Rev. Rul. 59-101

Advice has been requested relative to the allowance of credit under the provisions of section 901 of the Internal Revenue Code of 1954 for taxes paid or accrued to Puerto Rico under the `pay as you go' provisions of the Puerto Rican Income Tax Act of 1954.

A citizen of the United States, an alien resident of the United States or an alien resident of Puerto Rico for the entire taxable year is eligible for a credit against his United States income tax under the provisions of section 901 of the Internal Revenue Code of 1954 for any income tax paid or accrued to Puerto Rico, subject to the conditions and limitation of Code section 904. See I.T. 4047, C.B. 1-951-1, 59.

The Commonwealth of Puerto Rico, in its Income Tax Act of 1954, effective June 29, 1954, inaugurated a `pay as you go' or current system of income taxation. This was accomplished with respect to individuals by providing for the withholding of income tax from wages and for the voluntary payment of estimated income tax. In order to relieve individual taxpayers from the burden of paying final tax for 1954 while also paying estimated tax or having tax withheld for 1955, the Puerto Rican Income Tax Act of 1954 (also referred to as the Commonwealth Income Tax Act) provides that a taxpayer who elects under section 60(d) of that Act to pay estimated tax is relieved, under the provisions of sections 60A thereof, from the payment of that part of his final tax for 1954 which is not in excess of his final tax for 1955, and that a taxpayer having tax withheld from his wages for 1955 is relieved, under the provisions of section 141A of the Puerto Rican Act, from the payment of that part of his final tax for 1954 attributable to income derived from wages which is not in excess of his tax on income derived from wages during 1955. The excess, in either instance, must be paid within a period of 18 months from the date of the termination of the taxpayer's 1954 taxable year, which is the calendar year 1954 or any fiscal year beginning in such calendar year.

The questions with respect to which advice has been requested, together with the replies thereto, as set forth below. For convenience this material is divided on the basis of questions covering individuals who calim credit for taxes `accured' during the year, and the those relating to individuals who clam credit for taxes `paid' during the year.

Taxpayers Claiming Section 901 Credit on `Accrued' Basis .

A. Must the foreign tax credit of an individual who claims such credit on an `accrued' basis reflect the relief from 1954 Puerto Rican income tax available under sections 141A and 60A of the Commonwealth Income Tax Act?

The relief afforded a taxpayer from whose wages Commonwealth tax is withheld under section 141 of the Commonwealth Act is allowed automatically by the terms of the Act and is not on an elective basis. Likewise, the relief afforded by section 60A of the Commonwealth Act to a taxpayer who elects to pay estimated Commonwealth tax is automatic and not elective. Subject to the qualification that there appears to be no basis for requiring a taxpayer to make an election to pay estimated Commonwealth tax, the relief afforded by the cited sections of the Commonwealth Act must be reflected in the foreign tax credit for Federal income tax purposes.

B. Should a taxpayer claiming credit on his 1954 Federal income tax return for tax accrued to Puerto Rico in 1954 be allowed credit, as limited by section 904 of the Code, for the total amount of the tax shown on the Puerto Rican return, even though, because tax is being withheld during 1955 from his wages, he is relieved from the payment of such part of the 1954 tax as is attributable to his income derived from wages; or shall he be allowed credit only on the amount shown due on the return subsequent to deducting the part attributable to income from wages?

There is no accrual of a liability when the existence of the liability is uncertain. Passage of the Puerto Rican Income Tax Act of 1954 prevented accrual in 1954 of liability with respect to tax on income derived from wages earned in 1954 to the extent such tax did not exceed the tax on wages to be withheld in 1955. Accordingly, only the net amount of the tax for 1954 which constitutes the taxpayer's liability, will, subject to the limitation of section 904, be allowed as a credit on his United States return.

C. Should a taxpayer claiming credit for tax accrued to Puerto Rico in 1954 be allowed credit, as limited by section 904, for the total amount of the tax shown on the return even though, because he has elected to pay estimated tax for 1955, he is relieved from the payment of 1954 tax which is not in excess of his tax for 1955?

Any part of the Puerto Rican tax with respect to which relief has been granted to the taxpayer cannot be claimed as a credit against his United States tax. No liability exists with respect to the part of the tax of which he has been relieved, and, as explained in the answer to question B, above, there is no accrual in 1954 of such part of the tax.

D. Would a taxpayer who has claimed credit each year since 1951 for tax accrued to Puerto Rico for the taxable year be allowed to file amended returns back to 1951 (if within the statute of limitations) claiming credit on the basis of tax paid during the taxable year?

Under the provisions of section 131(d) of the Internal Revenue Code of 1939, where a taxpayer has made an election to claim a credit against his United States income tax for income tax accrued during the taxable year to a possession of the United States, the credit for all subsequent years must be taken upon the same basis. These provisions have been carried through to the Internal Revenue Code of 1954 as a part of section 905(a). There is no provision in the Internal Revenue Code whereby a taxpayer who elected on his original return to claim credit for foreign tax `accrued' may change his original election and file amended returns on which he claims credit for foreign taxes `paid.'

E. If a taxpayer who claims credit against his United States tax for tax accrued to Puerto Rico has been relieved from the payment of part or all of the 1954 Commonwealth tax, and at the end of 1955 finds that his 1954 tax (or that part of it attributable to income from wages) is greater than his 1955 tax (or that part of it attributable to income from wages) and is required to pay the excess in 1956, when does the accrual of the excess take place?

At the end of the taxpayer's taxable year 1955 all (as defined in section 60A of the Commonwealth Act) events which fix the liability for payment of the excess tax and its amount will have occurred. Before that time the amount of the liability for excess tax, and in many instances the existence of the liability, will be incapable of determination. Under these circumstances the excess tax will accrue in the taxpayer's taxable year 1955. See U.S. v. P. Chauncey Anderson et al. , 269 U.S. 422, T.D. 3839, C.B. V-1, 179 (1926).

Taxpayers Claiming Section 901 Credit on `Paid' Basis .

F. May a taxpayer who has always claimed credit against his United States income tax for income tax `paid' to Puerto Rico continue to claim credit not only for final tax payments to the Commonwealth but also for estimated tax actually paid during the year in question?

Section 901 of the Internal Revenue Code of 1954 allows the credit provided therein, for income, war profits, and excess profits taxes `paid or accrued' during the taxable year.

Section 59(d) of the Puerto Rican Income Tax Act provides `Payment of the estimated tax, or any installment thereof, shall be considered payment on account of the tax for the taxable year.'

A taxpayer who has always claimed credit against his United States income tax for income tax `paid' to Puerto Rico may credit against his United States income tax the amount of Puerto Rican Commonwealth income tax withheld from his wages or salary and/or the amount thereof paid by such taxpayer as estimated tax during the taxable year, to the extent such amount represents a legal and actual tax liability. Compare Rev. Rul. 57-516, C.B. 1957-2, 435; Rev. Rul. 56-124, C.B. 1956-1, 97.