Tax Court and Court of Federal Claims reject GILTI effective-date-fix regulations in upholding deductions

In Siemens, the Tax Court held in a reviewed opinion that the taxpayer was entitled to a full Section 245A¹ dividends-received deduction (DRD), rejecting Temporary Treasury Regulation § 1.245A-5T (Extraordinary Disposition Rules) as contrary to unambiguous statutory text and beyond the Treasury’s delegated authority. Siemens is consistent with Varian Medical Systems, Inc. & Subsidiaries v. Commissioner, 163 T.C. 76 (2024),² which rejected Section 78 regulations related to Section 245A on similar grounds. 

In 2017, Congress passed the Tax Cuts and Jobs Act (TCJA), with the objective of moving the United States closer to a so-called “territorial” tax system. On the one hand, the TCJA included Section 245A, which provides a 100 percent DRD for foreign-source dividends from specified 10-percent owned foreign corporations. On the other hand, the TCJA included a mandatory repatriation tax, Section 965, to ensure taxation of earnings and profits allocable to periods before enactment of the TCJA, and a subpart F inclusion for global intangible low-taxed income (GILTI), Section 951A, to discourage certain income shifting outside the United States. The issue in Siemens arose out of a mismatch in the effective dates of these TCJA amendments; Section 245A’s DRD is effective for distributions after December 31, 2017, and the mandatory repatriation tax under Section 965 was based on accumulated earnings determined as of one of two dates during 2017, whereas the GILTI rules under Section 951A are effective for tax years of controlled foreign corporations (CFCs) beginning after December 31, 2017. For taxpayers with fiscal-year CFCs, this mismatch meant that certain CFC earnings in calendar year 2018 were not subject to inclusion under either Section 965 or Section 951A, yet were eligible for distributions subject to the Section 245A DRD. 

In 2019, the Treasury attempted to close this statutory mismatch by promulgating a regulation containing the Extraordinary Disposition Rules. The Extraordinary Disposition Rules target the apparent discrepancy by disallowing 50% of the Section 245A DRD for dividends traced to related-party dispositions during that gap (i.e., essentially taxing the dividends at the same rate as if the Earning and Profits (E&P) had been taxable under the GILTI rules, albeit without related foreign tax credits). 

In April 2018, an affiliate of Siemens Medical Solutions USA (Siemens) with a September 30 fiscal year-end sold two subsidiaries to related parties, increasing its E&P by a substantial sum. In March 2019, that affiliate distributed a dividend to Siemens that was, under the Extraordinary Disposition Rules, partially sourced from the E&P attributable to the 2018 sales. Siemens claimed a Section 245A DRD for the full dividend amount, disclosing on Form 8275-R (Regulation Disclosure Statement) its view that the regulations were invalid. The IRS disallowed 50% of the Section 245A DRD attributable to the relevant E&P and asserted deficiencies for tax years 2019 and 2021.

The Tax Court agreed with Siemens that the transaction fell within the plain text of Section 245A. Namely, the distribution occurred after December 31, 2017, from a specified 10-percent owned foreign corporation, and was entirely foreign-source. Relying on the reasoning in Varian, the Tax Court held that Congress deliberately chose differing effective dates for Sections 245A, 951A, and 965, and as such, the Treasury did not have authority to alter the consequences of the statutory discrepancy by regulation. See Siemens, 167 T.C. at 14 (Congress could have chosen for Section 245A and Section 951A to have the same effective dates. Congress chose not to do so, and as in Varian, we will respect the choice that Congress made.). Although the Extraordinary Disposition Rules at issue in Siemens differ from the regulations invalidated in Varian, the court found the effect materially the same: both sets of regulations purported to override clear statutory text. Applying Loper Bright, the court held that the Treasury’s rulemaking authority under Sections 245A(g) and 7805(a) cannot justify a regulation contradicting unambiguous statutory text.

In Keysight, the Court of Federal Claims invalidated a similar GILTI regulation to that in Siemens. Keysight Technologies, Inc. (Keysight) owned several fiscal-year CFCs and, in computing its GILTI inclusion for the 2020, 2021, and 2022 tax years, claimed Section 197 amortization deductions attributable to basis step-ups from transactions entered into during the effective-date mismatch gap in 2018. Treasury Regulation § 1.951A-2(c)(5) purported to disallow the deductions for purposes of computing the taxpayer’s GILTI inclusions. Section 1.951A-2(c)(5) would treat deductions attributable to “disqualified basis” (i.e., certain increased basis resulting from related-party transactions during the effective-date mismatch gap in 2018) as allocable to residual CFC gross income. As a result, the IRS determined that the deductions are not “properly allocable” to income taxed under GILTI and denied the deductions. 

Before the Court of Federal Claims, the IRS argued that Congress had delegated to Treasury the authority to cure the statutory mismatch between fiscal-year and calendar-year filers. 

First, the IRS argued that Treasury was empowered to issue Section 1.951A-2(c)(5) under Section 7805(a). The IRS asserted that Section 7805(a)’s delegation to Treasury of the power to prescribe “needful rules and regulations” was broad enough to include Section 1.951A-2(c)(5). The Court of Federal Claims rejected this argument as proving too much. The court explained that “section 7805(a) does not give the Secretary the power to promulgate regulations in every case” and “the premise that the Secretary is allowed to read ambiguity into the Tax Code and then resolve the ambiguity without constraint is antithetical to the very core of Loper Bright.” 

Second, the IRS argued that Congress expressly delegated to Treasury the authority to issue regulations under Section 951A. Here again, the court held that Congress’ delegation could not support Treasury’s attempt to fill the statutory gap. The court noted that the express delegations in Section 951A are “limited to specific subsections and even more specific conditions.” Further, the court found that Section 951A(c), the subsection at issue, “is altogether ambiguous,” and makes no reference to the Secretary’s authority to promulgate regulations either expressly or impliedly. The government’s alternative reliance on the phrase “rules similar to the rules of section 954(b)(5)” in Section 951A(c)(2)(A)(ii) also failed, because Section 954(b)(5) authorizes regulations only “for purposes of subsection (a),” which addresses foreign base company income rather than GILTI. Finding no express or implied authority in the statute, and no persuasive weight in the Treasury’s interpretation under Skidmore, the Court of Federal Claims held that the Treasury lacked authority to issue Treasury Regulation § 1.951A-2(c)(5).

Siemens and Keysight are examples of two separate courts embracing Loper Bright’s rejection of deference to regulations inconsistent with the best reading of the statute. Together with Varian, they demonstrate the Tax Court and Court of Federal Claims’ readiness to police the limits of the Treasury’s rulemaking authority. Moreover, Keysight’s rejection of the IRS’s delegation arguments under Sections 7805(a) and 951A represent an important setback in the IRS’s efforts to contain the impact of Varian on Treasury regulations by pointing to Congressional delegations of rulemaking authority in Section 7805(a) and other provisions of the Code not expressly authorizing the regulation under review. Practitioners should watch for an appeal of Varian within the 90-day period following the Tax Court’s final decision entered on June 15, 2026 (the final decision was tolled pending the parties’ resolution of computational issues which occurred in April 2026), which expires on September 14, 2026. The government’s decision to appeal, or acquiesce to, Varian will be informative of the government’s intentions with Siemens and Keysight. 

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_{1 All “section” references are to the Internal Revenue Code of 1986, as amended, unless otherwise specified.} 

_{2 For additional information on the Varian decision, see our prior coverage here: https://www.eversheds-sutherland.com/en/united-states/insights/loper-bright-rising-varian-highlights-the-renewed-import-of-statutory-text-in-a-post-chevron-world.}