## Facts

- A U.S. parent corporation received dividends in 1970 and 1971 from its wholly owned U.K. subsidiary and claimed indirect foreign tax credits under I.R.C. § 902 based on foreign income taxes the subsidiary paid to the United Kingdom and the Republic of Ireland.
- In 1973, the subsidiary reported a net loss under U.K. tax law and carried the loss back to 1970 and 1971, leading foreign tax authorities to recompute prior-year liability and issue refunds of previously paid foreign taxes.
- Under I.R.C. § 905(c), the IRS redetermined the parent’s foreign tax credit to reflect the foreign tax refund by reducing the amount of foreign taxes treated as paid.
- The IRS did not reduce the subsidiary’s “accumulated profits” (used in the § 902 credit fraction) to reflect the foreign-law loss carryback, reasoning that such a carryback would not have been allowable under U.S. rules if the subsidiary were domestic.
- The IRS assessed deficiencies for 1970 and 1971, which the parent paid, then sued for a refund.
- The Claims Court ruled for the United States, holding that “accumulated profits” under § 902 is computed using U.S. tax concepts.
- The Federal Circuit reversed, concluding that “accumulated profits” must be measured under foreign law.
- The Supreme Court granted review and reversed the Federal Circuit.

## Issues

1. Whether “accumulated profits” in I.R.C. § 902 must be measured under U.S. tax principles or under the foreign tax law governing the subsidiary’s taxable income.

## Decision

- The Supreme Court unanimously reversed the Federal Circuit and upheld the IRS’s method.
- “Accumulated profits” for § 902 purposes are calculated in accordance with U.S. tax principles, not foreign law.
- The Commissioner properly refused to reduce the subsidiary’s accumulated profits for 1970 and 1971 by a foreign-law loss carryback that would not have been allowed under U.S. law.

## Legal Principles

- Absent clear congressional direction, terms used in the Internal Revenue Code are construed according to U.S. tax concepts rather than by incorporation of foreign tax law.
- In the § 902 indirect foreign tax credit fraction, “accumulated profits” functions as a domestic tax concept analogous to U.S. corporate “earnings and profits,” and is computed under U.S. principles.
- The foreign tax credit system is structured to approximate the foreign tax burden allocable to dividends while preserving U.S. revenue; it does not require mechanical conformity with foreign-law determinations of the earnings base.
- Redetermination under § 905(c) due to foreign tax refunds does not compel a corresponding foreign-law recomputation of “accumulated profits” for § 902 when U.S. principles govern that term.

## Conclusion

The Court held that “accumulated profits” in § 902 is a U.S.-law concept, so a foreign subsidiary’s foreign-law loss carryback that generated foreign tax refunds could reduce the “taxes paid” component under § 905(c) without requiring a matching foreign-law reduction to accumulated profits in the § 902 credit computation.


United States v. Goodyear Tire & Rubber Co., 493 U.S. 132 (1989)