Back in 2011, we reviewed a Tax Court case that determined that income inclusion under the controlled foreign corporation (CFC) rules, while taxed like a dividend at ordinary income rates, could not qualify for the lower 15% (now 20%) preferred rate for qualified dividends. You can read our analysis here.
The Fifth Circuit Court of Appeals has now affirmed the Tax Court, confirming the unavailability of the preferential rate.
Interestingly, the appellate court notes that if the CFC had made an actual dividend distribution, the lower tax rate would be available:
It is also worth noting that, in the context of this case, Appellants—as Editora's sole shareholders—could have caused a dividend to issue. Had they done so, the income at issue would have unquestionably qualified as dividend income subject to a lower tax rate, a point the IRS concedes.
Rodriguez, 112 Aftr 2d Para 2013-5050
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