Vulcan Materials Company and Subsidiaries v. Commissioner of Internal Revenue

Vulcan Materials Company (Vulcan) (plaintiff) was a domestic corporation that was part of a Saudi Arabian partnership in 1976. The other members of the partnership were American entities Shepherd Construction Co., Inc. (Shepherd), Fred Weber, Inc. (Weber), and Dalton Rock Products Co. (Dalton). The other member of the partnership was a Saudi Arabian company, Trading & Development Co. (Tradco). For the 1978 taxable year, ownership of the partnership was divided as follows: Vulcan, 48 percent; Dalton, 10 percent; Shepherd, 10 percent; and Tradco, 32 percent. Ultimately, the assets and business of the Saudi partnership were transferred to Tradco-Vulcan Co., Ltd. (TVCL), a Saudi Arabian corporation with the stock divided the same as the partnership interests above. In Saudi Arabia, income tax for Saudi corporations was governed by the Shari’ah under Islamic law, which requires payment of a tax called the Zakat. For mixed corporations, a Saudi income tax was imposed to the extent of the corporation’s net profits attributable to non-Saudi shareholders. The Saudi shareholders were then responsible for the Zakat. The dispute in this case concerned the manner of credit calculation for foreign taxes paid by Vulcan. The Commissioner of Internal Revenue (the commissioner) (defendant) alleged an underpayment by Vulcan on its 1984 return. In considering the 1983 and 1984 calculation of the credit for foreign taxes, the parties agreed on the figures for Saudi tax and the amount of dividend paid on the annual profits to Vulcan, with the Saudi tax multiplied by the dividend constituting the numerator of the allowable credit. The issue was whether the denominator must be, according to Vulcan, the pretax accumulated profits of the non-Saudi entities less the Saudi tax or, according to the government, the pretax accumulated profits of all entities, including Tradco, less the Saudi tax.