In Rodruquez v. Comm’r, 137 T.C. No. 14 (2011), issued December 7 2011, the United States Tax Court found that a couple’s Section 951 earnings from a CFC did not qualify for dividend treatment. The taxpayers in the case owned 100% of the stock of a Mexican corporation with U.S. real estate holdings. The couple included the CFC’s earnings in their gross income and attempted to claim preferential tax treatment for the income as a qualified dividend.
In rejecting the taxpayer’s treatment of the earnings, the court relied on the Section 316 definition of a dividend as “distribution of property made by a corporation to its shareholders.” The court ruled that the earnings did not qualify as dividends because there was no distribution actually made to the shareholders. The IRS acknowledged ambiguity in the instructions to Form 5471, however Judge Michael B. Thornton noted that IRS guidance published before the couple filed their returns clearly indicate that Section 951 inclusions do not constitute qualified dividend income under. View the full court opinion on the case.