## Facts

- Texasgulf, Inc., through a Canadian subsidiary, operated the Kidd Creek Mine in Ontario, Canada.
- Ontario imposed the Ontario Mining Tax (OMT) on mine operators, generally computed from gross receipts minus specified deductions and a processing allowance.
- Texasgulf paid the OMT for 1979–1981 and claimed a foreign tax credit under I.R.C. § 901.
- The Commissioner issued deficiency notices for 1979–1981, asserting the OMT was not creditable because it did not satisfy the “net income requirement” in Treas. Reg. § 1.901-2(b)(4).
- The Commissioner conceded the OMT was a “tax” and satisfied the realization and gross-income requirements under Treas. Reg. § 1.901-2; only the net-income requirement was disputed.
- Texasgulf presented expert analysis using a broad sample of OMT returns from other Ontario mining operators over multiple years, concluding that, for most taxpayers, the processing allowance plus deductions exceeded expenses not otherwise recoverable under the OMT base.
- The Commissioner’s expert largely agreed with the numerical results but contended remaining nonrecoverable costs were still significant enough to defeat creditability.

## Issues

1. Whether the OMT, as imposed during 1979–1981, constituted an “income tax” creditable under I.R.C. § 901.
2. Whether the OMT satisfied Treas. Reg. § 1.901-2(b)(4)’s net-income requirement, judged by the levy’s “predominant character,” through deductions and the processing allowance that were likely to approximate or exceed significant expenses.

## Decision

- The Tax Court held the OMT was a creditable foreign income tax under § 901.
- The court found, as a matter of fact, that judged by the OMT’s predominant character, the processing allowance was likely to approximate or exceed significant expenses nonrecoverable through specific deductions.
- The court accepted an analysis focusing on the levy’s operation across a representative body of taxpayers, not solely Texasgulf’s cost structure.
- The deficiencies were redetermined in Texasgulf’s favor.

## Legal Principles

- A foreign levy is creditable under I.R.C. § 901 only if it is an “income tax” within the meaning of Treas. Reg. § 1.901-2.
- Under Treas. Reg. § 1.901-2(b)(4)(i)(B), the net-income requirement is satisfied if, judged on the basis of the levy’s predominant character, its base is computed by reducing gross receipts to permit recovery of significant expenses under a method likely to approximate or exceed those expenses.
- The “predominant character” inquiry permits evaluating how the levy generally operates for a representative class of affected taxpayers, and may be proven with empirical evidence.
- A statutory allowance may satisfy the expense-recovery requirement if, in operation, it effectively compensates for significant costs attributable to the receipts included in the tax base.

## Conclusion

The Tax Court concluded that the Ontario Mining Tax functioned, in its predominant character, as a net-income tax because its deductions and processing allowance were likely to approximate or exceed significant related expenses, making the OMT creditable for foreign tax credit purposes under I.R.C. § 901.


Texasgulf, Inc. v. Commissioner, 107 T.C. 51 (1996)