Judgment summary
Keysight Technologies, Inc. & Subsidiaries sought refunds for the 2020, 2021 and 2022 tax years, arguing it was entitled to a Section 197 amortisation deduction when computing its GILTI inclusion under Section 951A. (Compl. at ¶¶ 1, 14).
The United States had denied part of the deduction by applying Treasury Regulation 1.951A-2(c)(5), which allocates deductions or losses attributable to "disqualified basis" solely to "residual CFC gross income" rather than to gross tested income.
Both parties moved for summary judgment on the same regulation, presenting differing theories of statutory interpretation following Loper Bright Enterprises v. Raimondo. The Court found that Congress did not confer discretion on the Treasury to interpret the underlying statute, denied the United States' cross-motion, and granted Keysight's partial motion for summary judgment.
Background
Keysight is a multinational technology company with three subsidiaries organised in Singapore and one in Delaware. (Compl. at ¶¶ 7, 24). It brought a refund claim for the 2020, 2021 and 2022 tax years, alleging the United States failed to grant its claims. (Compl. at ¶ 14).
The dispute arises from the Tax Cuts and Jobs Act of 2017 ("TCJA"), which created global intangible low-taxed income ("GILTI") as a new category of taxable income under I.R.C. § 951A, taxed in the year earned regardless of repatriation.
Enactment of the TCJA created an inconsistency between fiscal-year and calendar-year filing taxpayers with controlled foreign corporation ("CFC") subsidiaries. The Treasury promulgated Regulation 1.951A-2(c)(5) to address this, aiming, according to the United States, to prevent taxpayers from "gam[ing] the new rules" by transferring assets between related CFCs during the "disqualified period". (Def.'s Cross-Mot. at 11).
Keysight challenged the validity of the Regulation, arguing it contradicts the promulgating statute, exceeds Treasury's authority, and is not a logical outgrowth of the proposed rule under the Administrative Procedure Act ("APA"). (Pl.'s Mot. at 13-40).
Core dispute
The central issue was whether the Treasury was permitted to remedy, via Regulation 1.951A-2(c)(5), the congressionally created distinction between fiscal-year and calendar-year filers that benefited Keysight and similarly situated companies with CFC subsidiaries.
Keysight argued it would be entitled to a Section 197 amortisation deduction when computing its GILTI inclusion had the Regulation never been promulgated, and that the Regulation exceeded Treasury's statutory authority.
The United States argued that Treasury had broad authority under I.R.C. § 7805(a) to prescribe "needful rules and regulations", and that Congress delegated authority under I.R.C. § 951A(c)(2)(A)(ii) to define what deductions are "properly allocable" to a CFC's gross income. It also argued the Regulation was a logical outgrowth of the proposed rule.
Court findings
The Court found that Section 7805(a), standing alone, does not give the Secretary the power to promulgate regulations in every case, and that treating it as such would render Loper Bright meaningless.
The Court found that Section 951A(c)(2)(A)(ii) does not grant the Treasury specific authority, either expressly or impliedly, and that the subsection at issue, Section 951A(c), does not reference the Secretary at all, unlike other subsections such as Section 951A(d)(4) which expressly delegate authority.
The Court further found that Section 954(b)(5), relied upon by the United States, only grants authority to promulgate regulations "for purposes of subsection (a)", which concerns foreign base company income, not GILTI.
Applying Skidmore, the Court considered the Treasury's interpretation of "properly allocable" but found its reasoning and consistency lacking, noting that Keysight had demonstrated a clear thread of legislative intent supporting a definition closer to the factual relationship test under the historic regulation, Treas. Reg. § 1.954-1(c)(1)(i)(B).
The Court concluded that allowing the Secretary to define ambiguous terms without a congressional grant of authority or statutory context was the kind of agency overreach Loper Bright was designed to foreclose. The Court did not reach Keysight's argument on whether the Regulation was a logical outgrowth of the proposed rule, finding it unnecessary given its conclusion on invalidity.
Outcome
The Court held that the Treasury lacked authority to promulgate Treasury Regulation § 1.951A-2(c)(5).
The United States' Cross-Motion for Summary Judgment was DENIED (ECF No. 40), and Keysight's Partial Motion for Summary Judgment was GRANTED (ECF No. 34).
Major issues / areas of contention
- Whether Section 7805(a) alone grants the Treasury Secretary authority to promulgate Regulation 1.951A-2(c)(5).
- Whether Section 951A(c)(2)(A)(ii) expressly or impliedly delegates authority to the Secretary to define deductions 'properly allocable' to a CFC's gross income.
- Whether Section 954(b)(5) supplies authority for the Regulation, given it applies only to subsection (a) foreign base company income and not to GILTI.
- The proper post-Loper Bright methodology for interpreting tax statutes and assessing agency regulatory authority.
- Whether the Treasury's interpretation of 'properly allocable' merits Skidmore deference given its thoroughness, reasoning and consistency.
- Whether legislative history, including committee reports on the Tax Reform Act of 1986 and the TCJA, supports a broader anti-abuse reading of the statute.
- Whether the Regulation was a logical outgrowth of the proposed rule under the APA (not reached by the Court).