89 T.C. 765">*766 Respondent determined the following deficiencies in petitioner's Federal income taxes:

Respondent twice increased the deficiency amount in two amended answers to the petition filed herein. The total deficiency now claimed is $ 438,180 for the fiscal year ended March 31, 1980, and $ 466,531 for the fiscal1987 U.S. Tax Ct. LEXIS 142">*145 year ended March 31, 1981.

89 T.C. 765">*767 Petitioner filed an amendment to its petition, claiming an overpayment of $ 1,850,956 for the fiscal year ended March 31, 1980.

This case concerns the amount of foreign tax credit, if any, which may be claimed with respect to Brazilian taxes withheld on interest income received by petitioner as a result of a loan to a Brazilian borrower. The borrower was contractually obligated to absorb all Brazilian taxes required to be paid with respect to the interest income (i.e., petitioner was to receive the interest free of all Brazilian taxes). During the years involved, the borrower received a subsidy from the Brazilian Government equal to a percentage of the taxes withheld.

The issues to be resolved are: (1) Whether petitioner is legally liable for Brazilian withholding taxes paid by the Brazilian borrower; and if so, then (2) whether such subsidy reduces the amount of the foreign tax credit allowable to petitioner pursuant to section 901; ³ and (3) whether petitioner is entitled to a foreign tax credit with respect to withholding taxes, if any, on interest received on funds deposited by the Brazilian borrower with the Banco Central do Brasil pursuant1987 U.S. Tax Ct. LEXIS 142">*146 to Brazilian Resolution No. 432.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulation of facts and attached exhibits are incorporated herein by this reference.

Nissho Iwai American Corp. (hereinafter referred to as petitioner or NIAC) is a corporation organized and existing under the laws of the State of New York. Its principal place of business at the time of the filing of the petition herein was in New York City.

Petitioner is a wholly owned subsidiary of Nissho Iwai Corp. (hereinafter referred to as NIC), a Japanese corporation. NIC is a large trading company, having numerous subsidiaries and branches.

During the years in issue, petitioner was engaged in the business of importing and exporting a wide variety of products, including metals and metal products, machinery, 89 T.C. 765">*768 textiles, lumber, chemicals, foodstuffs, fuels, and 1987 U.S. Tax Ct. LEXIS 142">*147 general merchandise. It also engaged in making loans in the United States and abroad.

On January 27, 1978, petitioner entered into a loan agreement with Companhia Nipo-Brasileira de Pelotizacao-Nibrasco (hereinafter referred to as Nibrasco), a corporation organized and existing under the laws of the Federal Republic of Brazil. ⁴ The loan agreement provided that NIAC would lend Nibrasco $ 20 million dollars U.S. (the loan) on or before February 17, 1978 (the remittance date). Nibrasco agreed to repay the principal of the loan in six semi-annual installments, the first of which was due 30 months from the remittance date, and the last of which was due 60 months from the remittance date. The amount of the first installment was $ 3.5 million and the amount of each of the remaining five installments was $ 3.3 million.

1987 U.S. Tax Ct. LEXIS 142">*148 The loan agreement provided that Nibrasco would pay interest semi-annually; the first interest payment was due 6 months after the remittance date. The rate of interest fluctuated; it was based on the rate quoted to the Industrial Bank of Japan, Ltd., London Branch, for the offering of dollars by prime banks in the London interbank eurodollar market for deposit for the applicable 6-month period.

All payments of principal and interest were to be made by means of telegraphic transfer to NIAC's bank account in New York, in U.S. dollars. All payments of principal and interest were to be free and clear of, and without deduction for, any taxes imposed by Brazil.

The loan was subject to the approval of the Brazilian Government and the obtaining of a certificate of registration by the Banco Central do Brasil (hereinafter referred to 89 T.C. 765">*769 as the Central Bank). ⁵ Nibrasco also agreed to pay NIAC an administration fee of $ 200,000 within 10 days after the issuance of the certificate of registration. On February 17, 1978, NIAC caused $ 20 million to be transferred to Nibrasco's Brazilian bank. The U.S. dollars were subsequently converted into Brazilian currency.

1987 U.S. Tax Ct. LEXIS 142">*149 The Central Bank issued a registration certificate with respect to the loan on March 31, 1978. Nibrasco timely paid the administration fee, as well as all required installments of principal and interest.

Brazil imposes a 25-percent withholding tax on interest paid by Brazilian borrowers on loans to foreign entities. Foreign loans to Brazilian borrowers fall into two categories -- gross loans and net loans. The difference between a gross loan and a net loan is that in the former the quoted interest rate is a gross rate which does not guarantee the lender a fixed rate of return after deduction of the withholding tax, whereas in the latter, the interest quoted is net of the withholding tax. Because of this difference, most of the foreign loans made to Brazilian borrowers during the years in issue were net loans, as was the NIAC-Nibrasco loan.

Evidence of payment of the withholding tax is a precondition for the payment of interest to a foreign lender. ⁶ Under Brazilian law, payment of the tax is made by submitting a Documento de Arrecadacao de Receitas Federais (hereinafter referred to as a DARF) and the amount of tax to a Brazilian bank.

1987 U.S. Tax Ct. LEXIS 142">*150 Nibrasco maintained a bank account at BancoAmerica de Sul, S.A. (hereinafter referred to as the bank). For each interest payment made to NIAC during the years in issue, Nibrasco prepared a DARF indicating the amount of the interest payment and the 25-percent withholding tax due 89 T.C. 765">*770 thereon and submitted it to the bank. Thereafter, the bank debited Nibrasco's account for the amount of tax due.

On July 31, 1975, Brazilian Decree-Law No. 1411 was issued which inter alia granted the National Monetary Council ⁷ authority to reduce the income tax on interest paid to non-Brazilian persons or to grant a monetary benefit (i.e., a subsidy) to the Brazilian borrower. The subsidy is payable only when payment of income tax on the interest is "actually made, and never in an amount higher than the collected tax." Pursuant to Decree-Law No. 1411, on August 5, 1975, a subsidy was granted to certain borrowers (including Nibrasco) equal to 85 percent of the income tax withheld. ⁸ The amount of the subsidy was reduced from 85 percent to 50 percent, effective July 27, 1979, and remained at 50 percent until December 9, 1979. From December 10, 1979, to May 12, 1980, the amount of the subsidy1987 U.S. Tax Ct. LEXIS 142">*151 was 95 percent. From May 13, 1980, to June 30, 1985, the amount of the subsidy was 40 percent until its elimination on July 1, 1985.

The Brazilian borrower (here, Nibrasco) automatically1987 U.S. Tax Ct. LEXIS 142">*152 receives a credit from his bank (i.e., the tax-collecting bank) in the amount of the subsidy at the time of payment of the withholding tax; however, the credit is subject to the approval of the Central Bank. Mechanically, the tax-collecting bank credited the account of the National Treasury for the entire tax due and simultaneously debited (reduced) the account of the National Treasury for the amount of the subsidy. The effect of this accounting procedure was that the National Treasury was credited only with the amount by which the withholding tax exceeded the subsidy.

During the years in issue, the payments made and received by NIAC and Nibrasco, and NIAC's treatment of the transaction for Federal tax purposes, were as follows: 89 T.C. 765">*771

1987 U.S. Tax Ct. LEXIS 142">*153 Because of the historically high inflation in Brazil and the resulting periodic currency exchange devaluations, the National Monetary Council on June 23, 1977, by Central Bank Resolution No. 432, authorized borrowers of registered foreign currency loans to hedge cruzeiros ⁹ (intended to be used for payments on the loans) against currency exchange devaluations by depositing foreign funds at the borrower's Brazilian bank. Pursuant to Resolution No. 432, the borrower may purchase the foreign funds to be deposited at its Brazilian bank at the current official exchange rate. The foreign funds remain on deposit until such time as the borrower is required to make payment to the lender. The foreign currency deposited at the borrower's bank is then transferred to the Central Bank which pays (2 days prior to the date the borrower must make a payment to the lender) interest on the deposited funds at a rate equal to that payable by the Brazilian borrower to the foreign lender (as set forth in the certificate of registration). To the extent that interest is paid to the foreign lender with funds deposited in the Central Bank, the Brazilian borrower has no obligation to withhold income taxes1987 U.S. Tax Ct. LEXIS 142">*154 thereon; correspondingly, the Brazilian borrower receives no subsidy.

During petitioner's taxable year ended March 31, 1981, Nibrasco deposited funds with the Central Bank pursuant to Resolution No. 432. During the term of this deposit, petitioner received interest payments, which it claims were net of $ 48,650 in withholding of taxes. In its income tax return for the taxable year ended March 31, 1981, petitioner did not include the $ 48,650 as additional interest income, 89 T.C. 765">*772 nor did it claim a foreign tax credit for the $ 48,650. Petitioner now claims entitlement to an additional $ 48,650 of foreign tax credit. ¹⁰

In the notice of deficiency, respondent1987 U.S. Tax Ct. LEXIS 142">*155 reduced the amount of claimed foreign tax credit for both years in issue by 85 percent, except for the foreign tax credit claimed with respect to the August 17, 1979, payment which respondent allowed under the grandfather clause set forth in Rev. Rul. 78-258, 1978-1 C.B. 239, 241. ¹¹1987 U.S. Tax Ct. LEXIS 142">*156 Respondent disputes petitioner's entitlement to the additional $ 48,650 of foreign tax credit. By the amendments to his answer to the petition, respondent seeks increased deficiencies claiming that none of the Brazilian foreign tax credits are allowable because petitioner was not legally liable for the Brazilian tax. ¹²

OPINION

At the outset, it should be noted that this case1987 U.S. Tax Ct. LEXIS 142">*157 involves the unusual situation in which a taxpayer seeks to recognize 89 T.C. 765">*773 income. The reason for this is because attached to the recognition of income is the potential availability of a foreign tax credit; and taxwise, the foreign tax credit is worth more than the detrimental recognition of the income.

Section 901 allows a domestic corporation to claim as a credit against its Federal income tax (subject to certain limitations not applicable herein) the amount of any income taxes paid on behalf of the taxpayer to a foreign country. Sec. 4.901-2(a), Temporary Income Tax Regs., 45 Fed. Reg. 75647 (Nov. 17, 1980). ¹³

1987 U.S. Tax Ct. LEXIS 142">*158 Petitioner claimed a credit for the entire amount of Brazilian withholding tax. In his notice of deficiency, respondent disallowed 85 percent of the claimed credit. Subsequent to the issuance of the notice of deficiency, respondent became aware that the amount of the subsidy had been changed on several occasions during the years in issue. To reflect such changes, respondent claimed an increased deficiency with respect to fiscal year ended March 31, 1980, in his first of two amended answers to the petition. In the second amended answer, respondent asserted that the entire credit claimed should be disallowed. Respondent's latest position is based on statements made at trial by his expert witness that legal liability to pay the withholding tax is imposed on the Brazilian borrower (i.e., Nibrasco) rather than on the lender (i.e., petitioner).

A foreign tax is creditable only if the taxpayer is legally liable under foreign law for the tax. Sec. 4.901-2(g), Temporary Income Tax Regs. However, legal liability for a tax and the obligation to pay the tax are not necessarily the same. For example, under a withholding system, legal liability for the tax and the obligation to pay the 1987 U.S. Tax Ct. LEXIS 142">*159 tax are different. The Federal wage withholding system illustrates this difference -- the employer is the person obligated to withhold the tax and to pay the withheld tax to the Government; the employee is the person legally liable for the tax.

89 T.C. 765">*774 Under Brazilian law, interest paid to foreign lenders (i.e., lenders residing or domiciled abroad) is subject to an income tax at the rate of 25 percent. The Brazilian borrower is required to withhold that percentage from each payment of interest; as a practical matter, the interest payment cannot be made unless and until the Brazilian withholding tax is paid. Respondent argues that the Brazilian withholding tax is a tax upon the payment, rather than receipt, of interest. We disagree.

U.S. tax law is the standard for deciding whether a foreign levy is a creditable income tax. Biddle v. Commissioner, 302 U.S. 573">302 U.S. 573 (1938). After reviewing translations of the applicable Brazilian law, it is our opinion that the tax is on the receipt of the interest. The tax is imposed on the foreign lender; the Brazilian borrower is simply the person required to pay the tax on behalf of the foreign lender. Accordingly, 1987 U.S. Tax Ct. LEXIS 142">*160 we believe that the Brazilian withholding tax per se is potentially creditable to the lender. See sec. 4.901-2(a), Temporary Income Tax Regs.; Gleason Works v. Commissioner, 58 T.C. 464">58 T.C. 464 (1972). ¹⁴ We now turn to the amount of the Brazilian withholding tax which is creditable.

Section 4.901-2(f), Temporary Income Tax Regs. (relating to the amount of income tax paid or accrued), provides:

(f) Amount of income tax paid or accrued -- (1) In general. A credit is allowed under section 901 for the amount of income tax (within the meaning of sec. 4.901-2(a)(1)¹⁵ that is paid or accrued to a foreign 89 T.C. 765">*775 country, subject to the provisions of this paragraph (f). The amount of income tax paid or accrued is determined separately for each taxpayer.

* * * *

(3) Subsidies -- (i) General rule. An amount is not income tax paid or accrued to a foreign country1987 U.S. Tax Ct. LEXIS 142">*161 to the extent that --

(A) The amount is used directly or indirectly by country to provide a subsidy by any means (such as through a refund or credit) to the taxpayer; and

(B) The subsidy is determined directly or indirectly by reference to the amount of income tax, or the base used to compute the income tax, imposed by the country on the taxpayer.

(ii) Indirect subsidies. A foreign country is considered to provide a subsidy to a person if the country provides a subsidy to another person that --

(A) Is owned or controlled, directly or indirectly, by the same interests that own or control, directly or indirectly, the first person; or

(B) Engages in a business transaction with the first person, but only if the subsidy received by such other person is determined directly or indirectly by reference to the amount of income tax, or the base used to compute the income tax, imposed by the country on the first person with respect to such transaction.

[45 Fed. Reg. 75653-75654 (Nov. 17, 1980).]

1987 U.S. Tax Ct. LEXIS 142">*162 Respondent contends that if petitioner is legally liable for the Brazilian tax, that portion of the tax which was returned to Nibrasco by way of the subsidy is not creditable. Respondent relies on section 4.901-2(f)(3), Temporary Income Tax Regs., for this position. Petitioner argues that this regulation is invalid and requests that we follow what have been termed the "Mexican railroad car rental" cases, e.g., Missouri Pacific R.R. Co. v. United States, 204 Ct. Cl. 837">204 Ct. Cl. 837, 497 F.2d 1386">497 F.2d 1386 (1974); Chicago Burlington & Quincy Railroad Co. v. United States, 197 Ct. Cl. 264">197 Ct. Cl. 264, 455 F.2d 993">455 F.2d 993 (1972), revd. on other grounds 412 U.S. 401">412 U.S. 401 (1973); Missouri Pacific R.R. Co. v. United States, 301 F. Supp. 839">301 F. Supp. 839 (E.D. Mo. 1967), affd. in part and revd. in part on other grounds 411 F.2d 327">411 F.2d 327 (8th Cir. 1969); Missouri-Illinois R.R. Co. v. United States, 180 Ct. Cl. 1179">180 Ct. Cl. 1179, 381 F.2d 1001">381 F.2d 1001 (1967). We agree with respondent.

The temporary regulations in effect during both years in issue provide1987 U.S. Tax Ct. LEXIS 142">*163 that, for purposes of creditability, amounts of tax paid or accrued to a foreign country do not include 89 T.C. 765">*776 amounts used directly or indirectly as a subsidy to either the taxpayer or a person who is engaged in a business transaction with the taxpayer where the subsidy is determined directly or indirectly by reference to the amount of income tax, or the base used to compute the income tax, imposed by the country on the taxpayer. Here, the amount of the subsidy received by Nibrasco is clearly based on the amount of the withholding tax.

These regulations were promulgated under the Treasury's general rule-making power as authorized by section 7805(a). As stated by the Supreme Court, Treasury regulations "must be sustained unless unreasonable and plainly inconsistent with the revenue statutes." Commissioner v. South Texas Lumber Co., 333 U.S. 496">333 U.S. 496, 333 U.S. 496">501 (1948), and they "should not be overruled except for weighty reasons." Bingler v. Johnson, 394 U.S. 741">394 U.S. 741, 394 U.S. 741">750 (1969). We recognize that the regulations involved are temporary, not final, regulations; nevertheless, we believe that they are entitled to the same weight as 1987 U.S. Tax Ct. LEXIS 142">*164 the final regulations.¹⁶ See Zinniel v. Commissioner, 89 T.C. 357">89 T.C. 357 (1987).

The position set forth in the temporary regulations, in our opinion, is not unreasonable. The purpose of the foreign tax credit is to reduce international double taxation. See American Chicle Co. v. United States, 316 U.S. 450">316 U.S. 450 (1942). Here, no double taxation occurred; in fact, because petitioner's loan with Nibrasco was a net loan, petitioner was not "out of pocket" for any of the Brazilian taxes. As far as petitioner is concerned, its receiving credit for the Brazilian taxes in any amount essentially constitutes a windfall. The question to be resolved is how much of a windfall petitioner is to receive.

Here, Nibrasco absorbed the entire amount of the Brazilian withholding tax on behalf of 1987 U.S. Tax Ct. LEXIS 142">*165 petitioner. Simultaneous with the payment of the tax, Nibrasco received a subsidy from the Brazilian Government based on the amount of tax paid. Petitioner argues that an amount collected as a tax does not "lose its status as such by virtue of the fact that the taxing authority (foreign or domestic) allocates that amount to a specific program." While in general we agree 89 T.C. 765">*777 with petitioner's argument, in the situation involved herein, payment of the tax and receipt of the subsidy are in lockstep. Commonsense dictates that payment of the tax and receipt of the subsidy be viewed together in determining the amount of foreign taxes creditable for purposes of section 901. If we accept payment of the Brazilian tax as one transaction and receipt of the subsidy as another, we would ignore the true unity of the transaction and elevate form over substance; this we shall not do.

The Mexican railroad car rental cases, which predated the temporary regulations, held that a Mexican withholding tax imposed on freight car rentals was creditable, notwithstanding the granting of a subsidy by Mexico to the Mexican railroad company in an amount equal to the tax withheld. We believe that the 1987 U.S. Tax Ct. LEXIS 142">*166 years have sapped such decisions of whatever vitality they may have had; accordingly we decline to follow the holdings of those cases. ¹⁷

1987 U.S. Tax Ct. LEXIS 142">*167 Were it not for the grandfather clause set forth in Rev. Rul. 78-258, we would reduce the credit for the Brazilian withholding tax for both years in issue to the extent of the subsidy received by Nibrasco. However, the grandfather clause states that "the conclusions in this Revenue Ruling (Rev. Rul. 78-258) will not be applied to disallow a foreign tax credit for amounts claimed as income tax imposed by Brazil on interest accrued or received (but not prepaid) prior 89 T.C. 765">*778 to January 1, 1980, with respect to loans made prior to March 16, 1978." We do not believe this language to be ambiguous, as respondent contends. We understand the meaning of the grandfather clause to be that respondent has conceded creditability for the entire amount of Brazilian withholding tax paid with respect to interest accrued or paid prior to January 1, 1980, without reduction for any subsidy received by the Brazilian borrower. The public has a right to rely on positions taken by the Internal Revenue Service in published revenue rulings. Having made a concession in Rev. Rul. 78-258,1987 U.S. Tax Ct. LEXIS 142">*168 we believe respondent should be so bound.

Respondent concedes that petitioner is entitled to full credit for the foreign tax paid with respect to the August 17, 1979, interest payment. Further, he admits that interest accrued, in an economic sense, daily from August 17, 1979, to December 31, 1979. The amount of interest accrued from August 18, 1979, through December 31, 1979, is $ 941,875; the amount of Brazilian withholding tax on such interest is $ 313,958. In view of the grandfather clause, we find that petitioner is entitled to full credit for the $ 313,958 without reduction for the subsidy paid to Nibrasco with respect thereto. With respect to the credit for the Brazilian withholding taxes paid on interest accruing after December 31, 1979, we find that such credit is to be reduced by the amount of the subsidy paid to Nibrasco.

We now turn to whether petitioner is entitled to a foreign tax credit with respect to interest on funds deposited by Nibrasco pursuant to Brazilian Resolution No. 432. The record in this case does not indicate what amount of Brazilian tax, if any, was withheld by the Central Bank on behalf of petitioner. In fact, the only evidence in this regard was1987 U.S. Tax Ct. LEXIS 142">*169 testimony by respondent's expert witness that the Central Bank had no duty to withhold, and did not withhold, such tax on behalf of petitioner. The burden of proof with respect to this issue is on petitioner; it has failed to carry such burden. See Rule 142(a). Accordingly, we hold that petitioner is not entitled to a foreign tax credit with respect to interest on funds deposited with the Central Bank of Nibrasco pursuant to Brazilian Resolution No. 432.

89 T.C. 765">*779 To reflect the foregoing and concessions by the parties,

Decision will be entered under Rule 155.