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Refund claim for disputed foreign credits time-barred

Albemarle Corp. v. U.S., (CA Fed Cir 3/13/2015) 116 AFTR 2d ¶2015-5141

Affirming the Court of Federal Claims, the Court of Appeals for the Federal Circuit has held that when foreign taxes are contested, the 10-year limitations period in Code Sec. 6511(d)(3)(A) for filing claims for foreign tax credits begins with date for filing the return for the year in which the foreign taxes originated, not for the year in which the taxes were finalized and actually paid or accrued.As a result, the taxpayer’s claim for refund for ’98 was untimely.The appellate court also held the taxpayer’s claim for refund for ’97 was untimely under the prior law version of the 10-year limitations period.

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—instead of the general 3-year limitations period under Code Code Sec. 6511(a)—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 foreign tax credit).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 this 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 (and not the year to which the foreign tax credits are carried).

Facts.In ’96, a Belgian subsidiary of Albemarle Corp, an accrual basis company, issued 20-year debentures to Albemarle and certain of its U.S. subsidiaries.Interest payments were made on the debentures from ’97 through October 2001.The Belgian subsidiary, however, did not pay Belgian withholding taxes on the interest payments because it believed the payments to be 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 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 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 foreign tax credits attributable to the withholding taxes it had agreed to pay Belgian tax authorities. IRS allowed Albemarle’s refund claims for ’99, 2000, and 2001, but it disallowed its claims for ’97 and ’98 on the ground that the refund claims for these years had not been filed within the 10-year limitations 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 foreign tax credits 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.Now the Court of Appeals for the Federal Circuit has upheld the Court of Federal Claims decision.

Dispute over ’98 tax year claim.The post-’97 version of Code Sec. 6511(d)(3)(A) governed Albemarle’s refund claim for the ’98 tax year.Albermarle claimed that “the year in which such taxes were actually paid or accrued” in that version refers to the year in which its contested foreign tax liability was finalized and established—namely, 2002.It said the 10-year limitations period for filing refund claims for foreign tax credits for ’98 started to run on Mar. 15, 2003—the date prescribed by law for filing the return for the 2002 tax year—rendering its May 15, 2009, filing timely.

IRS, on the other hand, argued that the critical year is the year in which Albemarle’s foreign taxes originated, i.e., ’98.Under IRS’s view, the limitations period started to run on Mar. 15, ’99, making Albemarle’s May 15, 2009, refund claim untimely.

Agreeing with IRS, the Court of Appeals for the Federal Circuit 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.

The appellate court also pointed out that Reg. § 1.904-2(c) uses the same “actually paid or accrued” language as Code Sec. 6511(d)(3)(A).That reg addresses whether a taxpayer is in an “excess limitation” period for a tax year, i.e., whether the taxpayer may absorb excess taxes carried from another year.The reg provides that foreign taxes “actually paid or accrued” in a tax year are counted toward the credit limitation for that year.If Abermarle’s interpretation were correct and a contested foreign tax “actually accrues” in the contest resolution year, the foreign tax would be counted toward the credit limitation for the contest resolution year.By contrast, under IRS’s interpretation, which the court held to be correct and well-established, a contested foreign tax “actually accrues” in its year of origin and would be counted instead toward the credit limitation for the year of origin of the tax.

The Court of Appeals for the Federal Circuit pointed out that, where identical language is used in statutes or regs, it’s assumed that the language is intended to have the same meaning.Thus, Congress’s decision to use the same phrase in the ’97 revision of Code Sec. 6511(d)(3)(A) suggests that it meant for that phrase to have the same meaning in the statute that it did in the reg, i.e., to refer to the year of origin of the tax liability in question.

Other theories rejected.Albermarle argued that, under the contested tax doctrine, foreign taxes don’t “actually accrue” for Code Sec. 6511(d)(3)(A) purposes until the contest is over and liability is established.It also took the position that, under the Code Sec. 461 all events test, a contested foreign tax cannot be satisfied until the taxpayer’s liability is finally established, and thus, the year in which the tax “actually accrued” for Code Sec. 6511(d)(3)(A) purposes must be the year in which the taxpayer resolves its dispute with the foreign government.

The appellate court ruled that neither the contested tax doctrine nor the all events test dictates when a contested foreign tax liability actually accrues in the different context of Code Sec. 6511(d)(3)(A).According to the Court, it has long been recognized that the contested tax doctrine, which is derived from the law regarding deductions, is not strictly applicable to claims of foreign tax credits.Instead, the mechanism by which a taxpayer may claim credits for a contested foreign tax is governed by the so-called “relation back” doctrine.A contested foreign tax is accruable for the tax year to which it relates even though the taxpayer contests the liability and the tax is not paid until a later year.

The appellate court’s final salvo was that Albermarle’s interpretation of Code Sec. 6511(d)(3)(A) was inconsistent with the purpose underlying the statute.Congress provided a special 10-year limitations period for filing a refund claim for foreign taxes—as opposed to three years for filing a claim for domestic taxes—out of concern that a taxpayer may be barred from asserting a claim if foreign governments adjust the foreign tax liabilities after the initial 3-year period.Under Albemarle’s interpretation, however, the 10-year limitations period would start to run only after the tax liability has been finalized; in other words, no more adjustments would be made and all that would be left for the taxpayer to do in the 10-year period would be to file a refund claim.The Court pointed out that it was highly unlikely that Congress intended to provide the prolonged 10-year limitations period simply to enable a taxpayer to complete the filing process following the resolution of its foreign tax liability.In light of the fact that a domestic taxpayer is given only three years to file a refund claim, it was evident that the much longer period for filing foreign tax claims was intended to take account of the time needed to resolve foreign tax liability.

In sum, the appellate court concluded that the 10-year limitations period for filing a refund claim for Albemarle’s ’98 Belgian withholding taxes started to run on Mar. 15, ’99, “the date prescribed by law for filing the return for” the ’98 tax year. For that reason, Albemarle’s May 15, 2009, claim for credits for its ’98 Belgian taxes was time-barred.

Claim for ’97 tax year rejected as well.Under the pre-’97 version of Code Sec. 6511(d)(3)(A), the 10-year limitations period started to run on the date “prescribed by law for filing the return for the year with respect to which the [refund] claim is made.”Albemarle claimed credits for its ’97 Belgian withholding taxes, and it intended to use those credits to offset its U.S. tax liability for the ’97 tax year.Thus, the year with respect to which Albemarle’s refund claim is made was the year ’97.Accordingly, the appellate court concluded that the 10-year limitations period for Albemarle’s ’97 refund claim started to run on Mar. 15, ’98, i.e., the due date for filing the return for the ’97 year.As a result, the May 15, 2009, claim for a refund of ’97 taxes was untimely.

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  .

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