First Circuit - Puerto Rico tax credit under section 936 (repealed); effects of sale of business eligible for credit during transition period 

June 4:  The U.S. Court of Appeals for the First Circuit—in a case of first impression—held that a sale of three lines of business eligible for the then-applicable Puerto Rico tax credit under section 936 did not result in a reduction of the taxpayer’s credit cap when the businesses were sold to an Irish corporation that was not subject to U.S. corporate income tax. OMJ Pharmaceuticals, Inc. v. United States, No. 13-1008 (1st Cir. June 3, 2014)

The First Circuit concluded that for the taxpayer’s Puerto Rico credit cap to have been reduced under the statutory regime, there must have been a corresponding increase in the buyer’s credit cap—and because the sale of the lines of business in this case did not increase any credit cap of the Irish corporate purchaser, the transfers did not reduce the taxpayer’s credit cap.

Read the First Circuit’s decision [PDF 305 KB]


Section 936 (now repealed) provided a tax credit to U.S. corporations that fully offset the federal tax owed on income earned in the operation of any trade or business in Puerto Rico.

The legislation repealing section 936 in 1996 provided a 10-year transition period, during which the credit remained available only for taxpayers who had claimed it in previous years. During the final eight years of the transition period, the amount of taxable income that could be taken into account to compute the tax credit was capped at an amount approximately equal to the average of the amounts claimed in previous years. While the cap was generally fixed, it could be adjusted—up or down—to account for the taxpayer’s purchases and sales of businesses that had generated credit-eligible income.

For example, if one U.S. corporation sold to a second U.S. corporation a business that accounted for $1 million in average prior year credit claims, the credit cap for the purchasing corporation would normally be increased by $1 million, and the credit cap for the selling corporation would be decreased by the same amount.

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