Guardian Industries Corp. and Subsidiaries v. United States

United States Court of Appeals for the Federal Circuit
2006-5058
GUARDIAN INDUSTRIES CORP. AND SUBSIDIARIES,
Plaintiff-Appellee,
v.
UNITED STATES,
Defendant-Appellant.
A. Duane Webber, Baker & McKenzie LLP, of Washington, DC, argued for
plaintiff-appellee. With him on the brief was George M. Clarke III.
Joan I. Oppenheimer, Attorney, Tax Division, United States Department of Justice,
of Washington, DC, argued for defendant-appellant. With her on the brief were Eileen J.
O’Connor, Assistant Attorney General; Richard T. Morrison, Deputy Assistant Attorney
General; and Gilbert S. Rothenberg and Frank P. Cihlar, Attorneys.
Appealed from: United States Court of Federal Claims
Senior Judge James F. Merow

-- 1 of 14 --

United States Court of Appeals for the Federal Circuit
2006-5058
GUARDIAN INDUSTRIES CORP. AND SUBSIDIARIES,
Plaintiff-Appellee,
v.
UNITED STATES,
Defendant-Appellant.
___________________________
DECIDED: February 23, 2007
___________________________
Before LINN, DYK, and MOORE, Circuit Judges.*
DYK, Circuit Judge.
The United States appeals from the judgment of the United States Court of
Federal Claims granting the motion for summary judgment of appellee Guardian
Industries Corp. and Subsidiaries (“Guardian”) and ordering judgment in Guardian’s
favor in the amount of $2,729,268.00 for overpayment of taxes for the tax period ending
December 31, 2001. Guardian Indus. Corp. v. United States, 65 Fed. Cl. 50 (2005).
We affirm.
* Circuit Judge Moore heard oral argument in this appeal but subsequently
determined not to participate, taking no position in the decision of this case.

-- 2 of 14 --

BACKGROUND
This case concerns the extent to which domestic corporations, under the United
States tax code, can claim tax credits for foreign taxes they have paid. Section 901 of
the Internal Revenue Code provides for a credit for “the amount of any income, war
profits, and excess profits taxes paid or accrued during the taxable year to any foreign
country or to any possession of the United States.” I.R.C. § 901(b)(1) (2006). Typically
a domestic corporation cannot claim a foreign tax credit for foreign taxes paid by its
foreign subsidiary until the year that the subsidiary repatriates its earnings. The
regulations create an exception to this rule, however. Under Treas. Reg. § 301.7701-
3(a) (2006) a foreign subsidiary can elect to be treated as a “disregarded” entity. If such
an election is made, the U.S. parent and the foreign subsidiary are treated as a single
company for U.S. tax purposes. The U.S. parent then reports the income of both
entities on its U.S. tax return and can claim a foreign tax credit for foreign taxes paid by
the subsidiary.1
In this case Guardian Industries Corp., a Delaware corporation, is the parent
company of a group of subsidiaries in the United States, referred to collectively as
“Guardian,” which have elected to file a consolidated return. One of Guardian’s
domestic subsidiaries, Interguard Holding Corp. (“IHC”) is the sole shareholder of
Guardian Industries Europe, S.a.r.l. (“GIE”), a Luxembourg company. In 2001, the
1 See Staff of S. Comm. On Finance, 104th Cong., Description and Analysis
of Present-Law Tax Rules Relating to Income Earned by U.S. Businesses from Foreign
Operations 3 (Comm. Print 1995) (“U.S. persons that conduct foreign operations directly
(that is, not through a foreign corporation) include income (or loss) from those
operations on their U.S. tax return for the year the income is earned or the loss is
incurred.”).
2006-5058 2

-- 3 of 14 --

Internal Revenue Service (“IRS”) approved an election by GIE under Treas. Reg.
§ 301.7701-3(a) to be treated as a foreign eligible entity with a single owner and to be
disregarded as an entity separate from IHC. GIE holds a controlling interest in and is
the parent of a number of Luxembourg subsidiaries. The question here is whether
Guardian can claim a credit for certain foreign taxes paid by GIE.
For tax year 2001, GIE paid 3,429,074 Euros in Luxembourg income taxes (“loi
de l’impôt sur le revenu” or “LIR”) on behalf of itself and its subsidiaries. Guardian had
first filed its 2001 tax return treating the Luxembourg tax paid by GIE on behalf of itself
and its subsidiaries as allocable pro rata among GIE and its subsidiaries, and claimed a
credit only for that portion of the tax allocable to GIE itself. Then, in an amended U.S.
tax return for tax year 2001, Guardian, pursuant to I.R.C. § 901, claimed it was entitled
to a credit in the amount of Luxembourg taxes paid by GIE on behalf of both itself and
its subsidiaries. Having obtained no action on its request for a refund, Guardian filed a
complaint in the Court of Federal Claims claiming entitlement to a refund of taxes paid.
The government made two arguments in the Court of Federal Claims, relying on
two regulations. The first regulation provides in relevant part that “[t]he person by whom
tax is considered paid for purposes of [I.R.C.] section[] 901 . . . is the person on whom
foreign law imposes legal liability for such tax, even if another person (e.g., a
withholding agent) remits such tax.” Treas. Reg. § 1.901-2(f)(1) (emphasis added).
The government argued that, under Luxembourg law, GIE’s subsidiaries were legally
liable for taxes on the income they had earned, even though GIE paid those taxes on
the subsidiaries’ behalf, and that therefore Guardian was not entitled to a foreign tax
credit with respect to those taxes. The second regulation provides that if a corporation
2006-5058 3

-- 4 of 14 --

and its subsidiaries are jointly and severally liable for a tax under foreign law, then each
entity is liable “for the amount of the foreign income tax that is attributable to its portion
of the base of the tax.” Treas. Reg. § 1.901-2(f)(3). With respect to this regulation the
government argued that, under Luxembourg law, GIE and its Luxembourg subsidiaries
were jointly and severally liable for the LIR tax, and consequently that Guardian could
not obtain a credit for taxes paid by GIE on the subsidiaries’ behalf.
The Court of Federal Claims, relying on the text of the Luxembourg statutes and
regulations and on reports and declarations of several well-qualified experts in
Luxembourg law presented by both sides, concluded that Luxembourg law did not make
GIE and its subsidiaries jointly and severally liable for the taxes under Treas. Reg.
§ 1.901-2(f)(3). While the Court of Federal Claims stated that GIE, the parent, was
liable for the tax, it did not address in any detail the government’s other argument that,
under Treas. Reg. § 1.901-2(f)(1), the subsidiaries, and not the parent, were “the person
on whom foreign law imposes legal liability for such tax.” The Court of Federal Claims
granted summary judgment for Guardian and entered judgment in Guardian’s favor in
the amount of $2,729,268.00 for overpayments, with interest. The government timely
appealed. We have jurisdiction pursuant to 28 U.S.C. § 1295(a)(3) (2000).
DISCUSSION
On appeal the government does not challenge the determination of the Court of
Federal Claims that, under Luxembourg law, GIE and its subsidiaries are not jointly and
severally liable for the taxes paid by GIE, and that consequently, Treas. Reg. § 1.901-
2(f)(3) does not require apportionment of the tax. Rather, the government’s sole
argument is that, pursuant to Treas. Reg. § 1.901-2(f)(1), GIE did not have “legal
2006-5058 4

-- 5 of 14 --

liability” for the tax imposed on its subsidiaries within the meaning of the regulation, and,
therefore, Guardian cannot claim a credit for the tax imposed on GIE’s subsidiaries.
“We review the Court of Federal Claims' decisions on summary judgment and
conclusions of law without deference.” Old Stone Corp. v. United States, 450 F.3d
1360, 1367 (Fed. Cir. 2006).
I
As noted, Treas. Reg. § 1.901-2(f)(1) states in relevant part that “[t]he person by
whom tax is considered paid for purposes of [I.R.C.] section[] 901 . . . is the person on
whom foreign law imposes legal liability for such tax, even if another person (e.g., a
withholding agent) remits such tax.” The regulation on its face distinguishes between
two situations. In one the person paying the tax is merely a withholding agent (or
similarly, a remittance agent) and is paying the tax on behalf of another person who is
legally liable for the tax. In the other the person paying the tax is the person with “legal
liability for such tax.” Treas. Reg. § 1.901-2(f)(1).
The line separating a person who is liable for the tax and a person who is merely
a withholding or remittance agent is a difficult one to draw, and the regulation itself
provides no guidance. Rather, the regulation mandates an inquiry into “foreign law” to
determine which situation exists. Treas. Reg. § 1.901-2(f)(1). The determination of
foreign law is a question of law which we review de novo. See Fed. R. Civ. P. 44.1; id.,
Advisory Committee Notes (“[T]he court’s determination of an issue of foreign law is to
be treated as a ruling on a question of ‘law,’ not ‘fact,’ so that appellate review will not
be narrowly confined by the ‘clearly erroneous’ standard of [review].”); 9 Charles Alan
Wright & Arthur R. Miller, Federal Practice and Procedure §§ 2444, 2446 (2d ed. 1994).
2006-5058 5

-- 6 of 14 --

II
The government argues that the parent here should be treated as a mere
collection or remittance agent, relying on several Tax Court cases involving foreign tax
credits. In virtually all of these cases the tax years in question predated the adoption of
section 1.901-2 of the regulations in 1983, see 48 Fed. Reg. 46,272 (October 12, 1983),
and the decisions did not interpret the regulation. Rather they appeared to apply
generally the same test later incorporated in the regulations. We turn to those cases.2
In the first case, a New York corporation loaned funds to its British subsidiary,
which paid interest to the parent. Pursuant to British law the subsidiary withheld a
portion of its interest payments to its parent and paid that portion to the British
government as a tax. Gleason Works v. Comm’r, 58 T.C. 464, 464-65 (1972). The
court held that the party on whom the tax was imposed was the U.S. corporation, and
that the British subsidiary paid the tax “purely as a matter of collection.” Id. at 479. The
court analogized the common situation where a U.S. employer withholds a portion of an
employee’s wages and pays it over to the IRS, but the tax is nonetheless imposed on
the employee. Id. at 478. The government also relies on a series of cases involving
Brazilian law, of which Nissho Iwai American Corp. v. Comm’r, 89 T.C. 765 (1987), is
2 In addition to the foreign tax credit cases discussed in the text, the
government also relies on the Supreme Court’s decision in Wisconsin Gas & Electric
Co. v. United States, 322 U.S. 526 (1944), which involved entitlement to a federal
deduction for taxes paid to the state. There a Wisconsin public utility sought to deduct
taxes paid to the state, amounting to a fixed percentage of dividends paid to
shareholders, under a provision that provided that taxes were deductible “only by the
person upon whom they are imposed.” Id. at 527. The Court held that under the
relevant Wisconsin law, the utility was a mere tax collector and that the tax was
imposed on the shareholders, and thus that the corporation was not entitled to the
deduction. Id. at 529-30.
2006-5058 6

-- 7 of 14 --

representative. There too foreign borrowers were required to pay to the Brazilian state
a portion of the interest payments owing to U.S. banks on loans. Id. at 768-69. The
interest rate in those cases was net of the tax, so that the borrower had to absorb any
increase in the Brazilian tax and the lender was unaffected. Id. at 769. Also, the
Brazilian government subsidized the payment of the tax by Brazilian borrowers under
certain conditions. Id. at 770. The court nonetheless held that the U.S. lender was the
party on whom the tax was imposed, and not the Brazilian borrower, from whom the tax
was merely collected. Id. at 774.
These cases do not resolve the question at hand. They merely serve to illustrate
the general and undisputed proposition that the party who pays the tax may not be the
party that is legally liable for the tax. The cases cited concluded that the British and
Brazilian laws at issue there did not impose legal liability for the tax on the borrowers,
but treated them as withholding or remittance agents only. The cases neither illuminate
the meaning of the regulation in the present context, nor are the foreign laws at issue in
those cases counterparts of the Luxembourg law at issue here.
Since the regulation points us to the “foreign law” to determine which entity has
legal liability for the tax imposed, we turn to the specific provisions of Luxembourg law.
III
GIE filed a consolidated Luxembourg tax return on behalf of itself and its
subsidiaries pursuant to Article 164bis of Luxembourg Tax Law (“loi de l’impôt sur le
revenu” or “LIR”). LIR article 164bis during the tax year in question provided (in
translation):
A fully-taxable resident company, the share capital of which is at
least 99% held, either directly or indirectly, by another fully-taxable
2006-5058 7

-- 8 of 14 --

resident company and which is economically and organizationally
integrated into the latter may, upon approval by the Ministry of
Finance, be assimilated for corporate income tax purposes to a
permanent establishment of the parent company. . . A Grand
[D]ucal decree shall determine the terms and conditions for the
above-mentioned special regime.
LIR Article 164bis (2001) (emphasis added). Thus Luxembourg LIR Article 164bis
provides that a subsidiary “may . . . be assimilated for corporate income tax purposes to
. . . the parent company.” The verb “assimilated” in no way suggests that the parent
company becomes a mere withholding or remittance agent; rather it suggests that the
parent company is the only entity that exists for tax purposes, and therefore any taxes
could only be imposed on the parent company.
As required by Article 164bis, a Grand Ducal decree issued in 1981. It provides
in relevant part (in translation):
(1) Should a tax consolidation regime apply for a group of
companies, the parent company and the subsidiary companies that
are assimilated to permanent establishments of the parent
company must have the same opening and closing dates for their
respective fiscal years. Each entity of the group has to determine
its own annual tax result and has to file a tax return as if it would
not be a part of the group. The parent company must furthermore
file a tax return including the taxable income of the group obtained
by adding or compensating the fiscal results of companies
members of the group and by deducting from this amount special
allowable expenses incurred by these companies. If the tax
consolidation regime leads to a double taxation or a double
deduction, this effect has to be neutralized by an appropriate
adjustment to the group global result. . . .
(4) The parent company is liable for corporate income tax
corresponding to taxable income of the group, computed in
accordance with above-mentioned rules. It is also liable, in
accordance with Article 135 Income Tax Law, to pay corporate
income tax advances computed on the basis of above-mentioned
taxable income.
2006-5058 8

-- 9 of 14 --

Luxembourg Grand Ducal decree (July 1, 1981) (emphasis added). The Grand Ducal
decree thus elaborates on the standard set forth in Article 164bis. Paragraph (4) states
that “[t]he parent company is liable for corporate income tax corresponding to taxable
income of the group.” The statement that the parent company is “liable” seems
dispositive, since Treas. Reg. § 1.901-2(f)(1) points to “the person on whom foreign law
imposes legal liability for such tax.” Thus paragraph (4) of the Grand Ducal decree
seems to conclusively answer the question posed by Treas. Reg. § 1.901-2(f)(1) by
providing that the parent company—GIE in this case—is the party “liable” for the tax.
There is confirmation of what seems obvious from the face of paragraph (4) of
the decree, that the parent reports income on behalf of the entire group and is subject to
liability for the tax. Paragraph (1) of the Grand Ducal decree provides the method of
calculation of the tax. It states that “[e]ach entity of the group has to determine its own
annual tax result and has to file a tax return as if it would not be a part of the group.”
The parent company files a return “including the taxable income of the group.” The
Court of Federal Claims noted the manner in which this regime is administered. It found
that, in practice, “[w]hile individual members of the group file tax returns . . . the parent []
files a consolidated return and receives the notice of assessment for the LIR tax and the
members each receive an assessment notice indicating zero taxable income.” 65 Fed.
Cl. at 55.
The conclusion that the parent company bears sole liability for the tax under
Luxembourg law is also supported by the expert testimony during the trial. Guardian’s
expert, Mr. Carlo Mack, the Deputy Director of the Luxembourg tax authority
(Administration des Contributions Directes), testified that, under the regime of Article
2006-5058 9

-- 10 of 14 --

164bis and the Grand Ducal decree, ‘the parent company . . . is the sole debtor of the
corporate income tax of the group,” and that Luxembourg law “doesn’t provide a
determination to the separate tax liability . . . [of] the parent company.” 65 Fed. Cl. at
55. This testimony suggests that the parent company is liable for the taxes of all the
group members. Mr. Mack is well qualified on the subject of Luxembourg law, and the
Court of Federal Claims correctly gave considerable weight to his testimony. The
government acknowledges Mr. Mack’s qualifications in its brief, stating that “[s]ince
Mack helped draft Article 164bis LIR and the Grand Ducal decree of July 1, 1981, and
holds the number two position in the Luxembourg Taxing Authority . . . his interpretation
of Luxembourg law should control.” Appellant Br. 31. We conclude that Luxembourg
law does not make the parent a mere collection or remittance agent, and that the parent
has “legal liability” for the tax.
IV
However, the government argues that Treas. Reg. § 1.901-2(f)(1) creates a
regime under which the party liable for the tax within the meaning of the regulation is the
party that earns the income under Luxembourg law. The government explicitly argues
that “‘the person on whom foreign law imposes legal liability for such tax’ [] is the person
whose income is subject to the tax, not the person who is legally responsible for paying
the tax.” Appellant Br. at 12-13 (citing examples under Treas. Reg. § 1.901-2(f)(1)).
The government points out that the testimony of Guardian’s own expert, Mr. Carlo
Mack, established that the income being taxed under Luxembourg law is the income of
the subsidiaries, and that under Luxembourg law, “[t]he tax law doesn't provide an
effective transfer of income earned by the subsidiaries.” Id. at 31. Similarly, the
2006-5058 10

-- 11 of 14 --

government’s expert, Mr. Elvinger, testified that the income of the subsidiaries is not
attributed to the parent under Luxembourg law. Thus, the government argues, since the
subsidiaries earn their income under Luxembourg law, they should be treated as
“liab[le]” for the tax on that income under the Treasury regulation. Treas. Reg. § 1.901-
2(f)(1).
We reject the government’s argument. There is no indication that the applicable
Treas. Reg. § 1.901-2(f)(1) contemplates an inquiry into which party earns the income
under foreign law. Also, contrary to the government’s argument, the British and
Brazilian cases discussed above do not hold that entitlement to the credit depends on
which entity “earned” the income but rather on which entity bore the imposition of the
tax. The Treasury has the ability to draft a regulation that specifically calls for such a
regime, and it has not done so here.3 In fact, Treas. Reg. § 1.901-2(f)(3), requiring
allocation of the credit where the liability is joint and several, specifically requires that
the allocation be based on the “amount of the foreign income tax that is attributable to [a
person’s] portion of the base of the tax.”4 Tellingly no similar language appears in
3 The Treasury has recently proposed modifying Treas. Reg. § 1.901-
2(f)(1). 71 Fed. Reg. 44,240 (Aug. 4, 2006). The new regulation would provide that
“[i]ncome tax . . . is considered paid for U.S. income tax purposes by the person on
whom foreign law imposes legal liability for such tax. In general, foreign law is
considered to impose legal liability for tax on income on the person who is required to
take the income into account for foreign income tax purposes.” Id. at 44,243. We take
no position on whether this new regulation, if adopted, would provide that the party
liable for the tax is the party that, under foreign law, earns the income taxed.
4 Treas. Reg. § 1.901-2(f)(3) provides:
If foreign income tax is imposed on the combined income of two or
more related persons (for example, a husband and wife or a
corporation and one or more of its subsidiaries) and they are jointly
and severally liable for the income tax under foreign law, foreign
2006-5058 11

-- 12 of 14 --

Treas. Reg. § 1.901-2(f)(1).
The government finally argues that we should adopt its “earnings” interpretation
of the regulation because that interpretation, in its view, would further the policy of the
foreign tax credit, which is to avoid double taxation. See United States v. Goodyear Tire
and Rubber Co., 493 U.S. 132, 139 (1989) (describing the purpose of the foreign tax
credit as “protection against double taxation”). The government contends that that
purpose would be frustrated by allowing Guardian to claim a credit in 2001 for taxes
paid by the subsidiaries, when the income of the subsidiaries has never been taxed in
the United States.
The government’s appeal to the policy underlying the foreign tax credit is
unavailing. The government’s argument appears to assume that if its proposed
“earnings” test were adopted, the allowance of the credit would avoid double taxation.
We fail to see why this would be so. United States taxation of the income of a
disregarded foreign subsidiary does not depend on the provisions of foreign law as to
which entity “earns” the income. Thus under an “earnings” regime the credit could be
available even if there were no United States tax on the income giving rise to the credit.
In any event, the regulation is clear on its face, and we must interpret it as written.
We therefore hold that, based on the text of the relevant regulations and the
law is considered to impose legal liability on each such person for
the amount of the foreign income tax that is attributable to its
portion of the base of the tax, regardless of which person actually
pays the tax.
(emphasis added). The government agrees that, under Treas. Reg. § 1.901-2(f)(3), “the
tax must be apportioned based on the relative amounts of such persons’ taxable
incomes under foreign law.” Appellant Br. 15.
2006-5058 12

-- 13 of 14 --

Luxembourg laws, GIE is the party liable for the tax under Luxembourg law, within the
meaning of Treas. Reg. § 1.901-2(f)(1), and that consequently the Court of Federal
Claims correctly held that the government was obligated to pay the refund.
CONCLUSION
For the foregoing reasons, the decision below is affirmed.
AFFIRMED
COSTS
No costs.
2006-5058 13

-- 14 of 14 --