Foreign Tax Credits

In CCA 200920051, the IRS reviewed another fact pattern where the foreign entity that is required to pay foreign income tax is not the same foreign entity that earned the income, under US federal income tax principles, on which the tax was imposed. In Guardian Industries, the IRS used the combined income/joint and several liability rule of Reg. §1.901 -2(f)(3) to challenge foreign tax credits separated from income under a foreign consolidated regime. The taxpayer prevailed. The approach of the IRS in Guardian Industries was to argue that GIE and the Luxembourg subsidiaries and several liability for the Luxembourg corporate tax and, accordingly, the tax paid should be allocated among the subsidiaries pursuant to Reg. §1.901-2(f)(3). The trial court in Guardian concluded that GIE and its subsidiaries did not have joint and several liability for the Luxembourg corporate income tax paid by GIE. The appeals court affirmed that finding.