motion for summary judgment

considered forfeited); see also Mano-Y&M Ltd. v. Field (In re Mortg. Store, Inc.), 773

F.3d 990, 998 (9th Cir. 2014) (“A litigant may waive an issue by failing to raise it in a

[district] court.”). Nevertheless, we do not believe that such an argument would prevail

because Varian’s section 78 dividends would likely be considered received as of the end

of its taxable year (i.e., after December 31, 2017) since the calculation of the dividend

depends on taxes deemed paid over the course of the entire year.

section 1248(j) provides, in relevant part, that “any amount received by

the domestic corporation which is treated as a dividend by reason of this

section shall [also] be treated as a dividend for purposes of applying

section 245A.”

The Commissioner tells us this amendment would have been

unnecessary if simply recharacterizing an amount as a dividend were

sufficient to qualify for a deduction under section 245A, because, even

before the TCJA, section 1248(a) affected such a recharacterization.

Thus, the Commissioner’s argument goes, section 1248(j) was needed to

satisfy the “distribution” requirement that he reads into section 245A.

But the Commissioner misconstrues the statute, which, when

considered carefully, contradicts his arguments.

To begin, the addition of section 1248(j) was necessary because

the reach of the dividend recharacterization under section 1248(a) was

unclear. Note carefully what section 1248 said before the addition of

section 1248(j). It simply provided that gain recognized on a sale or

exchange by a certain type of person would be included in the gross

income of that person as a dividend. Note also that the provision did not

say that the recharacterized amount would be a dividend for all

purposes of the Code. Nor did it say that the dividend would be treated

as a deemed distribution of some sort, although Congress certainly

addressed distributions elsewhere in section 1248. See, e.g., I.R.C.

§ 1248(f), (k). Accordingly, because the recharacterization work of

section 1248(a) was limited in its reach, to ensure that gain

recharacterized by virtue of section 1248(a) was treated as a dividend

received for purposes of section 245A, Congress needed to adopt an

affirmative rule.

And that is exactly what it did in adding

section 1248(j). There, Congress told us that gain recharacterized as a

dividend by virtue of section 1248(a) would also “be treated as a dividend

for purposes of applying section 245A.” I.R.C. § 1248(j).

No such rule was necessary for a section 78 dividend. Existing

section 78 already told us that the amount discussed in that section

“shall be treated . . . as a dividend received by such domestic corporation

from the foreign corporation” for purposes of this title. Saying that an

amount will be treated in a particular manner “for purposes of this title”

(i.e., the Code) is equivalent to listing every section in the Code and

saying that the amount will be so treated for purposes of each section.

Thus, Congress did not need to say more to bring a section 78 dividend

within the scope of section 245A. Section 245A plainly is within the

Code and section 78 therefore provided that the relevant amounts would

be treated as dividends received for purposes of that section, precisely

as section 1248(j) did. By contrast, Congress did need to say something

if it wanted to preclude a section 78 dividend from being considered

under section 245A. And, for the year before us, it stayed silent.

Section 1248(j) highlights an even greater problem for the view

the Commissioner advances. As we have said, the Commissioner claims

that a deduction under section 245A is predicated on the existence of a

distribution and a deemed dividend does not suffice. But section 1248

addresses gains on sales or exchanges of stock. Such transactions

involve no actual distributions by the foreign subsidiary whose stock is

being transferred. Any consideration in this type of transaction would

come from a counterparty, not the subsidiary. Moreover, section 1248(a)

does not create any deemed distribution—only a deemed dividend,

which is inadequate in the Commissioner’s view. So, if (as the

Commissioner contends) a distribution (actual or expressly deemed)

were a prerequisite for section 245A to apply, a person with

recharacterized gain under section 1248(a) would be out of luck with

respect to a section 245A deduction, absent some further rule.

The Commissioner acknowledges as much and contends that

section 1248(j) fills the gap. But look at what that provision actually

says. Specifically, it says that amounts treated as dividends for

purposes of section 1248 “shall [also] be treated as a dividend for

purposes of applying section 245A.” I.R.C. § 1248(j) (emphasis added).

To reiterate, section 1248(j) says that any amount it covers shall be

treated as a dividend—not that it shall be treated as a distribution. So

section 1248(j) does not even fill the gap the Commissioner purports to

see. Or, put another way, if we were to accept the Commissioner’s

argument, then the addition of section 1248(j) would have been

insufficient to entitle taxpayers to the deduction under section 245A. 13

And of course we do not presume that Congress enacts legislation that

has no effect. See United States v. Castleman, 572 U.S. 157, 178 (2014)

(Scalia, J., concurring in part and concurring in judgment) (describing

the “presumption against ineffectiveness” as reflecting “the idea that

Congress presumably does not enact useless laws”); see also United

States v. Hayes, 555 U.S. 415, 427 (2009) (rejecting an interpretation in

13 When pressed on this point at the hearing, counsel for the Commissioner

argued that we should read section 1248(j) and a similar provision in section 964(e)(4)

as if they required that amounts “be treated as a dividend of the type that would qualify

[for a deduction] under section 245A.” Hearing Tr. 67. We are unconvinced by this

interpretation, which impermissibly adds words and concepts to the text Congress

actually adopted.

part because under it the statute would have been a nullity in multiple

states); Antonin Scalia & Bryan A. Garner, Reading Law: The

Interpretation of Legal Texts 63 (2012).

Perhaps seeing the wisdom of these principles, the Commissioner

acknowledges that the addition of section 1248(j) was in fact sufficient

to provide a deduction for amounts under section 245A. The same is

true for section 78. As we have demonstrated, section 1248(j) added

nothing to the Code that section 78 did not already include. Rather, the

wording of section 1248(j) confirms that section 245A requires nothing

more than (1) an amount being treated as a dividend and (2) that

treatment being extended for section 245A purposes either by express

cross-reference to section 245A (as in the case of section 1248) or by a

broader cross-reference that includes section 245A (as in the case of

section 78).

Finally, as if all this were not enough, section 1248(j) also

undercuts the Commissioner’s reliance on the computation provisions of

section 245A. Recall that, for purposes of determining the foreignsource portion of a dividend, section 245A(c) applies a ratio. Specifically,

section 245A(c)(1) provides that the foreign-source portion “is an amount

which bears the same ratio to [the] dividend” as “the undistributed

foreign earnings” of the foreign corporation bear to “the total

undistributed earnings” of the foreign corporation. And in calculating

the undistributed earnings, section 245A(c)(2) refers to the “year . . . in

which the dividend is distributed” and the “dividends distributed during

[the] year.” Because section 78 dividends, the Commissioner says, are

not actual or deemed “distributions,” the ratio does not work,

presumably because there would be no “year . . . in which the dividend

is distributed.”

But, if the Commissioner’s reading of section 245A(c) were

correct, the same analysis would apply to amounts treated as dividends

under section 1248. Those amounts also are not “distributed,” and

nothing in section 1248 deems them as distributions. So for those

amounts too the ratio would not work if an actual or deemed distribution

were required. Yet, at our hearing on the Motions held on May 17, 2024,

counsel for the Commissioner conceded that the ratio would work for

section 1248 dividends and that they are in fact eligible for the deduction

under section 245A. So, the computation provisions of section 245A

cannot be the impediment that the Commissioner portrays them to be.

Section 964(e)(4)

Similarly, section 964(e), the other provision the Commissioner

cites, deals with gain recognized by a CFC on the sale or exchange of

stock in a foreign corporation. Like section 1248(a), section 964(e)(1)

recharacterizes a portion of the gain as a dividend received by the CFC.

And Congress coordinated the rule with section 245A by providing that

the deduction “shall be allowable” to the ultimate U.S. shareholder for

the resulting subpart F income “in the same manner as if such subpart F

income were a dividend received by the shareholder from the selling

[CFC].” I.R.C. § 964(e)(4)(A)(iii). For the same reasons that we

discussed with respect to section 1248, Congress needed to add an

affirmative rule if it wished for gain recharacterized under

section 964(e)(4) to get the benefit of section 245A. Moreover (as with

section 1248), nowhere does the text of section 964 provide specifically

for a distribution to a domestic corporation, as the Commissioner says is

required. Rather, the amounts for which a taxpayer may claim a

section 245A deduction are subpart F inclusions (i.e., not distributions).

And again, section 964(e)(4) does not fill the purported gap, because it

provides for the subpart F inclusion to be treated in the same manner

as a dividend and not as a distribution. Once more, therefore, Congress

viewed treating an amount as a dividend as sufficient to accomplish its

purpose of making an amount eligible for a deduction under

section 245A. 14

To summarize, as the Commissioner appears to agree, adopting a

rule that treats an amount as a dividend for purposes of section 245A is

sufficient to qualify the amount for the dividends received deduction.

See I.R.C. §§ 964(e)(4)(A)(iii), 1248(j). And, by its express terms,

section 78 already treated the amount discussed there as a dividend for

all purposes of the Code (other than one section that is not relevant

here). Accordingly, there was no need for Congress to change section 78

to confirm that section 78 dividends qualified for the deduction. 15

14 In section 245A(f), Congress took the same approach with respect to amounts

under section 1291, excluding those amounts from the deduction by providing that they

“shall not be treated as a dividend for purposes of this section.”

15 For this reason, we also reject the Commissioner’s argument that the lack of

a specific rule allowing the deduction for section 78 dividends—in contrast to the

specific rules provided under section 1248 and section 964—means that the deduction

is not available. And, of course, Congress did ultimately provide a specific rule under

section 78, as we discuss further below. But that rule was not in effect for the year

before us.

Historical Practice

Fourth, our conclusion here is consistent with Congress’s

historical practice in this area of the Code. In 1976, Congress made

changes to sections 902, 960, and 78 repealing special rules that had

applied to investments in “less developed country corporations,” a term

that was previously defined at section 902(d). See Tax Reform Act of

1976, Pub. L. No. 94-455, § 1033, 90 Stat. 1520, 1626–28. The changes

to sections 902, 960, and 78 were substantive, and Congress made them

effective “in respect of any distribution received by a domestic

corporation” before or after specified dates. Tax Reform Act of 1976

§ 1033(c), 90 Stat. at 1628.

This was an interesting choice because, as counsel for the

Commissioner acknowledged at the hearing, section 960 applies

primarily in the context of subpart F inclusions, which are not

distributions (or deemed distributions). Under the Commissioner’s

argument, therefore, because Congress made the 1976 amendments

effective only for “distribution[s] received,” the change to section 960 and

the related change to section 78 arguably would never have taken effect.

But, as we have said, we do not presume that Congress enacts ineffective

legislation. And Treasury apparently agreed, confirming by regulation

that, for purposes of the new regime, section 951 inclusions would

qualify as deemed distributions. See T.D. 7649, 1979-2 C.B. 274, 274,

44 Fed. Reg. 60,085, 60,085–86 (Oct. 18, 1979). The historical

determination that subpart F inclusions qualified as distributions for

purposes of applying the effective date provision of the 1976

amendments further supports our conclusion that section 78 dividends

similarly qualify here.

Section 78 Amendment

A final word on textual inferences for now. Congress appears to

have been well aware that, without some intervention, section 78

dividends would be deductible under section 245A. That is why it

amended section 78 to preclude the deduction. But Congress chose a

later effective date for this amendment, allowing fiscal year taxpayers

like Varian to deduct their section 78 dividends for a limited time. This

choice stands in contrast to another express exclusion from

section 245A, which Congress crafted to take effect at the same time as

the deduction.

See I.R.C. § 245A(f) (expressly excluding from

deductibility

any

amounts

treated

dividends

section 1291(d)(2)(B)). In other words, Congress knew how to draft a

contemporaneous exclusion if it so desired. See Knight v. Commissioner,

552 U.S. 181, 188 (2008) (“The fact that [Congress] did not adopt [a]

readily available and apparent alternative strongly supports rejecting

[a] reading [that relies on the rejected alternative text].”); Thomas v.

Commissioner, 160 T.C. 371, 382 (2023) (citing Knight v. Commissioner,

552 U.S. at 188). But, for section 78, it chose a different course, and we

will not ignore its choice. See Cheneau, 997 F.3d at 920; see also Russello

v. United States, 464 U.S. 16, 23 (1983) (“We would not presume to

ascribe this difference to a simple mistake in draftsmanship.”).

The Import of Sections 275(a)(4) and 261

The Commissioner further argues that section 275(a)(4) precludes

Varian from claiming any deduction under section 245A for its section 78

dividend. In relevant part, section 275 provides:

Sec. 275. Certain taxes.

(a) General rule.—No deduction shall be allowed for

the following taxes:

....

(4) Income, war profits, and excess profits

taxes imposed by the authority of any foreign

country or possession of the United States if the

taxpayer chooses to take to any extent the benefits

of section 901.

The Commissioner claims that permitting the deduction of section 78

dividends violates this rule because it “would be an effective deduction

for the amount of ‘the taxes deemed to be paid’ by [Varian] under

section 78 and other Code sections,” for which it already claims foreign

tax credits. Resp’t’s Br. 31. But the Commissioner’s argument again

misses the mark.

Section 275(a)(4) prohibits deductions “for [specified] taxes.” But

section 78 dividends are not “taxes.” Rather, they are “amount[s] equal

to the taxes deemed to be paid” by a U.S. corporation that are “treated

. . . as a dividend” for all relevant purposes of the Code. And

section 245A provides a deduction for dividends, not taxes. As we

explained in Champion International Corp., 81 T.C. at 427, “[t]he effect

[of section 78 was] to treat the domestic corporation as though it had

received a distribution out of the foreign corporation’s before-tax profits

and then paid the foreign income tax thereon itself.” Put differently, the

deduction is for the deemed distribution the domestic corporation is

considered to receive, not for the taxes that corporation is deemed to

pay. 16

The Commissioner might counter that the deemed dividend here

amounts to the same thing as taxes. But the text of section 275(a) does

not stretch so far. The statute prohibits what it says it prohibits (here,

deductions “for . . . taxes”). It does not extend to any circumstance that

Accordingly,

arguably has the same substantive effect. 17

section 275(a)(4) has no application to the facts before us.

Next, the Commissioner focuses on the text of section 261 to

support his argument. Specifically, section 261 provides: “In computing

taxable income no deduction shall in any case be allowed in respect of

the items specified in [part IX of subchapter B].” In essence, the

Commissioner argues that section 261 broadens the class of deductions

disallowed by section 275(a)(4) to include deductions “in respect of”

foreign income taxes. But we disagree with the Commissioner that

section 261 has the broadening effect he claims it does.

As the Supreme Court has said, and the Commissioner

acknowledges in his Brief, section 261 serves as a “priority-ordering

directive” requiring that items specified in part IX of subchapter B take

precedence over other deduction granting provisions in computing

taxable income. See Commissioner v. Idaho Power Co., 418 U.S. 1, 17

(1974); see also Pac. Power & Light Co. v. United States, 644 F.2d 1358,

1360 (9th Cir. 1981) (citing Commissioner v. Idaho Power Co., 418 U.S.

at 17). For example, section 261 (combined with section 161) ensures

that certain capital expenditures for which a deduction is disallowed by

section 263 are not deducted under section 167 for exhaustion and wear

and tear. See Commissioner v. Idaho Power Co., 418 U.S. at 17–18. But

section 261 applies only so far as an item is specified in Part IX. Because

16 As we discuss further below, section 245A has its own rule addressing the

U.S. tax treatment of those taxes. See infra Part IV.

17 If we were to give section 275(a)(4) such a broad construction, one might

question whether the enactment of section 78, which the Commissioner argues was “to

prevent the effective allowance of both a credit and a deduction for deemed-paid foreign

taxes,” Resp’t’s Br. 12, would have been superfluous, since a predecessor of

section 275(a)(4) was already on the books at the time section 78 was adopted, see

Internal Revenue Code of 1954 § 164(b), 68A Stat. at 47 (“No deduction shall be allowed

for the following taxes: . . . (6) Income, war profits, and excess profits taxes imposed by

the authority of any foreign country or possession of the United States, if the taxpayer

chooses to take to any extent the benefits of section 901 (relating to the foreign tax

credit).”).

section 275(a)(4) precludes deductions for foreign taxes for which foreign

tax credits are claimed, Varian’s deduction for its section 78 dividends

is not disallowed.

Additionally, it would make little sense for Congress to specify in

section 275 and the 26 other provisions currently referenced by

section 261 that deductions are disallowed for certain, specifically

described items only to broaden the scope of the disallowance for all

those items in a separate, one-sentence provision. Not only would that

reading of section 261 contradict the clear text of multiple other

provisions, but it would render the more limited disallowances in those

provisions duplicative of section 261. We see little sense in reading the

text this way when a perfectly reasonable alternative is available. See

Duncan v. Walker, 533 U.S. 167, 174 (2001) (“It is our duty ‘to give effect,

if possible, to every clause and word of a statute.’” (quoting United States

v. Menasche, 348 U.S. 528, 538–39 (1955))). Accordingly, we reject the

Commissioner’s argument that sections 261 and 275(a)(4) combined

preclude Varian’s deduction. 18

Policy Considerations

Throughout his Motion papers, the Commissioner appeals to

policy considerations to argue that Varian cannot be allowed a deduction

for its section 78 dividend. A principal concern, according to the

Commissioner, is that allowing the deduction will produce “an absurd

result and an inappropriate windfall for a subset of taxpayers” (i.e.,

taxpayers like Varian) and will permit effectively “both a deduction and

a credit for foreign taxes,” which he says section 78 “was enacted

specifically to prevent.” Resp’t’s Br. 3.

At the May 17, 2024, hearing, the Court asked counsel whether

these and similar statements in the Commissioner’s Motion papers were

intended to invoke the absurd results doctrine, which allows a court to

depart from a statute’s clear text in certain circumstances. Counsel

clarified that the Commissioner was not invoking the doctrine. The

18 That section 261 applies “in respect of the items specified in this part” does

not give us license to disallow deductions not specified in the referenced part or to

expand the scope of the specified items beyond what the text of the relevant provisions

can fairly bear. No matter how broadly one reads the phrase “in respect of,” see infra

Part IV.A, the analysis under section 261 is cabined by “the items specified”—i.e., the

operative rules (like section 275) that disallow specific deductions. Section 261

explains how these provisions relate to other Code provisions, but it does not change

their substance.

decision was wise, because the absurd results doctrine imposes a high

bar. Specifically, an interpretation is absurd only if the result would be

“so gross as to shock the general moral or common sense,” Crooks v.

Harrelson, 282 U.S. 55, 60 (1930), or if it is “quite impossible that

Congress could have intended the result . . . and [if] the alleged

absurdity is so clear as to be obvious to most anyone,” Tamm v. USTU.S. Trustee (In re Hokulani Square, Inc.), 776 F.3d 1083, 1088 (9th Cir.

2015) (quoting Pub. Citizen v. U.S. Dep’t of Just., 491 U.S. 440, 471

(1989) (Kennedy, J., concurring in the judgment)). These circumstances

are not present here.

For example, the Code is full of provisions that treat taxpayers

differently. This does not mean that those provisions are absurd. See

Harrelson, 282 U.S. at 61 (“Congress may select the subjects of taxation

and qualify them differently as it sees fit; and if it does so in plain terms,

as it has done here, it is not within the province of the court to modify

the law by construction.”); see also Cochise Consultancy, Inc. v. United

States ex rel. Hunt, 587 U.S. 262, 271 (2019) (“[A] result that ‘may seem

odd . . . is not absurd.’” (quoting Exxon Mobile Corp. v. Allapattah Servs.,

Inc., 545 U.S. 546, 565 (2005))); United States v. Paulson, 68 F.4th 528,

544 (9th Cir. 2023) (stating that “a statute is not absurd if ‘it is at least

rational,’” and that “the bar for ‘rational’ is quite low” (first quoting In

re Hokulani Square, 776 F.3d at 1088; and then quoting United States

v. Lopez, 998 F.3d 431, 438 (9th Cir. 2021), abrogated on other grounds

by Pulsifer v. United States, 144 S. Ct. 718 (2024))). 19 Similarly, that

our interpretation of section 245A will reduce the amount of income tax

owed by certain taxpayers does not mean that result is absurd.

Further, general policy concerns (i.e., those that fall short of an

absurd result) and speculation about congressional intent cannot

override clear statutory text. See United States ex rel. Schutte v.

SuperValu Inc., 143 S. Ct. 1391, 1404 (2023) (“Nor do we need to address

any of the parties’ policy arguments, which ‘cannot supersede the clear

statutory text.’” (quoting Universal Health Servs., Inc. v. United States

ex rel. Escobar, 579 U.S. 176, 192 (2016))); Gitlitz v. Commissioner, 531

U.S. 206, 220 (2001) (“Because the Code’s plain text permits the

19 The statute before us easily satisfies this standard. Indeed, one can come up

with a number of reasons Congress might have chosen the text it did. For example,

the effective date Congress chose for the amendments to section 78 conformed with the

effective dates for important changes Congress made to the foreign tax credit (e.g.,

repealing section 902 and modifying section 960). Congress may reasonably have

chosen to prioritize coordinating these changes in section 78 over those related to

section 245A.

taxpayers here to receive these benefits, we need not address this policy

concern.”). That is so because “[a]chieving a better policy outcome . . . is

a task for Congress, not the courts.” 20 Hartford Underwriters Ins. Co.,

530 U.S. at 13–14; see also Crowe v. Wormuth, 74 F.4th 1011, 1032 (9th

Cir. 2023) (“[O]ur role is not to devise a ‘better’ administrative scheme

than the one Congress enacted. ‘[P]ractical difficulties . . . do not justify

departure from the [statute’s] plain text.’” (quoting EPA v. EME Homer

City Generation, L.P., 572 U.S. 489, 509 (2014))); Tex. Brine Co. v. Am.

Arb. Ass’n, 955 F.3d 482, 486 (5th Cir. 2020) (“We are not the final

editors of statutes, modifying language when we perceive some

oversight.”); Fisher Flouring Mills Co. v. United States, 270 F.2d 27, 32

(9th Cir. 1958) (“Even if it be said that the omission . . . is a palpable

error . . . this Court can give no remedy. ‘To supply omissions transcends

the judicial function.’” (quoting Iselin v. United States, 270 U.S. 245, 251

(1926))).

For the reasons we have described, Congress spoke clearly on the

point at issue when it enacted section 245A and selected the mismatched

effective dates for that provision and the amendments to section 78.

Appeals to policy and Congress’s overarching purpose cannot overcome

these choices, no matter how much the Commissioner may dislike them.

See Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204, 220

(2002) (“[V]ague notions of a statute’s ‘basic purpose’ are . . . inadequate

to overcome the words of its text regarding the specific issue under

consideration.” (quoting Mertens v. Hewitt Assocs., 508 U.S. 248, 261

(1993))); see also Metzger Tr. v. Commissioner, 693 F.2d 459, 472 (5th

Cir. 1982) (“As understandable as it may be, yielding to the temptation

to ‘do equity’ in a specific tax case by looking past plain language to

judicially perceived purpose will not do.”), aff’g 76 T.C. 42 (1981);

Metzger Tr., 76 T.C. at 59 (“Courts do not have the power to repeal or

amend the enactments of the legislature even though they may disagree

with the result; rather, it is their function to give the natural and plain

meaning to the statutes as passed by Congress.”). And an unenacted

technical correction proposal does not alter the result.

The force of these principles is especially apparent in a case like

this one, where Congress chose the rule it adopted over a readily

available alternative. Specifically, the Senate version of the bill that

became the TCJA had conforming effective dates for the bill’s section 78

20 In light of these clear directives from the Supreme Court, the Commissioner’s

citations of older cases that may reflect a different view of the judiciary’s role in

statutory construction cases cannot carry the day.

amendments and for new section 245A, which, if applied, would have

precluded Varian’s deduction. Compare S. 1, 115th Cong. § 14101(f)

(2017) (applying new section 245A to “to taxable years of foreign

corporations beginning after December 31, 2017, and to taxable years of

United States shareholders in which or with which such taxable years

of foreign corporations end”), with id. § 14301(d) (applying the same

effective date to the amendments to section 78). The House version, on

the other hand, proposed the disparate effective dates that ultimately

were enacted. Compare H.R. 1, 115th Cong. § 4001(f) (2017) (applying

new section 245A to “distributions made after . . . December 31, 2017”),

with id. § 4101(d) (“The amendments made [to section 78] shall apply to

taxable years beginning after December 31, 2017.”). And Congress chose

the House proposal, with slight modifications. See TCJA § 14101(f), 131

Stat. at 2192; id. § 14301(d), 131 Stat. at 2225.

Moreover, Congress chose the rule it adopted for section 78

despite making changes to other statutory provisions to reflect the

adoption of section 245A and made those changes effective at the same

time as section 245A. See, e.g., TCJA § 14101(b) and (c), 131 Stat.

at 2191 (inserting references to section 245A into section 246); id.

subsec. (d) (inserting references to section 245A into section 904(b)).

Congress could have included in TCJA § 14101 a similar, modest

amendment to section 78 with an effective date matching that of

section 245A, while leaving the more substantive amendments for TCJA

§ 14301 with an effective date that matched the repeal of section 902

and the amendments to section 960, but it followed a different path. We

will respect the choice that Congress made and give effect to the statute

as written. Cf. Thomas, 160 T.C. at 382.

Finally, the Commissioner argues that Varian’s “position is

illogical in treating its subpart F income as ineligible for the

Section 245A DRD but the Section 78 gross-up arising from that

inclusion as qualifying, even though the latter is the tax expense that

was incurred on subpart F income.” Resp’t’s Br. 23 n.10. We struggle

to see why Varian’s position is illogical. As a general matter, subpart F

income is not a dividend; rather it is simply an inclusion in gross income.

See Rodriguez v. Commissioner, 137 T.C. 174, 177–78 (2011), aff’d, 722

F.3d 306 (5th Cir. 2013). Therefore, subpart F income does not qualify

for a deduction under the terms of section 245A. But, as we have already

discussed, section 78 expressly deems Varian to receive a dividend,

which does qualify for the deduction. So, at bottom, the Commissioner’s

problem lies with the text of the statute, not Varian’s position.

Amended Treasury Regulation § 1.78-1

Finally, the Commissioner argues that Treasury Regulation

§ 1.78-1, as revised June 21, 2019, precludes Varian from deducting its

section 78 dividend. In relevant part, the second sentence of Treasury

Regulation § 1.78-1(a) (as amended in 2019) says:

A section 78 dividend is treated as a dividend for all

purposes of the Code, except that it is not treated as a

dividend for purposes of section 245 or 245A, and does not

increase the earnings and profits of the domestic

corporation or decrease the earnings and profits of the

foreign corporation.

Subsection (c) then applies this sentence (and this sentence only) “to

section 78 dividends that are received after December 31, 2017, by

reason of taxes deemed paid under section 960(a) with respect to a

taxable year of a foreign corporation beginning before January 1,

2018.” 21

The rule adopted by the revised regulations essentially gives one

of the TCJA’s amendments to section 78 an earlier effective date than

provided for in the TCJA to prevent taxpayers like Varian from

deducting section 78 dividends. But, as we have already observed, the

plain text of the statutes provides for the deduction. 22 As the Supreme

Court has said, “self-serving regulations never ‘justify departing from

the statute’s clear text.’” Niz-Chavez v. Garland, 141 S. Ct. 1474, 1485

(2021) (quoting Pereira v. Sessions, 138 S. Ct. 2105, 2118 (2018)); see also

Util. Air Regul. Grp. v. EPA, 573 U.S. 302, 328 (2014) (“[T]he need to

rewrite clear provisions of the statute should have alerted [the

Government] that it had taken a wrong interpretive turn.”); Koshland

21 The effective date for the rest of the regulation matches the effective date for

the section 78 amendments and therefore does not apply for Varian’s 2018 Year.

22 In the preamble to the final regulation, Treasury acknowledged that the rule

was “necessary to ensure that th[e] principle [that a section 78 dividend is not eligible

for a deduction under section 245A] is consistently applied with respect to a CFC that

uses a fiscal year beginning in 2017 . . . in order to prevent the arbitrary disparate

treatment of similarly situated taxpayers.” T.D. 9866, 2019-29 I.R.B. 261, 296, 84 Fed.

Reg. 29,288, 29,319 (June 21, 2019). Treasury said that, without the rule in the revised

regulation, “a U.S. shareholder of a fiscal year CFC would effectively be able to take

both a credit and a deduction for foreign taxes by claiming a section 245A deduction

with respect to its section 78 dividend.” Id. A fair reading of this preamble is that

Treasury thought the plain statutory text provided (or could be read as providing) for

the deduction Varian claims, as we find here.

v. Helvering, 298 U.S. 441, 447 (1936) (“[W]here . . . the provisions of the

act are unambiguous, and its directions specific, there is no power to

amend it by regulation.”); Abdo v. Commissioner, No. 5514-20, 162 T.C.,

slip op. at 21 (Apr. 2, 2024) (reviewed) (“Respondent’s regulation . . .

cannot change the result dictated by an unambiguous statute.” (citing

Niz-Chavez, 141 S. Ct. at 1485)).

The Commissioner initially argued that, even if we disagreed

with his interpretation of the statute, the statute was at least

ambiguous and that, under Chevron, we had to accept his regulation’s

attempt to fill the gap because his interpretation was permissible. But

of course Chevron has now been overruled. See Loper Bright, 144 S. Ct.

at 2273. A “permissible” interpretation of a statute no longer prevails

simply because an agency offers it to resolve a perceived ambiguity. See

id. at 2266, 2273.

As the Supreme Court observed in Loper Bright, “statutes, no

matter how impenetrable, do—in fact, must—have a single, best

meaning. That is the whole point of having written statutes; ‘every

statute’s meaning is fixed at the time of enactment.’” Id. at 2266

(quoting Wis. Cent. Ltd. v. United States, 585 U.S. 274, 284 (2018)). And,

in cases involving ambiguity, “instead of declaring a particular party’s

reading ‘permissible’ . . . , courts [must] use every tool at their disposal

to determine the best reading of the statute and resolve the ambiguity.”

Id. Put another way, “in an agency case as in any other . . . even if some

judges might (or might not) consider the statute ambiguous, there is a

best reading all the same—the reading the court would have reached if

no agency were involved.” Id. (cleaned up).

In short, “[i]n the business of statutory interpretation, if it is not

the best, it is not permissible.” Id. And, as we have shown above, the

best (indeed the unambiguous) reading of the provisions at issue here

permits Varian’s deduction.

In reaching this conclusion, we have given “[c]areful attention to

the judgment of the Executive Branch.” Id. at 2273. The Executive’s

views “constitute a body of experience and informed judgment to which

courts and litigants may properly resort for guidance.” Id. at 2262

(quoting Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944)). “The weight

of such a judgment in a particular case,” of course, “depend[s] upon the

thoroughness evident in its consideration, the validity of its reasoning,

its consistency with earlier and later pronouncements, and all those

factors which give it power to persuade, if lacking power to control.” Id.

at 2259 (quoting Skidmore, 323 U.S. at 140).

Nevertheless, “[c]ourts must exercise their independent judgment

in deciding whether an agency has acted within its statutory authority.”

Id. at 2273. It “remains the responsibility of the court to decide whether

the law means what the agency says.” Id. at 2261 (quoting Perez v.

Mortg. Bankers Ass’n, 575 U.S. 92, 109 (2015) (Scalia, J., concurring in

the judgment)). Indeed, “Congress expects courts to do their ordinary

job of interpreting statutes.” Id. at 2267. “And to the extent that

Congress and the Executive Branch may disagree with how the courts

have performed that job in a particular case, they are of course always

free to act by revising the statute.” Id. 23

In the cases that come before us, “the question that matters [is]:

Does the statute authorize the challenged agency action?” Id. at 2269.

And, in answering that key question, we may not follow the Executive’s

guidance (expressed in a regulation or elsewhere) when (as here) it

contradicts the statutory text. See, e.g., Niz-Chavez, 141 S. Ct. at 1485;

Koshland v. Helvering, 298 U.S. at 447. The Supreme Court’s view on

this principle is unanimous. See Loper Bright, 144 S. Ct. at 2264

(observing that, even under Chevron, “‘[i]f the intent of Congress is clear,

that is the end of the matter,’ [Chevron, 467 U.S. at 842,] and courts

were therefore to ‘reject administrative constructions which are contrary

to clear congressional intent,’ [Chevron, 467 U.S. at 843, n.9]”); see also

id. at 2297 (Kagan, J., dissenting) (summarizing Chevron and observing

that the step one “inquiry is rigorous: A court must exhaust all the

‘traditional tools of statutory construction’ to divine statutory meaning.

[Chevron, 467 U.S.] at 843, n.9. And when it can find that meaning—a

‘single right answer’—that is ‘the end of the matter’: The court cannot

defer because it ‘must give effect to the unambiguously expressed intent

of Congress.’ Kisor [v. Wilkie, 139 S. Ct. 2400, 2415 (2019)] (opinion of

the Court); Chevron, 467 U.S., at 842–843”); id. at 2300 (Kagan, J.,

dissenting) (“Where Congress has spoken, Congress has spoken; only its

23 See also Loper Bright, 144 S. Ct. at 2274 (Thomas, J., concurring) (“The

judicial power, as originally understood, requires a court to exercise its independent

judgment in interpreting and expounding upon the laws.” (cleaned up)); id. at 2275

(Thomas, J., concurring) (“The Founders envisioned that the courts would check the

Executive by applying the correct interpretation of the law.” (cleaned up)); id. at 2284–

85 (Gorsuch, J., concurring) (explaining that the framers designed a judicial system

“in which impartial judges, not those currently wielding power in the political

branches, would ‘say what the law is’ in cases coming to court” (quoting Marbury v.

Madison, 5 U.S. (1 Cranch) 137, 177 (1803))).

judgments matter. And courts alone determine when that has

happened: Using all their normal interpretive tools, they decide whether

Congress has addressed a given issue.”).

That Congress delegated certain rulemaking authority to

Treasury under section 245A24 does the Commissioner no good here.

This is so because his regulation purports to modify the effective date

provision for new section 78, which could hardly have been clearer. In

other words, it impermissibly attempts to change an unambiguous

provision of the statute. As a result, the regulation falls outside the

boundaries of any authority that Congress may have delegated under

section 245A or 7805. See, e.g., United States v. Locke, 471 U.S. 84, 95

(1985) (“There is a basic difference between filling a gap left by Congress’

silence and rewriting rules that Congress has affirmatively and

specifically enacted.” (quoting Mobil Oil Corp. v. Higginbotham, 436

U.S. 618, 625 (1978))); see also Loper Bright, 144 S. Ct. at 2263 (noting

that, where Congress has delegated discretionary authority to an

agency, courts fulfill their role by “fix[ing] the boundaries of [the]

delegated authority” (quoting Henry P. Monaghan, Marbury and the

Administrative State, 83 Colum. L. Rev. 1, 27 (1983))).

The Commissioner pushes back on this reading of the regulation.

Specifically, he says that the regulation was not intended to interpret

the statute’s effective date, but rather “the ambiguous interaction

between [s]ection 245A and [p]rior [s]ection 78 during the relevant

period.” Resp’t’s Br. 3. We are unconvinced for at least two reasons.

First, if the revised regulation truly were aimed at resolving an

ambiguity between section 245A and prior section 78, one would expect

it to reference section 902, which was referenced in prior section 78 and

was still in effect for Varian’s 2018 Year. See TCJA § 14301(d), 131 Stat.

at 2225 (striking section 902 for “taxable years of foreign corporations

beginning after December 31, 2017, and [for] taxable years of United

States shareholders in which or with which such taxable years of foreign

corporations end”). But neither the revised regulation nor its effective

date provision mentions section 902. Rather, the sentence of the revised

regulation purporting to disallow section 245A deductions for section 78

dividends applies only “to section 78 dividends that are received . . . by

24 Section 245A(g) provides: “Regulations.—The Secretary shall prescribe such

regulations or other guidance as may be necessary or appropriate to carry out the

provisions of this section, including regulations for the treatment of United States

shareholders owning stock of a specified 10 percent owned foreign corporation through

a partnership.”

reason of taxes deemed paid under section 960(a).” Treas. Reg.

§ 1.78-1(c). Therefore, the revised regulation ignores a key part of prior

section 78 and presumably would not prevent Varian from claiming a

section 245A deduction for its section 78 dividends related to section 902

deemed paid taxes. Thus, the omission of any reference to section 902

from the new regulation casts doubt on the Commissioner’s claim that

the regulation interprets prior section 78.

Second, and more importantly, we cannot ignore that the revised

regulation makes precisely the same change as new section 78 (adding

an explicit carveout for section 245A), but with an earlier effective date.

No matter what the revised regulation intended to interpret, it cannot

contradict the clear effective date provided for in the statutory text. 25

See supra pp. 28–31.

For these reasons, the amended regulation does not alter our

conclusion as to Varian’s claimed deduction. 26

IV.

Section 245A(d) Limits on Foreign Tax Credits

The final question we must resolve is how section 245A(d) affects

the foreign tax credits that Varian claimed for its deemed paid foreign

taxes. In relevant part, section 245A(d)(1) provides that “[n]o credit

shall be allowed under section 901 for any taxes paid or accrued (or

treated as paid or accrued) with respect to any dividend for which a

deduction is allowed under this section.”

The Applicability of the Limitation

The Commissioner argues that, if we allow Varian to deduct its

section 78 dividend under section 245A, then section 245A(d) requires

Varian to reduce its credits by an appropriate amount. In the

Commissioner’s view, that amount is the amount of Varian’s deemed

In this context, contrary to the Commissioner’s arguments in his

supplemental briefing, the revised regulation cannot be viewed as either “necessary”

or “appropriate” to implement section 245A, regardless of how broadly one construes

those terms as used in section 245A(g). See, e.g., Locke, 471 U.S. at 95; Koshland v.

Helvering, 298 U.S. at 447.

26 In view of these conclusions, we need not address the many other arguments

the parties raise regarding the procedural and substantive validity of amended

Treasury Regulation § 1.78-1.

paid foreign tax that is attributable to the foreign earnings reflected in

its section 78 dividend.

Varian, on the other hand, claims that section 245A(d) is

irrelevant to its section 78 dividend. In essence, Varian would have us

read section 245A(d)(1) as limiting foreign tax credits only for “taxes

paid or accrued (or treated as paid or accrued) on any dividend.”

Because Varian misreads the operative text, notably the phrase “with

respect to,” we agree with the Commissioner.

The ordinary meaning of the phrase “with respect to” is

“concerning” or “relating to.” See Respecting, The American Heritage

Dictionary (5th ed. 2018) (“With respect to; concerning.”); Cal. Tow

Truck Ass’n v. City & Cnty. of S.F., 807 F.3d 1008, 1021 (9th Cir. 2015)

(“[T]he phrase ‘with respect to’ is generally understood to be

synonymous with the phrase[] ‘relating to.’” (quoting Fireman’s Fund

Ins. Co. v. Plant Insulation Co. (In re Plant Insulation Co.), 734 F.3d

900, 910 (9th Cir. 2013))); see also Khan v. United States, 548 F.3d 549,

556 (7th Cir. 2008) (“Synonyms for ‘with respect to’ include ‘pertaining

to’ and ‘concerning.’” (citing Encarta World English Dictionary (2007)));

see also Jennings v. Rodriguez, 138 S. Ct. 830, 856 (2018) (Thomas, J.,

concurring in the judgment) (“The phrase ‘with respect to’ means

‘referring to,’ ‘concerning,’ or ‘relat[ing] to.’” (quoting Oxford American

Dictionary & Language Guide (1999 ed.))). Courts have given this

phrase and similar ones a broad meaning. See Cal. Tow Truck Ass’n,

807 F.3d at 1021; see also Dan’s City Used Cars, Inc. v. Pelkey, 569 U.S.

251, 260 (2013) (defining the phrase “related to” as embracing those

things “having a connection with or reference to” something else

(quoting Rowe v. N.H. Motor Transp. Ass’n, 552 U.S. 364, 370 (2008)));

Adams Challenge (UK) Ltd. v. Commissioner, 154 T.C. 37, 63 (2020)

(analyzing relevant cases and finding “no appreciable difference

between the terms ‘related to,’ ‘connected with,’ and ‘in connection

with’”). With this principle in mind, we conclude that section 245A(d)(1)

limits foreign tax credits so far as the deemed paid foreign taxes for

which a taxpayer claims credits relate to the dividends for which a

taxpayer claims a deduction.

Varian’s deemed paid foreign taxes undoubtedly relate to its

section 78 dividend. 27 As we have explained, a section 78 dividend

27 We of course acknowledge that, while the meaning of “related to” and similar

phrases is broad, it is not without limits. See Whistleblower 972-17W v. Commissioner,

represents the share of a foreign corporation’s earnings that were paid

out to a foreign country as tax and therefore never repatriated (or

attributed) to the domestic corporation. See Champion Int’l Corp., 81

T.C. at 427. In other words, a section 78 dividend reflects genuine

earnings of a foreign corporation that are taxed by a foreign country. By

claiming foreign tax credits for those taxes, and including a section 78

dividend in income, a domestic corporation (like Varian) is treated as if

it had received all the foreign corporation’s foreign earnings and directly

paid the tax on those earnings. Therefore, the foreign taxes Varian is

treated as paying were “with respect to” its section 78 dividend within

the meaning of section 245A(d)(1).

The Amount of the Limitation

Having decided that section 245A(d)(1) limits foreign tax credits

so far as they are attributable to taxes paid (or deemed paid) on the

earnings reflected by Varian’s section 78 dividend, we now consider the

amount of the limitation. In his Motion papers, the Commissioner

expresses this limitation through the following equation:

Disallowed

Foreign

Tax Credit

Deemed

Paid

Foreign

Tax

Credit

�

Section 78 gross-up

Net section 965 inclusion + section 78 gross-up

�

We agree that this equation properly reflects the limitation provided for

in section 245A(d)(1) in the context of foreign tax credits resulting from

an inclusion in subpart F on account of the MRT.

To illustrate how this equation applies, assume AmCo was a 100%

shareholder of a CFC (CFC 1) that had $100 of earnings in Country A.

If Country A taxed those earnings at a 20% rate, then CFC 1 would have

paid $20 of tax and had $80 of earnings remaining. If we assume the

earnings qualified as subpart F income for U.S. tax purposes, then $80

would have been included in AmCo’s subpart F income and AmCo would

have been treated as paying $20 in tax to Country A under

section 960(a). As a result, AmCo would have been entitled to $20 of

foreign tax credits and would have been treated under section 78 as

receiving a $20 dividend out of CFC 1’s earnings. If AmCo claimed a

deduction for the $20 section 78 dividend under section 245A, then

159 T.C. 1, 15–16 (2022) (reviewed) (discussing authorities). But the facts before us

now do not approach those limits.

section 245A(d)(1) would reduce its allowable foreign tax credits as

follows:

(Disallowed

FTC)

$20

(Deemed

Paid

FTC)

�

$20 (Section 78 gross-up)

$100 (Subpart F inclusion28 + section 78 gross-up)

�

The same principle applies to limit Varian’s claimed foreign tax

credits.

Accordingly, because Varian claims a deduction under

section 245A for its section 78 dividend, it must reduce its foreign tax

credits by the amount that its deemed paid foreign taxes are

attributable to the foreign earnings reflected in its section 78 dividend.

Conclusion

For the reasons stated above, we will grant Varian’s Motion to the

extent it seeks a deduction under section 245A for its section 78 dividend

and will deny the Commissioner’s Motion to the extent it seeks the

opposite conclusion. Furthermore, we will grant the Commissioner’s

Motion so far as it seeks to limit Varian’s foreign tax credits under

section 245A(d)(1).

To reflect the foregoing,

An appropriate order will be issued.

Reviewed by the Court.

KERRIGAN, FOLEY, BUCH, NEGA, PUGH, ASHFORD, URDA,

COPELAND, JONES, GREAVES, MARSHALL, and WEILER, JJ.,

agree with this opinion of the Court.

28 For purposes of this example, the taxpayer has a general subpart F inclusion

rather than a section 965 inclusion in its subpart F income. Either way, the equation

achieves the same result.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.