The Tax Times

Thursday, April 9, 2026

Tax Court Tell Varian You Can't Have It Both Ways - 100% Section 245A DRD on Section 78 Gross-Up & Foreign Tax Credits

Varian Medical Systems, Inc. and Subsidiaries v. Commissioner, 163 T.C. No. 4 (Aug. 26, 2024), is a key U.S. Tax Court decision on whether a fiscal‑year corporate taxpayer could claim a section 245A participation‑exemption DRD on a section 78 gross‑up during the TCJA “gap period,” and what that meant for its foreign tax credits.

Case overview

Varian, a U.S. parent filing a consolidated return, owned controlled foreign corporations (CFCs) and for its 2018 fiscal year both elected foreign tax credits and was required to include a section 78 gross‑up in income tied to deemed‑paid foreign taxes. On its return, Varian reported a section 78 dividend of roughly 159 million dollars and claimed an approximately 60‑million‑dollar deduction under section 245A related to that gross‑up, while also claiming significant foreign tax credits. Following examination, the IRS issued a notice of deficiency disallowing the section 245A deduction on the section 78 amount and increasing the section 78 dividend by about 1.9 million dollars, and alternatively asserted that if the deduction were allowed, Varian’s foreign tax credits must be limited.^[2]^[5]^[1]

The statutory “gap period” issue

The dispute grew out of a mismatch in effective dates created by the TCJA between new section 245A and the contemporaneous amendment to section 78. Section 245A, the participation exemption, generally applies to certain dividends received by U.S. corporations from specified 10‑percent owned foreign corporations, allowing a 100 percent DRD for qualifying distributions. Section 78, which treats deemed‑paid foreign taxes as a dividend “gross‑up,” was later amended to say that amounts taken into account under section 245A are not eligible for a section 78 gross‑up, but for fiscal‑year taxpayers there was a period in 2018 where the new section 245A applied while the amended section 78 did not yet apply. Varian’s position was that, during that window, the text of section 245A permitted a DRD for the section 78 dividend, because the statute did not carve out gross‑ups, and no other operative provision barred the deduction.

The Commissioner relied heavily on Treasury Regulation section 1.78‑1, as amended in 2019, to argue that the section 78 gross‑up could not be treated as eligible for the section 245A DRD. The IRS also argued that, even if a deduction were allowable, section 245A(d)(1) and related rules operate to limit foreign tax credits to prevent a double benefit when a taxpayer both claims a DRD and foreign tax credits on the same earnings.

The Tax Court’s holding

On cross‑motions for partial summary judgment, the Tax Court held that Varian was entitled to a 100 percent DRD under section 245A on the section 78 gross‑up for the 2018 fiscal year gap period. The Court found that the operative statutory text of section 245A, as in effect for Varian’s year, encompassed the section 78 gross‑up and that the government’s attempt to exclude such amounts via regulation was inconsistent with the statute. In doing so, the Court invalidated the long‑standing regulation under section 78 to the extent it barred section 245A treatment for the gross‑up, and it invoked the Supreme Court’s Loper Bright framework to reject deference to the IRS’s interpretation.

However, the Tax Court also agreed with the Commissioner that section 245A(d)(1) required a reduction in Varian’s foreign tax credits attributable to the same earnings covered by the DRD. The Court concluded that allowing both a full section 245A DRD on the section 78 dividend and an unreduced foreign tax credit on the related deemed‑paid taxes would confer an impermissible double benefit, so Varian’s foreign tax credits had to be proportionately disallowed under the statutory limitation formula.

Practical implications for corporate taxpayers

Varian confirms that, for fiscal‑year taxpayers caught in the TCJA effective‑date gap, section 245A can reach section 78 gross‑up amounts, notwithstanding contrary regulatory language, allowing a 100 percent DRD on those deemed dividends. At the same time, the decision underscores that taxpayers cannot stack both full participation‑exemption benefits and full foreign tax credits on the same pool of foreign earnings; section 245A(d)(1) will require a calculated reduction in foreign tax credits to offset the DRD.

Beyond the technical DRD and FTC computation, the case has broader significance in tax administration because it represents a unanimous Tax Court willingness to invalidate an IRS regulation where it conflicts with the statute, using the post‑Loper Bright approach to agency deference. For multinational groups with similar fact patterns, Varian provides both an opportunity—asserting DRDs for section 78 gross‑ups in the gap period—and a warning that collateral issues, especially around the foreign tax credit limitation, can materially affect the net benefit even when the primary statutory interpretation issue is decided in the taxpayer’s favor.

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Sources:

1. https://kpmg.com/kpmg-us/content/dam/kpmg/taxnewsflash/pdf/2024/08/tnf-tax-court-varian-aug26-2024.pdf

2. https://case-law.vlex.com/vid/varian-med-sys-subsidiaries-1047847129

3. https://www.pwc.com/us/en/services/tax/library/us-tax-court-rules-taxpayer-is-allowed-a-drd-for-the-sec-78.html

4. https://www.jonesday.com/en/insights/2024/08/us-tax-court-invokes-loper-bright-for-the-first-time

5. https://www.augusttaxlaw.com/tax-court-allows-100-participation-exemption-deduction-in-varian-medical-systems-inc-and-explains-scope-of-section-245a/

6. https://www.davispolk.com/insights/client-update/tax-court-invalidates-tax-regulation-varian-first-case-consider-validity

7. https://www.grantthornton.com/insights/newsletters/tax/2024/hot-topics/sep-17/mixed-dividends-ruling-in-varian-case

8. https://news.bloombergtax.com/tax-insights-and-commentary/varian-medical-ruling-shows-loper-bright-cases-continued-power

9. https://www.millerchevalier.com/publication/collateral-issues-dominate-final-briefing-varian-and-sysco

10. https://news.bloomberglaw.com/federal-contracting/tax-court-ruling-in-varian-case-is-latest-blow-to-irs-rulemaking

11. https://www.casemine.com/judgement/us/654b0ecbc2e6e0006eb459c7

12. https://www.casemine.com/judgement/us/66e662cb9d92026d6a37b466

13. https://ustaxcourt.gov/files/documents/163_TC_46-112.pdf

Tuesday, April 7, 2026

IRS Expands The Online Self-Service Platform Tax Accounts To Businesses

In IR-2026-46, April 6, 2026, The Internal Revenue Service provides a major expansion of its Business Tax Account, making the available to partnerships, federal, state, and local governments, Indian tribal governments, and tax-exempt organizations.

“By opening the Business Tax Account to partnerships, tax-exempts and other organizations, we’re giving millions more entities secure, convenient access to their tax information,” said IRS Chief Executive Officer Frank J. Bisignano. “Digital access will reduce the burden on these taxpayers because they no longer will be limited to paper and phone interactions to perform simple tasks with the IRS.”

The newly eligible entities join sole proprietors, S corporations, and C corporations that are already able to access the platform. The expansion supports the agency’s ongoing service improvement effort by broadening digital access to more segments of the business community.

The Business Tax Account is a secure, centralized platform that allows eligible users to manage their federal tax responsibilities online. Through BTA, users and designated officials can:

View tax balances, make payments, and see payment history
Download select digital notices
View eligible transcripts, such as payroll and income
Request a tax compliance check
See the business name and address on file with the IRS

For more information or to set up a Business Tax Account, visit www.irs.gov/businessaccount..

Have A Tax Problem?

Contact the Tax Lawyers at

Marini & Associates, P.A.

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243)

Friday, April 3, 2026

Beyond Panama Papers: How the Super-Rich Still Hide Oceans of Wealth

Ten years after the explosive revelations of the Panama Papers, a new report from Oxfam paints a stark picture of how extreme wealth inequality and tax evasion have only deepened. According to the analysis released on April 2, 2026, the richest 0.1 percent of people now hold more untaxed wealth in offshore accounts than the combined wealth of the poorest half of the global population of about 4.1 billion people.

Oxfam estimates that $3.55 trillion in untaxed wealth was hidden offshore in 2024. That figure surpasses the entire GDP of France and is more than twice the combined economic output of the world’s 44 least-developed countries.

Even more striking, about 80 percent of this offshore wealth belongs to the wealthiest 0.1 percent — with the ultra-rich 0.01 percent controlling nearly half of it.

A Decade After the Panama Papers

“The Panama Papers pulled back the veil on a shadow world where the richest quietly move immense fortunes beyond the reach of taxes and scrutiny,” said Christian Hallum, Oxfam International’s Tax Lead. “Ten years on, the super-rich are still sequestering oceans of wealth in offshore vaults.”

The report underscores that this is not just a question of creative accounting, but of power and impunity. When billionaires hide fortunes offshore, governments lose critical funding for hospitals, schools, and infrastructure. Ordinary people end up paying the price as the public sector is starved of resources and inequality grows ever wider.

The Global Cost of Evasion

While efforts such as the Automatic Exchange of Information system (AEOI) have made some progress in curbing untaxed offshore holdings, these gains have not benefited everyone equally. Many developing countries, those that need tax revenue most, are still excluded from AEOI participation.

As a result, untaxed offshore wealth remains stubbornly high, equal to about 3.2 percent of global GDP. For countries in the Global South, the lost revenue means fewer teachers, weaker health systems, and slower economic development.

A Call for Coordinated Action

Oxfam’s findings come as a clear call for coordinated international action to rein in extreme wealth and close the loopholes that allow the ultra-rich to hide assets offshore. The organization urges reforms that make global tax systems more transparent and equitable — ensuring that the wealthiest contribute fairly to societies from which they benefit.

As the world reflects on a decade since the Panama Papers, the question remains: will this new spotlight on offshore wealth finally lead to meaningful change, or will the richest continue to live by a different set of financial rules?

Experianced International Tax Planning Is Needed
To Avoid US Tax Traps For The Unwary!

Contact the Tax Lawyers at

Marini & Associates, P.A.

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243)

NIL Deals Are Turning Student‑Athletes into Small Business Taxpayers who Need Professional Advice

In a recent blog post, the National Taxpayer Advocate (NTA) warns that NIL arrangements are effectively converting many young athletes—often with no prior filing history, into small business owners for federal tax purposes, with corresponding exposure to income tax, self‑employment tax, and underpayment penalties. Post‑NCAA v. Alston, athletes at both the collegiate and, increasingly, high school levels may monetize their name, image and likeness through endorsement contracts, appearance fees, social media promotion, and school‑facilitated revenue‑sharing. Unlike traditional wage income, NIL compensation generally is not subject to withholding, shifting the burden to the athlete to calculate liabilities, make timely estimated tax payments, and comply with multi‑form information reporting.

Scope of Taxable NIL Income

The NTA underscores that NIL income is not limited to cash payments; it encompasses all accessions to wealth tied to the athlete’s commercial use of their persona. Taxable receipts typically include:

· Cash payments for appearances, autograph signings, and social media content.

· Royalties from licensed merchandise or trading card deals.

· Non‑cash consideration such as vehicles, apparel, travel, meal vouchers, or other in‑kind perks provided by sponsors or local businesses.

· Direct revenue‑sharing payments from educational institutions or affiliated entities.

These items are often reported on Forms 1099‑NEC or 1099‑MISC, and the blog notes that many athletes are surprised to see information returns for benefits they viewed as “free.” Even where a Form 1099 is not issued, the athlete remains obligated to report the income and include the fair market value of non‑cash benefits in gross income under general realization principles.

Compliance Profile: Self‑Employment, Estimated Tax, and Recordkeeping

For federal purposes, most NIL earners are treated as independent contractors engaged in a trade or business, with income reported on Schedule C (and royalties on Schedule E where applicable), and net earnings generally subject to self‑employment tax under section 1402. Because payors typically do not withhold, the NTA stresses the need for quarterly estimated tax payments to mitigate large year‑end balances and section 6654 additions to tax. The blog emphasizes that athletes must maintain books and records akin to any other small business: tracking multiple income streams, substantiating deductible expenses (e.g., travel, promotional costs, agent/marketing fees), and reconciling various information returns received from collectives, schools, and third‑party sponsors.

Role of Advisors and Risk Mitigation

The NTA characterizes professional tax guidance as a “necessity rather than a luxury” for many NIL participants, given their youth, lack of tax literacy, and the layered nature of NIL compensation. Practitioners should anticipate issues such as unreported barter income, mismatches between 1099 reporting and filed returns, dependency questions in the family context, and potential state and local nexus where athletes perform services across multiple jurisdictions.

The blog encourages early engagement to set up basic systems, contract review, contemporaneous tracking of non‑cash benefits, periodic tax accruals and savings, and calendarized estimated payment reminders, to prevent NIL opportunities from evolving into collection and penalty problems.

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