Taxation-Federal Income Tax-Liquidation Distributions Entitled to Both Capital Gains Treatment and Foreign Tax Credit

Plaintiff, Associated, is an American corporation whose wholly-owned subsidiary, Automatic, owned all the stock of Filcrest, a Canadian corporation. In 1954 all the assets of Filcrest were distributed to Automatic pursuant to a plan of complete liquidation, accomplished in accordance with Canadian law. In its 1954 consolidated return, plaintiff treated the gain realized on the Filcrest liquidation as a capital gain, and also claimed a foreign tax credit for any Canadian income, war or excess profits taxes which Filcrest had paid over the years to Canada on that part of the liquidation distribution which represented Filcrest’s accumulated earnings and profits. The Commissioner of Internal Revenue assessed a deficiency, maintaining that the foreign tax credit was applicable only to dividends, and that a liquidation distribution was not a “dividend” within the purview of the statute. In a suit for refund of taxes paid, held, for the purposes of the foreign tax credit provisions of section 902(a), the liquidation distribution was a “dividend,” and therefore plaintiff is entitled to the claimed credit, though it is required to pay only at capital gains rates on the amount realized in the distribution. Associated Tel. & Tel. Co. v. United States, 199 F. Supp. 452 (S.D.N.Y. 1961).