Tax Insight

Varian limits Section 245A to directly held stock and adopts post-Section 965(c) FTC denominator

Insight
5 minute read
April 14, 2026

What happened?

The US Tax Court on April 8 resolved cross-motions for summary judgment in Varian Medical Systems, Inc. and Subsidiaries v. Commissioner, 166 T.C. No. 8, relating to how Varian’s 2018 tax year dividend received deduction (DRD) under Section 245A and disallowed foreign tax credits (FTCs) under Section 245A(d) should be computed. In granting the IRS’s motion, the court held that Varian satisfied the Section 246 holding period rule with respect to first-tier controlled foreign corporations (CFCs), but not lower-tier CFCs whose stock was not directly held by Varian or a US group member, and that the Section 245A(d) FTC disallowance formula must use the post-Section 965(c) amount in the denominator rather than the pre-Section 965(c) amount.

Why is it relevant?

The opinion is significant because it resolves issues left open after Varian Medical Systems, Inc. and Subsidiaries v. Commissioner, 163 T.C. 76 (2024), the Tax Court’s August 2024 unanimous reviewed opinion (Varian I). In Varian I, the court held that Varian was entitled to a deduction under Section 245A for amounts treated as dividends under Section 78 for its final tax year beginning before December 31, 2017, and that a proportionate amount of deemed paid taxes attributable to the Section 78 dividend was disallowed under Section 245A(d). However, Varian I did not clarify if the Section 246 holding period rule would restrict the Section 245A deduction, particularly for amounts related to lower-tier CFCs.

The 2026 opinion does not disturb the earlier holding in Varian I but substantially narrows its practical benefit by holding that Section 246(c) disallows the Section 245A deduction for amounts attributable to lower-tier CFCs held through foreign subsidiaries, and that the Section 245A(d) FTC disallowance formula must use the post-Section 965(c) amount in the denominator. As a result, the opinion is important both for establishing that direct ownership matters in applying Section 246(c) to Section 245A, and for clarifying how the related FTC disallowance must be computed in the Section 965 context.

The opinion also is relevant beyond the Section 78 context because the court left open how the direct-ownership requirement under Section 246(c) could apply in other contexts where Section 245A is coordinated with deemed-dividend rules, such as Sections 1248(j) and 964(e)(4).

Actions to consider

Taxpayers with fiscal-year CFCs and Section 965 inclusions, especially those with lower-tier CFCs, should revisit Section 245A positions that rely on indirect ownership for holding-period purposes and should test Section 245A(d) computations using post-Section 965(c) amounts. Taxpayers also should consider whether the court’s direct-ownership analysis under Section 246(c) could affect positions involving other provisions coordinated with Section 245A, including Sections 1248(j) and 964(e)(4).