Circuit Court Affirms Taxpayer Victory in Foreign Tax Credit Case

International Tax Alert

On February 23, 2007, in Guardian Industries Corp. v. United States, No. 2006-5058, 2007 U.S. App. LEXIS 3927 (Fed. Cir. Feb. 23, 2007), the Federal Circuit affirmed the judgment of the U.S. Court of Federal Claims in favor of Guardian Industries Corp. and Subsidiaries (“Guardian”). The court held that Guardian was entitled to foreign tax credits because it was legally liable to pay the foreign tax at issue notwithstanding the fact that it was not required to include the associated earnings in current income. The court declined to adopt the principles underlying regulations proposed in 2006, which if effective would have allocated the foreign taxes to the associated earnings. It is not clear whether the court’s decision will have an impact on the proposed regulations, scheduled to have effect as of January 1, 2007 when finalized.


The issue in Guardian Industries was whether and the extent to which the taxpayer could claim a foreign tax credit for taxes paid by Guardian Industries Europe, S.a.r.l. (“GIE”), a disregarded Luxembourg entity that was wholly owned by a domestic subsidiary of Guardian. GIE was the parent of a group of Luxembourg companies and, as such, was liable under Luxembourg law for Luxembourg taxes on income earned by the group. When Guardian first filed its 2001 Federal income tax return, it allocated the Luxembourg tax paid by GIE pro rata among GIE and its subsidiaries and claimed a credit only for the portion of tax allocable to GIE itself. Guardian later filed an amended U.S. tax return claiming a credit for all Luxembourg taxes paid by GIE notwithstanding the fact that that Guardian was not required to include currently into income the earnings of the other Luxembourg companies.

Court of Federal Claims Decision

The government made two arguments in the Court of Federal Claims. First, the government argued that GIE’s subsidiaries were “legally liable” under Luxembourg law for taxes on the income they had earned (which taxes GIE was required to pay on the subsidiaries’ behalf). Second, the government argued that GIE and its Luxembourg subsidiaries were jointly and severally liable for the tax under Luxembourg law. The Court of Federal Claims rejected these arguments and concluded that GIE was solely liable for the taxes under Luxembourg law. Thus, Guardian was entitled to foreign tax credits under the so-called “technical taxpayer rule” of Treas. Reg. § 1.901-2(f)(1), which treats the person on whom foreign law imposes legal liability for the tax as the taxpayer. See Guardian Indus. Corp. v. United States, 65 Fed. Cl. 50, 55 (2005).

Federal Circuit Decision

On appeal, the government’s sole argument was that GIE did not have “legal liability” for the tax imposed on its subsidiaries and, therefore, Guardian could not claim a credit for tax imposed on GIE’s subsidiaries. Despite Treas. Reg. § 1.901-2(f)(1), the government argued that the party that earns the income under Luxembourg law is the party liable for the tax for purposes of the foreign tax credit. Notably, this position is in keeping with the government’s 2006 proposed regulations.

The Court disagreed, observing that Treas. Reg. § 1.901- 2(f)(1) does not contemplate the identification of the party earning the income under foreign law. “The Treasury has the ability to draft a regulation that specifically calls for such a regime, and it has not done so here.” Guardian Indus. Corp., No. 2006-5058, at *17. The Court declined to import into the existing regulations the principles adopted in the 2006 proposed regulations. The Court concluded that Luxembourg law does not make the parent a mere collection or remittance agent for the subsidiaries, but instead imposes on the parent the legal liability for the tax within the meaning of the current regulations. As such, the Court affirmed the Court of Federal Claims judgment in favor of the taxpayer.

For further information, please contact any of the following lawyers:

Rocco Femia,, 202-626-5823

Kathryn Morrison Sneade

Kimberly Majure 

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