Rev. Rul. 84-125

ISSUES

(1) To what extent and in what taxable year should an accrual method taxpayer who contests the assessment of additional income tax by a foreign government under the circumstances described below, be allowed a foreign tax credit under section 901 of the Internal Revenue Code for the contested tax?

(2) When must the taxpayer claim a refund for the overpayment of Federal income tax with respect to the foreign tax credit allowed?

FACTS

X is a domestic corporation that files its Federal income tax return using the accrual method of accounting and on a calendar year basis. In 1973, FC, a foreign country, asserted that X was liable for 100x dollars of additional FC income tax with respect to X's FC 1971 taxable year (which is also the calendar year). X contested the assessment of any such additional liability. Although contesting the assessment and without admitting that any additional amount was due, X in 1973 paid FC 5x dollars of the asserted deficiency. In 1978, it was finally determined that X was liable for 20x dollars of additional 1971 FC income tax, and in 1978 X paid the remaining 15x dollars (the 20x dollars due less the 5x dollars thereof that was paid in 1973) in satisfaction of the 1978 determination.

Prior to the assertion in 1973 of additional FC income tax liability, X's allowable foreign tax credit for the 1971 taxable year exceeded its foreign tax credit limitation for 1971, as provided in section 904(a) of the Code. X's excess foreign tax credit was fully utilized when it was carried back to 1969 and 1970, respectively, causing the section 904(a) limitation to be reached in 1970 as well as in 1969. Consequently, X carried over to 1972 the 20x dollars of additional 1971 foreign income tax paid, and filed two claims for refund for overpayment of Federal income tax with respect to the taxable year 1972. The claims were filed in 1973 and 1978, in amounts of 5x dollars and 15x dollars, respectively.

LAW AND ANALYSIS

Section 901(a) and (b) of the Code provide for the allowance of a credit against Federal income tax for taxes paid or accrued during the taxable year to any foreign country by a domestic corporation, subject to the limitation of section 904.

Section 461(a) of the Code provides that the amount of any deduction or credit allowed by this subtitle A (including sections 901-905) shall be taken for the taxable year which is the proper taxable year under the method of accounting used in computing taxable income.

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 accrued, subject to adjustments prescribed in section 905(c).

Section 905(c) of the Code provides that if accrued taxes when paid differ from the amounts claimed as credits by the taxpayer, or if any tax paid is refunded in whole or in part, the taxpayer shall notify the Secretary, who shall redetermine the amount of the tax for the year or years affected. The amount of tax due on such redetermination, if any, shall be paid by the taxpayer on notice and demand by the Secretary, or the amount of tax overpaid, if any, shall be credited or refunded to the taxpayer in accordance with subchapter B of chapter 66 (section 6511 and following).

Rev. Rul. 58-55, 1958-1 C.B. 266, holds that a foreign tax for the purpose of the foreign tax credit is accruable for the taxable year to which it relates even though the taxpayer contests the liability therefor and the tax is not paid until a later year. However, the question of when the foreign tax accrues is still governed by section 461 and the regulations thereunder, and thus such accrual generally cannot be made until the contested liability is finally determined.

Rev. Rul. 70-290, 1970-1 C.B. 160, holds that the provisions of section 905(c) of the Code contemplate that credit is to be given for the taxes paid to a foreign government, and that a redetermination of the credit is to be made in the event of a refund of such taxes to the taxpayer by the foreign government. Thus, the portion of contested foreign tax that is actually paid by the taxpayer is accruable for the taxable year to which the foreign tax liability relates, as provided in section 905(a), and such accrual can be made at the time of payment, even though the amount of the tax liability is not finally determined at the time of payment.

Accordingly, in 1973 X is allowed to claim a foreign tax credit of 5x dollars for the amount of the additional foreign tax assessment actually paid by X in 1973, which accrues for the taxable year 1971 pursuant to section 905(a) of the Code. In 1978, subsequent to the final determination of X's additional foreign tax liability, X is allowed to claim a foreign tax credit of 15x dollars which accrues for the taxable year 1971, representing the difference between the portion of the total foreign tax assessment for which X is finally determined to be liable (20x dollars) and the amount previously paid and claimed by X in 1973 (5x dollars).

The second issue concerns the proper timing of a claim for refund of Federal income tax paid by X that is precipitated by the assessment of additional income tax by FC.

Section 904(c) of the Code provides that to the extent 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 two preceding years and carried forward to the five succeeding years under certain limitations and conditions not relevant here.

Section 6511(d)(3)(A) of the Code provides special rules relating to the foreign tax credit. That section provides that if the claim for credit or refund relates to an overpayment attributable to any taxes paid or accrued to any foreign country for which credit is allowed under section 901, in lieu of the 3-year period of limitation 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.

The period of limitation prescribed in section 6511(d)(3)(A) of the Code for claiming a foreign tax credit is determined by reference to the year for which the taxes were paid or accrued and not to the carryover year. See Rev. Rul. 75-268, 1975-2 C.B. 294.

Although 5x dollars of the total tax assessment of 100x dollars was paid in 1973 and 15x dollars of that assessment was paid in 1978, the total of 20x dollars in foreign taxes paid is considered accruable for 1971, the year to which it relates. Consequently, the 10-year period of limitation prescribed in section 6511(d)(3)(A) of the Code is determined with reference to the due date of X's 1971 Federal corporate income tax return, March 15, 1972, even though the foreign tax credit will be carried forward to X's 1972 taxable year. See Rev. Rul. 77-487, 1977-2 C.B. 479.

Accordingly, X is required to file a claim for refund of the 20x dollars of additional foreign tax paid by X no later than March 15, 1982, 10 years from the due date of X's 1971 Federal corporate income tax return.

HOLDINGS

(1) Under the circumstances described above, X is allowed to claim a foreign tax credit in 1973 in the amount of 5x dollars, and in 1978, upon the final determination of X's additional foreign tax liability, X is allowed to claim the remaining foreign tax credit of 15x dollars. The total FC income tax liability of 20x dollars will accrue for X's 1971 taxable year.

(2) Since X's claims for refund of a total of 20x dollars for the overpayment of Federal income tax that resulted from the additional foreign tax liability of 20x dollars were filed prior to the March 15, 1982 10-year statutory deadline, the entire amount of 20x dollars is allowable as a credit against X's 1972 Federal income tax liability.

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 58-55, 1958-1 C.B. 266, and Rev. Rul. 77-487, 1977-2 C.B. 479 are amplified. Rev. Rul. 70-290, 1970-1 C.B. 160 is clarified.