U.S. v. Goodyear Tire
493 U.S. 132

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U.S. Supreme Court

U.S. v. Goodyear Tire, 493 U.S. 132 (1989)

United States v. Goodyear Tire and Rubber Company

No. 88-1474

Argued Nov. 1, 1989

Decided Dec. 11, 1989

493 U.S. 132

CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR

THE FEDERAL CIRCUIT

Syllabus

In 1970 and 1971, Goodyear Tyre and Rubber Company (Great Britain) Limited (Goodyear G.B.), a wholly owned subsidiary of Goodyear Tire and Rubber Company (Goodyear), a domestic corporation, filed income tax returns in, and paid taxes to, the United Kingdom and the Republic of Ireland. It also distributed dividends to Goodyear, its sole shareholder, which Goodyear reported on its federal tax return. Thereafter Goodyear sought an indirect credit for a portion of the foreign taxes paid by Goodyear G.B. as permitted by § 902 of the Internal Revenue Code (Code), which limits a domestic parent corporation's credit to the amount of tax paid by the subsidiary attributable to the dividend issued. The credit is calculated by multiplying the total foreign tax paid by that portion of the subsidiary's after-tax "accumulated profits" that is actually issued to the domestic parent in the form of a taxable dividend. After Goodyear G.B. carried back a net loss reported on its 1973 British tax return to offset portions of its 1970 and 1971 income, British taxing authorities recalculated its 1970 and 1971 income and tax liability, and the company received a refund for those years. Pursuant to § 905(c) of the Code -- which permits redetermination of the foreign tax credit whenever any tax paid is refunded -- the Commissioner of Internal Revenue recalculated the indirect tax credit available to Goodyear for 1970 and 1971 by lowering the foreign taxes paid to reflect the refund. However, he refused to lower accumulated profits for those years to reflect the British tax authorities' redetermination because, applying United States tax principles, Goodyear G.B.'s loss would not have been allowable had the company been a domestic corporation filing a federal tax return. Thus, the Commissioner assessed, and Goodyear paid, tax deficiencies for 1970 and 1971. Goodyear subsequently sought a refund in the Claims Court, which rejected Goodyear's claim that foreign tax law principles govern the calculation of "accumulated profits" in § 902's tax credit, finding instead that the purposes underlying § 902 favored calculation of "accumulated profits" in accordance with United States tax concepts. The Court of Appeals reversed, holding that the "plain meaning" of § 902 required that "accumulated profits" be determined under foreign law. It also held that the congressional

Page 493 U. S. 133

purpose underlying § 902 to eliminate international double taxation would be defeated if a foreign subsidiary's taxes, but not its "accumulated profits," were calculated under foreign law.

Held: "Accumulated profits," as that term appears in § 902's indirect tax credit, are to be calculated in accordance with domestic tax principles. 493 U. S. 138-145.

(a) Section 902's text does not resolve how "accumulated profits" are to be calculated, since it relates such profits both to the foreign tax paid by the subsidiary, calculated in accordance with foreign law, and to the dividend issued by the subsidiary, calculated in accordance with domestic law. Pp. 493 U. S. 138-139.

(b) No definitional approach to "accumulated profits" uniformly and unqualifiedly satisfies the indirect credit's dual congressional purposes, as clearly demonstrated by the credit's history, of protecting a domestic parent from double taxation of its income and treating foreign branches and foreign subsidiaries alike in terms of the tax credits they generate for their domestic companies. Goodyear correctly claims that calculating such profits according to domestic tax principles can result in situations in which § 902's statutory goal of avoiding double taxation will be disserved. However, as the Government contends, defining the profits in terms of foreign tax principles can unfairly advantage domestic companies that operate through foreign subsidiaries over those that operate through unincorporated branches. Pp. 493 U. S. 139-140.

(c) The Government's interpretation of "accumulated profits" is more faithful to congressional intent. The risk of double taxation is less substantial than the risk of unequal treatment. Goodyear offers no basis for its suggestion that double taxation -- which can result only when a dividend is sourced to a year in which domestic tax concepts recognize little or no income and yet a subsidiary pays substantial foreign tax -- commonly occurs. On the other hand, Goodyear's approach leads to unequal tax treatment of subsidiaries and branches whenever the foreign taxing authority calculates income more or less generously than the United States, a result that is difficult to square with the express congressional purpose of ensuring tax parity between corporations that operate through foreign subsidiaries and those that operate through foreign branches. The Government's approach is also supported by administrative interpretations of § 902 and by the statutory canon that tax provisions should generally be read to incorporate domestic tax concepts absent a clear congressional expression that foreign concepts control, Biddle v. Commissioner,302 U. S. 573, 578. Pp. 493 U. S. 143-145.

856 F.2d 170, (CA Fed 1988), reversed and remanded.

MARSHALL, J., delivered the opinion for a unanimous Court.

Page 493 U. S. 134

Justice MARSHALL delivered the opinion of the Court.

In this case, we must decide whether "accumulated profits" in the indirect tax credit provision of the Internal Revenue Code of 1954, 26 U.S.C. § 902 (1970 ed.), are to be measured in accordance with United States or foreign tax principles. We conclude that "accumulated profits" are to be measured in accordance with United States principles.

I

Goodyear Tyre and Rubber Company (Great Britain) Limited (Goodyear G.B.) is a wholly owned subsidiary of Goodyear Tire and Rubber Company, a domestic corporation (Goodyear). Goodyear brought this suit seeking a refund of federal income taxes collected for the years 1970 and 1971. During those years, Goodyear G.B. filed income tax returns in, and paid taxes to, the United Kingdom and the Republic of Ireland. Goodyear G.B. also distributed dividends to Goodyear, its sole shareholder. Goodyear reported these dividends on its federal tax return, as required by 26 U.S.C. §§ 301, 316 (1970 ed.). Goodyear thereafter sought credit for a portion of the foreign taxes paid by Goodyear G.B. in the amount specified in § 902. [Footnote 1]

Page 493 U. S. 135

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). [Footnote 2]

Page 493 U. S. 136

In 1973, Goodyear G.B. reported a net loss on its British tax return and carried back that loss to offset substantial portions of its 1970 and 1971 income. Based on the 1973 carried-back losses, British taxing authorities recalculated Goodyear G.B.'s income and tax liability for the years 1970 and 1971. Goodyear G.B. thereafter received a refund of a substantial portion of its 1970 and 1971 foreign tax payments. In response to the refunds, and pursuant to § 905(c) of the Code which permits redetermination of the foreign tax credit whenever "any tax paid is refunded in whole or in part," the Commissioner of Internal Revenue recalculated the indirect tax credit available to Goodyear for the tax years 1970 and 1971. The Commissioner lowered the foreign taxes paid (T) to reflect the refund. He refused, however, to lower accumulated profits (AP) for those years to reflect British tax authorities' redetermination of Goodyear G.B.'s income. The deductions that created, for British tax purposes, the 1973 loss would not have been allowable in the computation of United States income tax if Goodyear G.B. had been a United States corporation filing a United States return. See App. 19-29 (Stipulation of Facts). In the Commissioner's view, accumulated profits are to be calculated in accordance with United States tax principles; accordingly, the Commissioner regarded Goodyear G.B.'s 1970 and 1971 accumulated profits as unaffected by the deductions allowed under British law.

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's 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

Page 493 U. S. 137

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. [Footnote 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

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