## Facts

- American Chicle Co., a U.S. corporation, wholly owned several foreign subsidiaries.
- In tax years 1936–1938, the subsidiaries paid income taxes to their respective foreign countries on their earnings.
- American Chicle received dividends from the subsidiaries and claimed a deemed-paid foreign tax credit under § 131 of the Revenue Acts of 1936 and 1938.
- The parties agreed the credit computation under § 131(f) uses a fraction: dividends received (numerator) over the subsidiary’s “accumulated profits” (denominator).
- The dispute concerned the multiplicand to which the fraction applies: American Chicle used the subsidiaries’ total foreign taxes; the government used only the portion of taxes attributable to accumulated profits from which the dividends were paid.
- The Commissioner allowed a smaller credit; American Chicle paid the assessed tax, sought refunds, and sued after denial.
- The Court of Claims entered judgment for the United States, and the Supreme Court granted certiorari.

## Issues

1. Under § 131(f), whether the deemed-paid credit is computed by applying the dividend/accumulated-profits fraction to the subsidiary’s total foreign taxes, or only to the portion of foreign taxes attributable to the accumulated profits from which the dividend was paid.
2. Whether a prior, longstanding administrative practice can prevent the Commissioner from changing the credit computation prospectively to conform to the statute’s meaning.

## Decision

- The Supreme Court affirmed the judgment for the United States.
- The Court held that “taxes paid” in § 131(f) refers only to taxes paid “upon or with respect to the accumulated profits” from which the dividends were paid.
- Accordingly, the multiplicand is the portion of the subsidiary’s foreign taxes attributable to accumulated profits (i.e., the same proportion of total foreign taxes as accumulated profits bear to total profits), not the total foreign taxes paid.
- The Court held that the Commissioner could change an earlier administrative practice prospectively to conform to the statute’s plain meaning.

## Legal Principles

- For § 131(f) deemed-paid credits, the allowable credit is limited to foreign taxes attributable to the subsidiary’s accumulated profits underlying the dividend distribution.
- Statutory qualifiers tying foreign taxes to “accumulated profits” restrict the credit and cannot be disregarded by treating all subsidiary taxes as creditable.
- The foreign tax credit is aimed at preventing double taxation of the same income; credit computations should match the foreign-taxed income that produced the dividend.
- An agency may revise a long-applied administrative interpretation prospectively when the change aligns with the statute’s plain meaning.

## Conclusion

The Court interpreted § 131(f) to confine the deemed-paid foreign tax credit to the portion of a foreign subsidiary’s taxes attributable to accumulated profits from which dividends were paid, and it permitted the Commissioner to implement a prospective correction of prior administrative practice to match the statute’s text.


American Chicle Co. v. United States, 316 U.S. 450 (1942)