Xerox Corporation v. United States

Xerox Corporation (Xerox) (plaintiff) was an American corporation that directly and indirectly controlled the majority of voting shares of RXL, a British corporation. RXL had various British subsidiaries. In 1974, RXL paid a dividend distribution to Xerox and its Advance Corporation Tax (ACT) to the United Kingdom. RXL used part of that ACT payoff as a credit against its British mainstream corporation tax in 1974. However, part of the ACT was not used as an ACT payoff but instead surrendered by RXL to its British subsidiaries, as allowed by British law. The United States (defendant) then withdrew the foreign tax credit for this part of the ACT payments that had been allowed to Xerox in 1974 and requested payment of additional income accordingly. Xerox paid and filed suit for a refund, which was denied. Xerox has since appealed, arguing that not allowing a foreign tax credit for this portion of the ACT means Xerox was taxed twice. The matter was greatly complicated by the fact that the United States and the United Kingdom entered into a tax treaty in 1975, which was subsequently amended and revised in the following years. That treaty, begun in 1975, did not control the application of the ACT to Xerox’s 1974 dividends but did provide a compelling case of the ultimate intentions of the British and American governments on the double-taxation issues Xerox was facing. Also, the treaty was clear that the ACT was a creditable tax for American foreign tax credit purposes. Ultimately, Xerox argued that it was entitled to its foreign tax credit when the dividends were distributed to Xerox and when the ACT was paid or accrued by RXL. However, the government argued that the credit for the 1974 taxes was appropriately reversed when RXL surrendered the offset value to its subsidiaries. The government argued that Xerox must not be entitled to its foreign tax credit until the offset rights were exhausted.