Tax developments
The validity of the 245A DRD for indirectly owned foreign corporations
On January 21, 2025, the IRS filed a motion for summary judgment asking the Tax Court to hold that Sysco Corporation (Sysco) was not entitled to receive the section 245A dividends received deduction (DRD) for dividends deemed received from lower-tier controlled foreign corporations (CFCs) under section 78. Last week, Sysco Corporation filed a brief for partial summary judgment in its favor and responding to the IRS’s arguments. The underlying issue is one that has already been decided in Varian Medical Systems Inc. v. Commissioner, where the Tax Court held that a taxpayer is entitled to section 245A DRD for section 78 dividends that arose in connection with the section 965 transition tax. The main difference between Varian and Sysco is that the IRS is challenging whether the section 245A DRD is available with respect to section 78 gross-up inclusions from all CFCs with taxable years that begin in 2017 and end in 2018 or only first-tier CFCs.
In its brief, the IRS argued that Sysco does not qualify for a section 245A DRD for dividends from lower-tier CFCs because section 246(c)(1) requires that the US shareholder itself directly hold the foreign corporation's shares for the specified holding period. Since Sysco indirectly owned shares of its lower-tier CFCs through an intermediate foreign corporation, it did not directly "hold" the shares, as the IRS argues is required. The IRS also contends that concepts of indirect and constructive ownership do not apply to section 246(c)(1), arguing that the absence of references to the concepts reflects a deliberate choice by Congress. In addition, the IRS argues that section 78, which treats the amount of certain deemed-paid foreign taxes as dividends, does not create a deemed direct ownership of the lower-tier corporation’s stock by the US shareholder.
The core of Sysco’s argument is that section 245A explicitly allows the deduction for dividends from both direct and indirect foreign subsidiaries, a position Sysco argues is supported by the statute’s language and legislative history and by IRS regulations. According to Sysco, the term "any dividend" in section 245A(a) applies to all dividends received from a foreign corporation by a US shareholder, regardless of direct or indirect ownership. Sysco emphasizes the use of "United States shareholder" in section 245A and the definition of the term in section 951(b), which expressly includes indirect ownership by reference to section 958(a)(2). Sysco also argues that legislative history and Treasury regulations support the conclusion that section 245A authorizes a DRD for dividends from indirectly owned foreign corporations. Sysco argues that section 246(c) establishes an ownership-duration requirement but is neutral regarding the proximity of ownership, which is instead addressed by the operative DRD provisions, including section 245A.
We will monitor any developments on the case and provide updates throughout.
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