United States Tax Court

163 T.C. No. 4

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES,

Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

—————

Docket No. 8435-23. Filed August 26, 2024.

—————

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

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

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

dividends received by a U.S. corporation from certain 

foreign corporations. Given its formulation, the DRD had 

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

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

taxpayers who claimed foreign tax credits, a specified 

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

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

corporation from the foreign corporation.” TCJA amended 

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

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

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

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

after I.R.C. § 245A took effect.

Relying on this effective date mismatch, for fiscal 

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

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

Summary Judgment, P argues that it is entitled to the 

DRD for this amount plus an additional amount alleged in 

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

Partial Summary Judgment. Additionally, R argues in the 

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

Served 08/26/24
2

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

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

otherwise be entitled.

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

deduction for amounts properly treated as dividends under 

I.R.C. § 78 for its 2018 tax year.

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

conclusion because it cannot contravene the clear statutory 

text.

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

tax credits to the extent they are attributable to amounts 

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

deducts under I.R.C. § 245A.

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

R’s Motion will be granted in part.

—————

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

Clionsky Kelly, for petitioner.

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

Clifton Bonney, Jr., for respondent.

OPINION

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

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

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

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

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

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

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

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

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

Procedure.
3

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

questions by following the plain text of the relevant provisions.

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

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

corporation a deduction for certain dividends received from foreign 

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

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

Because the deduction under section 245A applies to dividends 

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

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

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

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

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

such domestic corporation from the foreign corporation.” 

Recognizing that section 245A might otherwise allow a taxpayer 

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

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

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

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

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

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

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

at 2225. 

For some taxpayers—including those with foreign subsidiaries 

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

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

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

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

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

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

it was deemed to receive under section 78.

Seeking partial summary judgment, the Commissioner argues 

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

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

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

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

dividends do not satisfy this requirement. Alternatively, the 
4

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

June 21, 2019, disallows the deduction.

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

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

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

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

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

judgment in its favor.

Because a plain reading of the statutory text authorizes the 

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

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

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

section 78 dividend.

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

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

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

therefore will grant his Motion in part.

Background

The following facts are derived from the parties’ pleadings and

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

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

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

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

consolidated group of medical device and software manufacturers. Its 

principal place of business is in Palo Alto, California.

Varian operates through corporations in many different 

countries, at least some of which are controlled foreign corporations 

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

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

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

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

ended on September 28, 2018 (2018 Year).

Varian filed a consolidated federal income tax return for the 2018 

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

foreign taxes that it was deemed to pay under section 960 and was 
5

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

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

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

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

from its first tier CFCs.

The Commissioner examined Varian’s tax return and issued 

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

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

Commissioner also increased Varian’s section 78 dividend by nearly 

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

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

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

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

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

Varian timely petitioned our Court for a redetermination of the 

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

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

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

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

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

arising from its lower tier CFCs.

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

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

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

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

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

Partial Summary Judgment asking for, in effect, the opposite 

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

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

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

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

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

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

July 29, 2024. 

2 Varian does not dispute this adjustment.
6

Discussion

I. Summary Judgment Standard

The purpose of summary judgment is to expedite litigation and 

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

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

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

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

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

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

judgment, we construe factual materials and inferences drawn from 

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

Corp., 98 T.C. at 520.

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

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

II. Legal Principles

We begin by considering some legal principles established more 

than 100 years ago.

A. Historical Background

The United States has long taxed the worldwide income of its 

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

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

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

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

112 (2022).

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

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

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

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

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

shareholders in foreign corporations to claim foreign tax credits for 

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

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

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

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

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

493 U.S. 132, 135 (1989). But, while this system eliminated double tax 
7

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

that conducted business through foreign branches rather than foreign 

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

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

example.3

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

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

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

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

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

817 (1964).

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

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

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

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

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

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

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

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

have owed $5 in U.S. tax.

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

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

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

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

earnings from Country A generally would have been taxable to AmCo 

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

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

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

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

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

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

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

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

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

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

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

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

complexities of the foreign tax credit.
8

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

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

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

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

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

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

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

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

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

Congress set out to eliminate the disparate taxation of foreign earnings 

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

1962.

B. Addition of Section 78

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

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

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

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

Sec. 78. Dividends received from certain foreign 

corporations by domestic corporations choosing foreign tax 

credit.

If a domestic corporation chooses to have the 

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

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

to the taxes deemed to be paid by such corporation under 

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

stockholder in foreign corporation) or under section 

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

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

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

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

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

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

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

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

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

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

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

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

Corporations & Shareholders ¶ 15.61 (2020), Westlaw FTXCORP.
9

for such taxable year shall be treated for purposes of this 

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

domestic corporation from the foreign corporation.

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

Returning to our simplified example, after the adoption of section 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

operating through foreign subsidiaries.6

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

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

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

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

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

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

relating to dividends received from certain foreign corporations, or 

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

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

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

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

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

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

Report.
10

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

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

Section 78 remained virtually unchanged for more than 50 years

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

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

C. 2017 Tax Cuts and Jobs Act

Among other things, the TCJA made significant changes to how 

the United States taxes income that a domestic corporation earns

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

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

controlled foreign corporations to invest earnings from their foreign 

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

86.

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

worldwide system of taxation described above to a partial territorial tax 

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

certain income a domestic corporation earns from subsidiaries operating 

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

base through a deduction.7

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

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

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

at 1686. The MRT generally required that certain accumulated foreign 

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

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

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

Moore, 144 S. Ct. at 1686.

1. New Section 245A

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

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

dividends they received from certain foreign corporations. TCJA

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

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

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

AptarGroup Inc., 158 T.C. at 112.
11

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

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

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

dividends received by domestic corporations from specified 

10-percent owned foreign corporations.

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

from a specified 10-percent owned foreign corporation by a 

domestic corporation which is a United States shareholder 

with respect to such foreign corporation, there shall be 

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

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

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

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

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

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

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

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

Stat. at 2192.

2. Amendment to Section 78

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

the Code, Congress also amended section 78 to read: 

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

If a domestic corporation chooses to have the 

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

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

to the taxes deemed to be paid by such corporation under 

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

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

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

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

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

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

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

There is no dispute in this case that Varian satisfied the relevant holding period.
12

a dividend received by such domestic corporation from the 

foreign corporation.

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

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

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

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

provides that section 78 dividends are not treated as dividends for 

purposes of section 245A.

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

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

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

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

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

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

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

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

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

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

III. Varian’s Entitlement to the Section 245A Deduction

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

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

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

A. Statutory Analysis

We begin with the familiar maxim “that courts must presume 

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

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

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

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

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

released a Tax Technical and Clerical Corrections Act Discussion Draft addressing 

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

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

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

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

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

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

v. Sandoval, 532 U.S. 275, 292–93 (2001).
13

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

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

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

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

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

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

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

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

here produces a clear result.

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

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

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

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

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

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

§ 245A(c)(1).10 

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

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

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

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

conclude that it does. 

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

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

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

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

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

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

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

the relevant text in the two provisions is effectively identical.

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

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

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

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

which bears the same ratio to such dividend as—

(A) the undistributed foreign earnings of the specified 

10-percent owned foreign corporation, bears to

(B) the total undistributed earnings of such foreign 

corporation.
14

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

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

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

The Commissioner’s longstanding regulations reiterated this rule until 

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

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

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

relating to dividends received from certain foreign corporations, or 

increase the earnings and profits of the domestic corporation.”

(Emphasis added.)).11

To summarize, section 78 provides that Varian must treat the 

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

foreign subsidiaries for all relevant purposes of the Code, and 

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

any dividend received from such subsidiaries. The obvious conclusion is 

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

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

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

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

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

dividend qualified for a deduction under section 245A. 

B. The Commissioner’s Arguments

The Commissioner advances several arguments explaining why 

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

1. Section 78 Dividends as Distributions

The Commissioner’s primary argument is that section 78 

dividends are not qualifying dividends for purposes of section 245A 

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

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

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

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

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

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

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

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

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

change the result here. See infra Part III.B.4.
15

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

Commissioner’s argument fails for at least five reasons.

a. Operative Rule in Section 245A

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

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

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

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

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

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

requirement to the operative rule. Similarly, the references in 

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

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

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

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

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

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

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

dividend somehow shows that section 78 dividends cannot qualify for 

the deduction.

b. Meaning of “Dividend”

Second, even if we did read a distribution requirement into 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

and distributed”). Therefore, if section 78 requires a taxpayer to deem 
16

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

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

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

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

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

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

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

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

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

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

c. Coordinated Statutory Amendments

Third, coordinating amendments that Congress made to other 

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

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

the deduction under section 245A. These amendments establish that 

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

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

1. Section 1248(j)

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

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

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

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

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

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

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

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

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

The TCJA coordinated section 1248 with section 245A by adding 

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

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

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

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

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

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

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

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

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

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

depends on taxes deemed paid over the course of the entire year. 
17

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

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

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

section 245A.” 

The Commissioner tells us this amendment would have been 

unnecessary if simply recharacterizing an amount as a dividend were 

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

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

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

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

But the Commissioner misconstrues the statute, which, when 

considered carefully, contradicts his arguments.

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

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

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

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

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

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

say that the recharacterized amount would be a dividend for all 

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

as a deemed distribution of some sort, although Congress certainly 

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

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

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

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

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

affirmative rule. And that is exactly what it did in adding 

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

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

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

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

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

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

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

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

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

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

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

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

Code and section 78 therefore provided that the relevant amounts would 
18

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

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

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

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

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

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

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

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

addresses gains on sales or exchanges of stock. Such transactions 

involve no actual distributions by the foreign subsidiary whose stock is 

being transferred. Any consideration in this type of transaction would 

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

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

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

Commissioner contends) a distribution (actual or expressly deemed) 

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

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

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

The Commissioner acknowledges as much and contends that 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

actually adopted.
19

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

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

Interpretation of Legal Texts 63 (2012).

Perhaps seeing the wisdom of these principles, the Commissioner 

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

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

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

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

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

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

treatment being extended for section 245A purposes either by express 

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

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

section 78). 

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

undercuts the Commissioner’s reliance on the computation provisions of 

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

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

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

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

undistributed earnings” of the foreign corporation. And in calculating 

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

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

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

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

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

is distributed.” 

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

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

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

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

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

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

counsel for the Commissioner conceded that the ratio would work for 

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

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

cannot be the impediment that the Commissioner portrays them to be.
20

2. Section 964(e)(4)

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

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

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

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

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

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

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

income were a dividend received by the shareholder from the selling 

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

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

affirmative rule if it wished for gain recharacterized under 

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

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

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

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

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

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

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

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

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

purpose of making an amount eligible for a deduction under 

section 245A.14

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

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

sufficient to qualify the amount for the dividends received deduction. 

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

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

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

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

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

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

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

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

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

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

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

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

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

before us.
21

d. Historical Practice

Fourth, our conclusion here is consistent with Congress’s 

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

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

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

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

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

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

effective “in respect of any distribution received by a domestic 

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

§ 1033(c), 90 Stat. at 1628.

This was an interesting choice because, as counsel for the 

Commissioner acknowledged at the hearing, section 960 applies 

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

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

argument, therefore, because Congress made the 1976 amendments

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

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

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

legislation. And Treasury apparently agreed, confirming by regulation 

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

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

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

determination that subpart F inclusions qualified as distributions for 

purposes of applying the effective date provision of the 1976 

amendments further supports our conclusion that section 78 dividends

similarly qualify here.

e. Section 78 Amendment

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

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

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

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

later effective date for this amendment, allowing fiscal year taxpayers 

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

choice stands in contrast to another express exclusion from 

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

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

deductibility any amounts treated as dividends by 

section 1291(d)(2)(B)). In other words, Congress knew how to draft a 
22

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

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

readily available and apparent alternative strongly supports rejecting 

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

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

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

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

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

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

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

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

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

dividend. In relevant part, section 275 provides:

Sec. 275. Certain taxes.

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

the following taxes:

. . . .

(4) Income, war profits, and excess profits 

taxes imposed by the authority of any foreign 

country or possession of the United States if the 

taxpayer chooses to take to any extent the benefits 

of section 901.

The Commissioner claims that permitting the deduction of section 78 

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

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

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

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

misses the mark.

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

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

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

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

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

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

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

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

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

deduction is for the deemed distribution the domestic corporation is 
23

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

pay.16 

The Commissioner might counter that the deemed dividend here 

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

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

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

arguably has the same substantive effect.17 Accordingly, 

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

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

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

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

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

Commissioner argues that section 261 broadens the class of deductions 

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

foreign income taxes. But we disagree with the Commissioner that 

section 261 has the broadening effect he claims it does.

As the Supreme Court has said, and the Commissioner 

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

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

precedence over other deduction granting provisions in computing 

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

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

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

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

that certain capital expenditures for which a deduction is disallowed by 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

credit).”). 
24

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

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

is not disallowed.

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

section 275 and the 26 other provisions currently referenced by 

section 261 that deductions are disallowed for certain, specifically 

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

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

reading of section 261 contradict the clear text of multiple other 

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

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

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

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

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

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

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

preclude Varian’s deduction.18

3. Policy Considerations

Throughout his Motion papers, the Commissioner appeals to 

policy considerations to argue that Varian cannot be allowed a deduction 

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

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

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

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

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

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

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

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

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

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

clarified that the Commissioner was not invoking the doctrine. The 

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

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

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

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

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

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

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

their substance. 
25

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

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

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

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

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

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

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

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

are not present here.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

absurd result) and speculation about congressional intent cannot 

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

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

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

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

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

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

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

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

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

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

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

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

section 245A.
26

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

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

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

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

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

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

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

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

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

editors of statutes, modifying language when we perceive some 

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

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

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

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

(1926))). 

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

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

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

Appeals to policy and Congress’s overarching purpose cannot overcome 

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

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

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

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

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

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

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

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

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

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

amend the enactments of the legislature even though they may disagree 

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

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

technical correction proposal does not alter the result.

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

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

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

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

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

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

statutory construction cases cannot carry the day. 
27

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

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

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

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

United States shareholders in which or with which such taxable years 

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

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

the other hand, proposed the disparate effective dates that ultimately 

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

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

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

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

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

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

Moreover, Congress chose the rule it adopted for section 78

despite making changes to other statutory provisions to reflect the 

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

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

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

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

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

amendment to section 78 with an effective date matching that of 

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

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

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

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

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

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

illogical in treating its subpart F income as ineligible for the 

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

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

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

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

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

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

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

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

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

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

problem lies with the text of the statute, not Varian’s position.
28

4. Amended Treasury Regulation § 1.78-1

Finally, the Commissioner argues that Treasury Regulation 

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

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

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

A section 78 dividend is treated as a dividend for all 

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

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

increase the earnings and profits of the domestic 

corporation or decrease the earnings and profits of the 

foreign corporation.

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

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

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

taxable year of a foreign corporation beginning before January 1, 

2018.”21 

The rule adopted by the revised regulations essentially gives one 

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

provided for in the TCJA to prevent taxpayers like Varian from 

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

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

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

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

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

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

rewrite clear provisions of the statute should have alerted [the 

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

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

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

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

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

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

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

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

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

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

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

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

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

the deduction Varian claims, as we find here.
29

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

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

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

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

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

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

The Commissioner initially argued that, even if we disagreed

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

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

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

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

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

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

id. at 2266, 2273. 

As the Supreme Court observed in Loper Bright, “statutes, no 

matter how impenetrable, do—in fact, must—have a single, best 

meaning. That is the whole point of having written statutes; ‘every 

statute’s meaning is fixed at the time of enactment.’” Id. at 2266

(quoting Wis. Cent. Ltd. v. United States, 585 U.S. 274, 284 (2018)). And, 

in cases involving ambiguity, “instead of declaring a particular party’s 

reading ‘permissible’ . . . , courts [must] use every tool at their disposal 

to determine the best reading of the statute and resolve the ambiguity.” 

Id. Put another way, “in an agency case as in any other . . . even if some

judges might (or might not) consider the statute ambiguous, there is a 

best reading all the same—the reading the court would have reached if 

no agency were involved.” Id. (cleaned up). 

In short, “[i]n the business of statutory interpretation, if it is not 

the best, it is not permissible.” Id. And, as we have shown above, the 

best (indeed the unambiguous) reading of the provisions at issue here 

permits Varian’s deduction. 

In reaching this conclusion, we have given “[c]areful attention to 

the judgment of the Executive Branch.” Id. at 2273. The Executive’s 

views “constitute a body of experience and informed judgment to which 

courts and litigants may properly resort for guidance.” Id. at 2262

(quoting Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944)). “The weight 

of such a judgment in a particular case,” of course, “depend[s] upon the 

thoroughness evident in its consideration, the validity of its reasoning, 

its consistency with earlier and later pronouncements, and all those 
30

factors which give it power to persuade, if lacking power to control.” Id. 

at 2259 (quoting Skidmore, 323 U.S. at 140).

Nevertheless, “[c]ourts must exercise their independent judgment 

in deciding whether an agency has acted within its statutory authority.” 

Id. at 2273. It “remains the responsibility of the court to decide whether 

the law means what the agency says.” Id. at 2261 (quoting Perez v. 

Mortg. Bankers Ass’n, 575 U.S. 92, 109 (2015) (Scalia, J., concurring in 

the judgment)). Indeed, “Congress expects courts to do their ordinary 

job of interpreting statutes.” Id. at 2267. “And to the extent that 

Congress and the Executive Branch may disagree with how the courts 

have performed that job in a particular case, they are of course always 

free to act by revising the statute.” Id.23

In the cases that come before us, “the question that matters [is]:

Does the statute authorize the challenged agency action?” Id. at 2269.

And, in answering that key question, we may not follow the Executive’s 

guidance (expressed in a regulation or elsewhere) when (as here) it 

contradicts the statutory text. See, e.g., Niz-Chavez, 141 S. Ct. at 1485; 

Koshland v. Helvering, 298 U.S. at 447. The Supreme Court’s view on 

this principle is unanimous. See Loper Bright, 144 S. Ct. at 2264

(observing that, even under Chevron, “‘[i]f the intent of Congress is clear, 

that is the end of the matter,’ [Chevron, 467 U.S. at 842,] and courts 

were therefore to ‘reject administrative constructions which are contrary 

to clear congressional intent,’ [Chevron, 467 U.S. at 843, n.9]”); see also

id. at 2297 (Kagan, J., dissenting) (summarizing Chevron and observing 

that the step one “inquiry is rigorous: A court must exhaust all the 

‘traditional tools of statutory construction’ to divine statutory meaning. 

[Chevron, 467 U.S.] at 843, n.9. And when it can find that meaning—a 

‘single right answer’—that is ‘the end of the matter’: The court cannot 

defer because it ‘must give effect to the unambiguously expressed intent 

of Congress.’ Kisor [v. Wilkie, 139 S. Ct. 2400, 2415 (2019)] (opinion of 

the Court); Chevron, 467 U.S., at 842–843”); id. at 2300 (Kagan, J.,

dissenting) (“Where Congress has spoken, Congress has spoken; only its 

23 See also Loper Bright, 144 S. Ct. at 2274 (Thomas, J., concurring) (“The 

judicial power, as originally understood, requires a court to exercise its independent 

judgment in interpreting and expounding upon the laws.” (cleaned up)); id. at 2275

(Thomas, J., concurring) (“The Founders envisioned that the courts would check the 

Executive by applying the correct interpretation of the law.” (cleaned up)); id. at 2284–

85 (Gorsuch, J., concurring) (explaining that the framers designed a judicial system 

“in which impartial judges, not those currently wielding power in the political 

branches, would ‘say what the law is’ in cases coming to court” (quoting Marbury v. 

Madison, 5 U.S. (1 Cranch) 137, 177 (1803))). 
31

judgments matter. And courts alone determine when that has 

happened: Using all their normal interpretive tools, they decide whether 

Congress has addressed a given issue.”).

That Congress delegated certain rulemaking authority to 

Treasury under section 245A24 does the Commissioner no good here. 

This is so because his regulation purports to modify the effective date 

provision for new section 78, which could hardly have been clearer. In 

other words, it impermissibly attempts to change an unambiguous

provision of the statute. As a result, the regulation falls outside the 

boundaries of any authority that Congress may have delegated under 

section 245A or 7805. See, e.g., United States v. Locke, 471 U.S. 84, 95 

(1985) (“There is a basic difference between filling a gap left by Congress’

silence and rewriting rules that Congress has affirmatively and 

specifically enacted.” (quoting Mobil Oil Corp. v. Higginbotham, 436 

U.S. 618, 625 (1978))); see also Loper Bright, 144 S. Ct. at 2263 (noting 

that, where Congress has delegated discretionary authority to an 

agency, courts fulfill their role by “fix[ing] the boundaries of [the]

delegated authority” (quoting Henry P. Monaghan, Marbury and the 

Administrative State, 83 Colum. L. Rev. 1, 27 (1983))). 

The Commissioner pushes back on this reading of the regulation. 

Specifically, he says that the regulation was not intended to interpret 

the statute’s effective date, but rather “the ambiguous interaction 

between [s]ection 245A and [p]rior [s]ection 78 during the relevant 

period.” Resp’t’s Br. 3. We are unconvinced for at least two reasons. 

First, if the revised regulation truly were aimed at resolving an 

ambiguity between section 245A and prior section 78, one would expect 

it to reference section 902, which was referenced in prior section 78 and

was still in effect for Varian’s 2018 Year. See TCJA § 14301(d), 131 Stat. 

at 2225 (striking section 902 for “taxable years of foreign corporations 

beginning after December 31, 2017, and [for] taxable years of United 

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

corporations end”). But neither the revised regulation nor its effective 

date provision mentions section 902. Rather, the sentence of the revised 

regulation purporting to disallow section 245A deductions for section 78 

dividends applies only “to section 78 dividends that are received . . . by 

24 Section 245A(g) provides: “Regulations.—The Secretary shall prescribe such 

regulations or other guidance as may be necessary or appropriate to carry out the 

provisions of this section, including regulations for the treatment of United States 

shareholders owning stock of a specified 10 percent owned foreign corporation through 

a partnership.”
32

reason of taxes deemed paid under section 960(a).” Treas. Reg. 

§ 1.78-1(c). Therefore, the revised regulation ignores a key part of prior 

section 78 and presumably would not prevent Varian from claiming a 

section 245A deduction for its section 78 dividends related to section 902 

deemed paid taxes. Thus, the omission of any reference to section 902

from the new regulation casts doubt on the Commissioner’s claim that 

the regulation interprets prior section 78. 

Second, and more importantly, we cannot ignore that the revised 

regulation makes precisely the same change as new section 78 (adding 

an explicit carveout for section 245A), but with an earlier effective date. 

No matter what the revised regulation intended to interpret, it cannot 

contradict the clear effective date provided for in the statutory text.25

See supra pp. 28–31.

For these reasons, the amended regulation does not alter our 

conclusion as to Varian’s claimed deduction.26

IV. Section 245A(d) Limits on Foreign Tax Credits

The final question we must resolve is how section 245A(d) affects 

the foreign tax credits that Varian claimed for its deemed paid foreign 

taxes. In relevant part, section 245A(d)(1) provides that “[n]o credit 

shall be allowed under section 901 for any taxes paid or accrued (or 

treated as paid or accrued) with respect to any dividend for which a 

deduction is allowed under this section.”

A. The Applicability of the Limitation

The Commissioner argues that, if we allow Varian to deduct its 

section 78 dividend under section 245A, then section 245A(d) requires 

Varian to reduce its credits by an appropriate amount. In the 

Commissioner’s view, that amount is the amount of Varian’s deemed 

25 In this context, contrary to the Commissioner’s arguments in his 

supplemental briefing, the revised regulation cannot be viewed as either “necessary” 

or “appropriate” to implement section 245A, regardless of how broadly one construes 

those terms as used in section 245A(g). See, e.g., Locke, 471 U.S. at 95; Koshland v. 

Helvering, 298 U.S. at 447.

26 In view of these conclusions, we need not address the many other arguments 

the parties raise regarding the procedural and substantive validity of amended 

Treasury Regulation § 1.78-1. 
33

paid foreign tax that is attributable to the foreign earnings reflected in 

its section 78 dividend.

Varian, on the other hand, claims that section 245A(d) is 

irrelevant to its section 78 dividend. In essence, Varian would have us 

read section 245A(d)(1) as limiting foreign tax credits only for “taxes 

paid or accrued (or treated as paid or accrued) on any dividend.”

Because Varian misreads the operative text, notably the phrase “with 

respect to,” we agree with the Commissioner.

The ordinary meaning of the phrase “with respect to” is 

“concerning” or “relating to.” See Respecting, The American Heritage 

Dictionary (5th ed. 2018) (“With respect to; concerning.”); Cal. Tow 

Truck Ass’n v. City & Cnty. of S.F., 807 F.3d 1008, 1021 (9th Cir. 2015) 

(“[T]he phrase ‘with respect to’ is generally understood to be 

synonymous with the phrase[] ‘relating to.’” (quoting Fireman’s Fund 

Ins. Co. v. Plant Insulation Co. (In re Plant Insulation Co.), 734 F.3d 

900, 910 (9th Cir. 2013))); see also Khan v. United States, 548 F.3d 549, 

556 (7th Cir. 2008) (“Synonyms for ‘with respect to’ include ‘pertaining 

to’ and ‘concerning.’” (citing Encarta World English Dictionary (2007))); 

see also Jennings v. Rodriguez, 138 S. Ct. 830, 856 (2018) (Thomas, J., 

concurring in the judgment) (“The phrase ‘with respect to’ means 

‘referring to,’ ‘concerning,’ or ‘relat[ing] to.’” (quoting Oxford American 

Dictionary & Language Guide (1999 ed.))). Courts have given this 

phrase and similar ones a broad meaning. See Cal. Tow Truck Ass’n, 

807 F.3d at 1021; see also Dan’s City Used Cars, Inc. v. Pelkey, 569 U.S. 

251, 260 (2013) (defining the phrase “related to” as embracing those 

things “having a connection with or reference to” something else

(quoting Rowe v. N.H. Motor Transp. Ass’n, 552 U.S. 364, 370 (2008))); 

Adams Challenge (UK) Ltd. v. Commissioner, 154 T.C. 37, 63 (2020) 

(analyzing relevant cases and finding “no appreciable difference 

between the terms ‘related to,’ ‘connected with,’ and ‘in connection 

with’”). With this principle in mind, we conclude that section 245A(d)(1) 

limits foreign tax credits so far as the deemed paid foreign taxes for 

which a taxpayer claims credits relate to the dividends for which a 

taxpayer claims a deduction.

Varian’s deemed paid foreign taxes undoubtedly relate to its 

section 78 dividend.27 As we have explained, a section 78 dividend 

27 We of course acknowledge that, while the meaning of “related to” and similar 

phrases is broad, it is not without limits. See Whistleblower 972-17W v. Commissioner, 
34

represents the share of a foreign corporation’s earnings that were paid 

out to a foreign country as tax and therefore never repatriated (or 

attributed) to the domestic corporation. See Champion Int’l Corp., 81 

T.C. at 427. In other words, a section 78 dividend reflects genuine

earnings of a foreign corporation that are taxed by a foreign country. By 

claiming foreign tax credits for those taxes, and including a section 78 

dividend in income, a domestic corporation (like Varian) is treated as if 

it had received all the foreign corporation’s foreign earnings and directly 

paid the tax on those earnings. Therefore, the foreign taxes Varian is 

treated as paying were “with respect to” its section 78 dividend within 

the meaning of section 245A(d)(1). 

B. The Amount of the Limitation

Having decided that section 245A(d)(1) limits foreign tax credits 

so far as they are attributable to taxes paid (or deemed paid) on the 

earnings reflected by Varian’s section 78 dividend, we now consider the 

amount of the limitation. In his Motion papers, the Commissioner 

expresses this limitation through the following equation: 

Disallowed 

Foreign 

Tax Credit

= 

Deemed 

Paid 

Foreign 

Tax 

Credit

× � Section 78 gross-up

Net section 965 inclusion + section 78 gross-up�

We agree that this equation properly reflects the limitation provided for 

in section 245A(d)(1) in the context of foreign tax credits resulting from 

an inclusion in subpart F on account of the MRT. 

To illustrate how this equation applies, assume AmCo was a 100% 

shareholder of a CFC (CFC 1) that had $100 of earnings in Country A. 

If Country A taxed those earnings at a 20% rate, then CFC 1 would have 

paid $20 of tax and had $80 of earnings remaining. If we assume the 

earnings qualified as subpart F income for U.S. tax purposes, then $80 

would have been included in AmCo’s subpart F income and AmCo would 

have been treated as paying $20 in tax to Country A under 

section 960(a). As a result, AmCo would have been entitled to $20 of 

foreign tax credits and would have been treated under section 78 as 

receiving a $20 dividend out of CFC 1’s earnings. If AmCo claimed a 

deduction for the $20 section 78 dividend under section 245A, then

159 T.C. 1, 15–16 (2022) (reviewed) (discussing authorities). But the facts before us 

now do not approach those limits. 
35

section 245A(d)(1) would reduce its allowable foreign tax credits as 

follows:

$4 

(Disallowed 

FTC)

= 

$20 

(Deemed 

Paid 

FTC)

× � $20 (Section 78 gross-up)

$100 (Subpart F inclusion28 + section 78 gross-up)

�

The same principle applies to limit Varian’s claimed foreign tax 

credits. Accordingly, because Varian claims a deduction under 

section 245A for its section 78 dividend, it must reduce its foreign tax 

credits by the amount that its deemed paid foreign taxes are 

attributable to the foreign earnings reflected in its section 78 dividend. 

V. Conclusion

For the reasons stated above, we will grant Varian’s Motion to the 

extent it seeks a deduction under section 245A for its section 78 dividend

and will deny the Commissioner’s Motion to the extent it seeks the 

opposite conclusion. Furthermore, we will grant the Commissioner’s 

Motion so far as it seeks to limit Varian’s foreign tax credits under 

section 245A(d)(1). 

To reflect the foregoing, 

An appropriate order will be issued.

Reviewed by the Court.

KERRIGAN, FOLEY, BUCH, NEGA, PUGH, ASHFORD, URDA, 

COPELAND, JONES, GREAVES, MARSHALL, and WEILER, JJ., 

agree with this opinion of the Court. 

28 For purposes of this example, the taxpayer has a general subpart F inclusion 

rather than a section 965 inclusion in its subpart F income. Either way, the equation 

achieves the same result.