Sysco Corporation, T. C. Memo. 2026-84, filed 9/14/26, claims Tax Court got it wrong in Varian II, a/k/a Varian Medical Systems, Inc. and Subsidiaries, 166 T.C.  8, more particularly bounded and described in my blogpost “‘Such Rarefied Heights of Pure Mathematics – Excluded,” 8/4/26. 

Judge Emin (“Eminent”) Toro sums it up. “In Varian II, 166 T.C., slip op. at 20, we held that section 246(c)(1) limits the deduction available under section 245A to amounts treated as dividends on shares directly held by the relevant taxpayer. We further held that the formula used to compute the foreign tax credit disallowance under section 245A(d)(1) must include the post-section 965(c) amount in the denominator of the fraction. Varian II, 166 T.C., slip op. at 33.” T. C. Memo. 2026-84, at p. 2.

Simple enough, right?

On the return at issue, Sysco excluded the Section 245A deduction for the deemed dividends received of foreign taxes (Section 78). IRS said no, per Varian II.

Thye whole fight is over Section 246(c)(1). First is the phrase “held by the taxpayer.” Sysco claims only US person owning 10% of designated foreign corporation’s stock, per Section 951(b). Too narrow, says Judge Eminent Toro. Taxpayer means anyone subject to any IRC tax. And “held” means held directly.

“The history of section 246(c)(1) allows us to draw several conclusions. First, when Congress adopted the phrase ‘held by the taxpayer’ in section 246(c)(1), subpart F concepts, including indirect and constructive ownership under section 958(a) and (b), were not in the picture. Second, Congress has in the past expressly differentiated between direct and indirect ownership requirements in rules regarding dividends received deductions. And third, as Congress amended section 246(c)(1) through the years, it retained the phrase ‘held by the taxpayer’ rather than replacing it with more expansive terms or incorporating tests from other provisions.

“There is no indication that, when Congress amended section 246(c)(1) to include section 245A in its list of covered provisions, the meaning of ‘held by the taxpayer’ changed to incorporate concepts from subpart F. If that were true, the text of section 246(c)(1) would adopt an entirely different meaning depending on the provision under which the taxpayer claims a dividends received deduction. Specifically, ‘held by the taxpayer’ would mean ‘owned, as described in section 958, by the U.S. shareholder as defined in section 951(b)’ only when a taxpayer claimed a dividends received deduction under section 245A.

“This is not how statutes work.” T. C. Memo. 2026-84, at p. 9.

There’s a lot more, but ‘ll spare you. “In short, Sysco’s valiant efforts to find a statutory hook for its position do not carry the day.” T. C. memo. 2026-84, at p. 11. (Footnote omitted, but it says indirect ownership does play a part. If 5% owned directly and 95% indirectly, shareholder can deduct 5% of the dividend since the 95% counts toward the 10% threshold, but if the 95% didn’t count at all, shareholder could deduct nothing.)

Reg. Section 1.245A-5 doesn’t help, either. All it says is what part of the dividend deduction will be disallowed; it doesn’t say whether anything over will necessarily be allowed.

Legislative history doesn’t avail either. There’s more mathematics for those who like that sort of thing.

But at close of play, there’s no variant of Varian.