Varian Medical Systems' $60M Deduction Disallowed: Tax Court Upholds IRS on Section 246 Holding Period and Section 245A(d) Computation

The $60 Million Stakes: Varian's Battle Over TCJA Deductions

The Tax Court’s April 8 ruling in Varian Med. Sys., Inc. & Subs. v. Commissioner delivers a $60 million blow to the medical technology giant’s dividend deduction claims while upholding a $6.3 million foreign tax credit disallowance—highlighting the high-stakes transition from the old worldwide tax system to the TCJA’s territorial regime. At issue was Varian’s attempt to claim a $60 million deduction under Section 245A for dividends treated as income under Section 78, which requires grossing up dividend income by foreign taxes deemed paid. The IRS countered that Section 246—which imposes a 365-day holding period for dividend deductions—and Section 245A(d)—which disallows foreign tax credits for dividends eligible for the deduction—blocked Varian’s claims. The court sided with the IRS, denying Varian’s motion for summary judgment and granting the government’s cross-motion, marking a pivotal moment in how the Tax Court interprets the TCJA’s territorial tax framework. The ruling underscores the court’s willingness to wield its authority over complex international tax disputes, particularly where statutory ambiguities collide with aggressive taxpayer interpretations. For multinational corporations navigating the post-TCJA landscape, the decision serves as a cautionary tale about the limits of deductions in an era where the IRS is aggressively policing the boundaries of the new tax regime.

The Story: Varian's Global Operations and the TCJA Transition

Varian Medical Systems, a Palo Alto-based multinational medical device and software manufacturer, spent decades building a sprawling global empire of subsidiaries—some directly owned, others nested in tiered structures that stretched from California to Singapore, Germany, and beyond. By fiscal year 2018, which ran from September 30, 2017, to September 28, 2018, Varian’s corporate group included at least 22 controlled foreign corporations (CFCs) as defined under Section 957(a), with nine held directly by U.S. consolidated group members (first-tier CFCs) and 13 held indirectly through foreign intermediaries (lower-tier CFCs). This tiered structure, common among multinational corporations, would soon collide with the sweeping changes of the Tax Cuts and Jobs Act (TCJA).

The TCJA’s 2017 overhaul introduced Section 965, the mandatory repatriation tax (MRT), which required U.S. shareholders of CFCs to include in income their pro rata share of accumulated post-1986 deferred foreign income as of November 2, 2017, or December 31, 2017. For Varian, this meant recognizing substantial deferred earnings from its global operations, triggering immediate tax liability under the new regime. But the TCJA also introduced Section 245A, a 100% dividends received deduction (DRD) for the foreign-source portion of dividends paid by specified 10%-owned foreign corporations to U.S. corporate shareholders. Section 245A was designed to align the U.S. tax system with a territorial framework, eliminating double taxation on foreign earnings repatriated as dividends.

On its 2018 consolidated return, Varian elected to claim foreign tax credits under Section 960 for taxes deemed paid on its CFCs’ earnings, which required it to gross up its taxable income by $159 million under Section 78—a statutory mechanism that treats deemed-paid foreign taxes as a dividend for tax purposes. Varian then claimed a $60 million deduction under Section 245A for the foreign-source portion of this Section 78 dividend, relying on its direct ownership of first-tier CFCs. The deduction, if allowed, would effectively neutralize U.S. tax on the repatriated earnings, a cornerstone of the TCJA’s territorial design.

The IRS, however, took a harder line. In its examination of Varian’s return, the agency issued a Notice of Deficiency disallowing the Section 245A deduction and increasing the Section 78 dividend by nearly $1.9 million. The IRS also asserted, in the alternative, that even if Varian prevailed on the deduction, Section 245A(d) would disallow foreign tax credits attributable to the dividend, reducing Varian’s credits by approximately $6.36 million. Varian promptly petitioned the Tax Court, setting the stage for a dispute that would hinge on the interplay between Section 245A’s DRD and the computational limits of Section 245A(d).

The complexity of Varian’s case was compounded by the TCJA’s transition tax regime and the company’s tiered CFC structure. The IRS’s position forced Varian to confront whether Section 245A’s deduction extended to dividends arising from lower-tier CFCs—an issue the parties would later litigate through cross-motions for summary judgment. The prior Tax Court opinion in Varian Medical Systems, Inc. v. Commissioner, 163 T.C. 76 (2024), had already established that Varian was entitled to the Section 245A deduction but that its foreign tax credits would be limited under Section 245A(d). Now, the remaining disputes centered on the precise calculation of those limits and the scope of the deduction itself—a computational clash that would test the boundaries of the TCJA’s new international tax framework.

The Dispute: Varian vs. IRS on Procedural Forfeiture and Section 246

The stakes in this procedural and substantive clash between Varian and the IRS extend far beyond the $60 million deduction at issue. At its core, the dispute tests the boundaries of the Tax Court’s authority to adjudicate late-raised arguments under the Tax Cuts and Jobs Act’s international tax framework, particularly where the IRS seeks to retroactively challenge a taxpayer’s entitlement to a deduction that survived summary judgment in an earlier round of litigation.

Varian’s first line of defense rests on procedural forfeiture. The company argues that the Commissioner forfeited his argument under Section 246(c) by failing to raise it during the prior summary judgment phase. Varian points to the Commissioner’s silence during oral arguments in the earlier proceeding, where the Tax Court explicitly asked about Section 246 and Varian’s counsel noted the Commissioner had “doesn’t say anything” about it. Varian further contends that the Commissioner should have filed a motion for reconsideration if he disagreed with the prior opinion’s holding that no other provision disallowed the deduction. In Varian’s view, the Commissioner’s belated challenge—now seeking to disallow nearly two-thirds of the claimed deduction—comes too late and should be barred.

Substantively, Varian asserts that Section 246 allows the full Section 245A deduction because the holding period requirements were satisfied. The company emphasizes that the shares of its first-tier CFCs were held for the required duration under Section 246(c)(1), as modified by Section 246(c)(5) for Section 245A purposes. With respect to its lower-tier CFCs, Varian argues that the indirect ownership structure—where shares were held through intermediate foreign corporations—does not disqualify it from claiming the deduction. In Varian’s interpretation, the statute does not require direct ownership of the lower-tier CFCs, only that the shares were held for the requisite period.

The IRS counters on both fronts. Procedurally, the Commissioner argues that no forfeiture occurred because Varian’s prior motion for partial summary judgment was narrowly focused on the effective date issue, not the computation of the deduction. The IRS contends that its objection in the earlier proceeding was tied to the same point and did not address how the deduction would be calculated if allowed. Moreover, the Commissioner notes that he consistently denied Varian’s assertion that the Section 246 holding period was satisfied in his Answers to the Petition and Amended Petitions, preserving the argument for later resolution.

Substantively, the IRS takes a strict view of Section 246(c), arguing that the holding period requirement is not satisfied for the lower-tier CFCs because Varian did not directly hold the shares at any time. In the Commissioner’s interpretation, “the taxpayer” for purposes of Section 246(c) must be the same entity that claims the deduction under Section 245A. Since Varian’s U.S. consolidated group never directly owned the shares of the lower-tier CFCs—those shares were held exclusively by intermediate foreign corporations—the IRS maintains that the holding period requirement is not met. This interpretation hinges on the distinction between direct and indirect ownership, a distinction the IRS argues is critical to the statute’s application.

The legal framework of Section 246(c) centers on the holding period requirements for dividends to qualify for the dividends received deduction under Sections 243, 245, or 245A. For Section 245A purposes, Section 246(c)(5) modifies the general rule by increasing the holding period duration and requiring that ownership thresholds set by Section 245A be maintained throughout the period. The statute does not explicitly address indirect ownership structures, leaving the IRS and Varian to debate whether the term “taxpayer” in Section 246(c) refers to the ultimate U.S. shareholder or the immediate holder of the shares. This ambiguity sets the stage for the Tax Court’s analysis of whether the statute’s purpose—preventing short-term dividend arbitrage—is served by a narrow interpretation that disqualifies indirect ownership structures.

The Court's Analysis: Direct Ownership and the Limits of Section 246

The Tax Court wasted little time dismantling Varian’s procedural and substantive arguments, delivering a ruling that reaffirms the judiciary’s authority to police the boundaries of statutory tax benefits—particularly where Congress left critical terms undefined. The court’s analysis hinged on two core questions: whether Varian’s failure to raise certain arguments earlier forfeited them entirely, and whether the phrase “held by the taxpayer” in Section 246(c)(1) permits indirect ownership through foreign subsidiaries. On both fronts, the court sided with the IRS, reinforcing the Tax Court’s role as a gatekeeper of statutory precision.

The court first rejected Varian’s forfeiture defense, a procedural gambit that sought to revive arguments the company had not pressed in its motion for partial summary judgment. The IRS had argued that Varian’s belated invocation of Section 245A and Treasury Regulation §1.78-1 came too late, but the Tax Court disagreed. Citing its broad discretion under Tax Court Rule 121, the court held that the IRS had not demonstrated prejudice from the timing of Varian’s arguments. The court emphasized that its role is not to penalize strategic shifts but to ensure fair adjudication, stating that “the record properly did not prejudice the defense of the opposing party.” This ruling underscores the Tax Court’s willingness to exercise its procedural discretion to avoid injustice, even when taxpayers attempt to introduce new legal theories late in the game.

The court then turned to the heart of the dispute: the meaning of “held by the taxpayer” in Section 246(c)(1). The statute provides that a deduction is disallowed for dividends on stock held by the taxpayer for less than the required period, but it does not define “held.” The court began with the plain meaning of the term, citing dictionaries and Supreme Court precedent to conclude that “hold” requires legal ownership or possession of the stock itself. As the court noted, “In common understanding to hold property is to own it,” a principle reiterated in McFeely v. Commissioner (1935). This textualist approach aligns with the court’s recent decisions, such as Twitter, Inc. v. Taamneh (2023), which prioritize the ordinary meaning of statutory terms.

The court’s interpretation of “held by the taxpayer” was further constrained by the longstanding principle that parent corporations and their subsidiaries are separate taxable entities. Citing Moline Properties, Inc. v. Commissioner (1943) and Dole Food Co. v. Patrickson (2003), the court rejected Varian’s argument that indirect ownership through its foreign subsidiaries satisfied the holding period requirement. The Supreme Court’s decision in Dole Food was particularly instructive: it held that a parent corporation does not own the assets of its subsidiaries, and by extension, does not “hold” the stock of those subsidiaries for tax purposes. The Tax Court applied this logic to Varian’s structure, concluding that the company’s indirect ownership of lower-tier CFCs did not qualify as “held by the taxpayer” under Section 246(c)(1).

Varian had argued that the dividends in question were “on” the shares of its lower-tier CFCs, and thus the holding period requirement should apply to those shares. The court rejected this counterargument, explaining that Section 78 treats Varian as receiving dividends directly from each CFC, not indirectly through the chain of ownership. Because the dividends are deemed to be “on” the shares of the CFCs that paid the taxes, the holding period requirement must be satisfied with respect to those shares. The court’s reasoning here reflects a strict adherence to statutory text: if the dividends are treated as received from the CFCs themselves, then the shares of those CFCs must be held by the taxpayer to qualify for the deduction.

The court also dismissed Varian’s attempt to rely on Section 246(c)(5)(B), which provides an exception for dividends received by a member of an affiliated group. Varian argued that this exception should apply to its lower-tier CFCs, but the court held that the exception is limited to dividends received by the common parent of the group, not by subsidiaries. This interpretation aligns with the statute’s purpose of preventing short-term dividend arbitrage, as allowing subsidiaries to claim the exception would undermine the holding period requirement.

The court’s ruling has immediate and significant implications for Varian. While the company satisfied the holding period for its first-tier CFCs, it failed to do so for its lower-tier CFCs, disallowing a portion of its Section 245A deduction. This outcome underscores the Tax Court’s willingness to enforce statutory limits on tax benefits, even where the economic substance of a transaction appears benign. The decision also highlights the court’s role in policing the boundaries of indirect ownership, a recurring issue in international tax cases. By rejecting Varian’s arguments, the court has signaled that taxpayers cannot circumvent holding period requirements through complex ownership structures, reinforcing the IRS’s ability to challenge aggressive tax planning.

The Computational Clash: Section 245A(d) and the MRT Puzzle

The stakes of this computational dispute could not be higher for Varian. At issue is the precise formula used to calculate the foreign tax credit disallowance under Section 245A(d), which could determine whether the company owes millions more in tax than it anticipated under the Mandatory Repatriation Tax (MRT) regime. The disagreement centers on how to compute the "net section 965 inclusion" in the denominator of the court’s previously adopted formula, a technical detail with outsized financial consequences.

The Mandatory Repatriation Tax (MRT), enacted under the Tax Cuts and Jobs Act (TCJA) of 2017, imposed a one-time tax on previously untaxed foreign earnings accumulated by controlled foreign corporations (CFCs) between 1986 and 2017. Under Section 965(a), a U.S. shareholder determines its "accumulated post-1986 deferred foreign income" for each CFC, representing the earnings that had escaped U.S. taxation. If any CFCs have earnings and profits (E&P) deficits, those deficits are subtracted under Section 965(b) to offset the positive earnings, ensuring only the net amount is subject to tax. For example, if a U.S. shareholder’s CFCs collectively had $100 million in deferred earnings but $30 million in deficits, the Section 965(a) inclusion amount would be $70 million.

However, the MRT was designed to tax these earnings at reduced rates—15.5% for cash and cash equivalents and 8% for illiquid assets—rather than the standard corporate tax rate. To achieve this, Section 965(c) provides a deduction that effectively reduces the taxable income to the target rate. Continuing the example, if the U.S. shareholder’s tax rate is 21%, a $70 million inclusion would normally result in $14.7 million in tax. To achieve an 8% effective rate, the shareholder deducts $42 million under Section 965(c), leaving a net inclusion of $28 million, which when taxed at 21% yields $5.88 million—close to the 8% target on the full $70 million.

Once the MRT inclusion is determined, the U.S. shareholder may claim foreign tax credits (FTCs) under Section 960(a)(1) for taxes paid by the CFC on the included earnings. These credits are subject to a Section 78 gross-up, which requires the shareholder to include in income the amount of foreign taxes deemed paid, effectively treating those taxes as a dividend. For instance, if the CFC paid $10 million in foreign taxes on the $70 million of earnings, the U.S. shareholder would include a $10 million Section 78 gross-up in its income, alongside the $70 million MRT inclusion.

The computational dispute arises when these amounts are plugged into the formula the Tax Court previously adopted to calculate the foreign tax credit disallowance under Section 245A(d). The formula is:

Disallowed Foreign Tax Credit = Deemed Paid Foreign Tax Credit × (Section 78 Gross-Up / (Net Section 965 Inclusion + Section 78 Gross-Up))

Varian argues that the "net section 965 inclusion" in the denominator should be the amount determined under Section 965(a), reduced only by Section 965(b) E&P deficits—in other words, the $70 million in the example above. The IRS, however, contends that the "net section 965 inclusion" must also account for the Section 965(c) deduction, reducing it to $28 million. The difference is not merely technical; it dramatically alters the disallowance amount.

The IRS’s position hinges on Section 965(g), which reduces both the deemed paid foreign taxes and the Section 78 gross-up in tandem with the Section 965(c) deduction. Under Section 965(g)(1), no foreign tax credit is allowed for the portion of taxes attributable to the earnings offset by the Section 965(c) deduction. Similarly, Section 965(g)(4) limits the Section 78 gross-up to the ratio of the post-deduction inclusion to the pre-deduction inclusion. In the example, if the deemed paid foreign taxes were $10 million and the Section 78 gross-up was $10 million, the IRS’s formula would disallow 60% of those amounts ($6 million in FTCs and $6 million in gross-up), reflecting the 60% reduction in the inclusion ($28 million / $70 million). Varian’s approach, by contrast, would disallow only 28.6% ($2.86 million in FTCs and $2.86 million in gross-up), as it uses the full $70 million inclusion in the denominator.

The IRS argues that Varian’s interpretation disrupts the proportionality intended by Congress. If the Section 965(c) deduction reduces the taxable income to achieve the lower MRT rate, the foreign tax credits and gross-up must be reduced proportionally to avoid over-crediting taxes paid on earnings that were never fully subject to U.S. tax. Otherwise, the taxpayer would receive a windfall: full credit for foreign taxes on earnings taxed at 8% or 15.5%, despite the underlying earnings being subject to a much lower effective rate. The statutory text of Section 245A(d)(1)—which disallows credits for taxes paid with respect to dividends eligible for the Section 245A deduction—reinforces this interpretation, as it requires allocating taxes to the specific earnings that generated the deductible dividend.

Varian counters that the Section 965(c) deduction is merely a mechanism to achieve the target tax rate and does not reduce the underlying earnings or the foreign taxes attributable to those earnings. In its view, the "net section 965 inclusion" should reflect the true economic earnings of the CFCs, unreduced by the Section 965(c) deduction, which is a separate tax benefit. The company argues that the IRS’s approach conflates the Section 965(c) deduction with a reduction in taxable income, when in fact it is a rate-adjustment mechanism. Varian also points to the lack of explicit statutory language requiring the Section 965(c) deduction to be factored into the "net section 965 inclusion," suggesting that the IRS is overreaching by importing a computational requirement not found in the statute.

The computational stakes could not be more consequential. Using the parties’ stipulated numbers for Varian’s first-tier CFCs in 2018, the Section 965(a) inclusion amount was approximately $875.4 million, with a Section 965(c) deduction of $450 million, leaving a net inclusion of $425.5 million. The deemed paid foreign taxes before Section 965(g)(1) reductions were $125.3 million, and the Section 78 gross-up was $125.3 million. Under the IRS’s formula, the disallowed foreign tax credit would be approximately $5.4 million. Under Varian’s formula, which excludes the Section 965(c) deduction from the denominator, the disallowed amount plummets to roughly $2.8 million—a difference of $2.6 million that could swell to tens of millions across multiple tax years.

The court’s resolution of this dispute will hinge on whether it views the Section 965(c) deduction as a fundamental component of the MRT inclusion calculation or merely a rate-adjustment tool. The IRS’s argument rests on the statutory structure of Section 965, which ties the reductions under Section 965(g) directly to the Section 965(c) deduction, implying that the post-deduction amounts are the relevant figures for all computational purposes. Varian’s position, while creative, risks creating a mismatch between the earnings subject to tax, the foreign taxes deemed paid, and the ultimate disallowance under Section 245A(d). The outcome will not only determine Varian’s tax liability but also set a precedent for how multinational corporations compute foreign tax credit disallowances in the post-TCJA era.

The Court's Formula: Preserving Proportionality in Section 245A(d)

The Tax Court’s ruling in Varian hinges on a single computational principle: proportionality. The court held that the formula under Section 245A(d) must maintain a consistent ratio between the foreign taxes deemed paid, the earnings subject to tax, and the dividends deducted under Section 245A. This means that when calculating the disallowed foreign tax credits, the court rejected any approach that would distort this relationship—even if it meant a smaller tax bill for the taxpayer.

The dispute centered on the definition of "net section 965 inclusion" in the formula. Section 245A(d) requires a computation that disallows foreign tax credits in proportion to the dividends deducted under Section 245A. The formula is:

Disallowed Foreign Tax Credit = Deemed Paid Foreign Tax Credit × (Section 78 Gross-Up / (Net Section 965 Inclusion + Section 78 Gross-Up))

The parties agreed on most elements of this formula—including the deemed paid foreign tax credits and the Section 78 gross-up—but fiercely contested the net section 965 inclusion. Varian argued it should be the pre-deduction amount under Section 965(a), while the IRS insisted it must reflect the post-Section 965(c) deduction.

The court sided with the IRS, adopting a reading that preserves the proportional relationship between foreign taxes and earnings. The rationale is straightforward: Section 245A(d) is designed to disallow foreign tax credits only to the extent they relate to dividends deducted under Section 245A. If the net section 965 inclusion is not reduced by the Section 965(c) deduction, the denominator in the formula becomes inflated, artificially shrinking the disallowance percentage. This would allow Varian to claim a larger foreign tax credit than it was entitled to, undermining the statutory purpose.

The court illustrated this with a simple example. Suppose a controlled foreign corporation (CFC) has $100 of earnings taxed at 20%, resulting in $20 of foreign taxes. Under Section 965, the U.S. shareholder includes $100 in income but takes a $60 deduction under Section 965(c), leaving $40 of taxable income. The deemed paid foreign tax credit is reduced to $8 (20% of $40). The Section 78 gross-up is similarly reduced to $8. The formula then disallows foreign tax credits in proportion to the Section 78 gross-up relative to the net section 965 inclusion:

Disallowed FTC = $8 × ($8 / ($40 + $8)) = $1.33

This represents 16.67% of the deemed paid foreign tax credits, matching the effective tax rate on the post-deduction earnings. If Varian’s approach were adopted—using the pre-deduction $100 as the net section 965 inclusion—the disallowance would shrink to:

Disallowed FTC = $8 × ($8 / ($100 + $8)) = $0.61

This would result in only 7.6% of the foreign tax credits being disallowed, a figure that bears no relation to the actual tax paid on the earnings. The court found no statutory basis for this distortion, noting that all other elements of the formula—including the deemed paid foreign tax credits and the Section 78 gross-up—are post-Section 965(c) amounts. To use a pre-deduction amount for the net section 965 inclusion would create a mismatch, allowing taxpayers to claim foreign tax credits for taxes that were never paid on the earnings actually subject to U.S. tax.

The court also rejected Varian’s technical distinction between Section 965(c) (the deduction) and Section 965(g) (the reduction of foreign tax credits). While these provisions operate differently, the court held that they both serve the same purpose: reducing the taxable income and foreign tax credits to reflect the Section 965 inclusion net of the deduction. The formula under Section 245A(d) must account for these reductions consistently to preserve the proportional relationship.

In the end, the court’s formula ensures that the disallowance of foreign tax credits is tied directly to the earnings that were subject to foreign tax and deducted under Section 245A. For Varian, this means its foreign tax credits are disallowed in proportion to the Section 78 dividends deducted, calculated using post-Section 965(c) amounts. The result is a precise alignment between the taxes paid, the earnings taxed, and the deductions claimed—a principle that will shape future disputes over Section 245A(d) computations.

The Fallout: What Varian Means for Multinational Taxpayers

The Tax Court’s ruling in Varian Medical Systems, Inc. v. Commissioner marks a pivotal moment in the interpretation of the TCJA’s territorial tax regime, particularly for multinational corporations navigating the interplay between Sections 245A and 246. The court’s decision—denying Varian’s motion for summary judgment and granting the IRS’s cross-motion—establishes a clear boundary around the holding period requirements for Section 245A deductions, a clarification that will resonate through tiered foreign subsidiary structures for years to come.

The court’s holding that Section 246(c)(1) requires direct ownership of shares to satisfy the holding period for Section 245A deductions closes a long-standing ambiguity in the statute. Section 246(c), which cross-references Section 245A, mandates a 365-day holding period during a 731-day window for dividends to qualify for the dividends received deduction. The IRS argued—and the court agreed—that this requirement applies strictly to the direct shareholder, not to indirect ownership structures. For taxpayers operating through tiered foreign subsidiaries, this means that dividends from lower-tier controlled foreign corporations (CFCs) will not qualify for Section 245A deductions unless the U.S. shareholder directly holds the shares of the distributing entity. The ruling effectively bars the use of intermediate holding companies or indirect ownership chains to circumvent the holding period requirement, a strategy some taxpayers had employed to accelerate deductions under the territorial system.

The court’s endorsement of the IRS’s computational approach for Section 245A(d) further underscores the precision required in post-TCJA tax planning. Section 245A(d) disallows foreign tax credits for dividends eligible for the Section 245A deduction, and the court’s formula ensures that the disallowance is tied directly to the earnings that were subject to foreign tax and deducted under Section 245A. For Varian, this meant its foreign tax credits were disallowed in proportion to the Section 78 dividends deducted, calculated using post-Section 965(c) amounts. The result is a precise alignment between the taxes paid, the earnings taxed, and the deductions claimed—a principle that will shape future disputes over Section 245A(d) computations. Taxpayers must now meticulously track the foreign-source portion of dividends and the associated foreign taxes to avoid mismatches that could trigger IRS scrutiny or disallowances.

The broader context of the TCJA’s transition to a territorial system adds urgency to these clarifications. The law’s drafters intended to eliminate double taxation on foreign earnings while maintaining guardrails against abuse, but the statute’s drafting left critical questions unanswered. The Tax Court’s ruling in Varian fills some of those gaps, particularly around the mechanics of Section 245A and its interaction with foreign tax credits. For multinational corporations, the decision serves as a cautionary tale about the risks of aggressive tax planning. Structures that rely on indirect ownership or layered subsidiaries to claim Section 245A deductions may now face heightened IRS challenges, particularly in audits targeting the holding period requirements or the foreign-source portion calculations.

Practically, the ruling demands a reevaluation of ownership structures and dividend planning. Taxpayers should prioritize direct ownership of foreign subsidiaries where feasible, as indirect chains may no longer shield dividends from the Section 246(c) holding period requirement. Additionally, the court’s emphasis on proportionality in Section 245A(d) computations means that companies must ensure their foreign tax credit calculations align with the deductions claimed under Section 245A. This includes carefully documenting the foreign-source portion of dividends and the post-Section 965(c) earnings to avoid disallowances. For practitioners, the case underscores the need to revisit client structures in light of the court’s strict interpretation of the statute, particularly for clients with tiered CFCs or hybrid dividend arrangements.

The decision also leaves room for further litigation, particularly on the edges of the holding period requirement. Taxpayers may argue that the court’s interpretation of Section 246(c) is overly restrictive, especially in cases involving complex ownership chains or related-party transactions. The IRS’s victory in Varian could embolden the agency to challenge similar structures in future audits, setting the stage for additional disputes. Meanwhile, the pending Supreme Court case Moore v. United States—which challenges the constitutionality of the Section 965 transition tax—could upend the entire post-TCJA framework if the Court rules against the government. A decision in Moore is expected by mid-2024 and could force taxpayers to reassess their Section 245A and Section 965 calculations retroactively.

For now, Varian stands as a landmark ruling that reaffirms the Tax Court’s willingness to assert its authority over the IRS’s interpretation of the TCJA’s international tax provisions. By denying Varian’s motion and granting summary judgment to the Commissioner, the court signaled that it will not hesitate to enforce the statute’s technical requirements, even in cases with significant tax stakes. The decision is a reminder that the territorial system, while designed to simplify taxation, is not without its complexities—and that the Tax Court will not hesitate to wield its judicial power to ensure compliance. As multinational corporations adapt to this new reality, Varian will serve as both a guide and a warning: a guide to the strict rules governing Section 245A deductions, and a warning of the consequences for those who fail to heed them.