Tax Court Invalidates GILTI Reg That Limits Dividends Received Deduction

(Parker Tax Publishing August 2026)

The Tax Court held that the United States subsidiary of a German healthcare products company was entitled to claim a 100 percent dividends received deduction (DRD) under Code Sec. 245A for a dividend received from a foreign source, despite the fact that Reg. Sec. 1.245A-5T limits the deduction by 50 percent for certain extraordinary dispositions. The court found that Code Sec. 245A provides a 100 percent DRD, and the regulation cannot contravene the clear statutory text. Siemens Medical Solutions USA, Inc. v. Comm'r, 167 T.C. No. 5 (2026).

Background

Code Sec. 245A, which was enacted by the Tax Cuts and Jobs Act (TCJA) (Pub. L. No. 115-97), provides a deduction (DRD) for certain dividends received by a U.S. corporation from certain foreign corporations. The DRD applies to distributions made after December 31, 2017.

The TCJA included interrelated provisions to move the U.S. tax system from a worldwide tax system to a territorial tax system. The provisions did not all have the same effective dates and created gaps that affect certain taxpayers. In 2019, the IRS issued Reg. Sec. 1.245A-5T, which limits the DRD under Code Sec. 245A to address one such gap. In the preamble to the temporary regulations, the IRS stated that it did not believe Congress intended Code Sec. 245A to defeat the purposes of Subpart F and the global intangible low-tax income (GILTI) rules and was issuing the regulations pursuant to Code Sec. 245A(g), which delegates broad authority to the Treasury Department to promulgate "necessary or appropriate" rules to define the limits of the DRD. The preamble specifically addressed the effective date mismatch under the TCJA. The IRS stated that during the gap in effective dates, referred to in the temporary regulations as the "disqualified period," the income of a controlled foreign corporation (CFC) may not be subject to any tax and yet still be eligible for the Code Sec. 245A deduction. As a result, the temporary regulations limited the Code Sec. 245A deduction for income resulting from certain "extraordinary dispositions" occurring during the disqualified period.

Siemens Medical Solutions USA, Inc. (Siemens), is a wholly owned subsidiary of Siemens Healthineers AG (SHAG), a German company that provides healthcare products globally. Siemens Healthcare Diagnostics, Inc. (SHD US), a California corporation and member of Siemens Medical's U.S. consolidated group, owned 67.78 percent of Siemens Medical Solutions Diagnostics Holding I.B.V. (SMS BVI), a Dutch company treated as a corporation for U.S. federal income tax purposes. During tax year 2018, certain foreign subsidiaries of SMS BVI were restructured. In April 2018, SMS BVI sold 100 percent of Siemens Healthcare Diagnostics GmbH, a Swiss company, to Siemens Healthineers Holding III BV, a Dutch company within the SHAG Group (SHAG and its subsidiaries). In August 2018, SMS BVI sold 100 percent of Siemens Healthcare Diagnostics Holding GmbH, a German company, to Siemens Healthcare GmbH, a German company within the SHAG Group. As a result of these two sales, SMS BVI increased its earnings and profits (E&P) by approximately 819,000,000 euros.

In March 2019, SMS BVI made a pro rata distribution of 1.75 billion euros to its shareholders (March 2019 Distribution). Since SHD US owned 67.78 percent of SMS BVI, it received 67.78 percent of the March 2019 Distribution, which was approximately 1.18 billion euros. Of that amount $670 million was a dividend made out of SMS BVI's earnings and profits (March 2019 Dividend). The March 2019 Dividend was entirely foreign source.

On its Form 1120, U.S. Corporation Income Tax Return, for its 2019 tax year, Siemens claimed a deduction for the full amount of the March 2019 Dividend. When preparing its tax return for the 2019 tax year, Siemens considered the implications of Reg. Sec. 1.245A-5T and concluded that its two sales that occurred in 2018 likely fit the definition of an extraordinary disposition under those rules. However, Siemens concluded that the regulation was invalid and that it was entitled to the full Code Sec. 245A deduction. It filed Form 8275-R, Regulation Disclosure Statement, with its 2019 tax return. On its Form 8275-R, Siemens disclosed the relevant facts and its legal analysis supporting its position that the extraordinary disposition rules were invalid.

In a notice of deficiency, the IRS disallowed $314 million of the Siemens's Code Sec. 245A deduction under Reg. Sec. 1.245A-5T. Siemens took its case to the Tax Court. Siemens contended that applying Code Sec. 245A in this case provided a clear result. Since the March 2019 Dividend was distributed after December 31, 2017, from a qualifying corporation and was entirely foreign source income, Siemens said that under the plain terms of the statute it was entitled to the entire deduction. Additionally, Siemens argued that there was a conflict between Code Sec. 245A and Reg. Sec. 1.245A-5T and that Congress never passed a statute that limited Code Sec. 245A deduction. Siemens posited that when there is a head-to-head conflict between a statute and a regulation, the statute wins.

Analysis

The Tax Court agreed with Siemens and held that, because all the elements of Code Sec. 245A were met, Siemens was entitled to the full deduction under the plain terms of the statute.

The court found that Reg. Sec. 1.245A-5T conflicted with the plain meaning of Code Sec. 245A. The court noted that the regulation addressed mismatched effective dates that caused a gap where the earnings underlying certain dividends would not be taxed. In Varian Medical Systems, Inc. and Subs. v. Comm'r, 166 T.C. No. 8 (2026), there was a mismatch between the effective date of Code Sec. 245A and the TCJA's amendments to Code Sec. 78. The court found that, as in Varian, Congress "chose the rule it adopted over a readily available alternative." Since the House and the Senate versions of the TCJA had different effective dates for Code Sec. 245A, Congress had to choose what the effective date should be in the final version. Congress chose to have Code Sec. 245A apply to distributions made after December 31, 2017.

The court responded to the IRS's argument that it issued the regulation under the authority granted to it in Code Sec. 245A(g) and Code Sec. 7805(a) by noting that, under Loper Bright Enterprises v. Raimondo, 2024 PTC 237 (S. Ct. 2024), the court's rule in reviewing a regulation is "to independently interpret the statute and effectuate the will of Congress subject to Constitutional limits." The IRS relied on the word "appropriate" in Code Sec. 245A(g). But the court found that post-Loper Bright, the term "appropriate" is a "quintessentially context dependent term" that draws its meaning from surrounding provisions. The court said that in this case, context did not help the IRS. The regulation was not intended to construe the language of Code Sec. 245A, the court found, but rather to correct the mismatch in effective dates by changing the plain meaning of the statute.

Code Sec. 245A provides a 100 percent DRD, and Reg. Sec. 1.245A-5T limits the deduction by 50 percent for dividends attributable to extraordinary dispositions. The court noted that the statute contains no hint of such a rule. That is why, the court said, the IRS relied not on the statutory text but instead on assertions regarding Congress's intent, gleaned from the overall structure of the TCJA. But the court found that the IRS failed to explain why the effective dates Congress chose should be disregarded as evidence of its intent. In any event, the court concluded that when there is a direct conflict between a statute and a regulation, the statute prevails. And a regulation that purports to contradict the statute can be neither "necessary" nor "appropriate."

For a discussion of the dividends received deduction under Code Sec. 245A, see Parker Tax ¶41,110.

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