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Before addressing the substance of AptarGroup’s arguments,
the Tax Court explained that under the canons of statutory
interpretation, a court is required to give the text of a regulation
its plain meaning …

in Sec. 904(d) (limitation category), Regarding the apportionment of in- disregarded the special characteriza-
the FTC limitation must be computed terest for these purposes, Temp. Regs. tion rules for CFC stock held by a
separately for each limitation category. Sec. 1.861-9T provides that interest U.S. shareholder in Temp. Regs. Secs.
may be apportioned either using the 1.861-9T(f)(3)(iv) and 1.861-12(3)(i),
Sourcing rules asset method or the modified gross in- characterizing its stock in AGH Lux
To calculate the FTC limitation, the come method. However, domestic cor- using the asset method. It used the
taxpayer must determine the source porations must use the asset method. asset method because that method
for its gross income, using the sourcing CFCs, on the other hand, are permit- allowed it to reduce the amount of
rules in the regulations under Sec. 861. ted to choose either method subject to interest expense that it apportioned
After sourcing gross income, a taxpayer certain consistency requirements. to foreign-source income, thereby
must allocate losses, expenses, and other increasing its foreign-source taxable
deductions (collectively, expenses) to a Asset characterization income and consequently increasing its
class of gross income and, if necessary, In calculating its foreign tax credit foreign tax credit.
then apportion the expense within that limitation, a domestic corporation The IRS in 2020 issued a notice of
class between a statutory grouping or can characterize assets it holds using deficiency to AptarGroup for 2014,
a residual grouping. For purposes of the asset method or the gross in- disallowing the foreign tax credit taken
the foreign tax credit, each limitation come method. However, with respect by the company in its entirety. The
category is a statutory grouping, and a to CFC stock held by a domestic IRS determined that AptarGroup was
taxpayer claiming the credit must deter- corporation, a consistency rule ap- not permitted to use the asset method
mine the foreign-source taxable income plies. Under both Temp. Regs. Secs. under the special characterization rule
in each limitation category in which it 1.861-9T(f)(3)(iv) and 1.861-12(3)(i), a in Temp. Regs. Sec. 1.861-9T(f)(3)(iv)
has income. U.S. shareholder of a CFC must char- because AGH Lux had used the gross
Expenses generally are allocated and acterize the CFC stock it holds under income method to apportion its inter-
apportioned on the basis of their factual the same method the CFC used to est expense.
relationship to gross income. Expenses apportion its interest expense. AptarGroup, in response, chal-
are allocated to the class of gross in- lenged the IRS’s determination in Tax
come to which they definitely relate. If AptarGroup disregards special Court. AptarGroup and the IRS filed
not definitely related to a class of gross characterization rules cross-motions for partial summary
income or related to all gross income, an AptarGroup, as required, allocated judgment with respect to whether
expense must be ratably allocated to all its interest expense to all its income- AptarGroup could use the asset
gross income. After allocation, if need- producing assets and activities. method to apportion interest expense
ed, expenses are apportioned between Because it is a domestic corporation, for purposes of calculating its foreign
the statutory and residual groupings. the company apportioned its interest tax credit.
expense using the asset method. AGH
Special rules for interest Lux, as a CFC, under Temp. Regs. Sec. The Tax Court’s decision
expense 1.861-9T(f)(3)(i) could elect to use ei- The Tax Court granted the IRS’s mo-
In general, interest expense is treated ther the asset method or the modified tion for partial summary judgment,
as related to all income-producing gross income method, and it elected to agreeing with the Service that Aptar-
activities and assets regardless of the apportion interest expense using the Group was not permitted to use the
specific purpose for the borrowing. latter method. asset method to characterize its AGH
Thus, interest expense must be ratably In characterizing its assets for for- Lux stock in calculating its foreign tax
allocated to all gross income. eign tax credit purposes, AptarGroup credit for 2014.

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