Caroline Rule was quoted in a recent Bloomberg Tax article about the broad implications of a corporate tax loophole that the U.S. Tax Court upheld in its August 2024 decision in Varian Medical Systems Inc. v. Commissioner, 163 T.C. No. 4.
The article, titled “Cisco, Booking Get Big Tax Benefits From Varian Court Ruling,” examined the tax deductions several major companies are considering taking in accordance with the Varian decision.
Announcing what is now an important consideration in international tax compliance for some corporations, the U.S. Tax Court ruled in Varian that Varian Medical Systems could take advantage of a mismatch between the effective date of new Section 245A, enacted as part of the 2017 Tax Cuts and Jobs Act (TCJA), which provides for a deduction for certain dividends U.S. corporations receive from foreign subsidiaries, and the effective date of a corresponding amendment to Section 78, which limits the deduction. Other corporations, like Cisco Systems Inc., Booking Holdings, and Estee Lauder Cos. have indicated they are considering if they can take advantage of the Varian ruling.
Caroline noted that the number of companies seeking to take advantage of the Varian loophole will likely grow. “I think they’re just the start, really,” she told Bloomberg Tax
“I think the government is going to be fighting on a lot of fronts on this issue,” she said.
Section 245A provides a deduction for foreign source dividends that domestic corporate parents receive from certain 10% owned foreign subsidiaries, the Dividends Received Deduction (DRD). The DRD interacts with the longstanding Section 78 “gross-up,” an adjustment to gross income that prevents a taxpayer from effectively claiming both a deduction and a credit for foreign income taxes. The TCJA amended Section 78 to provide that money treated as a dividend under Section 78 does not qualify for the Section 245A DRD.
The loophole that Varian took advantage of arises because the new Section 245A DRD applies to foreign source dividends received after December 31, 2017, while the corresponding amendment to Section 78 is effective for “taxable years of foreign corporations beginning after December 31, 2017.” Varian was a fiscal year taxpayer whose first taxable year beginning after December 31, 2017, began on September 29, 2018. As a result, the Section 245A DRD was available to Varian between January 1, 2018, and September 28, 2018.
The unanimous Varian ruling held that Treasury regulations that tried to eliminate the effective date mismatch could not override clear and unambiguous statutory language enacted by Congress.
The full Bloomberg Tax article can be found here.
Caroline Rule is a tenacious advocate for her clients, many of whom face white-collar criminal investigations and prosecutions or civil tax audits and investigations. During her over 30 years in practice, Caroline has successfully championed both individual and corporate clients, defeating allegations of fraud so as to preserve their reputations and, in the case of individuals, their careers.
