Remember Emerson’s denunciation of “foolish consistency” as “the hobgoblin of small minds”? Well, today Judge Nega finds the consistency rule of Temp. Reg. Section 1.861-12T supplements but does not override Temp. Reg. Sec. 1.861-9T. So he’s all for consistency, as is the rest of the Tax Court bench in Aptargroup, Inc., 158 T. C. 4, filed 3/16/22.

Agroup owns a Luxembourg CFC that owns or controls, directly or indirectly, 32 (count ’em, 32) CFCs. They all pay a lot interest and foreign taxes (hi, Judge Holmes), for which taxes the Agrpoup wants Foreign Tax Credit. But Section 904(a) limits the credit to “…’the same proportion of the tax against which such credit is taken which the taxpayer’s taxable income from sources without the United States . . . bears to his entire taxable income for the same taxable year,’ and the FTC limitation is computed by multiplying total U.S. tax on worldwide income by a fraction with a numerator of foreign source taxable income and a denominator of worldwide taxable income. Generally, in the case of an affiliated group of corporations, the foreign tax credit is determined on a consolidated basis. Treas. Reg. § 1.1502-4(c).” 158 T. C. 4, at p. 4.

Matching categories of deductible items to income is easy, but interest expense is special.

“Special rules exist for allocation and apportionment of interest expense in Temporary Treasury Regulation § 1.861-9T (section -9T). In general, interest expense is treated as related to all income-producing activities and assets regardless of the specific purpose for the borrowing, on the general principle that money is fungible, borrowing frees up other funds for other purposes, and management has flexibility as to the source and use of funds. Id. para. (a). Thus, interest expense must be ratably allocated to all gross income. Allocation is not at issue. Petitioner must allocate its interest expense to all its income-producing assets and activities. The parties disagree over the apportionment of the interest expense.” 158 T. C. 4, at p. 5. (Footnote omitted, but it says the Regs were of limited duration, and those cited affect the year at issue here. YMMV).

Agroup wants a mismatch between how its consolidated CFCs apportion interest expense (modified gross income) and how its onshore owner apportions same (assets). The difference is $3 million foreign tax credit. Agroup says the right to elect the modified gross income option is an exception to the consistency rule.

No go, says Judge Nega. “…the consistency requirement is a condition of the election. The modified gross income method is an exception to the general rule of the asset method and is the reason for the consistency requirement. The consistency requirement is imposed because an election is provided.” 158 T. C. 4, at p. 8.

If you go with modified gross income offshore, you have to go with it onshore. Same with assets.