American Chicle Co. v. United States

Background

A U.S. corporation received dividends in 1936–1938 from foreign subsidiaries that it wholly owned. The subsidiaries paid income taxes to their home countries. The parent sought a credit on its U.S. returns for those foreign taxes under Section 131(f). The Internal Revenue Service computed a smaller credit. The parent paid the tax difference, sued for a refund, and the Court of Claims sided with the Commissioner. The question reached this Court: how exactly should the foreign-tax credit be calculated?

Reasoning

Section 131(f) says a parent “shall be deemed to have paid” a proportion of taxes paid by its subsidiary “upon or with respect to the accumulated profits” from which dividends were paid. The Court read those words plainly. It concluded the credit must be limited to the part of foreign taxes that relates to the subsidiary’s accumulated profits actually used to pay dividends. The Court reviewed the earlier 1918 and 1921 statutes and administrative practice. It noted that Treasury forms and later regulations (starting in 1930 and continued in Regulations 103) implemented the method the Commissioner used. The Court rejected the parent’s argument that earlier practice prevented a regulatory change when the later regulation matched the statute’s clear language.

Real world impact

The decision affirms the Commissioner’s calculation method. U.S. parent companies will have credits limited to the share of foreign tax attributable to accumulated profits paid out as dividends. The ruling upholds Treasury regulations and limits larger refund claims based on applying the fraction to total foreign taxes.