## Facts

- Nissho Iwai American Corporation (NIAC), a U.S. corporation, made a $20 million U.S.-dollar loan in 1978 to Nibrasco, a Brazilian corporation.
- Brazil imposed a withholding tax on interest paid to foreign lenders; under Brazilian law, the Brazilian borrower was obligated to withhold and remit the tax.
- Brazil also provided an automatic credit/subsidy to the borrower when it paid the withholding tax, intended to encourage foreign borrowing.
- The loan documents used a “net” loan structure: NIAC was to receive specified amounts net of Brazilian taxes, and Nibrasco bore responsibility to gross up payments as needed.
- NIAC claimed U.S. foreign tax credits under I.R.C. § 901 for the Brazilian withholding taxes remitted by Nibrasco in connection with NIAC’s interest income.
- The Commissioner disallowed the credits, asserting NIAC did not, in substance, pay or bear the foreign tax and that the subsidy undermined creditability.

## Issues

1. Whether Brazilian withholding taxes remitted by the borrower under a net-loan agreement constituted creditable foreign income taxes “paid or accrued” by NIAC under I.R.C. § 901.
2. Whether Brazil’s automatic credit/subsidy to the borrower meant the transaction lacked a substantive foreign tax burden necessary for a U.S. foreign tax credit.
3. Whether the applicable Treasury regulations, including requirements addressing economic benefit and compulsory payment, barred the claimed credits.

## Decision

- The Tax Court upheld the Commissioner’s disallowance of NIAC’s claimed foreign tax credits.
- The court found NIAC did not, in substance, bear the Brazilian withholding tax because the net-loan terms shifted the tax cost to Nibrasco and NIAC’s net return was insulated from the levy.
- The court treated the Brazilian subsidy as neutralizing the economic effect of the withholding tax and inconsistent with allowing a U.S. credit for the full nominal tax.
- Judgment was entered for the Commissioner on the foreign tax credit issue.

## Legal Principles

- A foreign tax credit under I.R.C. § 901 requires a substantive foreign income tax burden that is, in an economic sense, borne by the U.S. taxpayer claiming the credit.
- In evaluating whether a tax is “paid or accrued” by the taxpayer, courts consider economic incidence and substance, not merely payment mechanics or contractual labels.
- A levy may be noncreditable where it is offset by an associated foreign-government credit or subsidy that provides a specific economic benefit roughly equivalent to the amount paid.
- Net-loan “gross-up” provisions that protect the lender’s net yield can show that the lender did not bear the foreign tax cost necessary to support a § 901 credit.

## Conclusion

The Tax Court denied NIAC’s foreign tax credit claim because the net-loan structure and Brazil’s borrower subsidy showed NIAC did not bear a real foreign income tax burden, making the nominal withholding tax noncreditable under § 901 as applied to the transaction.


Nissho Iwai Am. Corp. v. Commissioner, 89 T.C. 765 (1987)