Section 901(a) provides taxpayers the option to claim a credit for foreign income taxes paid or accrued to a foreign country in each taxable year. A taxpayer may instead choose to deduct those taxes under section 164(a)(3), but the credit and deduction are mutually exclusive under section 275(a)(4). A taxpayer is not allowed to “double dip.”
Under section 6511(a), any claim for a credit or refund of an overpayment generally must be filed within three years from the time a return is filed or two years from when a tax is paid, whichever is later. If a taxpayer wants to claim a credit or refund related to an overpayment attributable to creditable taxes paid or accrued to a foreign country, however, the taxpayer has ten years from the due date of the relevant return to do so—and, accordingly, a taxpayer has that same amount of time to claim a foreign tax credit, according to Treas. Reg. § 1.901-1(d).
The taxpayer in CCA 202133013 timely elected to take a credit instead of a deduction for all of the relevant taxable years within the ten-year window, but its election to take a credit in two of its taxable years resulted in an underpayment of tax. For those two taxable years, the change from a deduction to a credit required the taxpayer to eliminate the deductions for the foreign tax claimed on the original returns, but the taxpayer was unable to fully credit the corresponding foreign taxes in either year, presumably due to the foreign tax credit limitation under section 904. As a result, those foreign tax credits were at least partially carried forward to a subsequent taxable year for which the taxpayer also submitted an amended return.
The IRS initially had refused to process the two returns that reflected US tax deficiencies because the three-year statute of limitation for assessing and collecting the tax due in those years had lapsed. The taxpayer contacted the National Taxpayer Advocate for assistance, which in turn requested advice from the IRS Chief Counsel’s office. In the memorandum, the IRS noted that, if the statute of limitations had run for the assessment and collection of tax due in such years, the taxpayer would have been able to benefit from the originally elected deductions and the newly elected credits on the later amended return. This result would cut against the mutual exclusivity set forth by section 275(a)(4) and thus create a result that, according to the IRS, “[t]he law does not permit.”
The IRS then noted, if the request for a refund for the later amended return was allowed, the IRS had a few tools at its disposal, including the equitable remedy of equitable recoupment and the mitigation framework of sections 1311 through 1314. The former allows the IRS to reduce a refund due to a taxpayer for a given taxable year by an underpayment from a different year, but only in cases of related and inconsistent time-barred tax claims relating to the same transaction. The latter allows adjustments to be made to tax items that would otherwise be prohibited where a number of conditions are met. For both, however, the IRS admitted uncertainty regarding how they interact with section 275(a)(4) to prevent taxpayers from obtaining the double benefit of a simultaneous deduction and credit for a single amount of foreign income tax paid.
The IRS ultimately concluded that the mitigation provisions could apply where the taxpayer’s election changes gave rise to a claim for both a deduction and a credit for the same foreign tax, entitling the IRS to assess and collect the related deficiencies. In doing so, the IRS also pointed to proposed regulations that would address at least some uncertainty in this situation. Proposed regulations (85 F.R. 72078) would amend Treas. Reg. § 1.905-3 to include changes in decisions between claiming a credit or deduction for foreign income taxes under the umbrella of a foreign tax redetermination, thereby allowing the IRS to assess and collect US tax deficiencies in intervening years even when the generally applicable three-year assessment period has expired. These regulations are expected to be finalized before the end of the year.
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