On December 7, 2011, the Tax Court published Rodriquez v. Commr., 137 T.C. No. 14 (2011). In this case, the taxpayers filed tax returns including in gross income, under Code §§951(a)(1)(B) and 956, approximately $1.6 million for 2003 and approximately $1.5 million for 2004. The inclusions represented their controlled foreign corporation’s earnings invested in U.S. property.
The taxpayers had treated the inclusions as qualified dividend income under Code §1(h)(11). The I.R.S. argued, and the court held, that the Code §951 inclusions were not qualified dividend income because the inclusions were not dividends. In Notice 2004-70, the I.R.S. had provided guidance that Code §951 inclusions did not constitute qualified dividend income under Code §1(h)(11), and the court in Rodriquez agreed with this conclusion.
Depending upon the circumstances, it may have made sense for the taxpayers in Rodriquez to make Code §962 elections for 2003 and 2004, where individuals can elect to be subject to tax at corporate rates but at the same time be allowed to claim deemed paid foreign tax credits under Code §960.