International Tax Counselors Blog

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Oldest Swiss Bank arrested while Senate expands the use of Tax Haven Corporations on this link.

Green Card Revoked for non -filing of FBAR.. here the story.

U.K.’s VAT sends SpaceShip I and II to the Golden State .. here is why.

Try our easy, yet powerful,  custom Google U.S. international tax research program, here.  This site has index all of IRS International (and only the international pages), my book and this blog. 

2012 Update for dual residents and dual citizens with new tax breaks from the IRS… here

IRS employee hand book on new “economic substance” penalties Ok’s use of offshore corporations learn why here.

IRS explains  “alter ego” theory” versus nominee…. an estate planning and offshore planning trap, on this link. 

IRS busted for “bait and switch”… here is why and how

The Amazon Kindle Special.. $1.98 for any Chapter of International Taxation in America, on Kindle.  Here is a link

2012 IRS update on U.S. Income Tax Treaties on  this page

White House issues 45 pages of Pre-exchange Control Regulations .. here are the details   on this link

Appeal Court agrees with IRS..no foreign tax credit for UK windfall profits tax.. more on this link.

2012  IRS’s tax planning for the resident alien with foreign investments, here.

A hidden tax is hurting foreigners doing business in the U.S. The “Branch Profit Tax” can be deadly to the foreign real estate investor and the foreign importer.  Learn more here.

2012  Guidance for the foreign investor / seller of U.S. real estate on this link.

What is a Great Tax Team and How to Get Your here on this link.

Author Page for Brian Dooley, CPA, MBT

Switzerland’s old bank (250 years old) has been indicted by the USA (more on this link).  Meanwhile, the U.S. Senate Finance Committee (the tax committee in the Senate) is moving fast to improve the use of low tax and no tax offshore companies.

This concept is called  “Base Territorial System Plan” with a  “Foreign Dividend Exemption.” This concept allows foreign source business income to be U.S. tax free (as it is now) but with reinvestment back into the U.S also free of tax.

Under current law, of the foreign profits are invested back in the US, a 35 percent tax is imposed.  This is keeping money and jobs outside the U.S.

Both of these are “American”…strict compliance to law and order (needed for any capitalistic society) along with a competitive tax system.  Both are these helping the USA explode into a new era of creation of wealth.

It is at this point, that your tax team needs your help to be a Great Tax Team.   Use your team as you plan to expand your use innovation to expand your business.

For example, if you create an E-store place the server and inventory is a no tax state (like Zappo shoes).  Here (on this link) is the  video from my class to the California Society of CPA.

With the third IRS amnesty,  a reminder of the extreme importance for Green Card holders living in the US.  Non filing of the FBAR  can cause lost of the  Green Card and deportation.  Here is what happen to Joel Arguelles.

In El Paso, Texas, Joel Arguelles-Olivares, Also Known As, Joel Arguelles, entered into a plea bargain and plead guilty for filing a false tax return. The amount involved was less than $10,000.   Joel argued that it was not a grievous offense, a standard required for deportation.

The Appeals Court for the Fifth Circuit cited 26 U.S.C. § 7206(1) (2000) (providing that one who “[w]illfully makes and subscribes any return, statement, or other document, which contains or is verified by a written declaration that it is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter” shall be guilty of a felony).

Now comes the question of FBAR’s and Form 1040 Schedule B’s question regarding foreign bank accounts.

For green card holders,  the voluntary disclosure  is the safest solution.  Since the non filing of the FBAR and the checking the box “no” on the Form 1040 may be  crime, always hire an attorney to help with the voluntary disclosure.   The attorney can hire your CPA to assist him/her.

I look forward to comments from others on this topic.

Here is an IRS internal letter where the National Office explains how the carry back of excess foreign tax credit applies.

Remind your CPA.  It is use or lose it.

ILC: 905.01-00, 6511.03-03CC:LM:NR:HOU:1AUS: POSTF-113176-10

to:  Shirley F. Harris
International Examiner
(New Orleans)
(Large & Mid-Size Business)

From:
Associate Area Counsel
(Houston, Group 1)
(Large & Mid-Size Business)

subject:
Foreign Tax Credit

This memorandum responds to your request for assistance dated March 22, 2010. This advice may not be used or cited as precedent.

This writing may contain privileged information. Any unauthorized disclosure of this writing may undermine our ability to protect the privileged information. If disclosure is determined to be necessary, please contact this office for our views.
ISSUES

1. Section 905(a) of the Internal Revenue Code provides that a taxpayer may claim a foreign tax credit in the year in which the foreign tax accrued. * * *, an accrual-basis taxpayer, contested its * * * and * * * withholding taxes. In * * *, it paid the taxes and resolved the dispute. In which taxable years may * * * claim the credits?2. Section 6511(d)(3)(A) of the Internal Revenue Code provides that the ten-year period of limitations to file a foreign-tax-credit refund claim begins on the due date of the return for the year in which the foreign tax was actually paid or accrued. On its amended * * * return, * * * claimed a refund for foreign tax credits relating to its * * * and * * * withholding taxes. When did the period of limitations begin?

CONCLUSIONS

1. Subject to the limitations period prescribed in section 6511(d)(3)(A), may claim the foreign tax credits in its * * * and * * * taxable years — and not in its * * * taxable year.

For purposes of section 905(a), the * * * withholding taxes are considered to have accrued in * * * and * * * when the foreign-source income was subject to the taxes, even though under traditional accrual principles the accrual was not perfected until * * *, when the contest was resolved. Because the purpose of the foreign tax credit is to avoid the double taxation of foreign-source income, consistent with Revenue Ruling 58-55, the accrual of the taxes in * * * related back to * * * and * * *, the years to which the taxes related and the years in which * * * income was subject to * * * tax.

2. The period of limitations began on the due dates (without extensions) of the returns for the * * * and * * * taxable years because the * * * withholding taxes accrued in those years for purposes of the foreign tax credit and the relevant period of limitations.

In 1997, the amendment to section 6511(d)(3)(A) removed the language, “for the year with respect to which the claim is made,” and substituted the language “for the year in which such taxes were actually paid or accrued.” The only purpose for the amendment was to clarify that the limitations period is determined by reference to the year to which the tax relates, and not the year in which foreign taxes, paid or accrued, that exceed the section 904 limitation for such year are “deemed” paid or accrued under the carryover provisions of section 904(c) and claimed as a credit. In the amended language, the word “actually” distinguishes the year paid or the relation-back year from the year in which the taxes are “deemed” paid or accrued under the carryover provisions. Alternatively, the word “actually” can be read to modify only the word “paid,” since there is no legislative history or policy justification that supports interpreting the word “actually” also to modify the word “accrued” in a manner that would override the relation-back rule.

Consistent with Revenue Ruling 84-125, since * * * is an accrual-basis taxpayer, the period of limitations began to run on the due date of the returns for the years in which the taxes accrued, in * * * and * * * (and not in * * *, the year in which the contest was resolved and the taxes were actually paid).
FACTS

* * * is a domestic corporation that files its U.S. income tax return on a calendar-year basis using the accrual method of accounting. It files a consolidated return.

* * * extended the due dates to file its * * * and * * * returns to * * *, and * * *, respectively.¹

In * * *, the * * * tax authorities asserted that * * * foreign subsidiary, * * *, was liable as withholding agent for a 25 percent withholding tax on bond interest paid to * * * in * * *, * * *, * * *, * * *, and * * *. * * * contested * * * liability for the withholding taxes. On * * *, the parties agreed that * * * would pay on * * * behalf a 15 percent withholding tax on the bond interest.

Pursuant to the agreement, * * * paid the following withholding taxes on behalf of * * * with respect to interest paid by * * * to * * * in * * * – * * *:²

Date                       Amount (USD)
_______________________________________

$* * *,394

$* * *,289

($* * *)³
_______________________________________
$* * *

* * * did not claim any foreign tax credits for the * * * withholding taxes on its * * *, * * *, * * *, * * *, and * * * returns. On * * *,⁴ * * * filed an amended return for the * * * taxable year. On this return, it claimed foreign tax credits totaling $* * * for the * * * withholding taxes assessed for its * * * – * * * taxable years that were paid in * * *. The amended return reported the credits as resulting in an overpayment of U.S. tax for which * * * requested a refund.

The IRS contends that * * * could claim foreign tax credits relating to the * * * withholding taxes with respect to the * * * and * * * taxable years,⁵ but for the fact that the ten-year period of limitations to file foreign-tax-credit-related refund claims for those taxable years has expired. * * *, on the other hand, argues that it may claim the foreign tax credit in the * * * taxable year when it paid the withholding taxes and resolved the dispute with the * * * tax authorities. It also claims that its refund claim was timely because the period of limitations began on the due date of its * * * return, which had not expired as of the amended return’s filing date.
LAW AND ANALYSIS

I. In which taxable years may * * * claim the foreign tax credits?

A.

* * * is an accrual-basis taxpayer and may only claim the foreign tax credits in the year the taxes accrued

.

As a preliminary matter, * * * failed to specifically address on which method of accounting it may take a foreign tax credit in any given year. The relevant authority is section 905(a) of the Code, which provides that a taxpayer may claim a foreign tax credit in the year in which the foreign taxes accrued. The regulations under this section provide that “the credit . . . may ordinarily be taken either in the return for the year in which the taxes accrued or in which the taxes were paid,” depending on whether the taxpayer’s accounts and returns use an accrual- or cash-basis method of accounting.⁶

Here, * * * is an accrual-basis — not a cash-basis — taxpayer. As such, it may only claim foreign tax credits in the year the foreign taxes accrued.⁷ Accordingly, the determination of the taxable year in which * * * may claim the foreign tax credit hinges on the meaning of “accrue” within this section.

B.

Foreign taxes accrued in * * * and * * *, the years to which the foreign taxes related, for purposes of the foreign tax credit

.

To understand the meaning of “accrue” for purposes of the foreign tax credit, we must look to the purpose of the credit itself. The legislative history explains that the credit’s purpose was to avoid double taxation of foreign-source income by crediting foreign taxes against U.S. income tax liabilities.⁸ Congress recognized that, to avoid double taxation, the year in which the credit may be taken should match the year when the income is subject to the foreign tax. Indeed, Congress acknowledged that “the tax laws of most [foreign] countries, like our own, provide for the payment of income taxes during the year following the year for which the tax is imposed.”⁹ And “in many cases the credit is taken against the United States tax for the year following the year in which was earned the income on which the foreign tax was imposed.”¹⁰ As a result, Congress remedied this timing issue by allowing a cash-basis taxpayer, at its option, to take the credit “in the year in which the taxes of the foreign country accrued.”¹¹ This remedy allows taxpayers who use a cash method of accounting to claim the credit in the year the foreign tax accrued. Congress’s remedy therefore underscores the foreign tax credit’s purpose — avoiding double taxation of foreign-source income.

When foreign taxes are contested, however, the timing of when they accrue for purposes of the credit does not follow traditional accrual accounting principles. For example, in order to clearly reflect income in a taxable year, all events which fix the fact and amount of a liability must occur in that year before a taxpayer may deduct or claim a credit for that liability.¹² And, in general, when an accrual-basis taxpayer contests a deductible liability and that liability remains contingent, the taxpayer may not accrue and deduct it in that year.¹³ As articulated in Dixie Pine Products Co. v. Commissioner, the accrual-basis taxpayer could deduct the liability only in the year when the liability is finally adjudicated.¹⁴ This principle is referred to as the “contested tax” doctrine.

But the court in Cuba Railroad Co. v. United States (“Cuba“) rejected the contested tax doctrine for purposes of the foreign tax credit.¹⁵ In light of the statutory language of section 131(d) of the 1939 Code — now section 905(a) — the contested tax doctrine did not apply.¹⁶ The court in Cuba analyzed section 131(d), which provided that “[t]he credits . . . may be taken in the year in which the taxes of the foreign country . . . accrued.”¹⁷ The court found that the language was “clear and unambiguous” and supported by case law.¹⁸ It therefore held that the credit may be taken in the year the foreign taxes accrued, even though the taxpayer contested the taxes, then resolved the dispute and paid the taxes in a later year.¹⁹

In Revenue Ruling 58-55, the IRS followed the holding in Cuba. It determined that a foreign tax accrued for purposes of the credit in the year to which the tax related, although the tax was disputed and could not be reasonably fixed in that year.²⁰ It noted that the provisions in section 905(a) are “strictly statutory and do not relate to usual accounting practices.”²¹ But the IRS also noted that the accrual of the foreign tax for purposes of the credit must still conform to section 461, which required that the accrual of a contested tax could not be made until it was finally determined.²²

To harmonize the rules under section 461 with the holding in Cuba, the IRS reasoned that, under the principles of Cuba, and in view of the special nature of the foreign tax credit as evidenced by its legislative history and concept, the “relation-back” doctrine applied to the accrual of the foreign tax.²³ In other words, the foreign tax accrued when the fact and amount of the liability were finally determined, but the accrual related back to the year in which the liability arose.²⁴

The legislative history to sections 905 and 986 further bolsters the argument that contested foreign taxes are considered to accrue in the year to which they relate, not in the year in which the contest is resolved and the taxes are paid. The Taxpayer Relief Act of 1997²⁵ revised the rules with respect to when a foreign tax redetermination is considered to have occurred and what translation rate applies to foreign income taxes paid in foreign currencies.

In lieu of the prior translation convention, whereby foreign taxes were translated at the time they were paid to the foreign country,²⁶

Congress believed that taxpayers that are on the accrual basis of accounting for purposes of determining creditable foreign taxes should be permitted to translate those taxes into U.S. dollar amounts in the year to which those taxes relate, and should not be required to make adjustments or redetermination [sic] to those translated amounts, if actual tax payments are made within a reasonably short period of time after the close of such year.

²⁷

Consistent with that legislative history, section 986(a)(1)(A) states that, in the case of any taxpayer who takes foreign income taxes in account when accrued, the amount of any foreign income taxes is translated into dollars by using the average exchange rate for the taxable year to which such taxes relate. If taxes are paid after the date that is two years after the close of the taxable year to which they relate, they are translated at the spot rate on the date of payment.²⁸

Similarly, section 905(c)(1)(B) provides that, if accrued taxes are not paid before the date two years after the close of the taxable year to which the taxes relate, a foreign tax redetermination results. Taxes paid before that date are treated as paid in the year to which they relate and no redetermination of U.S. tax is required. The legislative history and the statute both provide that, “[i]n the case of the direct foreign tax credit, any such taxes subsequently paid are taken into account for the taxable year to which such taxes relate . . .,”²⁹ although translated at the spot rate on the date of payment. Thus, consistent with Cuba and Revenue Ruling 58-55, taxes paid either within or after two years after the close of the taxable year to which they relate are considered to accrue in the year to which they relate, not in the year in which they are paid.

The application of the relation-back doctrine therefore prevents the double taxation of foreign-source income. Otherwise, if the foreign tax accrued for purposes of the credit in the year the liability was finally determined, then the credit would not be taken in the year when the income was earned and subject to double taxation. Such a contrary result would thwart the purpose of the credit.

Consistent with the IRS’s position in Revenue Ruling 58-55, in the instant case, * * * accrued the * * * withholding taxes in * * * when the * * * contest was resolved and the taxes were paid. But for purposes of the foreign tax credit, the accrual related back to * * * and * * *, the years for which the taxes were assessed.

C.

* * * may not claim the foreign tax credits on its amended return

.

In its rebuttals, * * * relied on Revenue Ruling 58-55, as well as United States v. Campbell,³⁰ to support its position that the credits may be taken on its amended * * * return, rather than the returns for the years to which the taxes related. Based on these authorities, it argued that, because the foreign taxes accrued in * * *, the foreign tax credits may be taken in * * *. But in analyzing these authorities, * * * took statements out of context and failed to read the respective authorities as a whole.

In discussing Revenue Ruling 58-55, * * * dismissed the application of the relation-back doctrine and ignored the remaining contents of the ruling. It only focused on the statement that the accrual “cannot be made until the . . . liability is finally determined.”³¹ On this basis, it asserted that it could claim the credits on its amended * * * return. But the sentence preceding this statement provided: “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.”³² In the instant case, * * * was not the taxable year to which the * * * withholding taxes related. Therefore, this ruling does not support taking the credit in * * * taxable year.

* * * also relied on Campbell to support its assertion that the credit may be claimed only on its * * * return. But it misread the Campbell court’s discussion of Revenue Ruling 58-55. It ignored the court’s entire description of the ruling. Instead, it bifurcated one of the court’s sentences and took each portion out of context. Following the description of Revenue Ruling 58-55, the court stated:

Thus, if the taxpayer contests his liability for a foreign tax imposed on income in 1960, and this liability is finally adjudicated in the foreign country in 1965, ‘the credit may not be claimed until 1965 . . . (but) the foreign tax imposed on 1960 income will be offset against the United States 1960 tax just as if it had accrued in 1960.’

³³

* * * interpreted the initial part of this sentence, ending with “the credit may not be claimed until 1965,” to mean that “the taxpayer may not claim the credit for the contested tax until the year in which the contest is resolved.”³⁴ Although literally correct, the phrase does not mean that the credit may be claimed in the return for the year in which the dispute was resolved. Rather, the second part of the sentence beginning with “(but)” indicated in which year the credit may be claimed and described the application of the relation-back doctrine to the particular facts in the ruling. Thus, the accrual of the liability related back to 1960, the year in which the foreign tax was levied. * * * reliance on Campbell therefore fails. In the instant case, * * * was not the year in which the * * * withholding taxes were levied. Therefore, * * * was not the year in which the credit may be taken.

* * * cited to no authority that supported its position. Indeed, its cited authorities supported claiming the credits on the returns for the years in which the foreign taxes were imposed. Accordingly, * * * may not claim the credits on its * * * amended return.

II. When did the period of limitations to file the foreign-tax-credit refund claim begin?

A.

The period of limitations did not begin on the due date of the * * * return

.

In its rebuttals, * * * relied on Campbell, as well as the 1997 amendment to section 6511(d)(3)(A), to support its position that the period began on the due date of its * * * return. The court in Campbell made no mention of the period of limitations in its discussion of Revenue Ruling 58-55, and the case was decided well before the amendment to section 6511(d)(3)(A). Further, its conclusion — that the foreign tax accrued in the year the tax was levied — was contrary to * * * position. Therefore, this authority provides no support for * * * position.

Regarding its other argument, * * * made much of the fact that section 6511(d)(3)(A) was amended in 1997. Specifically, it focused on the language, “the year in which such taxes were actually paid or accrued.” It argued that the period of limitations began when the taxes were “actually paid” or “actually accrued.” * * * argues that the * * * withholding taxes were “actually paid” and “actually accrued” in * * *, so that the period of limitations began to run on the due date of its * * * return.

But an analysis of the plain language of the relevant statutes determining the limitations period, as well as the legislative history of the 1997 amendment to section 6511(d)(3)(A), demonstrates otherwise.

The relevant statutes are found in sections 901(a) and (b), 905(a) (discussed in part I., above), and 6511(d)(3)(A).

Section 901(a) describes the allowance of the foreign tax credit. It provides:

If the taxpayer chooses to have the benefits of this subpart, the tax imposed by this chapter shall . . . be credited with the amounts provided in the applicable paragraph of subsection (b) plus, in the case of a corporation, the taxes deemed to have been paid under sections 902 and 960. Such choice

for any taxable year

may be made or changed at any time before the expiration of the

period prescribed for making a claim for credit or refund

of the tax imposed by this chapter

for such taxable year

. . . .

³⁵

Section 901(b) describes the amount generally allowed as a credit. For domestic corporations, a credit is allowed for “the amount of any income, war profits, and excess profits taxes paid or accrued during the taxable year to any foreign country.”³⁶

Section 905(a) and its regulations describe the year in which the foreign tax credit may be claimed and on which method of accounting the credit may be claimed — in other words, the year in which the taxes were paid or accrued. Specifically, section 905(a) provides that, regardless of the method of accounting used by the taxpayer, the credit may be taken “in the year in which the taxes of the foreign country . . . accrued.”³⁷

Sections 901(a) and (b), when read together, provide that a foreign tax credit is allowed against U.S. income tax for foreign taxes paid or accrued during the taxable year to a foreign country. Section 905(a) then permits a cash-basis taxpayer to take the credit in the year in which the foreign taxes accrued. Based on a reasonable construction of the statutes, the terms, “for any taxable year” and “for such taxable year” in section 901(a), “during the taxable year” in section 901(b), and “in the year” in section 905(a), all refer to the same year for purposes of when the taxes were paid or accrued.³⁸ And for purposes of the foreign tax credit, as discussed in part I.B., above, the liability for the * * * withholding taxes was fixed in * * *, but the accrual related back to the years to which the taxes related.

* * * taxable years at issue are calendar years * * * and * * *. As stated above, section 901(a) provides that the choice to elect either a credit or a deduction for foreign taxes paid for any taxable year may be made or changed at any time before the expiration of the period prescribed for making a claim for credit or refund of the U.S. tax imposed for such taxable year. Section 6511(d)(3)(A) describes the period of limitations for credit or refund referred to in section 901(a). This section was amended on August 5, 1997, with the amendment being effective for taxes paid or accrued in the taxable years beginning after its enactment.³⁹ Thus, taxable year * * * is subject to the pre-amendment version of section 6511 and taxable year * * * the post-amendment version.

Before the enactment date, the section stated as follows:

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 against the tax . . . in accordance with the provisions of section 901

. . . in lieu of the 3-year period of limitation prescribed in subsection (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

.

⁴⁰

After the enactment date, the language was changed from “for the year with respect to which the claim is made” to “for the year in which such taxes were actually paid or accrued.”⁴¹

Under either version, the “year” referred to in section 6511(d)(3)(A) is the same “year” referred to in sections 901(a) and (b) and 905(a). Under the pre-amendment language, both the IRS and the courts determined that the year referred to in the foregoing statutes is the same — the year the taxes were actually paid or accrued, and not the later year to which excess credits were carried and “deemed” paid or accrued under section 904(c).⁴² The court in Chrysler stated that, “In our view, the most reasonable reading of these two statutes is that the ‘such taxable year’ of § 901(a) and the ‘year with respect to which the claim is made’ of § 6511(d)(3)(A) refer to the same year: the year in which the taxpayer first made its election whether to claim a foreign tax credit.”⁴³ The court went on to say, “All that § 6511(d)(3)(A) provides to the taxpayer is a longer limitations period for altering its election of a foreign tax credit than the three-year limitations period prescribed by § 6511(a). The touchstone for triggering the statute of limitations remains the original year of election.”⁴⁴ Further, the Chrysler court, in discussing the pre-amendment version of section 6511(d)(3)(A), noted that, “[O]ur reading avoids the uncertainty that would attend Chrysler’s interpretation, which could lend to a shorter or longer limitations period depending on the unique fiscal circumstances of the taxpayer.”⁴⁵ Both statements of the Chrysler court apply equally to the pre- and post-amendment versions of section 6511(d)(3)(A), since the change to the statute was merely clarifying.

In reading the plain language of the amended statute, the phrase, “such taxes were actually paid or accrued,” refers to the prior language in the same sentence, “any taxes paid or accrued to any foreign country . . . for which credit is allowed against the tax . . . in accordance with the provisions of section 901.”⁴⁶ Thus, the “year in which such taxes were actually paid or accrued” is the year in which the credit may be taken under section 905(a).⁴⁷ And as discussed in part I.C., above, in the instant case, the credit may not be taken in the * * * taxable year.

The legislative history of the amendment to section 6511(d)(3)(A) also demonstrated that the limitations period begins by reference to the year to which the creditable taxes relate. The amendment was enacted to clarify the limitations period attributable to refund claims attributable to foreign tax credit carryovers.⁴⁸ Congress acknowledged that the IRS took the position in Revenue Ruling 84-125 that, in the case of a credit carryforward, the period governed by “the year with respect to which the claim is made” is determined by reference to “the year in which the foreign taxes were paid or accrued (and not the year to which the credits were carried).”⁴⁹ It also acknowledged the holding in Ampex Corp. v. United States, which provided that the limitations period is determined by reference to “the year to which the credits are carried (and not the year in which the taxes were paid or accrued).”⁵⁰

As a result, Congress amended the section to make clear that, in the case of a claim relating to an overpayment attributable to foreign tax credits, the limitations period is determined by reference to the year in which the foreign taxes were paid or accrued, consistent with Revenue Ruling 84-125.⁵¹ Also, in acknowledging Revenue Ruling 84-125, which amplified Revenue Ruling 58-55, Congress by extension accepted the holding of the latter, that, “A foreign tax is accruable for the purpose of [the credit provided in section 901] for the taxable year to which it relates even though the taxpayer contests the liability therefore and such tax is not paid until a later year.” Despite * * * urging to interpret the amended language as “actually paid” or “actually accrued,” the legislative history makes no mention of the term “actually,” and the discussion of the reasons for the clarifying amendment supports the IRS’s position that Congress’s intention was merely to distinguish the year in which the credit claim arose from the carryover year. Alternatively, the word “actually” modifies the word “paid,” and there is no legislative history or policy justification that supports interpreting the word “actually” also to modify the word “accrued” so as to override the relation-back rule, as * * * advocates. Notably, Congress did not reject the concept that foreign taxes accrue in a year that is different from the year the tax accrual is perfected based on section 461 and traditional accrual principles. In fact, it gave weight to Revenue Ruling 84-125, which provided for a special definition of accrual for purposes of the foreign tax credit. When Congress amended section 6511(d)(3)(A), it adopted the IRS’s position in the ruling that the period is determined by reference to the year in which the taxes were paid or considered to accrue, not the later year to which the taxes were carried and claimed as a credit.

Given the language of the relevant statutes and the legislative history of the amendment to section 6511(d)(3)(A), the period of limitations began to run on the due date (without extensions) of the return for the year to which the foreign taxes relate. In the instant case, though the taxes were “actually paid” in * * * when the contest was resolved and the accrual was perfected, they did not accrue for purposes of claiming the foreign tax credit in the * * * taxable year. So the limitations period began to run on the due date of * * * and * * * returns, not the due date of the * * * return.

B.

The period of limitations began on the due date of the * * * and * * * returns

.

Under both the pre- and post-amendment language of section 6511(d)(3)(A), the date on which the period of limitations begins to run is the same. The IRS addressed the pre-amendment language in Revenue Ruling 84-125 and took the position that the period begins to run on the due date of the return for the year in which the taxes were paid or accrued. And for accrual-basis taxpayers, the year in which taxes accrue is the year to which the taxes relate. Through the enactment of the 1997 amendment to section 6511(d)(3)(A), Congress adopted the IRS’s position in the ruling.

Revenue Ruling 84-125 amplified Revenue Ruling 58-55, and applied the relation-back doctrine to the accrual principles of the foreign tax credit to determine in which taxable year the credit was allowed.⁵² The accrual-basis taxpayer, who contested a foreign tax assessment, may claim the credit in the taxable year to which the foreign tax related, even though the credit may not be claimed (except to the extent the tax was already paid) until the tax was finally determined and the accrual was perfected.⁵³ The ruling specifically held that the taxpayer may claim the credit when the tax was paid and finally determined, but for purposes of the foreign tax credit, the tax accrued for the taxable year to which the tax related.⁵⁴ And in interpreting the pre-amendment language of section 6511(d)(3)(A), it held that the claim for refund of the foreign tax credit must be made within ten years of the due date of the return for the year to which the foreign tax related, that is, the year the taxes accrued.⁵⁵

In the instant case, for purposes of the foreign tax credit, the * * * withholding taxes accrued in * * * and * * *, the years to which the taxes related. Since the amendment was effective for taxes accrued in the taxable years after August 5, 1997, the pre-amendment version of section 6511(d)(3)(A) applies to the * * * taxes and the post-amendment version applies to the * * * taxes. But under both versions, the determination is the same because Congress adopted the IRS’s position in Revenue Ruling 84-125 as to the date on which the limitations period begins. And in any event, since the instant case does not involve a carryover of excess tax credits, the “year to which the claim relates” and the “year in which the taxes are actually paid or accrued” are one and the same. So consistent with the ruling, in the instant case, the period began to run on the due dates of the returns for * * * and * * *.

Please call * * * if you have any further questions.

• • • • • • Marion S. Friedman
            Associate Area Counsel
            (Large & Mid-Size Business)

            By: Huong T. Bailie
            Attorney (Austin)
            (Large & Mid-Size Business)

cc:
* * *
FOOTNOTES

¹ The IRS’s Notice of Proposed Adjustments (“NOPA“) provides that the ten-year statute of limitations under section 6511(d)(3)(A) of the Internal Revenue Code (“Code“) for * * * and * * * taxable years expired on * * *, and * * *, respectively. The undersigned attorney assumes that the due dates to file the returns for these years were ten years prior to these expiration dates. However, because the section 6511(d)(3)(A) period of limitations is determined without regard to extensions, the relevant statutes of limitation for foreign tax credit-related refund claims for * * * and * * * calendar taxable years expired on * * *, and * * *, respectively. Treas. Reg. § 301.6511(d)-3(a).

² The IRS’s NOPA contains conflicting information regarding the amounts of withholding taxes paid in Euros and the conversion into dollars. The undersigned attorney assumes that the amounts presented in dollars are correct.

³ This amount is a refund of overpaid withholding taxes.

⁴ In * * * Rebuttal 1, * * * states that it filed the amended return on * * *. The undersigned attorney assumes that the date indicated in the IRS’s NOPA is the correct filing date.

⁵ The IRS’s NOPA states that * * * conceded the portion of the * * * foreign tax credit for the * * *, * * *, and * * * withholding taxes. For this reason, this memorandum only addresses the * * * and * * * taxable years. However, it appears that * * * did not so concede, and the section 6511(d)(3)(A) period of limitations expired on * * *, for the * * * taxable year. The section 6511(d)(3)(A) period of limitations will expire on * * * and * * * for the * * * and * * * taxable years, respectively.

⁶ Treas. Reg. § 1.905-1(a).

⁷ I.R.C. §§ 461(a); 905(a); Treas. Reg. § 1.905-1(a).

⁸ H.R. Rep. No. 65-767, pt. 2, at 93 (1918).

⁹ H.R. Rep. No. 68-179, pt. 2, at 257 (1924); S. Rep. No. 68-398, pt. 2, at 284 (1924).

¹⁰ Id.

¹¹ Id.

¹² I.R.C. § 461(h)(4); United States v. Anderson, 269 U.S. 422, 441 (1926).

¹³ Dixie Pine Products Co. v. Commissioner, 320 U.S. 516 (1944). But see Treas. Reg. § 1.461-2(a)(1).

¹⁴ Id.

¹⁵ 124 F. Supp. 182 (S.D.N.Y. 1954).

¹⁶ Id. at 185.

¹⁷ I.R.C. § 131(d) (1939).

¹⁸ Cuba, 124 F. Supp at 185.

¹⁹ Id.

²⁰ Rev. Rul. 58-55, 1958-1 C.B. 266.

²¹ Id.

²² Id.

²³ Id.

²⁴ Id.

²⁵ Pub.L. No. 105-34, 111 Stat. 788 [hereinafter Taxpayer Relief Act].

²⁶ This translation rule applied to taxes claimed as credits under either the cash method or the accrual method.

²⁷ General Explanation of Tax Legislation Enacted in 1997, Part Two: Taxpayer Relief Act of 1997. JCS-28-97, Pt. 2 Title XI [hereinafter General Explanation].

²⁸ I.R.C. § 986(a)(1)(B).

²⁹ General Explanation, supra. See also I.R.C. § 905(c)(2)(B).

³⁰ 351 F.2d 336 (2d Cir. 1965).

³¹ Rev. Rul. 58-55.

³² Id.

³³ Campbell, 351 F.2d at 338 (citing Owens, The Foreign Tax Credit 5/3B2, at 328 (1961)).

³⁴ * * * Rebuttal 2.

³⁵ I.R.C. § 901(a) (emphasis added).

³⁶ Id. § 901(b) (emphasis added).

³⁷ Id. § 905(a).

³⁸ Rev. Rul. 58-55.

³⁹ Taxpayer Relief Act, supra § 1056(b).

⁴⁰ I.R.C. § 6511(d)(3)(A) (1997) (emphasis added).

⁴¹ I.R.C. § 6511(d)(3)(A) (1998) (emphasis added).

⁴² Rev. Rul. 75-268, 1975-2 C.B. 294; Rev. Rul. 77-487, 1977-2 C.B. 479; Rev. Rul. 84-125, 1984-2 C.B. 125; Chrysler Corp. v. Commissioner, 436 F.3d 644 (6th Cir. 2006). But see Ampex Corp. v. United States, 620 F.2d 853 (Ct. Cl. 1980).

⁴³ Chrysler Corp., 436 F.3d at 655.

⁴⁴ Id.

⁴⁵ Id. at 656.

⁴⁶ I.R.C. § 6511(d)(3(A) (1998).

⁴⁷ Id.

⁴⁸ Taxpayer Relief Act, supra, § 1056.

⁴⁹ H.R. Rep. No. 105-148, at 552-53 (1997); H.R. Rep. No. 105-220, at 576-77 (1997) (Conf. Rep.); S. Rep. No. 105-33, at 179-80 (1997); see also Staff of Joint Comm. on Taxation, 105th Cong., General Explanation of Tax Legislation Enacted in 1997, at 253 (Comm. Print 1997).

⁵⁰ Id.

⁵¹ Id.

⁵² See Rev. Rul. 84-125.

⁵³ Id.

⁵⁴ Id.

⁵⁵ Id.
END OF FOOTNOTES

Another example of the theme found in my book International Taxation in America (at Amazon on this link).  The American tax code was great for last century, but not his century.

The IRS never had a chance.  Service income is sourced where the service provider resides.  End of story.

Avoiding US source income in the virtual world has never been easier.  The use of virtual currency has open a new gateway to tax savings.   Chapter One of International Taxation in America is devoted to this topic.  Here is a link to a free copy.

The case is short and sweet and is below.

Container Corporation, Successor in Interest of Container Holdings Corporation,

Successor to Interest of Vitro International Corporation, Petitioner – Appellee

The Tax Court held that guaranty fees paid by a United States subsidiary to a foreign corporation are analogous to payments for services, and that the fees were not generated by a source within the United States. Thus, those fees were not subject to withholding taxes under 26 U.S.C. § 881(a).

This Court “appl[ies] the same standard of review to decisions of the Tax Court that [it] appl[ies] to district court decisions.” Green v. Comm’r, 507 F.3d 857, 866 (5th Cir. 2007) (citing Arevalo v. Comm’r, 469 F.3d 436, 438 (5th Cir. 2006)). “Findings of fact are reviewed for clear error and issues of law are reviewed de novo.” Id. (citingArevalo, 469 F.3d at 438). “Clear error exists when this [C]ourt is left with the definite and firm conviction that a mistake has been made.” Id.Streber v. Comm’r, 138 F.3d 216, 219 (5th Cir. 1998)). Factual findings must be affirmed if they are “plausible in light of the record viewed in its entirety.” Estate of Lisle v. Comm’r, 541 F.3d 595, 601 (5th Cir. 2008). (citing

To determine what class of income guaranty fees fall within or may be analogized to, the court must look to the “substance of the transaction.” Bank of America v. United States, 680 F.2d 142, 147 (Ct. Cl. 1982). The Commissioner contends the guaranty fees are more closely analogized to interest, while Container Corporation argues that the fees are more closely analogous to payment for services. See Howkins v. Comm’r, 49 T.C. 689 (1968) (applying by analogy the sourcing rule for the income type that is most similar to the income in question where that income is not covered under a specific statutory sourcing rule).

Looking to the substance of the transaction, the Tax Court found that the guaranty fees were more closely analogous to payments for services. Container Corp. v. Comm’r, 134 T.C. 122 (2010). International, the domestic corporation, paid Vitro, its Mexican parent corporation, fees to guarantee notes issued by International. Id. at 129. The guaranty here was not a loan transaction as no money was exchanged. Vitro’s obligations under the guaranty were contingent on International’s default. Thus, the guaranty was issued as a secondary obligation. The factual basis of the guaranty and guaranty fee payments relied on by the Tax Court evidence that Vitro was being compensated for its promise to stand by in the event a future obligation materialized and not for putting its money at risk at the time of signing the guaranty. Accordingly, the Tax Court’s factual findings are not clearly erroneous, nor is its ultimate characterization incorrect.

It is clear that the source of payments for services is where the services are performed, not where the benefit is inured. See Comm’r v. Piedras Negras Broadcasting Co., 127 F.2d 260, 261 (5th Cir. 1942). The Tax Court held that Vitro’s promise to pay in the event of default produced the guaranty fees. Vitro’s guaranty was the service. Thus, the services were performed in Mexico, and International did not have to withhold thirty percent of the guaranty fees paid. Container Corp., 134 T.C. at 140.

Under these factual circumstances, the guaranty fees are more analogous to payments for services, and the income was properly sourced outside the United States. As we find no reversible error of fact or law, the judgment of the Tax Court is AFFIRMED.
FOOTNOTES
^* District Judge of the Northern District of Mississippi, sitting by designation.

^** Pursuant to 5TH CIR.R.47.5, the court has determined that this opinion should not be published and is not precedent except under the limited circumstances set forth in 5TH CIR. R. 47.5.4.
END OF FOOTNOTES

Some see the voluntary disclosure as a cost of staying out of jail.  They justify the penalty as the cost of avoiding prison.   However, it can also be a great tax planning opportunity for the future.. with tax elections to allow you to create more offshore wealth.

Your first business tax return is your most important.  It is here that you make all of the important tax election.  International tax has hundreds… such as electing your base currency, cash versus accrual accounting, foreign tax credits and much more.

Your CPA is part of your think -tank.

Meanwhile, your CPA and attorney must watch the IRS carefully.   The IRS got busted for bait and switch on prior voluntary programs.. here is more on this.

Must like during  the Great Depression, Congress is forced to innovated.

Now, these changes do not reduce taxes.  They merely make the law simpler.
In theory, all special corporate tax breaks are gone in exchange for a lower
tax rate at the cost of no special tax credits.  European companies have told Congress that the higher US tax rate, makes the US attractive.

We need jobs.  So, like during the Great Depression, our Government is taking an action.

A rate of about 25% , which  equals other nations’ rate  which is about 25 percent.  The battle is going to be over the rate and foreign operations of American businesses.

Small business (where 70% of new jobs are created), gets nothing.  The Federal Tax rate of a a small business owner including his SE taxes, is about 40%.

Thus, small business may want to consider adding a “C corporation” to their planning.  Besides having the lower tax rate, C-corporations can also have ESOP.. a great tax planning tool or a super pension plan for those business owners over age 55.

1/30/12 Update- the feedback from all of you is great… & for the most part, disbelief that our Government would really prosecute someone for a non crime.   A fourth of my business is consulting to a few attorneys  that handle only criminal tax cases.    I have seen enough folks get arrested because someone in Government just does not like them.  Oh, yes they are found not guilty after a few $100,000′s in attorney fees and sleepless nights. 

The original post as follows:  The Obama administration successfully imprisoned Mr. and Mrs. Awand for not paying their income tax.  They did not evade their taxes.  They merely did not write a check to the IRS.

Molson Beer reported a  loss due to higher costs and lower sales prices (more info on this link).  McDonald’s announced a food  cost raise at the beginning of the year (on this link).

Today, the European Central Bank announced that it will follow the U.S. and merely print more money, on this link.

Us older folks remember this from the 1970′s as stagflation.  President Jimmy Carter  was voted out because he missed this concepts.   So, how about your tax planner?  Is he or she missing this?  Here are  six great  tax methods from the 1970′s, below.

A change in tax plans is  required to fend off the required inflation.  Both the USA and the EU need inflation if they want to payoff their debts.  Inflation makes the currency cheaper and increase tax revenues.     Congress issued a report on this method the other day (please contact me, Brian Dooley,  if you  want a copy).

Last month core inflation jumped. Parents are seeing higher prices for back to school clothes, on this link.

Small businesses are effective the most.  They are in the highest tax rate (fifty percent including state taxes and self-employment taxes).  They also have the hardest time obtaining a bank loan.

During stagflation, liquidity disappears for small business.  Last time (in the 1970′s and 1980′s) many accrual basis businesses went bankrupt solely for the lack of money and not profits.

With an interest increase required to borrow more, the National Debt will double in seven years to $30 Trillion.  Since the debt debate, foreign buyers of Government bonds declined.

Without inflation, the Nation’s total tax revenue is only $2 trillion and we spend $3 trillion (under the new debt reduction law).  If inflation can increase faster than the National Debt, then the inflated dollars (or Euro’s for the EU, more here) can pay off the debt.

You see, the new law merely approves a yearly $1 trillion in new debt.  The “cuts” are spending planned in excess of the annual deficit of $1 trillion.

To pay off the National Debt, the USA must deflate the value of the dollar.  Inflation is a deflated currency, which is a currency with less buying power.

For example,  if your salary doubles you pay twice the income tax.   Your salary can double if:
1.  Your employer and you produce more wealth (such as Apple), or

2. Inflation raises both your salary and the cost of the items that you buy.

Excess debt is a funny  creature.  It causes either inflation or bankruptcy.   When a country can print money to pay the debt,  a post World War I  Germany  scenario is the most likely. During that area, Germany had high unemployment and high inflation.

Your  Tax Planning Team needs a few years to position you in a stagflation  tax plan . I have six tax methods for you below, at the end of this blog.  However, there are many more than six methods.

If you read about the Great Depression (in the Forgotten Man),  then you learn that the big Wall Street crash was in 1927 but the depression took five years to explode into unemployment.  Prices raised before the collapse.  Inflation is not only the National Debt, but also the supply of money by the Federal Reserve (or the European Central Bank).

Before the six tax ideas, here is a video on why.

Six  Tax Plans  and  for your Great Tax Team

Inflation tax planning requires using tricks to defer taxes as to keep your liquidity. Further, like the Government, you want to pay the deferred taxes back with cheaper (inflated dollars).  For the best result, have the deferral role over, again and again.   Here are some tricks of the trade:

1.  If you are require to use the accrual method, split your businesses to have a marketing and distribution company (which has no inventory)  to earn your customers receivables.  This will place your overall business on the cash accounting  method.  The result is a deferral of taxes each year.

2.  Re-consider a C-corporation versus a S-corporation or an LLC.  C-corporations have a better loss carry back.  Further, unpaid corporate income taxes are not an obligation of the shareholders.   The IRS (controlled by the Department of Treasury) seldom closes a business for unpaid income taxes especially with unemployment is at this level.

During the 1930′s,  this method allowed small business to keep their working capital (without working capital you are out of business).

Alternatively, have your S-corporation owned by a Nevada Asset Protection Trust.  This will keep the income tax liability inside the trust and protect your other assets.

3.  Consider an ESOP for a portion of your business. If you use parent and subsidiary corporations, you can generate large tax deductions without using cash.  Instead, you use stock of one of your corporations to fund the ESOP.  This may be the most important method for a small business.  A great design is the new Sub Chapter S qualified subsidiary law.  These are “invisible corporations” with easy tax accounting.

A C-corporation can also use an ESOP (however, the tax return is much more complicated).

4. Improve items 2. and 3, above, by using subsidiaries.  If one subsidiary owes income taxes, it will not affect the other business operations.   With the ESOP, shares of a subsidiary can be used to fund the ESOP so that other lines of business can have different types of shareholders.

5. Shift income out of a high tax state to a no tax state by factoring your receivables to an affiliate company (located in the no tax state).   See my blog (here)  on using the new patent law to patent your business process.  With a patent, the tax saving rule of section 1235 can be used by you.

6. Other inter company pricing with an affiliate in a no tax state or a tax haven.  Here is an article how one company legally, with IRS approval (and by the way we always get an IRS ruling), saved $40 billion in taxes using inter company pricing.  I present the article to demonstrate that a great tax team can obey the law and save taxes… lots of taxes.

There are many more methods.  You will find some on my Face Book Author page regarding getting a great tax team on this link Having Great Tax Planning is work that requires you to have a great tax team.  Income taxes is one third of  your net  income.. it is one of your biggest expenses.  Yet, few small business make an investment into savings taxes.

As you see the hearings on oil companies and read about GE paying no US income taxes, you learn that successful corporations spend  time and money to save taxes.  You can do the same.

Look at the  amount of taxes you paid last year.  I suggest that you spend ten percent of the amount of your taxes for your a Great Tax Team.    Remember, you can deduct your tax planning costs, but you can not deduct your income taxes.

How high will taxes become?  Today’s New York Times article (on this link) reports that the payment on the National Debt will exceed the Country’s income (not income tax, but the total income).