Texas Instruments challenges FDII deficiencies and seeks tax refunds
Texas Instruments Inc. v. Commissioner. United States Tax Court. No. 4413-26.
Texas Instruments has asked the Tax Court to reject almost $48 million in IRS deficiencies related to its FDII deduction. The company argues that the IRS wrongly reduced qualifying income by including compensation and accounting expenses from before the TCJA in the FDII calculation.
Holding
There is no decision yet. Texas Instruments has filed a Tax Court petition to challenge the IRS notice of deficiency. The company is seeking to eliminate the claimed deficiencies and to have tax overpayments for 2018 and 2019 recognized.
Why It Matters
This is one of the first significant Tax Court disputes involving how expenses should be allocated when computing the §250 FDII deduction.
The case focuses on whether deductions tied to services performed before FDII existed can reduce FDII benefits in later years.
A favorable taxpayer result could affect many multinational corporations with large stock-based compensation deductions and historic accounting method adjustments.
The dispute also highlights continuing uncertainty surrounding IRS administrative guidance on FDII expense allocation.
Key Facts
Congress created the FDII regime under the Tax Cuts and Jobs Act, effective for tax years beginning after December 31, 2017. FDII provides a reduced effective tax rate on certain foreign-derived income earned by U.S. corporations.
Texas Instruments received a Notice of Deficiency dated May 18, 2026. The IRS asserted deficiencies of:
$9.6 million for 2018
$38.3 million for 2019
The adjustments stem from a dispute over the company’s §250 deduction and the treatment of certain expenses incurred before FDII became effective.
The disputed expenses fall into two categories:
Deferred compensation expense from restricted stock units and stock options.
A §481(a) accounting method adjustment related to depreciation and amortization deductions previously affected by the now-repealed Foreign Sales Corporation (FSC) regime.
Texas Instruments argues that much of these expenses relate to periods before FDII existed and therefore should not reduce deduction-eligible income (DEI) for FDII purposes.
The company also seeks overpayment determinations of:
$11.8 million for 2018
$289,134 for 2019
based on separate adjustments previously agreed to with the IRS.
Statutory Framework
§250 allows a deduction for foreign-derived intangible income (FDII).
FDII is determined by measuring the foreign-derived portion of a corporation’s deemed intangible income (DII).
DII depends on the relationship between foreign-derived deduction-eligible income (FDDEI) and deduction-eligible income (DEI).
DEI equals qualifying gross income reduced by deductions properly allocable to that income.
FDII applies only to income arising in tax years beginning after December 31, 2017.
Taxpayer’s Arguments
Texas Instruments argues:
Deferred compensation deductions tied to stock awards and options granted or earned in earlier years were not properly allocable to post-2017 DEI.
The IRS improperly reduced DEI and FDDEI by including those deferred compensation amounts in the FDII calculation.
The §481(a) adjustment represented depreciation and amortization deductions attributable largely to pre-2007 periods and had no factual relationship to post-2017 income generation.
Because the underlying FDII adjustments were incorrect, related foreign tax credit adjustments are also incorrect.
The company is entitled to overpayment determinations based on previously agreed audit adjustments.
Government’s Position
Based on the notice described in the petition, the IRS appears to take the position that:
Deferred compensation expenses and the §481(a) adjustment must reduce DEI when computing the §250 deduction.
Those allocations materially reduce FDII and, therefore, the allowable §250 deduction.
The resulting reductions produce deficiencies for both 2018 and 2019.
Issues Before the Court
The case centers on a narrow but important question:
When an expense is deducted in a post-2017 year but economically relates to services or activities performed before FDII existed, must that expense still reduce DEI for purposes of calculating the §250 deduction?
The answer will determine whether taxpayers must use the deduction's timing or the economic activity underlying it when allocating expenses in the FDII formula.
Why This Case Is Significant
Most large multinational corporations have substantial stock-based compensation programs. Many also implemented accounting method changes that generated §481(a) adjustments after the TCJA became effective.
Texas Instruments alleges that:
More than $757 million of deferred compensation deductions were involved in 2018.
Nearly $986 million of deferred compensation deductions were involved in 2019.
More than 98% of the disputed §481(a) adjustment related to periods before 2007.
Because FDII calculations can produce significant tax benefits, the treatment of these expenses can have a large effect on tax liability across the corporate sector.
The petition also references IRS Advice Memorandum 2022-001, which reconsidered prior IRS views regarding deferred compensation allocation for FDII purposes. That suggests the litigation may test the strength and reach of the IRS’s administrative position in this area.
Request
Texas Instruments is asking the Tax Court to remove the claimed deficiencies, recognize the agreed adjustments, determine overpayments for 2018 and 2019, and order any refunds. The case is still at the pleading stage.
The Takeaway
This is not a typical deficiency dispute. The petition brings up a key FDII allocation issue that could change how companies handle large deferred compensation deductions and past accounting adjustments in the §250 calculation. Tax departments with big stock-based compensation programs should pay close attention, since the outcome could affect FDII calculations for many companies, not just Texas Instruments.
List of Citations
IRC §250, Foreign-Derived Intangible Income deduction. Central provision governing the disputed deduction.
IRC §481(a), accounting method adjustment rules. Source of the disputed depreciation and amortization adjustment.
IRC §83, taxation of restricted stock units and nonqualified stock options. Governs timing of deferred compensation deductions.The The
Tax Cuts and Jobs Act of 2017 created the FDII regime, effective after 2017.
CBS Corp. v. United States, 105 Fed. Cl. 74 (2012). Basis for the accounting method change involving FSC assets.
IRS Advice Memorandum 2022-001. Addresses deferred compensation allocation in FDII calculations and is likely relevant to the dispute.