No. 94-2005

In the Supreme Court of the United States

OCTOBER TERM, 1994

UNITED STATES OF AMERICA, PETITIONER

v.

XEROX CORPORATION

PETITION FOR A WRIT OF CERTIORARI 
TO THE UNITED STATES COURT OF APPEALS
FOR THE FEDERAL CIRCUIT

DREW S. DAYS, III
Solicitor General

LORETTA C. ARGRETT
Assistant Attorney General

LAWRENCE G. WALLACE
Deputy Solicitor General

KENT L. JONES
Assistant to the Solicitor General
ROBERT E. LINDSAY

DAVID ENGLISH CARMACK
THOMAS J. CLARK
Attorneys

Department of Justice
Washington, D.C. 20530
(202)514-2217

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QUESTIONS PRESENTED

1. Whether Article 23(1) of the tax treaty between
the United States and the United Kingdom 1. requires the
United States to allow respondent a foreign tax credit in
1974 for the "advance corporation tax" that its United
Kingdom subsidiary paid in that year to the United
Kingdom government when, in a later year, the subsidi-
ary "surrendered" that tax payment, under applicable
United Kingdom law, to its own United Kingdom sub-
sidiaries for application against the United Kingdom cor-
poration tax liabilities of those subsidiaries.
2. Whether affidavits offered by respondent five years
after the trial of this case-containing the proffered, un-
examined recollections of several individuals who were
not current officials and were not authorized to speak
on behalf of any government-may be considered as part
of the evidentiary "record" of this case in evaluating the
intent and course of dealing of the treaty signatories.

___________________(footnotes)                                                
                              
1 The full name of the treaty is the Convention Between the
Government of the United States of America and the Government
of the United Kingdom of Great Britain and Northern Ireland for.
the Avoidance of Double Taxation and the Prevention of Fiscal
Evasion with Respect to Taxes on Income and Capital Gains. It is
reported at T.I.A.S. No. 9682, 31 U.S.T. 5668.

(I)

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      TABLE OF CONTENTS

Page

Opinions below  . . . . 1
Jurisdiction  . . . . 2
Statutory, treaty and regulatory provisions involved  . . . . 2
Statement . . . . 2
Reasons for granting the petition . . . . 14
Conclusion  . . . . 29
Appendix A  . . . .  1a 
Appendix B  . . . . 33a
Appendix C . . . . 34a 
Appendix D . . . . 35a
Appendix E  . . . . 73a
Appendix F  . . . . 75a

     TABLE OF AUTHORITIES

Cases:

Air France v. Saks, 470 U.S. 392 (1985)  . . . . 25, 28
Biddle v. Commissioner, 302 U.S. 573 (1938)  . . . .  20
Charlton v. Kelly, 229 U.S. 447 (1913)  . . . . 24
Cleveland Electric Illuminating Co. V. United
States, 6 Cl. Ct. 711 (1984)  . . . . 9
Eastern Airlines, Inc. v. Floyd, 499 U.S. 530
(1991)  . . . . 28
Factor v. Laubenheimer, 290 U.S. 276 (1933) . . . . . . . 24,25
H.H. Robertson Co. v. Commissioner, 59 T.C. 53
(1972), aff'd per curiam, 500 F.2d 1399 (3d Cir.
1974)  . . . . 18
Helvering v. Queen Insurance Co., 115 F.2d 341
(2d Cir. 1940), cert. denied, 312 U.S. 706
(1941)  . . . .  20, 21
Kolovrat v. Oregon, 366 U.S. 187 (1961)  . . . .  23, 24
National Muffler Dealers Ass'n v. United States,
440 U.S. 472 (1979) . . . .  20
O'Connor v. United States, 479 U.S. 27 (1986)  . . . . 27

(III)

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           IV

Cases-Continued

 Page

Pacific Metals Corp.v. Commissioner, 1 T.C. 1028
  (1943)  . . . . 17
Palmer v. Hoffman, 318 U. S. 109 (1943) . . . . 26
Sumitomo Shoji America, Inc. v. Avagliano, 457
  U.S. 176 (1982)  . . . . . 7, 8, 17, 23, 24, 25
United States v. American Bar Endowment, 477
  U.S. 105 (1%36)  . . . . 16.
United States v. Goodyear Tire& Rubber Co., 493
  U.S. 132 (1989)  . . . . 4, 15, 17, 18
United States v. Hill, 113 S. Ct. 941 (1993) . . . .  15
United States v. Stuart, 489 U.S. 353 (1989) . . . .  22-23
United States v. United Mine Workers, 330 U.S.
  258 (1947)  . . . . 25
Vanadium Corp. v. Fidelity & Deposit Co., 159
  F.2d 105 (2d Cir. 1947) . . . . 26
Walsh V. Rogers, 54 U.S. (13 How.) 283 (1851 ) . . . . 26
Weinberger v. Rossi, 456 U.S. 25 (1982)  . . . . 25
Whitney v. Robertson, 124 U.S. 190 (1888)  . . . . 24
 
Treaty, statutes and rules:

Convention Between the Government of the United
  States of America and the Government of the
  United Kingdom of Great Britain and Northern
  Ireland for the Avoidance of Double Taxation
  and the Prevention of Fiscal Evasion with Re-
  spect to Taxes on Income and Capital Gains,
  Dec. 31, 1975, 31 U.S.T. 5668, T.I.A.S. No.
  9682  . . . . 4
   Art. 2 (2),31 U.S.T. 5671 . . . . 2
   Art. 2 (2) (b), 31 U.S.T. 5671  . . . . 15
   Art. 2 (3),31 U.S.T. 5671  . . . . 15
   Art. 10 (2),31 U.S.T. 5677  . . . . 2
   Art. 10 (2) (a), 31 U.S.T. 5677-5678  . . . . 5, 15
   Art. 10(2) (a) (i), 31 U.S.T. 5677-5678  . . . . 4, 5
   Art. 23,31 U.S.T. 5685  . . . . 7
   Art. 23 (1),31 U.S.T. 5685 . . . . 5,  16, 23
   Art. 23(1) (a), 31 U.S.T. 5685-5686 . . . . 5, 9,  15, 19
   Art. 23 (1) (c),31 U.S.T. 5685-5686  . . . .  5, 6, 7, 8, 9,
                                                                          11, 15, 19                  
   Art. 25 (3),31 U.S.T. 5688  . . . . 7, 8, 9

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V

Treaty, statutes and rules-Continued:
 
Page

Internal Revenue Code of 1939, 26 U.S.C. 131 (c)
  (1952)  . . . . 17
Internal Revenue Code (26 U.S.C. (1974)):
   901  . . . . 2, 17
    902 . . . . 2, 4, 23
    902(a)  . . . . 17, 20
   902 (b)  . . . . . 6
    902 (b) (1) . . . . 6
   905 (c)  . . . . 2, 6, 7, 13, 14, 17, 18, 20
   6511 (d) (3)  . . . . 22   
Fed. R. Evid.:                    .
   Rule 801 (d) (2) (D)  . . . . 26
   Rule 802 . . . .  26

Miscellaneous:

B. Bittker & J. Eustice, Federal Income Taxation
  of Corporations and Shareholders (5th ed.
  1987)  . . . . 17
Internal Revenue Service, Statistics of Income
  Bulletin (Winter 1994 -1995) . . . . 22
4 C. Mueller & L. Kirkpatrick, Federal Evidence
  (2d ed. 1994)  . . . . 26
Rev. Proc. 80-18,1980-1 C.B. 623 . . . . 2, 5, 7, 8, 12, 17, 19, 24
S. Exec. Rep. No. 18, 95th Cong., 2d Sess. (1978 ) . . . . 20
Statement of Ass't Sec'y of the Treasury, Laurence
  N. Woodworth, 1980-1 C.B. 433 (July 19,
  1977)  . . . . 5      
  Tax Treaties with the United Kingdom, the Re-
  public of Korea, and the Republic of the Philip-
  pines: Hearings Before the Senate Comm. on
  Foreign Relations, 95th Cong., 1st Sess. (1977 ). . . . 10
Technical Explanation of the Convention Between
  the Government of the United States of America
  and the Government of the United Kingdom of
  Great Britain and Northern Ireland for the
  Avoidance of Double Taxation and the Preven-
  tion of Fiscal Evasion with Respect to Taxes on
  Income and Capital Gains, 1980-1 C.B. 455. . . . 2, 5, 18

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VI

Miscellaneous-Continued:

Page

J. Wigmore, Evidence:
   Vol. 5 (Chadbourn ed. 1974)  . . . . 26
   Vol. 6 (Chadbourn ed. 1976) . . . . 26

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In the Supreme Court of the United States

      OCTOBER TERM, 1994

No.

UNITED STATES OF AMERICA, PETITIONER

    v.

XEROX CORPORATION

PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
   FOR THE FEDERAL CIRCUIT

The Solicitor General, on behalf of the United States
of America, petitions for a writ of certiorari to review
the judgment of the United States Court of Appeals for
the Federal Circuit in this case.

      OPINIONS BELOW

The opinion of the court of appeals (App., infra, 1a-
32a) is reported at 41 F.3d 647. The opinion of the
Claims Court (now the Court of Federal Claims) (App.,
infra, 35a-72a) is reported at 14 CL Ct. 455.

JURISDICTION

The judgment of the court of appeals was entered on
December 6, 1994. A petition for rehearing was denied

(1)

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2

on February 7, 1995 (App., infra, 34a). On May 2,
1995, the Chief Justice extended the time for filing a
petition for a writ of certiorari to and including June 7,
1995. The jurisdiction of this Court is invoked under
28 U.S.C. 1254( 1).

     STATUTORY, TREATY AND
  REGULATORY PROVISIONS INVOLVED

The pertinent parts of (i) Sections 901, 902 and
905 (c) of the Internal Revenue Code as in effect for
1974 (26 U.S.C. 901, 902, 905(c)), (ii) Articles 2(2),
10(2 ) and 23(1) of the income tax treaty between the
United States and the United Kingdom, (iii) the Tech-
nical Explanation of the Treaty submitted by the Treas-
ury to Congress, 1980-1 C.B. 455, and (iv) Revenue
Procedure 80-18, 1980-1 C.B. 623, are set forth in the
Appendix, infra, 75-83a.

       STATEMENT

1. A United Kingdom corporation is required to pay
a "corporation tax" on its net profits ( App., infra, 39a).
That tax is analogous to our own corporate income tax.
In the Finance Act of 1972, the United Kingdom also
required its corporations to pay an "advance corporation
tax" (ACT), the liability for which generally arises when
a corporation pays a dividend (ibid.). As in effect in
1974, the Finance Act of 1972 imposed the "advance
corporation tax" at a rate of three-sevenths of the amount
of the dividend (id. at 40a). 2.  A dividend payment of
L 70 would thus give rise to a liability of L 30 of "ad-
vance corporation tax."
A United Kingdom corporation may apply its "advance
corporation tax" payments to satisfy its underlying "cor-

___________________(footnotes)

2 The United Kingdom "advance corporation tax" has been modi-
fied several times since it was enacted in 1972. The basic structure
remains intact, however, and the issues raised in this case with
respect to 1974 continue to be relevant today.

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  3

poration tax" liability (App., injra, 40a-41a). Any
"advance corporation tax's payment that is not used to
satisfy the corporation tax due for the current year may
be carried back two years, or carried forward indefinitely,
for application against corporation tax liability in other
years (ibid.). Instead of applying its "advance corpora-
tion tax" payments to satisfy its own corporation tax
liability, a United Kingdom corporation may "surrender"
that right to one or more of its United Kingdom sub-
sidiaries, for application against the corporation tax lia-
bilities of those subsidiaries (id. at 41a).
Under the Finance Act of 1972, an individual United
Kingdom resident shareholder who receives a dividend
from a United Kingdom corporation is required to in-
clude in his reported income the amount of the dividend
plus the amount of the "advance corporation tax" im-
posed on the corporation with respect to the dividend
(App., infra, 43a). The shareholder is then allowed a
credit against his United Kingdom income tax liability
for the amount of the "advance corporation tax" thus
included in his income (ibid.). If that credit exceeds the
shareholder's income tax liability, he is entitled to a re-
fund of the excess amount (ibid.). The Finance Act of
1972 seeks in this manner to reduce (but not eliminate)
the traditional "double tax" on corporate income that
arises when shareholders are taxed on dividends paid out
of previously taxed corporate income (id. at 5a).
When the Finance Act of 1972 was originally enacted,
only the shareholders of United Kingdom corporations
who were United Kingdom residents were entitled to a
credit against United Kingdom taxes for the "advance
corporation tax" paid in connection with the dividends
distributed to them. Non-resident shareholders were not
provided such a credit (App., infra, 44a).
2. Following enactment of the Finance Act of 1972,
the United States and the United Kingdom negotiated a
new income tax treaty. As is relevant to this case, the

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 4

new treaty addressed two principal concerns:  (i)
whether the United States would recognize the "advance
corporation tax" as a foreign "income" tax for the pur-
pose of allowing a tax credit under 26 U.S.C. 902 to a
United States corporation whose United Kingdom sub-
sidiary has paid the advance tax; 3. and (ii) the extent to
which United States shareholders of United Kingdom
corporations are to obtain a benefit parallel to the tax
credit that the United Kingdom provides its own resi-
dents with respect to dividends upon which the "advance
corporation tax" has been paid.
The new income tax treaty between the United States
and the United Kingdom was signed on December 31,
1975. The Treaty entered into force on April 25, 1980.
31 U.S.T. at 5668; see note 1, supra. Two articles of
the Treaty are relevant to this case.
First, under Article 10(2) (a) ( i), when a United
Kingdom subsidiary pays a dividend to its United States
corporate parent, the United Kingdom government is to
pay the United States parent an amount equal to one-
half of the tax credit (the amount of the "advance cor-
poration tax") to which an individual resident of the
United Kingdom would have been entitled had he re-
ceived the same dividend (App., in infra, 45a-46a). 4.

___________________(footnotes)

3 Under 26 U.S.C. 902, a United States corporation is granted a
tax credit against its United States income tax liability for the
appropriate share of the "foreign income taxes" paid by its sub-
sidiaries with respect to the income distributed as dividends by
those subsidiaries to the United Strike corporation, See United
States v. Goodyear Tire & Rubber Co., 493 U.S. 132, 134-135
(1989). Prior to the adoption of the new tax treaty between the
United States and the United Kingdom, the Treasury had expressed
doubt as to whether the "advance corporation tax" imposed on
dividends by the Finance Act of 1972 would qualify as an "income"
tax for the purpose of 26 U.S.C. 902 (App., infra, 14a).
4 The obligation of the United Kingdom to make payments under
Article 10(2) (a) (i) became effective only for taxable years begin-
ning after April 6, 1975 (App., infra, 48a). The United Kingdom
was therefore not obligated to, and did not, make payments under

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5

Second, Article 23( 1) of the Treaty provides that, "[i]n
accordance with the provisions and subject to the limita-
tions of the law of the United States," the United States
will allow a foreign tax credit for "the appropriate
amount" of income taxes paid to the United Kingdom
by a United Kingdom corporation with respect to the
income from which that corporation pays dividends to a
United States shareholder (App., infra 46a-47a). See
note 3, supra. Under Articles 23(1) (a) and 23(1) (c),
respectively, the United Kingdom "corporation tax" and
"advance corporation tax" (to the extent that the latter
is not refunded by the United Kingdom to the United
States  corporate  shareholder pursuant to Article.
10(2) (a) ) are deemed "income" taxes for this purpose
(App., infra, 46a-48a).
In a Technical Explanation submitted to the Senate in
connection with hearings on ratification of the Treaty
( 1980-1 C.B. 455, 472; App., infra, 81a-82a), and in a
revenue procedure issued on the date that the Treaty
went into force (Rev. Proc. 80-18, 1980-1 C.B. 623,
625; App., infra, 82a-83a), the Treasury Department ex-
plained that (i) if the "advance corporation tax" pay-
ment is not applied against the "corporation tax" liability
in the year the "advance" tax is paid, a foreign tax credit
will be allowed provisionally for the "advance" tax paid
in that year but (ii) when that payment is subsequently
applied against "corporation tax" (or is "surrendered" to
a subsidiary for application against "corporation tax") in
a different year, the initial credit will be reversed. under

___________________(footnotes)

Article 10 (2) (a) (i) with regard to the dividends and related
"advance corporation tax" payments at issue in this case, which
were made in 1974 (App., infra, 48a).
A payment by the United Kingdom government to the United
States corporate shareholder of one-half of the credit made avail-
able to the United Kingdom resident shareholder was viewed as suffi-
cient to place United States investors on a par with United Kingdom
resident shareholders. Statement of Ass't Sec'y Woodworth, 1980-1
C.B. 433, 436 (July 19, 1977).

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 6

26 U.S.C. 905(c) and a permanent credit will be allow-
able instead in the year that the offset is actually made. 5.
3. In 1974, Rank Xerox, Ltd. (RXL), respondent's
United Kingdom subsidiary, paid respondent a dividend
of L 9.2 million and paid an "advance corporation tax"
of L 3.9 million on that dividend. RXL applied 26.5
percent of that "advance corporation tax" payment
toward its "corporation tax" liability for 1974. RX-
"surrendered" the right to set off the remaining 73.5 per-

___________________(footnotes)

5 When a United Kingdom subsidiary pays a dividend to its
United States parent and pays the "advance corporation tax" to
the United Kingdom government on that dividend, the United
States parent is entitled to a "foreign income tax" credit-to the
extent permitted under United States law-by virtue of Article
23 (1) (c) of the Treaty (App., infra, 80a-81a). If the United
Kingdom subsidiary makes an advance tax payment in one year
but applies that payment to satisfy its corporation tax for a
subsequent year, that deferred application of the advance payment
constitutes an "adjustment" or "refund" of the tax for the year
paid. In that situation, the provisional credit for the year that
the "advance corporation tax" was paid is reversed under the
applicable provisions of United States law (26 U.S.C. 905 (c)), and
a permanent credit is then allowable for the year in which the
"advance corporation tax" is actually applied against the "corpora-
tion tax" liability of the corporation (App., infra, 55a). This
conclusion follows from 26 U.S.C. 905 (c), which provides that
"[i]f accrued taxes when paid differ from the amounts claimed
as credits by the taxpayer, or if any tax paid is refunded in whole
or in part, the * * * Secretary * * * shall redetermine the amount
of the tax for the year or years affected." See also pages 17-21,
infra.
Similarly, if the United Kingdom subsidiary surrenders its
"advance corporation tax" to a second-tier subsidiary, then the
provisional credit allowed to the corporation that paid the advance
tax is reversed and the advance tax is allowable as a credit in the
year it is applied against the "corporation tax" liability of the
second-tier subsidiary. In that situation, under 26 U.S.C. 902(b),
the foreign tax credit flows through to the United States parent
only if and when the second-tier subsidiary pays a dividend to its
United Kingdom parent out of the profits to which the advance
tax payment was applied and the first-tier subsidiary, in turn, pays
a dividend to the United States parent. See 26 U.S.C. 902 (a) and
(b) (1) .

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7

cent of its "advance" tax payment to three of its United
Kingdom subsidiaries, for use against their "corporation
tax" liabilities in other years. Under Article 23(1)(c)
of the Treaty, respondent claimed a foreign tax credit for
1974 for the entire L 3.9 million of "advance corpora-
tion tax" that RXL paid to the United Kingdom in that
year. 6. Relying on the Technical Explanation of the Treaty,
the implementing revenue procedure (Rev. Proc. 80-18)
and 26 U.S.C. 905(c), the United States took the posi-
tion that respondent was not entitled to a foreign tax
credit in 1974 for the portion of the "advance corpora-
tion tax" that RXL surrendered to its subsidiaries. See
note 5, supra. When the government did not grant re-
spondent's refund claim for 1974, respondent commenced
this refund suit in the Claims Court.
4. The Claims Court agreed with the government's
interpretation of the Treaty. The court concluded that
the Treasury's Technical Explanation and the implement-
ing revenue procedure were consistent with the language
of the Treaty and that "the meaning attributed to treaty
provisions by the Government agencies charged with
their negotiation and enforcement is entitled to great
weight" ( App., infra, 55a-56a, quoting Sumitomo Shoji
America, Inc. v. Avagliano, 457 U.S. 176, 184 (1982)).
The Claims Court also relied upon the Competent
Authority Agreement made between the governments of
the United States and the United Kingdom in 1986,
under which the Treaty parties agreed that "the timing
of the credit is to be determined as a matter of U.S.
law" (App., infra, 61a). 7.  The court stated (id. at 63a):

___________________(footnotes) 
 
6 Although the Treaty did not enter into force until April 25,
1980, Article 23 was made effective retroactively for taxes paid
to the United Kingdom after April 1, 1973 (App., infra, 48a).
7 Article 25(3) of the Treaty provides that "[t] he competent
authorities of the Contracting States shall endeavour to resolve
by mutual agreement any difficulties or doubts arising as to the
interpretation or application of the Convention." 31 U.S.T. 5688.

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8

the agreement of the competent authorities as to the
governance of U.S. law over the timing of the Article
23( 1) (c) credit accords with [the view of the United
States], previously expressed in the Technical Expla-
nation and Rev. Proc. 80-18, that the credit must
ultimately be applied in the year the underlying
["advance corporation tax"] is used to offset U.K.
corporation tax liability.
The court rejected respondent's assertion that these
statements of the Treaty parties have no bearing on the
proper interpretation of the Treaty (App., infra, 64a-
65a):
  The court * * * does not share plaintiffs dim view
of these documents. As previously discussed, Trea-
sury's Technical Explanation was presented to the
U.S. Senate as an aid to its understanding of the
treaty articles, and the Senate's intent in ratifying the
[Treaty] was clearly shaped thereby. In view of the
United Kingdom's subsequent ratification of the
[Treaty] without reservation, and with full knowledge
of the Technical Explanation underlying the U.S.
ratification, it is difficult to sustain plaintiffs asser-
tion that the Technical Explanation did not conform
with the terms of the treaty. Moreover, plaintiff can
hardly minimize the importance of the Competent
Authority Agreement as an expression of the intent
of the treaty parties, since Article 25(3) of the
[Treaty] specifically empowered the competent au-
thorities "to resolve . . . any difficulties arising as to
the interpretation or application of the Convent ion."
Courts have traditionally been reluctant to impinge
on the judgments of competent authorities charged
by the treaty states with responsibilities of interpreta-
tion and implementation. Sumitomo Shoji American,
Inc. v. Avagliano, 457 U.S. [at 185].
The court found nothing in the language of the Treaty
or in its history to suggest that a result different from that
described in the Technical Explanation and in the imple-

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  9

menting revenue procedure was intended by the parties to
the Treaty (App., infra, 65a).
The court also observed that the Treasury's interpreta-
tion addresses the potential anomaly-and double tax
credit-that could arise from an unthinking application
of the Treaty language ( App., infra, 67a). The court
noted that, because Articles 23( 1 ) (a) and 23(1) (c)
treat both the "corporation tax" and the "advance cor-
poration tax" as "income" taxes for purposes of the for-
eign tax credit under United States law (see note 3, supra,
and note 12, infra), the Treaty language necessarily
should be understood to permit the credit only when the
latter is applied toward payment of the former. As the
court observed, a double credit for the same economic
tax would result if, as respondent contends, the "advance
corporation tax" and the "corporation tax" were viewed
simply as separate, independent events (App., infra, 67a).
The court emphasized that such a double credit for the
same economic tax would conflict with "the body of U.S.
law holding that double crediting is to be avoided unless
expressly anticipated or provided for by Congress" (ibid.,
citing, e.g., Cleveland Electric Illuminating Co. V. United
States, 6 Cl. Ct. 711,715 (1984)).
The Claims Court noted that respondent had intro-
duced evidence at trial from two former government offi-
cials who expressed "their views as to the intent of the
U.S. and U.K. treaty negotiators in 1975" (App., infra,
70a). The court stated that such evidence was entitled
"to little evidentiary weight in this action" (id. at 71a),
for the "statements of former U.S. government agents in-
volved in the negotiations * * * cannot * * * take prece-
dence over the Technical Explanation and other official
pronouncements of the United States and the United
Kingdom as evidence of the intent of the treaty parties"
(ibid.). 8.

___________________(footnotes)

8 The court similarly concluded that internal agency memoranda
relating to the preparation of the Technical Explanation and Rev.

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10

5. The Claims Court entered its decision following the
conclusion of the trial in this case in 1987. Other issues
remained for disposition, however, and the court did not
enter its final judgment until 1992. When the final judg-
ment was entered, Xerox moved for reconsideration and
for a new trial. In support of its motion, respondent sub-
mitted four new affidavits from former officials of the
United States and the United Kingdom. In respondent's
view, these affidavits supported the following propositions:
(i) contrary to the court's conclusion, the United King-
dom was not aware of the Technical Explanation at the
time the Treat y was ratified and (ii) the United States
had "misrepresented" the truth in contending to the
contrary.
In response to this motion, the United States stated
that the unexamined affidavits of these former officials,
submitted five years after the conclusion of the trial, were
entitled to no weight. The government pointed out that
the record developed at trial included (i) the contempo-
raneous transcripts of the Senate hearings, at which rep-
resentatives of the Joint Committee on Taxation stated
that "[i]t is our understanding that the basic treatment
provided in the technical explanation was specifically part
of the negotiated agreement with the United Kingdom"
(Tax Treaties With the United Kingdom, the Republic of
Korea, and the Republic of the Phillipines: Hearings Be-
fore the Senate Comm. on Foreign Relations, 95th Cong.,
1st Sess. 50 ( 1977)) and (ii) other contemporaneous
public records indicating the substantial degree of com-
munication between the two governments concerning the
meaning and application of the Treaty (including, of

___________________(footnotes)

Proc. 80-18 were of little weight. The court explained that such
internal memoranda can "not be accorded greater weight than the
official U.S. government pronouncements which were issued there-
after" (App., infra, 71a).

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 11

course, the Competent Authority Agreement on which the
Claims Court had relied at trial ). 9.
The Claims Court denied respondent's motion. The
court stated that the evidence belatedly offered by re-
spondent provides "no grounds upon which to grant the
motion" and that the "court stands by its Opinion issued
over 4 years ago" (App., infra, 73a-74a).
6. The court of appeals reversed (App., infra, 1a-
32a). The court stated that the "plain meaning of the
Treaty" requires that a credit be given contemporaneously
with the payment of the "advance corporation tax" be-
cause, in Article 23(1) (c) of the Treaty, the United
States undertook to treat the "advance corporation tax"
as a separate foreign "income" tax for purposes of United
States law (id. at 12a, 31 a), For that reason, the court
said, the "advance corporation tax" is creditable in the
year paid, and the subsequent application of the advance
tax to the "corporation tax" has no effect on the proper
timing of the tax credit (id. at 31a-32a).
The court acknowledged that the Treaty specifies that
allowance of the credit for foreign taxes is to be "[i]n
accordance with the provisions and subject to the limita-
tions of the law of the United States" (App., infra, 8a).
The court noted, however, that the Treaty does not ex-
pressly specify that there is to be an adjustment of the
United States tax credit to the year that the advance tax
is actually applied against the "corporation tax" obliga-
tion of the United Kingdom corporation (id. at 12a).
The court stated that the official interpretation of the
Treasury set forth in the Technical Explanation and the

___________________(footnotes)

9 In response to the claim of "misrepresentation, " the government
also noted that respondent had adduced evidence at trial showing
that representatives of the United Kingdom and the United States
had communicated concerning the provisions of the Technical
Explanation before the Treaty was ratified by either party. See
App., infra, 57a.

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12

implementing revenue procedure thus lacks direct support
in the language of the Treaty (id. at 20a, 22a).
Relying extensively on the post-trial affidavits submitted
by respondent, the court further stated that the Treaty
negotiators had not contemplated that the credit for pay-
ments of "advance corporation tax" would be aligned
with the period in which the advance tax was applied
against the "corporation tax" of the United Kingdom cor-
poration. 10.  Based on these same post-trial affidavits, the
court further stated that the United Kingdom had not
acquiesced in the views of the Treaty set forth in the
Technical Explanation and the implementing revenue pro-

___________________(footnotes)

10 The court pointed to the affidavit of a former United States
official who was involved in the Treaty negotiations for the propo-
sition that aligning the credit for the "advance corporation tax"
with the year in which that advance tax is applied against the
"corporation tax" liability of the United Kingdom corporation "has
never previously been set forth by the United States, the United
Kingdom, or anyone else" (App., infra, 15a). That statement is
difficult to reconcile with the fact that (i) the Technical Explana-
tion prepared by the Treasury Department in 1977 and Rev. Proc.
80-18 prepared by the IRS in 1980 contained precisely that inter-
pretation of the Treaty and (ii) the Technical Explanation was
submitted to the Senate in connection with its treaty ratification
hearings and the Revenue Procedure was submitted to the United
Kingdom in connection with the Competent Authority Agreement
on which the Claims Court relied (App., infra, 55a-58a). It is
similarly difficult to understand the post-trial affidavit of Mr.
Oosterhuis, formerly of the Joint Committee on Taxation, who
averred that "the Treasury Department never presented to the
Senate in its ratification procedure any explanation that the
["advance corporation tax"] is * * * an interim credit" (id. at
15a). Since the Technical Explanation was submitted by the
Treasury "in connection with the Senate ratification proceedings"
(id. at 17a), and since that document explained that the "advance
corporation tax" is to be attributed to the year that it is applied
to satisfy the "corporation tax" liability of the United Kingdom
corporation (id. at 18a), the post-trial affidavit of Mr. Oosterhuis
conflicts with the historical, public record.

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13

cedure. 11.  Noting that "[a] treaty must be construed in
accordance with the intent of both signatories," the court
stated that the post-trial affidavits reflect that the United
Kingdom "did not accept, or even know of, the position
taken in the Technical Explanation" (App., infra, 20a).
Referring to the post-trial affidavits in describing what the
court stated was an "extremely one-sided record," the
court concluded that there was no "mutual assent by the
signatories to the position taken by the Treasury" (id.
at 21a).
The court of appeals dismissed the Competent Author-
ity Agreement on which the Claims Court relied. The
court acknowledged that this agreement was an authori-
tative elaboration of the Treaty (see note 7, sup-a). The
court also acknowledged that the Competent Authority
Agreement, which stipulates that "the timing of the credit
is to be determined as a matter of U.S. law" ( App., infra,
25a), was reached in response to the very questions raised
in this litigation (id. at 24a). The court stated, however,
that the Competent Authority Agreement is irrelevant to
this case because the implementing revenue procedure and
the Technical Explanation do not represent a "law" of
the United States (id. at 25a-26a).
Turning finally to the applicable provisions of the In-
ternal Revenue Code, the court ruled that Section 905 (c)
of the Code has no application to the timing of the tax
credit involved in this case. Even though that Section

___________________(footnotes)

11 The unexamined affidavits of two former members of the
United Kingdom parliament were relied on by the court of appeals
as demonstrating a lack of awareness by the United Kingdom gov-
ernment as a whole of the interpretation of the Treaty evidenced in
the Technical Explanation and the implementing revenue procedure.
Those former officers, however, were not authorized to, and did not
purport to, speak on behalf of the United Kingdom government.
Moreover, their proffered testimony, like that of the other post-
trial affiants, was not part of the trial record and was not subject
to examination by the parties.

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14

authorizes a "recalculation of the tax credit if the amount
of foreign tax is refunded or adjusted after the credit is
taken" (App., infra, 30a), the court stated that the pay-
ment of "advance corporation tax" is permanently fixed
"when the dividends were paid" and that the subsequent
application of that advance payment to the "corporation
tax" owed in a different year does not represent a "re-
fund" or "adjustment" of the tax (id. at 31a). In the
court's view, "no adjustment of the * * * United States
tax credit is [therefore] warranted" under Section 905(c)
(App., infra, 3la).

  REASONS FOR GRANTING THE PETITION

This case presents two related questions of substantial
administrative importance. The first concerns the proper
interpretation of the substantive provisions of the income
tax treaty of the United States and the United Kingdom.
In particular, it concerns whether respondent is entitled
to a tax credit under United States law for the "advance
corporation tax" paid by its United Kingdom subsidiary
and then transferred (or "surrendered" ) by that sub-
sidiary to its second-tier United Kingdom subsidiaries for
subsequent application against the corporation tax owed
by those subsidiaries. For the reasons that we will de-
scribe, the correct disposition of this substantive question
has a significant impact on the public fist.
The second, related question presented in this case
concerns the proper evidentiary procedures to be followed
in determining the intent and course of dealings of the
Treaty signatories. The approach followed by the court
of appeals-permitting post-trial affidavits of former gov-
ernment officials to be considered as part of the evidentiary
"record" for this purpose-finds no sanction in the deci-
sions of this Court and is at variance with standard no-
tions of proof. In addition to the fact that such unexam-
ined "evidence" is not admissible for this purpose, its use

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15

would interfere with the proper functioning of treaty rela-
tions and would be an irritant in the administration of
treaty affairs.
The Federal Circuit's decision was issued by a court of
nationwide jurisdiction. Since all taxpayers are entitled
to pay a challenged tax and sue for a refund within the
Federal Circuit, and since the corporate taxpayers that are
affected by the decision in this case are professionally
counseled, it is unlikely that other courts of appeals will
have an opportunity to review this same issue. In similar
circumstances, this Court has recognized the need for
plenary review of Federal Circuit decisions that present
isues of substantial fiscal and administrative importance.
See, e.g., United States V. Hill, 113 S. Ct. 941, 945
(1993): United States v. Goodyear Tire & Rubber Co.,
493 U.S. 132, 138 (1989); United States v. American
Bar Endowment, 477 U.S. 105, 109 ( 1986). Such re-
view is appropriate in this case.
1. The court of appeals erroneously held that Article
23(1)(c) of the Treaty allows a foreign tax credit under
United States law for the "advance corporation tax" paid
by a United Kingdom subsidiary of a United States cor-
poration without regard to when (or whether) that pay-
ment is in fact applied to the "corporation tax" liability
of the subsidiary.
a. Articles 23(1) (a) and 23(1 ) (c) of the Treaty
contain a potential anomaly. They provide that both the
"corporation tax" and the "advance corporation tax" are
to be recognized as a foreign "income" tax for purposes of
the foreign tax credit provisions of United States law. l2.

___________________(footnotes)

12 Article 23(1) (a) of the Treaty specifies that the taxes listed
in Articles 2 (2) (b) and 2 (3) of the Treaty-which include the
"corporation tax''-''shall be considered to be income taxes" (App.,
infra, 79a, 81a).
Article 23 (1) (c) provides that the portion of the United Kingdom
shareholder credit that is not refunded to the United States cor-
porate shareholder pursuant to Article 10 (2) (a) shall be deemed

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16

Under United Kingdom law, however, the "advance cor-
poration tax" may be applied to satisfy the "corporation
tax'' liability. Unless the Treaty is to be assumed to have
intended a double credit for the same economic tax-an
assumption that no one contends should be made-then
some mechanism must exist to determine whether the
payment of the "advance" tax or of the "corporation tax"
itself is controlling for purposes of the United States
foreign tax credit. 13.
The opening paragraph of Article 23(1) of the Treaty
indicates that the determination of which tax event is con-
trolling for this purpose is to be made "[i]n accordance
with the provisions * * * of the law of the United States"
(App., infra, 80a). The Treaty signatories confirmed
that conclusion through adoption of the Competent Au-
thority Agreement in 1986. That agreement, which was
adopted in response to the issues framed by this litigation,
specifies that "Article 23( 1 ) of the [Treaty] was not in-
tended to provide two U.S. foreign tax credits for a single
payment of ['advance corporation tax'] to the United
Kingdom" and that "the timing of the credit is to be de-
termined as a matter of U.S. law" (id. at 61a). As the
Claims Court correctly stated, courts should defer to the
bilateral understanding reached by the "competent au-
thorities charged by the treaty states with responsibilities
of interpretation and implementation" (id. at 65a, citing

___________________(footnotes)

an income tax imposed on the United Kingdom corporation paying
the dividend (App., infra, 81a). The United Kingdom shareholder
credit is equal to the amount of "advance corporation tax" imposed
on the United Kingdom corporation paying the dividend (id.
at 43a).
13 In concluding that the "advance corporation tax" must be
treated as a "separate" tax from the "corporation tax" ( App.,
infra, 31a), the court of appeals discounted the anomaly created
by its interpretation of the Treaty language simply by stating that
respondent had not "received" or "claim [cd]" that it was entitled
to a double credit (id. at 26a).

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17

Sumitomo Shoji America, Inc. V. Avagliano, 457 U.S.
176, 185 (1982) ).
b. It is thus to United States law, not to the Treaty
itself, that we are to look to determine the proper timing
of this tax credit.
Section 901 of the Internal Revenue Code allows a
United States corporation a credit for specified taxes that
it has paid, or is deemed to have paid, to a foreign gov-
ernment. 26 U.S.C. 901 (a). Under Section 902(a), a
United States parent that receives a dividend from its
foreign subsidiary is "deemed" to have paid a portion of
the "foreign income taxes" that the subsidiary paid on
the profits from which the dividend was distributed. 26
U.S.C. 902(a). See United States v. Goodyear Tire &
Rubber Co., 493 U.S. at 135. 14.  Under Section 905(c),
when a "foreign income tax" paid by the foreign sub-
sidiary results in a foreign tax credit for its United States
parent under Section 902, and the foreign tax of the
subsidiary is thereafter adjusted or refunded, the United
States income tax liability of the parent is to be redeter-
mined. 26 U.S.C. 905(c). Section 905(c) thus provides
a mechanism for final adjustment of the foreign tax credit
at the time that the taxpayer ascertains and satisfies the
exact amount of its foreign tax liability. See Pacific
Metals Corp. v. Commissioner, 1 T.C. 1028, 1029
( 1943) (interpreting Section 131 (c) of the Internal
Revenue Code of 1939, the predecessor to Section
905(C) ).
In the Technical Explanation submitted to the Senate
in connection with the Treaty ratification hearings, and
in the implementing Rev. Proc. 80-18 issued on the date

___________________(footnotes)

14 The foreign tax credit provisions seek to eliminate a double
taxation of foreign source income by the foreign country (on
the income of the foreign subsidiary) and the United States (on
the distribution of that income as a dividend). See B. Bittker &
J. Eustice, Federal Income Taxation of Corporations and Share-
holders Par. 17.11 (5th ed. 1987).

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18

that the Treaty went into force, the Treasury set forth
its interpretation of the proper application of Section
905 (c) in this unique, foreign tax setting. The Technical
Explanation specified that a payment of "advance cor-
poration tax" that is not contemporaneously applied to
satisfy the "corporation tax " "will generally be attributed
to the accumulated profits of the year of distribution."
1980-1 C. El. 455, 472-473. A United States foreign tax
credit would therefore be allowed initially in the year
the "advance corporation tax" is paid. But, if that pay-
ment is later applied to satisfy a "corporation tax" due
in a different year, it "will be attributed to the earnings
of the year in which it offsets such tax and treated as if
it were regular corporate tax." 15.  Id. at 472. When the
"advance" tax is thus used to satisfy the "corporation
tax" in a different year (iii. at 473):
the offset will be viewed as a refund of the ["ad-
vance" tax] initially allowed as a credit and as a
  tax paid in respect of the year for which the ["ad-
  vance" tax] is applied as an offset. Consequently,
  a reduction in the foreign tax credit for the year

___________________(footnotes)

15 The Technical Explanation in this manner sought to imple-
ment the "matching principle" of the United States foreign tax
credit system in the context where an "advance corporation tax"
and a "corporation tax" are separately assessed. A fundamental
principle of the United States foreign tax credit is that foreign
income taxes are to be associated with the earnings on which they
are imposed. "It is of critical importance to determine the 'accumu-
lated profits' of each year, so that they can be matched against
the foreign taxes paid for that year, and so that when dividends
are paid `out of' or `from' such `accumulated profits,' a foreign tax
credit may properly be computed as a portion (in accordance with
the statutory formula) of the foreign taxes paid in respect of the
`accumulated profits' of that year." H.H. Robertson Co. v. Com-
missioner, 59 T.C. 53, 79 (1972), aff'd per curiam, 500 F.2d 1399
(3d Cir. 1974). See United States v. Goodyear `Tire & Rubber Co.,
493 U.S. at 138-139. The aim is to ensure that a foreign tax
credit is allowed only for foreign income taxes paid on accumulated
profits that are distributed to a United States taxpayer.

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19

from which the ["advance" tax] is carried must be
made in accordance with section 905(c) of the
Code.
Rev. Proc. 80-18 reached the same conclusion, and speci-
fied the same treatment, when the "advance" tax is trans-
ferred to a second-tier foreign subsidiary for application
against the "corporation tax" liability of that subsidiary.
1980-1 C.B. at 625. In these published interpretations,
the Treasury thus resolved the potential "double credit"
anomaly created by Articles 23(1) (a) and 23(1) (c) by
specifying that the foreign tax credit is finally allowable
in the year that the "advance" tax is in fact applied to
satisfy the "corporation tax" liability.
The court of appeals rejected the interpretation set
forth in the Technical Explanation, stating that it de-
feated the Treaty's "stated purpose of avoiding double
taxation of the same profits" (App., infra, 20a). But
the Technical Explanation does not result in double taxa-
tion. If "advance corporation tax" is not used to offset
"corporation tax" in the current year, it effectively be-
comes an increased income tax on the profits from which
the dividend is distributed. The Technical Explanation
allows a foreign tax credit for the "advance" tax in that
year, thereby ensuring that those profits are not taxed
twice. But, when the "advance" tax payment is subse-
quently used to satisfy "corporation tax" due in another
year, the Technical Explanation treats the "advance" tax
as an income tax payment on the profits only of that
other year (as specified under United Kingdom law by
Section 92(6) of the Finance Act of 1972). It thereby
ensures that the profits of that other year are not taxed
twice. 16.

___________________(footnotes)

16 The suggestion of the court of appeals that the Senate "criti-
cized" the Technical Explanation (App., infra, 18a) is not correct.
The Senate Committee on Foreign Relations issued a report in
connection with its ratification hearings that explicitly stated its
intention to defer to the Treasury's Technical Explanation in con-

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20

The Treasury's interpretation of the proper interplay
between the provisions of this Treaty and of Section
905(c) of the, Internal Revenue Code is entitled to sub-
stantial deference.  The correct application of these
unique United Kingdom tax concepts within the general
terminology of the Internal Revenue Code provisions that
provide a tax credit for "foreign income taxes" (26
U.S.C. 902(a)) involves precisely the type of interpretive
issue for which deference to the Treasury is most appro-
priate. 17.  The agency's interpretation, set forth in public

___________________(footnotes)

nection with the precise issue raised in this case (S. Exec. Rep.
NO. 18, 95th Cong., 2d Sess. 36-37 (1978) (emphasis added)):
  The Treasury's technical explanation also sets forth a com-
plex set of rules and examples intended to be used for purposes
of determining the earnings to which ["advance corporation
tax"] payments by a U.K. corporation are to be attributed for
purposes of computing the indirect U.S. foreign tax credit.
* * * These rules raise difficult and complex issues. In recom-
mending the ratification of the proposed treaty, the Committee
does not intend that these rules necessarily serve as a model
for future treaties. Further, in recommending the ratification
of the treaty, the Committee does not intend to adopt or reject
the amplifications of the foreign tax credit roles contained in
the Treasury technical explanation. Consequently, Treasury
would not be foreclosed by the ratification of the treaty from
modifying those administrative interpretations in the future
should it deem it advisable to do so.
This passage from the Senate report, on which the court of
appeals relied (App., infra, 19a), suggests only that the Senate
did not intend to ossify the Treasury position by appearing to
adopt it as substantive law. The Senate expressly did not "reject
the amplifications of the foreign tax credit rules contained in the
Treasury technical explanation."
17 In the courts below, respondent claimed that the Treasury's
interpretation was precluded by Biddle V. Commissioner, 302 US.
573 (1938), and Helvering V. Queen Insurance Co., 115 F.2d 341
(2d Cir. 1940), cert. denied, 312 U.S. 706 (1941). But Biddle
concerned whether the taxpayer had himself paid a foreign income
tax on the earnings he received (302 U.S. at 583) and Queen
Insurance concerned whether a non-income tax that is used to
satisfy an "income" tax thereby becomes a creditable "income"

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21

rulings issued contemporaneously with the signing and
ratification of the Treaty, should not have been rejected
by the court of appeals (National Muffler Dealers Ass'n
V. United States, 440 U.S. 472,477 ( 1979)):
"Congress has delegated to the * * * Commissioner
[of Internal Revenue], not to the courts, the task of
prescribing `all needful rules and regulations for the
enforcement' of the Internal Revenue Code. 26
U.S.C.  7805 (a)." United States V. Correll, 389
U.S. at 307. That delegation helps ensure that in
"this area of limitless factual variations," ibid., like
cases will be treated alike. It also helps guarantee
that the rules will be written by "masters of the sub-
ject," United States V. Moore, 95 U.S. 760, 763
(1878), who will be responsible for putting the rules
into effect.
c. The decision of the court of appeals threatens seri-
ous adverse consequences to the administration of the
tax laws. The court discarded the carefully structured
rules that the Treasury devised to integrate the Code and
the Treaty and replaced those rules with a simplistic,
"plain meaning" interpretation that fails to address-much
less to resolve-the inherent "double credit" anomaly
that the Treaty language contains. See note 13, supra.
The decision of the court of appeals is certain to have
a significant effect on the public fist. For 1990, the most
recent year for which statistics are available, United
                                                     
___________________(footnotes)

tax under the Code (115 F.2d at 342). The present case, by con-
trast, involves application of the foreign income tax credit provi-
sions of the Internal Revenue Code in a setting that, under the
terms of the Treaty, provides two creditable foreign income taxes
with respect to the same stream of earnings. Because foreign law
permits the payment of one of those taxes to be applied toward
satisfaction of the other, the Technical Explanation and the imple-
menting revenue procedure address the problem of which payment
controls the proper timing of the credit. Neither Biddle nor Queens
Insurance governs, or provides instruction for resolution of, the
interpretive issues addressed in this case.

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22

States corporations reported more foreign-source income
from the United Kingdom than from any other country. 18.
The foreign tax credits claimed by United States tax-
payers with respect to the "foreign income taxes" paid
by their United Kingdom subsidiaries exceeded $2.24
billion. 19.  Even a modest increase or realignment of for-
eign tax credits available to these United States tax-
paiyers could yield huge revenue consequences. 20.  More-
over, the statute of limitations for amended returns with
respect to foreign tax credit claims is ten years from the
date that the taxpayer's return was filed. 26 U.S.C.
6511 (d) (3). The decision in this case thus threatens a
major impact on revenue not only for the future, but also
for a significant period into the past.
The revenue impact of the decision in this case is
compounded by the fact that any taxpayer is free to pay
the contested tax and sue for a refund within the Federal
Circuit. Taxpayers obviously will find it in their interest
to compute their foreign tax credits for "advance corpora-
tion tax" under both the approach adopted in the
Technical Explanation and the approach adopted by the
Federal Circuit and then obtain the more favorable tax
treatment simply by electing their preferred judicial
or administrative forum. Evenhanded enforcement of
the foreign tax credit provisions would thus be fully
compromised.
2. It is well established that "the meaning attributed
to treaty provisions by the Government agencies charged
with their negotiation and enforcement is entitled to great
weight ." United States v. Stuart, 489 U.S. 353, 369

___________________(footnotes)

18 Internal Revenue Service, Statistics of Income Bulletin 11
(Winter 1994 -1995).
19 Internal Revenue Service, Statistics of Income Bulletin 38
(Winter 1994 - 1995). 
20 For respondent alone, millions of dollars of tax savings are
involved. See App., infra, 36a.

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23

( 1989), quoting Sumitomo Shoji America, Inc. V.
Avagliano, 457 U.S. at 184-185. See also Kolovrat V.
Oregon, 366 U.S. 187, 194 ( 1961). Instead of accept-
ing the Treasury's interpretation of the Treaty, as con-
firmed by the Competent Authority Agreement ( App.,
infra, 23a-26a), the court of appeals relied heavily upon
post-trial affidavits submitted (i) by former United
States and United Kingdom officials who stated that
Article 23( 1 ) was not described during negotiations as
providing an "interim" credit for "advance corporation
tax" (App., infra, 14a-16a; see note 10, supra ) and (ii)
by former United Kingdom officials who stated that they
were unaware of the Treasury's Technical Explanation
and did not acquiesce in it ( App., infra, 20a-21a).
The court of appeals erred in extensively quoting
and relying on those unexamined post-trial affidavits in
evaluating the intent and course of dealing of the Treaty
parties. The court further erred in stating that these
affidavits form part of the evidentiary "record" of this
case (App., infra, 2 la).
a. Even if these affidavits were a valid part of the
evidentiary record of this case, they would not alter the
conclusion that the timing of the credit is not resolved
under the Treaty but is to be resolved as a matter of
United States law. Under the Treaty, the United States
agreed that the "corporation tax" and the "advance cor-
poration tax" represented a "foreign income tax" for the
purposes of the foreign tax credit available under United
States law (26 U.S.C. 902). The parties explicitly agreed
in Article 23(1) of the Treaty that the credit for those
taxes would be allowed "[i]n accordance with the provi-
sions and subject to the limitations of the law of the
United States" (App., infra, 80a). And, in the Com-
petent Authority Agreement, the Treaty parties agreed
that a double credit was not intended for the two taxes
and that "the timing of the credit [for the "advance cor-

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24

poration tax"] is to be determined as a matter of U.S.
law" (id. at 25a).21
When the question of the timing of the tax credit was
thus explicitly addressed by the Treaty parties, they
agreed that United States law, rather than the Treaty
itself, is controlling. This rational interpretation of the
Treaty by the competent authorities is "entitled to great
weight." Sumitomo Shoji America, Inc. V. Avagliano,
457 U.S. at 185. The court of appeals should have
deferred to that interpretation. Ibid. See also Kolovrat
v. Oregon, 366 U.S. at 194; Factor V. Laubenheimer,
290 U.S. 276, 298 ( 1933); Charlton V. Kelly, 229 U.S.
447, 473 ( 1913); Whitney V. Robertson, 124 U.S. 190,
194-195 (1888).
b. Moreover, the court of appeals committed two im-
portant evidentiary errors in treating the unexamined,
post-trial affidavits of former government officials as part
of the "record" of this case.
(i) Even if the testimony of such individuals had
properly been offered at trial, it would have been entitled
to no weight.22 This Court has recognized that the con-
temporaneous records of treaty negotiations and the pub-
lic records of the parties' official course of dealings under
21 The trial record of this case contained additional contem-
poraneous evidence from the public record that indicated that-
long before adoption of the Competent Authority Agreement-the
United Kingdom had notice of the Technical Explanation and made
no objection to it. See note 10, supra. The United Kingdom also
unquestionably had notice of the interpretation set forth in Rev.
Proc. 80-18 before the Competent Authority Agreement was signed
in 1986 (App., infra, 24a).
22 The court of appeals erred in characterizing the two United
Kingdom affiants as "negotiators" (App., infra, 15a). They were
not. Their affidavits show that they were members of Parliament.
Neither affiant states that he was a negotiator or direct partici-
pant in the Treaty negotiations. Nor does either affiant state
that he has authority to speak on behalf of the United Kingdom
government.

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25

a treaty have an appropriate role in ascertaining the
meaning of treaty language. Drafts of the treaty, official
government interpretations of treaty language and com-
petent authority agreements are all relevant, in proper
circumstances, in determining the correct application of
treaty provisions. See, e.g., Air France v. Saks, 470 U.S.
392, 398-405 ( 1985); Factor v. Laubenheimer, 290 U.S.
at 294-295.
But the post-treaty recollections of individual, former
government employees-who are not "competent authori-
ties" to interpret the Treaty-are entitled to no weight.
In an analogous context, this Court has discounted the
relevance of post-enactment testimony of Senators or
Representatives concerning their understanding of legisla-
tive language or history. See, e.g., Weinberger v. Rossi,
456 U.S. 25, 35 ( 1982); United States v. United Mine
Workers, 330 U.S. 258, 281-282 ( 1947). The post-
treaty testimony of former government employees, who
are not speaking as "competent authorities" of the treaty
governments, is similarly entitled to no weight in the
interpretation of treaty provisions. As the Claims Court
correctly stated in this case, the "statements of former
U.S. government agents involved in the negotiations * * *
cannot * * * take precedence over the Technical Ex-
planation and other official pronouncements of the United
States and the United Kingdom as evidence of the intent
of the treaty parties" (App., infra, 71a). It is the
latter, not the former, that this Court has stated is
"entitled to great weight" (Sumitomo Shoji America, Inc.
V. Avagliano, 457 U.S. at 184-185).
(ii) Even if the recollections of former government
agents were thought relevant to questions of treaty inter-
pretation, the court of appeals erred in describing (and
relying upon ) the post-trial affidavits proffered by re-
spondent as part of the evidentiary "record" of this case
(App., infra, 21a). If such statements of personal recol-
lection are relevant in a particular case, their proof
should conform to normal evidentiary requirements. The

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26

unexamined affidavits proffered by respondent, however,
represent classic hearsay that would not have been ad-
missible even if timely offered at trial. See, e.g., Fed.
R. Evid. 802; 5 J. Wigmore, Evidence 1384, at 84
(Chadbourn ed. 1974) ("it is clear that a mere affidavit
-i.e., a statement made upon oath before an officer-
is inadmissible"), The "one-sided record" described by
the court of appeals (App., infra, 21a) truly was "one-
sided"; the Court has long stated that such ex parte affi-
davits are not proper evidence (Walsh v. Rogers, .54 U.S.
(13 How.) 283,287 (1851)): 23
[Testimony thus taken is liable to great abuse. At
best, it is calculated to elicit only such a partial state-
ment of the truth as may have the effect of entire
falsehood. The person who prepares the witness and

___________________(footnotes)

23 Affidavits are generally inadmissible to prove the truth of the
matters asserted therein unless they (i) come within an exception
to the hearsay rule or (ii) are offered in connection with an aspect
of the proceeding for which hearsay may be considered. See 6 J.
Wigmore, supra,  1709-1710; 4 C. Mueller & L. Kirkpatrick,
Federal Evidence  432, at 367 & nn.7-9 (2d ed. 1994). The hear-
say affidavits proffered by respondent, setting forth the individual
recollections of former government agents (see Fed. R. Evid.
801 (d) (2) (D) ), would not come within either the "official record"
or "state paper" exceptions (see Vanadium Corp. v. Fidelity &
Deposit Co., 159 F.2d 105, 109 (2d Cir. 1947)). Nor do they
represent a record maintained in routine course of business (see
Palmer v. Hoffman, 318 U.S. 109, 112 (1943)).
Affidavits may properly be employed in connection with certain
motions, including a new trial motion based upon newly discovered
evidence. See 4 C. Mueller, supra, 432, at 357. When offered for
that purpose, however, the affidavits would he relevant only for
evaluation of the new trial motion and not for evaluation of the
merits of the underlying decision. Respondent initially proffered
the post-trial affidavits in this case in support of its new trial
motion (App., infra, 73a-74a). On appeal, however, respondent
addressed only the merits of the underlying decision and did not
renew its request for a new trial. In reversing the trial court, the
court of appeals erroneously treated these affidavits as if they were
part of the substantive, evidentiary "record" of the case.

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27

examines him can generally have just so much or so
little of the truth, or such aversion of it, as will suit
his case.
The court of appeals further erred in treating affidavits
proffered five years after trial as part of the evidentiary
"record" (App., infra, 21a). It is at trial, not on appeal,
that evidence of individual recollections (if relevant)
is ordinarily tested through methods such as cross-
examination for bias and memory error. The course of
treaty interpretation followed by the court of appeals,
however, relies on affidavits presented after trial from
individuals who have long been removed from the perti-
nent events and whose errors in recollection and inter-
pretation cannot be exposed in examination.24
c. The evidentiary approach of the court of appeals
threatens to create a persistent irritant in treaty adminis-
tration. Instead of observing the appropriate deference
owed to official interpretations of treaty language, the
court of appeals looked to the unexamined recollections of
former government agents concerning the intent and
course of dealing of the treaty parties. The court, in this
fashion, substituted the non-official, personal views of
former officials for the official judgment of those who are
the designated, "competent authorities" to interpret the
Treaty.
The approach followed by the court of appeals would
allow the recollections of individual employees, rather
than the considered, public views of gowernments,to ad-, .

___________________(footnotes)
                        
24 In O'COnnor V. United States, 479 U.S. 27 ( 1986 ), the written,
official views of the "competent authorities" were submitted after
-the conclusion of the trial and while the case was pending on
appeal. The petitioner asserted that the "mutual a.m'cement be-
tween the contracting parties on interpretation cannot be disposi-
tive of third-party rights" and objected to the admissibility of the
diplomatic note. Because the Court sustained "the Government's
position without reference to the note," the Court concluded that
it "need not resolve these disputes." Id. at 33 n.2.

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28

just the affairs of Nations.25 It would also encourage at-
tempts by litigants to introduce such evidence. The poten-
tial mischief that could result from such a personalized
approach to treaty interpretation-and the injury to the
ability of governments to engage in the sensitive process
of bilateral administration of treaty agreements-is
obvious.
The evidentiary approach of the court of appeals
creates uncertainty for the Departments that administer
our Nation's treaty relations by threatening radically to
alter the processes by which the treaties of the United
States are interpreted. Guidance is needed concerning the
extent to which the unofficial recollections of former em-
ployees are relevant and admissible in cases involving
treaty construction. Further review is warranted for this
reason alone, as well as for the reasons described above.

___________________(footnotes)

25 In cases Such as Eastern Airlines, Inc. V. Floyd, 499 U.S. 530
(1991), the Court has looked to the official Minutes and other
components of the "documentary record" of negotiations to deter-
mine the context and meaning of treaty language. See id. at 544,
547. See also Air France v. Saks, 470 U.S. at 402-403. In these
cases, the Court did not rely on the subsequent recollection of
individual involved in the treaty process. No single individual
would possess a comprehensive knowledge of the entire course of
communications between the governments.

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29
    
   CONCLUSION

The petition for a writ of certiorari should be granted..
Respectfully submitted.

DREW S. DAYS, III
Solicitor General

LORETtA C. ARGREtT
Assistant Attorney General

LAWRENCE G. WALLACE
Deputy Solicitor General
Kent L. Jones
Assistant to the Solicitor General

DAVID ENGLISH CARMACK
THOMAS J. CLARK .
Attorneys

JUNE 1995

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APPENDIX A
UNITED STATES COURT OF APPEALS
  FOR THE FEDERAL CIRCUIT

       93-5094

XEROX CORPORATION, PLAINTIFF-APPELLANT

        v.

THE UNITED STATES, DEFENDANT-APPELLEE

     Decided: December 6, 1994

Before RIch, NEWMAN, and PLAGER, Circuit Judges.
NEWMAN, Circuit Judge.
This tax appeal has its origins in the United King-
dom system of corporate and shareholder taxation
that was adopted in the Finance Act of 1972. The
ensuing changes of tax structure in the United King-
dom resulted in renegotiation of the tax treaty be-
tween the United Kingdom and the United States, in
order to obtain for United States shareholders the
avoidance of double taxation on dividends. This ben-
efit had been made available to United Kingdom

 (la)

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 2a 

shareholders through a method of "imputation," en-
acted in the 1972 law.
The issue is whether Xerox Corporation is en-
titled, by virtue of the tax treaty, to an indirect for-
eign tax credit for tax year 1974 for certain Ad-
vance Corporation Tax ("ACT" ) that was paid in
the United Kingdom by its affiliated company Rank
Xerox Ltd. ("RXL"), on dividends that RXL paid
to Xerox Corporation in 1974.
We conclude that the tax treaty and revenue code
allow the tax credit to Xerox for the tax year in
which the ACT was paid or accrued in the United
Kingdom, whether or not the ACT was offset against
mainstream corporation tax in the United Kingdom,
or was otherwise, used or surrendered by RXL in ac-
cordance with United Kingdom law.

       BACKGROUND

Xerox, a New York corporation, owned directly
and indirectly the majority of the voting shares of
RXL, a corporation of the United Kingdom. RXL
had various subsidiary companies in the United King-
dom, including Rank Xerox Management Limited,
Rank Xerox U.K. Limited, and Rank Xerox Ireland
Limited. In 1974, the tax year here at issue, RXL
paid a dividend distribution to Xerox and paid the
requisite ACT in the United Kingdom on the dis-
tribution.
A portion of that ACT was set off in 1974 against
RXL'S mainstream corporation tax in the United
Kingdom, as permitted by British law; the foreign
tax credit for that portion of the 1974 ACT is not
in dispute. However, a portion of the ACT was not
used to offset RXL'S mainstream tax. In 1980 this

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3a

unused ACT was surrendered by RXL to its United
Kingdom subsidiaries, again as permitted by British
law. The United States Internal Revenue Service
("IRS") then withdrew the foreign tax credit for
this portion of the ACT, credit that had been allowed
to Xerox in 1974, and required payment of the cor-
responding income tax on the dividends received by
Xerox in 1974. Xerox paid the tax and brought suit
for refund in the Claims Court. Recovery was de-
nied. Xerox Corp. v. United States, 14 Cl. Ct. 455
(1988).1 Final Judgment was entered on Nov. 5,
1992. Xerox states that it has been allowed no for-
eign tax credit for this ACT, and that the same
profits have thereby been taxed twice.
A. The United Kingdom Finance Act of 1972
The system of corporate taxation that was insti-
tuted by the United Kingdom Finance Act of 1972
was designed, inter alia, to eliminate double taxation
of the same profits, at both the corporate and share-
holder levels. This was achieved by "imputation" to
resident shareholders of the tax paid by the corpora-
tion on distributions to the shareholders. In accord-
ance with the Finance Act of 1972, a United King-
dom corporation must pay 1) mainstream corpora-
tion tax, which is a tax on corporate income, and
2) advance corporation tax (ACT), a tax on any
qualifying distribution to shareholders. Section 85
of the Finance Act of 1972 provides that ACT pay-
ments can be used by a United Kingdom corpora-
tion to offset its mainstream corporation tax (the
"Section 85 offset"). However, the ACT must be

___________________(footnotes)

1 The Claims Court was renamed the Court of Federal
Claims in 1992.

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4a

paid by the United Kingdom corporation when the
shareholder distribution is made, regardless of the
corporation's mainstream tax liability or offset op-
portunity.
The ACT is payable whether or not the corpora-
tion has any profits. ACT is not refundable, whether
or not it is used as a Section 85 offset by the United
Kingdom corporation that paid the tax.2 Unused Sec-
tion 85 offset can be carried back to the two preced-
ing taxable periods or carried forward indefinitely.
Section 92 of the Finance Act of 1972 permits the
distributing corporation that paid the ACT to sur-
render, at any time, all or part of its Section 85 off-
set to a United Kingdom subsidiary that is 51% or
more owned by the distributing corporation. The
subsidiary can then use the surrendered offset against
its own mainstream corporation tax. The right to
carry forward or surrender Section 85 offset to sub-
sidiaries is useful, for example, when the United
Kingdom parent corporation has excess foreign tax
credits, because those credits must be used in the
year they are earned.
Section 86 of the Finance Act of 1972 provides
that a United Kingdom resident shareholder is en-
titled to a tax credit for the ACT paid by the cor-
poration. This is called the "Section 86 credit":
  86( 1 ) [Entitlement to Credit] Where a com-
  pany resident in the United Kingdom makes a
  qualifying distribution after 5th April 1973 and
  the person receiving the distribution is another

___________________(footnotes)

2 An exception can occur if the United Kingdom corporation
pays ACT and then receives additional franked investment
income during the same accounting period. That exception is
not relevant to this case.

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5a

such company or a resident in the United King-
dom, not being a company, the recipient of the
distribution shall be entitled to a tax credit un-
der this section . . . . 
86(2 ) [Purpose and amount of tax credit] The
tax credit in respect of a distribution shall be
available for the purposes specified in the section
and the subsequent provisions of this Act, and
shall be equal to such proportion of the amount
or value of the distribution as corresponds to the
rate of advance corporation tax in force for the
financial year in which the distribution is made.
In this way double taxation on dividends is alleviated
for United Kingdom residents. The Section 86 credit
can not be withdrawn or withheld by the United
Kingdom tax authorities.
The resident shareholder receives the Section 86
credit when the dividend is received. However, the
Finance Act of 1972 excluded non-resident sharehold-
ers from this benefit. In a document entitled Reform
of Corporation Tax Presented to the Parliament by
the Chancellor of the Exchequer by Command of her
Majesty, April 1972, at p. 11 Par. 32, it was stated that
one of the reasons for denying non-resident share-
holders the Section 86 credit was to require tax
treaty partners to renegotiate the treaty terms,
whereby the British government hoped to obtain bal-
ancing concessions.
B. The Renegotiated Tax Treaty
On enactment of the Finance Act of 1972, the
United States requested renegotiation of the existing
tax treaty. The purpose was to obtain the benefit of
the shareholder tax credit for United States investors

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 6a

who receive dividends from United Kingdom com-
panies, thereby avoiding double taxation of the same
profits. See S. Exec. Rep. No. 95-18, 95th Cong.,
2nd Sess., 22-24, 32-37 (1978), reprinted in 1980-1
C.B. 411, 420-21, 426-29; Statement of Assistant
Secretary of the Treasury Laurence N. Woodworth,
July 19, 1977, before the Senate Foreign Relations
Committee, id. at 86, 89-90, reprinted in 1980-1 C.B.
at 433, 435-36.
The renegotiated tax treaty was signed on Decem-
ber 31, 1975, and amended by diplomatic notes on
April 13, 1976, First Protocol of August 26, 1976,
Second Protocol. of March 31, 1977, and Third Proto-
COl of March 15, 1979, together comprising the Con-
vention Between the Government of the United States
of America and the Governmen t of the United King-
dom of Great Britain and Nothern Ireland for the
Avoidance of Double Taxation and the Prevention  Of
Fiscal Evasion with Respect to Taxes on Income and
Capital Gains, 31 U.S.T. 5668 (hereinafter the
"Treaty"), reprinted in 1980-81 C.B. at 394. As
was explained to the Senate during the ratification
proceedings, Articles 10 and 23 of the Treaty were
"designed to resolve the problems presented by the
interaction of the U.S. system of corporate taxation
and the new hybrid system adopted by the United
Kingdom in 1973 [the Finance Act of 1972] which
in part integrates corporate and shareholder taxa-
tion." S. Exec. Rep. No. 95-18 at 4, reprinted in
1980-81 C.B. at 413.
Treaty Article 10 is retroactive only to April 6,
1975, and thus does not apply to the ACT paid on
Xerox's 1974 dividends. however, it is a guide to the
pm-pose of the Treaty and the intent of its terms.
The" relevant portion is:

---------------------------------------- Page Break ----------------------------------------
 7a

      Article 10-Dividends

        ***
(2) (a) In the case of dividends paid by a cor-
poration which is a resident of the United King-
dom:
(i) to a United States corporation, which either
alone or together with one or more associated
corporations controls, directly or indirectly, at
least 10 percent of the voting stock of the cor-
poration which is a resident of the United King-
dom paying the dividend, the United States cor-
poration shall be entitled to a payment from the
United Kingdom of a tax credit equal to one half
of the tax credit to which an individual resident
in the United Kingdom would have been entitled
had he received the dividend, subject to the de-
duction withheld from such payment and accord-
ing to the laws of the United Kingdom of an
amount not exceeding 5 per cent of the aggre-
gate of the amount or value of the dividend and
the amount of the tax credit paid to such cor-
poration;
The tax credit in Article 10 is paid to the United
States corporate shareholder for the tax period in
which the ACT is paid or accrued by the United
Kingdom corporation on the dividend distribution;
that is, the period in which the United Kingdom
shareholder would have received a credit under Sec-
tion 86. This credit is not defensible by subsequent
events concerning how the United Kingdom uses its
Section 85 offset, as the government asserts for the
tax credit in Article 23.
Treaty Article 23 is retroactive to April 1, 1973.
With only Article 23 in force in 1974, it was agreed

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 8a

that a 1974 tax credit for the ACT paid by RXL
in 1974 on the dividends to Xerox, if the credit were
held to be available to Xerox, would apply to all
the ACT at issue.
  Article 23-Elimination of Double Taxation
23( 1) In accordance with the provisions and sub-
ject to the limitations of the law of the United
States (as it may be amended from time to time
without changing the general principles hereof),
the United States shall allow to a resident or
national of the United States as a credit against
the United States tax the appropriate amount of
tax paid to the United Kingdom; and, in the case
of a United States corporation owning at least
10 per cent of the voting stock of a corporation
which is a resident of the United Kingdom from
which it receives dividends in any taxable year,
the United States shall allow credit for the ap-
propriate amount of tax paid to the United King-
dom by that corporation with respect to the
profits out of which such dividends are paid.
Such appropriate amount shall be based upon the
amount of tax paid to the United Kingdom, but
the credit shall not exceed the Imitations (for
the purpose of limiting the credit to the United
States tax on income from sources outside of the
United States) provided by United States law
for the taxable year. For the purposes of ap-
plying the United States credit in relation to tax
paid to the United Kingdom;
  (a) the taxes referred to in paragraphs (2)
(b) and (3) of Article 2 (Taxes Covered) shall
be considered to be income taxes;

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   9a

  (b) the amount of 5 or 15 per cent, as the case
may be, withheld under paragraph (2) (a) (i) or
(ii) of Article 10 (Dividends) from the tax
credit paid by the United Kingdom shall be
treated as an income tax imposed on the recipi-
ent of the dividend; and
  (c) that amount of tax credit referred to in
paragraph (2) (a) (i) of Article 10 (Dividends)
which is not paid to the United States corpora-
tion but to which an individual resident in the
United Kingdom would have been entitled had
he received the dividend shall be treated as an
income tax imposed on the United Kingdom pay-
ing the dividend.
Thus for dividends distributed to a United States
shareholder corporation, Article 10 provides that half
of the ACT paid in the United Kingdom is repaid as
a tax credit by the United Kingdom, and Article 23
provides that the remainder is allowed as a United
States tax credit as if the ACT were an income tax
in the United Kingdom.
The government's position is that the Article 23
tax credit for ACT paid is not available to a United
States shareholder corporation until or unless the
Section 85 offset has been used in the United King-
dom to offset mainstream corporation tax; that is,
that the tax credit provided in Article 23(1) (c) is an
interim or provisional credit, which in Xerox's case
was withdrawn when RXL surrendered its Section
85 offset to its subsidiaries. The Court of Federal
Claims so held.

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10a

DISCUSSION

In construing a treaty, the terms thereof are given
their ordinary meaning in the context of the treaty
and are interpreted, in accordance with that mean-
ing, in the way that best fulfills the purposes of the
treaty. See United States v. Stuart, 489 U.S. 353,
356-66 (1989) (interpreting a treaty to carry out the
intent or expectations of the signatories) ; Kolovrat
v. Oregon, 366 U.S. 187, 193-94 (1961) (a treaty
should be interpreted to carry out its purpose). As
discussed in Sumitomo Shoji America, inc. v. Avag-
liano, 457 U.S. 176, 185 (1981), the court's role is
"limited to giving effect to the intent of the Treaty
parties." See generally Restatement (Third) of For-
eign Relations Law of the United States, Part III,
Introductory Note at 144-145 (1987). `The judicial
obligation is to satisfy the intention of both of the
signatory parties, in construing the terms of a treaty.
Valentine v. United States, 299 U.S. 5, 11 (1936)
("it is our duty to interpret [the treaty] according
to its terms. These must be fairly construed, but we
cannot add or detract from them.")
Unless the treaty terms are unclear on their face,
or unclear as applied to the situation that has arisen,
it should rarely be necessary to rely on extrinsic evi-
dence in order to construe a treaty, for it is rarely
possible to reconstruct all of the considerations and
compromises that led the signatories to the final docu-
ment. However, extrinsic material is often helpful
in understanding the treaty and its purposes, thus
providing an enlightened framework for reviewing
its terms. See Air France v. Saks, 470 U.S. 392, 400
(1985) ("In interpreting a treaty it is proper, of
course, to refer to the record of its drafting and ne-

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11a

gotiation." ) However, "the ultimate question re-
mains what was intended when the language actually
employed . . . was chosen, imperfect as that language
may be." Great-West Life Assurance Co. v. United
States, 678 F.2d 180, 188 (Ct. Cl. 1982). In this
context we have reviewed the evidence as well as the
arguments proffered by both sides.
A. The Purpose of the Treaty
The stated purpose of the renegotiation, and the
stated purpose of Article 23, is the elimination of
double taxation of United Kingdom corporate dis-
tributions of dividends to United States shareholders.
As explained by Paul W. Oosterhuis, an attorney for
the Senate Joint Committee on Taxation, "generally
favorable tax credit rules is an important concession
to the United Kingdom which will make U.S. direct
investment in the United Kingdom more attractive."
(quoted in Snap-On Tools, Inc. v. United States, 26
Cl. Ct. 1045, 1069 (1992), aff'd, 26 F.3d 137 (Fed.
Cir. 1994) (Table) ). It is not disputed that the ACT
on the dividends paid by RXL to Xerox in 1974 is
subject to Article 23 of the Treaty.
Article 23 provides that "the United States shall
allow credit for the appropriate amount of tax paid
to the United Kingdom." It was stipulated in the
Claims Court that Article 23( 1) (c) provides a tax
credit to the United States shareholder for ACT paid
by the United Kingdom corporation, by treating the
ACT as an income tax imposed on the United King-
dom corporation paying the dividend. The govern-
ment's position, as we have stated, is that the Treaty
permits the United States to reverse that tax credit
unless or until the ACT it set off against mainstream
corporation tax in the United Kingdom.

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  12a

The Treaty does not mention such a condition on
the allowance of foreign tax credit in the United
States for ACT paid in the United Kingdom. Xerox
argues that this omission is strong evidence that this
restrictive condition was not intended by the signa-
tories, for so dramatic a change in the effect of the
Treaty-in this case defeating the purpose of avoid-
ing double taxation on profits-should not be inferred
by silence. Xerox argues -that if the downstream dis-
position of the Section 85 offset were controlling of
the availability of the benefit for which the Treaty
was renegotiated, the Treaty could not have omitted
stating this condition explicitly. Xerox states that the
plain meaning of the Treaty, in the context of its
purpose, does not permit its interpretation to require
this modification.
Article 10 is relevant to understanding the plain
meaning of the Treaty, as we have mentioned, be-
cause its provision, whereby the United Kingdom
pays half of the tax credit for the ACT directly to
the United States shareholder, is not dependent on
whether or when the United Kingdom corporation or
its United Kingdom subsidiaries uses the Section 85
offset against mainstream corporation tax. Indeed,
no such dependency has been suggested by the gov-
ernment for Article 10.
United Kingdom shareholders receive the ACT
credit whether or not the ACT offset is used, sur-
rendered, or saved by the British payor of the divi-
dend. Stipulated Fact 30 in the Claims Court record
is that a United Kingdom shareholder "is entitled to
the benefit of the U.K. shareholder credit in respect
to the period in which the qualifying distribution is
made," without regard to whether or how the U.K.
company uses the ACT "in that accounting period or

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 13a

in any other accounting period." This weighs against
the government's argument that the Article 23 credit
must be interpreted as not available to the United
States shareholder until the occurrence of some sub-
sequent event in the United Kingdom.
The government states that the United States al-
ways intended to restrict. the availability of the ACT
credit to United States taxpayers on the basis here
asserted, and that this position was known to and
was accepted by both signatories. In support, the
government relies on the Treasury's Technical Ex-
planation issued in 1977 and Revenue Procedure 80-
18, documents we shall discuss post. In opposition,
Xerox relies on the plain language of the treaty it-
self, its ratification history, and testimony of the
chief negotiators for the United States and the
United Kingdom. The 1986 Competent Authority
Agreement is relevant, as are the provisions of the
United States tax code with respect to foreign tax
credits.
B. The Negotiation History
The Senate Report that accompanied the Treaty
when it was presented for ratification in 1978 stated
that "the United States agrees that it will continue
to allow its U.S. citizens and residents to claim  . . . . 
the indirect foreign tax credit (Code sec. 902 ) ." S.
Exec. Rep. No. 95-18 at 32, reprinted in 1980-81
C.B. at 426. The Report explained that a reason for
renegotiation of the existing treaty was to ensure
that the ACT would be credited by the IRS:
There is, therefore, a reasonable possibility that
the ACT would not be viewed by the IRS as a
creditable tax in the absence of the proposed
treaty.

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14a

S. Exec. Rep. No. 95-18 at 34, reprinted in 1980-81
C.B. at 427. The Report explained that in the ab-
sence of the new treaty provisions, the ACT that was
paid by the foreign corporation might not be credit-
able to the United States taxpayer until some later
year in which United Kingdom mainstream tax lia-
bility was offset by the ACT:

However, notwithstanding these technical diffi-
culties [that ACT did not fit the IRS criteria for
a creditable foreign tax], the ACT could be
treated as a creditable income tax to the extent
that it is allowed as an offset against the U.K.
"mainstream" corporate tax, which is a credit-
able income tax. Under this treatment, in situa-
tions where the ACT is offset against a main-
stream tax accruing in years subsequent to the
dividend payment, no foreign tax credit would
be allowed in the absence of the treaty until that
later year in which the mainstream liability is
offset.

S. Exec. Rep. No. 95-18 at 34, reprinted in 1980-81
C.B. at 427. Thus the position here taken by the
government against Xerox was foreseen as occurring
"in the absence of the proposed treaty," id., and its
remedy was a stated purpose of the Treaty.

Affidavits of negotiators for both sides were in
accord with each other and with this purpose. Robert
J. Patrick, Jr., International Tax Counsel for the
Treasury and a principal negotiator for the United
States, averred that the assumption during the nego-
tiations was that under the Treaty "the U.S. foreign
tax credit [for ACT paid to the U.K.] resulted in
the resulting U.S. tax credits going to the U.S. cor-

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15a

porate shareholders in the year the dividend was
paid, rather than revenues going to the U.S. Treas-
ury." He and David S. Foster of the Treasury, who
succeeded Patrick as International Tax Counsel, and
Paul W. Oosterhuis of the Senate Joint Committee
on Taxation, averred that Article 23 was not viewed
during the negotiations as providing a "provisional"
or "interim" credit for ACT: the theory on which
the IRS withdrew, in 1980, the ACT credit it had
allowed in 1974. Mr. Patrick averred that "[t] o the
best of my knowledge, this interpretation of the
Treaty has never previously been set forth by the
United States, the United Kingdom, or anyone else."
Mr. Oosterhuis averred that "[t] o the best of my
recollection, the Treasury Department never pre-
sented to the Senate in its ratification procedure any
explanation that the ACT is creditable under Article
23( 1) (a) or that the credit for ACT under Article
23( 1) (c) is an interim credit."
These statements are consistent with the clear text
of the treaty and its purpose of avoiding double taxa-
tion of dividends. A provisional or interim credit,
defensible by actions of the distributing corporation
six years later inside the United Kingdom, is in bold
conflict with that plain meaning.
The negotiators for the United Kingdom testified
to similar effect, and responded to the government's
statements in the Claims Court that they had ac-
cepted the proposed interpretation. Lord Rees, the
responsible Minister of the United Kingdom Govern-
ment for this Treaty and the Minister of State at the
British Treasury from 1979 to 1981, averred:
As I stated in comments delivered to the House
of Commons in January 1977 and again on 18th

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16a

February 1980, a fair balance had to be struck
between United States and United Kingdom
portfolio and direct investors. . . . Developing a
fair balance for the United States direct investor
was more difficult but was eventually accom-
plished by the United Kingdom giving an im-
mediate 50 percent refund (subject to a 5 per-
cent withholding tax which was currently credit-
able against United States tax liability ) and the
United States giving an indirect foreign tax
credit for the other 50 percent under Article
23(1 ) (e). TO strike the intended fair balance
with United Kingdom shareholders, this indirect
foreign tax credit had to be currently creditable.
Therefore, to the extent that the United States
Treasury Technical Explanation denies a current
indirect foreign tax credit, it frustrates the pol-
icy underlying these provisions of the Treaty.
Consequently, had the United States Government
interpretation of Article 23(1) been brought to
my attention as the responsible Minister of the
United Kingdom Government, I would have
raised objections to its interpretation of the
Treaty as being in conflict with the policy under-
lying the Treaty.
(Emphases added, citations to exhibits omitted.)
The affidavit of the Rt. Hon. Denzil Davies, Minister
of State at the Treasury from 1975 to 1979, was to
the same effect, and equally strongly stated.
The government argues that there is "no reason to
give any weight" to affidavits that were drafted af-
ter the Treaty entered into force. It is correct that
post facto statements of legislators interpreting a
statute are usually not acorded much weight, see

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17a

Consumer Product Safety Commission v. GTE Syl-
vania, Inc., 447 U.S. 102, 116-118 & n. 13 (1980),
for it is seldom easy to reconstruct all of the legisla-
tive interests. Similar reasoning well applies to
treaties. However, one need not ignore the identity
and statute of the affiants, or the nature of their
involvement, particularly when the affiants simply
but strongly reinforce the plain meaning of the text
of the treaty. When the recollections of the persons
principally involved are fully consistent with the
clear text of the treaty, and when no substantial con-
trary evidence has been proffered, these affidavits add
weight to the wisdom expressed in Rocca v. Thomp-
son, 223 U.S. 317, 332 (1912), that had the signa-
tories intended the purpose now urged, "it would
have been very easy to have declared that purpose
in unmistakable terns."
C. The Technical Explanation
In 1977, in connection with the Senate ratification
proceedings, the Treasury issued a Technical Expla-
nation that stated, inter alia, that the United States
foreign tax credit for ACT depended on when the
ACT was used to offset mainstream tax in the United
Kingdom, and that any credit previously given would
be reduced accordingly:
  1. ACT paid with respect to a distribution
shall be treated as attributable to the accumu-
lated profits (determined under U.S. principles)
of the year of distribution, except in two cir-
cumstances:
  a) to the extent the ACT reduces mainstream
tax for a prior or subsequent year; and

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18a

  b) if, after attribution of ACT' which does
not reduce mainstream tax, accumulated profits
would not exceed corporate taxes for the year.
  ACT which reduces mainstream tax in any
year or years shall be attributable to any accu-
mulated profits of the year or years for which
the mainstream tax is reduced. Where ACT is
used to offset mainstream tax, the offset will be
viewed as a refund of the ACT initially allowed
as a credit and as a tax paid in respect of the
year for which the ACT is applied as an offset.
Consequently, a reduction in the foreign tax
credit for the year from which the ACT is
carried must be made in accordance with section
905(c) of the Code . . . . 
Technical Explanation of the Convention between the
Government of the United States of America and the
Government of the United Kingdom of Great Britain
and Northern Ireland for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion with
Respect to Taxes on Income and Capital Gains Signed
at London, on December 31, 1975, as Amended by the
Notes Exchanged at London on April 13, 1976, the
Protocol Signed at London on August 26, 1976, and
the Second Protocol signed at London on March 31,
1977 (herein "Technical Explanation"), submitted to
the Senate Foreign Relations Committee at hearings
held on July 19-20, 1977, reprinted in 1980-81 C.B.
at 473-74.
This approach was referred to and criticized in
general terms in the Senate Executive Report, as
quoted supra. Referring specifically to the Technical
Explanation, the Report mentioned the "difficult and
complex issues*' raised, and declined to "adopt or

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19a

reject" the "amplifications" in the Technical Ex-
planation:
  The Treasury's technical explanation also set
forth a complex set of rules and examples in-
tended to be used for purposes of determining
the earnings to which ACT payments by a U.K.
corporation are to be attributed for purposes of
computing the indirect foreign tax credit . . . . 
  The ACT refunds, the withholding tax, and
the unrefunded portion of the ACT are treated
for U.S. foreign tax credit purposes in a manner
which is generally favorable to U. S.. shareholders.
These rules raise difficult. and complex issues. In
recommending the ratification of the proposed
treaty, the Committee does not intend that these
rules necessarily serve as a model for future
treaties. Further, in recommending the ratifica-
tion of the treaty, the Committee does not in-
tend to adopt or reject the amplifications of the
foreign tax credit rules contained in the Treas-
ury technical explanation. Consequently, Treas-
ury would not be foreclosed by the ratification
of the treaty from modifying those administra-
tive interpretations in the future should it deem
it advisable to do so, Of course, the rules con-
tained in the treaty also do not limit any legis-
lative action in this area; the computation of
the foreign tax credit for unrefunded ACT may
be subject to any generally applicable changes in
the U.S. foreign tax credit rules which may
subsequently be enacted.
S. Exec. Rep. No. 95-18 at 36-37, reprinted in 1980-
81 C.B. at 429. One may debate the meaning of this
cool treatment of the Technical Explanation. What

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20a

is clear, however, is that the Treasury's position was
not embraced by the Senate. That this position is
absent from the text of the Treaty is not surprising
for, as the negotiators and the Senate recognized, it
defeats the stated purpose of avoiding double tax-
ation of the same profits.
A treaty must be construed in accordance with the
intent of both signatories. Both of the United King-
dom's Ministers for the Treasury averred that they
did not accept, or even know of, the position taken
in the Technical Explanation:
I can say categorically that I was not at any
time as Minister or as a Member of the House
of Commons shown the Technical Explanation,
or briefed on the Technical Explanation or the
point at issue in the case. Since I was the re-
sponsible Government Minister speaking for the
Government in the debates before the House of
Commons, I would be the only person to bring
any such material before the House of Commons
or authorize it to be deposited in the library of
the House of Commons. ***
[T]he United Kingdom Government did not ac-
cept this United States Treasury Technical Ex-
planation of Article 23 either explicitly or im-
plicitly.      ***
  [W]hen the House of Commons approved the
Order in Council giving effect to the Treaty as
a matter of U.K. domestic law in February 1980,
neither it nor I as the Minister responsible had
any knowledge, express or implied, of the Tech-
nical Explanation. In these circumstances, it is

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21a

not surprising that the United Kingdom voiced
no objection to the Technical Explanation.
Affidavit of Lord Rees at 5-8. The Rt. Hon. Denzil
Davies averred:
I can state from my own knowledge that during
the whole of the period when I was a Minister
of State responsible for the Treaty, I had no
knowledge of and never saw the United States
Treasury Technical Explanation of the Treaty
in any form.    ***
[T]he United Kingdom Government of which I
was a member and on whose behalf I was the
responsible Minister in this matter did not ac-
cept the United States Treasury's Technical Ex-
planation either explicitly or implicitly.
Affidavit of Rt. Hon. Denzil Davies at 5-6.
The government refers to the affidavit of a Treas-
ury employee and member of the United States ne-
gotiating team, Steven P. Hannes, who stated that
"copies of the Technical Explanation would have
been sent to the U.K. negotiators." No evidence of
such "sending" was provided, and it must be assumed
that the Treasury's files contained no such support.
On this extremely one-sided record, it would violate
any reasonable canon of construction to infer mutual
assent by the signatories to the position taken by the
Treasury.
D. The Revenue Procedure
On the effective date, after the Treaty was ratified
by both signatories, the Treasury issued Revenue
Procedure 80-18, which introduced a different theory
on which to deny the Article 23 credit for ACT, de-

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 22a

pending on whether the United Kingdom corporation
surrendered the Section 85 offset to subsidiaries in
the United Kingdom:
[F]or U.S. foreign tax credit purposes and pur-
.  suant to Article 23, the parent corporation has
not paid or accrued the unrefunded ACT [Sec-
tion 85] offset against the subsidary's main-
stream tax and has contributed to the capital of
the subsidiary an amount equal to the unre-
funded ACT offset.
Rev., Proc. 80-18, 3.05, reprinted in 1980-1 C.B.
at 625. That is, if the British corporation that paid
the ACT later surrenders the Section 85 offset to its
subsidiaries, Revenue Procedure 80-18 treats that
surrender as a contribution to the capital of the
subsidiary, and reverses the tax credit previously
granted pursuant to Article 23(1) (c). Thereafter,
the government argues, ACT is creditable only un-
der Article 23(1 ) (a). As we shall discuss, this in-
terpretation strains the plain meaning of the treaty.
It would also defeat the Treaty purpose of avoiding
double taxation.
Revenue Procedures "do not have the force and
effect of Treasury Department Regulations." 1980-
81 C.B. at v. See Helvering v. New York Trust Co.,
292 U.S. 455, 468 (1934) (revenue rulings cited by
the Commissioner "have none of the force or effect
of Treasury Decisions and do not commit the De-
partment to any interpretation of law") ; Spang In-
dustries, Inc. v. United States, 791 F.2d 906, 913
(Fed. Cir. 1986) ("a revenue ruling is entitled to
so-me weight as reflecting the Commissioner's inter-
pretation of the regulation, but does not have the
same force as a regulation"); State Bank of Albany

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23a

v. United States, 530 F.2d 1379, 1382 (Ct. Cl. 1976)
("It may be helpful in interpreting a statute, but
it is not binding on . . . the courts." ) Thus although
the Revenue Procedure warrants fair consideration
as reflecting the Treasury's position, it is not in-
sulated from inquiry.
The new theory offered in Procedure 80-18 leads
to the faulty conclusion that Xerox's credit for the
ACT that was paid by RXL on the dividends received
by Xerox can be rescinded based on downstream
activity within the United Kingdom. The internal
disposition of ACT in any of the ways authorized by
the Finance Act of 1972 is not relevant to the Section
23 credit. A foreign country's procedures do not
determine United States tax credit rules, other than
as encompassed within a Treaty. United States v.
Goodyear Tire & Rubber Co., 493 U.S. 132 (1989).
A Revenue Procedure can not change the terms and
purpose of a treaty. Procedure 80-18,3 insofar as
it would reverse Xerox's entitlement to the Article
23 credit for the ACT that was paid by RXL on the
dividends paid to Xerox, is declared void.
E. The Competent Authority Agreement
A dispute, ambiguity, or uncertainty concerning
a treaty is ideally resolved by the signatories them-
selves. Such a process can provide useful clarifica-
tion, short of substantive change which would re-
3 Another aspect of Revenue Procedure 80-18 was rejected
by the Court of Claims in Brown & Williamson, Ltd. v. United
States, 688 F.2d 747, 752 (Ct. Cl. 1982). A still different
aspect was voided by the Claims Court in Snap-On Tool-s v.
United States, 26 Cl. Ct. 1045, 1065 (1992), aff'd, 26 F.3d
137 (Fed. Cir. 1994) (Table).

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24a

quire ratification. The Treaty's Article 25 provides
for such a "Mutual Agreement Procedure." This
procedure was invoked in 1986 at the initiative of
the United States with the approval of the Claims
Court, while this case was pending.
After a period of discussion, an agreed letter from
the United States Competent Authority (by delega-
tion of the Secretary of the Treasury, the Competent
Authority was the Associate Commissioner ( Oper-
ations) of the Internal Revenue Service), to the
United Kingdom Competent Authority, was issued on
December 18, 1986 and accepted on December 23,
1986. The Agreement states, in substantial part:
L It is agreed that Article 23(1) (c) provides
a mechanism by which a U.S. foreign tax credit
may be obtained for that part of the U.K. tax
credit referred to in Article 10 (2) (a) (i) which
is not paid to a U.S. corporation but to which
an individual resident in the United Kingdom
would have been entitled had he received the
dividend.
2. It is agreed that Article 23(1) (c) was in-
cluded in the Convention for the purpose of en-
suring that in accordance, with Article 23 ( 1 ) (a)
the Advance Corporation Tax ("ACT" ) payment
which generally underlies the U.K. tax credit
referred to in paragraph 1 would be treated as
an income tax paid to the United Kingdom by
the U.K. corporation paying the dividend, be-
cause the United States questioned to what ex-
tent, in the absence of the Convention, payments
of ACT would be treated as payments of a cred-
itable corporate income tax for U.S. foreign tax
credit purposes.

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25a

3. It is agreed that, pursuant, to Article 23(1),
the Article 23(1 ) (c) mechanism must be applied
in accordance with the provisions and subject
to the limitations of the law of the United Stales
and that a credit is to be given under Article
23( 1) (c) only for the appropriate amount of
tax paid to the United Kingdom.
4. It is agreed that Article 23(1) of the con-
vention was not intended to provide two U.S.
foreign tax credits for a single payment of ACT
to the United Kingdom or U.S. foreign tax cred-
its in excess of the amount of corporation tax
(including both ACT and mainstream corpora-
tion tax) paid to the United Kingdom in respect
of the profits out which a dividend is paid.
5. It is agreed that under the language of Ar-
ticle 23( 1) which provides that the Article 23
(1) (c) credit must be allowed in accordance
with the provisions and subject to the limitations
of the law of the United States, the timing of
the credit is to be determined as a matter of
U.S. law. discern no substantive change from the Treaty
provisions. The Agreement summarizes the Treaty
purpose and its implementation as applied to the
ACT, deplores the taking of double credit in the
United States, and confirms that United States law
applies to the timing of the credit. Xerox points out
that this Agreement did not treat the important as-
pects of the Treasury's litigation position, such as
that the Article 23 credit is only provisional, or that
downstream surrender of the Section 85 offset in the
United Kingdom permits or requires revocation of
the Article 23 credit.

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26a

The Treasury states that paragraph 5 of the
Agreement is important because it provides that
United States law determines the timing of the credit,
and that Revenue Procedure 80-18 "elaborates"
United States law and thus controls this case. As
we have discussed supra, a Revenue Procedure is
neither law nor regulation, and is not binding on the
courts. The Competent Authority Agreement is silent
on the Section 85 offset and the effect of when and
how that offset is used in the United Kingdom. This
was the main issue in dispute, then and now. The
omission from the Agreement of the positions taken
in this Revenue Procedure and the earlier Technical
Explanation appears to us to emphasize the weak-
nesses in the government's argument.
The Agreement's affirmation that the timing of
the tax credit is governed by United States law
directs us to the Internal Revenue Code. As we
next discuss, the Code allows the United States tax-
payer an indirect foreign tax credit for, inter alia,
income taxes paid by the foreign corporation on
dividends to the United States shareholder, the credit
to be taken when the foreign tax is paid or accrued.
Finally, there is no issue here of double tax credit
in the United States. Although the government de-
votes a significant portion of its brief to this spectre,
it is undisputed that this taxpayer has not received
single tax credit, and has made no claim that is
suspect on this ground.
F. The Internal Revenue Code Provisions
A treaty, when ratified, supersedes prior domestic
law to the contrary, United States v. Lee Yen Tai,
185 U.S. 213, 220-22 (1902), and is equivalent to
an act of Congress. However, tacit abrogation of

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27a

prior law will not be presumed and, unless it is im-
possible to do so, treaty and law must stand together
in harmony. In this ease there is easy harmony be-
tween the Treaty and the United States law govern-
ing foreign tax credits, $$901-906 of the Internal
Revenue Code of 1954.
In construing the tax law, as for any statute, the
starting point is the words of the statute, Bread
Political Action Committee v. Federal Election Com-
mission, 455 U.S. 577, 580 (1982 ), taking the words
in their ordinary meaning in the field of interest,
Perrin v. United States, 444 U.S. 37, 42 (1979),
and giving full effect to "every word Congress used."
Reiter v. Sonotone Corp., 442 U.S. 330, 339 (1979).
As a special rule in tax cases, "if doubt exists as to
the construction of a taxing statute, the doubt should
be resolved in favor of the taxpayer." Hassett v.
Welch, 303 U.S. 303, 314 (1938); Auto-Ordnance
Corp. v. United States, 822 F.2d 1566, 1571 (Fed.
Cir. 1987).   26 U.S.C. 902

Revenue Code 902 authorizes, inter alia, a tax
credit under 26 U.S.C. 901 for income taxes paid
to a foreign government when a domestic corpora-
tion owns at least 10 percent of the voting stock of
a foreign corporation from `which it receives divi-
dends in any taxable year. The Treaty, by defining
ACT as an income tax, brought. ACT within the
purview of 902. In, accordance with  902(a), the
domestic corporation shall "be deemed to have paid
the same proportion of any income . . . taxes paid
or deemed to be paid by such foreign corporation. to
any foreign country . . . on or with respect to such
accumulated profits." Section 902 also includes pro-

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28a

visions relating to second and third tier foreign cor-
porations that pay dividends through their parent
corporation to the United States corporation.
Each party states that 902 supports its position.
The government states that since  902 permits a
tax credit involving second tier foreign corporations,
credit for the ACT paid by RXL in 1974 was prop-
erly reversed when RXL surrendered the Section 85
offset to its subsidiaries. The government's position
is that credit for this ACT can not be allowed to
Xerox until "each foreign subsidiary up the line dis-
tributes dividends to its parent."
We do not share this reasoning. The ACT here
at issue was for dividends that were paid to Xerox
in 1.974; the ACT on those dividends was paid by
RXL in the United Kingdom in 1974, and was not
refundable or reversible. The second-tier RXL sub-
sidiaries did not pay, and had no obligation to pay,
the ACT on those dividends. The ACT obligation by
RXL was completed in 1974, and was not defensible
by whether, when, or how RXL used its offset rights
under United Kingdom law, including whether and
when the offset was surrendered to RXL'S subsidi-
aries in the United Kingdom.
In accordance with  901 and 902, Xerox was en-
titled to the credit when the dividends were distri-
buted to Xerox and the ACT thereon was paid or
accrued by RXL, see  905. The straightforward read-
ing of the Code provisions firmly links the foreign
tax credit to the payment to the United States share-
holder of dividends on which foreign income tax was
paid. In United States v. Goodyear the Court re-
affirmed that under  902 the dividends received by
the United States parent must be sourced to the year

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29a

in which the foreign subsidiary paid the foreign
tax, citing " 902's statutory goal of avoiding double
taxation." Goodyear, 493 U.S. at 144. That princi-
ple is not served by the government's theory.
In view of our conclusion that the conditions now
imposed on ACT credits have no support in 902
and are contrary thereto, we do not reach Xerox's
alternative argument that in accordance with 902
Xerox is entitled to the tax credit even without re-
course to the Treaty.
26 U.S.C. 905

The government also relies on Code Section 905,
which relates to adjustments to and accounting pe-
riods for indirect foreign tax credits. Section 905 (a)
allows the foreign tax credit to be taken in the year
in which the foreign tax accrues, and requires con-
sistency in accounting:
 905(a) Year in which credit taken.
The credits provided in this subpart may, at the
option of the taxpayer and irrespective of the
method of accounting employed in keeping his
books, be taken in the year in which the taxes
of the foreign country or the possession of the
United States accrued, subject, however, to the
conditions prescribed in subsection (c). If the
taxpayer elects to take such credits in the year
in which the taxes of the foreign country or the
possession of the United States accrued, the cred-
its for all subsequent years shall be taken on the
same basis, and no portion of any such taxes
shall be allowed as a deduction in the same or
any succeeding year.

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30a

Section 905 (c) does not determine entitlement, but
authorizes recalculation of the tax credit if the
amount of foreign tax is refunded or adjusted after
the credit is taken.

 905(c) Adjustments on payment of accrued
   taxes.

If accrued taxes when paid differ from the
amounts claimed as credits by the taxpayer, or
if any tax paid is refunded in whole or in part,
the taxpayer shall notify the Secretary or his
delegate, who shall redetermine the amount of
tax for the year or years affected. The amount
of tax due on such redetermination, if any, shall
be [paid or credited]. . . . In such redetermina-
tion by the Secretary or his delegate of the
amount of. tax due from the taxpayer for the
year or years affected by a refund, the amount
of the taxes refunded for which credit has been
allowed under this section shall be reduced by
the amount of any tax described in section 901
imposed by the foreign country or possession of
the United States with respect to such refund;
but no credit under this subpart, and no deduc-
tion under section 164 (relating to deduction
for taxes) shall be allowed for any taxable year
with respect to such tax imposed on the refund
The Court of Federal Claims erred in its reliance
on  905(c) as substantive basis for the withdrawal
of credit upon the 1980 surrender by RXL of the
Section 85 offset. Section 905 (c) indeed permits re-
determination of the foreign tax credit when any
foreign tax is refunded or adjusted. However, the

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 31a

ACT paid in 1974 was not refunded or adjusted in
1980. The movement of the Section 85 offset from
British parent to subsidiary is not a refund or ad-
justment of the ACT. This tax obligation in the
United Kingdom was fixed and paid in 1974, when
the dividends were paid to Xerox. It is not refund-
able, and no adjustment of the 1974 United States
tax credit is warranted. Neither  902 nor  905
supports the reversal or postponement of credit for
the ACT paid by RXL in 1974.

       CONCLUSION

Review of the evidence and arguments persuades
us that the Treaty's meaning on this issue is plain
and unambiguous, and that it should not be con-
strued contrary to its clear purpose of avoidance of
double taxation. It is inappropriate for courts to de-
part from the purpose and import of a treaty, "par-
ticularly [when] there is no indication that applica-
tion of the words of the treaty according to their
obvious meaning effects a result inconsistent with the
intent or expectations of its signatories." Maximov
v. United Slates, 373 U.S. 49,54 (1963).
The ACT is a separate tax, and is not properly
viewed as a prepayment or interim credit or esti-
mated tax of mainstream corporate tax. The ACT
does not become provisional by virtue of the offset
procedures available under United Kingdom law.
The Treaty requires that the unrepaid (under Ar-
ticle 10) portion of the ACT be "treated as an in-
come tax," Article 23(c), thus accommodating 901
et seq. of the Revenue Code.
We conclude that the ACT is creditable in the
United States, in accordance with  902, in the year

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32a

it is paid or accrued in the United Kingdom. RXL'S
subsequent disposition of its offset rights under the
Finance Act of 1972 did not defeat the foreign tax
credit for ACT, which vested in Xerox when the
tax and dividends were paid.
The decision of the Court of Federal Claims is re-
versed. Payment of the claimed refund is ordered,
calculated in accordance with law.

COSTS

Costs in favor of Xerox.

REVERSED

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  33a

     APPENDIX B

UNITED STATES COURT OF APPEALS
FOR THE FEDERAL CIRCUIT

      93-5094

XEROX CORPORATION, PLAINTIFF-APPELLANT

       v.

THE UNITED STATES, DEFENDANT-APPELLEE

On Appeal from the United States Court of
Federal Claims in Case No (s). 80-85T

       JUDGMENT
This CAUSE having been heard and considered,
it is
ORDERED and ADJUDGED: REVERSED
 ENTERED BY ORDER OF THE COURT
     /s/ Francis X. Gindhart
      FRANCIS X. GINDHART
       Clerk
Dated Dec. 6, 1994
Issued as a mandate: February 2, 1995

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34a

APPENDIX C

UNITED STATES COURT OF APPEALS
FOR THE FEDERAL CIRCUIT

ORDER

Before RICH, Circuit Judge, NEWMAN, Circuit
Judge, and PLAGER, Circuit Judge.

A petition for rehearing having been filed by the
APPELLEE, 

UPON CONSIDERATION THEREOF, it is

ORDERED that the petition for rehearing be, and
the same hereby is, DENIED.

The mandate will issue February 14, 1995.

FOR THE COURT
FRANCIS X. GINDHART
Clerk

by /s/ Diane M. Frye
  Clerk
  DIANE M. FRYE
  Chief Deputy Clerk

Dated: February 7, 1995

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  35a

      APPENDIX D
IN THE UNITED STATES CLAIMS COURT

No. 80-85T

(Filed: March 17, 1988)

XEROX CORPORATION, PLAINTIFF

      v.

THE UNITED STATES, DEFENDANT

U.S U.K. Income Tax Treaty for the Avoid-
ance of Double Taxation and the Preven-
tion of Fiscal Evasion (1975); U.K. Im-
putation System; "U.K. Advance Corpora-
tion Tax (ACT); U.S. Foreign Tax Credit;
Treaty Interpretation; Intent of Treaty
Parties; Effect of Technical Explanation
and Competent Authority Agreement; Ad-
ministrative Implementation

       OPINION

FUTEY, Judge.

Plaintiff brought this action seeking recovery of
federal income taxes totaling $6,333,334 (or such
larger sum as is legally due) plus assessed, restricted,

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36a

and statutory interest for its taxable year ended
December 31, 1974. Plaintiff alleged eleven separate
grounds of recovery in its complaint, one of which
claimed that plaintiff was entitled to a refund of
$1,826,222 for an indirect foreign tax credit pur-
suant to Article 23(1) (c) of the Convention between
the Government of the United States of America and
the Government of the United Kingdom of Great
Britain and Northern Ireland for the Avoidance of
Double Taxation and the Prevention of Fiscal Eva-
sion with Respect to Taxes on Income and Capital
Gains (hereinafter the "US-UK Income Tax Treaty"
or "Convention"). Defendant answered by denying
that plaintiff was entitled to recover on the above or
any other causes of action listed in the complaint.
While the parties are attempting to resolve the other
causes of action without litigation, trial was held on
the treaty issue. For the reasons discussed hereinaf-
ter, the court concludes that plaintiff is not entitled
to an indirect foreign tax credit for the sum here
at issue under Article 23(1) (c) of the US-UK In-
come Tax Treaty. Accordingly, the court holds for
defendant and dismisses the above cause of action.

FACTS

Plaintiff, Xerox Corporation, is a New York cor-
poration engaged in the manufacture and sale of a
full range of xerographic and other office equipment
products. The company's principal office is in Stam-
ford, Connecticut. As the parent corporation of an
affiliated group of corporations, plaintiff files consoli-
dated federal income tax returns on a calendar year
basis and employs the accrual method of accounting.
One of the affiliated corporations of the said af-
filiated group of corporations is Lyell Holdings, Ltd.,

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 37a

a Delaware corporation (hereinafter "Lyell" ). Lyell
is wholly owned by Xerox and is a resident United
Kingdom ("U.K.") corporation. Lyell is treated as
a U.K. resident for all U.K. tax purposes.
During 1974 and at all times relevant to this liti-
gation plaintiff owned, directly and through Lyell
a majority of the outstanding voting shares of Rank
Xerox, Limited ( "RXL" ). RXL is a U.K. corpora-
tion whose principal office was during 1974, and for
many years thereafter, in London, England, U.K.
RXL is engaged directly and through multiple U.K.
and foreign subsidiary corporations in businesses in
the Eastern Hemisphere which are generally compar-
able to those conducted in the United States by plain-
tiff and its U.S. subsidiary corporations. RXL has
non-U.K. operating subsidiary corporations in most
of the major countries of Europe and in many other
parts of the Eastern Hemisphere. RXL also owns the
share capital of various U.K. corporations, some of
which are relevant to this case. The particular U.K.
subsidiaries of RXL which are relevant to the instant
litigation are:
(a) Rank Xerox Management Ltd. ("RXM"), in-
corporated in 1965-a holding company owning the
share capital of numerous non-U.K. corporations in
Europe and other portions of the Eastern Hemis-
phere;
(b) Rank Xerox (U.K.) Ltd. ("RX-UK"), incor-
porated in 1937-an operating company engaged in
the business of marketing xerographic equipment in
the U. K.; and
(c) Rank Xerox Ireland Ltd. ("RX-Ireland"), in-
corporated in 1937-an operating company engaged

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37

in the business of marketing xerographic equipment
in Ireland.
The outstanding shares of RXL which are not
owned, directly or indirectly, by Xerox are owned
by the Rank Organization Plc. ( "RO"), an unrelated
publicly held U.K. corporation and its subsidiaries.
Also, a limited class of shares of RXL are held by
certain key employees of RXL as part of a key ex-
ecutive compensation plan. The share ownership of
RXL as of the end of its fiscal year 1974 was as
follows :

Classes     Par       Number of
of Shares   Value in Pounds   Shares Outstanding
A       1   7,401,254
B       1
C            7,401,254
          1   7,481,388
D       1
E             3,740,694
          1   49,350

Class A, B and E shares are non-voting; Class C
and D shares are voting shares. Class A and B
shares participate equally in pre-tax profits of RXL
up to 7,401,254 pounds and Classes C, D and E shares
participate in profits in excess of `7,401,254 pounds.
Plaintiff held directly 6,356,147 Class C shares. Lyell
held all of the Class A shares and 1,125,241 of the
Class C shares. RO held all of the Class B and D
shares of RXL either directly or through affiliated
companies. Key employees held the Class E shares
of RXL. Lyell and RO together own over 75% of
the ordinary share capital of RXL for U.K. tax pur-
poses.      ****

During 1972, the U.K. enacted Legislation that sig-
nificantly altered the U.K. system for taxing corpora-

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 39a

tions and their shareholders. This new legislation,
adopting what is generically known as an "imputa-
tion system," was enacted as the Finance Act of
1972 (hereinafter "FA 1972").
Under FA 1972, a corporation tax is imposed on
U.K. resident corporations on the income and charge-
able gains which are derived in a given accounting
period. An "accounting period" for purposes of U.K.
tax law is the period by reference to. which assess-
ments for corporation tax are made. Normally, an
accounting period is 12 months. RXL and its sub-
sidiaries had, during 1974 and at all other relevant
times, a 12-month accounting period ending October
31. The corporation tax assessed against the income
and chargeable gains of any accounting period is
generally due 9 months after the close of such ac-
counting period. There are certain exceptions to this
9-month period for corporations formed prior to April
1965. RXL, which was formed prior to April 1965,
has 18 months from the end of its accounting period
in which to pay its corporation tax.
Section 84 of FA. 1972 provides that where a cor-
poration resident in the U.K. makes a "qualifying
distribution" during its accounting period and such
distribution is not made out of "franked investment
income," an Advance Corporation Tax (hereinafter
"ACT" ) is imposed on the corporation resident in the
U.K. making such qualifying distribution. The term
"qualifying distribution" as used in FA 1972 includes
all dividends. The term "franked investment in-
come," defined in section 88, FA 1972, refers to a
qualifying distribution received by a corporation resi-
dent in the U.K. from another corporation resident
in the U.K. which carries a related U.K. shareholder

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 40a

credit granted by section 86, FA 1972. "Franked in-
vestment income" includes both the qualifying dis-
tribution and related tax credit. Such amount is also
termed a "franked payment" when reference is made
to the amount distributed by the distributing com-
pany.
A financial year in the U.K. is the year beginning
on April 5 and ending on the succeeding April 4.
Thus, the 1974 financial year ran from April 5,
1973 to April 4, 1974. The rate of ACT imposed
during that financial year was equal to 3/7 of the
amount of a qualifying distribution.
If ACT is paid (and not repaid) by a U.K. resi-
dent corporation making a qualifying distribution,
such distributing corporation may use the ACT pay-
ment in the following ways:
(a) it may offset the ACT (subject to certain
limits) against its own corporation tax liability, i.e.,
use ACT to satisfy its U.K. corporation tax liability,
in respect of the accounting period in which the
qualifying distribution is made. Section 85(1), FA
1972 ;
(b) if the amount of its corporation tax liability
in respect of that accounting period is insufficient
to absorb the whole of that ACT payment, it may
offset the ACT against its corporation tax liabilities
in respect of the two preceding accounting periods
(on the basis of the latter of the two preceding years
first). Section 85(3), FA 1972;
(c) if, after the application of (a) and (b) above,
ACT remains unabsorbed as an offset against the
U.K. corporation tax liability of the current or two
prior accounting periods, the. distributing company
may carry forward for an indefinite period the un-
absorbed ACT and offset it against its corporation

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  41a

tax liabilities for subsequent periods. Section 85(4)
FA 1972;
(d) instead of offsetting the ACT payment against
its own U.K. corporation tax liability, the distribut-
ing company may, under section 92, FA 1972, "sur-
render" that right to set off ACT against U.K. cor-
poration tax liability (to the extent that an ACT pay-
ment arises as a result of the payment of a dividend
and not any other kind of qualifying distribution)
to one or more of its 51 percent or greater owned
subsidiaries. If ACT is surrendered, a subsidiary to
which the surrender has been made may set off the
ACT surrendered to it (subject to certain limits)
against its own U.K. corporation tax liability in re-
spect of the accounting period in which the dividend
giving rise to the ACT was paid. To the extent that
such corporation tax liability is insufficient to absorb
the ACT set off, the company to which the surrender
is made (hereinafter "surrendered" ) may carry the
surrendered ACT set off forward (but not back) for
an indefinite period for set off against its U.K. cor-
poration tax liabilities in subsequent periods. A sur-
rendered cannot make a further surrender of ACT.
Section 92 (3A), FA 1972.
If a resident U.K. corporation makes a qualifying
distribution in one calendar quarter and pays ACT
with respect to such distribution, it may obtain a re-
fund of such ACT from Inland Revenue if and to the
extent it receives franked investment income during
the remainder of the same accounting period. This
is the only circumstance by which a distributing com-
pany can obtain a refund of ACT paid, and such
circumstance is the sole reason for the parenthetical
"(and not repaid)" in section 85 (1), FA 1972.

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42a

A resident U.K. corporation making a qualifying
distribution which is not out of franked investment.
income must pay ACT regardless of its income
whether or not it has any U.K. corporation tax lia-
bility which could be satisfied by use of the associated
section 85 offset. For this reason and because ACT
is not refundable, ACT is not an "estimated tax"
payment and is not similar to U.S. corporate esti-
mated tax payments.
When a resident U.K. corporation pays a dividend
to another resident U.K. corporation which owns
either 51%  or more of the ordinary share capital of
the distributing company or is a member of a "con-
sortium" 1 owning such company, the distributing
company and distribute may jointly elect to treat
the dividend as "group income" which operates to ex-
clude the dividend from the requirements of section
84( 1), FA 1972 ( liability to pay ACT), and from
the benefits of section 86, FA 1972 (right to share-
holder credit). A group income election does not af-
fect the U.K. corporation tax liability of either the
distributing company or the distribute. The distrib-
uting company is and remains liable for U.K. cor-
poration tax on its profits out of which any such
distribution is made and the distribution does not
constitute income to the distribute.
Except with respect to qualifying distributions for
which a group income election has been made, U.K.

1 A "consortium" is defined under U.K. law (as in effect-
in 1974) as a group of four or fewer resident U.K. corpo-
rations which in, the aggregate own 75% or more of the
ordinary share capital of another resident U.K. corporation
and separately each own at least 5% of the ordinary share
capital.

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 43a

resident shareholders (individual and corporate ) re-
ceiving qualifying distributions from U.K. resident
corporations are entitled to a U.K. shareholder credit
under section 86, FA 1972. The. U.K. resident share-
holder entitled to the U.K. shareholder credit is able
to claim such tax credit even in situations where the
distributing U.K. resident company making the
qualifying distribution has not paid ACT with re-
spect to the distribution and has no franked invest-
ment income out of which a qualifying distribution
may be made without the payment of additional ACT.
If the recipient of a qualifying distribution is a
U.K. resident individual, he is treated, for U.K. in-
come tax purposes, as haying received income equal
to the aggregate of the amout or value of the quali-
fying distribution plus the amount of the U.K. share-
holder credit. The U.K. shareholder credit is equal
to such proportion of the amount or value of the
qualifying distribution as corresponds to the rate of
ACT force for the financial year in which the dis-
tribution is made. Section 86(2), FA 1972. The
U.K. shareholder credit received as a result of the
receipt of a qualifying distribution may be applied
by that individual against his own income tax lia-
bility for the assessment period in which the quali-
fying distribution is subject to income tax. To the
extent that the U.K. shareholder credit exceeds the
individual's income tax for such period, he is en-
titled to a cash payment of the excess by the U.K.
Inland Revenue (section 86(4), FA 1972), regard-
less of whether or not the U.K. resident company
paying the dividend to him has itself paid ACT in
relation to that dividend and regardless of whether
such distributing company had received franked in-

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44a

vestment income out of which to make such dis-
tribution.
A U.K. resident company receiving a qualifying
distribution from another such company is also en-
titled to a U.K. shareholder credit as a result of
the receipt of the franked payment. Section 86(1),
FA 1972. A U.K. resident company which receives
a distribution in respect of which it is entitled to a
U.K. shareholder credit, is treated, by section 88,
FA 1972, as having received "franked investment
income". The receipt of franked investment income
correspondingly relieves the U.K. company receiving
such income from the liability which would otherwise
arise to pay ACT in relation to qualifying distribu-
tions made by it to the extent of its franked invest-
ment income. Section 89(1), FA 1972.
The U.K. resident individual shareholder receiving
a qualifying distribution and, with it, the associated
U.K. shareholder credit, may only use that shareholder
credit in respect of the assessment period in which
the distribution is made. Similarly, the U.K. resi-
dent corporate recipient is entitled to the benefit of
the U.K. shareholder credit in respect of the period
in which the qualifying distribution is made. It
makes no difference, for this purpose, whether the
U.K. company making the distribution has or has
not itself paid ACT, or is able to use ACT in any of
the aforementioned ways during that accounting pe-
riod or in any other accounting period.

*   *   *   *

Under the Finance Act of 1972, a non-resident of
the U.K., individual or corporate, does not receive
the benefit of the section 86 U.K. shareholder credit.
Thus, the U.K.'S imputation system discriminates
against non-resident shareholders in U.K. corpora-

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 45a

tions by taxing profits distributed to them at both
the corporate and shareholder levels, while profits
distributed to U.K. shareholders are taxed only at
the corporate level. Section 497 of the U.K. Income
and Corporation Taxes Act of 1970, however, allows
bilateral income tax treaties between the U.K. and
other countries to confer on such non-residents a
right to the U.K. tax credit granted under section
86, FA 1972. To alleviate the discrimination against
U.S. shareholders of U.K. corporations, the United
States negotiated a new treaty with the United King-
dom (the US-UK Income Tax Treaty) which was
signed on December 31, 1975, and came into force on
April 25, 1980.
The salient provisions of this treaty are Article
10, entitled "Dividends," and Article 23, entitled
"Elimination of Double Taxation." The pertinent
sections thereof read as follows:
       Article 10-Dividends
(2) (a) In the case of dividends paid by a cor-
poration which is a resident of the United King-
dom:  (i) to a United States corporation
which either alone or together with one or more
associated corporations controls, directly or in-
directly, at least 10 percent of the voting stock
of the corporation which is a resident of the
United Kingdom paying the dividend, the United
States corporation shall be entitled to a payment
from the United Kingdom of a tax credit equal
to one-half of the tax credit to which an indi-
vidual resident in the United Kingdom would
have been entitled had he received the dividend,

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46a

subject to the deduction withheld from such pay-
ment and according to the laws of the United
Kingdom of an amount not exceeding 5 percent
of the aggregate of the amount or value of the
dividend and the amount of the tax credit paid
to such corporation;

   (ii) in all other cases, the resident of
the United States to whom such dividend is paid
shall be entitled to a payment from the United
Kingdom of the tax credit to which an individ-
ual resident in the United Kingdom would have
been entitled had he received the dividend, sub-
ject to the deduction withheld from such pay-
ment and according to the laws of the United
Kingdom of an amount not exceeding 15 percent
of the aggregate of the amount or value of the
dividend and the amount of the tax credit paid
to such resident;

   (iii) the aggregate of the amount or
value of the dividend and the amount of the tax
credit referred to in sub-paragraphs (a) (i) and
(ii) of this paragraph paid by the United King-
dom to the United States corporation or other
resident (without reduction for the 5 or 15 per-
cent deduction, as the case may be, by the United
Kingdom) shall be treated as a dividend for
United States tax credit purposes.
Article 23-Elimination of Double Taxation
(1) In accordance with the provisions and sub-
ject to the limitations of the law of the United
States (as it may be amended from time to time
without changing the general principle hereof)
the United States shall allow to a resident or

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47a

national of the United States as a credit against
the United States tax the appropriate amount
of tax paid to the United Kingdom; and, in the
case of a United States corporation owning at
least 10 percent of the voting stock of a corpo-
ration which is a resident of the United King-
dom from which it receives dividends in any tax-
able year, the United States shall allow credit
for the appropriate amount of tax paid to the
United Kingdom by that corporation with re-
spect to the profits out of which such dividends
are paid. Such appropriate amount shall be
based upon the amount of tax paid to the United
Kingdom, but the credit shall not exceed the
limitations (for the purpose of limiting the
credit to the United States tax on income from
sources outside of the United States) provided
by United States law for the taxable year. For
the purposes of applying the United States credit
in relation to tax paid to the United Kingdom:
   (a) the taxes referred to in paragraphs
(2) (b) and (3) of Article 2 (Taxes Covered)2
shall be considered to be income taxes;
2 These paragraphs read as follows:
(2) the existing taxes to which this Convention shall
apply are: (b) in the case of the United Kingdom, the income
tax, the capital gains tax, the corporation tax and the petro-
leum revenue tax. The foregoing taxes covered are herein-
after referred to as "United Kingdom Tax";
(3) This Convention shall also apply to any identical
or substantially similar taxes which are imposed by a Con-
tracting State or its political subdivisions or local authorities
after the date of signature of this Convention in addition to,

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48a

(b) the amount of 5 or 15 percent, as the
case may be, withheld under paragraph (2)(a)
(i) or (ii) of Article 10 (Dividends) from the
tax credit paid by the United Kingdom shall be
treated as an income tax imposed on the recip-
ient of the dividend; and
(c) that amount of tax credit referred to in
paragraph (2) (a) (i) of Article 10 (Dividends)
which is not paid to the United States corpora-
tion but to which an individual resident in the
United Kingdom would have been entitled had
he received the dividend shall be treated as an
income tax imposed on the corporation paying
the dividend.
The Article 23(1 ) U.S. tax credit for taxes paid to
the U.K. was given retroactive application to April
1, 1973. However, the Article 10(2) (a) (i) U.K.
payment with respect to dividends distributed by a
U.K. corporation to a (10% or greater) U.S. corpo-
rate shareholder was given retroactive application
only to April 6, 1975. Thus, during the 1974 tax
year at issue in this action, the U.S. foreign tax
credit plaintiff claims under Article 23( 1) (c) was
not defrayed by any U.K. payment under Article
10(2) (a) (i).  *  **  *
During 1974, RXL paid the following amounts of
dividends to its shareholders and ACT to the United
Kingdom tax authorities with respect to such divi-
dends (in pounds sterling) :
or in place of, the existing taxes. The competent authorities
of the Contracting States shall notify each other of any
changes which have been made in their respective taxation
laws.

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Shareholder

49a
    Amount of Dividend

Plaintiff (including Lyell)       9,166,714

RO and Affiliates and Class E
Shareholders               4,833,286
Total Dividends          14000,000
ACT                            6,000,000

The applicable exchange rate for conversion of
pounds sterling to dollars for U.S. foreign tax credit
purposes in 1974 is 2.3335 dollars to one pound. Ac-
cordingly, the dollar equivalents of the foregoing
amounts are as follows:

Shareholder          Amount of Dividend       
Plaintiff (including Lyell)      $21,390,527

RO and Affiliates and Class E
Shareholders               $11,278,473
Total Dividends          $32,669,000
ACT                            $14,000,000

Under U.K. law, a foreign tax credit against U.K.
corporation tax is granted by reason of the receipt
of dividends from non-U.K. resident corporations
out of the income of such non-U.K. resident corpo-
rations which has been subject to an income tax in
a foreign jurisdiction.
The section 85 set off against U.K. corporation
tax, if not surrendered, satisfies U.K. corporation
tax liability prior to the use of any foreign tax cred-
its to satisfy such U.K. corporation tax liability.
Foreign tax credits arising under U.K. law by rea-
son of the receipt of dividends from non-U.K. resi-
dent corporations which are not used against the
U.K. corporation tax liability of the U.K. resident
corporation receiving such dividends for the account-

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 50a
    
ing period in `which the dividends are received are
lost and may not be carried back or carried forward.
In order to avoid losing, sizeable foreign tax credits
under U.K. law, RXL surrendered a portion of the
ACT offset arising from its 1974 dividend, and satis-
fied a substantial portion of its 1974 corporation tax
liability by using foreign tax credits it would other-
wise have lost had such ACT set off not been sur-
rendered.
Of the 6,000,000 pounds ($14,000,000) of ACT
paid by RXL in 1974, 4,407,855 pounds ($10,285,-
730) was subsequently surrendered to its subsidiaries
RX-UK, RXM, and RX-Ireland to be used in reduc-
ing their U.K. corporation tax liabilities. only
1,592,145 pounds ($3,715,270) of the ACT paid in
1974 was applied in reduction of RXL'S U.K. cor-
poration tax liability for the tax year 1974.
The parties agree that the latter sum qualifies for
credit in 1974 under Article 23(1) of the US-UK
Income Tax Treaty, which took effect on April 25,
1980. However, defendant disputes plaintiff's claim
that such credit should also apply to any of the
4,407,855 pounds ($10,285.730) of surrendered ACT.
On February 28, 1984, plaintiff filed a timely claim
with the Internal Revenue Service (bawd on the
above and other causes of action) for refund of fed-
eral income tax in the amount of $5,272,575, or such
greater amount as is legally refundable, for the tax
year 1974. Plaintiff amended this claim on Febru-
ary 26, 1985, in the additional amount of $1,052,65(!
or such greater amount as is legally refundable.
No action having been taken by IRS on the Feb-
ruary 28, 1984 refund claim, and more than six
months having passed since filing as required by
section 6532 of the Internal Revenue Code, plaintiff

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51a

filed its complaint in this court on February 7, 1985,
in the principal sum of $6,333,334. The complaint
listed eleven causes of action, the second of which
claimed entitlement to additional foreign tax credit
in the amount of $3,511,965, which after adjustment
(for the additional deemed dividend of the amount
under section 78 of the Internal Revenue Code)
would result in a refund to the plaintiff of $1,826,222
with respect to the indirect foreign tax credit pro-
vided under Article 23( 1) (c) of the US-UK Income
Tax Treaty.
Trial was held on the treaty issue in Washington,
D.C. on October 13-14, 1987.

       DISCUSSION

The issue at bar is whether the surrender by RXL
of a portion of its section 85 offset to U.K. subsidi-
aries should have any effect on the availability of an
Article 23(1 ) (c) U.S. foreign tax credit to its par-
ent, Xerox. Plaintiff contends that RXL'S surrender
of the balance of its section 85 offset does not affect
Xerox's entitlement to the full Article 23(1) (c) U.S.
foreign tax credit in the 1974 year of distribution.
Defendant's position, however, is that the indirect
foreign tax credit granted to Xerox (and Lyell)
under the provisions of Article 23 should be calcu-
lated as if RXM, RX-Ireland, and RX-UK, rather
than RXL, had actually paid the ACT which was
used to satisfy portions of their corporation tax lia-
bilities. In other words, Xerox should receive no
Article 23( 1) (c) credit for any ACT offset surren-
dered by RXL.
Plaintiff builds its case for a full indirect foreign
tax credit under Article 23( 1) (c) on three lines of
reasoning:

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52a

(1) The U.S. foreign tax credit provided by the
terms of Article 23(1} (e) is based on the share-
holder credit under section 86, FA 1972, and not on
the payment of ACT under section 84, so that the use
of the section 85 offset by the payer of the dividend
or its surrendered is irrelevant to the issue of when
the Article 23(1 ) (c) credit is properly taken into
account.
(2) Even if Article 23(1) (c) were considered to
provide a U.S. foreign tax credit for section 84 ACT,
ACT is a tax which is paid or accrued in the year
the related dividend is paid and therefore, under
U.S. law, gives rise to a U.S. foreign tax credit in
the year of distribution.
(3) In no event can a surender under section 92,
FA 1972, make the surrendered the "taxpayer" of
ACT under U.S. or U.K. law, or the "corporation
paying the dividend" under the language of Article
23( 1) (c) of the Treaty.
Plaintiff contends that these arguments are sup-
ported by both the language and purpose of Articles
10 and 23 of the Treaty.
Defendant, however, contends that these Articles
inextricably link the U.S. foreign tax credit to the
payment of ACT and the year of its application
against U.K. corporation tax liability. According to
this view, the Article 23( 1) (c) U.S. foreign tax
credit arising as a result of the U.K. subsidiary's
dividend distribution and payment of ACT applies
only until the ACT is used to offset U.K. corporation
tax liability. Thus, in the event the section 85 ACT
offset is surrendered, in whole or in part, to another
U.K. corporation and applied against its U.K. cor-
poration tax liability, the U.S. direct investor's Ar-
ticle 23(1 ) (c) credit becomes an Article 23(1) (a)

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 53a

credit, no longer applicable in the year of dividend
distribution but rather in the year the offset is ap-
plied against the surrendered's U.K. corporation tax
liability. Defendant points to the language and pur-
pose of Articles 10 and 23, as well as the explicit
interpretations thereof by both treaty parties, as sup-
porting the foregoing argument.
      Article 10 (2) (a) (i)
Plaintiff, in support of its theory that the Article
23(1 ) (c) U.S. foreign tax credit is based on the sect-
ion 86 shareholder credit and independent of the
section 84 payment of ACT or the section 85 offset,
cites the following language from Articles 10(2 )
(a) (i) and 23 (1) (c) of the Treaty.
      Article 10(2) (a) (i)
 . . . the United States corporation shall be en-
titled to a payment from the United Kingdom
of a tax credit equal to one-half of the tax credit
to which an individual resident in the United
Kingdom would have been entitled had he re-
ceived the dividend  . . . . "
       Article 23(1) (c)
 For the purposes of applying the United
States credit in relation to tax paid to the
United Kingdom:
that amount of tax credit. referred to in
paragraph (2) (a) (i) of Article 10 (Dividends)
which is not paid to the United States corpora-
tion but to which an individual resident in the
United Kingdom would have been entitled had
he received the dividend shall be treated as an

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54a

income tax, imposed on the corporation paying
the dividend."
The "tax credit" referred to above is, as plaintiff
asserts, the section 86 U.K. shareholder credit. How-
ever, a credit against U.K. tax liability is not what
the foregoing articles confer upon a U.S. share-
holder. Article 10(2) (a) (i) provides that a U.S.
direct investor receive a "payment" from the U.K.
"equal to one-half of the tax credit" a U.K. resident
would receive. Moreover, Article 23( 1 ) specifically
provides that a U.S. direct investor be allowed a U.S.
tax credit "for the appropriate amount of tax paid
(emphasis added) to the United Kingdom" on ac-
count' of the dividend distribution. The Article 23
(1) (c) credit is qualified as a U.S. credit applied
"in relation to tax paid to the United Kingdom."
Thus, the treaty language cited by plaintiff hardly
affirms its theory that the applicability of an Article
23( 1) (c) U.S. foreign tax credit is entirely inde-
pendent of the ACT paid by its U.K. subsidiar(ies).
To better determine the intent of the treaty parties
with respect to the applicability of the Article 23
(1) (c) credit, it is appropriate to examine the offi-
cial pronouncements of the United States (and the
United Kingdom ) in connection with the ratification
and implementation of the Convention. Air France
v. Saks, 470 U.S. 392, 396, 105 S. Ct. 1338, 84
L. Ed.2d 289 (1985); " [T]reaties are construed more
liberally than private agreements, and to ascertain
their meaning we may look beyond the written words
to the history of the treaty, the negotiations, and the
practical construction adopted by the parties."
(quoting Choctaw Nation of Indians v. United
States, 318 U.S. 423,431-32 "(1943)).

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55a

 The Technical Explanation
After the signing of the US-UK Income Tax
Treaty on December 31, 1975, a "Technical Expla-
nation" was prepared by the U.S. Department of the
Treasury in connection with the submission of the
Convention to the Senate for hearings on ratifica-
tion in 1977. The Technical Explanation, which pro-
vided an article by article interpretation of the Con-
vention, stated the following with respect to ACT
in the context of Article 23:
"ACT which reduces mainstream [corporation]
tax in any year or years shall be attributable
to any accumulated profits of the year or years
for which the mainstream tax is reduced. Where
ACT is used to offset mainstream tax, the offset
will be viewed as a refund of the ACT initially
allowed as a credit and as a tax paid in respect
of the year for which the ACT is applied as an
offset. Consequently, a reduction in the foreign
tax credit for the year from which the ACT is
carried must be made in accordance with section
905 (c) of the Code."
This explanation accords with defendant's view that
the Article 23( 1) (c) U.S. foreign tax credit is linked
to the payment of ACT and the year of its applica-
tion as an offset against U.K. corporation tax liabil-
ity. It refutes plaintiff's first two arguments that
ACT and offset considerations are unconnected to the
Article 23(1) (c) credit.
The Technical Explanation reveals the intent of
Treasury with respect to the Convention and, as
numerous federal courts have stated, "the meaning
attributed to treaty provisions by the Government
agencies charged with their negotiation and enforce-

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56a

ment is entitled to great weight." Sumitomo Shoji
America, Inc. v. Avagliano, 457 U.S. 176, 194, 102
S.Ct. 2374, 72 L.Ed.2d 765 (1982) ; See also Kolovrat
v. Oregon, 366 U.S. 187, 194, 81 S. Ct. 922, 6 L. Ed.2d
218 (1961); Great-West Life Assurance Co. v.
United States, 230 Ct. Cl. 477, 491, 678 F.2d 180,
189 (1982). Moreover, the Senate's consideration of
the Convention, beginning in July 1977, was based
upon the interpretation set forth in the Technical
Explanation. Hearings and floor debates were held,
following which the Senate intially rejected the
treaty before approving it with two reservations in
June 1978. The Convention was ratified by the Sen-
ate in its final form on July 9, 1979. The record
does not indicate any disagreement in the Senate
during this time concerning the interpretation of Ar-
ticle 23 in the Technical Explanation, or any pro-
posals for reservations in regard thereto. At most,
the Senate Committee on Foreign Relations, in recom-
mending ratification of the Convention, acknowledged
Treasury's discretionary authority in the future ad-
ministration of the Article 23 provisions.3 Accord-
ingly, it is logical to conclude that the Senate was in
accord with Treasury's interpretation of Article 23
as set forth in the Technical Explanation when it
ratified the US-UK Income Tax Treaty in 1978-79.
Similarly, the record indicates at least tacit accept-
ance by the U.K. of the U.S. interpretation of Article
3 "[I]n  recommending the ratification of the treaty, the
Committee does not intend to adopt or reject the amplifica-
tions of the foreign tax credit rules contained in the Treasury
technical explanation. Consequently, Treasury would not be
foreclosed by the ratification of the Treaty from modifying
those administrative interpretations in the future should it
deem it advisable to do so. S, Exec. Rep. 18 at 36-37, reprinted
in 1980-81 Cum. Bull, at 429.

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57a

23( 1) (c) as set forth in the Technical Explanation.
As stated in the affidavit of Steven P. Hannes, who
was a member of the U.S. negotiating team in 1975
and an attorney for Treasury during the U.S. Sen-
ate's consideration of the treaty, "copies of the Tech-
nical Explanation would have been sent to the U.K.
negotiators."4 Knowledge of the U.S. interpretation,
therefore was clearly before the House of Commons
during its own ratification debate. The U.K. ratified
the Convention in the form approved by the U.S.
Senate, without further reservation or amendment,
by enacting section 16 of the Finance Act (No. 2)
1979, dated July 26, 1979.
Revenue Procedure 80-18
On April 25, 1980, the day the US-UK Income Tax
Treaty took effect, the Internal Revenue Service is-
sued Revenue Procedure (Rev. Proc. ) 80-18 setting
forth procedures for U.S. taxpayers to follow under
the applicable provisions of Articles 10 and 23. Sec-
tion 3.05 of Rev. Proc. 80-18 described the tax rami-
fications of Article 21(1) (c), in pertinent part, as
follows :
Paragraph (1) (c) of Article 23 provides, in
addition, that the one-half of the ACT paid by a
United Kingdom corporation that is not re-
funded to a U.S. direct investor [pursuant to
Article 10] and that would be credited or re-
funded to a United Kingdom individual resident
is treated as an income tax imposed on the dis-
tributing United Kingdom corporation (rather
than the U.S. shareholder). Under United King-
4 Plaintiff's Exhibit 30, Affidavit of Steven P. Hannes, PP.
7-8.

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58a

dom law, a United Kingdom corporation that
pays ACT may, however, transfer to a related
United Kingdom corporation the right to apply
ACT against mainstream tax liability. Thus,
for example, a United Kingdom subsidiary of a
United Kingdom corporation may benefit from
the parent's ACT payment by offsetting part or
all of the ACT against its own liability for
United Kingdom mainstream tax. In such a
case, for U.S. foreign tax credit purposes and
pursuant to Article 23, the parent corporation
has not paid or accrued the unrefunded ACT
offset against the subsidiary's mainstream tax
and has contributed to the capital of the sub-
sidiary an amount equal to the unrefunded ACT
offset. The subsidiary is considered to have paid
or accrued only mainstream tax paid or accrued
in excess of the ACT offset, plus the amount of
unrefunded ACT so offset. (Emphasis added.)
This revenue ruling, augmenting the treaty interpre-
tation outlined in the Technical Explanation, fully-
accords with defendant's position on Article 23
(1) (c). All three of plaintiff's arguments conflict
with Rev. Proc. 80-18.
Competent Authority Agreement
Notwithstanding the foregoing authority, Xerox
and other U.S. "direct investors" in U.K. corpora-
tions continued to express doubts about the U.S. gov-
ernment's interpretation of Article 23(1). To re-
solve this ongoing dispute, the "competent authori-
ties" of the United States and the United Kingdom
entered into negotiations in accordance with the
Convention's Article 25 "Mutual Agreement Proce-
dure." This article provides, in pertinent part, as
follows :

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59a

ARTICLE 25-MUTUAL AGREEMENT
PROCEDURE
   
(3) The competent authorities of the Contract-
ing States shall endeavor to resolve by mutual
agreement any difficulties or doubts arising as to
the interpretation or application of the Conven-
tion. In particular the competent authorities of
the Contracting States may reach agreement on:
(a) the attribution of income, deductions, cred-
its, or allowances of an enterprise of a Contract-
ing State to its permanent establishment situ-
ated in the other Contracting State;
(b) the allocation of income, deductions, credits,
or allowances between persons;
(c) the nature of particular items of income;
(d) the meaning of terms not otherwise defined
in this Convention;
(e) the place where a particular item of income
has it source.
(4) The competent authorities of the Contract-
ing States may communicate with each other
directly for the purpose of. reaching agreement
as contemplated by this Convention.5
After several years of correspondence and meet-
ings between the U.S. and U.K. competent authori-
ties, an agreement emerged in December 1986. This

___________________(footnotes)
 
5 The United States Competent Authority, as delegated by
the Secretary of the Treasury, is the Associate Commissioner
(Operations) of the Internal Revenue Service.

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60a

agreement took the form of an exchange of letters
which read as follows:     December 18, 1986
Mr. P.W. Fawcett
Inland Revenue, Policy Division
Room F-14, West Wing
Somerset House
London, WC2R 1LB
England

Dear Mr. Fawcett:
The following memorializes the agreement
reached at our meetings of July 11, and Septem-
ber 12, 1986, and is intended to constitute, when
accepted by you, a competent authority agree-
ment under Article 25 of the Convention be-
tween the Government of the United States of
America and the Government of the United
Kingdom of Great Britain and Northern Ireland
for the Avoidance of Double Taxation and Pre-
vention of Fiscal Evasion with respect to Taxes
cm Income (the "Convention"). (Emphasis
added.)
1. It is agreed that Article .23(1) (c) provides
a mechanism by which a U.S. foreign tax credit
may be obtained for that part of the U.K. tax
credit referred to in Article 10(.2) (a) (i) which
is not paid to a US. corporation but to which
an individual resident in the United Kingdom
would have been entitled had he received the
dividend. (Emphasis added.)
2. It is agreed that Article 23(1) (c) was in-
cluded in the Convention for the purpose of en-
suring that in accordance with Article 23(1) (a)

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 61a

the Advance Corporation Tax ("ACT") payment
which generally underlies the U.K. tax credit
referred to in paragraph 1 would be treated as
an income tax paid to the United Kingdom by
the U.K. corporation paying the dividend, be-
cause the United States questioned to what ex-
tent, in the absence of the Convention, payments
of ACT would be treated as payments of a cred-
itable corporate income tax for U.S. foreign tax
credit purposes. (Emphasis added. )
3. It is agreed that, pursuant to Article 23
(1), the Article 23(1) (c) mechanism must be
applied in accordance with the provisions and
subject to the limitations of the law of the
United States and that a credit is to be given
under Article 23(1) (c) only for the appropriate
amount of tax paid to the United Kingdom.
(Emphasis added).
4. It is agreed that Article 23(1) of the Con-
vention was not intended to provide two US.
foreign tax credits for a single payment of ACT
to the United Kingdom or U.S. foreign tax
credits in excess of the amount of corporation
tax (including both ACT and mainstream cor-
poration tax) paid to the United Kingdom in
respect of the profits out which a dividend is
paid. (Emphasis added. )
5. It is agreed that under the language of Ar-
ticle 23(1) which provides that the Article 23
(1) (c) credit must be allowed in accordance
with the provisions and subject to the limita-
tions of the law of the United States, the timing
of the credit is to be determined as a matter of
U.S. law. (Emphasis added.)

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62a

I would appreciate your reply as to whether you
are in agreement with the propositions set forth
in paragraphs (1) through (5) above. If you
do assent to these propositions, we will consider
such propositions to be a competent authority
agreement under Article 25 of the Convention.
This agreement will supercede any and all prior
agreements or correspondence between us re-
garding the matters addressed herein. (Em-
phasis added.)  Sincerely,

/s/ P.E. Coates
[U.S. Competent Authority]

Mr. P.E. Coates
Associate Commissioner (Operations)
Internal Revenue Service
Department of the Treasury
Washington, DC 20224
USA          23 December 1986
Dear Mr. Coates:

Thank you for your letter of 18 December 1986
recording the agreements reached at our meet-
ings on 11 July and 12 September 1986.

I am writing to say that I am in agreement with
the propositions set out in paragraphs 1 to 5 of
your letter, and your letter and this letter now
constitute a competent authority agreement
under Article 25 of the UK/US Double Taxation
Convention, superseding preview correspondence

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 63a

between us on the matters covered in the letters.
(Emphasis added.)

       Yours sincerely,

      /s/ P.W. Fawcett
        [U.K. Competent Authority]
This "Competent Authority Agreement" further
supports defendant's position that the Article 23
(1) (c) U.S. foreign tax credit is linked to the pay-
ment of ACT rather than the preceding dividend dis-
tribution by the U.K. corporation. It affirms that
both treaty parties view the application of the Ar-
ticle 23( 1) (c) credit as a matter of U.S. law,
thereby undermining plaintiff's argument that this
credit is based on the shareholder credit of U.K. law
(section 86, FA 1972), which arises as the direct
consequence of a dividend distribution by a U.K.
corporation without regard to whether ACT is paid
thereon. Moreover, the agreement of the competent
authorities as to the governance of U.S. law over
the timing of the Article 23(1) (c) credit accords
with defendant's view, previously expressed in the
Technical Explanation and Rev. Proc. 80-18, that the
credit must ultimately be applied in the year the
underlying ACT is used to offset U.K. corporation
tax liability.   *  *  *  *
Plaintiff challenges the authoritativeness of the
foregoing official pronouncements with respect to the
proper interpretation of Article 23(1) (e). The Tech-
nical Explanation is characterized by plaintiff as a
 
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64a

vehicle by which Treasury attempted not just to ex-
plain the treaty's contents, but "to legislate its
changing views of what it believes should have been
added to the treaty."6 Plaintiff charges that Rev.
Proc. 80-18, in its explanation of the US. foreign
tax credit consequences of an ACT surender, miscon-
strues both U.S. law and the terms of the treaty and
is therefore "invalid." 7 As for the Competent Au-
thority Agreement, plaintiff asserts that it is weak
on content-a collection of "self-evident and non-
controversial statements which are more consistent
with plaintiff's position than defendant's."8 More
importantly, acording to plaintiff, neither the Com-
petent Authority Agreement nor the Technical Ex-
planation addresses the central issue in this case-
the significance for Xerox of RXL's surrender of sec-
tion 85 ACT offsets. Accordingly, plaintiff maintains
that none of these materials provides a reliable guide
as to the intent of the treaty parties. Thus, they
should not be accorded much evidentiary weight in
this action.
The court, however, does not share plaintiffs dim
view of these documents. As previously discussed,
Treasury's Technical Explanation was presented to
the U.S. Senate as an aid to its understanding of the
treaty articles, and the Senate's intent in ratifying
the Convention was clearly shaped thereby. In view
of the United. Kingdom's subsequent ratification of
the Convention without reservation, and with full
knowledge of the Technical Explanation underlying
the U.S. ratification, it is difficult to sustain plain-
6Pretrial Reply Brief of Plaintiff, P. 30.
7 Pretrial Brief of Plaintiff, pp. 43-47.
8 Pretrial Reply Brief of Plaintiff, p. 25.

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65a

tiff's assertion that the Technical Explanation did
not conform with the terms of the treaty. Moreover,
plaintiff can hardly minimize the importance of the
Competent Authority Agreement as an expression
of the intent of the treaty parties, since Article
25(3 ) of the Convention specifically empowered the
competent authorities "to resolve . . . any difficulties
or doubts arising as to the interpretation or applica-
tion of the Convention." Courts have traditionally
been reluctant to impinge on the judgments of com-
petent authorities charged by the treaty states with
responsibilities of interpretation and implementation.
Sumitomo Shoji American, Inc. v. Avagliano, 457 U.S.
176, 185, 102 S. Ct. 2374, 72 L. Ed.2d 765 (1982);
Filler v. Commissioner, 74 T.C. 406, 408-09 (1980);
See also Collins v. Weinberger, 707 F.2d 1518, 1522-
1523 (D.C. Cir. 1983). As the Supreme Court stated
in Sumitomo, 457 U.S. at 185, "Our role is limited
to giving effect to the intent of the Treaty parties.
When the parties to a treaty both agree as to the
meaning of a treaty provision, and that interpreta-
tion follows from the clear treaty language, we must,
absent extraordinarily strong contrary evidence,
defer to that interpretation."
This court finds no such "extraordinarily strong
contrary evidence " in the case at bar, to the effect
that the Competent Authority Agreement misinter-
prets the language of the Convention or the intent of
the treaty parties. Nor does the court find this
Agreement a relatively substance-less document gen-
erally favorable, as plaintiff alleges, to its position.
To the contrary, as previously discussed, the court
finds the Competent Authority Agreement strongly
supportive of defendant's position on Article 23
(1) (c). Moreover, the court finds this Agreement,

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66a

along with the Technical Explanation and Rev. Proc.
80-18, fully in accordance with the language of Ar-
ticle 23( 1) tying the U.S. tax credit under Article
23(1 ) (c) not just to a dividend distribution, but "to
tax paid to the United Kingdom."
Plaintiff's assertion that the Competent Authority
Agreement and the Technical Explanation fail `m
address the ACT surrender issue is specious. While
the word "surrender" may not appear in the texts,
that action is clearly covered in previously cited pas-
sages from these documents. Thus, the Technical Ex-
planation states with respect to Article 23:
"Where ACT is used to offset mainstream tax,
the offset will be viewed as a refund of the ACT
initially allowed as a credit and as a tax paid
in respect of the year for which the ACT is ap-
plied as an offset."
And the Competent Authority Agreement states in
paragraph 5:
"It is agreed that under the language of Article
23(1) . . . the timing of the credit is to be de-
termined as a matter of U.S. law."
These- pasages present the scenario of the U.S. tax
credit arising in a different year from that of the
ACT payment, which would happen when either the
original payor of ACT or its subsidiar(ies), as sur
renderee (s), apply the ACT offset against U.K. main-
stream tax liability in a year other than that of the
dividend distribution.
Plaintiff contends that Rev. Proc. 80-18 is out of
step with U.S. tax law and the language of Article
23(1) (c). In particular, plaintiff argues that RXL
was the "technical taxpayer" of the ACT for U.S.
foreign tax credit purposes under the principles set

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67a

forth by the Supreme Court in Biddle v. Commis-
Sioner, 302 U.S. 573, 579-81, 58 S. Ct. 379, 82 L. Ed.
431 (1938 ). Rev. Proc. 80-18, plaintiff asserts, is in
direct conflict with the Biddle decision. Plaintiff also
cites Treasury Reg.  1.901-2(f), issued in 1983,
which defines "taxpayer" for foreign tax credit pur-
poses as "the person on whom foreign law imposes
legal liability for such tax." According to plaintiff,
language in Rev. Proc. 80-18 to the effect that, after
a U.K. corporation's payment of ACT and surrender
of the offset to a subsidiary who applies it against
U.K. corporation tax, "for U.S. foreign tax credit
purposes and pursuant to Article 23, the parent cor-
poration has not paid or accrued the unrefunded ACT
offset against the subsidiary's mainstream tax" can-
not be reconciled with U.S. tax law.
The above language, however, addresses the poten-
tial problem of double crediting for a single payment
of ACT. As defendant points out, Article 23(1) (c)
treats the corporation paying ACT as having paid
an income tax for U.S. tax purposes, while Article
23( 1) (a) also treats the surrendered of the offset
who applies it against its own corporation tax liabil-
ity as having paid the ACT for U.S. tax purposes.
To forestall any double credit, Rev. Proc. 80-18
treats the original Article 23( 1) (c) credit as re-
versed in favor of an Article 23(1) (a) credit
whereby "the subsidiary is considered to have paid
or accrued only mainstream tax paid or accrued in
excess of the ACT offset, plus the amount of unre-
funded ACT so offset." This ruling accords with the
body of U.S. law holding that double crediting is to
be avoided unless expressly anticipated or provided
for by Congress. Cleveland Electric Illuminating Co.
v. United States, 6 Cl. Ct. 711, 715 (1984) ; National
Cash Register Co. v. United States, 400 F.2d 820,

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68a

825-26 (6th Cir. 1968). Moreover, Rev. Proc. 80-18
was expressly affirmed in the subsequent Competent
Authority Agreement which stated that "Article
23(1)  of the Convention was not intended to provide
two U.S. foreign fax credits for a single payment of
ACT to the United Kingdom." 1986 Competent Au-
thority Agreement, Par. 4, supra.
Authority for this reversal of the Article 23 ( 1 ) (c)
credit when ACT is surrendered can also be found in
section 905 (c) of the Internal Revenue Code, which
requires a recomputation of the U.S. indirect foreign
tax credit when foreign taxes are refunded. As pre-
viously noted, the Technical Explanation which
formed the basis of the Senate's understanding of the
Convention and which was tacitly accepted by the
U.K. prior to its own ratification, stated specifically
that "Where ACT is used to offset mainstream tax,
the offset will be viewed as a refund of the ACT
initially allowed as a credit," necessitating "a reduc-
tion in the foreign tax en-edit for the year [the ACT
was initially paid] . . . in accordance with section
905 (c) of the Code." (Emphasis added. ) This lan-
guage, in confirming the applicability of section
905 (c) in determining entitlement to a U.S. foreign
tax credit under the Convention, manifests the in-
terim nature of the Article 23 (1 ) (c) credit.
With the reversal of the initial credit arising with
the payment of ACT, Article 23(1) (a j remains the
only avenue to claim a credit for the ACT. The
credit shifts to the year(s) the ACT is applied
against "mainstream" (corporation) tax and is
viewed "as a tax paid in respect of [that] year."
1977 Technical Explanation, supra. Based on this
language in the Technical Explanation, Rev. Proc.
80-18 duly recognizes that the "tax paid" by a sub-
sidiary (as surrendered) applying the ACT offset is

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69a

"the amount of the unrefunded ACT." While plain-
tiff objects to this interpretation not only shifting
the credit mechanism from Article 23( 1) (c) to Ar-
ticle 23( 1) (a) but also making the surrendered the
deemed payor of the ACT, the court does not find the
interpretation unreasonable in view of the fact that
the surrenderee's U.K. tax liability is satisfied.
In this respect the court finds the case at bar dis-
tinguishable from Biddle, supra. In that case plain-
tiff, a U.S. national who received cash dividends on
stock held in three U.K. corporations, claimed U.S.
foreign tax credits based on the U.K. income taxes
assessed against the U.K. corporations with respect
to the profits out of which the dividends were dis-
tributed. The Supreme Court, noting that Biddle
had no independent U.K. tax liability and received
his dividends only after the U.K. corporations had
been taxed upon their earnings, held that Biddle
could not be considered the taxpayer of any U.K. in-
come taxes for U.S. foreign tax credit purposes. In
the case at bar, RXM, RX-UK, and RX-Ireland did
have their own U.K. corporation tax liabilities which
were satisfied, at least in part, by the application
of the ACT offsets received from RXL. The surren-
derees were certainly "the person [s] on whom for-
eign law imposes legal liability for such [corpora-
tion] tax [es]" within the meaning of Treasury Reg.
 1.901-2(f), supra, unlike Biddle who had no such
liability with regard to U.K. income taxes on the
earnings from which his dividends were distributed.
Moreover, treating the surrenderees as the deemed
payers of ACT when they apply the offsets against
U.K. corporation tax liability furthers the expressed
purpose of both treaty parties to prevent a double
U.S. tax credit for a single payment of ACT.

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70a

Accordingly, the court rejects plaintiff's conten-
tion that Rev. Proc. 80-18 is "invalid" insofar as it
treats the surrendered as the deemed taxpayer of ACT
for U.S. foreign tax credit purposes. Nor dues the
court find any relevance in plaintiff's companion
argument that a surrendered cannot be considered
the "corporation paying the- dividend" under Article
23(1 ) (c) of the treaty, since a surrenderee applies
the ACT offset against U.K. tax liability under Ar-
ticle 23( 1) (a) and not as the "corporation paying
the dividend" under Article 23(1 ) (c). Thus, the
court finds the theories advanced by plaintiff in its
third line of reasoning (p. 13, supra ) Unpersuasive.
      *  **  *
At trial, plaintiff elicited testimony from various
experts cm U.K. tax law concerning the U.K. imputa-
tion system and certain aspects of the US-UK In-
come Tax Treaty.9 Plaintiff also introduced affidavits
from two former members of the U.S. negotiating
team containing their views as to the intent of the
U.S. and U.K. treaty negotiators in 1975 and brief
comments on the Technical Explanation, as well as
internal U.S. government memoranda summarizing
meetings held at Treasury in 1977, to discuss the
Technical Explanation,10 and at IRS in 1980, to dis-
9 Over defendant's objection, the court also heard testimony
under an offer of proof pursuant to Rule 103(a) (2) of the
Federal Rules of Evidence regarding alleged misstatements
of U.K. law in parts of the Technical Explanation covering
Articles 10 and 23 of the Convention. The court admits this
testimony into evidence to be accorded its due weight.
10 Plaintiff's Exhibits 28 and 29, Affidavits of Robert J.
Patrick, Jr.; Plaintiff's Exhibit 30, Affidavit of Steven P.
Hannes.

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71a

cuss Rev. Proc. 80-18.11 The court concludes, how-
ever, that the foregoing items are entitled to little
evidentiary weight in this action.
The Patrick and Hannes affidavits, statements of
former U.S. government agents involved in the nego-
tiations, cannot, in this court's judgment, take prece-
dence over the Technical Explanation and other offi-
cial pronouncements of the United States and. the
United Kingdom as evidence of the intent of the
treaty parties. To the extent the affidavits and the
official pronouncements are inconsistent, the affidavits
must give way. See generally Coplin v. United
States, 6 Cl. Ct. 115, 128 (1984), rev'd on other
grounds, 761 F.2d 688 (Fed. Cir. 1985) aff'd, sub
nom., O'Connor v. Unied States, 479 U.S. -, 107
S. Ct. 347, 93 L.Ed.2d 206 (1986) ; Johnson Controls,
Inc. v. United States, 8 Cl. Ct. 359, 370 (1985). This
same reasoning applies to the internal U.S. govern-
ment memoranda, which will not be accorded greater
weight than the official U.S. government pronounce-
ments which were issued thereafter. In short, plain-
tiff has failed to convince this court that there is
sufficient ambiguity in the treaty language and as-
sociated official pronouncements necessitating our re-
sort to the foregoing evidence as a means of constru-
ing the intent of the treaty parties.
The testimony of plaintiff's witnesses, while very
illuminating as to U.K. law, is of little assistance to
the court in interpreting Articles 10 and 23 of the
US-UK Income Tax Treaty. Principles of U.K. tax
law were not incorporated into treaty Articles 10 and
23 and did not underlie the U.S. Senate's under-
standing of the Convention in the ratification process.
11 Plaintiff's Exhibit 31. 

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72a

Moreover, the Competent Authority Agreement ex-
pressly confirmed that the application and timing of
the Article 23(1) (c) tax credit was a matter of U.S.
law. The testimony received by the court under offer
of proof, concerning alleged misstatements of U.K.
law in the Technical Explanation, is likewise unavail-
ing to plaintiff's cause. The Technical Explanation
formed the basis of the Senate's intent in ratifying
the Convention, and no objection thereto was voiced
by the U.K. prior to its own ratification. Regardless
of the accuracy of the Technical Explanation in de-
scribing U.K. law, it is clear that this document, not
U.K. law, is determinative of the intent of the treaty
parties. 

 CONCLUSION

For the reasons discussed herein, the court finds
that plaintiff has not established its entitlement to
the indirect foreign tax credit for 1974 claimed under
Article 23( 1) (c) of the US-UK Income Tax Treaty.
Having determined that there is no just reason for
delay, the Court hereby directs the Clerk to enter
judgment dismissing that part of the complaint seek-
ing a refund of federal income taxes in the amount
of $1,826,222.
With respect to plaintiff's other causes of action,
the parties shall advise the court within 60 days as
to their plans for further proceedings.

No costs.

IT IS SO ORDERED.

/s/ Bohdan A. Futey
BOHDAN A. Futey
Judge

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  73a

       APPENDIX E

       IN THE

UNITED STATES COURT OF FEDERAL CLAIMS

       No. 80-85T

     (Filed January 5, 1993)

   XEROX CORPORAT1ON, PlaINTIFF

         v.

   THE UNITED STATES, DEFENDANT

        ORDER

This matter is before the court on plaintiff's mo-
tion filed on November 9, 1992, for reconsideration
of the Opinion issued March 17, 1988.1 On December
10, 1992, defendant filed its response. Although not
required by the RCFC, the court will allow plaintiff's
motion for leave to file a reply brief as of this date.
After careful consideration, however, this court
finds no grounds upon which to grant the motion for
reconsideration. Moreover, the case cited by plaintiff,
Snap-on-Tools, Inc. v. United States, 26 Cl. Ct. 1045
(1992) is not binding precedent. See Sun Eagle
Corp. v. United States, 23 Cl. Ct. 465, 473 (1991).

1 Although the Opinion was issued on March 17, 1988, judg-
ment was entered on November 5, 1992.

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74a

Accordingly, this court stands by its Opinion issued
over 4 years ago. Plaintiff's motion for reconsidera-
tion is DENIED.
IT IS so ORDERED.

/s/ Bohdan A. Futey
BOHDAN A. FUTeY
Judge

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         75a

       APPENDIX F
     STATUTORY, TREATY AND
     REGULATORY PROVISIONS

\1. The Internal Revenue Code of 1954, as in effect
for the year 1974, provided in relevant part:
a. 26 U.S.C. 901. TAXES OF FOREIGN COUN-
 
       TRIES AND OF POSSES-
        SIONS OF UNITED STATES.

(a) Allowance of Credit.
If the taxpayer chooses to have the benefits of this
subpart, the tax imposed by this chapter shall, sub-
ject to the applicable limitation of section 904, be
credited with the amounts provided in the applicable
paragraph of subsection (b) plus, in the ease of a
corporation, the taxes deemed to have been paid
under sections 902 and 960. Such choice for any
taxable year may be made or changed at any time
before the expiration of the period prescribed for
making a claim for credit or refund of the tax im-
posed by this chapter for such taxable year. The
credit shall not be allowed against the tax imposed
by section 56 (relating to minimum tax for tax pref-
erences), against the tax imposed by section 531
(relating to the tax on accumulated earnings),
against the additional tax imposed for the taxable
year under section 1333 (relating to war loss recov-
eries) or under section 1351 (relating to recoveries
of foreign expropriation losses) or against the per-
sonal holding company tax imposed by section 541.

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76a

(b) Amount Allowed.

Subject to the applicable limitation of section 904,
the following amounts shall be allowed as the credit
under subsection (a) :

(1) Citizens and domestic corporations In
the case of a citizen of the United States and of
a domestic corporation, the amount of any in-
come, war profits, and excess profits taxes paid
or accrued during the taxable year to any for-
eign country or to any possession of the United
States; and *  *  *  *  *

b. 26 U.S.C. CREDIT FOR CORPORATION
     STOCKHOLDER IN FOREIGN
     CORPORATIONS.

(a) Treatment of Taxes Paid by Foreign Corpora-
tion For purposes of the subpart, a domestic cor-
poration which owns at least 10 percent of the voting
stock of a foreign corporation from which it receives
dividends in any taxable year shall-

(1) to the extent such dividends are paid by
such foreign corporation out of accumulated
profits (as defined in subsection (c) (1) (A)) of
a year for which such foreign corporation is not
a less developed country corporation, be deemed
to have paid the same proportion of any income,
war profits, or excess profits taxes paid or
deemed to be paid by such foreign corporation
to any foreign country or to any possession of
the United States on or with respect to such
accumulated profits, which the amount of such
dividends (determined without regard to section
78) bears to the amount of such accumulated

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 77a

profits in excess of such income, war profits, and
excess profits taxes (other than those deemed
paid); and *  *  *  *  *
(b) Foreign Subsidiary of First and Second For-
eign Corporation 
(1) If the foreign corporation described in
subsection (a) (hereinafter in this subsection
referred to as the "first foreign corporation")
owns 10 percent or more of the voting stock of
a second foreign corporation from which it re-
ceives dividends in any taxable year, it shall be
deemed to have paid the same proportion of any
income, war profits, or excess profits taxes paid
or deemed to be paid by such second foreign cor-
poration to any foreign country or to any posses-
sion of the United States on or with respect to
the accumulated profits of the corporation from
which such dividends were paid which-
  (A) for purposes of applying subsection
  (a) (1), the amount of such dividends bears
  to the amount of the accumulated profits
  (as defined in subsection (c) (1) (A)) of
  such second foreign corporation from which
  such dividends were paid in excess of such
  income, war profits, and excess profits taxes,
  or
(2) If such first foreign corporation owns 10
percent or more of the voting stock of a second
foreign corporation which, in turn, owns 10 per-
cent or more of the voting stock of a third for-
eign corporation from which the second foreign
corporation receives dividends in any taxable

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78a

year, the second foreign corporation shall be
deemed to have paid the same proportion of any
income, war profits, or excess profits taxes paid
by such third foreign corporation to any foreign
country or to any possession of the United States
on or with respect to the accumulated profits of
the corporation from which such dividends were
paid which-
(A) for purposes of applying subsection
(a) (1), the amount of such dividends bears
to the amount of the accumulated profits
(as defined in subsection (c) (1) (A) of
such third foreign corporation from which
such dividends were paid in excess of such
income, war profits, and excess profits taxes,
or  *  *  *  *  *

C. 26 U.S.C. 905 APPLICABLE RULES
             *
(c) Adjustments on Payment of Accrued Taxes 
If accrued taxes when paid differ from the amounts
claimed as credits by the taxpayer, or if any tax paid
is refunded in whole or in part, the taxpayer shall
notify the Secretary or his delegate, who shall rede-
termine the amount of the tax for the year or years
affected, The- amount of tax due on such redetermi-
nation, if any, shall be paid by the taxpayer on notice
and demand by the Secretary or his delegate, or the
amount of tax overpaid, if any shall be credited or
refunded to the taxpayer in accordance with subchap-
ter B of chapter 66 (sec. 6511 and following). * * *.
     *  *  *  *  *

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79a

2. The Convention Between the Government of
the United States of America and the Government of
the United Kingdom of Great Britain and Northern
Ireland for the Avoidance of Double Taxation and the
Prevention of Fiscal Evasion with Respect to Tax on
Income and Capital Gains, T.I.A.S. No. 9682, 31
U.S.T. 5668, provides in relevant part:
Article 2-Taxes Covered   *  *
(2) The exiting `taxes" to which the Convention
shall apply are:

  (b) in the case of the United Kingdom, the
income tax, the capital gains tax, the corporation
tax and the petroleum revenue tax. The forego-
ing taxes covered are hereinafter referred to as
"United Kingdom tax."
     *   *  *  *   *
Article 10-Dividends
     *  *  *  *  *
(2)    *  *    *  *
(a) In the case of dividends paid by a corporation
which is a resident of the United Kingdom:
(i) to a United States corporation which either
alone or together with one or more associated
corporations controls, directly or indirectly, at
least 10 percent of the voting stock of the cor-
poration which is a resident of the United King-
dom paying the dividend, the United States cor-
poration shall be entitled to a payment from the

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80a

United Kingdom of a tax credit equal to one-half
of the tax credit to which an individual resident
in the United Kingdom would have been entitled
had he received the dividend, subject to the de-
duction withheld from such payment and accord-
ing to the laws of the United Kingdom of an
amount not exceeding 5 percent of. the aggregate
of the amount or value of the dividend and the
amount of the tax credit paid to such corpo-
ration;  *  *  *   *   *

Article 23-Elimination of Double Taxation

{1) In accordance with the provisions and subject
to the limitations of the law of the United States (as
it may be amended from time to time without chang-
ing the general principle hereof), the United States
shall allow to a resident or national of the United
States as a credit against the United States tax the
appropriate amount of tax paid to the United King-
dom; and, in the case of a United States corporation
owning at least 10 percent of the voting stock of a
corporation which is a resident of the United King-
dom from which it receives dividends in any taxable
year, the United States shall allow credit for the
appropriate amount of tax paid to the United King-
dom by that corporation with respect to the profits
out of which such dividends are paid. Such appropri-
ate amount shall be based upon the amount of tax
paid to the United Kingdom, but the credit shall not
exceed the limitations (for the purpose of limiting
the credit to the United States tax on income from
sources outside of the United States) provided by
United States law for the taxable year. For the pur-

---------------------------------------- Page Break ----------------------------------------

  81a

poses of applying the United States credit in relation
to tax paid to the United Kingdom:
  (a) the taxes referred to in paragraphs (2)
(b) and (3) of Article 2 (Taxes Covered) shall
be considered to be income taxes;
  (b) the amount of 5 or 15 percent, as the
case may be, withheld under paragraph (2) (a)
  (i) or (ii) of Article 10 (Dividends) from the
tax credit paid by the United Kingdom shall be
treated as an income tax imposed on the recipi-
ent of the dividend; and
  (c) that amount of tax credit referred to in
paragraph (2) (a) (i) of Article 10 (Dividends)
which is not paid to the United States corpora-
tion but to which an individual resident in the
United Kingdom would have been entitled had
he received the dividend shall be treated as an
income tax imposed on the United Kingdom corp-
oration paying the dividend.
     *   *  *  *  *
3. Technical Explanation of the Convention Be-
tween the Government of the United States of Amer-
ica and the Government of the United Kingdom of
Great Britain and Northern Ireland for the Avoid-
ance of Double Taxation and the Prevention of Fis-
cal Evasion with Respect to Tax on Income and
Capital Gains, 1980-1 C.B. 455, provides in relevant
part:    *   *   *   *   *
Article 23. Elimination of Double Taxation
      *  *  *   *  *
In the United Kingdom tax system, ACT serves
a dual function. To the extent that it offsets the
United Kingdom corporate income tax imposed with-

---------------------------------------- Page Break ----------------------------------------

 82a

out regard to distributions (hereinafter referred to
as "mainstream tax"), it is analogous to a payment
of regular corporate income tax. To the extent that
it does not offset mainstream tax, it is more analo-
gous to a tax imposed on distributions which are in-
come to shareholders.
To reflect this hybrid nature of ACT, ACT which
offsets mainstream tax will be attributed to the earn-
ings of the year in which it offsets such tax and
treated as if it were regular corporate tax. ACT
which does not offset mainstream tax will generally
be attributed to the accumulated profits of the year
of distribution.
     *  *  *   *   *
ACT which reduces mainstream tax in any year
or years shall be attributable to any accumulated
profits of the year or years for which the mainstream
tax is reduced, Where ACT is used to offset main-
stream tax, the offset will be viewed as a refund of
the ACT initially allowed as a credit and as a tax
paid in respect. of the year for which the ACT is
applied as an offset. Consequently, a reduction in
the foreign tax credit for the year from which the
ACT is carried must be made in accordance with
section 905 (c) of the Code.
4. Revenue Procedure 80-18, 1980-1 C.B. 623,
provides in relevant part:
     *  *  *  *  *
Sec. 3. Application of ACT Refunds to United
  States Shareholders
     *  *  *  *  *

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  83a

.05 Allowance of Foreign Tax Credits with Re-
spect to ACT Refunds.
    *  *  *  *  *
Paragraph (1) (e) of Article 23 provides, in
addition, that the one-half of the ACT paid by a
United Kingdom corporation that is not refunded
to a U.S. direct investor and that would be
credited or refunded to a United Kingdom in-
dividual resident is treated as an income tax
imposed on the distributing United Kingdom
corporation (rather than the U.S. shareholder).
Under United Kingdom law, a United Kingdom
corporation that pays ACT may, however, trans-
fer to a related United Kingdom corporation the
right to apply ACT against mainstream tax lia-
bility. Thus, for example, a United Kingdom
subsidiary of a United Kingdom corporation may
benefit from the parent's ACT payment by off-
setting part or all of the ACT against its own
liability for United Kingdom mainstream tax.
In such a case, for U.S. foreign tax credit pur-
poses and pursuant to Article 23, the parent
corporation has not paid or accrued the unre-
funded ACT offset against the subsidiary's main-
stream tax and has contributed to the capital of
the subsidiary an amount equal to the unre-
funded ACT offset. The subsidiary is considered
to have paid or accrued only mainstream tax
paid or accrued in excess of the ACT offset, plus
the amount of unrefunded ACT so offset.

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No. 94-2005

In The Supreme Court of The United States
OCTOBER TERM, 1994

UNITED STATES OF AMERICA, PETITIONER

v.

XEROX CORPORATION

PETITION FOR A WRIT OF CERTIORARI 
TO THE UNITED STATES COURT OF APPEALS
FOR THE FEDERAL CIRCUIT

DREW S. DAYS, III
Solicitor General
Department of Justice
Washington, D.C. 20530
(202)514-2217

---------------------------------------- Page Break ----------------------------------------

TABLE OF AUTHORITIES

Commissioner v. Portland Cement Co. of Utah, 450
U.S. 156 (1981)  . . . . 8
Factor v. Laubenheimer,290 U. S. 276 (1933)  . . . . 5
Helvering v. Queen Ins. Co., 115 F.2d 341(2d Cir. 1940),
cert. denied, 312 U.S. 706(1941)  . . . . 7
National Muffler Dealers Ass'n v. United States, 440
U.S. 472 (1979)  . . . . 8
Snap-on Tools v. United States, 26 F.3d137(Fed. Cir.
1994)  . . . . 1
United States v. Cartwright,411U.S. 546(1973)  . . . . 8
United States v. Goodyear Tire & Rubber Co., 493 U.S.
132 (1989)  . . . . 1, 6
United States v. Hill, 113S. Ct. 941(1993)  . . . . 1

Statutes and regulations

Internal Revenue Code of 1954 (26 U.S.C.):
 902  . . . . 6
 905(c)  . . . . 6, 7
 6402(a)  . . . . 7
 6511(d)(3)  . . . . 2
Treasury Reg. (26 C.F.R.):
 1.901-2(e)(4)  . . . . 6
 1.903-1(b)(3)  . . . . 7

Miscellaneous:

D. Marks, Advance Corporation Tax, The Tax
(Apr. 20, 1995)  . . . . 2, 3

(I)

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OCTOBER TERM, 1995       

 No. 94-2005

UNITED STATES OF AMERICA, PETITIONER

       v.

 XEROX CORPORATION

ON PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
   FOR THE FEDERAL CIRCUIT

REPLY BRIEF FOR THE UNITED STATES

1. a. Respondent claims (Br. in Opp. 11) that the peti-
tion should be denied because there are no conflicting de-
cisions. But we did not argue that the petition should be
granted because of a conflict within the circuits. Instead,
as this Court has often concluded in similar contexts, the
petition should be granted because the Federal Circuit is
a court of nationwide jurisdiction and its decision in this
case presents questions of substantial fiscal and admini-
strative importance. Pet. 15. See, e.g., United States v.
Hill, 113 S. Ct. 941, 945 (1993); United States v. Goodyear
Tire & Rubber Co., 493 U.S. 132, 138 (1989). 1

___________________(footnotes)

1 Respondent errs in claiming (Br. in Opp. 11) that Snap-on Took
v. United States, 26 F.3d 137 (Fed. Cir. 1994), is relevant to the present
case. Snap-on Took concerned the entirely distinct question whether
dividends paid by a foreign corporation during the first 60 days of the
year are to be treated as if paid from the accumulated profits of that
            
(1)

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2

b. Respondent contends that the absence of other
pending litigation on the questions presented in this case
is "compelling evidence" (Br. in Opp. 13) that the deci-
sion of the court of appeals has only a limited signifi-
cance. The fact that respondent took a uniquely aggres-
sive stance on this tax issue does not mean that the deci-
sion in respondent's favor lacks administrative impor-
tance. To the contrary, as the petition notes (Pet. 22):
The foreign tax credits claimed by United States tax-
payers with respect to the "foreign income taxes"
paid by their United Kingdom subsidiaries exceeded
$2.24 billion [in 1990 alone]. Even a modest increase
or realignment of foreign tax credits available to
these United States taxpayers could yield huge reve-
nue consequences. Moreover, the statute of limita-
tions for amended returns with respect to foreign tax
credit claims is ten years from the date that the tax-
payer's return was filed. 26 U.S.C. 6511(d)(3). The
decision in this case thus threatens a major impact on
revenue not only for the future, but also for a signifi-
cant period into the past.
Because the decision in this case ''has changed the timing
of a United States parent's entitlement to foreign tax
credits for advance corporation tax," international tax
advisors have counseled corporations to give "considera-
tion * * * to amending United States tax returns and
adjusting earnings and profits and foreign taxes of
United Kingdom corporations." D. Marks, Advance Cor-
poration Tax, The Tax Journal 5, 6 (Apr. 20, 1995). As

___________________(footnotes)

corporation for the prior year. The issues addressed in that case have
no relationship to the questions presented in this case. Respondent is
indulging in hyperbole in suggesting that the decision not to seek
further review in Snap-on Tools is "dramatic evidence that the govern-
ment itself does not consider" the different issues involved in the pre-
sent case to be "of any real importance" (Br. in Opp. 12).

---------------------------------------- Page Break ----------------------------------------

3

these advisors note, the decision in this case permits
corporations to engage in tax planning that reduces their
world-wide tax exposure simply by adjusting "which
companies in the group should account for the [advance
corporation tax] on dividend payments." Id. at 6.2
Respondent errs in suggesting (Br. in Opp. 12) that the
decision in this case applies only when a United Kingdom
subsidiary surrenders the right to offset the payment of
"advance corporation tax" against corporation tax liabi-
lity to a second-tier subsidiary. The court of appeals held
that the "advance" tax "is a separate tax, and is not pro-
perly viewed as a prepayment or interim credit or estim-
ated tax of mainstream corporate tax" (Pet. App. 31a).
The court concluded that the advance corporation tax is
"fixed," and the credit is to be given, "in the year it is
paid or accrued in the United Kingdom" (id. at 31a-32a).
The holding and rationale of the decision in this case thus
purport to apply to any case where the "advance cor-
poration') taxis either deferred or surrendered for appli-
cation against "corporation" taxi.iabilityinalater year.
As a result, taxpayers who defer or surrender their
setoff right have an option to follow either the Federal
Circuit's decision or the Treasury's Technical Explana-
tion in computing their foreign tax credits. Those who
receive a greater benefit from the approach of the
Federal Circuit will recompute their credits and enforce
their claim in a refund suit within the Federal Circuit.
Those who receive a greater benefit under the Technical
Explanation will rely on the Treasury's published inter-
pretation. Evenhanded enforcement of the foreign tax
credit provisions is thus fully compromised.

___________________(footnotes)

2 The Treasury Department informs us that taxpayers are follow-
ing the recommendation of these advisors and are recomputing their
credits in order to file refund claims based on the decision in this case.

---------------------------------------- Page Break ----------------------------------------

4

2. Respondent's extensive efforts to defend the erro-
neous decision of the court of appeals do nothing to
detract from the need for this Court's further review.
a. Respondent contends that the Treasury's inter-
pretation defeats the Treaty's goal of reducing "double
taxation on U.K. corporate dividend distributions to U.S.
shareholders" (Br. in Opp. 18). Neither respondent nor
the court of appeals, however, explains how the Treas-
ury's interpretation results in double taxation of cor-
porate dividends distributed to United States share-
holders. As we explain in the petition, the Treasury's
interpretation does not result in double taxation. Pet. 19.
Respondent nonetheless contends that the Treasury's
interpretation is "inequitable" because respondent's sub
sidiary was "forced" to surrender its setoff right under
United Kingdom law so that the subsidiary could "use
efficiently" its own United Kingdom foreign tax credits
(Br. in Opp. 8, 15). What respondent is euphemistically
describing is the fact that, under United Kingdom law,
its subsidiary simply had more credits against its United
Kingdom tax obligation than it needed.  There is, of
course, no precedent for the suggestion that United
States law should be interpreted in such a way that re-
spondent obtains maximum benefit not only of its United
States tax credits but also of the tax credits inde-
pendently available to it under foreign law. The Treas-
ury's position is not, as respondent puts it, "inequitable"
(id. at 15) simply because it does not enable respondent to
minimize its total, world-wide tax payments. Under the
Treasury's interpretation, respondent is entitled to ob-
tain the full benefit of the United States foreign tax
credit at the time that the "advance" payment is applied
against the "corporation" tax liability. See Pet. 19.
b. Respondent belatedly acknowledges (Br. in Opp.
18) that the timing of the foreign tax credit for payments

---------------------------------------- Page Break ----------------------------------------

5

of the advance corporation taxis to be determined under
United States law and not under the Treaty itself. See
Pet. 15-17; Br. in Opp. 18. Respondent errs, however, in
stating (ibid.) that the court of appeals also acknowledged
that fact. Instead, the court of appeals erroneously con-
cluded that the "advance" tax was a "separate" tax and
that the credit for that tax became "fixed" under the
Treaty and ''vested in Xerox when the tax and dividends
were paid" (Pet. App. 31a, 32a).
c. The Internal Revenue Code does not directly and
precisely answer whether the foreign tax credit for the
advance corporation tax is to be granted under United
States law at the time that the "advance" tax is paid or
when that payment is later applied against the ultimate
corporation tax liability. The Technical Explanation and
Revenue Procedure 80-18 were adopted by the Treasury
to interpret how the general foreign tax credit provisions
of the Code apply in this discrete foreign tax context.3
Section 902 of the Internal Revenue Code allows a
foreign tax credit only for foreign taxes paid on the "ac-

___________________(footnotes)

3 Respondent mistakenly refers to the Technical Explanation,
Revenue Procedure 80-18 and the Competent Authority Agreement as
"post treaty interpretations" (Br. in Opp.22). The first two were issu-
ed contemporaneously with the adoption and ratification of the Treaty.
The Technical Explanation was presented to the Senate at the time of
its hearings (Pet. App. 17a) and the Senate ratified the Treaty with
full knowledge of the Treasury's interpretation (Pet. 18-19 & n. 16).
The Revenue Procedure was issued on the date the Treaty went into
force (Pet. App. 21a) and is also a contemporaneous interpretation of
the agency. While the Competent Authority Agreement is a `(post
treaty" record, Article 25 of the Treaty provides that the competent
authorities may "resolve by mutual agreement any difficulties or
doubts arising as to the interpretation or application of the" Treaty
(Pet. App.58a-59a). The Competent Authority agreement is therefore
entitled to dispositive weight. See Factor  v. Laubenheimer, 290 U.S.
276,294-295 (1933).

---------------------------------------- Page Break ----------------------------------------

6

cumulated profits" of a foreign subsidiary.  United
States v. Goodyear Tire & Rubber Co., 493 U.S. 132, 138-
139(1989). If the advance corporation tax is not applied
to the foreign subsidiary's corporation tax liability in the
year it is paid, it effectively becomes an additional in-
come tax on the "accumulated profits" of the foreign sub-
sidiary for that year. The Treasury therefore concluded
that a provisional credit should be allowed under United
States law for advance corporation tax in the year it is
paid. When the "advance" tax is thereafter applied to
corporation tax liability for a different year, or is
surrendered for application against a subsidiary's corpo-
ration tax liability, however, that payment becomes a
charge against the "accumulated profits" of the later
year. The Treasury therefore reasonably concluded that
United States law provides a permanent credit for the
"advance" tax in the year it is applied as payment of the
taxes owed for the "accumulated profits" of the foreign
subsidiary.
Under Section 905(c) of the Code, when a "foreign in-
come tax" paid by a foreign subsidiary results in a for-
eign tax credit for its United States parent, and the for-
eign tax of the subsidiary is later adjusted or refunded,
the United States income tax liability of the parent is to
be redetermined.  The Technical Explanation explains
that, when the "advance corporation tax" is used to
satisfy the "corporation tax" in a different year, "the off-
set will be viewed as a refund of the [advance corporation
tax] initially allowed as a credit and as a tax paid in
respect of the year for which the [advance corporation
tax] is applied as an offset" (Pet. App. 82a).4 While

___________________(footnotes)

4 Respondent suggests (Br. in Opp. 20-21) that this interpretation
of Section 905(c) is inconsistent with Treasury Regulation Section
1.901-2(e)(4). That regulation concerns the situation where the liability

---------------------------------------- Page Break ----------------------------------------

7

United States law, rather than United Kingdom law, con-
trols the timing of the tax credit (see Pet. 16-17), it
should be noted that United Kingdom law also specifies
that the second-tier subsidiary to whom the "advance"
payment is surrendered "shall be treated * * *
as having paid an amount of advance corporation tax
equal to the surrendered amount." Finance Act of 1972,
 92(2)(a), quoted at Br. in Opp. App. 8a.5
The Treasury's interpretation of how the general for-
eign tax credit provisions of the Code apply in this dis-
crete foreign tax setting is entitled to substantial defer-
ence. Commissioner v. Portland Cement Co. of Utah,

___________________(footnotes)

for a foreign income tax may be "reduced by the amount of the
taxpayer's liability for a different levy (the `second levy')" (ibid.). It
gives as an example of its scope the facts of Example 5 of Treasury
Regulations Section 1.903-1(b)(3). That Example describes the facts of
Helvering v. Queen Insurance Co., 115 F.2d 341 (2d Cir. 1940), cert.
denied, 312 U.S. 706 (1941). The regulation that respondent cites, and
the Queen Insurance decision that the regulation incorporates by
example, are not relevant to the issues presented in this case for the
reasons already explained in the Petition. See Pet. 20-21 n. 17. This
case does not concern the amount of the foreign income tax that has
been paid when an income tax is reduced by some other mm-income
tax levy; it instead concerns the situation where the Treaty defines
both levies to be foreign "income" taxes but leaves to United States law
the determination of the proper timing of the credit that must be
allocated between them.
5 Respondent asserts that the Treasury's position is wrong because
"section 905(c) applies to actual refunds of foreign tax and not to alleged
or deemed refunds" (Br. in Opp. 21). Neither respondent nor the court
of appeals (Pet. App. 30a-31a) cites any authority in support of that
proposition. Contrary to respondent's unsupported contention, the stat-
ute does not state that it applies only to "actual" refunds (Br. in Opp.
21). Instead, it refers simply to "adjustments" and "refunds," and it is
obvious that an adjustment or refund may be made by allowing a
"credit" against a different tax obligation as well as by remitting an
"actual" payment to the taxpayer. See 26 U.S.C. 6402(a).

---------------------------------------- Page Break ----------------------------------------

8

450 U.S. 156, 169 (1981). "The choice among reasonable
interpretations is for the Commissioner, not the courts. "
National Muffler Dealers Ass`n v. United States, 440
U.S. 472, 488 (1979). The interpretation adopted by the
Treasury is ''reasonable" (ibid.) and shouldn't have been
rejected by the court of appeals.
3. Before arguing that the court of appeals correctly
relied on the post-trial affidavits of individuals who were
not competent authorities to interpret the Treaty (Br. in
Opp. 26-30), respondent first inconsistently claims that
the court of appeals did not rely on those affidavits (id. at
25). Even a cursory reading of the opinion of the court
of appeals, however, shows that the court in fact relied
extensively on the affidavits.  The court quoted the
affidavits at length in describing what it called "The
Negotiation History" of the Treaty (Pet. App. 15a-17a).
The court also relied extensively on the post-trial affida-
vits in rejecting the Treasury's Technical Explanation of
the Treaty (id. at 20a-21a). Indeed, the court's central
premise-that the "advance" tax is a''separate" tax, the
credit for which is "fixed" under the Treaty at the time
the "advance" tax is paid (id. at 23a, 31a)-was emphati-
cally based by the court on its acceptance of the state-
ment in the post-trial affidavits that the "foreign tax
credit had to be currently creditable" under the Treaty
itself (id at 16a; emphasis by court). The court plainly
and directly relied on the post-trial affidavits in describ-
ing what the court stated was an "extremely one-sided
record" in this case (id. at 21a).
Respondent errs in contending (Br. in Opp. 26) that
the post-trial affidavits became a proper part of the evi-
dentiary "record" in this case when they were submitted
by respondent in connection with its new trial motion
five years after the conclusion of the trial. As the peti-
tion explains (Pet. 26 & n.23), post-trial affidavits are

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9

hearsay and, when offered in connection with a new trial
motion, may be considered only in evaluating that
motion; they may not be considered in evaluating the
merits of the underlying decision.6
Respondent further contends (Br. in Opp. 28-29) that
the error of the court of appeals in relying on the ex
parte, post-trial affidavits should be ignored because
other "competent evidence" supports at least some of the
statements made in the affidavits. The other "evidence"
to which respondent refers is correspondence between
the United Kingdom Inland Revenue and respondent's
counsel that occurred several years after the trial (Br. in
Opp. App. 21a-26a). These post-trial letters, like the post-
trial affidavits, were submitted by respondent in connec-
tion with its motion for a new trial. Like the post-trial
affidavits, the post-trial letters are not competent author-
ity agreements and are not "competent evidence" on the
merits of this case. See Pet. 28 n.25. Respondent's con-
trary view ignores that "evidence" is to be submitted and
weighed at trial, not on appeal.
Moreover, the letters state only that the Inland Reve-
nue has "no reason to dissent from" one of the many fact-
ual assertions made in the post-trial affidavits. What the
letters do not "dissent from" is the statement that the
Treasury's Technical Explanation was not presented by
the United Kingdom government on the floor of the

___________________(footnotes)     
                  .
6 Respondent errs in stating (Br. in Opp. 27) that, by not objecting
to inclusion of the post-trial affidavits in the joint appendix on appeal,
the government waived its objection. Not surprisingly, respondent
cites no plausibly relevant authority for that proposition. The affida-
vits were properly included in the joint appendix because if respondent
had reasserted its new trial claim on appeal the affidavits could have
been relevant to that issue. Respondent chose not to seek a new trial
on appeal, however, and the court's reliance on the post-trial, ex parte
affidavits in its decision on the merits was improper.

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House of Commons (Br. in Opp. App. 26a). The letters
do not, as respondent misleadingly suggests, "confirm"
the entire bulk of the lengthy `post-trial affidavits (Br. in
Opp. 29). In particular, they do not "confirm" the por-
tions of the affidavits that offer personal interpretations
of the Treaty, on which the court of appeals emphatically
relied. See page 8, supra.
Instead, the post-trial letters reaffirm the statement in
the Competent Authority agreement that "the timing of
the credit is to be, determined as a matter of U.S. law"
and that the Treaty itself does not fix the timing of the
credit (Pet. App. 61a; see Br. in Opp. App. 24a, 26a). De-
spite this bilateral international agreement, respondent
procured and submitted private, ex parte affidavits five
years after the trial in an effort to show that the Treaty
partners intended the credit to be fixed permanently in
the year it is paid in the United Kingdom. Those post-
trial affidavits conflict with the interpretation of the
Treaty adopted by the "competent authorities." By rely-
ing upon the post-trial, ex parte affidavits as if they were
part of the evidentiary record of this case, the court of
appeals allowed unexamined private recollections, rather
than the considered, public views of governments, to ad-
just the affairs of Nations.
As the facts of this case itself reveal, the evidentiary
approach of the "'court of appeals threatens to create a
persistent irritant in the sensitive process of bilateral ad-
ministration of treaty agreements.  The Departments
that administer our Nation's treaties need guidance from
this Court concerning the extent to which the unofficial
recollections of former employees are relevant and ad-
missible in cases involving treaty construction.

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11

*****

For the reasons stated herein and in the petition, the
petition for a writ of certiorari should be granted.
Respectfully submitted.

          DREW S. DAYS, III
          Solicitor General

    AUGUST 1995