Compaq Computer Corp. & Subsidiaries v. Comm'r of Internal Revenue, 24238–96.

• Decision Date: 18 November 1999
• Docket Number: No. 24238–96.,24238–96.
• Citation: 113 T.C. No. 25,113 T.C. 363
• Parties: COMPAQ COMPUTER CORPORATION AND SUBSIDIARIES, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

113 T.C. 363

113 T.C. No. 25

COMPAQ COMPUTER CORPORATION AND SUBSIDIARIES, Petitioners

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

No. 24238–96.

United States Tax Court.

Nov. 18, 1999.

H, a U.K. corporation, paid a dividend to P, its U.S. parent. Upon payment of the dividend, H, pursuant to the law of the United Kingdom, became liable for and paid advance corporation tax (ACT) and became entitled to a credit against its U.K. corporate tax. H allocated the U.K. credit to its two wholly owned subsidiaries, S1 and S2, which used the U.K. credit against their respective mainstream corporate tax liabilities. Pursuant to I.R.C. sec. 901(a), P claimed a foreign tax credit for the ACT paid by H.Held: Pursuant to Article 23(c)(1) of the U.S.-U.K. Convention, the payor of the ACT is the corporation that pays the dividend and corresponding ACT and not the corporation that uses the corresponding U.K. credit against its U.K. tax liability. Accordingly, P is entitled to claim a foreign tax credit pursuant to I.R.C. sec. 901(a) for the ACT paid by H. Held, further, the U.K. credit allocated by H to S1 and S2 and used by them against their U.K. tax is not a subsidy within the meaning of I.R.C. sec. 901(i).Mark A. Oates, John M. Peterson, Jr., James M. O'Brien, Owen P. Martikan, Paul E. Schick, Robert S. Walton, Tamara L. Frantzen, Erika S. Schechter, Allen Duane Webber, David A. Waimon, Lafayette G. Harter, III, and Steven M. Surdell, for petitioners.

Allan E. Lang, Sandra K. Robertson, and Barbara A. Felker, for respondent.

OPINION

WELLS, J.

In the instant case, the parties filed cross-motions for summary judgment pursuant to Rule 121(a).¹ The issue ² presented by the parties' summary judgment motions is whether Compaq Computer Corp. (petitioner) is entitled to foreign tax credits pursuant to section 901(a) for certain U.K. advance corporation tax (ACT) payments.³

Summary judgment may be granted if the pleadings and other materials demonstrate that no genuine issue exists as to any material fact and that a decision may be rendered as a matter of law. See Rule 121(b); Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520, 1992 WL 88529 (1992), affd. 17 F.3d 965 (7th Cir.1994). The record shows and the parties do not dispute that there is no genuine issue as to any material fact. Accordingly, we may render judgment on the issue in the instant case as a matter of law. See Rule 121(b).

Background

Petitioner is a Delaware corporation with its principal place of business in Houston, Texas. Petitioner owns 100 percent of the issued and outstanding stock of Compaq Computer Group, Ltd. (Compaq U.K.), a corporation organized and existing under the laws of the United Kingdom. Compaq U.K. owns 100 percent of the issued and outstanding stock of Compaq Computer Manufacturing, Ltd. (CCML), and Compaq Computer, Ltd. (CCL) (hereinafter we will sometimes refer to CCML and CCL collectively as the U.K. Subs.), which are corporations organized and existing under the laws of the United Kingdom.

During 1992, a corporation that resided in the United Kingdom was required to pay tax to the United Kingdom at the rate of 33 percent on its corporate income (mainstream tax). See Finance (No. 2) Act, 1992, sec. 21. Additionally, a corporation that paid a dividend to its shareholders was obligated to pay to the United Kingdom ACT. See Income and Corporation Taxes Act, 1988, sec. 14(1) (Eng.)

Generally, upon payment of the ACT, a U.K. corporation becomes entitled to a credit against mainstream tax equal to the amount of the ACT (corporate offset). See id. sec. 239(1). If the corporate offset exceeds the amount of the corporation's mainstream tax, the corporation can carry the corporate offset back 6 years or forward indefinitely. See id. sec. 239(3) and (4). A corporation that cannot use the corporate offset in the current year, rather than carrying the corporate offset back or forward, can elect to allocate the corporate offset to one or more of its controlled subsidiaries. ⁴ See id. sec. 240(1)

One exception to the general terms of the ACT is that a corporation is not required to pay ACT on “franked investment income”, which is a distribution on which ACT has already been paid. Id. secs. 238(1), 241(1). Additionally, if a controlled subsidiary makes a distribution to a parent, the parties can elect whether the subsidiary will pay ACT on the distribution or the parent will pay ACT on subsequent distributions of such funds. See id. sec. 247(4)

Additionally, a U.K. shareholder, upon receipt of the dividend, becomes entitled to a credit (shareholder credit) against its individual taxes. The shareholder credit is a portion of the ACT paid by the corporation. See id. sec. 231(1) Absent a treaty provision to the contrary, the shareholder credit is not available to nonresidents of the United Kingdom. See id.

The United States and the United Kingdom entered into the Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains and Three Protocols, Dec. 31, 1975–Mar. 15, 1979, U.S.-U.K., 31 U.S.T. (Part 6) 5668, T.I.A.S. 9682 (U.S.-U.K.Convention). Article 10 of the U.S.-U.K. Convention, 31 U.S.T. at 5677, provides that shareholders owning more than 10 percent of the outstanding stock of a U.K. corporation are entitled to a payment of one-half of the shareholder credit to which an individual U.K. resident shareholder would have been entitled. Shareholders owning less than 10 percent of the outstanding stock of a U.K. corporation are entitled to a payment of the full amount of the shareholder credit to which an individual U.K. resident shareholder would have been entitled.⁵

During 1992, Compaq U.K. declared and paid a dividend of £>>11,800,000 to petitioner. As a result of paying the dividend, Compaq U.K. became liable for and paid ACT in the amount of £ 3,933,333. Upon payment of the ACT, Compaq U.K. became entitled to a corporate offset against its mainstream corporate income tax. Additionally, pursuant to Article 10 of the U.S.-U.K. Convention, petitioner became entitled to a payment from the United Kingdom equal to one-half of the shareholder credit to which an individual shareholder resident of the United Kingdom would have been entitled.

Compaq U.K. surrendered the corporate offset to the U.K. Subs. instead of using it against Compaq U.K. tax. The U.K. Subs. used the corporate offset to reduce their 1992 U.K. mainstream tax liability. The U.K. Subs. did not pay any dividends during 1992.

Petitioner, pursuant to Rev. Proc. 80–18, 1980–1 C.B. 623, modified by Rev. Proc. 81–58, 1981–2 C.B. 678, and Rev. Proc. 84–60, 1984–2 C.B. 504, and amplified and clarified by Rev. Proc. 90–61, 1990–2 C.B. 657, did not claim a foreign tax credit for the unrefunded portion of the ACT paid by Compaq U.K. Following the opinion of the U.S. Court of Appeals for the Federal Circuit in Xerox Corp. v. United States, 41 F.3d 647 (Fed.Cir.1994), revg. 14 Cl.Ct. 455 (1988), petitioner made an informal claim for refund for additional foreign tax credits for the ACT payment. Respondent disallowed the refund.

Discussion

Section 901(a) allows a domestic corporation to claim a foreign tax credit for taxes “deemed to have been paid under sections 902 and 960.” Section 902 provides, inter alia:

SEC. 902. DEEMED PAID CREDIT WHERE DOMESTIC CORPORATION OWNS 10 PERCENT OR MORE OF VOTING STOCK OF FOREIGN CORPORATION.

(a) Taxes Paid by Foreign Corporation Treated as Paid by Domestic Corporation.—For purposes of this subpart, a domestic corporation which owns 10 percent or more of the voting stock of a foreign corporation from which it receives dividends in any taxable year shall be deemed to have paid the same proportion of such foreign corporation's post–1986 foreign income taxes as—

(1) the amount of such dividends (determined without regard to section 78), bears to

(2) such foreign corporation's post–1986 undistributed earnings.

(b) Deemed Taxes Increased in Case of Certain 2nd and 3rd Tier Foreign Corporations.—

(1) 2nd tier.—If the foreign corporation described in subsection (a) (hereinafter in this section referred to as the “1st tier corporation”) owns 10–percent or more of the voting stock of a 2nd foreign corporation from which it receives dividends in any taxable year, the 1st tier corporation shall be deemed to have paid the same proportion of such 2nd foreign corporation's post–1986 foreign income taxes as would be determined under subsection (a) if such 1st tier corporation were a domestic corporation.

The parties disagree as to which corporation is the payor of the ACT and, consequently, disagree as to whether section 902(a) or 902(b) applies to the dividend received by petitioner during 1992. Petitioners contend that, for foreign tax credit purposes, the payor of the ACT is the corporation that pays the dividend and the corresponding ACT. Petitioners further contend that the subsequent use or allocation of the corporate offset is irrelevant. Petitioners, therefore, argue that they are entitled to a foreign tax credit under section 902(a) because, during 1992, petitioner received a dividend from a 10–percent–owned subsidiary that paid taxes to a foreign government during 1992.

Respondent disagrees with petitioners' contentions and argues that, for purposes of the foreign tax credit, the payor of the ACT is the corporation that uses the corporate offset. Accordingly, respondent argues that the U.K. Subs., rather than Compaq U.K., must be viewed as the payors of the ACT in 1992. Respondent further argues that, because the U.K. Subs. did not pay a dividend to Compaq U.K. during 1992, no portion of the ACT paid by the U.K. Subs. can be attributed, pursuant to section 902(b), to the dividend distributed in 1992 by Compaq U.K. to petitioner.

To support their respective positions, both parties rely on Article 23 of the U.S.-U.K. Convention, which addresses the foreign tax credit treatment of the ACT...