U.S. Tax Court Invokes Loper Bright for the First Time
The U.S. Tax Court allows a dividend-received deduction ("DRD") for a Section 78 gross-up while also disallowing foreign tax credits in its first application of Loper Bright.
On August 26, 2024, in Varian Medical Systems, Inc. and Subsidiaries v. Commissioner, 163 T.C. No. 4 (2024), the U.S. Tax Court allowed the petitioner U.S. corporation a DRD under Section 245A of the Internal Revenue Code for a Section 78 gross-up included during 2018, due to a mismatch in the effective dates of the two Code provisions. The Tax Court also concluded that Section 245A(d)(1) required the petitioner to reduce its corresponding foreign tax credits by a proportionate amount.
The Tax Court relied on the plain text of the statute to conclude that taxpayers whose foreign subsidiaries had fiscal years could claim a DRD under Section 245A for the Section 78 gross-up amount during the effective-date mismatch period. Citing for the first time the Supreme Court's decision in Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244 (2024), the Tax Court held that it would not defer to a Treasury Regulation to the contrary because it exceeded Treasury's delegated rulemaking authority, explaining that "the best (indeed the unambiguous) reading" of Sections 78 and 245A permitted the DRD in the effective date mismatch period.
Varian Medical presents the first tax case where the court has invoked Loper Bright to reject the Commissioner's attempted reliance on regulations interpreting a "perceived ambiguity" in a statute, foreshadowing the broad impact Loper Bright may have on courts' treatment of an agency's regulatory interpretation of a purportedly ambiguous statute.
As a result of the Varian Medical decision, U.S. corporate taxpayers who have open 2018 taxable years and whose non-U.S. corporate subsidiaries have fiscal years should consider whether they can claim any refunds based on the decision and the availability of the DRD under Section 245A for any gross-up amounts under Section 78.
