Fifth Circuit confirms that subpart F inclusions are not dividends

August 2013


Subpart F income inclusions are not dividends and thus, are not qualified dividend income for purposes of Section 1(h)(11), the Court of Appeals for the Fifth Circuit held on July 5, 2013. This affirms the US Tax Court’s decision in Osvaldo and Ana Rodriguez v. Commissioner. Accordingly, the tax rate applicable to subpart F income inclusions is the ordinary income rate, not the reduced rate for qualified dividend income.

The holding in Rodriguez could have broader relevance for individuals earning income through foreign corporations. Although the opinion addresses an inclusion under Section 951(a)(1)(B) with respect to a CFC’s investment in US property, the opinion is equally applicable to subpart F inclusions under Section 951(a)(1)(A) and may also inform the final analysis of the proper application of the net investment income tax under Section 1411.

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