Source: https://openjurist.org/493/us/132
Timestamp: 2019-03-25 10:12:12
Document Index: 414208890

Matched Legal Cases: ['§ 902', '§ 902', '§ 902', '§ 902', '§ 902', '§ 902', '§ 902', '§ 964']

493 U.S. 132 - United States v. Goodyear Tire and Rubber Company
493 US 132 United States v. Goodyear Tire and Rubber Company
GOODYEAR TIRE AND RUBBER COMPANY and Affiliates.
Section 902 provides a parent of a foreign subsidiary with an "indirect" or "deemed paid" credit on its domestic income tax return to reflect foreign taxes paid by its subsidiary. The credit protects domestic corporations that operate through foreign subsidiaries from double taxation of the same income: taxation first by the foreign jurisdiction, when the income is earned by the subsidiary, and second by the United States, when the income is received as a dividend by the parent. In some circumstances, a foreign subsidiary may choose to distribute only a portion of its available profit as a dividend to its domestic parent. For that reason, a domestic parent cannot automatically claim credit for all foreign taxes paid by its subsidiary: § 902 limits a domestic parent's credit to the amount of tax paid by the subsidiary attributable to the dividend issued. The foreign tax deemed paid by the domestic parent is calculated by multiplying the total foreign tax paid (T) by that portion of the subsidiary's after-tax accumulated profits (AP - T) that is actually issued to the domestic parent in the form of a taxable dividend (D).2
In view of the reduced amount of Goodyear's tax deemed paid, the Commissioner assessed substantial tax deficiencies for the tax years 1970 and 1971. Goodyear paid the deficiencies and, following the IRS' denial of its administrative refund claim, brought this action in the United States Claims Court, averring that foreign tax law principles govern the calculation of "accumulated profits" in § 902's tax credit. Calculating "accumulated profits" in accordance with British tax law principles, Goodyear maintained that Goodyear G.B.'s after-tax accumulated profits for 1970 and 1971 were insufficient to cover the dividends paid in those years. In such a circumstance, § 902 requires that, for the purpose of computing the indirect credit, the excess of the dividend be deemed paid out of the after-tax accumulated profits of the preceding year. If in that year the remaining portion of the dividend exceeds the after-tax accumulated profits, the remainder of the dividend is allocated or "sourced" to the next most recent year, until the dividend is exhausted.3 Thus, Goodyear argued that the dividends it received from Goodyear G.B. in 1970 and 1971 should have been sourced to prior tax years, 1968 and 1969, until Goodyear G.B.'s after-tax accumulated profits covered the dividends. Through this sourcing mechanism, Goodyear would, in computing its domestic tax liability for the dividends issued by Goodyear G.B., receive credit for a portion of the foreign taxes paid by Goodyear G.B. in 1968 and 1969. Because Goodyear G.B. paid substantial foreign taxes in those tax years, allocation of the dividend to those years would yield a tax deemed paid by Goodyear in excess of £1 million, over four times greater than the tax the Commissioner deemed paid. If the term "accumulated profits" is defined in accordance with domestic tax principles, as the Commissioner advocated, the dividends issued in 1970 and 1971 are fully exhausted by the accumulated profits of those years, resulting in a tax deemed paid of £247,124.
The Court of Appeals' decision has important consequences for the calculation of the indirect tax credit of domestic parents that have received dividends from their subsidiaries abroad. To clarify the operation of the § 902 credit in the tax years to which it applies,4 we granted certiorari, 490 U.S. 1045, 109 S.Ct. 1952, 104 L.Ed.2d 421 (1989), and now reverse.
In defending the amended version of the indirect credit, one sponsor described the purpose of the credit as securing, for domestic corporations that receive income in the form of dividends from foreign subsidiaries, the same sort of deduction available to domestic corporations that receive income from foreign branches. 61 Cong.Rec. 7184 (1921).5 This goal of equalized treatment is reflected as well in testimony regarding the amendment before the Senate Committee on Finance, in which a spokesperson for the Department of the Treasury described the proposal as intended "to give this American corporation about the same credit as if conducting a branch." Hearings on H.R. 8245 before the Senate Committee on Finance, 67th Cong., 1st Sess., pt. 2, p. 389 (1921). More recently, the Senate Report on the 1962 amendments to the indirect credit confirms Congress' intent to treat foreign branches and foreign subsidiaries alike in terms of the tax credits they generate for their domestic companies. See S.Rep. No. 1881, 87th Cong., 2d Sess., 66-67 (1962), U.S.Code Cong. & Admin.News 1962, p. 3297.6
The Government contests Goodyear's characterization of this case as one of "double taxation." In the Government's view, the dividends received by Goodyear should not be allocated to prior years because to do so would permit Goodyear to avoid taxation altogether on domestically defined income that its subsidiary earned in 1970 and 1971. Under domestic rules, Goodyear G.B. earned sufficient income in 1970 and 1971 to cover the dividends it issued to Goodyear in those years. That British taxing authorities recognized little income in those years should not, in the Government's view, prevent the United States from recognizing the substantial income attributable to those years under domestic rules. According to the Government, the foreign tax paid in 1968 and 1969 by Goodyear G.B.—the years to which Goodyear seeks to source its dividends—relates to income that Goodyear G.B. chose not to distribute during those years as dividends to Goodyear. To credit Goodyear with taxes paid on undistributed income, the Government concludes, would be inequitable because it would provide domestic parents that operate through foreign subsidiaries favorable treatment vis-a-vis domestic corporations that use foreign branches.
"For purposes of this subpart, a domestic corporation which owns at least 10 percent of the voting stock of a foreign corporation from which it receives dividends in any taxable year shall—
Calculation of the indirect credit for tax years beginning after 1986 is governed by the amended version of § 902 established by the Tax Reform Act of 1986, 100 Stat. 2528, 26 U.S.C. § 902 (1982 ed., Supp. V). The amended version substantially overhauls the method of calculating the credit and removes the controversy regarding the definition of "accumulated profits." The current version of § 902(c)(1) replaces "accumulated profits" with "undistributed earnings," which are defined as the "earnings and profits of the foreign corporation (computed in accordance with sections 964 and 986)." Section 964(a) in turn provides that "the earnings and profits of any foreign corporation . . . shall be determined according to rules substantially similar to those applicable to domestic corporations." 26 U.S.C. § 964(a) (1982 ed.).