U.S. Tax Review: Annual APA Report; Corporate AMT; FedEx, Moore, Mann, Farhy And Coca-Cola

• Jurisdiction: United States,Federal
• Law Firm: Fenwick
• Subject Matter: Tax, Income Tax, Tax Authorities
• Author: Ms Larissa Neumann, Michael Knobler and Julia Ushakova-Stein
• Published date: 16 May 2023

FedEx FTC Victory: Section 965 Reg Held

In FedEx, ¹ the U.S. District Court for the Western District of Tennessee invalidated reg. section 1.965-5(c)(1)(ii) and granted FedEx a tax refund of $89 million for improperly denied foreign tax credits. FedEx did not dispute that if the regulation were valid, it would not be entitled to a refund. The opinion is very well written and an important precedent for regulations being invalidated when they contradict the statute. The court also rejected the IRS's argument that policy should control whether a regulation is valid.

Under the transition tax rule in section 965(b), before including the accumulated overseas earnings of profitable subsidiaries in income, U.S. corporations are allowed to offset those earnings with the losses of their unprofitable foreign subsidiaries, which the court called offset earnings.

FedEx argued that it is entitled to FTCs on the offset earnings under sections 959, 960, and 965. The IRS argued that the statutes forbid these FTCs and that, even if the statutory language were ambiguous, reg. section 1.965-5(c)(1)(ii) fills the gap by prohibiting a credit.

Section 959 permits funds to be distributed to the United States shareholder without additional tax if those funds have already been included in income under section 951. Offset earnings, however, were never included in income. Section 965(b)(4)(A) addresses this situation, stating that:

For purposes of applying section 959 in any taxable year beginning with the taxable year described in subsection (a), with respect to any United States shareholder of a deferred foreign income corporation, an amount equal to such shareholder's reduction under [section 965(b)(1)] which is allocated to such deferred foreign income corporation under this subsection shall be treated as an amount which was included in the gross income of such United States shareholder under section 951(a).

Section 959 excludes from income earnings that have already been included under section 951, and section 965(b)(4)(A) extends that exclusion to offset earnings by directing that offset earnings be treated as if they were previously included by section 951. The parties agreed that, under sections 959 and 965(b)(4)(A), offset earnings are not included in income when repatriated. They disagreed, however, about how section 965(b)(4)(A) affects FedEx's claim to FTCs.

Before the Tax Cuts and Jobs Act, when a U.S. corporation had to include its foreign subsidiary's earnings in...