Chief Counsel advice - No refund allowed for foreign income tax deduction beyond 10-year limitations period 

July 26: The IRS today publicly released a Chief Counsel Advice memorandum* that rejects a taxpayer’s claim for a refund of income tax when, nine years later, the taxpayer changed its election to claim a foreign tax credit to a deduction of foreign income taxes paid, in an effort to give rise to a refundable overpayment of tax.  CCA 201330031 (released July 26, 2013, and dated April 18, 2013)

In the Chief Counsel memo [PDF 69 KB], the IRS concluded that the special 10-year limitations period does not apply in this situation.


*Chief Counsel Advice documents are legal advice, signed by executives in the National Office of the IRS Office of Chief Counsel and issued to IRS personnel who are national program executives and managers. The documents are issued to assist IRS personnel in administering their programs by providing authoritative legal opinions on certain matters, such as industry-wide issues. However, they are not to be used or cited as precedent.

Background

The taxpayer in Year 17 filed an amended federal income tax return for Year 8, reflecting its election to change its previously claimed foreign tax credits under section 901 to section 164(a)(3) deductions for foreign income taxes that accrued in Year 8.


The taxpayer also filed on the same day in Year 17 an amended federal income tax return for Year 3 to reflect its claimed carryback of an increased net operating loss (NOL) created by its election to deduct—rather than to credit—the foreign taxes that accrued in Year 8.


The taxpayer asserted that this claimed increase to the NOL carryback—from Year 8 to Year 3—released Year 3 foreign tax credits, which the taxpayer then claimed it was entitled to carry back to Year 1.


Accordingly, the taxpayer also filed a refund claim for Year 1 on the same day in Year 17.

Chief Counsel Advice memo

The issue considered in the Chief Counsel Advice was whether the taxpayer’s claim for the Year 1 overpayment was timely under section 6511(d)(3)(A).


Under the taxpayer’s refund claim (filed in Year 17), the NOL carryback to Year 3 would result in an increase in excess foreign taxes paid or accrued in Year 3, which then could be carried back and credited against the Year 1 federal income tax—resulting in a refund.


The IRS Chief Counsel Advice, however, concludes that the refund claim for Year 1 was not timely under section 6511(d)(3)(A).


As the memorandum explains, because the taxpayer elected to deduct foreign taxes paid or accrued in Year 8, no credit was allowed for these taxes, and thus the special 10-year period of limitations did not apply regarding the foreign taxes paid or accrued in Year 8. In other words, the special 10-year limitations period only applies to foreign tax credits—not to deductions of foreign taxes.


Also, the IRS memo notes that the taxpayer’s refund claim for Year 1 was attributable to a carryback of excess foreign taxes paid or accrued in Year 3—not in Year 8.


Because the Year 1 refund claim was filed in Year 17 (i.e., more than 10 years after the due date of the return for Year 3), the IRS concluded that it was not timely filed under section 6511(d)(3)(A).




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