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IRS Clarifies Timing of Refund Claims for Foreign Tax Deductions and Credits.

(Parker Tax Publishing May 15, 2015)

The IRS Office of Chief Counsel advised that a taxpayer's refund claim, stemming from returns amended to deducted foreign taxes instead of taking a credit for those taxes, was outside the time limit allowed for such refunds. CCA 201517005.

Background

A taxpayer filed an amended return and a refund claim, changing his election from taking a credit for foreign taxes paid under Code Sec. 901 to deducting the foreign taxes under Code Sec. 164.

The additional deduction significantly reduced the taxpayer's income, resulting in a Net Operating Loss (NOL) for the year the amended return was filed. At the same time the return was amended, the taxpayer also filed an amended return for his tax year two years prior to the first amended return in order to carry back and apply the NOL.

An IRS Senior Technician reviewing the taxpayer's refund claim requested the IRS Office of Chief Counsel's (IRS) advice as to whether a claim for refund of tax paid for year 2 is timely filed under Code Secs. 6511(d)(2) or (d)(3), where an amended return is filed in year 13 claiming a deduction, in lieu of a credit, for foreign taxes paid in year 4, the timely election to deduct foreign taxes in year 4 results in an NOL for year 4, and the claim for refund for year 2 is also filed in year 13 based on an NOL carryback from year 4 to year 2.

The following example illustrates the timeline described in the CCA:

Example: In 2015, Bill filed an amended return and a refund claim for 2006. On the amended return, Bill changed his election in order to deduct creditable foreign taxes under Code Sec. 164, in lieu of taking the credit under Code Sec. 901. This new deduction, for foreign taxes paid or accrued, significantly reduced Bill's 2006 income, resulting in a NOL for that year. At the same time Bill filed the amended return for 2006, he also filed an amended return for 2004, carrying back the NOL from 2006 to 2004.

Analysis

A taxpayer is entitled to a foreign tax credit for foreign taxes paid or accrued (Code Sec. 901(a)). Alternately, taxpayers may deduct foreign taxes paid pursuant to Code Sec. 164(a).

Code Sec. 6511(d)(2)(A) provides that when a claim for refund relates to an overpayment attributable to an NOL carryback, in lieu of the three-year period of Code Sec. 6511(a), the period ends three years after the time prescribed by law for the filing of the return for the tax year of the NOL which results in the carryback.

Code Sec. 6511(d)(3)(A) provides that if a claim for credit or refund relates to an overpayment attributable to a tax paid for which credit is allowed under Code Sec. 901, in lieu of the three-year period of Code Sec. 6511(a), the period is ten years from the date prescribed for the filing of the return for the taxable year in which the foreign tax was actually paid or accrued.

The IRS advised the Senior Technician that the taxpayer's refund claim was not timely. The IRS noted the claim for refund of tax paid with respect to the second amended return was the result of an NOL from the first amended return. It found the timeliness of the claim for refund was governed by Code Sec. 6511(d)(2) because it was attributable to an NOL carryback. Thus, the applicable period had expired three years after the due date of the original return for the first amended return, which was six years prior to when the taxpayer had requested a refund.

Even if the claim for refund was viewed as attributable to foreign taxes paid, the IRS determined the ten-year period under Code Sec. 6511(d)(3) was only available for refunds attributable to foreign tax credits and did not apply to refunds attributable to deductions for creditable foreign taxes.

For a discussion on net operating losses, see Parker Tax ¶ 99,100. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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