US Shareholder Must Use CFC Method To Characterize Stock

The U.S. Tax Court has held in AptarGroup Inc., 158 TC No. 4, that the American shareholder of a controlled foreign corporation (CFC) had to use the same method to characterize the stock of the CFC that the corporation used to apportion its own interest expense.

AptarGroup, a U.S. shareholder, owned stock in a CFC that apportioned interest expense under the Reg §1.861-9T(j) modified gross income method. AptarGroup claimed a foreign tax credit under Code Sec. 904 with respect to tax imposed on its income from the CFC.

To determine the amount of the foreign tax credit, AptarGroup characterized its stock in the CFC using the Reg §1.861-9T(g) asset method. Thus, AptarGroup didn't use the same method that the CFC used for interest expense apportionment.

The IRS issued a notice of deficiency to AptarGroup denying the foreign tax credit.

The issue before the court was whether AptarGroup must use the modified gross income method to characterize the stock of its CFC for purposes of computing the foreign tax credit, as that was the method the CFC used to apportion interest expense.

The court held that AptarGroup's position is inconsistent with the proper application of Reg §1.861-9T(f)(3)(iv), which requires the U.S. shareholder of a CFC to characterize the stock of the CFC using the same method the CFC used to apportion its interest expense.

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