# United States Tax Court

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/agency%3Atax-court%3Ab19499c5ff75c668

## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

United States Tax Court
163 T.C. No. 4
VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES,
Petitioner
v.
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

2
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.

3
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

4
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

5
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.

6
Discussion
I.

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.
A.

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

7
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.

8
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.
B.

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.

9
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

10
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.
C.

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.
1.

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.

11
§ 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.
2.

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.

12
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.
A.

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).

13
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.

14
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.
B.

The Commissioner’s Arguments

The Commissioner advances several arguments explaining why
he thinks this result is incorrect. None alters the result here.
1.

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.

15
taxable year . . . in which the dividend is distributed.”
Commissioner’s argument fails for at least five reasons.
a.

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.
b.

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

16
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.
c.

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.
1.

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.

17
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

18
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.

19
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.

20
2.

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.

21
d.

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.
e.

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

22
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.”).
2.

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

23
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).”).

24
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
3.

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.

25
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.

26
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.

27
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.

28
4.

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.

29
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

30
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))).

31
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.”

32
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.”
A.

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.
25

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.

33
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,

34
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).
B.

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.

35
section 245A(d)(1) would reduce its allowable foreign tax credits as
follows:
$4
(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.
V.

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.

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Atax-court%3Ab19499c5ff75c668. Public record. Not legal advice.