Refund Claims Relating to Foreign Tax Credits

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By Edward Tanenbaum

Alston & Bird LLP, New York, NY

There has been some recent press regarding some of the procedural aspects of refund claims relating to foreign tax credits and they stand as a reminder about how significant the statute of limitations periods can be in processing tax claims.

In a case decided last year on October 20, 2014, Albemarle Corp. and Subs. v. United States,1 the U.S. Court of Federal Claims, in a 55-some-odd-page opinion, decided for the government in holding that the taxpayer's claims for refunds in certain years attributable to foreign tax credits were time-barred.

The case involved the Belgian subsidiary of Albemarle which, in 2002, agreed to pay (and did pay) additional Belgian withholding taxes arising out of an audit claiming that such taxes were due on payments of interest on debentures issued to Albemarle, an accrual basis taxpayer. The additional taxes were allocated to each of the taxable years involved in the audit, 1997 – 2001.  As a result of the payment of such withholding taxes in 2002, Albemarle, in May of 2009, filed an administrative refund claim in the form of an amended tax return for the 2002 taxable year. Based on the additional Belgian withholding taxes paid in 2002, Albemarle claimed entitlement to foreign tax credits in each of the 1997 – 2001 years.

The IRS permitted the refund claims for the 1999 – 2001 years but denied the refund claims attributable to the 1997 and 1998 years, on the theory that the refund claims for those years were not filed timely for purposes of seeking refunds based on foreign tax credits. Thus, according to the IRS, refunds attributable to foreign tax credits for the 1997 and 1998 years should have been filed on or before March 15, 2008, and March 15, 2009, respectively, and the taxpayer's filing in May of 2009 was untimely.

At issue was the interpretation of the time period for filing refund claims relating to foreign tax credits under §6511(d)(3)(A).  The issue in the case was further complicated by the fact that §6511(d)(3)(A) had been amended by the Taxpayer Relief Act of 1997. Under the prior version of §6511(d)(3)(A), a claim for credit or refund attributable to foreign taxes paid must have been brought within 10 years from the date prescribed by law for filing the return for the year with respect to which the claim is made. Under the amended statute, the 10-year period runs from the date prescribed by law for filing the return for the year in which such taxes were actually paid or accrued.

According to the court's decision, Albemarle claimed that the additional foreign taxes were actually paid and accrued in 2002 (although they accrued in 1997 and 1998 for purposes of the foreign tax credit) and, therefore, the 10-year period referred to in §6511(d)(3)(A) should run from the due date of the 2002 tax return, i.e., March 15, 2003, and that its 2009 refund claim was timely.  The government argued that a contested foreign tax accrues in the taxable year to which the tax relates, not the year in which the contest is resolved and the foreign tax is paid.

The court first went into some length about the meaning of when foreign taxes are deemed to "accrue," observing that the "all events" test of §461 and the regulations thereunder govern the accrual of foreign taxes. Both the taxpayer and the government agreed that the all events test was met in 2002. On that basis, Albemarle maintained that the additional foreign taxes relating to 1997 and 1998 did not actually accrue until 2002 and that the 10 years runs from the due date of the 2002 tax return. The government argued that, although the all events test was met in 2002, under the "relation back" doctrine and the redetermination rules of §905(c) the accrual relates back to the years to which the foreign taxes relate, i.e., 1997 and 1998, making the taxpayer's claims untimely. As the court put it, Albemarle was claiming that the additional withholding taxes accrued once in 1997 and 1998 in order to trigger its ability to claim the foreign tax credit and then actually accrued in 2002 when the contested liability was resolved and paid, whereas the government was arguing that, although the claims for the foreign taxes were resolved and paid in 2002, the claims related back to the taxable years with respect to which the refunds were being claimed.

After reviewing the contested tax and relation back doctrines, the court found in favor of the government with respect to both the 1997 and 1998 years, i.e., that the foreign taxes accrued in the earlier years and that the statute of limitations period ran from the filing dates for the 1997 and 1998 years. This apparently was the case, in the court's view, based on the wording of §6511(d)(3)(A), both before and after its amendment by the Taxpayer Relief Act of 1997.

Another aspect of the statute of limitations, relating to carrybacks of foreign tax credits, was articulated in a 2013 Chief Counsel's Advice, CCA201330031.

The facts in the CCA involved a taxpayer that had originally taken a foreign tax credit in year 8. The taxpayer changed its mind and in year 17 filed an amended return with respect to year 8 to change from a credit to a deduction. The taxpayer also filed in year 17 an amended return for year 3 to reflect a carryback of the net operating loss created by the deduction it took in year 8. The taxpayer claimed that the net operating loss carryback from year 8 released excess foreign tax credits in year 3, which the taxpayer was entitled to carry back to year 1. As a result, the taxpayer, in year 17, filed a refund claim for year 1.

The issues in the CCA were whether the special 10-year rule contained in §6511(d)(3)(A) (the pre-1997 version was in play in the CCA) applied to the deduction (rather than the credit) for foreign taxes and whether the refund claim for year 1 was timely under §6511(d)(3)(A).

The IRS determined that the refund claim was not timely because, in its view, the special ten-year period of limitations expressed in §6511(d)(3)(A) does not apply to the deduction for foreign taxes paid in year 8 (as opposed to the taking of a credit in year 8). Moreover, because the refund claim in year 1 was attributable to a carryback of excess foreign taxes paid or accrued in year 3, rather than in year 8, the refund claim filed in year 17 was more than ten years after the due date of the year 3 return and, therefore, untimely.

The 2013 CCA and the recent Albemarle case (which, as noted, is on appeal) make clear that the procedural aspects attendant to the foreign tax credit provisions and, in particular, the statute of limitations periods can be quite convoluted and deserving of significant attention.

This commentary also will appear in the June 2015 issue of the  Tax Management International Journal.  For more information, in the Tax Management Portfolios, see Peyser, 627 T.M., Limitations Periods, Interest on Underpayments and Overpayments, and Mitigation, DuPuy, 6020 T.M., The Creditability of Foreign Taxes,  and in Tax Practice Series, see ¶3860, Statute of Limitations, ¶7150, U.S. Persons — Worldwide Taxation.


1   118 Fed. Cl. 549 (2014), Appeal filed Oct. 21, 2014, to the U.S. Court of Appeals for the Federal Circuit, Docket for Case No. 15-5015.