Rev. Rul. 58-55

Advice has been requested whether a taxpayer may consider a foreign tax accrued for the purpose of the foreign tax credit if the liability therefor is disputed and can not be reasonably fixed.

In Dixie Pine Products Company v. Commissioner , 320 U.S. 516, Ct.D. 1598, C.B. 1944, 509, the Supreme Court of the United States held that a taxpayer, employing the accrual method of accounting, could not accrue and deduct the amount of gasoline tax assessed against it by the State taxing authorities, so long as such taxes were contested by the taxpayer; and that the taxpayer may claim a deduction for such tax only for the taxable year in which the liability therefor is finally adjudicated.

However, in the case of The Cuba Railroad Company v. United States , 124 Fed.Supp. 182, the court held, so far as pertinent, that taxes paid to Cuba constituted a proper accrual for the purpose of the foreign tax credit for the year to which they relate irrespective of the fact that such taxes were contested and paid in a later year. Thus, the court rejected the `contested tax' doctrine in cases involving the accrual of a foreign tax under section 131(d) of the Internal Revenue Code of 1939, now section 905(a) of the Internal Revenue Code of 1954, for the purpose of the foreign tax credit.

Section 901(a) of the 1954 Code provides for the allowance of a credit against United States income tax, for taxes paid or accrued during the taxable year to a foreign country or to a pessession of the United States, subject to the limitation of section 904 of the Code.

Section 905(a) of the 1954 Code provides that the credit for foreign taxes may, at the option of the taxpayer, and irrespective of the method of accounting employed in keeping his books, be taken in the year in which the taxes of the foreign country or possession of the United States accrued, subject to the adjustments prescribed in section 905(c) of the Code.

The basic purpose of the allowance of a foreign tax credit is to provide a credit against United States income tax on specific income from foreign sources for foreign taxes paid on such income and in this manner to substantially avoid double taxation on the income when earned. See H. R. Report No. 767, 65th Congress, Second Session, C.B. 1939-1 (Part 2), 86, at page 93. The alternative provisions of section 905(a) of the 1954 Code allowing a credit for foreign taxes when the tax accrued, irrespective of the accounting method used, demonstrate the special nature of such credit. The purpose of this provision of the Code was to allow a taxpayer, employing the cash method of accounting, to take the credit in the year in which the foreign tax accrued and thus offset the foreign tax against United States Federal income tax due. See H. R. Report No. 179, 68th Congress, First Session, C.B. 1939-1 (Part 2), 241, at page 257, and Senate Report No. 398, 68th Congress, First Session, C.B. 1939-1 (Part 2), 266, at page 284.

It is to be noted that the provisions are strictly statutory and do not relate to usual accounting practice. Section 905(c) of the 1954 Code and section 131(c) of the 1939 Code provide a separate and distinct method of correcting differences in taxes claimed as a credit and taxes finally paid. Under these provisions the Commissioner may call for additional taxes due by notice and demand without facing the bar of the ordinary statute of limitations. Similarly, section 6511(d)(3) of the 1954 Code, which provides a ten-year statutory period of limitations, with respect to refunds relating to the credit for foreign taxes, evidences Congressional intent of separate treatment of the foreign tax credit.

However, the accrual of foreign taxes, for the purpose of the foreign tax credit under section 901 of the 1954 Code and section 131 of the 1939 Code, must conform to the general rules laid down under section 461 of the 1954 Code or section 43 of the 1939 Code. Under such rules the accrual for the contested taxes cannot be made until the liability is finally determined, but, under the principles stated in The Cuba Railroad Company case, and in view of the special nature of the foreign tax credit as evidenced by its legislative history and concept, such accrual will relate back to the taxable year for which the foreign tax is in dispute.

Accordingly, in view of the statutory framework, the legislative history and the concept of the foreign tax credit, it is held that the `contested tax' doctrine as expressed in the Dixie Pine Products Company case is not applicable to the accrual of a foreign tax for the purpose of the credit under section 901 of the 1954 Code or section 131 of the 1939 Code. A foreign tax for the purpose of such credit is accruable for the taxable year to which it relates even though the taxpayer contests the liability therefor and such tax is not paid until a later year. Such accrual, however, cannot be made until the contested liability is finally determined.

The above-principles are not intended to affect the taxable year of the accrual of the deduction for foreign taxes under section 164 of the 1954 Code or section 23(c) of the 1939 Code, as distinguished from the accrual of credits for such taxes under section 905(a) of the 1954 Code or section 131(d) of the 1939 Code. The principles enunciated in the Dixie Pine Products Company case, supra , will continue to be applicable to the accrual of foreign taxes for the purposes of the deductions under section 164 of the 1954 Code or section 23(c) of the 1939 Code.

Since this Revenue Ruling modifies a prior position of the Internal Revenue Service on which taxpayers have relied in computing their foreign tax credit, pursuant to the authority contained in section 7805(b) of the Internal Revenue Code of 1954, the principles stated herein will not, where adverse to the taxpayer, be applicable to taxes in respect of a taxable year ended prior to Frbruary 24, 1958.