November 21, 2012
The parties have now filed their opening briefs in the Fifth Circuit in Rodriguez, an appeal from the Tax Court’s decision that section 951 inclusion income is not to be taxed at the lower rate applicable to qualified dividends. See our prior report here.
As they argued in the Tax Court, the taxpayers emphasize a policy argument, stating that “Subpart F’s general purpose and mechanics should govern” and “Subpart F treats the amount included in the U.S. shareholder’s gross income essentially like a dividend.” The taxpayer also invokes substance vs. form principles and statements in the legislative history of Subpart F characterizing section 951 inclusions as deemed dividends. The taxpayers also point to GCMs, private letter rulings, and Internal Revenue Manual sections that support deemed dividend treatment.
The government’s response, like the Tax Court, focuses mostly on the text of the Code. It argues that the section 951 inclusion income is not literally a dividend; that the Code decrees that it should be treated as a dividend for other purposes but makes no such provision concerning the qualified dividend tax rate; and that there are some contexts in which section 951 inclusion income is not treated as a dividend, such as the earnings and profits calculation.
With respect to policy, the government asserts that the policy underlying enactment of the favorable tax rate for qualified dividends was to provide “an incentive for corporations to distribute their earnings to shareholders instead of retaining them.” Accordingly, the government argues, it does not advance that policy to provide the preferential tax rate in a situation where the corporation did not distribute the earnings.
Finally, the government urges the court to ignore the taxpayers’ argument that the IRS had previously treated section 951 inclusions as dividends in prior pronouncements. It states that those pronouncements did not specifically address the preferential tax rate question at issue here and that they are not the kind of IRS pronouncements that can be cited as authoritative precedent. In any event, the government states, the Commissioner “may change an erroneous administrative interpretation if he determines that such a position is incorrect.”