District Court rules for FedEx regarding FTC provision in Section 965 regulations

April 2023

In brief

The US District Court for the Western District of Tennessee on March 31 issued an order granting FedEx’s motion for partial summary judgment in its challenge of a foreign tax credit (FTC) provision in the final Section 965 regulations, and denying the government’s cross motion for partial summary judgment. Any appeal to the court’s decision would lie with the US Court of Appeals for the Sixth Circuit.

At issue in the case is the validity of a Section 965 regulation that precludes tax credits for foreign taxes considered paid on the portion of earnings from profitable foreign corporations that are offset by deficits from other foreign corporations (Offset Earnings) as part of the Section 965 transition tax enacted by the 2017 Tax Cuts and Jobs Act (TCJA). 

In granting partial summary judgment to FedEx, the District Court ruled that Treas. Reg. sec. 1.965-5(c)(1)(ii) is contradicted by the unambiguous language of Section 965(b)(4)(A) and Section 960(a)(3) (as in effect prior to the TCJA). FedEx thus was deemed to have paid foreign taxes paid on Offset Earnings when those earnings were distributed to the United States. The District Court also denied the government’s cross motion for partial summary judgment.

The takeaway: The District Court held the Section 965 regulation invalid based on the plain language of the Code. The District Court’s reasoning may be of interest not only for the specific issue presented but also for general analysis relating to the validity of Treasury regulations. Companies interested in the specific issue addressed by the court should consider the relevant statute of limitations, including the special 10-year statute of limitations related to foreign tax credits under Section 6511(d)(3).


FedEx sought a tax refund from the United States of more than $89 million associated with FTCs it claimed the government wrongly denied. FedEx argued that its right to claim FTCs with respect to foreign taxes imposed on the Offset Earnings of its foreign subsidiaries when such earnings were distributed is clearly supported by the language of Section 960(a)(3). In contrast, the United States contended that the foreign taxes associated with the Offset Earnings were considered deemed paid through the operation of Section 965(b)(4)(A) and Section 960(a)(1) in the tax year in which FedEx recognized its inclusion under Section 965, and thus Section 960(a)(3) did not apply. As a result, the government argued that under the tax code and associated regulations, FedEx is not entitled to credits beyond what it already had received. 

The District Court focused on the language “for purposes of Section 959” in Section 965(b)(4)(A), and concluded that the ordinary and common meaning of this limitation was unambiguous and precluded the treatment of Offset Earnings as having been included in gross income under Section 951 for purposes of Section 960(a) and the FTC regime.


As part of the 2017 TCJA, Congress enacted Section 965, a one-time transition tax under which certain US persons were required to include in income the accumulated undistributed untaxed earnings of their foreign subsidiaries. Before including the accumulated earnings of their overseas subsidiaries in income, Section 965(b) allowed US corporations to offset those earnings with the deficits of certain other foreign subsidiaries, decreasing the amount of income subject to the transition tax. Under Sections 959 and 965(b), Offset Earnings can be repatriated to the United States without being included in gross income.

FedEx argued that, upon the distribution of its Offset Earnings, it is entitled to receive tax credits for foreign taxes paid on its Offset Earnings, pointing principally to the interaction of Sections 959, 960, and 965. The government responded that the Code forbids tax credits for Offset Earnings and that, even if the statutory language were ambiguous, Treas. Reg. sec. 1.965-5(c)(1)(ii) prohibits any such credit. The government also focused on policy concerns that the FTC was created to alleviate the problem of double taxation, meaning that it would be inappropriate to give a credit for Offset Earnings, which were not and typically would never be subject to US tax.

Observation: The FedEx case focuses on the ability to claim FTCs under the pre-TCJA version of Section 960, which included provisions that addressed deemed paid credits as a result of inclusions in gross income under Section 951, as well as upon the distribution of previously taxed earnings. As amended by the TCJA, Section 960(a) and (b) contain the operative provisions for inclusions and distributions, respectively, but the amended provisions contain a “properly attributable” standard. As a result, the District Court’s order relating to the application of Section 960(a)(3) is only directly relevant for foreign taxes imposed on previously taxed earnings distributed prior to the effective date of the TCJA amendments. Foreign taxes that relate to Offset Earnings distributed in subsequent years are not deemed paid upon the distribution of the previously taxed Offset Earnings unless they satisfy the new “properly attributable” standard.

The District Court’s analysis

Application of Chevron test

The District Court noted that the validity of an agency regulation interpreting a statute is addressed under the two-step Chevron framework. Under that framework, a court first asks “whether Congress has directly spoken to the precise question at issue.” Under this step, the court uses all of the ordinary tools of statutory construction to interpret the statute and does not defer to the agency’s views. If the statute is unambiguous, the inquiry ends; however, if the statute is ambiguous, the court then considers the second step, which defers to the agency’s expertise and upholds the regulation so long as it is a ‘permissible’ interpretation of the statute (i.e., the regulation is not “arbitrary, capricious or manifestly incompatible with the statute”).

The District Court reviewed the interactions of Sections 959, 960, and 965. Section 965(a) includes foreign subsidiaries’ aggregate cumulative net positive earnings in the US shareholder’s income, while Section 965(b)(1) offsets the amount included by the aggregate deficits of subsidiaries in an cumulative net loss position. The amounts earned by the net profitable subsidiaries, but not included in the US shareholder’s income because of Section 965(b)(1), are Offset Earnings. 

Section 959 excludes from gross income earnings that already have been included under Section 951, and Section 965(b)(4)(A) extends that exclusion to Offset Earnings by directing that, “for purposes of Section 959,” the Offset Earnings are to be treated as if they were previously included in gross income under Section 951. In their respective motions for partial summary judgment, FedEx and the United States agreed that, under Sections 959 and 965(b)(4)(A), Offset Earnings are not included in gross income when repatriated, but the parties disagreed about how Section 965(b)(4)(A) affects FedEx’s claim to FTCs under Section 960(a).

The District Court noted that, prior to the amendments to Section 960 made by TCJA, the three parts of Section 960(a) worked together harmoniously to create an integrated foreign tax credit regime for deemed paid foreign taxes. When a US corporation had to include in income an amount based on its foreign subsidiary’s earnings under Subpart F and Section 951, Section 960(a)(1) treated that inclusion as a dividend for purposes of claiming a credit for foreign taxes. When the US parent repatriated the foreign earnings–which already had been included in income and for which a credit already had been provided–Section 960(a)(2) precluded a second, redundant credit. Section 960(a)(3) treated the subsequent repatriation as a dividend for any additional foreign taxes that had been imposed and for which no credit had previously been provided. 

In reviewing the parties' arguments, the District Court agreed with FedEx that Section 960(a)(3) applied with respect to foreign taxes paid on Offset Earnings under the plain terms of the statute. The court did not agree with the government’s argument that because Offset Earnings are deemed to have been included in income, FedEx’s associated foreign taxes were deemed to have been paid already under Section 960(a)(1) such that Section 960(a)(2) prevented those foreign taxes from being credited again. 

Focus of analysis

The District Court focused on the limiting language in Section 965(b)(4)(A) that treats Offset Earnings as included in income “for purposes of applying Section 959,” meaning that such that Offset Earnings are not treated as included in income when applying Section 960, which provides for FTCs in respect of subpart F inclusions. The court noted that “Section 965(b)(4)(A) is unambiguous — by its plain terms, the statute applies to [S]ection 959, but not to other sections” and “[t]he government’s attempt to stretch [S]ection 965(b)(4)(A) by making it apply to both [S]ection 959 and [S]ection 960 contravenes the plain and ordinary meaning of the statute.”

Further, the District Court buttressed its conclusion by identifying internal inconsistency in the government’s arguments. First, the court noted the government’s argument would require the court to agree that the “for purposes of Section 959” language in Section 965(b)(4)(A) applied to (i) Section 960(a)(3), because that provision references Section 959, and (ii) Section 960(a)(1), because Section 960(a)(3) cross-references to that provision. However, the court concluded that the government’s reading is not a plausible reading of the relevant statutes because when Section 960(a)(1) applies independently of Section 960(a)(3), there is nothing connecting Section 960(a)(1) to Section 965(b)(4)(A). Thus, Offset Earnings are not treated as included in gross income, the foreign taxes are not deemed paid, and there is no FTC. 

The District Court also pointed out that Section 960(a)(3) only precluded an FTC if the taxes were “deemed paid by the domestic corporation under…[Section 960(a)(1)] for any prior taxable year.” Considering this, the earliest that limitation to the application of Section 960(a)(3) could apply would be in the year after the Offset Earnings were considered included in gross income. The court therefore found the government’s argument to be flawed because an FTC would not be denied under the limitation in Section 960(a)(3) if the Offset Earnings were distributed in the same tax year as such earnings were considered included in gross income. 

The District Court made clear that because it made its decision under step 1 of the Chevron framework, the court could not consider the legislative history or general considerations of policy, such as the government’s argument that allowing FTCs in this case would run contrary to the underlying purpose of the FTC regime to mitigate double taxation. Nevertheless, in dicta, the court stated that even if it were to consider the legislative history and the government’s policy-based argument, it would reach the same conclusion. That is, the court believed that the statutes at issue were unambiguous, and the result in the case would not produce a result that is “demonstrably at odds with the intention of the drafters.” 

Observation: In analyzing the validity of regulations, the reasoning of the District Court underscores the importance of Treasury and the IRS (and taxpayers) first determining whether the plain meaning of a statute is unambiguous; a regulation that is in conflict with an unambiguous statute will generally only be deemed valid if the statute’s plain meaning leads to a result that clearly could not have been intended by Congress.

Observation: After the enactment of the TCJA, the Joint Committee on Taxation staff (JCT) released its General Explanation of Public Law No. 115-97 (JCS-1-18), which stated that no deduction or credit is allowed for foreign taxes associated with Offset Earnings, but noted that ‘[a] technical correction may be needed to reflect this intent.” Within two weeks of the release of the JCT explanation, the House Ways and Means Committee released a discussion draft of the “Tax Technical and Clerical Corrections Act.” The draft technical corrections bill proposed to add new Section 965(g)(5) that would state that “[n]o credit shall be allowed under section 901 for any taxes paid or accrued (or treated as paid or accrued) with respect to any amount described in subsection (b)(4)(A).” Thus, the proposed technical correction language was in substance the same as the final regulation issued by Treasury and the IRS. The District Court did not discuss either the JCT explanation or the draft technical corrections bill, even though those documents arguably appear to support the court’s conclusion that a legislative change is required to achieve the result reflected in the final regulation. 

Policy considerations

As noted, the government argued policy concerns that providing for deemed paid FTCs with respect to Offset Earnings, which are untaxed in the United States, “is not the mitigation of double tax; it is the elimination of any tax” and that this would be counter to the purpose of FTCs which is to “mitigate the evil of double taxation.” While the District Court agreed there was considerable weight to the government’s arguments, it concluded it could not consider extra-textual indicators of congressional intent, such as legislative history, or general considerations of policy since it found the statute unambiguous. 

Observation: The District Court did not address whether foreign taxes associated with Offset Earnings that are not deemed paid under former Section 960(a)(1) (in the year in which the taxpayer had an inclusion under Section 965(a)) or former Section 960(a)(3) (due to a distribution to the US in the transition tax year) may be deemed paid under Section 960(b) (as amended by the TCJA) upon a distribution that occurs after the transition tax year. As noted, Section 960(b) (which applies post-transition tax year to allow for deemed paid credits with respect to previously taxed earnings and profits (PTEP)) now sets forth a “properly attributable” standard to determine when a taxpayer may claim a deemed paid credit with respect to a distribution of PTEP. The new standard, as interpreted in Treasury regulations, may give rise to a different outcome than the Section 960(a)(3) credits addressed in FedEx.

FedEx Corp. v. United States, No. 20-cv-2794 (W.D. Tenn. Mar. 31, 2023)

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Ken Kuykendall

Ken Kuykendall

US Tax Leader and Tax Consulting Leader, PwC US

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