DOJ says FedEx cannot claim foreign tax credits for earnings exempted under §965
FedEx Corp. v. United States. United States Court of Appeals for the 6th Circuit. No. 25-5694.
The Justice Department says corporations cannot claim foreign tax credits on foreign earnings that Congress already exempted from U.S. tax under the §965 transition tax regime.
Holding
The government asked the Sixth Circuit to reverse a district Court ruling that allowed FedEx Corporation to claim foreign tax credits tied to “offset earnings” under §965. DOJ argues Treasury validly barred those credits through Treas. Reg. §1.965-5(c)(1)(ii) and that the Internal Revenue Code independently disallows them.
Why It Matters
The case could determine whether multinational corporations can claim additional foreign tax credits on earnings that Congress already removed from U.S. taxation under the TCJA's transition tax.
DOJ is pushing an aggressive post-Loper Bright Enterprises v. Raimondo defense of Treasury regulatory authority. The government argues §965(o) expressly delegated broad anti-avoidance authority to the Treasury.
The dispute affects large multinational groups with foreign deficits and foreign earnings pools during the §965 transition tax years.
The government repeatedly frames the taxpayer position as producing a “windfall” and a “double benefit,” signaling the IRS's continued resistance to structures that separate foreign tax credits from actual U.S. taxation.
Key Facts
The dispute centers on the TCJA transition tax enacted under § 965.
Congress imposed a one-time transition tax on accumulated offshore earnings as the United States moved toward a quasi-territorial international tax system.
Under §965(b), profitable foreign subsidiaries could offset earnings with deficits from unprofitable foreign subsidiaries. The resulting exempted earnings are referred to in the litigation as “Offset Earnings.”
FedEx claimed foreign tax credits tied to those Offset Earnings.
Treasury issued Treas. Reg. §1.965-5(c)(1)(ii), called the “disallowance rule,” which bars credits for foreign taxes associated with Offset Earnings.
The District Court invalidated the regulation and allowed the credits. DOJ appealed to the Sixth Circuit.
Regulatory Framework
§965 imposed the transition tax on accumulated foreign earnings.
§965(g) reduced foreign tax credits tied to transition-taxed earnings to prevent over-crediting.
§965(o) authorized Treasury to issue regulations preventing avoidance of §965’s purposes.
§959 generally excludes previously taxed earnings from income upon later distribution.
§960 governs deemed-paid foreign tax credits connected to subpart F inclusions and related distributions.
Treas. Reg. §1.965-5(c)(1)(ii) disallows credits for foreign taxes associated with Offset Earnings.
Taxpayer argued
§960(a)(3) allows foreign tax credits tied to Offset Earnings distributions.
Treasury exceeded its authority by effectively rewriting the statute through regulation.
Congress intentionally left these credits available when enacting the TCJA.
The disallowance rule improperly overrides statutory text.
Government argued
Congress never clearly authorized credits for earnings exempt from U.S. tax.
§965(o) expressly delegated authority to Treasury to prevent avoidance of §965’s purposes.
Allowing credits for Offset Earnings would undermine §965(g)’s anti-double-benefit framework.
Offset Earnings taxes were already treated as deemed paid under §960(a)(1), which independently bars additional credits under §960(a)(3).
Tax credit statutes must be strictly construed in the government’s favor.
Court’s Reasoning at Issue
The filing is a government appellate brief, not a judicial opinion. DOJ’s reasoning focuses on several themes:
Congress carefully limited foreign tax credits associated with the transition tax through §965(g).
Offset Earnings are permanently exempt from U.S. tax, so DOJ argues there is no double taxation requiring relief through credits.
Treasury acted within the explicit delegated authority under § 965(o).
The government argues FedEx selectively reads §960(a)(3), applying §965(b)(4)(A) only where beneficial to the taxpayer.
DOJ repeatedly emphasizes that the statutory provisions must be interpreted as part of an integrated international tax regime rather than as isolated sections.
The brief relies heavily on structural arguments and legislative purpose rather than a single explicit statutory prohibition.
DOJ also argues the taxpayer interpretation would create a “massive giveaway” benefiting corporations with historically unprofitable foreign subsidiaries.
Result
DOJ asked the Sixth Circuit to reverse the district Court, uphold Treasury’s disallowance rule, vacate the judgment, and remand the case.
The Takeaway
This appeal matters because it tests how far Treasury’s anti-avoidance authority extends after Loper Bright and whether courts will permit foreign tax credits detached from actual U.S. taxation.
The government is framing the issue as one of structural coherence, not technical ambiguity. Its position is simple: if Congress exempts the income from U.S. tax, taxpayers should not also receive full credits tied to that exempt income. International tax lawyers, meanwhile, continue their sacred cultural tradition of turning one transition rule into twelve years of litigation.
List of Citations
§965(g) → Limits foreign tax credits associated with transition-taxed earnings.
§965(o) → Delegates anti-avoidance regulatory authority to Treasury.
§959 → Excludes previously taxed foreign earnings from later U.S. taxation.
§960(a)(1) and §960(a)(3) → Govern deemed-paid foreign tax credits tied to subpart F income.
Loper Bright Enterprises v. Raimondo → DOJ cites the case to support judicial respect for explicit congressional delegations to agencies.
Moore v. United States → Referenced for the TCJA transition tax’s purpose and structure.
Summa Holdings, Inc. v. Commissioner → FedEx relies on the case to argue agencies cannot rewrite statutes.
Varian Medical Systems, Inc. v. Commissioner → DOJ cites the case regarding Congress’s effort to prevent excessive foreign tax credits under §965.