Cite as: 505 U. S. 71 (1992)
Opinion of the Court
the dividends that a corporation receives from its foreign subsidiaries, Iowa does not tax dividends received from domestic subsidiaries. The question presented is whether the disparate treatment of dividends from foreign and from domestic subsidiaries violates the Foreign Commerce Clause.3
I
The Iowa statute uses the federal definition of "net income" with certain adjustments.4 For federal tax purposes, corporations are generally allowed a deduction for dividends received from domestic subsidiaries.5 As the earnings of the domestic subsidiaries, themselves, are subject to federal taxation, this deduction avoids a second federal tax on those earnings.6 The Federal Government generally does not tax the earnings of foreign subsidiaries, and the dividends paid by foreign subsidiaries are not deductible. The parent corporation, however, does receive a credit for the foreign taxes paid on the dividends and on the underlying foreign earnings.7 Like the deduction for domestic subsidiary dividends, the foreign tax credit is intended to mitigate multiple taxation of corporate earnings.8
3 "The Congress shall have Power . . . To regulate Commerce with foreign Nations . . . ." U. S. Const., Art. I, § 8.
4 See Iowa Code § 422.35 (1981).
5 See 26 U. S. C. § 243.
6 See 465 N. W. 2d 664, 665 (Iowa 1991); B. Bittker & J. Eustice, Federal Income Taxation of Corporations and Shareholders ¶ 5.05 (5th ed. 1987).
7 See 26 U. S. C. §§ 901, 902. Instead of taking the credit, the corporation may elect to deduct the foreign tax withheld on dividends from foreign subsidiaries. See § 164. The taxpayer may not take both the credit and the deduction. See § 275(a)(4). The credit is almost always more valuable to the taxpayer. See 3 B. Bittker & L. Lokken, Federal Taxation of Income, Estates and Gifts ¶ 69.14 (2d ed. 1991).
8 See United States v. Goodyear Tire & Rubber Co., 493 U. S. 132, 139 (1989); American Chicle Co. v. United States, 316 U. S. 450, 452 (1942); see also Bittker & Eustice, Federal Income Taxation of Corporations and Shareholders ¶ 17.11.
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