Judgment summary
This case came before the United States Tax Court on the petitioner's Motion for Summary Judgment and the respondent's Cross-Motion for Summary Judgment. The respondent had issued a Notice of Deficiency for the tax year ended September 30, 2019 and the tax year ended September 30, 2021, disallowing part of a deduction claimed under section 245A and its accompanying regulations.
The respondent determined that the petitioner was entitled only to a partial section 245A deduction because of the application of the Extraordinary Disposition Rules, which form part of the section 245A temporary regulations.
The Court held that the Extraordinary Disposition Rules cannot contravene the plain meaning of section 245A. It granted the petitioner's Motion and denied the respondent's Cross-Motion, concluding that the petitioner was entitled to the full dividends-received deduction.
Background
The petitioner, Siemens Medical Solutions USA, Inc., is a wholly owned subsidiary of Siemens Healthineers AG (SHAG), a German company that provides healthcare products globally. Its principal place of business was Pennsylvania when its Petition was timely filed.
At all relevant times, Siemens Healthcare Diagnostics, Inc. (SHD US), a California corporation and member of the petitioner's U.S. consolidated group, owned 67.78% of Siemens Medical Solutions Diagnostics Holding I.B.V. (SMS BVI), a Dutch company treated as a corporation for U.S. federal income tax purposes.
During the tax year ended September 30, 2018, certain foreign subsidiaries of SMS BVI were restructured. On April 1, 2018, SMS BVI sold 100% of Siemens Healthcare Diagnostics GmbH, a Swiss company, for EUR 85,715,399 to Siemens Healthineers Holding III BV, a Dutch company within the SHAG Group. On August 13, 2018, SMS BVI sold 100% of Siemens Healthcare Diagnostics Holding GmbH, a German company, to Siemens Healthcare GmbH, a German company within the SHAG Group, for EUR 1,339,593,000. As a result of these two sales, SMS BVI increased its earnings and profits by approximately EUR 819,000,000.
On March 19, 2019, SMS BVI made a pro rata distribution of EUR 1,750,000,000 to its shareholders. SHD US received 67.78% of that distribution, which was EUR 1,186,073,740. Of that amount, $670,616,109 was a dividend made out of SMS BVI's earnings and profits (the March 2019 Dividend), which was entirely foreign source.
The petitioner claimed a deduction for the full amount of the March 2019 Dividend on its Form 1120 for the 2019 Tax Year. It considered the Extraordinary Disposition Rules and concluded that its two 2018 sales likely fit the definition of extraordinary dispositions, but it also concluded that the rules were invalid and filed Form 8275-R, Regulation Disclosure Statement, disclosing the relevant facts and its legal analysis.
In the Notice of Deficiency, the respondent determined deficiencies of $5,581,518 and $1,452,006 for the 2019 Tax Year and the 2021 Tax Year respectively, and disallowed $314,992,962 of the section 245A deduction. Of the March 2019 Dividend, $40,630,184 was not attributable to the two 2018 sales.
Core dispute
The parties did not dispute that the petitioner was eligible for the dividends-received deduction, nor did they dispute that SMS BVI's two 2018 sales met the requirements of an extraordinary disposition. Since SMS BVI's 2018 Tax Year ended on September 30, 2018, it had a gap from January 1, 2018 to September 30, 2018, which met the temporary regulation's definition of a disqualified period.
The dispute was whether the Extraordinary Disposition Rules apply and limit the petitioner's claimed section 245A deduction.
The petitioner argued that, under the plain terms of section 245A, it was entitled to the entire deduction because the March 2019 Dividend was distributed after December 31, 2017, from a qualifying corporation, and was entirely foreign source. It contended there was a head-to-head conflict between the statute and the regulation and that the statute must prevail. It also argued that the regulation was retroactive and did not comply with the Administrative Procedure Act.
The respondent argued that Treasury issued necessary or appropriate regulations to carry out section 245A, relying on section 245A(g) and section 7805(a), and that the Administrative Procedure Act did not apply, or that Treasury complied with it if it did.
Court findings
The Court found there was no material dispute of fact and that the Motions could be resolved as a matter of law.
Applying the maxim that courts must presume that a legislature says in a statute what it means, the Court found that all the elements of section 245A were met. The March 2019 Distribution was made well after December 31, 2017. SHD US owned 67.78% of SMS BVI, a controlled foreign corporation, making it a specified 10% owned foreign corporation. All of the March 2019 Dividend was from foreign earnings. The Court agreed with the petitioner that it was entitled to the full deduction under the plain terms of the statute.
The Court found that Treasury's Extraordinary Disposition Rules conflict with the plain meaning of section 245A. It observed that Congress chose the effective date for section 245A of distributions made after December 31, 2017, chose the effective date for the start of the GILTI regime, and chose the measurement date for income subject to the Mandatory Repatriation Tax. Congress could have chosen for section 245A and section 951A to have the same effective dates but chose not to do so.
The Court considered the respondent's attempt to distinguish this case from Varian Medical Systems, Inc. and Subsidiaries v. Commissioner. It accepted that the Extraordinary Disposition Rules do not specifically change an effective date, but found that Treasury drafted them to address a gap created solely by different effective dates, so the effect was materially the same. The rules disallow 50% of the deduction for distributions that Treasury admits satisfy the plain terms of the statute, using criteria that appear nowhere in the statute, creating a contradiction in which the statute must prevail.
The Court held that the Extraordinary Disposition Rules were inconsistent with section 245A and outside the boundaries of regulatory authority provided by section 245A(g) or section 7805. Citing Loper Bright Enterprises v. Raimondo, the Court noted its role to independently interpret the statute. It found that a regulation that purports to contradict the statute can be neither necessary nor appropriate, and that Treasury does not have authority to impose the MRT or GILTI on foreign-source income subject to neither.
Outcome
The Court granted the petitioner's Motion for Summary Judgment and denied the respondent's Cross-Motion for Summary Judgment, holding that the petitioner was entitled to the full dividends-received deduction under section 245A for the March 2019 Dividend. The Court stated that an appropriate order and decision would be entered.
Major issues / areas of contention
- Whether the petitioner was entitled to the full dividends-received deduction under I.R.C. section 245A for the March 2019 Dividend under the plain terms of the statute.
- Whether the Extraordinary Disposition Rules in Temp. Treas. Reg. section 1.245A-5T apply to limit the section 245A deduction.
- Whether the Extraordinary Disposition Rules conflict with the plain meaning of section 245A.
- Whether the Extraordinary Disposition Rules fall within the regulatory authority delegated to Treasury under section 245A(g) or section 7805 as necessary or appropriate rules.
- Whether summary judgment was appropriate given the absence of any genuine dispute of material fact.