United States v. Goodyear Tire and Rubber Company
See 493 U.S. 1095, 110 S.Ct. 1172.
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), 26 U.S.C. § 902 (1970 ed.), 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 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. Pp. 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. 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. 138-143.
(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, 58 S.Ct. 379, 381, 82 L.Ed. 431. Pp. 143-145.
856 F.2d 170, (CA Fed 1988), reversed and remanded.
MARSHALL, J., delivered the opinion for a unanimous Court.
Alan I. Horowitz, Washington, D.C., for petitioner.
Barring Coughlin, Cleveland, Ohio, for respondents.
Justice MARSHALL delivered the opinion of the Court.