## Facts

- Liggett Group, Inc. (the taxpayer) was the successor to Paddington, a Delaware corporation that served as the exclusive U.S. distributor of J&B Rare Scotch whisky produced by Justerini & Brooks, Ltd., a U.K. company.
- Paddington bought J&B Rare from the U.K. producer and resold it to U.S. customers, with payments flowing through Paddington (Paddington paid the producer; customers paid Paddington).
- Paddington and the producer did not use the term “F.O.B.” in their written contracts, but they generally understood that title and responsibility for the whisky shipments passed to Paddington in the British Isles.
- Many customers purchased through Paddington’s “direct-import” process, under which customers received shipments directly from the producer in the United Kingdom at a port in the British Isles.
- For direct-import sales, the written terms between Paddington and its customers expressly stated “F.O.B. United Kingdom.”
- Paddington paid U.K. taxes associated with its direct-import sales.
- Paddington claimed foreign tax credits on its U.S. return for the U.K. taxes paid, treating the related income as foreign-source.
- The IRS disallowed the foreign tax credits on the ground that the income was not from sources outside the United States, and a deficiency dispute followed in the Tax Court.

## Issues

1. Whether income from Paddington’s direct-import sales was foreign-source (rather than U.S.-source) based on where the sales occurred for federal income tax sourcing purposes.
2. Whether, given the sourcing of that income, Paddington was entitled to claim foreign tax credits for U.K. taxes paid on those sales.

## Decision

- The Tax Court determined the relevant sales for the disputed credits occurred outside the United States because, under the direct-import agreements, title (and related burdens of ownership) passed “F.O.B. United Kingdom.”
- Because the direct-import sales produced foreign-source income, the court held Paddington could claim foreign tax credits for the U.K. taxes paid on that income (subject to the statutory credit limitations).
- The court rejected the Commissioner’s position that the income should be treated as U.S.-source solely because the customers were in the United States and the orders and billing relationships were managed by a U.S. distributor.

## Legal Principles

- A U.S. taxpayer may claim a foreign tax credit for qualifying foreign taxes, but the credit is limited by the amount of foreign-source taxable income in the relevant limitation category.
- For sourcing income from sales of personal property, the “place of sale” is generally determined by where title passes from seller to buyer, as established by contract terms and the parties’ performance.
- “F.O.B.” terms are strong evidence of when and where title and risk of loss pass; “F.O.B. United Kingdom” indicates passage at the foreign shipping point.
- In evaluating sourcing and credit entitlement, the Tax Court focuses on objective sales terms and the transaction structure that governs ownership transfer, not only on the customer’s location or where administrative functions occur.

## Conclusion

Liggett Group, Inc. v. Commissioner held that Paddington’s direct-import whisky sales were foreign sales because the customer contracts placed passage of title “F.O.B. United Kingdom,” making the resulting income foreign-source and permitting foreign tax credits for U.K. taxes paid on that income within the statutory limits.


Liggett Group, Inc. v. Commissioner, 58 T.C.M. (CCH) 1167 (1990)