U.S. Tax Court: Compute foreign tax credit using same method that CFC used to apportion interest expense

U.S. shareholder of CFC must use same method that CFC used to apportion interest expense for purposes of determining foreign tax credit

An opinion concerning CFC stock for purposes of computing its foreign tax credit

The U.S. Tax Court today issued an opinion concluding that the taxpayer must use the same method to characterize its controlled foreign corporation (CFC) stock for purposes of computing its foreign tax credit under section 904 as the method used by the CFC for interest expense apportionment.

The case is: AptarGroup, Inc. v. Commissioner, 158 T.C. No. 4 (March 16, 2022). Read the Tax Court’s opinion [PDF 150 KB] (nine pages)

Summary

The Tax Court briefly summarized the facts of the case as follows:

  • The taxpayer owned stock in a CFC that apportioned interest expense under the “modified gross income method.”
  • The taxpayer claimed a foreign tax credit of approximately $3.5 million under section 904 with respect to tax imposed on its income from the CFC.
  • To determine the amount of its foreign tax credit, the taxpayer characterized its stock in the CFC using the “asset method.”
  • Thus, the taxpayer did not use the same method that the CFC used for interest expense apportionment.
  • The IRS issued a notice of deficiency to the taxpayer denying the foreign tax credit of $3.5 million.
  • The parties filed cross-motions for partial summary judgment on the issue of whether the taxpayer must use the modified gross income method to characterize the stock of its CFC for purposes of computing the foreign tax credit because it was the method that the CFC used to apportion interest expense.

The Tax Court briefly summarized its holding as follows:

  • The taxpayer’s position was inconsistent with the proper application of Temp. Reg. section 1.861-9T(f)(3)(iv), which requires the U.S. shareholder of a CFC to characterize the stock of the CFC using the same method that the CFC used to apportion its interest expense and which was not limited by Temp. Reg. section 1.861-12T.

 

The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organization. KPMG International Limited is a private English company limited by guarantee and does not provide services to clients. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.