Once again the most famous sentence that never made it on the screen gives me a title. Here, it’s Varian Medical Systems, Inc. and Subsidiaries, 163 T.C. 4, filed 8/26/24. Because of a mismatch in the effective date of the TCJA amendment to Section 78, and that of the newly-added Section 245A, Varian gets both its foreign tax credit and its dividends received deduction.

Of course, there’s a Section 245A(d)(1) disallowance of tax credit, that reduces some of the beneficence bestowed on multinationals with offshore CFCs, which fall into this No-Man’s Land. Judge Emin (“Eminent”) Toro has the arithmetic all worked out; see 163 T. C. 4, at pp. 34-35.

IRS tries the usual ambiguity hunt, but Reg. Section 1.78-1 gets the Loper-Bright heave-ho; IRS tried to rewrite the statute. Absurd result fails; IRS doesn’t even argue it, as bar too high. All the squabbling about the dividend not being the result of a distribution is irrelevant.

“…the operative rule in section 245A sets out the conditions for deductibility, but says nothing about distributions. Rather, it says simply that the deduction is available ‘[i]n the case of any dividend received,’ I.R.C. § 245A(a) (emphasis added), essentially mirroring the text of section 78. We are not inclined to read the reference to ‘distributions’ in the effective date provision to add another unstated requirement to the operative rule. Similarly, the references in section 245A(c)(2) to the ‘year . . . in which the dividend is distributed’ and the ‘dividends distributed during [the] taxable year’ simply explain how to compute the foreign-source portion of a dividend for purposes of section 245A. And the computation works just fine for section 78 dividends: one simply treats the section 78 dividend as the dividend for purposes of applying the instructions, as section 78 mandates. We disagree that a computation that may easily be applied to a section 78 dividend somehow shows that section 78 dividends cannot qualify for the deduction.” 163 T. C. 4, at p.15.

The idea, of course, was to have the deduction and the anti-double-dip provision work together. Except they didn’t.

And it’s clear Congress knew about the mismatch.

“Specifically, the Senate version of the bill that became the TCJA had conforming effective dates for the bill’s section 78 amendments and for new section 245A, which, if applied, would have precluded Varian’s deduction. Compare S. 1, 115th Cong. § 14101(f) (2017) (applying new section 245A to ‘to taxable years of foreign corporations beginning after December 31, 2017, and to taxable years of United States shareholders in which or with which such taxable years of foreign corporations end’), with id. § 14301(d) (applying the same effective date to the amendments to section 78). The House version, on the other hand, proposed the disparate effective dates that ultimately were enacted. Compare H.R. 1, 115th Cong. § 4001(f) (2017) (applying new section 245A to ‘distributions made after . . . December 31, 2017’), with id. § 4101(d) (“The amendments made [to section 78] shall apply to taxable years beginning after December 31, 2017.”). And Congress chose the House proposal, with slight modifications. See TCJA § 14101(f), 131 Stat. at 2192; id. § 14301(d), 131 Stat. at 2225.” 163 T. C. 4, at pp. 26-27.

“So, at bottom, the Commissioner’s problem lies with the text of the statute, not Varian’s position.” 163 T. C. 4, at p. 27.

Taishoff says I hope Varian tips out the lobbyist who engineered that fast one real good. The dude saved Varian a couple million bucks (hi, Judge Holmes). All I can do is award him/her/them a Taishoff “Good Job, First Class with Swords and Diamonds, Grand Weasel Division.”

Ch J Kerrigan, and JJ Foley, Buch, Nega, Pugh, Ashford, Urda, Copeland, Jones, Greaves, Marshall, and Weiler, are all down with this.