By is not so narrow---‘increase fiscal redistribution’ is the controlling action.
Kerrigan ’19 [Kathleen Kerrigan; February 25, 2019; Judge on the United States Tax Court; Westlaw, “Eaton Corp. v. Comm'r of Internal Revenue,” 152 T.C. 43]
Petitioner's primary argument, reduced to its essentials, is that the section 964 regulations supply a freestanding, self-contained, and comprehensive system for determining the E & P of a foreign corporation, without any need to refer to or incorporate the rules set forth in section 312 and the regulations thereunder. As discussed earlier section 1.964-1(a)(1), Income Tax Regs., states that a foreign corporation's E & P shall be computed “substantially as if such corporation were a domestic corporation by” doing three things: taking the foreign corporation's P & L statement and making U.S. accounting and tax adjustments to it. Petitioner interprets the preposition “by” in an extremely narrow sense, to mean “by doing these three things and nothing else.”
Petitioner contends that the upper tier CFC partners did the three required things by making the adjustments specified in paragraphs (b) and (c) of the regulation. That having been done, petitioner says, the E & P computation was complete. Petitioner's view of section 1.964-1(a), Income Tax Regs., forecloses resort to the general rules of section 312 for determining the E & P of a foreign corporation--in particular, to the requirement that E & P shall be determined by taking into account “all items includible in gross income under section 61”. Sec. 1.312-6(b), Income Tax Regs.
Petitioner's argument is unpersuasive. The section 964 regulations set forth preliminary steps that must be taken to *56 conform a foreign corporation's P & L statement to that of a domestic corporation. By its terms, section 1.964-1(a)(1), Income Tax Regs., refers only to the “profit and loss statement” and “the adjustments necessary to conform such statement” to U.S. accounting and tax principles. The section 964 regulations do not tell the taxpayer how to compute E & P. They simply require that the foreign corporation's P & L statement first be adjusted to U.S. standards before the E & P rules of section 312 can be applied.