In the latest turn in the FedEx foreign tax credit (FTC) dispute, the district court granted partial summary judgment to the taxpayer on a second issue, this time rejecting an alternative argument from the Department of Justice (DOJ) that FedEx's FTC claim was partially disallowed by section 965(g). The district court's decision represents another positive development for taxpayers with an existing or potential claim to credit foreign taxes with respect to the distribution of offset earnings. Affected taxpayers should continue to monitor this case and any subsequent appeal, as well as the Sysco case in the U.S. Tax Court, in which the Internal Revenue Service (IRS) has articulated the same arguments. 

Two years ago, the district court granted partial summary judgement to FedEx, holding that regulations under section 965 (specifically, Treas. Reg. § 1.965-5(c)(1)(ii)) were substantively invalid, to the extent those regulations disallowed a foreign tax credit on the distribution of "offset earnings" before the effective date for amendments to section 960. The court reached this conclusion under step one of the former Chevron doctrine, concluding that the Internal Revenue Code "unambiguously permits foreign tax credits on Offset Earnings," and it was therefore unnecessary to assess whether the regulation was a "permissible" construction of an ambiguous statute, to which the court would have been obligated to defer. While working with the taxpayer to compute the associated refund, DOJ belatedly raised an argument that regulations issued under the "haircut" rules in section 965(g) should partially disallow a portion of the disputed credits. Last year, FedEx moved the court for entry of judgment, which the court has now construed as a second motion for partial summary judgment. 

In its February 2025 decision, the court confirmed that its prior ruling is unaffected by the Supreme Court's decision in Loper Bright to eliminate Chevron deference. In particular, the court observed that it previously rejected DOJ's "arguments at step 1 of the Chevron analysis," without deferring to the agency's views, which is "the analysis Loper Bright requires." The court then rejected the government's new argument that the haircut provision in section 965(g) and the associated regulations applied to partially disallow the taxpayer's FTC with respect to offset earnings. The court held that offset earnings fall outside the plain language of section 965(g). The partial disallowance rules in section 965(g) apply only to amounts deductible under section 965(c), which, in turn, is limited to earnings included in gross income under section 951. As the court held in its prior decision, the plain language of the statute unambiguously provides that offset earnings are never included for any purpose other than the exclusion from gross income afforded by section 959 and therefore section 965(g) could not apply to offset earnings. Accordingly, the regulation implementing the haircut provision (Treas. Reg. § 1.965-5(c)(1)(i)), was invalid as applied to offset earnings, and any argument that the regulation represents a permissible exercise of delegated authority fails. 

For more information, please contact:

Jeffrey M. Tebbs, jtebbs@milchev.com, 202-626-1480

Samuel A. Lapin, slapin@milchev.com, 202-626-5807

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