General Elec. Co. v. United States

• Decision Date: 14 November 1979
• Docket Number: No. 429-76.,429-76.
• Citation: 610 F.2d 730
• Parties: GENERAL ELECTRIC COMPANY, v. The UNITED STATES.
• Court: U.S. Claims Court

610 F.2d 730

GENERAL ELECTRIC COMPANY, v. The UNITED STATES.

No. 429-76.

United States Court of Claims.

November 14, 1979.

M. Bernard Aidinoff, New York City, attorney of record, for plaintiff; Charles E. Dorkey, III, Sydney E. Unger, and Sullivan & Cromwell, New York City, of counsel.

Bruce W. Reynolds, Washington, D. C., with whom was Asst. Atty. Gen., M. Carr Ferguson, Washington, D. C., for defendant; Theodore D. Peyser and Donald H. Olson, Washington, D. C., of counsel.

Before KASHIWA, KUNZIG and BENNETT, Judges.

OPINION

KASHIWA, Judge:

This income tax case comes before the court on the parties' stipulation of facts. General Electric Co. (GE) seeks a refund for taxes and interest paid for its 1966 tax year. The issues presented in this case¹ involve interpretation of the regulations promulgated under I.R.C. § 963. We must decide whether plaintiff was correct in applying the special rules of Treas.Reg. § 1.963-4 in determining the amount of its foreign tax credit on distributions received from foreign corporations covered by an election under I.R.C. § 963 and whether it properly attributed a distribution received from a foreign corporation in 1967 to the 1966 tax year and properly deemed that distribution to be from the 1966 earnings and profits of the distributing corporation under Treas.Reg. § 1.963-3. After considering the written submissions of the parties and their oral presentations, we hold for the Government.

I. Statutory Background

An appreciation of the problems raised in this case requires a general understanding of those parts of the Internal Revenue Code which ordinarily determine the taxation of United States shareholders of controlled foreign corporations.² I.R.C. § 951 requires a United States shareholder that owns 10 percent or more of the stock of a controlled foreign corporation³ to include in its gross income its pro rata share of the subpart F income of the controlled foreign corporation.⁴ Thus, under ordinary circumstances, a United States shareholder of a controlled foreign corporation is taxed on its pro rata share of the subpart F income of the controlled foreign corporation without regard to whether this income is actually distributed to the shareholder during the taxable year.

Until its repeal,⁵ I.R.C. § 963 provided an exception to taxation under section 951. A corporate United States shareholder that qualifies for treatment under section 963 is excluded from the coverage of section 951, and is not taxed on its pro rata share of the subpart F income of controlled foreign corporations. Such a shareholder is only taxed on distributions actually received during the taxable year.

In order to qualify for treatment under section 963, every corporation must (1) file an election to be covered by that section of the Code, (2) consent to the regulations promulgated under section 963(f); and (3) receive a statutorily determined distribution of the earnings and profits of the foreign corporations covered by its election. The section 963 election may extend to (a) one or more first tier controlled foreign corporations, (b) two or more controlled foreign corporations connected in a chain of stock ownership, (c) the group consisting of all controlled foreign corporations, or (d) the group consisting of all controlled foreign corporations other than certain less developed country corporations.

The distribution of the earnings and profits of the foreign corporations included in an election that the shareholder must receive under section 963 is called the minimum distribution. The amount of the minimum distribution equals a varying percentage of the earnings and profits of the foreign corporations covered by the section 963 election. The minimum distribution formula was designed so that the sum of the amount of foreign tax paid by the distributing corporation that was attributable to the minimum distribution and the amount of United States tax paid by the electing shareholder on the minimum distribution would equal approximately 90 percent of the amount the electing shareholder would pay if it were taxed at United States rates on its proportional share of the pretax earnings and profits of the foreign corporations covered by its election.⁶

The amount of the minimum distribution for a particular taxable year is determined by reference to the appropriate statutory table in section 963(b). For the tax year at issue in this case, the table found in section 963(b)(3) controls. The percentage of earnings and profits of the foreign corporations covered by the election which must be distributed is a function of the effective foreign tax rate of those corporations.⁷ There is an inverse relationship between the effective foreign tax rate and the percentage of the earnings and profits of the foreign corporations covered by the election that must be distributed. Under the table in section 963(b)(3), when the effective foreign tax rate is 43 percent or higher no minimum distribution is required. Under these circumstances, an electing corporation obtains the section 963 exclusion without receiving any distribution from the foreign corporations covered by its election.

Ordinarily, a distribution is treated as received in that taxable year in which the shareholder receives it. Treas.Reg. §§ 1.301-1(b) and 1.902-1(a)(8). Because of the special significance of a minimum distribution, however, Treas.Reg. § 1.963-3(a) allows a shareholder which receives a distribution from a foreign corporation covered by a section 963 election in the taxable year following the election year to treat that distribution as received within the taxable year of the election if it is received within 180 days of the close of the election year and is made within the distribution period of the foreign corporation relating to the election year. Under Treas.Reg. § 1.963-3(c), such distributions are deemed to come from the earnings and profits of the foreign corporation that relate to the taxable year of the election.

II. Facts

Plaintiff is a New York corporation with its principal place of business in Fairfield, Connecticut, using the accrual method on a calendar year taxable year. For the 1966 tax year GE made a valid group election under section 963. The effective foreign tax rate was over 43 percent, thus GE was not required to receive any distribution from the foreign corporations covered by its election in order to use the section 963 exclusion. GE received $7,451,404 in distributions in 1966 from foreign corporations covered by its election. It also received a distribution of $76,776 from a foreign corporation covered by its election within the first 60 days of 1967. In its 1966 corporate tax return, plaintiff treated this latter distribution as received in 1966 and paid out of earnings and profits attributable to 1966. In determining its foreign tax credit on these distributions, plaintiff applied the special rules of Treas.Reg. § 1.963-4(b) and (c).

After audit and examination of plaintiff's return for 1966, the Internal Revenue Service asserted a deficiency on the ground that the regulations cited above did not apply to the distributions received by plaintiff because such distributions were not part of a minimum distribution under section 963. Plaintiff paid the deficiency and related interest and brought this refund suit after the Service disallowed its claim for refund.

III. Positions of the Parties

Plaintiff argues that the authority granted to the Secretary of the Treasury to vary the foreign tax credit rules by section 963(f) was not limited to the determination of the foreign tax credit in respect to the minimum distribution. It contends that the language of the regulations at issue in this case clearly indicates that they apply to the full amount of the distribution received by an electing shareholder from a foreign corporation covered by its election. Plaintiff takes the position that the failure of the regulations to differentiate between the minimum distribution and distributions in excess of that statutorily determined amount indicates that the regulations were intended to control all distributions. It argues that the Government's interpretation is contrary to the plain meaning of the regulations. It further contends that any requirement that it apply one set of rules to the minimum distribution and another set of rules to distributions in excess of that amount would impose a heavy administrative burden contrary to the Congressional purpose in enacting section 963.

Defendant takes the position that the legislative history shows that the Secretary's authority to vary the foreign tax credit rules was limited to the determination of the foreign tax credit on the minimum distribution. It argues that the regulations, when read as a whole and in the context of the statutory purpose, are limited in application to the minimum distribution. It contends that to apply the regulations in the manner proposed by plaintiff would result in a windfall for plaintiff which was not intended either by Congress or the drafters of the regulations.

IV. Discussion

The parties agree that our decision in this case is dependent on the proper interpretation of the regulations promulgated pursuant to the grant of authority in section 963(f). Those regulations are legislative in character and have the force and effect of law. In determining the meaning of such regulations, rules of interpretation applicable to statutes are appropriate tools of analysis. See Rucker v. Wabash R. R. Co., 418 F.2d 146 (7th Cir. 1969); C. Sands, Sutherland Statutory Construction § 31.06 (4th ed. 1972). The meaning of particular terms is to be derived not only by consideration of the words themselves but also by examination of the context, the purpose, and the circumstances under which the terms are used. See Sea-Land Service, Inc. v. United States, 493 F.2d 1357, 204 Ct.Cl. 57, cert. denied, 419 U.S. 840, 95 S.Ct. 69, 42 L.Ed.2d 67 (1974); Irving...