The Tax Act created two new foreign tax credit limitation baskets – one for foreign branch income (new section 904(d)(1)(B)) and one for any amount includible in gross income under section 951A (i.e., GILTI) – however, it failed to amend section 904(d)(2)(H)(i) to reflect these changes to section 904(d)(1). As a result of this oversight, section 904(d)(2)(H)(i) currently instructs the taxpayer to treat foreign taxes imposed on amounts that do not constitute income under US principles as imposed on income described in the foreign branch income basket. In light of legislative history and Treasury regulations, such a failure to amend the Code appears to be a drafting error. This article addresses the relevant case law that, on balance, supports applying section 904(d)(2)(H)(i) as if its language and cross-reference had been properly amended.
In Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc. 467 US 837 (1984), the Supreme Court of the United States established a framework for assessing an agency’s interpretation of statutory provisions. First, a reviewing court must ask whether Congress “delegated authority to the agency generally to make rules carrying the force of law,” and whether the agency’s interpretation was promulgated under that authority. United States v. Mead Corporation, 533 US 218, 226–27 (2001). Delegation may be shown in a variety of ways, including “an agency’s power to engage in adjudication or notice-and-comment rulemaking, or by some other indication of a comparable congressional intent.” Id. at 227. If an agency has been delegated the requisite authority, the analysis is segmented into two steps.
Under step one, the reviewing court asks whether Congress has clearly spoken on the precise question at issue. See Chevron, 467 US at 842. If so, both the court and agency must follow the “unambiguously expressed intent of Congress,” and the inquiry ends. Id. at 842–43.
If the statute under review is ambiguous or silent, the reviewing court moves to step two: whether the agency’s interpretation is based on “a permissible construction of the statute.” Id. at 842. This inquiry asks whether the interpretation is reasonable and not “arbitrary, capricious, or manifestly contrary to the statute.” Chevron, 467 US at 843; see also Judulang v. Holder, 565 US 42, 53 n.7 (2011); Encino Motorcars, LLC v. Navarro, 579 US ____, 136 S. Ct. 2117, 2125 (2016). If the agency’s interpretation passes muster, then the agency’s interpretation is given Chevron deference, and afforded the force of law. The Chevron two-part analysis applies to tax regulations issued by the United States Department of the Treasury and the Internal Revenue Service. Mayo Foundation for Medical Education & Research v. United States, 562 US 44, 55 (2011). (more…)