Tech giant Cisco Systems announced this week that it realized a $720 million tax cut in 2024 related to a drafting error in the 2017 tax law pushed through by President Donald Trump and Republicans in Congress. The disclosure, coupled with similar statements from other large multinationals, means that this single drafting error will cost U.S. taxpayers over $1 billion in unintended tax cuts for big multinationals like Cisco.
The billion-dollar drafting error was created by the 2017 tax law’s move from a system that generally taxed corporate income worldwide to one that mostly exempted the foreign income of U.S. multinationals. Congress achieved this by creating a “dividends received deduction” (DRD), which exempted from U.S. corporate income most dividends received by foreign affiliates. This exemption was effective for all distributions made after December 31, 2017.
In a brief fit of rationality, Congressional tax writers realized that the law shouldn’t allow companies to claim both a deduction and a foreign tax credit for the same stream of foreign income, so they amended the law to prevent this. But the provision preventing this double dip was inadvertently written to take effect for “taxable years of foreign corporations beginning after December 31, 2017.”
For the many companies for whom the fiscal year aligns with the calendar year, this was a distinction without a difference. But for companies with fiscal years beginning in any other month, this meant an opportunity to take the double dip. Since Cisco’s fiscal year ends in late July, it meant Cisco could claim both a deduction and a credit for dividends received between January 1 of 2018 and July 28 of that year.
This error did not go entirely unnoticed. The Joint Committee on Taxation’s detailed summary of the so-called “Tax Cuts and Jobs Act,” released just days after the TCJA was signed into law, noted laconically that “[a] technical correction to the effective date of the changes to section 78 may be necessary” to prevent corporations from claiming the double dip. But this polite reminder appears to have been lost amidst the 57 (really!) other TCJA provisions for which JCT offered a similar “you should really fix this” warning.
While Congress subsequently failed to fix this error, The Treasury Department issued regulations designed to essentially change the effective date of the foreign tax credit changes in order to prevent the unintended double dip. And if the Supreme Court hadn’t decided its Loper Bright decision in the summer of 2024, the Treasury regs could have resolved Congress’s error in a way that would have prevented an accidental billion-dollar corporate handout.
But the Loper decision’s new restrictions on the authority of regulatory agencies to clarify laws enacted by Congress led directly to a 2024 case challenging those regs. In that case, the federal Tax Court ruled that Treasury regulations could not trump the plain language of the TCJA, and that both the Court and the Treasury Department should assume Congress had *meant* to create the temporary double dip because “Congress knew how to draft a contemporaneous exclusion if it so desired.” In other words, since Congress hadn’t owned up to making an error, Loper Bright requires tax administrators and the courts to assume they really intended to allow companies a nonsensical “double dip” tax break.
The case was brought by Varian Corporation, and its resolution left Varian open to claim some fraction of the $149 million tax deduction narrowly at issue in the case. But the barn door is now wide open for other big multinationals with unusual fiscal years to claim similar benefits.
While Cisco’s haul is the biggest disclosed so far, other companies are already reporting a substantial 2024 tax savings from the Tax Court’s ruling. The online travel company Booking Holdings reported a $416 million tax benefit from the Varian outcome in its 2024 annual report. The cosmetics giant Estee Lauder estimates a $73 million tax benefit in 2024. Ralph Lauren claimed $34 million, and Dolby Laboratories claimed $10 million. This handful of companies collectively are claiming over $1 billion in tax breaks—and other large tech companies may yet push this price tag even higher.
Judicially, the ”case of the billion-dollar drafting error” was resolved in favor of large multinational corporations like Cisco, in part, because of the new Loper Bright Supreme Court doctrine. But this mess was, in the first instance, made possible by a Republican Congress’ choice to push through the 2017 tax cuts without adequate committee hearings and, in some cases, without even having access to accurate and updated bill text.
The clear lesson of this fiasco is that Congressional tax writers need to take their job far more seriously. That obviously means taking a clear-eyed view of how much their tax plans will really cost, but also means not punting the details of complicated tax proposals to the beleaguered and understaffed Treasury Department. And perhaps most important, it also means taking the time to think through the unintended consequences of these proposals, something the 2017 Congress clearly did not do.
