UNITED STATES OF AMERICA, PETITIONER V. THE GOODYEAR TIRE & RUBBER
COMPANY AND AFFILIATES

   No. 88-1474

   In the Supreme Court of the United States

   October Term, 1989

   On Writ of Certiorari to the United States Court of Appeals for the
Federal Circuit

   Brief for the United States

            TABLE OF CONTENTS
   Question Presented
   Opinions below
   Jurisdiction
   Statutory and regulatory provisions involved
   Statement
   Summary of argument
   Argument:
      The term "accumulated profits" in Section 902 of the Code means
      income or profits as defined by the tax law of the United
      States, not as defined by the tax law of a foreign country
      A. Because the dividends taken into the income of the United
         States parent are defined in terms of United States tax
         principles, the term "accumulated profits" in Section 902
         must also be defined in terms of United States law in order
         to make the statutory allocation formula coherent
         1. "Accumulated profits" describes the fund out of which the
            dividends reported as United States income are paid
         2. The apportionment formula of Section 902 is incongruous
            unless "accumulated profits," like dividends, are
            determined under principles of United States law
      B. The court of appeals' interpretation undermines the
         statutory policy of providing the same relief from double
         taxation for domestic companies that operate through
         foreign subsidiaries as is provided to those that operate
         through foreign branches
      C. The court of appeals' decision erroneously overturns the
         longstanding administrative and judicial construction of
         Section 902
      D. The court of appeals' interpretation is not supported by
         either the plain meaning of the statute or its policy of
         preventing double taxation
   Conclusion

                            OPINIONS BELOW

   The opinion of the court of appeals (Pet. App. 1a-8a) is reported
at 856 F.2d 170.  The opinion of the Claims Court (Pet. App. 9a-28a)
is reported at 14 Cl. Ct. 23.

                             JURISDICTION

   The judgment of the court of appeals (Pet. App. 29a) was entered on
August 31, 1988.  A petition for rehearing was denied on November 8,
1988 (Pet. App. 31a).  On January 25, 1989, the Chief Justice extended
the time within which to petition for a writ of certiorari to and
including March 8, 1989.  The petition was filed on that date, and was
granted on May 1, 1989.  The jurisdiction of this Court is invoked
under 28 U.S.C. 1254(1).

             STATUTORY AND REGULATORY PROVISIONS INVOLVED

   Sections 316, 901, and 902 of the Internal Revenue Code of 1954 (26
U.S.C.) and Section 1.902-3 of the Treasury Regulations on Income Tax
(26 C.F.R.), as in effect for 1970 and 1971, are set forth in
pertinent part in a statutory appendix (App., infra, 1a-4a).

                          QUESTION PRESENTED

   Whether the term "accumulated profits" in the foreign tax credit
provisions of Section 902 of the Internal Revenue Code means income or
profits as defined by the tax law of the United States or, instead, as
defined by the tax law of a foreign country.

                               STATEMENT

   1. This case involves the foreign tax credit applicable to the
federal taxation of dividend income received by a United States
corporation from its foreign subsidiary.  When a foreign subsidiary
distributes all or part of its profits to its domestic parent, that
distribution generally is taxable to the parent as a dividend under
the provisions of Sections 301 and 316 of the Internal Revenue Code.
/1/ If those profits have already been subjected to income tax by the
foreign country where they were earned, simple taxation as a dividend
by the United States would result in double taxation.  /2/
Accordingly, Sections 901(a) and 902(a)(1) of the Code allow the
parent (if it owns at least 10% of the voting stock of the foreign
subsidiary) to take an "indirect" or "deemed paid" credit against its
United States income tax to reflect income tax paid by the subsidiary
to a foreign country.

   The situation is complicated somewhat when, in a particular year,
the foreign subsidiary does not distribute all of its profits to its
parent, but instead retains some of the profits and adds them to
surplus.  In that event, giving the parent a full credit for all of
the foreign income tax paid by the subsidiary would overcompensate for
the double taxation risk -- and thus give the taxpayer a windfall --
because the parent is not receiving all of the subsidiary's profits as
a dividend subject to United States income tax.  Therefore, the Code
allows the parent to take a credit against the income tax payable to
the United States for only a prorated portion of the foreign income
taxes paid by the subsidiary.  See generally American Chicle Co. v.
United States, 316 U.S. 450 (1942).

   Section 902(a)(1) provides for the computation of the allowable
credit as follows:  "to the extent such dividends are paid by such
foreign corporation out of accumulated profits," the parent is "deemed
to have paid the same proportion of any income * * * taxes paid * * *
by such foreign corporation to any foreign country * * * on or with
respect to such accumulated profits, which the amount of such
dividends * * * bears to the amount of such accumulated profits in
excess of such * * * taxes." In other words, the allowable prorated
credit is computed by multiplying the foreign income taxes paid by a
fraction -- namely, the ratio of the dividends to the subsidiary's
(after-tax) accumulated profits.  This computation is illustrated by
the following equation (see Pet. App. 4a, 15a n.6):  /3/

   Foreign taxes paid X Dividends over Accumulated profits minus
foreign taxes = Section 902 credit

   The issue in this case is the meaning of the term "accumulated
profits" -- specifically, whether it refers to the subsidiary's
profits as computed under United States tax law or under the tax law
of the foreign country.  /4/

   2. Respondent is an affiliated group of domestic corporations that
file consolidated federal income tax returns.  The parent of the group
(Goodyear U.S.) owns all of the stock of a British subsidiary
(Goodyear U.K.) that does not join in the consolidated return.  The
subsidiary reported net income on its British tax returns for 1970 and
1971, paid taxes to Britain on that income, and distributed dividends
to its parent.  On the United States consolidated tax returns for 1970
and 1971, respondent claimed Section 902 foreign tax credits with
respect to the foreign tax paid for those years by the British
subsidiary.  On its 1973 British tax return, however, the subsidiary
reported a loss (attributable to accelerated depreciation and special
inventory adjustments), which it carried back to offset virtually all
of its income for 1971 and part of its income for 1970.  As a result
of this loss carryback, Britain refunded almost all of the income tax
paid for 1971 and part of the tax paid for 1970.  The 1973 loss
deductions, although recognized under British law, would not be
allowable in computing income under the Internal Revenue Code.  Pet.
App. 1a-2a, 10a-11a.

   Following the payment of the British tax refunds, the Commissioner
audited respondent's consolidated returns for 1970 and 1971 and
recomputed the foreign tax credits under the authority of Section
905(c) of the Code, which requires the redetermination of a foreign
tax credit after a refund of any of the foreign tax paid.  The
Commissioner reduced the creditable foreign taxes to reflect the
refund, but made no adjustment to the British subsidiary's
"accumulated profits," which he determined must be computed under
principles of United States tax law and therefore were unaffected by
the 1973 loss and resulting carryback not allowable under the Internal
Revenue Code.  Under this analysis, the subsidiary's profits for 1970
and 1971 were adequate to cover the dividends paid in those years, and
the Commissioner treated the dividends as having been derived from the
accumulated profits for the years of distribution.  Because the
foreign tax paid in those years (after taking into account the refund)
was relatively small, the Section 902 credit for those years allowed
by the Commissioner was correspondingly small.  He asserted
deficiencies in respondent's income tax of $323,654 for 1970 and
$237,616 for 1971.  Pet. App. 2a-3a & n.3, 11a-12a, 23a-24a.

   Respondent paid the deficiencies and, after its administrative
refund claim was denied, brought this refund action in the Claims
Court.  It contended that, for purposes of computing the prorated
credit, the "accumulated profits" must be based on the British
definition of taxable income.  Respondent therefore adjusted that
figure to account for the loss carryback peculiar to British law.
This adjustment eliminated almost all of the subsidiary's accumulated
profits for 1971 and reduced them for 1970.  The result was a
substantially larger Section 902 credit for respondent for 1970 and
1971, and therefore a correspondingly smaller United States income tax
liability, than when the Commissioner had computed "accumulated
profits" based on the United States definition of taxable income.
Pet. App. 3a, 15a-16a.  /5/

   3. On cross-motions for summary judgment, the Claims Court held for
the government, ruling that "accumulated profits" in Section 902 means
income or profits as defined by the Internal Revenue Code, not by the
tax law of a foreign country (Pet. App. 9a-28a).  The court found that
this conclusion was strongly supported by Tax Court precedent (id. at
16a-19a) and by the language (id. at 19a-21a), purpose (id. at
22a-25a), and consistent administrative interpretation (id. at
25a-26a) of Section 902.  With respect to the statute itself, the
court explained that the dividends in the numerator of the Section 902
fraction are undeniably computed under United States law (Pet. App.
20a) and that the "accumulated profits" in the denominator are "the
fund from which the dividends are paid" (id. at 21a).  Therefore, the
court concluded, it would introduce an inconsistency that would impair
the proper functioning of the allocation formula if United States law
is not also used to compute the profits in the denominator (ibid.).

   Based on the legislative history, the Claims Court identified three
principal purposes of the Section 902 credit:  (1) to provide equal
treatment for unincorporated foreign branches and foreign
subsidiaries;  (2) to eliminate double taxation;  and (3) to limit the
allowable credit for foreign taxes paid by a subsidiary when only a
portion of its profits is distributed as a dividend.  Pet. App. 23a.
The court found that its interpretation "effectuates congressional
intent" (ibid.) in furthering these policies, whereas respondent's
interpretation would frustrate them.  In particular, the court
rejected respondent's contention that defining "accumulated profits"
in terms of United States law would lead to double taxation in this
case.  The court explained that the relatively small credit that
respondent receives under the court's interpretation is a direct
result of the fact that its subsidiary paid very little British income
tax for 1970 and 1971.  Id. at 24a.  The court concluded (ibid.):  "To
not recognize this fact as (respondent) urges would eviscerate the
very purpose of the pro-rata credit and permit (respondent) a
substantial windfall in avoiding other taxes with the phantom taxes
deemed paid."

   Finally, the court found that its holding was supported by the
longstanding administrative construction embodied in Treas. Reg.
Section 1.902-3(c)(1) (1971 ed.).  That regulation explicitly defines
the phrase "accumulated profits" in Section 902 in terms of "earnings
and profits," which are the source of dividends under Section 316 of
the Code and which are computed under United States law.  The court
concluded that this administrative construction is "consistent with
the purposes enunciated by Congress when enacting the indirect tax
credit legislation" (Pet. App. 26a).

   4. The court of appeals reversed (Pet. App. 1a-8a).  The court held
that the "plain meaning" of Section 902 requires the conclusion that
"accumulated profits" be determined by applying the tax law of the
foreign country (id. at 6a).  The court stated that the text of
Section 902(a)(1) describes the creditable foreign taxes as those paid
"on or with respect to the accumulated profits of such foreign
corporation," and that Section 902(c) uses similar language (Pet. App.
5a (quoting the 1982 version of Section 902) (emphasis omitted)).  The
court concluded from this phrasing that "accumulated profits" must be
"the actual basis on which the foreign sovereign assesses tax
liability," i.e., foreign taxable income as determined by foreign
revenue laws (id. at 6a).  The court also concluded that its
interpretation is necessary to implement the statutory goal of
preventing double taxation, stating that determining "accumulated
profits" under United States law would defeat this goal by "severing
the relationship" between the foreign taxes paid by the subsidiary and
the accumulated profits with respect to which those taxes are paid
(ibid.).  The court rejected the Tax Court precedent relied upon by
the Claims Court as "fail(ing) to address the controversy raised in
the instant case" (id. at 7a), and it did not discuss at all the
Treasury Regulation that defines "accumulated profits" under Section
902 in terms of "earnings and profits."

                          SUMMARY OF ARGUMENT

   A. The basic function and purpose of Section 902 are to avoid
double taxation by allowing the domestic parent of a foreign
subsidiary a foreign tax credit on its United States income tax
return.  This indirect credit is designed to reflect the foreign tax
already paid by the subsidiary on the portion of its income that is
distributed as a dividend to the parent.  When all of the income of
the subsidiary is so distributed, the parent should be entitled to a
credit for all of the foreign tax paid.  When only a portion is so
distributed, however, and the rest is retained by the subsidiary as
surplus, the Section 902 apportionment formula is intended to limit
the credit to the portion of the foreign tax paid that is attributable
to the distributed earnings -- those "paid * * * out of accumulated
profits." For this apportionment to work properly, the statutory ratio
("dividends" to "accumulated profits" less foreign taxes) must reflect
the ratio between the actual dividends paid and the pool of potential
dividends, i.e., the maximum earnings of the foreign subsidiary that
would be taxed as dividends if distributed to the parent.

   Dividends are defined as distributions paid out of "earnings and
profits," and it is well settled that the term "earnings and profits"
is defined by principles of United States law (see I.R.C. Sections
312, 316).  Therefore, the pool of potential dividends contained in
the Section 902 apportionment formula (i.e., "accumulated profits")
must be defined in terms of United States tax principles.  Indeed, the
unworkability of the Section 902 apportionment formula under the court
of appeals' interpretation is further shown by the fact that, if
"accumulated profits" are defined in terms of foreign law principles
to be higher than under United States rules, the parent typically
would not be allowed the full credit in cases where the subsidiary
distributes its entire pool of potential dividends.  In short, the use
of United States law to determine "accumulated profits" is required to
correlate the numerator of the Section 902 fraction (the actual
dividends) with the denominator of the fraction (the potential
dividends), thereby providing a coherent ratio by which to determine
the foreign tax that relates to the distributed portion of the
subsidiary's total earnings.

   B. One of the dominant concerns motivating Congress in its
enactment, and later revisions, of the indirect credit of Section 902
has been the desire to provide domestic corporations that operate
through a separately incorporated foreign subsidiary with the same
relief from double taxation as is provided to companies with an
unincorporated foreign branch.  That statutory policy would be
seriously undermined by the interpretation of the court of appeals.  A
foreign branch has no separate tax status and therefore a domestic
company with a foreign branch is required to report all of the
branch's income on its United States tax return.  It is then granted a
"direct" credit by Section 901 for foreign taxes paid with respect to
that income.  Foreign concepts of taxable income have no bearing on
whether the earnings of the branch are recognized on the return of the
domestic "parent";  those earnings, like any other earnings of the
parent, are included in its income according to United States
principles of taxation.  To maintain the tax treatment of the two
types of business arrangements on an equal footing, the accumulated
profits of a foreign subsidiary must approximate the income that would
be reported by the parent were it conducting operations through a
branch.  Otherwise, the two arrangements will yield different
treatment even where a subsidiary distributes all of its available
earnings and profits as a dividend (which is essentially equivalent to
the direct attribution of income to the domestic company in the branch
situation).  Thus, the "accumulated profits" of a foreign subsidiary
must be computed under United States law, just like the income of a
foreign branch.

   C. The Treasury has consistently ruled that "accumulated profits"
in Section 902 are computed according to United States tax principles.
 This reading of the statute was first contained in a ruling issued in
1933, and it was embodied in a formal regulation in 1965.
Considerable deference is due to this longstanding administrative
interpretation, which also has been approved by the Tax Court for many
years and by Congress when it amended Section 902 in 1986.  Moreover,
this interpretation accords with the general principle that, in the
absence of an express indication to the contrary, Congress intended
that provisions of the Internal Revenue Code would be construed under
United States law rather than under unfamiliar and highly variable
concepts of foreign law.  See Biddle v. Commissioner, 302 U.S. 573
(1938).

   D. The court of appeals' reliance on the "plain meaning" of Section
902 is erroneous.  The clause on which the court rested its analysis
was designed to make clear that the foreign taxes that are the
starting point for computing the credit are those paid with respect to
the income of the subsidiary actually available for distribution as
dividends.  Thus, this clause suggests that "accumulated profits"
should accord with "earnings and profits," which are defined in terms
of United States law.  Moreover, the statutory phrase "dividends * * *
paid * * * out of accumulated profits" also suggests identification of
the term "accumulated profits" with the pool of potential dividends
determined under United States law.  Accordingly, there is no "plain
meaning" of Section 902 that supports the court of appeals'
interpretation.

   Nor does that interpretation advance the statutory policy of
preventing double taxation.  The fact that respondent's credit on its
1970 and 1971 tax returns is reduced when "accumulated profits" are
determined under United States law is a logical consequence of the
fact that respondent's subsidiary paid little foreign tax in those
years as a result of the loss and carryback available only under
British law.  Because most of the "earnings and profits" distributed
by the subsidiary had escaped British tax owing to the loss carryback,
they were taxed for the first time, not the second, when included in
respondent's United States income.  By contrast, respondent seeks a
substantial windfall through ignoring these untaxed profits and
instead treating the dividends in question as distributions of profits
earned in prior years when the subsidiary paid higher taxes to Britain
-- profits that had yet to be distributed to respondent under the
principles of Sections 312 and 316 of the Code.

                               ARGUMENT

   THE TERM "ACCUMULATED PROFITS" IN SECTION 902 OF THE CODE MEANS
INCOME OR PROFITS AS DEFINED BY THE TAX LAW OF THE UNITED STATES, NOT
AS DEFINED BY THE TAX LAW OF A FOREIGN COUNTRY

   Section 902 of the Code specifies the amount that a United States
corporation may credit against its United States income tax for
foreign taxes paid by its subsidiary.  The court of appeals in this
case held that the term "accumulated profits" in that provision of the
United States tax laws must be defined in terms of the tax law of the
foreign country.  This counterintuitive conclusion -- reached without
any recognition by the court of its inconsistency with a longstanding
administrative interpretation and a Treasury Regulation directly in
point -- is antithetical to the basic design of the statute and
undermines its purposes.

   Section 902 computes the allowable foreign tax credit by allocating
the foreign tax paid to the portion of the foreign-sourced income that
is being reported on the United States income tax return.  This
allocation is based on the ratio between the dividends received by the
domestic parent and the "accumulated profits" of the subsidiary from
which the dividends are paid.  The amount of "dividends" to be
included in the income of the United States parent is determined by
United States tax law;  it depends in the first instance upon the
existence and amount of the subsidiary's "earnings and profits" as
determined by Section 312 of the Code, and then upon the extent to
which the distribution was paid out of those "earnings and profits" as
determined under Section 316.  The logic of the statutory allocation
formula is destroyed, however, if United States law is used to measure
the dividends, but foreign law is used to compute the "accumulated
profits" of the subsidiary out of which the dividends are paid;
moreover, the use of such an unbalanced ratio would lead to irrational
results and disparities not intended by Congress.

   The decision below also undermines the statutory goal of avoiding
discrimination between domestic companies that operate abroad through
unincorporated foreign branches and those that operate through
separately incorporated foreign subsidiaries.  Since the profits of a
foreign branch are determined under United States law, the accumulated
profits of a foreign subsidiary must be similarly computed in order to
provide the domestic companies with the same relief from double
taxation regardless of the manner in which they operate their foreign
business.  Thus, the decision of the court of appeals is erroneous and
would significantly disrupt the proper operation of the foreign tax
credit provisions of the Internal Revenue Code.

   A. Because The Dividends Taken Into The Income Of The United States
Parent Are Defined In Terms Of United States Tax Principles, The Term
"Accumulated Profits" In Section 902 Must Also Be Defined In Terms Of
United States Law In Order To Make The Statutory Allocation Formula
Coherent

   1. "Accumulated Profits" Describes the Fund out of Which the
Dividends Reported as United States Income Are Paid

   The term "accumulated profits" was introduced into the ratio for
computing the indirect foreign tax credit by Section 238(e) of the
Revenue Act of 1921, ch. 136, 42 Stat. 259.  This Act was designed to
correct a major flaw in the original indirect foreign tax credit
provisions contained in Section 240(c) of the Revenue Act of 1918, ch.
18, 40 Stat. 1082.  The 1918 statute computed the credit based on the
ratio of the dividends received by the domestic company to the foreign
subsidiary's "total taxable income" for that year.  This provision
failed to achieve its purpose of relieving double taxation in cases
where the profits of a foreign subsidiary were distributed in a
different year from that in which they were earned.  For example, if
the subsidiary made no profit and paid no foreign tax for a particular
year, yet issued a dividend out of surplus accumulated during a prior
year for which it had paid a foreign tax, the 1918 statute would not
have allowed any credit because there was no foreign tax paid in the
year of the distribution.  The statute contained no mechanism to
attribute or "source" the dividend to the prior year's accumulated
earnings or to provide a credit for tax paid in other years on the
profits that were the source of the dividend.  As this Court explained
in American Chicle Co. v. United States, 316 U.S. 450, 453 (1942),
"(t)he difficulty with (the statute) was that it did not relate the
credit to the accumulated profits or surplus of the subsidiary out of
which the dividends were paid" (emphasis added).

   Thus, in amending the statute in 1921, Congress needed to describe
the total earnings of the foreign corporation, past and current, which
are the source from which dividends can be declared, and then to allow
a credit for the foreign taxes already paid upon the distributed
portion of those earnings.  To accomplish this, Congress chose the
term "accumulated profits," an ordinary accounting term that includes
earnings of prior years as well as current earnings, and substituted
it for "total taxable income" throughout the statute.  As a result,
the amended provision described the creditable foreign taxes as those
"paid * * * upon or with respect to the accumulated profits * * * from
which such dividends were paid," and it directed computation of the
credit by multiplying those foreign taxes by the ratio of the
"dividends" to the "accumulated profits." Sec. 238(e), 42 Stat. 259.
The statute thus established a two-step process for determining the
allowable credit:  first, the maximum credit is fixed by ascertaining
the foreign taxes paid upon the pool of profits that are the potential
source of dividends;  second, the allowable credit is limited to the
proportion of the maximum credit that the dividends actually
distributed bear to the total pool of profits.  /6/ The result of this
process is a credit in the amount appropriate to prevent double
taxation of the dividends received.  In the words of this Court, the
statute was designed "to permit identification of the accumulated
profits of each taxable year out of which the dividend might have been
paid and to give credit for a proportion of the subsidiary's taxes
attributable to such accumulated profits." American Chicle Co. v.
United States, 316 U.S. at 454.

   The essential features of the 1921 statute have been carried
forward into the foreign tax credit provisions of Section 902
applicable here.  The statute permits a domestic company to claim a
prorated credit with respect to dividends received from a foreign
subsidiary "to the extent such dividends are paid by such foreign
corporation out of accumulated profits" (I.R.C. Section 902(a)(1)).
The basic apportioning fraction remains the ratio of "dividends" to
"accumulated profits," and the accumulated profits continue to
represent the fund of earnings, current and historic, from which the
dividends are paid.  As the Tax Court explained in H.H. Robertson Co.
v. Commissioner, 59 T.C. 53 (1972), aff'd, 500 F.2d 1399 (3d Cir.
1974), the credit is allowed "in respect of foreign taxes paid on the
'accumulated profits' of a particular year to the extent that
dividends are paid 'out of' the accumulated profits of such year" (59
T.C. at 87-88).  The statute thus designates the accumulated profits
as the "source" of the distributions by the subsidiary that are taxed
in the United States as dividends to the parent (see id. at 87 n.19).

   2. The Apportionment Formula of Section 902 is Incongruous unless
"Accumulated Profits," like Dividends, Are Determined under Principles
of United States Law

   Section 316 of the Code provides that distributions to shareholders
from a corporation's "earnings and profits" are "dividends";  if a
distribution exceeds the available "earnings and profits," however,
the excess is not a dividend but rather a return of capital (I.R.C.
Section 301(c)).  Section 312 of the Code, in turn, provides a
detailed set of rules that govern the computation of "earnings and
profits." /7/ When a foreign subsidiary makes a distribution to its
domestic parent, as in this case, it is fundamental that these
provisions of United States law apply to the earnings and profits of
the foreign corporation to determine the extent to which that
distribution is to be treated as a "dividend" to the parent for United
States tax purposes.  /8/ See, e.g., Untermyer v. Commissioner, 24
B.T.A. 906 (1931), aff'd, 59 F.2d 1004 (2d Cir.), cert. denied, 287
U.S. 647 (1932).

   It is similarly clear that the term "dividend" in Section 902 must
be defined in the same manner, i.e., that the amount of the dividend
used in the apportionment formula is the same as that reported by the
parent as dividend income under the rules of Sections 312 and 316.
See Treas. Reg. Section 1.902-1(a)(6);  see also, e.g., H.H. Robertson
Co. v. Commissioner, 59 T.C. at 86;  Central Aguirre Sugar Co. v.
Commissioner, 24 T.C. 630, 636-638 (1955);  National Carbon Co. v.
Commissioner, 2 T.C. 57, 61 (1943).  The intent of the indirect credit
is to prevent double taxation of the "dividends" that the domestic
parent receives from the subsidiary and must treat as taxable on its
United States return.  Therefore, the foreign tax must be apportioned
to the domestic parent based on the amount of those dividends.  This
can be accomplished only if the term "dividends" in the numerator of
the Section 902 fraction has the meaning assigned to it by Section 316
of the Code, which depends on the corporation's "earnings and
profits." In sum, the phrase "dividends * * * paid * * * out of
accumulated profits," which describes the numerator of the
apportionment fraction in Section 902(a)(1), must be read in the same
way as the phrase "distribution of property * * * out of its earnings
and profits" in Section 316;  it is defined solely in terms of United
States law.

   The Claims Court thus correctly concluded that the use of foreign
law to define accumulated profits would destroy the "(a)lgebraic
consistency" of Section 902 (Pet. App. 21a) and would prevent the
statute from working properly to eliminate double taxation.  As we
have explained, the concept of "accumulated profits" was introduced
into the predecessor of Section 902 to represent the source of the
dividend payments that are being subjected to United States income
taxation.  Thus, the "accumulated profits" in the denominator of the
Section 902 fraction, like "earnings and profits," simply represent
the fund of earnings, past and present, out of which the dividends are
paid.  The total accumulated profits form a pool of potential
dividends, i.e., the maximum earnings of the subsidiary that would be
taxed as dividends if distributed to the parent.  The allocation
formula is designed to limit the credit according to the proportion of
those total profits that are actually distributed as dividends.  Just
as United States tax principles determine whether the subsidiary's
actual distribution is taxed as a dividend in the hands of the parent,
so too United States tax principles must determine what is the maximum
amount of the subsidiary's earnings that could be distributed as a
dividend, i.e., the "accumulated profits." It is therefore necessary
that "accumulated profits" be determined under principles of United
States law in order to correlate the numerator of the Section 902
fraction (the actual dividends) with its denominator (the potential
dividends), and thereby provide a coherent ratio by which to compute
the share of foreign tax that relates to the distributed portion of
the subsidiary's total income.

   The ways in which the court of appeals' interpretation of Section
902 would disrupt -- indeed, distort -- the proper functioning of the
credit can be illustrated by the simple examples provided above (see
note 3, supra).  If the foreign subsidiary earns $100 of profit for
the taxable year (as determined under the Internal Revenue Code), pays
foreign tax of $20 for the year, and distributes its net profit of $80
to its domestic parent as a dividend, the parent is entitled to the
full $20 credit ($20 x $80/($100-$20)).  This result is obviously
correct;  when the subsidiary distributes to the parent all of the
funds available for dividends, i.e., its entire net profit, the parent
should be entitled to a credit for all of the foreign taxes paid.
This result is achieved, however, only if "accumulated profits" are
defined under United States law.  If, on the same facts, the foreign
country does not allow an $80 deduction that is permitted by United
States law and therefore the "accumulated profits" determined under
foreign law would be $180, application of the court of appeals'
interpretation would halve the parent's credit to $10 ($20 x
$80/($180-$20)), even though the parent took into income 100% of the
amount of earnings available for distribution as a dividend.
Similarly, if the foreign country allows a $40 deduction that is not
allowed by United States law and if the subsidiary distributes only
$40, the parent would be entitled to the full amount of the available
credit ($20 x $40/($60-$20)), even though it received (and was being
taxed upon) only half of the subsidiary's net earnings available for
dividend distribution with respect to that year's operations.  Thus,
the court of appeals' approach, in attempting to apportion the credit
without consideration of the fund of potential dividends out of which
the distribution is made, would reintroduce the very kind of
"eccentric results" that the 1921 legislation was designed to
eliminate (see American Chicle Co. v. United States, 316 U.S. at 453).
 /9/

   The above analysis is supported by this Court's holding in American
Chicle itself.  The Court there construed the very phrase upon which
the court of appeals relied (see Pet. App. 6a) -- taxes "paid * * *
with respect to the accumulated profits" of the subsidiary (see 316
U.S. at 451).  At that time, the predecessor of Section 902 defined
"accumulated profits" as after-tax profits.  The question presented
was not the meaning of that term, but rather the meaning of the entire
"taxes paid" clause -- whether the foreign tax that is the starting
point for computing the credit should be the total tax paid on the
subsidiary's pre-tax profits or instead a smaller amount reflecting
the proportion of total tax attributable to the after-tax profits.
The Court agreed with the government that Congress had intended the
latter result.  /10/ The Court explained (id. at 452-453):

         If, as is admitted, the purpose is to avoid double taxation,
      the statute, as written, accomplishes that result.  The parent
      receives dividends.  Such dividends, not its subsidiary's
      profits, constitute its income to be returned for taxation.  The
      subsidiary pays tax on, or in respect of, its entire profits;
      but, since the parent receives distributions out of what is left
      after payment of the foreign tax, -- that is, out of what the
      statute calls "accumulated profits," it should receive a credit
      only for so much of the foreign tax paid as relates to or, as
      the Act says, is paid upon, or with respect to, the accumulated
      profits.

   The lesson of American Chicle is that the benchmark for computing
the prorated Section 902 credit is the maximum amount of the
subsidiary's earnings available for distribution as dividends.
Amounts that are not available for distribution as dividends are not
relevant in making the proration.  Thus, in American Chicle, the
amount of the subsidiary's earnings paid as foreign taxes would never
be available for distribution as dividends;  hence, the amount of
foreign tax attributable to those earnings was not creditable.
Correspondingly here, the amount of the subsidiary's income computed
under foreign law principles does not define the maximum amount
available for distribution as a dividend.  To the extent the income
under foreign law differs from that calculated under United States
law, the difference has no bearing on the maximum amount of earnings
that would be taxed as a dividend upon distribution to the parent in
the United States.  It is that figure, the "earnings and profits" of
the subsidiary as computed under United States law, that logically
must be the point of reference for determining the allowable portion
of the credit.  /11/

   In sum, the statutory design is that the allowable credit shall be
the proportion of the foreign tax that the dividends actually received
bear to the potential dividends.  That approach confines the credit to
the amount necessary to prevent double taxation.  It can be
implemented only if "accumulated profits" are computed under United
States law so that they equal the fund of potential dividends out of
which the actual dividends are paid.

   B. The Court of Appeals' Interpretation Undermines The Statutory
Policy Of Providing The Same Relief From Double Taxation For Domestic
Companies That Operate Through Foreign Subsidiaries As Is Provided To
Those That Operate Through Foreign Branches

   1. One of the major concerns that pervades the foreign tax credit
provisions is the desire to provide domestic companies, like
respondent, that operate their foreign businesses through separately
incorporated foreign subsidiaries with the same relief from double
taxation that is provided to companies that operate through
unincorporated foreign branches.  A foreign branch is simply a part of
the larger domestic company;  it is not a separate taxable entity.
Therefore, all of its income earned in a foreign country is
automatically income to the larger domestic company and is subject to
taxation on its United States income tax return.  Since 1918, the
domestic company has been entitled to take a credit against its United
States income tax for the foreign income taxes paid by its branch.
See Revenue Act of 1918, ch. 18, Section 238(a), 40 Stat. 1080.  This
is the "direct" credit that is now contained in Section 901 of the
Code.

   The "indirect" credit of Section 902 at issue here is necessary to
prevent companies that operate through foreign subsidiaries from being
placed at a relative disadvantage to their counterparts that operate
through foreign branches.  The domestic parent of a foreign subsidiary
cannot take any direct credit for foreign taxes under Section 901
because it does not pay any foreign tax;  rather, the tax is paid by
its foreign subsidiary, which is a separate entity for tax purposes.
Section 902 allows the domestic parent to take an apportioned credit
for those foreign taxes as if it had paid them itself.  The
apportionment aspect of Section 902 is necessary to prevent companies
that operate through foreign subsidiaries from gaining an advantage
over their counterparts that operate through foreign branches.  When
the subsidiary does not distribute all of its earnings to the domestic
parent, then allowing the parent a credit for the full amount of the
foreign tax paid would overcompensate for the possibility of double
taxation and would provide a tax benefit that is not available to
companies that operate through foreign branches.  Thus, the
apportionment formula of Section 902 is designed to limit the
allowable indirect credit to the amount of foreign tax that was paid
on the earnings actually distributed to the parent.  See generally
Burnet v. Chicago Portrait Co., 285 U.S. 1, 7-10 (1932).

   The legislative history of the foreign tax credit provisions
demonstrates Congress's fundamental and continued concern that the
statute promote equality of treatment of the two forms of conducting
business abroad.  In connection with the 1921 legislation that
introduced the term "accumulated profits" into the ratio for computing
the indirect credit, a spokesman for the Treasury explained that an
American corporation with a foreign subsidiary is, "economically and
practically," in much the same position as a domestic business with a
foreign branch and "(t)he proposal is to give this American
corporation about the same credit as if conducting a branch" (Internal
Revenue:  Hearings on H.R. 8245 before the Senate Comm. on Finance,
67th Cong., 1st Sess. 389 (1921) (statement of Dr. Adams)).  See also
Associated Telephone & Telegraph Co. v. United States, 306 F.2d 824,
832 (2d Cir. 1962), cert. denied, 371 U.S. 950 (1963).  Senator Smoot,
the sponsor of the legislation, echoed these sentiments on the floor
of Congress, explaining how the mechanism of a prorated credit would
operate to achieve parity of tax treatment between the two forms of
operating foreign business.  See 61 Cong. Rec. 7184 (1921).  /12/

   Subsequent amendments to the foreign tax credit provisions have
also been specifically intended to further the goal of providing the
same relief from possible double taxation for both modes of conducting
foreign business.  In the Revenue Act of 1962, Congress amended
Section 902 and added Section 78 of the Code, which requires domestic
companies to "gross up" (include in income) the foreign tax paid by
the subsidiary (see note 10, supra).  The purpose of this change was
to eliminate a tax advantage enjoyed by a subsidiary operation over a
branch operation.  See S. Rep. No. 1881, 87th Cong., 2d Sess. 66-67
(1962);  see also B. Bittker & J. Eustice, Federal Income Taxation of
Corporations and Shareholders, Paragraph 17.11, at 17-45 to 17-47 (5th
ed. 1987) (emphasis deleted) (1962 amendment "attacked * * *
preference for the use of foreign subsidiaries" and "equalize(d) the
treatment of foreign subsidiaries and unincorporated branches with
respect to the foreign tax credit for the distributed earnings of the
subsidiary").  /13/ In the Tax Reform Act of 1986, Congress made
additional changes in the indirect credit provisions (see note 17,
infra);  one reason given for some of these changes was the desire "to
provide more similar results" for branch and subsidiary operations.
See S. Rep. No. 313, 99th Cong., 2d Sess. 306 (1986).

   2. The decision of the court of appeals undermines this
congressional policy by introducing major disparities in the treatment
of companies depending upon whether they operate through subsidiaries
or branches.  Foreign concepts of taxable income play no role in
determining whether the earnings of a foreign branch constitute income
in the hands of the domestic owner;  those earnings flow directly to
the owner and are recognized according to United States tax
principles.  As noted by Senator Smoot in explaining the 1921
amendment on the floor of the Senate (see note 12, supra), "(i)f the
American corporation owned a foreign branch, it would include the
earnings or profits of such branch in its total income" (61 Cong. Rec.
7184 (1921)).  If the apportionment formula is to serve its purpose of
avoiding disparities between the two kinds of business arrangements
when a subsidiary distributes only a portion of its earnings, the
"accumulated profits" of a foreign subsidiary must approximate the
taxable income that would be recognized by the parent if it were
operating as a branch.  Otherwise, a distribution of all of the
subsidiary's earnings and profits, which is equivalent to what always
occurs in a branch operation, will not yield the same tax treatment
for both forms of business.  By the same token, unless the point of
reference for the apportionment, i.e., the total pool of earnings that
potentially could be distributed by the subsidiary, is correlated with
the income that would be recognized if the business were organized as
a branch, the fractional credit computed under Section 902 will not
apportion the credit so as to provide the same relief from double
taxation to companies that operate through subsidiaries.  This means
that the "accumulated earnings" must be computed under United States
law, just like the income received by the domestic owner of a foreign
branch.

   The necessity for accumulated profits to be based upon principles
of United States law may be illustrated by the basic example provided
earlier (p. 22, supra), where the foreign entity pays $20 in foreign
tax on profits computed at $100 under United States law and $180 under
foreign law.  A foreign branch would be treated as having funneled all
of its profits (which would be $100 under United States law) to the
domestic company, and it would receive the full $20 "direct" credit
under Section 901.  If the same business were conducted by a foreign
subsidiary, however, and the subsidiary distributed all of its $80 in
after-tax profits to the parent, computation of accumulated profits
under foreign law would limit the parent to a credit for only half of
the foreign taxes paid ($20 x $80/($180 - $20) = $10).  This result is
clearly incorrect under the statute because a domestic parent that
receives a dividend distribution of all of the subsidiary's earnings
should receive the same credit as if it operated its foreign business
through a branch.  Computing the accumulated profits of the subsidiary
under United States law, conversely, would yield the correct result of
the same credit available to the branch ($20 x $80/($100 - $20) =
$20).

   In this example, the foreign measure of income is higher than that
of the United States, and therefore the result under the court of
appeals' approach is to understate the credit to the disadvantage of
the company operating through a subsidiary.  If, as in the present
case, the foreign definition of income yields a figure lower than that
computed under United States law, the allowable credit under the
court's approach will correspondingly be greater, thereby conferring a
comparative advantage on the company that operates through a
subsidiary.  In both cases, however, the court of appeals' approach
subverts the clearly expressed legislative policy to avoid
discrimination between the two methods of doing business abroad.

   In sum, like the direct credit granted to a domestic company with a
foreign branch, the indirect credit of Section 902 treats the amount
of foreign tax paid as a fact.  It is not concerned with how the
foreign tax is computed or with the foreign income base on which the
tax is imposed.  It simply takes the amount of foreign tax paid and
apportions it in accordance with the fractional share of the
subsidiary's "accumulated profits" that is actually distributed as a
dividend.  To make the credit work properly, and to ensure parity of
treatment with companies that operate through a foreign branch, the
term "accumulated profits" in Section 902 must refer to the pool of
earnings available for distribution as income to the parent -- i.e.,
earnings computed under principles of United States taxation.

   C. The Court of Appeals' Decision Erroneously Overturns The
Longstanding Administrative And Judicial Construction Of Section 902

   1. For more than 50 years, the Treasury has uniformly interpreted
the term "accumulated profits" in Section 902 and its predecessors to
mean income or profits as defined under principles of United States
taxation.  In 1933, the Commissioner declared that "the amount of the
accumulated profits" is "based as a fundamental principle upon all
income of the foreign corporation available for distribution to its
shareholders, whether such profits be taxable by the foreign country
or not." I.T. 2676, XII-1 C.B. 48, 50 (1933) (emphasis added).
Accordingly, he ruled that deductions and credits allowed by foreign
countries as offsets to taxable income, but not allowed as deductions
under United States tax laws, do not reduce accumulated profits for
purposes of the Section 902 credit because they "in no way reduce
distributable income or surplus" (id. at 51).  The inventory
adjustments and accelerated depreciation that respondent's subsidiary
claimed under British law fall squarely within the category of special
deductions not permitted under United States law that, according to
the ruling, do not decrease accumulated profits.  The position of the
Treasury in this case is therefore identical to the one it announced
in 1933.

   Since the publication of the 1933 ruling, the Treasury has
consistently followed the principle that "accumulated profits" are
determined by United States law.  This position was embodied in a
formal regulation in 1965, Treas. Reg. Section 1.902-3(c)(1) (1965)
(now codified at Treas. Reg. Section 1.902-1(e)), which defined the
accumulated profits of a foreign subsidiary for a taxable year as "the
sum of (i) the earnings and profits of such corporation for such year,
and (ii) the foreign income taxes imposed on or with respect to the
gains, profits and income to which such earnings and profits are
attributable" (emphasis added).  "Earnings and profits" is an
established term that represents the source of payments treated as
dividends under Section 316 of the Code, and there is no doubt that
its calculation depends upon the rules for determining United States
taxable income.  See pp. 18-19, supra;  I.R.C. Section 312;  B.
Bittker & J. Eustice, supra, Paragraph 7.03.  In Rev. Rul. 63-6,
1963-1 C.B. 126, 128, the Commissioner explained the rationale for
basing the calculation of "accumulated profits" under Section 902 upon
the concept of "earnings and profits" as defined by Section 316 --
namely, that the term "dividends" has the same meaning in both
sections and "both 'accumulated profits' and 'earnings and profits'
denote the same source from which 'dividends' are paid." The
Commissioner has consistently adhered to this position.  See Rev. Rul.
74-310, 1974-2 C.B. 205;  Rev. Rul. 87-14, 1987-1 C.B. 181;  Rev. Rul.
87-72, 1987-2 C.B. 170.  /14/

   This Court has repeatedly held that interpretive rules and
regulations promulgated by the Commissioner, "if found to 'implement
the congressional mandate in some reasonable manner,' must be upheld."
National Muffler Dealers Assn. v. United States, 440 U.S. 472, 476
(1979) (quoting United States v. Cartwright, 411 U.S. 546, 550
(1973));  see also, e.g., Commissioner v. South Texas Lumber Co., 333
U.S. 496, 501 (1948);  Commissioner v. Wheeler, 324 U.S. 542, 546
(1945).  Regulations carry particular force if they have been
consistently followed by the Commissioner for many years, so long as
they are harmonious with the governing statute.  See 440 U.S. at 477;
United States v. Correll, 389 U.S. 299, 305-306 (1967) (quoting
Helvering v. Winmill, 305 U.S. 79, 83 (1938)) ("Treasury regulations
and interpretations long continued without substantial change,
applying to unamended or substantially reenacted statutes, are deemed
to have received congressional approval and have the effect of law.").
 Here, the regulation defining accumulated profits with reference to
United States concepts of taxation reflects a position first announced
by the Treasury more than 55 years ago and adhered to consistently
ever since.  Moreover, as the Claims Court correctly stated, "(t)he
regulation is consistent with the purposes enunciated by Congress when
enacting the indirect tax credit legislation" (Pet. App. 26a).
Accordingly, the Treasury's longstanding interpretation of
"accumulated profits" in Section 902 is entitled to substantial
deference.

   2. Although this established administrative position has, for the
most part, not been challenged in litigation, it has been approved by
the Tax Court on two occasions.  Steel Improvement & Forge Co. v.
Commissioner, 36 T.C. 265, 276-282 (1961), rev'd on other grounds, 314
F.2d 96 (6th Cir. 1963), is directly in point.  There, a domestic
corporation received dividends from a foreign subsidiary in 1953 and
1954 that were covered by the subsidiary's accumulated profits for the
years of the distributions.  The subsidiary reported a loss on its
foreign tax return for a later year, however, and it carried back the
loss to reduce its income for 1953 and 1954, thereby generating a
refund of all the foreign tax paid for those years.  For purposes of
computing the parent's indirect foreign tax credit, the Commissioner
recognized the refund and treated the subsidiary as having paid no
creditable foreign tax in 1953 and 1954 (see I.R.C. Section 905(c)).
Because the loss and carryback were allowable only under the tax law
of the foreign country, however, the Commissioner did not decrease the
subsidiary's "accumulated profits," reasoning that they must be
computed under principles of United States taxation.  Thus, he
continued to treat the dividends as covered by the accumulated profits
of the years in which they were distributed, and, because no
creditable foreign tax was paid for those years, he did not allow any
foreign tax credit on the taxpayer's United States income tax returns
for 1953 and 1954.  The Tax Court upheld the Commissioner's position
in a reviewed decision, stating that "the accumulated earnings and
profits from which the dividends are paid are to be determined under
American rather than foreign law" (36 T.C. at 277).

   The Tax Court reaffirmed this holding in Champion International
Corp. v. Commissioner, 81 T.C. 424 (1983).  The foreign subsidiary in
that case, unlike the subsidiary in Steel Improvement and respondent's
subsidiary, sustained a loss that could be carried back under both
United States law and the tax law of the foreign country.  The
question in the case was the year in which the loss should be
recognized for purposes of computing "accumulated profits." In
permitting the carryback sought by the taxpayer, the Tax Court noted
that "(t)he accumulated profits in the denominator (of the Section 902
fraction) represent the fund from which the dividends were paid and
must be determined in accordance with U.S. law" (81 T.C. at 433;  see
also id. at 431).  The court discussed Steel Improvement at length and
specifically approved its holding (id. at 446-447), stating
unequivocally that "(a)ccumulated profits are determined under
American law rather than foreign law" (id. at 447).  /15/

   Numerous texts and commentaries on the foreign tax credit likewise
have concluded that accumulated profits must be computed under
principles of United States taxation.  /16/ And Congress, in the
course of amending the foreign tax credit provisions in other respects
in 1986, explicitly noted its recognition that, under existing law,
"accumulated profits * * * are generally calculated in accordance with
the principles governing the calculation of earnings and profits for
U.S. tax purposes" (S. Rep. No. 313, supra, at 299).  The Senate
Report cited Steel Improvement, Treas. Reg. Section 1.902-1(e), and
Rev. Rul. 63-6, supra, as evidencing this settled proposition (S. Rep.
No. 313, supra, at 299 n.6).  /17/ See also H.R. Conf. Rep. No. 861,
98th Cong., 2d Sess. 841 (1984) (for purposes of the "deemed paid"
credit, "accumulated profits are essentially equivalent to earnings
and profits").  Thus, the decision below clearly departs from "the
generally accepted view that (E & P) and accumulated profits are
computed in accordance with U.S. concepts * * *." Fuller, Section 902
Accumulated Profits:  The Federal Circuit Takes a Different View in
Goodyear, 17 Tax Mgmt. Int'l J. (BNA) 502, 503 (1988).

   3. This established interpretation of "accumulated profits" also
accords with the general principle concerning the construction of the
foreign tax credit provisions that was laid down by this Court in
Biddle v. Commissioner, 302 U.S. 573 (1938).  The Court there stated
that, because the subject matter of the Code is the computation of
United States income tax, it should be presumed that Congress intended
that "its own criteria" would be used to interpret the terms of the
statute (id. at 578).  The Court explained that this presumption could
be rebutted only if "the statute, by express language or necessary
implication, makes the meaning of the phrase * * * depend upon its
characterization by the foreign statutes" (ibid.).  Under this
principle, the Court in Biddle held that the phrase "income taxes paid
or accrued" in a predecessor to Section 901(b)(1) was to be
interpreted in accordance with United States tax law, finding "nothing
in (the statute's) language to suggest that in allowing the credit for
foreign tax payments, a shifting standard was adopted by reference to
foreign characterizations and classifications of tax legislation" (id.
at 578-579).

   There is similarly nothing in Section 902 to suggest that the
computation of accumulated profits for purposes of the indirect credit
should be made under the laws of a foreign country rather than under
the laws of the United States.  Under the heretofore settled rule, the
prorated credit is computed solely by reference to the familiar
principles of the Internal Revenue Code;  the vagaries of foreign tax
law play no role.  The court of appeals' approach, however, would
require that the court determine the taxpayer's accumulated profits
under the unfamiliar tax principles of various foreign jurisdictions,
which may be difficult to ascertain and may contain concepts of
profits and taxable income that are profoundly different from those of
the United States.  This imposition of a "shifting standard * * *
adopted by reference to foreign characterizations and classifications
of tax legislation" (302 U.S. at 578-579) would depart from the
teaching of Biddle and would create troublesome and unwarranted
interference with the proper administration of the statute.  /18/

   D. The Court Of Appeals' Interpretation Is Not Supported By Either
The Plain Meaning Of The Statute Or Its Policy Of Preventing Double
Taxation

   1. The court of appeals relied almost entirely on what it found to
be the "plain meaning" of Section 902 (Pet. App. 6a), without even
acknowledging the longstanding contrary administrative construction
that had been approved by the Tax Court and relied upon by the Claims
Court below.  Its holding rests on one phrase in Section 902 read in
isolation.  Because the statute refers to foreign taxes paid "on or
with respect to * * * accumulated profits" (Section 902(a)(1);  see
also Section 902(c)(1)), the court held that "accumulated profits"
must be defined as the "actual basis on which the foreign sovereign
assesses tax liability," i.e., taxable income as computed under
foreign law (Pet. App. 6a).  But this reasoning, which in any event
hardly represents a "plain meaning" construction, loses any semblance
of force when the entire statute is examined.

   The prefatory clause of Section 902(a)(1) refers to the "dividends
* * * paid by such foreign corporation out of accumulated profits."
Under the court of appeals' own reasoning, this language indicates
that the statutory "relationship" that must not be "sever(ed)" (see
Pet. App. 6a) is the one between the dividends received by the parent
(and subjected to United States income taxation) and the accumulated
profits out of which the dividends are paid.  As we have seen (pp.
18-19, supra), the Code specifies that payments are treated as
"dividends" to the extent that their source is "earnings and profits."
Hence, this clause of Section 902 essentially identifies "accumulated
profits" with "earnings and profits." Even the court of appeals
recognized "the undisputed and well-settled fact that 'the
determination of a foreign corporation's earnings and profits * * *,
for purposes of the imposition of the U.S. tax, is to be made by the
application of U.S. tax principles'" (Pet. App. 7a (quoting H.H.
Robertson Co. v. Commissioner, supra, 59 T.C. at 69)).  Thus, the
court of appeals' approach to parsing the statute is indeterminate;
depending upon which clause of Section 902(a)(1) is examined, it
points to the conclusion that "accumulated profits" are computed under
United States law at least as strongly as it suggests that foreign law
principles should be used.

   Moreover, even if one focuses narrowly on the "taxes paid" clause
on which the court of appeals relied, there is little support in the
text of the statute for the court of appeals' conclusion.  This is
precisely the phrase that this Court construed in American Chicle Co.
v. United States, supra.  As we have explained (see pp. 22-25, supra),
the teaching of that case is that this clause -- the "taxes paid * * *
on or with respect to the accumulated profits" -- limits the allowable
credit to the foreign tax attributable to the earnings of the
subsidiary that are available for distribution as dividends in the
United States.  The maximum amount of the subsidiary's earnings
available for distribution as a dividend depends upon the subsidiary's
"earnings and profits," a figure determined under United States law.
Thus, even the "taxes paid" clause, when construed in light of
American Chicle, supports the Commissioner's position that accumulated
profits are calculated under United States law.  /19/

   It is therefore apparent that the "plain meaning" of the statute
does not provide an adequate basis for the court of appeals' decision.
 Indeed, if any "plain meaning" can be gleaned from examination of the
statute alone, it is the meaning suggested by the general principle of
Biddle v. Commissioner, supra -- namely, that provisions of the
Internal Revenue Code governing the computation of domestic income
taxes are to be interpreted in accordance with United States law in
the absence of some express indication to the contrary.  The correct
meaning of "accumulated profits" must be derived from its context in
Section 902, taking into account the purposes of the statute and the
way in which the credit is designed to work.  That inquiry, as we have
shown, clearly demonstrates that the amount of "accumulated profits"
is to be determined in accordance with United States tax law.

   2. The court of appeals' belief that its interpretation would
promote the statutory goal of preventing double taxation (Pet. App.
6a-7a) is similarly unfounded.  The court's analysis rested in large
part on assuming the answer to the question presented;  once it had
concluded that the credit is correctly computed by determining
"accumulated profits" under foreign law, the court reasoned that the
higher amount of tax that respondent would owe if United States law
principles are used (see pp. 6-7 & note 5, supra) must reflect double
taxation.  The court summarized its analysis by stating that "the IRS
view inflates" the amount of accumulated profits, which would yield
"double taxation" because "tax payments already made to the foreign
country will not be fully recoverable as tax credits" (id. at 6a-7a).

   The court of appeals' analysis is misguided.  When accumulated
profits are determined under United States tax principles, the foreign
taxes paid by a subsidiary in a given year remain "fully recoverable"
when the profits for that year are fully distributed to the parent.
That respondent's correctly computed indirect tax credit on its 1970
and 1971 tax returns is smaller than the credit that would be computed
by defining accumulated profits under foreign law principles is not
the result of double taxation, but rather is the necessary and
appropriate consequence of the favorable tax treatment allowed to
respondent's subsidiary by British law.  Because British law permitted
a loss and carryback to 1970 and 1971 not available under United
States law, the subsidiary's profits for those years when computed
under United States law were much higher than under British law, and
the subsidiary paid no tax to Britain on those additional United
States profits.  Those profits computed under United States law were
sufficient to cover the dividends that the subsidiary distributed in
1970 and 1971, and the Commissioner accordingly "sourced" the
dividends to those profits for purposes of computing the Section 902
credit.  See Pet. App. 23a-24a.  Since the subsidiary paid no foreign
tax on the additional "United States profits," there was no danger
that those profits would be subject to double taxation when
distributed as dividends includable in respondent's United States
income.  Rather, those profits were taxed for the first time as income
by the United States.

   Under the statutory scheme, therefore, respondent is simply not
entitled to any foreign tax credit with respect to those additional
United States profits -- a manifestly reasonable result since its
subsidiary had paid no foreign tax upon them.  By contrast,
respondent's position would distort the credit by treating the
dividends in question as a distribution of profits earned in prior
years (1968 and 1969) when the subsidiary paid higher taxes to
Britain.  Obviously, respondent would secure a tax advantage if it
could treat the dividend as coming entirely from profits that had
previously been subject to foreign tax (thus necessitating a credit on
the United States return in order to avoid double taxation).  Nothing
in Section 902, however, entitles respondent to overlook the earnings
and profits of 1970 and 1971 that were not subjected to foreign
taxation.  Under the governing rules of Sections 312 and 316 of the
Code, the dividends received by respondent were paid out of the
subsidiary's 1970 and 1971 profits;  the 1968 and 1969 profits were
not distributed to respondent.  Thus, respondent seeks a credit for
foreign taxes paid with respect to undistributed profits.  Because the
basic function of the statute's apportioning fraction is to grant a
credit only for profits distributed as dividends to the United States
parent, not for profits retained by the foreign subsidiary as surplus,
the Claims Court correctly described respondent's position as seeking
"a substantial windfall" that would "eviscerate the very purpose of
the pro-rata credit" (Pet. App. 24a).

                              CONCLUSION

   The judgment of the court of appeals should be reversed.

   Respectfully submitted.

   KENNETH W. STARR

      Solicitor General

   SHIRLEY D. PETERSON

      Assistant Attorney General

   LAWRENCE G. WALLACE

      Deputy Solicitor General

   ALAN I. HOROWITZ

      Assistant to the Solicitor General

   ROBERT S. POMERANCE

   DAVID M. MOORE

      Attorneys

   JULY 1989

   /1/ Unless otherwise noted, all statutory references are to the
Internal Revenue Code of 1954 (26 U.S.C.), as in effect during 1970
and 1971, the years at issue (the Code or I.R.C.).

   /2/ The deduction for intercorporate dividends allowed by Section
243 of the Code is applicable only to dividends received from domestic
corporations.

   /3/ This Court described this equation in narrative form in
American Chicle, stating that the foreign taxes are multiplied by a
fraction, of which "(t)he numerator is the dividends received by the
parent (and) (t)he denominator is the 'accumulated profits' of the
subsidiary" (316 U.S. at 452);  the statute was later amended to
require the subtraction of foreign taxes from the denominator (see
note 10, infra).  The operation of the proportional credit can be
illustrated by some simple examples.  If a foreign subsidiary earns
$100 of profits, pays $20 in foreign income taxes and distributes the
remaining $80 to its parent as a dividend, the parent is entitled to
the full $20 credit ($20 X $80/($100 - $20)).  If, however, the
subsidiary distributes only $40 of its after-tax profits to its
parent, the allowable credit will be halved to $10 ($20 X $40/($100 -
$20)).  The allowable credit can also be affected by a change in the
denominator of the fraction.  If the subsidiary pays the same $20 in
foreign income taxes and distributes the same $80, but the
"accumulated profits" are determined in a different manner and found
to be $180, the allowable credit will also be halved to $10 ($20 X
$80/($180 - $20)).

   /4/ The statutory definition of "accumulated profits" does not
specifically address this question.  It defines the term for purposes
of Section 902 as "the amount of (the corporation's) gains, profits,
or income computed without reduction by the amount of the income * * *
taxes imposed on or with respect to such profits or income" (I.R.C.
Section 902(c)(1)).  The definition further provides that the
Commissioner has the "full power to determine from the accumulated
profits of what year or years such dividends were paid," generally
"treating dividends as having been paid from the most recently
accumulated gains, profits, or earnings" (ibid.).  The credit thus is
computed by considering the subsidiary's accumulated profits on an
annualized basis.  A dividend payment is allocated first to the
accumulated profits of the most recent year and then, if those profits
are insufficient to cover the amount of the dividend, to the profits
of the next most recent year, and so forth.  The credit is then
computed separately for each year to which the dividend is traced (or
"sourced") by multiplying the foreign income tax paid for that year by
the appropriate fraction.  The sum of those separate annual
computations yields the Section 902 credit for the particular
dividend.  See H.H. Robertson Co. v. Commissioner, 59 T.C. 53, 78-83
(1972), aff'd, 500 F.2d 1399 (3d Cir. 1974);  General Foods Corp. v.
Commissioner, 4 T.C. 209, 215 (1944).

   /5/ The tax advantage was achieved by respondent in two related
ways.  First, the reduction in accumulated profits in 1970
correspondingly increased the ratio of dividends to profits for that
year, thereby allowing respondent to take a credit for a higher
proportion of the 1970 British tax.  Second, because the accumulated
profits for 1971 were virtually eliminated, those profits were not
sufficient to cover the dividend paid in that year.  Accordingly,
under the annualization principle of Section 902 (see note 4, supra),
part of the 1971 dividend was attributed to profits earned in
preceding years going back to 1968.  Because the foreign taxes for
those years were much higher than the almost nonexistent tax of 1971,
respondent's allowable Section 902 credit was increased.  Pet. App.
23a-24a;  J.A. 30.

   /6/ As we have stated (see note 4, supra), this matching of the
dividends to the accumulated profits is done on a year-by-year basis.
The 1921 statute vested the Commissioner with full power "to determine
from the accumulated profits of what year or years such dividends were
paid," generally "treating dividends as having been paid from the most
recently accumulated gains, profits, or earnings." That authority was
continued unchanged in the version of the statute applicable here.
See I.R.C. Section 902(c)(1).

   /7/ This Court has addressed the complexities of the computation of
earnings and profits on several occasions.  See Commissioner v.
Phipps, 336 U.S. 410 (1949);  Commissioner v. South Texas Lumber Co.,
333 U.S. 496 (1948);  Commissioner v. Munter, 331 U.S. 210 (1947);
Commissioner v. Wheeler, 324 U.S. 542 (1945);  Foster v. United
States, 303 U.S. 118 (1938);  Helvering v. Canfield, 291 U.S. 163
(1934);  Mason v. Routzahn, 275 U.S. 175 (1927).

   /8/ For example, if a foreign subsidiary earned $500 in "earnings
and profits" and distributed that $500 to its domestic parent, the
parent would recognize $500 in dividend income on its United States
return.  If the foreign country allowed a $500 deduction not available
in the United States and therefore the subsidiary's profit computed
under foreign law was zero, that would not change the treatment on the
parent's United States income tax return.  Because the $500
distribution came out of "earnings and profits" as defined in the
Internal Revenue Code, it would be a dividend, not a return of
capital, regardless of the foreign country's definition of income.

   /9/ See 1 E. Owens & G. Ball, The Indirect Credit 162 (1975):

      After all the profits of a year have been distributed, the
      quantity used in the numerator of the fraction, "dividends,"
      must be the same as the amount used in the denominator, "net
      profits." Otherwise, the amount of indirect credit will be
      either more or less than the amount of the foreign tax actually
      paid.  In short, the section 902 allocation fraction functions
      properly only when the definition of dividends (aggregate) and
      net profits is exactly the same.

   /10/ The precise dispute in American Chicle can be illustrated by
an example.  If the subsidiary had $200 in income and paid foreign tax
of $20, it would have had $180 in "accumulated profits" as then
defined.  If the subsidiary had distributed the $180 as a dividend,
the taxpayer's position in American Chicle was that it would be
entitled to a $20 credit.  The Court rejected that position, however,
finding that $20 was the amount of taxes paid on the subsidiary's
pre-tax income, not the amount paid "with respect to the accumulated
profits" of $180.  Thus, under the so-called American Chicle
limitation, the taxpayer was entitled to a credit of only $18, the
foreign tax apportionable to the $180 of accumulated profits.

   In 1962, Congress amended Section 902 to accomplish a similar
result by redefining "accumulated profits" as the pre-tax income of
the subsidiary, but at the same time adding Section 78 of the Code,
which requires the parent to take into income ("gross-up") the amount
of the allowable foreign tax credit.  Under that approach, applicable
for the tax years at issue in this case, the credit is first computed
without the American Chicle limitation, but this change is offset by
treating the credit itself as income to the parent.  See, e.g., H.H.
Robertson Co. v. Commissioner, 59 T.C. at 77 & n.13.  Congress
otherwise intended no change to the applicable apportioning fraction
under Section 902.  As both the House and Senate Reports on the 1962
Act make clear, "(t)he result is to continue * * * the use of the
ratios under existing law, but because of the amendment * * * the
amount against which the ratios operate is increased (by removing the
American Chicle limitation)." H.R. Rep. No. 1447, 87th Cong., 2d Sess.
A79-A80 (1962);  S. Rep. No. 1881, 87th Cong., 2d Sess. 223 (1962).
This adjustment was necessary to achieve maximum parity between the
tax treatment of foreign branches and foreign subsidiaries.  See pp.
26-32, infra;  B. Bittker & J. Eustice, Federal Income Taxation of
Corporations and Shareholders, Paragraph 17.11, at 17-45 to 17-47 (5th
ed. 1987).

   /11/ This is not to say that the concepts of "accumulated profits"
and "earnings and profits" are in every respect identical.
Accumulated profits under Section 902 are computed on a year-by-year
basis, while earnings and profits are computed on both a current basis
and an aggregate historical basis (Section 316(a) provides that a
dividend may be paid out of current earnings and profits even if there
is a deficit in the historical earnings account).  See generally Pet.
App. 26a n.8;  H.H. Robertson Co. v. Commissioner, supra, 59 T.C. at
78-79.  But Section 902 operates properly only if the terms are
interpreted using the same criteria (see Rev. Rul. 63-6, 1963-1 C.B.
126, 128), and therefore both must be determined under principles of
United States tax law.

   /12/ Senator Smoot explained the purpose of the indirect credit as
follows (61 Cong. Rec. 7184 (1921)):

         This amendment extends the credit for foreign income and
      profits taxes paid, to a domestic corporation which owns a
      majority of the voting stock of a foreign subsidiary, from which
      subsidiary the domestic corporation receives taxable dividends.

         In such a case a foreign subsidiary is much like a foreign
      branch of an American corporation.  If the American corporation
      owned a foreign branch, it would include the earnings or profits
      of such branch in its total income, but it would also be
      entitled to deduct from the tax based upon such income any
      income or profits taxes paid to foreign countries by the branch
      in question.  Without special legislation, however, no credit
      can be obtained where the branch is incorporated under foreign
      laws.

         Since the foreign subsidiary may not send back to the
      American parent company all of its profits or earnings, it
      follows that the American parent company should not obtain a
      credit for all the income and profits taxes paid to foreign
      countries by the European subsidiary.  The amendment in question
      grants only a partial or prorated credit.

Senator Pomerene, with Senator Smoot's agreement, later summarized the
operation of the indirect credit as follows (ibid.):

         To put it in another way, certain of its profits could be
      passed to surplus over there, and if not distributed in
      dividends, then the parent company would not receive credit for
      that part which went to surplus.

   /13/ Under pre-1962 law, the dividend income recognized by a parent
would never exceed the foreign subsidiary's after-tax income, while a
domestic corporation operating through a branch would recognize the
branch's pre-tax foreign income.  While this advantage for
subsidiaries was reduced by the American Chicle limitation on the
indirect credit (see pp. 22-24 & note 10, supra), it was not
completely eliminated.  See S. Rep. No. 1881, supra, at 66-67;  B.
Bittker & J. Eustice, supra, Paragraph 17.11, at 17-45 to 17-47.

   /14/ There is no merit to respondent's assertion (Br. in Opp. 11)
that the Treasury abandoned its position that "accumulated profits"
are identified with "earnings and profits" when it declared Rev. Rul.
63-6 to be "obsolete" in Rev. Rul. 72-621, 1972-2 C.B. 651.  The 1963
ruling was never revoked.  It is common for a ruling to be classified
as "obsolete" (i.e., not controlling for future transactions) when it
has become "unnecessary because the issue has been covered by
regulations" (Rev. Rul. 67-6, 1967-1 C.B. 576, 577).  That is
precisely what occurred here.  Rev. Rul. 63-6 construed Section 902 as
it read before amendment by the Revenue Act of 1962.  Subsequent to
that statutory change, the Treasury promulgated the formal regulation
described above, Treas. Reg. Section 1.902-3(c)(1) (1965),
interpreting the amended statute.  Because that regulation embodied
the substance of Rev. Rul. 63-6 and construed the new version of the
statute, the ruling was declared "obsolete" under the criteria
developed by the Treasury for reducing the number of outstanding
rulings.  Rev. Rul. 63-6 and the regulation continue to be recognized
as setting forth the Treasury's position that "accumulated profits"
are computed in accordance with the principles governing the
calculation of earnings and profits under United States law.  See S.
Rep. No. 313, supra, at 299 n.6;  Champion International Corp. v.
Commissioner, 81 T.C. 424, 433 (1983);  H.H. Robertson Co. v.
Commissioner, 59 T.C. at 78-79.

   /15/ Contrary to the court of appeals' assertion (Pet. App. 7a-8a),
the Tax Court in Champion did not misconstrue its own decision in
Steel Improvement.  In Steel Improvement the Tax Court ruled that "the
accumulated earnings and profits from which the dividends are paid are
to be determined under American rather than foreign law" (36 T.C. at
277), and it supported that ruling by reference to decisions involving
the computation of earnings and profits under Section 316.  The only
question before the Tax Court in Steel Improvement was whether a loss
recognized only by a foreign jurisdiction could be carried back to
reduce "accumulated profits" for purposes of the Section 902 credit;
therefore, the court of appeals' suggestion that the Tax Court was not
interpreting Section 902 is mistaken.  Rather, the Tax Court's
statement in Steel Improvement can reasonably be understood to mean
only that "accumulated profits," like earnings and profits, are
determined under United States law.  See Pet. App. 17a-19a.  The Tax
Court recognized this fact in Champion, as did Congress when it cited
Steel Improvement as standing for this proposition in a committee
report concerning the 1986 amendments to Section 902.  See S. Rep. No.
313, supra, at 299 & n.6.

   The court of appeals' reliance (Pet. App. 7a) on the Tax Court's
criticism in Champion of Pacific Gamble Robinson Co. v. United States,
62-1 U.S.T.C. (CCH) Paragraph 9160 (W.D. Wash. Dec. 15, 1961), is
equally unfounded.  Pacific Gamble involved the same issue as Champion
-- whether a loss sustained by the foreign subsidiary that is
recognized under the tax law of both the United States and the foreign
country can be carried back to reduce the "accumulated profits" of an
earlier year.  The district court in Pacific Gamble denied the
carryback;  the Tax Court in Champion criticized that holding and
reached the opposite conclusion (see 81 T.C. at 443 n.29).  Neither of
these holdings has any bearing on the issue presented here, which
concerns the treatment of the 1973 loss that is allowed only by
foreign law.  Hence, both Pacific Gamble and Champion are fully
consistent with the Commissioner's position here.

   /16/ See 1 E. Owens & G. Ball, The Indirect Credit 161-162 (1975);
E. Owens, The Foreign Tax Credit 119-121 (1961);  B. Bittker & J.
Eustice, supra, Paragraph 17.11, at 17-44 to 17-45;  Federal Income
Tax Project:  International Aspects of United States Income Taxation
398 (A.L.I. 1987);  Schoenfeld, Some Definitional Problems in the
Deemed Paid Foreign Tax Credit of Section 902:  "Dividends" and
"Accumulated Profits," 18 Tax L. Rev. 401, 407-421 (1963);  Eigner,
The Foreign Tax Credit, 39 Taxes 724, 729-730, 736 (1961);  Mentz, The
Effect of Net Operating Losses on the Foreign Tax Credit, 30 Tax Law.
309, 324 n.36, 333 (1977);  Burda, The Foreign Loss Carryback Dilemma:
 Gone But Not Forgotten, 13 Int'l Tax J. 199, 206 (1987).

   /17/ The 1986 Act prospectively changed the operation of the
Section 902 credit to eliminate the "annualization" approach, i.e.,
the matching of the dividend to accumulated profits on a year-by-year
basis (see note 4, supra).  See Section 1202(a) of the Tax Reform Act
of 1986, Pub. L. No. 99-514, 100 Stat. 2528.  Because Congress
believed that this scheme was subject to manipulation by taxpayers and
also subject to other problems, it provided that retained earnings
after 1986 would all go into one "pool," which would be the source of
the dividends.  See generally S. Rep. No. 313, supra, at 305-306;  B.
Bittker & J. Eustice, supra, Paragraph 17.11, at 17-47 to 17-48.
Congress accomplished this change by redrafting Section 902, including
replacing the term "accumulated profits" with the term "post-1986
undistributed earnings." The latter term is defined as the "earnings
and profits" of the foreign subsidiary accumulated in years after 1986
and computed "according to rules substantially similar to those
applicable to domestic corporations" (see 26 U.S.C. 902(c)(1) (Supp.
IV 1986) and 964(a)).  Therefore, while Congress was not focusing on
the question presented here in drafting the 1986 legislation, it is
nonetheless clear that, under the new law, United States tax
principles must be used in defining the subsidiary's profits to be
used in the apportionment formula of Section 902.  Congress manifestly
believed that it was perpetuating existing law on this issue.  See S.
Rep. No. 313, supra, at 299 & n.6.

   /18/ It is doubtful whether there is any foreign country whose
income tax laws accord with those of the United States in every
respect.  Thus, the court of appeals' approach could seriously burden
the fair administration of the Section 902 credit no matter where a
foreign subsidiary of a domestic corporation does business.  Those
problems could be compounded if a subsidiary earns income in, and pays
taxes to, more than one foreign jurisdiction, requiring a revenue
agent to be conversant with the idiosyncrasies of each system in order
to identify the profits out of which a dividend is declared.  In the
present case, the parties stipulated to the computation of taxable
income under British law, and respondent did not contend that the
revenue laws of Ireland, where its subsidiary also did business (see
Pet. App. 10a), differed in material respects from the tax laws of the
United States.  There is no assurance that the parties would agree on
the vagaries of foreign law in other cases;  the court of appeals'
decision thus could lead to burdensome litigation over the precise
contours of income, deductions, or losses under differing schemes of
taxation.

   /19/ The court of appeals' reliance (Pet. App. 6a) on Rev. Rul.
74-310, 1974-2 C.B. 205, is misplaced.  That ruling provides no
support for the court's theory that the term "accumulated profits" in
the "taxes paid" clause means the foreign tax base to which the
foreign government actually applies its tax.  Indeed, in holding that
the foreign income tax paid for a given year is deemed to have been
paid "on or with respect to" that year's accumulated profits as
computed under United States principles even though the profits are
computed differently under the tax law of the foreign country, the
ruling implicitly rejects the theory of the court of appeals below.
See 1 E. Owens & G. Ball, The Indirect Credit 82 (1975).  Moreover,
the ruling specifically incorporates the definition of accumulated
profits in Treas. Reg. Section 1.902-3(c)(1), which identifies
accumulated profits with "earnings and profits" as determined under
United States law.

   APPENDIX