Rev. Rul. 77-487

Advice has been requested whether the taxpayer has made a timely election to claim the foreign tax credit under section 901 (a) of the Internal Revenue Code of 1954 under the circumstances described below.

The taxpayer, a domestic corporation on an accrual method of accounting, contested the payment of 100x dollars of additional income taxes to M, a foreign country, for its 1962 taxable year. On January 2, 1972 the taxpayer paid the contested amount to M. The taxpayer's previously allowable foreign tax credit exceeded the limitation on credit for 1962, as provided in section 904(a), and had already been carried back to 1960 and 1961 so as to utilize the maximum limitation for those years. Consequently, the taxpayer carried over the 100x dollars of foreign income taxes paid for the year 1962 to 1963 and on March 12, 1974, filed a claim for refund for an overpayment of Federal income tax with respect to the taxable year 1963 in the amount of 100x dollars.

Section 904(c) of the Code provides, in part, that where taxes paid to any foreign country for any taxable year exceed the limitation under section 904 (a), the excess may be carried back to the 2 preceding years and carried forward to the 5 succeeding years under certain limitations and conditions not relevant here.

The second sentence of section 901 (a) of the Code provides that the choice to have the benefit of the foreign tax credit for any taxable year may be made or changed at any time before the expiration of the period prescribed for making a claim for credit or refund of Federal income tax for such taxable year. Section 6511 (a) provides, in part, that claims for credit or refund of an overpayment of any tax in respect of which tax the taxpayer is required to file a return shall be filed by the taxpayer within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever of such periods expires the later.

Section 6511 (d) (3) (A) of the Code provides special rules relating to foreign tax credit. That section provides, in part, that if the claim for credit or refund relates to an overpayment attributable to any foreign taxes paid or accrued for which credit is allowed under section 901, in lieu of the 3-year period of limitations prescribed in section 6511 (a), the period shall be 10 years from the date prescribed by law for filing the return for the year with respect to which the claim is made. See Rev. Rul. 68-150, 1968-1 C.B. 564.

Rev. Rul. 75-268, 1975-2 C.B. 294 holds that the period of limitations prescribed by the second sentence of section 901 (a) of the Code for claiming a foreign tax credit is determined with reference to the year for which the taxes were paid or accrued and not to the carryover year.

Section 905(a) of the Code provides, in part, that irrespective of its method of accounting, a taxpayer may take a credit for foreign taxes in the year in which the tax is accrued, subject to the conditions of section 905 (c), which are not relevant here.

Rev. Rul. 58-55, 1958-1 C.B. 266, provides, in part, that a foreign tax is accruable, for purposes of the foreign tax credit, in the taxable year to which it relates, even though the taxpayer contests the liability thereof and such tax is not paid until a later year.

Consequently, in the instant case, although the 100x dollars of contested foreign income tax was actually paid in 1972, it is considered accruable in 1962, the year to which it relates.

Since the period of limitations for claiming a foreign tax credit is determined with reference to the year the taxes were paid or accrued and not the carryover year, and since the 100x dollars of foreign tax accrued in 1962, the period of limitations for claiming a foreign tax credit carryover for 1963 is determined with reference to 1962, the year the 100x dollars of foreign taxes accrued.

In addition, since under section 6511 (d) (3) (A) of the Code, the period of limitations for claiming a refund for accrued foreign taxes ends 10 years from the date prescribed for filing the return for the year with respect to which the claim is made, and since the claim in the instant case is considered made with respect to 1962, the year the 100x dollars of foreign taxes accrued, the taxpayer's claim for refund was required to be filed by March 15, 1973, 10 years after March 15, 1963, due date of its 1962 corporate tax return.

Accordingly, because the taxpayer failed to claim the foreign tax credit for 1962 within the 10 years from the date its return was required to be filed for such year, it may not carry over the 100x dollars to 1963 under section 904(c) of the Code. However, had the taxpayer claimed such credit within the 14-month period beginning with the date of payment of the tax, January 2, 1972 and ending March 15, 1973, 10 years from the due date of its 1962 corporate tax return, it would have been allowed such carryover.