## Facts

- Osvaldo and Ana Rodriguez were U.S. permanent residents and the sole shareholders of Editora Paso del Norte, S.A. de C.V., a Mexican corporation treated as a controlled foreign corporation (CFC) for U.S. tax purposes.
- Under Subpart F, U.S. shareholders of a CFC must include certain CFC earnings in gross income even if the CFC makes no distribution.
- The Rodriguezes amended their 2003 return to include $1,585,527 attributable to Editora and filed their 2004 return reporting $1,478,202 attributable to Editora.
- They reported these Subpart F inclusions as “qualified dividend income” taxable at the preferential 15% rate, rather than as ordinary income.
- The IRS issued a notice of deficiency for 2003 and 2004, asserting the Editora-attributable amounts were taxable as ordinary income.
- The Tax Court, on a fully stipulated record, ruled for the Commissioner; the Rodriguezes appealed.

## Issues

1. Whether Subpart F income required to be included in gross income under 26 U.S.C. § 951(a) qualifies as “qualified dividend income” under § 1(h)(11) when no actual dividend was paid.
2. Whether other Code provisions, including §§ 959 and 1248, recharacterize a § 951(a) inclusion as a dividend for purposes of § 1(h)(11)’s preferential rate.

## Decision

- The Fifth Circuit affirmed the Tax Court.
- The court held the Rodriguezes’ Subpart F inclusions were not “qualified dividend income” under § 1(h)(11).
- The court upheld taxation of the Subpart F inclusions at ordinary income rates and sustained the IRS deficiencies.

## Legal Principles

- A § 951(a) Subpart F inclusion is a required income inclusion without an actual corporate distribution; it is not a “dividend” absent express statutory characterization.
- Preferential-rate provisions such as § 1(h)(11) are construed narrowly and apply only within the statute’s explicit terms and cross-referenced definitions (including the dividend definition in § 316).
- Section 959’s exclusion for later distributions of previously taxed Subpart F earnings reflects Congress’s treatment of the initial inclusion and later distribution as distinct tax events; it does not convert the inclusion into a dividend.
- Section 1248 shows Congress’s ability to deem specified amounts dividends when intended; the absence of comparable language in § 951 supports treating Subpart F inclusions as ordinary income for § 1(h)(11).

## Conclusion

The Fifth Circuit held that Subpart F inclusions attributable to a controlled foreign corporation are taxable as ordinary income and cannot be reported as “qualified dividend income” under § 1(h)(11) unless Congress expressly provides dividend treatment or an actual dividend is paid.


Rodriguez v. Comm'r, 722 F.3d 306 (5th Cir. 2013)