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OSVALDO AND ANA M. RODRIGUEZ, PETITIONERS v. 

COMMISSIONER OF INTERNAL REVENUE, 

RESPONDENT

Docket No. 13909–08. Filed December 7, 2011. 

Ps, citizens of Mexico and permanent residents of the 

United States, were the sole shareholders of E, a controlled 

foreign corporation. Pursuant to secs. 951(a)(1)(B) and 956, 

I.R.C., they included in their gross income amounts of E’s 

earnings that were invested in U.S. property. Ps characterized 

these inclusions as qualified dividend income subject to preferential income tax rates under sec. 1(h)(11), I.R.C. R recharacterized these amounts as ordinary income subject to 

(174) RODRIGUEZ v. COMMISSIONER 175

1 All section references are to the Internal Revenue Code (Code) in effect for the years in issue, 

and all Rule references are to the Tax Court Rules of Practice and Procedure. 2Petitioner husband owned 90 percent of Editora’s stock, and petitioner wife owned the other 

10 percent. 

nonpreferential income tax rates. Held: Inclusions in gross 

income as required under secs. 951(a)(1)(B) and 956, I.R.C., do 

not constitute qualified dividend income under sec. 1(h)(11), 

I.R.C. 

Patrick R. Gordon and Juan H. Gil II, for petitioners. 

Roberta L. Shumway, for respondent. 

OPINION 

THORNTON, Judge: Respondent determined deficiencies of 

$316,950 and $295,530 in petitioners’ Federal income taxes 

for taxable years 2003 and 2004, respectively. The issue for 

decision is whether amounts included in petitioners’ gross 

income pursuant to sections 951(a)(1)(B) and 956 1 with 

respect to their controlled foreign corporation’s investments 

in U.S. property (for brevity, section 951 inclusions) constitute qualified dividend income under section 1(h)(11). 

Background

The parties submitted this case fully stipulated pursuant 

to Rule 122. When they petitioned the Court, petitioners 

resided in Texas. 

At all relevant times petitioners were citizens of Mexico 

and permanent residents of the United States. Together they 

owned 100 percent of the stock of Editora Paso del Norte, 

S.A. de C.V. (Editora). 2 Editora had been incorporated in 

1976 under the laws of Mexico. In 2001 it had established 

operations in the United States as a branch under the name 

Editora Paso del Norte, S.A. de C.V., Inc. 

Originally, Editora’s primary business was publishing 

newspapers and selling newspaper advertising in Mexico. By 

the end of 2002 Editora had converted its primary business 

to developing, constructing, managing, and leasing commercial real estate and printing presses in Mexico and the 

United States. Editora also derived interest income from 

loans and royalty income from licensing intellectual property. 

During the years at issue Editora held significant investments of real and tangible personal property in the United 

States. 

176 137 UNITED STATES TAX COURT REPORTS (174) 

3More specifically, the sec. 951 inclusion represents the U.S. shareholder’s pro rata share of 

the CFC’s earnings invested in U.S. property holdings. The sec. 951 inclusion is the U.S. shareholder’s pro rata share of the lesser of two amounts: (1) The excess of (a) the average amounts 

of the CFC’s investments in U.S. property as of the end of each quarter of the taxable year over 

(b) the CFC’s earnings and profits representing previous sec. 951 inclusions; or (2) the amount 

of the CFC’s ‘‘applicable earnings’’, as defined in sec. 956(b)(1), representing essentially the 

CFC’s current and accumulated earnings and profits that have not already been included in its 

U.S. shareholders’ gross incomes. See Bittker & Lokken, Federal Taxation of Income, Estates 

and Gifts, par. 69.11.1, at 69–72 through 69–74 (rev. 3d ed. 2005). 

On their amended 2003 and original 2004 Federal income 

tax returns, which they filed October 15, 2005, petitioners 

included in gross income $1,585,527 and $1,478,202, respectively, representing amounts of Editora’s earnings invested 

in U.S. property and taxable directly to petitioners pursuant 

to sections 951(a)(1)(B) and 956. Petitioners treated the section 951 inclusions as qualified dividend income subject to 

preferential income tax rates under section 1(h)(11)(B). In 

the notice of deficiency respondent determined that the section 951 inclusions are taxable at ordinary income tax rates. 

Discussion

As enacted in the Jobs and Growth Tax Relief Reconciliation Act of 2003, Pub. L. 108–27, sec. 302, 117 Stat. 760, 

section 1(h)(11) provides preferential tax rates for ‘‘qualified 

dividend income’’. Qualified dividend income includes dividends received from a qualified foreign corporation. Sec. 

1(h)(11)(B)(i)(II). The parties agree that during the years at 

issue Editora was a qualified foreign corporation within the 

meaning of the statute. 

Section 951, enacted by the Revenue Act of 1962, Pub. L. 

87–834, sec. 12(a), 76 Stat. 1006 (the 1962 legislation), is 

part of subpart F of part III, subchapter N, chapter 1 of the 

Code. Through subpart F (sections 951 through 964), Congress sought to limit tax deferrals by any foreign corporation 

that meets the definition of a ‘‘controlled foreign corporation’’ 

(CFC), as provided in section 957(a). Elec. Arts, Inc. v. 

Commissioner, 118 T.C. 226, 272 (2002). Under section 951, 

subject to various restrictions and qualifications, U.S. shareholders of a CFC are taxed directly on the CFC’s earnings that 

are invested in certain types of assets in the United States. 3

Secs. 951(a)(1)(B), 956(a). The parties agree that during the 

years at issue Editora was a controlled foreign corporation as 

defined in section 957(a) and that petitioners were U.S. 

(174) RODRIGUEZ v. COMMISSIONER 177

shareholders with respect to Editora. They also agree as to 

the amounts of petitioners’ section 951 inclusions. They disagree as to whether the section 951 inclusions constitute 

qualified dividend income. The answer turns on whether a 

section 951 inclusion is properly characterized as a dividend. 

Section 316(a) defines ‘‘dividend’’ for purposes of subtitle A 

of the Code (which includes section 1) to mean ‘‘any distribution of property made by a corporation to its shareholders’’ 

out of the corporation’s current or accumulated earnings and 

profits. A dividend may be formally declared or it may be 

constructive, involving the shareholder’s informal receipt of 

corporate property. See Boulware v. United States, 552 U.S. 

421, 429–430 (2008); Truesdell v. Commissioner, 89 T.C. 

1280, 1295 (1987). But in either event there must be, in the 

first instance, a ‘‘distribution’’ by the corporation. See 

Boulware v. United States, supra at 437 n.12. 

A ‘‘distribution’’ entails a ‘‘change in the form of * * * 

ownership’’ of corporate property, ‘‘separating what a shareholder owns qua shareholder from what he owns as an individual.’’ Commissioner v. Gordon, 391 U.S. 83, 90 n.5 (1968). 

As the Supreme Court noted: 

Any common shareholder in some sense ‘‘owns’’ a fraction of the assets 

of the corporation in which he holds stock, including those assets that 

reflect accumulated corporate earnings. Earnings are not taxed to the 

shareholder when they accrue to the corporation, but instead when they 

are passed to shareholders individually through dividends. * * * The 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, of assets reflecting its accumulated earnings and profits. [Id.] 

A section 951 inclusion involves no change in ownership of 

corporate property. It arises not from any distribution of 

property by a CFC but from its investment in ‘‘United States 

property held (directly or indirectly) by the controlled foreign 

corporation’’. Sec. 956(a)(1)(A). Because there is no distribution, there is no dividend within the meaning of section 

316(a), unless some special rule or qualification applies. The 

Code and the regulations contain no special rule or qualification to treat a section 951 inclusion as a dividend for purposes of section 1(h)(11). 

In limited instances—not involving characterization as 

qualified dividend income under section 1(h)(11)—in which 

Congress has intended section 951 inclusions to be treated as 

178 137 UNITED STATES TAX COURT REPORTS (174) 

4Sec. 551 was repealed by the American Jobs Creation Act of 2004 (AJCA 2004), Pub. L. 108–

357, sec. 413(a)(1), 118 Stat. 1506. 

dividends, it has made express provision. See, e.g., sec. 

851(b) (providing that for purposes of the qualification rules 

for regulated investment companies, section 951 inclusions 

are ‘‘treated as dividends’’ to the extent that under section 

959(a)(1) there is a distribution out of earnings and profits 

of the taxable year which are attributable to the amounts so 

included); sec. 904(d)(3)(G) (providing that for purposes of 

applying limitation rules with respect to foreign tax credits, 

the term ‘‘dividend’’ includes amounts included in income 

pursuant to section 951(a)(1)(B)); sec. 960(a)(1) (providing 

that for purposes of rules applicable to indirect foreign tax 

credits under section 902, section 951 inclusions shall be 

treated ‘‘as if the amount so included were a dividend paid’’). 

To disregard this careful legislative design and treat section 

951 inclusions as dividends in the absence of express provision would tend to render these provisions superfluous or 

unnecessary, contrary to well-established tenets of statutory 

construction. See, e.g., Weinberger v. Hynson, Westcott & 

Dunning, Inc., 412 U.S. 609, 633–634 (1973). This consideration reinforces our conclusion that section 951 inclusions are 

not to be treated as dividends absent express provision in the 

Code or the regulations. 

Unlike section 951, various other Code sections expressly 

characterize certain types of items as distributions or dividends. See, e.g., sec. 54A(g) (as enacted in 2008, providing 

that allocation to S corporation shareholders of a tax credit 

with respect to certain bonds ‘‘shall be treated as a distribution’’); secs. 302(a), 304(a), 305(c) (all providing identically 

that certain redemptions ‘‘shall be treated as a distribution’’); 

sec. 551(b) (providing that certain undistributed foreign personal holding company income is included in the shareholder’s gross income ‘‘as a dividend’’). 4 Of particular note, 

the same 1962 legislation that enacted section 951, which 

does not provide for dividend treatment, also enacted section 

1248, which provides that in certain circumstances gain from 

disposition of CFC stock ‘‘shall be included in the gross 

income of such person as a dividend, to the extent of the 

earnings and profits of the foreign corporation’’. Sec. 1248(a). 

The absence, in the same legislation, of any corresponding 

(174) RODRIGUEZ v. COMMISSIONER 179

5 In Gulf Oil Corp. v. Commissioner, 87 T.C. 548 (1986), this Court held that increases in 

intercompany payables on the books of a U.S. corporate shareholder represented earnings of its 

foreign controlled subsidiaries, resulting in deemed inclusions in the U.S. shareholder’s income 

under secs. 951 and 956. In an introductory paragraph the Opinion framed the issue as being 

whether the uncollected balances in the payables account ‘‘constitute investment in U.S. property within the meaning of section 956, resulting in dividend income to petitioner’’. Id. at 550 

(fn. ref. omitted). And the headnote to Gulf Oil states that the increases to the payable balances 

‘‘represent earnings of a controlled foreign corporation invested in U.S. property at the close of 

the taxable year 1974 and dividend income to P.’’ Id. at 549. The body of the Opinion, however, 

does not expressly address whether the deemed inclusions under secs. 951 and 956 should be 

considered to constitute dividend income, nor was any such conclusion essential to the decision 

upholding the Commissioner’s determination that the taxpayer was required to recognize 

deemed inclusions under secs. 951 and 956. See id. at 563. Notably, however, the Court observed 

that the taxpayer had ‘‘complete and indefinite control over’’ its foreign controlled subsidiaries’ 

earnings that were reflected in the payables on the taxpayer’s own books, id. at 574, possibly 

suggesting that the Court viewed these earnings as constituting constructive dividends for reasons apart from the operation of secs. 951 and 956. In any event, Gulf Oil was decided under 

the pre-1993 version of sec. 956(a), which, as discussed infra, differed materially from the 

version of sec. 956(a) in effect for the years at issue. In these circumstances we do not view 

Continued

provision for section 951 inclusions seems purposeful. Consistent with this legislative scheme, the regulations carefully 

distinguish ‘‘deemed dividends’’ under sections 551 and 1248 

from ‘‘deemed inclusions’’ under section 951(a). Sec. 1.902–

1(a)(11), Income Tax Regs. (providing that for purposes of the 

deemed paid foreign tax credit under section 902, the term 

‘‘dividends’’ does not include deemed inclusions under section 

951(a)). 

In support of their position that section 951 inclusions 

should be characterized as dividends, petitioners cite this 

statement from a Senate report that accompanied the 1962 

legislation that enacted subpart F: ‘‘Generally, earnings 

brought back to the United States are taxed to the shareholders on the grounds that this is substantially the equivalent of a dividend being paid to them.’’ S. Rept. 1881, 87th 

Cong., 2d Sess. (1962), 1962–3 C.B. 707, 794. This Court has 

sometimes cited this legislative history as evidencing the 

general purpose of the 1962 legislation. For instance, in Limited, Inc. & Consol. Subs. v. Commissioner, 113 T.C. 169, 185 

(1999), revd. 286 F.3d 324 (6th Cir. 2002), this Court 

observed that a ‘‘dividend equivalency’’ rationale underlies 

the 1962 legislation. And in Gulf Oil Corp. v. Commissioner, 

87 T.C. 548, 571 (1986), affd. in part, revd. in part and 

remanded 914 F.2d 396 (3d Cir. 1990), this Court observed 

that under the 1962 legislation ‘‘Subpart F treats the amount 

of the increased investment much like a constructive dividend to the U.S. shareholders.’’ 5 But to say that section 951 

180 137 UNITED STATES TAX COURT REPORTS (174) 

Gulf Oil as establishing any rule for determining the issue before us. 

6The stated reason for enacting sec. 956A was to ‘‘impose on controlled foreign corporations 

a new type of limitation on accumulating deferred earnings’’ because ‘‘deferral of U.S. tax on 

accumulated active business profits is not necessary to maintain the competitiveness of business 

activities conducted by controlled foreign corporations where such accumulated profits are held 

in the form of excessive accumulations of passive assets.’’ H. Rept. 103–111, at 691–692 (1993), 

1993–3 C.B. 167, 267–268. 

treats a CFC’s investments in U.S. property ‘‘much like’’ a 

constructive dividend is a far cry from saying that such 

amounts actually constitute dividends. In fact, the statutory 

structure and operating rules in the Code, particularly as 

they have evolved over time, strongly suggest that these 

amounts do not constitute dividends under the Code. 

The formula for determining a CFC’s investment of 

earnings in U.S. property, for purposes of a section 951 inclusion, is found in section 956(a). As originally enacted in 1962, 

section 956(a)(1) provided that the section 951 inclusion was 

to be made by reference to the amount of U.S. property that 

the CFC held at the end of the taxable year to the extent this 

amount ‘‘would have constituted a dividend * * * if it had 

been distributed.’’ The clear import of this language is that 

because this amount has not been distributed, it does not in 

fact constitute a dividend. 

In 1993 Congress eliminated the just-quoted provision 

(‘‘would have constituted a dividend’’ etc.) as part of an 

amendment modifying the operation of section 956. Omnibus 

Budget Reconciliation Act of 1993, Pub. L. 103–66, sec. 

13232(a)(1) and (2), 107 Stat. 501 (the 1993 legislation). The 

legislative history indicates that the purpose of this 1993 

amendment was to conform the operating rules for section 

956 to the operating rules in new section 956A, enacted by 

the same legislation. Subject to certain qualifications, section 

956A required U.S. shareholders to include in income a pro 

rata share of a CFC’s earnings invested in ‘‘excess passive 

assets’’, defined generally as assets that the CFC holds for the 

production of passive income. See H. Rept. 103–111, at 691–

695 (1993), 1993–3 C.B. 167, 267–271. The legislative history 

indicates that the purpose of section 956A was to curb CFCs’ 

deferrals of U.S. taxation. 6 The 1993 legislation conformed 

the section 956(a) operating rules to section 956A because 

the provisions are ‘‘in some ways, conceptually parallel’’. Id.

at 692, 1993–3 C.B. at 268. There is no mention in the 1993 

legislative history of any dividend equivalency rationale with 

(174) RODRIGUEZ v. COMMISSIONER 181

7Sec. 956A was repealed in 1996, leaving intact the revised structure and operating rules of 

sec. 956(a) as in effect for the years at issue. 

8When the CFC eventually distributes the amounts previously included in the U.S. shareholder’s gross income pursuant to sec. 951, the distribution then reduces the CFC’s earnings and 

profits. See sec. 959(d). To avoid double taxation to the shareholder, the actual distribution is 

excluded from the shareholder’s gross income. See sec. 959(a). 

9This increase in the U.S. shareholder’s stock basis is counteracted if and when the CFC 

eventually distributes to the shareholder the amounts represented by the sec. 951 inclusions. 

See sec. 961(b)(1); sec. 1.961–2, Income Tax Regs. 

10The legislative history states in part: 

In addition, the Committee finds that present law, by taxing dividend income at a higher rate 

than income from capital gains, encourages corporations to retain earnings rather than to distribute them as taxable dividends. If dividends are discouraged, shareholders may prefer that 

corporate management retain and reinvest earnings rather than pay out dividends, even if the 

shareholder might have an alternative use for the funds that could offer a higher rate of return 

than that earned on the retained earnings. This is another source of inefficiency as the opportunity to earn higher pre-tax returns is bypassed in favor of lower pre-tax returns. [H. Rept. 

108–94, at 31 (2003), 2003–3 C.B. 35, 65.] 

respect to either amended section 956(a) or new section 

956A. 7

Further evidencing the distinction between dividends and 

section 951 inclusions, the Code subjects them to different 

operating rules. For instance, whereas dividend distributions 

reduce the earnings and profits of the distributing corporation, see sec. 316(a), section 951 inclusions do not—the undistributed earnings remain with the CFC, see sec. 956(a)(2), 

(b)(1); sec. 1.952–1(c)(1), Income Tax Regs. 8 As another 

example, whereas a dividend results in no increase to the 

shareholder’s stock basis, a section 951 inclusion does. 9 Sec. 

961(a); sec. 1.961–1, Income Tax Regs. 

In the light of these various considerations, the sentence in 

question from the 1962 legislative history does not control 

the issue of whether section 951 inclusions should be 

characterized as dividends for purposes of section 1(h)(11). 

The Code gives no hint that a section 951 inclusion, which 

as we have seen does not represent a ‘‘distribution’’, should 

be treated as a ‘‘dividend’’ within the meaning of section 

1(h)(11). 

According to its legislative history, section 1(h)(11) was 

intended in part to remove a perceived disincentive for corporations to pay out earnings as dividends instead of 

retaining and reinvesting them. 10 Because income inclusions 

under section 951(a)(1)(B) represent earnings that CFCs have 

retained and reinvested in U.S. property instead of paying 

them out as dividends, characterizing these amounts as 

182 137 UNITED STATES TAX COURT REPORTS (174) 

11Secs. 552 and 1246 were repealed as part of AJCA 2004 sec. 413(a). When Congress repealed the FPHC regime in 2004, it also amended sec. 1(h)(11)(C)(iii) by eliminating the reference to FPHCs and FICs. See AJCA 2004 sec. 413(c)(1)(B), 118 Stat. 1507. 

12 In its postenactment general explanation of sec. 1(h)(11), the Joint Committee on Taxation 

cited Notice 2004–70, 2004–2 C.B. 724, with apparent approval. Staff of the Joint Comm. on 

Taxation, General Explanation of Tax Legislation Enacted in the 108th Congress, at 25 n.44 

(J. Comm. Print 2005). 

qualified dividend income would not appear to further the 

stated legislative purpose. 

Further evidencing an absence of legislative purpose to 

treat section 951 inclusions as qualified dividend income, certain technical rules of section 1(h)(11) are a poor fit for section 951 inclusions. For instance, section 1(h)(11)(B)(iii), in 

coordination with section 246(c), imposes upon the taxpayer 

a holding period requirement with respect to the stock on 

which dividends are paid. This holding period is based on the 

shareholder’s ex-dividend date. See sec. 246(c)(1). Because a 

section 951 inclusion implicates no declaration or payment of 

a dividend, there is no ex-dividend date by which to measure 

the holding period. 

As enacted in 2003, section 1(h)(11)(C) expressly excluded 

from the definition of ‘‘qualified foreign corporation’’ foreign 

personal holding companies (as defined in former section 

552(a)) (FPHCs), foreign investment companies (as defined in 

former section 1246(b)) (FICs), and passive foreign investment 

companies (as defined in section 1297(a)) (PFICs). 11 Petitioners suggest that because section 1(h)(11) does not similarly exclude section 951 inclusions, it must treat them as 

qualified dividend income. This reasoning is fallacious. That 

the statute excludes certain types of corporations (not 

including Editora) from the definition of qualified foreign corporation has little bearing on the question of whether section 

951 inclusions relating to a corporation (such as Editora) 

that is a qualified foreign corporation should be characterized 

as qualified dividend income. 

In Notice 2004–70, 2004–2 C.B. 724, 726, the Internal Revenue Service (IRS) provided guidance that section 951 inclusions do not constitute qualified dividend income under section 1(h)(11). 12 For the reasons previously discussed, we 

agree with this conclusion. 

Petitioners argue that section 951 inclusions should be 

treated as dividends because the 2004 instructions to Form 

5471, Information Return of U.S. Persons With Respect To 

(174) RODRIGUEZ v. COMMISSIONER 183

13 Respondent asserts that when the 2004 instructions were drafted, before passage of the 

Jobs and Growth Tax Relief Reconciliation Act of 2003, Pub. L. 108–27, sec. 302, 117 Stat. 760, 

the distinction between dividend income and other ordinary income was of little import, all of 

it being taxed at the same rate. 

Certain Foreign Corporations, indicate that individual CFC

shareholders should report section 951 inclusions as ordinary 

dividend income. On brief respondent acknowledges that the 

2004 instructions are ‘‘ambiguous’’, pointing out that

the 2004 instructions also instruct corporate taxpayers to 

report section 951 inclusions not as dividends but as ‘‘other 

income’’. 13 But whatever ambiguity or inaccuracy might be 

found in the 2004 instructions, it cannot affect the operation 

of the tax statutes or petitioners’ obligations thereunder. See 

Weiss v. Commissioner, 129 T.C. 175, 177 (2007). ‘‘It is settled law that taxpayers cannot rely on Internal Revenue 

Service instructions to justify a reporting position otherwise 

inconsistent with controlling statutory provisions.’’ Montgomery v. Commissioner, 127 T.C. 43, 65 (2006); see Johnson 

v. Commissioner, 620 F.2d 153, 155 (7th Cir. 1980), affg. T.C. 

Memo. 1978–426. Moreover, as respondent notes, the IRS provided detailed guidance about this issue in Notice 2004–70, 

supra, published about a year before petitioners filed their 

amended 2003 and original 2004 returns. 

We conclude and hold that petitioners are not entitled to 

treat their section 951 inclusions as qualified dividend 

income under section 1(h)(11)(B). 

Decision will be entered for respondent. 

f