## Facts

- Xerox Corporation, a U.S. parent, owned (directly and indirectly) a majority of the voting shares of Rank Xerox Ltd. (RXL), a U.K. corporation with U.K. subsidiaries.
- Under the U.K. imputation system created by the Finance Act 1972, a U.K. corporation paying dividends generally incurred liability for Advance Corporation Tax (ACT), which could be credited against mainstream U.K. corporation tax, carried forward, or surrendered within a U.K. corporate group under group relief rules.
- In 1974, RXL paid a dividend to Xerox and paid ACT in connection with that dividend.
- Part of the 1974 ACT was used to offset RXL’s 1974 mainstream U.K. corporation tax; that portion was not disputed.
- The remaining portion of the 1974 ACT was not used against RXL’s 1974 mainstream tax and, in 1980, RXL surrendered that unused ACT to its U.K. subsidiaries to offset their U.K. corporation tax liabilities.
- Xerox claimed an indirect (deemed-paid) foreign tax credit for 1974 under IRC § 902 for the full amount of ACT paid in 1974, including the portion later surrendered.
- After learning of the later surrender, the IRS disallowed the credit for the surrendered portion and assessed additional U.S. tax on Xerox’s 1974 dividend income.
- Xerox paid the assessment and sued for a refund in the Court of Federal Claims, which ruled for the United States.

## Issues

1. Whether IRC § 902 permits a U.S. shareholder to claim an indirect foreign tax credit for U.K. ACT in the year the ACT is paid or accrued, even if the ACT is later surrendered to lower-tier U.K. subsidiaries under U.K. law.
2. Whether subsequent use or surrender of ACT retroactively changes the amount of foreign income tax “deemed paid” with respect to a prior-year dividend for U.S. foreign tax credit purposes.
3. Whether treaty materials addressing ACT and the U.K. imputation system support treating ACT as a creditable income tax fixed in the year of payment for U.S. credit computations.

## Decision

- The Federal Circuit reversed the Court of Federal Claims.
- The court held that Xerox was entitled to the foreign tax credit for 1974 for the ACT paid or accrued in 1974, including the portion later surrendered in 1980.
- The court rejected the government’s position that later surrender of ACT required a retroactive reduction of Xerox’s 1974 credit.
- The case was resolved in Xerox’s favor as a refund entitlement based on the IRS’s improper withdrawal of the prior-year credit.

## Legal Principles

- The availability and amount of an indirect foreign tax credit under IRC § 902 are determined for the tax year in which the relevant foreign tax is paid or accrued, not by later foreign-law reallocations or uses of that tax.
- U.K. ACT, when incurred upon payment of a dividend, is treated as a creditable foreign income tax for U.S. foreign tax credit purposes; its creditability is not negated by later surrender within a U.K. group.
- Subsequent surrender or application of ACT under foreign group relief rules does not retroactively alter the U.S. shareholder’s deemed-paid tax credit tied to the dividend year.
- Treaty purpose and contemporaneous treaty-related explanations may inform the characterization and intended U.S. treatment of foreign taxes within an integrated foreign corporate/shareholder tax system, particularly to prevent double taxation of cross-border dividends.

## Conclusion

The Federal Circuit held that Xerox’s deemed-paid foreign tax credit for U.K. ACT was fixed in the year the ACT was paid or accrued in connection with the dividend, and that RXL’s later surrender of unused ACT to subsidiaries under U.K. law did not permit the IRS to retroactively disallow Xerox’s 1974 foreign tax credit.


Xerox Corp. v. United States, 41 F.3d 647 (Fed. Cir. 1994)