FOREIGN TAX CREDITS were disallowed.

FOREIGN TAX CREDITS were disallowed.

April 01, 2002
FOREIGN TAX CREDITS were disallowed.

Sunoco lost an attempt to claim more foreign tax credits for the period 1982 through 1986.  The amount of foreign tax credits that a US company can claim is a function of the amount of income it has from foreign sources.  The more such income, the more foreign tax credits it is allowed.

US tax law treats borrowed money as fungible.  Therefore, it requires that US companies treat a portion of their interest expense — even on purely domestic borrowing — as a cost partly of their foreign operations.  Interest expense is allocated to US and foreign operations in the same ratio as assets are deployed at home and abroad. The more interest that is allocated abroad, the less income the US company will have from foreign sources and the fewer foreign tax credits it is allowed.

Sunoco argued that it should have to allocate only its net interest expense between US and foreign sources. The company earns millions of dollars each year in interest income that it wanted to use as an offset.  The US Tax Court said no in a decision in March.  Gross interest expense must be allocated.  IRS regulations have made this point clear since 1986.  The case involved earlier years.

Keith Martin