I’m a fan of sandwiches. So was Eaton Corporation and Subsidiaries, 164 T. C. 4, filed 2/24/25, but it costs them a bunch foreign tax credits (hi, Judge Holmes). Eaton sandwiched a domestic partnership between two coalitions of CFCs.

IRS “does not dispute that petitioner would be allowed deemed-paid FTCs arising from its section 951(a) inclusions with respect to the upper tier CFC partners, limited to the amount of foreign income taxes that they themselves paid or accrued. But respondent contends that the interposition of the partnership renders petitioner ineligible for deemed-paid credits for foreign income taxes paid by the lower tier CFCs.” 164 T. C. 4, at p. 2.

There’s no fight about foreign income taxes paid by the upper-tier CFCs. See my blogpost “When Judge Gustafson Dissents,” 2/25/19*.

“Here, petitioner, the only domestic corporation in view, had no section 951(a) inclusions with respect to the subpart F income and section 956 amounts generated by the lower tier CFCs. Instead, EW LLC—a domestic partnership, not a domestic corporation—had the section 951(a) inclusions with respect to the lower tier CFCs. And EW LLC’s section 951(a) inclusions were not included in the gross income of a domestic corporation. Rather, EW LLC was the United States shareholder required under section 951(a)(1) to include in gross income its pro rata share of the subpart F income generated by the lower tier CFCs. The upper tier CFC partners, which are foreign corporations, included their distributive shares of EW LLC’s section 951(a) inclusions with respect to the lower tier CFCs in their gross income pursuant to sections 61(a)(13) and 702(c). Eaton I, 152 T.C. at 54. In short, neither any CFC partner nor EW LLC was a domestic corporation. Therefore, the ‘hopscotch’ mechanism under section 960 is not triggered, because the statutory predicate in section 960(a) was not satisfied.” 164 T. C. 4, at pp. 9-10.

As for the undesirable result of double taxation, “any double taxation will be temporary, because petitioner will be entitled to the FTCs it seeks as soon as the earnings of the lower tier CFCs are distributed up to petitioner through the chain of ownership.” 164 T. C. 4, at p.10.

So Ch J Kathleen (“TBS = The Big Shillelagh”) Kerrigan sums up.

“To summarize, no credit for taxes paid by the lower tier CFCs is available to petitioner under either of the two Code sections that allow for deemed-paid credits. There is no credit under section 902 because there was no dividend distribution, and there is no credit under section 960 because the section 951(a) inclusions with respect to the lower tier CFCs were not taken into gross income by a domestic corporation. Because petitioner cannot show that it is entitled to be deemed to have paid foreign income tax, it is not entitled to a credit on account of the same under section 901(a).” 164 T. C. 4, at pp. 10-11.

* https://taishofflaw.com/2019/02/25/when-judge-davidson-dissents/