IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 12-60533

OSVALDO RODRIGUEZ; ANA M. RODRIGUEZ,

Petitioners–Appellants,

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent–Appellee.

Appeal from the Decison 

of the United States Tax Court

Before DeMOSS, DENNIS, and PRADO, Circuit Judges.

PRADO, Circuit Judge:

Osvaldo Rodriguez and Ana M. Rodriguez (“Appellants”) challenge a

determination of tax deficiency made by the IRS. The IRS determined that, for

2003 and 2004, the gross income Appellants reported based on their ownership

of a controlled foreign corporation should have been taxed at the rate of

Appellants’ ordinary income rather than the lower tax rate Appellants had

claimed. Appellants challenged the IRS’s determination before the Tax Court

and lost. This appeal followed. For the reasons that follow, we affirm the Tax

Court’s determination.

United States Court of Appeals

Fifth Circuit

F I L E D

July 5, 2013

Lyle W. Cayce

Clerk

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No. 12-60533

I

Appellants are Mexican citizens and permanent residents of the United

States who, during the relevant time periods, owned all of the stock of Editora

Paso del Norte, S.A. de C.V. (“Editora”), a company that is incorporated in

Mexico. Editora has a branch in the United States called Editora Paso del

Norte, S.A. de C.V., Inc. Editora is a controlled foreign corporation (“CFC”).

On October 15, 2005, Appellants amended their 2003 tax return to include

an additional $1,585,527 of gross income attributable to their ownership of

Editora’s shares. At the same time, Appellants also filed their 2004 tax returns,

in which they included $1,478,202 in gross income attributable to Editora. They

reported both amounts as qualified dividend income, which was taxed at a rate

of 15%, rather than the 35% at which their other income was taxed. On March

20, 2008, the IRS issued a notice of deficiency to Appellants. The notice

indicated that Appellants’ income tax payments for 2003 and 2004 were deficient

in the amounts of $316,950 and $295,530, respectively, based on the IRS’s

determination that Appellants’ Editora-attributable income should have been

taxed as ordinary income rather than as qualified dividend income.

Appellants challenged the deficiency, and the case was submitted to the

Tax Court on a fully stipulated record.1 The only issue for the Tax Court was

one of statutory interpretation: whether Appellants’ income attributable to

Editora constituted qualified dividend income subject to a lower tax rate than

Appellants’ ordinary income. The Tax Court ruled in favor of the IRS. After

unsuccessfully seeking a revision of the Tax Court’s determination, Appellants

filed this appeal.

1 The parties do not dispute the amounts of Editora-attributable income or the amount

owed if the income is taxed as ordinary income. The parties also do not dispute that Editora

qualifies as a controlled foreign corporation.

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II

As this is a direct appeal from a final decision of the Tax Court, we have

jurisdiction pursuant to 26 U.S.C. § 7482(a)(1). In reviewing Tax Court

decisions, we apply the same standard as applied to district court

determinations. Terrell v. Comm’r, 625 F.3d 254, 258 (5th Cir. 2010). Since this

case presents a purely legal issue of statutory interpretation, we review the Tax

Court’s decision de novo. Id.

III

A

The issue in this case is whether amounts included in Appellants’ gross

income for 2003 and 2004 pursuant to 26 U.S.C. §§ 951(a)(1)(B) and 956

(collectively, “§ 951 inclusions”) constitute qualified dividend income under

26 U.S.C. § 1(h)(11). The § 951 inclusions would be subject to a lower tax rate

if they constitute qualified dividend income. Ordinary income is taxed at a

higher rate.

Sections 951 and 956 are provisions of the tax code intended to limit the

deferral of taxes that would otherwise be owed to the United States. See Elec.

Arts, Inc. v. Comm’r, 118 T.C. 226, 272 (2002). These sections require that CFC

shareholders include CFC-owned United States property as part of the

shareholder’s gross income. 26 U.S.C. §§ 951(a)(1), 956(a). Tax deferrals are

thus minimized because CFC shareholders lose the ability to defer United States

tax obligations by keeping the CFC’s earnings abroad or by investing in property

instead of repatriating income through the payment of dividends.2

2

“[I]ncome earned by a CFC . . . generally is subject to U.S. tax when the income is

repatriated, for example as a dividend or a royalty. If the CFC invested the income in the

United States, for example, by the purchase of property or a loan to the parent corporation,

the income would be effectively repatriated in a manner that would escape current tax. Thus,

generally, in the case of certain investments in U.S. property by a CFC, the U.S. shareholder

must include in income an amount calculated by reference to the amount invested in the U.S.

property.” OFFICE OF TAX POLICY,DEP’T OFTHE TREASURY,THEDEFERRAL OF INCOME EARNED

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Section 951(a)(1)(B) requires that United States shareholders of CFCs

“shall include in [their] gross income . . . the amount determined under section

956 with respect to such shareholder for such year . . . .” 26 U.S.C.

§ 951(a)(1)(B). Section 956 describes how to determine a shareholder’s pro rata

share of United States property held by the CFC for inclusion as gross income. 

Id. § 956(a). The parties do not dispute the amount calculated pursuant to § 956. 

Their only dispute is whether the amount determined by § 956 and included as

income pursuant to § 951 constitutes “qualified dividend income” under

§ 1(h)(11). Section 1(h)(11)(B)(i)(II) defines qualified dividend income as

including “dividends received during the taxable year from . . . qualified foreign

corporations.” Id. § 1(h)(11)(B)(i)(II). A dividend is “any distribution of property

made by a corporation to its shareholders” out of its earnings and profits. Id.

§ 316(a). 

There are also instances where a statute specifically states that certain

income is to be treated as if it were a dividend. See infra Part III.C. These

“deemed dividend” provisions operate by legislative fiat. Appellants argue that

their § 951 inclusions constitute either actual dividends or deemed dividends. 

As explained below, Appellants’ § 951 inclusions do not qualify as either.

B

Section 951 inclusions do not constitute actual dividends because actual

dividends require a distribution by a corporation and receipt by the shareholder;

there must be a change in ownership of something of value. Since these § 951

inclusions involve no distribution or change in ownership, they do not constitute

qualified dividend income.

Section 316(a) defines a dividend as “any distribution of property made by

a corporation to its shareholders . . . .” 26 U.S.C. § 316(a) (emphasis added). In

THROUGH U.S. CONTROLLED FOREIGN CORPORATIONS: A POLICY STUDY xv (Dec. 2000),

http://www.treasury.gov/resource-center/tax-policy/Documents/subpartf.pdf.

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the same vein, § 1(h)(11)(B)(i) defines “qualified dividend income” as “dividends

received during the taxable year . . . .” 26 U.S.C. § 1(h)(11)(B)(i) (emphasis

added). These statutory provisions illustrate what case law explicitly states: in

determining when a dividend has issued, “[t]he question is not whether a

shareholder ends up with ‘more’ but whether the change in the form of his

ownership represents a transfer to him, by the corporation.” Comm’r v. Gordon,

391 U.S. 83, 91 n.5 (1968) (emphasis added); see also Jack’s Maint. Contractors,

Inc. v. Comm’r, 703 F.2d 154, 156 (5th Cir. 1983) (“[A]ll that is necessary [for a

dividend] is that the corporation confer an economic benefit on a shareholder

without expectation of repayment and that the primary advantage of the

transaction be to the shareholder’s personal interests rather than to the

corporation’s business interests.” (emphasis added)).

Section 951 inclusions do not qualify as actual dividends because no

transfer occurs. Indeed, these statutory provisions exist specifically to account

for instances where CFCs do not make transfers of value to shareholders. Under

the statutes at issue here, ownership of the CFC’s property does not change. On

this basis alone, § 951 inclusions do not constitute actual dividends. Section 951

inclusions are calculated purely on the basis of CFC-owned United States

property and the CFC’s earnings, without any change of ownership. 26 U.S.C.

§ 956(a). Shareholders are required to count the CFC’s earnings and property

as part of their own gross income to ensure that they cannot defer United States

tax obligations by keeping earnings abroad or investing in property instead of

repatriating income through the payment of dividends. Section 956(a) makes

clear that § 951 inclusions involve no transfer of ownership and no distribution

to shareholders. Section 951 inclusions are calculated solely on the basis of

property owned by the CFC. They thus do not constitute actual dividends.

It is also worth noting that, in the context of this case, Appellants—as

Editora’s sole shareholders—could have caused a dividend to issue. Had they

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done so, the income at issue would have unquestionably qualified as dividend

income subject to a lower tax rate, a point the IRS concedes. Appellants use this

point to decry the outcome reached here. They urge the Court to avoid the

“absurd, harsh, and unjust result” of taxing Appellants’ § 951 inclusions at a

higher rate than qualified dividend income, when Appellants, as Editora’s sole

shareholders, could have easily caused a dividend to issue, thereby avoiding this

issue altogether. 

This argument is unavailing. Appellants could have caused a dividend to

issue. They could have also paid themselves a salary or invested Editora’s

earnings elsewhere. Each of these decisions would have carried different tax

implications, thereby altering our analysis. Appellants cannot now avoid their

tax obligation simply because they regret the specific decision they made.3

C

In the alternative, Appellants claim that their § 951 inclusions should be

deemed dividends. This argument is unpersuasive, however, because, when

Congress decides to treat certain inclusions as dividends, it explicitly states as

much, and Congress has not so designated the inclusions at issue here. See, e.g.,

26 U.S.C. § 851(b) (“For purposes of paragraph (2), there shall be treated as

dividends amounts included in gross income under section 951(a)(1)(A)(i) . . . for

the taxable year to the extent that . . . there is a distribution out of the earnings

and profits of the taxable year . . . .”) (emphasis added); 26 U.S.C. § 904(d)(3)(G)

3 Appellants also attempt to avoid the outcome reached here by cursorily claiming that

the tax law giving rise to beneficial treatment of dividend income came into effect after some

of the decisions at issue had been made. That is, they make a brief attempt at contesting

§ 1(h)(11)’s retroactivity. However, aside from providing no substantive argument on point,

their claim is unpersuasive. The Supreme Court has generally upheld tax laws with

retroactive effect, going so far as to describe such laws as “customary congressional practice”

that is often required by “the practicalities of producing national legislation.” United States

v. Darusmont, 449 U.S. 292, 296–97 (1981); see also United States v. Carlton, 512 U.S. 26,

32–35 (1994); United States v. Hemme, 476 U.S. 558, 568–71 (1986); Welch v. Henry, 305 U.S.

134, 150–51 (1938); Milliken v. United States, 283 U.S. 15, 23–24 (1931).

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(“For purposes of this paragraph, the term ‘dividend’ includes any amount

included in gross income in section 951(a)(1)(B).”) (emphasis added); 26 U.S.C.

§ 959(a)(1) (“For purposes of this chapter, the earnings and profits of a foreign

corporation attributable to amounts which are, or have been, included in the

gross income of a United States shareholder under section 951(a) shall not [be

included as gross income] when such amounts are distributed to . . . such

shareholder . . . .”) (emphasis added); 26 U.S.C. § 960(a)(1) (“For purposes of

subpart A of this part, if there is included under section 951(a) in the gross

income of a domestic corporation any amount attributable to earnings and

profits of a foreign corporation . . . then, except to the extent provided in

regulations, section 902 shall be applied as if the amount so included were a

dividend paid by such foreign corporation . . . .”) (emphasis added). Moreover,

if all § 951 inclusions constituted qualified dividends, then statutory provisions

specifically designating certain inclusions as dividends would amount to

surplusage. Cf. Freeman v. Quicken Loans, Inc., 132 S. Ct. 2034, 2042–43 (2012)

(statutory interpretations that avoid surplusage are favored); Microsoft Corp. v.

i4i Ltd. P’ship, 131 S. Ct. 2238, 2248–49 (2011) (same).

Relatedly, the original version of § 956 specifically stated that Congress

did not intend amounts calculated thereunder to constitute dividends. Under

the original language of § 956, enacted in 1962, CFC earnings invested in United

States property “[are] the aggregate amount of such property held, directly or

indirectly, by the [CFC] . . . to the extent such amount would have constituted a

dividend . . . if it had been distributed.” Revenue Act of 1962, Pub. L. No. 87-834,

Sec. 12, § 956, 76 Stat. 960, 1015–16 (emphasis added). This language was

removed only in 1993 when the entire subpart was rewritten in light of other,

new regulations. Omnibus Budget Reconciliation Act of 1993, Pub. L. No. 103-

66, Sec. 13232, § 956, 107 Stat. 312, 501. It does not appear that the omission

of this language from the new version of the statute was intended to change the

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treatment of amounts calculated under § 956. As these examples demonstrate,

Congress specifically designates when § 951 inclusions are to be treated as

dividends, and Congress has not so stated here. 

Appellants’ reliance on various non-binding secondary sources does not

alter our analysis here because the sources cited are in each instance either nonbinding or inapposite. In the historical sources cited by Appellants, references

to a conceptual equivalence between § 951 inclusions and dividend income do not

carry the weight Appellants attribute because such comments were made at a

time when there was no tax advantage to classifying CFC-owned property as a

dividend; the distinction was treated loosely at the time because it did not carry

tax implications. Section 1(h)(11), the statute creating the tax disparity between

dividend income and ordinary income, was not enacted until 2003. See Jobs and

Growth Tax Relief Reconciliation Act of 2003, Pub. L. No. 108-27, Sec. 302, 117

Stat. 752, 760 (enacting § 1(h)(11)). 

For the reasons discussed above, it is clear that Congress did not intend

to deem as dividends the § 951 inclusions at issue here. The statute is

completely silent, a fact which carries added weight when compared to the

myriad provisions specifically stating that certain income is to be treated as if

it were a dividend. Appellants’ reliance on other non-binding sources is

unavailing. As such, we affirm the Tax Court.

IV

For the foregoing reasons, the judgment of the Tax Court is AFFIRMED.

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