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Federal Circuit denies rehearing in foreign tax credit refund case

Albemarle Corp. v. U.S., (CA Fed Cir 10/22/2015) 116 AFTR 2d ¶2015-5354

The Court of Appeals for the Federal Circuit has denied a corporation’s petition for rehearing of a decision that rejected its refund claim for disputed foreign tax credits (FTCs) as time-barred. The Court, dismissing the corporation’s contrary arguments as unsupported or otherwise off base, stuck to its holding that the 10-year statute of limitation period in Code Sec. 6511(d)(3)(A) for filing such claims began with date for filing the return for the year in which the foreign taxes originated and not for the year in which the amount of the contested foreign taxes was finally settled.

Background. Taxpayers must file a refund claim with IRS within the period stated in the Code. Under Code Sec. 6511(d)(3)(A), the limitations period is 10 years for claims for refund or credit that relate to overpayments attributable to the payment or accrual to a foreign country or U.S. possession of taxes for which a credit is allowed against U.S. income under Code Sec. 901 or a tax treaty (i.e., a FTC). As amended by the Taxpayer Relief Act of ’97, effective for taxes paid or accrued in tax years beginning after the Aug. 5, ’97 enactment date, the 10-year period in Code Sec. 6511(d)(3)(A), runs “from the date prescribed by law for filing the return for the year in which such taxes were actually paid or accrued.”

Under the previous version of Code Sec. 6511(d)(3)(A), the 10-year period ran from the date “prescribed by law for filing the return for the year with respect to which the [refund] claim was made.”

Code Sec. 6511(d)(3)(A) was amended in ’97 to resolve a conflict between a court decision and IRS’s position dealing with a situation where there was a carryover of excess foreign taxes. In Ampex Corp., (Ct Cl 1980) 45 AFTR 2d 80-140245 AFTR 2d 80-1402, the Court of Claims held that, in that situation, the 10-year limitations period should be determined by reference to the year to which the excess taxes are carried. IRS disagreed and, in Rev Rul 84-125, 1984-2 CB 125, took the position that the limitations period should be determined by reference to the year of origin for the excess taxes. The legislative history made it clear that the amendment to Code Sec. 6511(d)(3)(A) was intended to clarify that the 10-year limitations period was determined by reference to the year in which the foreign taxes were paid or accrued–that is, not the year to which the FTCs are carried).

Facts. In ’96, a Belgian subsidiary of Albemarle Corp., an accrual basis taxpayer, issued 20-year debentures to Albemarle and certain members of its U.S. consolidated group. Interest payments were made by the Belgian subsidiary on the debentures from ’97 through October 2001. However, the Belgian subsidiary did not pay Belgian withholding taxes on the interest payments, as it believed the payments were tax-exempt.

In 2001, Belgian tax authorities issued a notice of adjustment to Albemarle for tax years ’96 through ’98. The notice provided, in part, that the debenture interest payments made between ’97 and 2001 were subject to Belgian withholding tax at the statutory rate of 25%.

Albemarle protested, but ultimately agreed to pay Belgian withholding tax at the rate of 15% on all interest paid from ’97 through 2001. It then made two payments to the Belgian authorities in January 2002 and August 2002 that satisfied the total amount of the Belgian withholding taxes due.

On May 15, 2009, Albemarle filed an amended consolidated U.S. income tax return for the 2002 tax year, in which it claimed refunds of $1.4 million in FTCs attributable to the Belgian withholding taxes it had agreed to pay Belgian tax authorities.

RIA observation: In any given year, the foreign taxes paid or accrued by a taxpayer for a particular FTC limitation category may exceed the applicable limitation amount. Code Sec. 904 allows a taxpayer in such a position with respect to a given year to carry over the excess of its foreign taxes paid or accrued for the year over the FTC limitation for the year (the excess credit). For the years at issue, the carryback period was two years and the carryforward period was five years. Albemarle presumably carried forward its excess credit, arising from the additional Belgian withholding taxes paid, to the 2002 tax year in order to maximize its foreign tax credit position, thereby giving rise to the FTC refund request.

IRS allowed Albemarle’s refund claims for ’99, 2000, and 2001, but disallowed its claims for the ’97 and ’98 on the ground that the refund claims for these years had not been filed within the 10-year statute of limitation period in Code Sec. 6511(d)(3)(A). According to IRS, Albemarle should have filed its ’97 refund claim on or before Mar. 15, 2008, and its ’98 refund claim on or before Mar. 15, 2009, in order for those claims to be timely.

Albemarle filed suit in the Court of Federal Claims, seeking to recover a total refund of $825,846 attributable to the FTCs for its ’97 and ’98 Belgian withholding taxes, but the Court agreed with IRS that the claims for the ’97 and ’98 tax years were untimely.

In a Aug. 13, 2015 decision, the Court of Appeals for the Federal Circuit upheld the Court of Federal Claims decision. The Court pointed out that the 10-year limitations period for a contested foreign tax had been determined with reference to the year of origin since long before the ’97 amendment, because the year of origin is “the year with respect to which the [refund] claim is made,” including in the case of contested taxes. Nothing in the background of the ’97 amendment suggests that Congress intended for that amendment, which was directed solely at correcting a court decision governing carryover foreign taxes, to change the longstanding rule under which the special limitations period had been calculated for contested taxes. (Albemarle Corp. v. U.S., (CA Fed Cir 8/13/2015) 116 AFTR 2d 2015-5609, the “earlier decision”; see Weekly Alert ¶  6  08/20/2015 for prior coverage.)

Albemarle subsequently filed a petition for rehearing of the earlier decision.

Rehearing denied. The Federal Circuit denied Albemarle’s rehearing request, rejecting each of Albemarle’s arguments as detailed below.

Albemarle first argued that the earlier decision conflicted with Salem Financial, Inc. v. United States, (CA Fed Cir 2015)115 AFTR 2d 2015-1835, a tax shelter case involving the use of a trust to generate foreign tax credits that lacked economic substance. However, the Court found that Albemarle’s argument was actually based on a different decision that was cited inSalem—Reading & Bates Corp. v. U.S., (Ct Fed Cl 1998) 81 AFTR 2d 98-1126—which provided no support for Albemarle’s petition because it involved the accrual of income, not taxes.

Albemarle then argued that the earlier decision ignored accrual principles set out by the Supreme Court in Dixie Pine Products Co. v. Com., (Sup Ct 1944) 31 AFTR 95631 AFTR 956, which involved, among other things, the contested tax doctrine and the all-events test (later codified in Code Sec. 461). However, the Federal Circuit noted that it expressly considered the potential applicability of these principles in the earlier opinion and that Albemarle was merely taking issue with how the Court ultimately ruled.

The Federal Circuit also easily dismissed Albemarle’s arguments relating to the Court’s citation in the earlier opinion of Reg. § 1.904-2(c)(1), which deals with carryback and carryover of unused foreign taxes under the per-country limitation on foreign tax credits. Albemarle asserted that the repeal of the per-country limitation on FTCs rendered the Court’s analysis flawed, but the Court noted that the reg itself hadn’t been repealed (presumably because of continued application to pre-repeal transactions) and that the proposition for which the reg was cited (i.e., to aid in interpreting the phrase “actually paid or accrued”) was unaffected by the repeal.

Finally, Albemarle argued that the purported unintended consequence of accepting Albemarle’s interpretation of “actually paid or accrued” that the Court referenced in the earlier opinion—i.e., that the credit for a contested foreign tax would be allocated to the year of origin but counted toward the limitation applicable to the contest resolution year—would never actually happen, based on its assertion that the general rules for when taxes accrue (e.g., Reg. § 1.904-2(c)) wouldn’t apply tocontestedtaxes. However, Albemarle failed to cite any authority for that proposition, and the Court found the contested taxes would in fact be subject to Reg. § 1.904-2(c) and thus could potentially lead to the “anomalous result” described in the earlier opinion.

References: For 10-year limitations period for credit or refund for overpayment relating to foreign tax credit, see FTC 2d/FIN ¶  T-7569; United States Tax Reporter ¶  65,114.12; TaxDesk ¶  806,063.