FOREIGN TAX CREDIT ALLOWED FOR TAX PAID BY DISREGARDED ENTITY.

Stuart J. Bassin, U. S. Department of Justice, Tax Division, Court of Federal Claims Section, Washington, D.C., for defendant, with whom were Eileen J. O'Connor, Assistant Attorney General, Mildred L. Seidman, Chief, Court of Federal Claims Section, and Steven I. Frahm, Assistant Chief (of counsel).

Within Europe, Guardian and its affiliates conduct glass manufacturing and distribution operations in various countries, including the Grand Duchy of Luxembourg ("Luxembourg"), where some 1,200 persons are employed and 3 manufacturing facilities operated, representing a capital investment of more than $200,000,000.

Effective January 1, 2001, for the purpose of payment of Luxembourg corporate income taxes (Loi de l'impot sur le revenue ("LIR"), the Luxembourg tax authorities approved the taxation of the income derived from Guardian's operation of a fiscal unitary group of Luxembourg companies on a consolidated basis pursuant to Article 164bis of the LIR.

Guardian owns its Luxembourg operations through IHC which is the sole shareholder of Guardian Industries Europe, S.a.r.l. ("GIE"), a company organized under the laws of Luxembourg as a Société à responsabilité limitée. GIE, in turn, holds the requisite controlling interests in the following Luxembourg companies: Guardian Europe, S.A.; Guardian Luxcoating, S.A.; Guardian Germany Investments, S.A.; Guardian Glass, S.A.; Guardian Luxembourg, S.A.; Guardian Luxguard I, S.A.; Guardian Luxguard II, S.A.; Guardian Automotive Europe Development & Services, S.A.; Guardian Brazil Investments, S.A. Collectively, these companies comprise the "Guardian Luxembourg Group" for consolidated taxation purposes under Article 164bis of the LIR, with GIE operating as the parent company.

On January 8, 2001, GIE filed Form 8832 with the IRS electing, effective January 1, 2001, as a foreign eligible entity with a single owner, to be disregarded as an entity separate from IHC. By a Notice, dated March 12, 2001, IRS notified GIE that the election had been approved, effective January 1, 2001. See Dover Corp. and Subsidiaries v. Commissioner, 122 T.C. 324 (2004).

During 2001, GIE (IHC) made or accrued advance payments to Luxembourg for 2001 LIR taxes in the amount of 3,429,074 Euros for the Guardian Luxembourg Group.

On June 4, 2002, Guardian filed its 2001 consolidated U.S. Corporation Income Tax Return (Form 1120) with the IRS. In this return Guardian treated the Luxembourg tax as allocable pro rata to the various members of the Guardian Luxembourg Group. On June 18, 2002, Guardian filed an Amended U.S. Corporation Income Tax Return for 2001 (Form 1120X) claiming a refund of $2,855,214. In its Disclosure Statement (Form 8275) filed with this Amended Return, plaintiff explained its position concerning a credit for taxes paid to Luxembourg as follows:

No action having been obtained on the refund claims by the IRS, on December 23, 2002, plaintiff timely filed its Complaint, seeking a refund judgment in this matter. Jurisdiction is present pursuant to 28 U.S.C. § 1491.

Defendant opposes the direct foreign tax credit plaintiff claims asserting that Luxembourg law does not render GIE (IHC) solely liable for the LIR tax paid or accrued with respect to the Guardian Luxembourg Group, that each member of the Group becomes jointly and severally liable for the Group's aggregate tax liability, and that Treas. Reg. § 1.901-2(f)(3) allocates the foreign tax among them regardless of who actually remits the tax.²

Treasury Regulations and case law establish that the person on whom foreign law imposes legal liability for the foreign income tax is the person by whom the tax is considered paid, for Section 901 purposes. Treas. Reg. § 1.901-2(f)(1); Biddle v. Commissioner, 302 U.S. 573, 580-581 (1938); Norwest Corp. v. Commissioner, 69 F.3d 1404, 1407 (8th Cir. 1995).

Plaintiff asserts that under Luxembourg law GIE (IHC) alone was legally liable for the 2001 LIR tax, not the other Group members, and Guardian is thereby entitled to a direct foreign tax credit under Code Section 901.

In order to resolve this conflict, a ruling on Luxembourg law is required. Pursuant to RCFC 44.1, in determining foreign law, the court "may consider any relevant material or source, including testimony, whether or not submitted by a party or admissible under the Federal Rules of Evidence." By Order, filed March 9, 2004, the parties were requested to "explore all possibilities and procedures, if any, for obtaining evidence from an appropriate Luxembourg official(s) or tribunal (advisory opinion) with respect to the Luxembourg law issues involved in this matter . . . ." See United States v. Schultz, 333 F.3d 393, 400-401 (2nd Cir. 2003) cert. denied, 540 U.S. 1106 (2004) (testimony by government officials); Sidali v. INS, 107 F.3d 191, 197-8 (3rd Cir. 1997) (diplomatic note). The usual method for presenting foreign law is expert testimony accompanied by extracts from foreign legal materials. Jinro Am. Inc. v. Secure Inv., Inc., 266 F.3d 993, 1000 (9th Cir. 2001).

The parties have presented reports from experts in Luxembourg law. Plaintiff has submitted reports from: Professor Doctor Alain Steichen, a partner in the Luxembourg law firm of Bonn Schmitt Steichen, a Professor of tax law at Centre Universitaire de Luxembourg, and the author of numerous publications concerning Luxembourg tax law; Roger Molitor, an international tax partner in the accounting firm of KPMG, Managing Partner of the KPMG Tax Advisers, Luxembourg, who has practiced as a professional, specializing in Luxembourg tax matters for the last 25 years; Carlo Mack, Deputy Tax Director, Luxembourg Administration des Contributions Directes responding to a letter, dated March 22, 2004, from Roger Molitor and Patrick Goldschmidt, KPMG Tax Advisors. Defendant has presented reports from André Elvinger, an Avocat à la Cour, admitted to practice in the Grand-Duchy of Luxembourg in all courts, including the administrative courts dealing with tax matters. Maitre Elvinger was admitted to the Luxembourg bar in 1953 and served as President of the Bar in 1986 and 1987. He has published numerous articles in the field of tax law and is a member of the International Fiscal Association since 1958. Maitre Elvinger is a founder and partner in Elvinger, Hoss & Prussen, one of the leading law firms in Luxembourg, and has represented the Luxembourg Government and Luxembourg tax payers in tax litigation. Defendant also presents a response by Monsieur Carlo Mack to a letter dated April 21, 2004, from Mr. Rick Smith, Deputy Tax Attaché, Department of the Treasury, American Embassy, Paris, France and to matters discussed during a telephone conference on May 12, 2004, with IRS and Department of Justice officials.

As noted previously, all parties agree that Article 164bis of the LIR forms the statutory basis for the consolidated taxation involved in this litigation. This Article does not address joint and several liability of the Group members. In relevant part, for 2001 Article 164bis provided (in translation): "A fully-taxable resident company, the share capital of which is at least 99%-held, either directly or indirectly, by another fully-taxable resident company and which is economically and organizationally integrated into the latter may, upon approval by the Ministry of Finance, be assimilated for corporate income tax purposes to a permanent establishment of the parent company." Article 164bis also provided that "(5) A Grand-ducal decree shall determine the terms and conditions for the above-mentioned special regime."

The Grand-ducal decree, dated July 1, 1981, adopted pursuant to Article 164bis, paragraph 5 provides, in relevant part (translated):

Professor Steichen's conclusion that only the parent company is liable for the group income tax is shared by the Deputy Director of the Luxembourg Administration des Contributions Directes, Carlo Mack. The court is appreciative of Monsieur Mack's cooperation in responding to inquiries presented by both parties concerning Luxembourg tax matters. Monsieur Mack noted his agreement with the proposition that "the parent company (head of the tax grouping) is the sole debtor of the corporate income tax of the group, . . . ." Monsieur Mack also answered defendant's inquiry as to a computation of the portion of consolidated taxable income attributable to each member by responding, "The Luxembourg tax law requires determination of separate and individual taxable income of all companies that are members of the group, but it doesn't provide a determination to the separate tax liability that is only attributable to the parent company, sole debtor pursuant to the Grand-ducal Decree of 1981."

The manner in which the regime under Article 164bis is administered by the Luxembourg tax authorities is also consistent with the parent company having sole liability for the consolidated group corporate income tax. While individual member of the group file tax returns, the income or losses of the members are attributed to the parent who files a consolidated return and receives the notice of assessment for the LIR tax and the members each receive an assessment notice indicating zero taxable income.

(1) That plaintiff's Motion for Summary Judgment, filed May 13, 2003, shall be GRANTED;

(2) Defendant's Cross-motion for Summary Judgment , filed January 7, 2004, shall be DENIED;

(3) Counsel shall confer to reach agreement as to the refund amount resulting from the application of the tax credit for 2001 LIR payments or accruals;

(4) Absent prior agreement, on or before May 3, 2005, counsel shall file a status report(s) indicating the further proceedings, if any, required in this matter in order to obtain a final resolution as to the amount of recovery.

² Treas. Reg. § 1.901-2(f)(3) reads as follows: