Dealing with the interaction of various statute of limitation rules can be complex that it appears at first and, in the situation described in Chief Counsel Advice 201517005, the IRS concluded that the taxpayer could not take full advantage of amending a return to change from claiming a foreign tax credit to claiming a deduction for foreign tax paid when that change to the prior return created a net operating loss required to be carried back.
The period during which a taxpayer may file a claim for refund is generally governed by IRC §6511(a) which provides:
(a) Period of limitation on filing claim
Claim for credit or refund of an overpayment of any tax imposed by this title in respect of which tax the taxpayer is required to file a return shall be filed by the taxpayer within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever of such periods expires the later, or if no return was filed by the taxpayer, within 2 years from the time the tax was paid. Claim for credit or refund of an overpayment of any tax imposed by this title which is required to be paid by means of a stamp shall be filed by the taxpayer within 3 years from the time the tax was paid.
This is the “normal” three year statute (two years when no return is filed) that we are used to.
But §6511 provides a number of “exceptions” that tend to extend the period beyond the limit cited above. Two of those come into play in this ruling.
The first one, dealing with the foreign tax credit, is found at IRC §6511(d)(3) which provides:
(3) Special rules relating to foreign tax credit
(A) Special period of limitation with respect to foreign taxes paid or accrued
If the claim for credit or refund relates to an overpayment attributable to any taxes paid or accrued to any foreign country or to any possession of the United States for which credit is allowed against the tax imposed by subtitle A in accordance with the provisions of section 901 or the provisions of any treaty to which the United States is a party, 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 in which such taxes were actually paid or accrued.
(B) Exception in the case of foreign taxes paid or accrued
In the case of a claim described in subparagraph (A), the amount of the credit or refund may exceed the portion of the tax paid within the period provided in subsection (b) or (c), whichever is applicable, to the extent of the amount of the overpayment attributable to the allowance of a credit for the taxes described in subparagraph (A).
The second exception is one that most advisers deal with more often than the first, which is the extended period for filing a claim for refund related to a net operating loss being carried into the year in question.
That special rule is found immediately following the foreign tax rule at IRC §6511(d)(2(A) which provides:
(2) Special period of limitation with respect to net operating loss or capital loss carrybacks
(A) Period of limitation
If the claim for credit or refund relates to an overpayment attributable to a net operating loss carryback or a capital loss carryback, in lieu of the 3-year period of limitation prescribed in subsection (a), the period shall be that period which ends 3 years after the time prescribed by law for filing the return (including extensions thereof) for the taxable year of the net operating loss or net capital loss which results in such carryback, or the period prescribed in subsection (c) in respect of such taxable year, whichever expires later. In the case of such a claim, the amount of the credit or refund may exceed the portion of the tax paid within the period provided in subsection (b)(2) or (c), whichever is applicable to the extent of the amount of the overpayment attributable to such carryback.
In this case the taxpayer determined that the choice made nine years earlier on a return to take the foreign tax credit was an error—that by claiming a deduction in lieu of the credit the taxpayer’s taxable income would be reduced dramatically, creating a net operating loss.
That loss would then go to a return filed eleven years earlier and, when incorporated in that return, would result in a reduction of tax. The taxpayer filed amended returns (which were claims for refund) on the same day asking for refunds from both years.
Clearly the “regular” statute had expired years earlier in both cases. But the taxpayer argued that because he was changing the treatment of foreign taxes within 10 years (thus, within the time period provided for by §6511(d)(3)), he should be allowed the refund both from 9 years earlier (which the IRS did not challenge) and the refund that the loss from that year generated by being carried back two more years.
Although the memo doesn’t note it, advisers should note that the net operating loss statute extension would not save the taxpayer in this case. As the loss arose from the return filed nine years earlier, the NOL rule would have only extended the statute until three years after the due date of the original return. That is, the fact that the year generating the loss may have had its statute for filing a claim for refund extended by another provision did not serve to extend the statute for the net operating loss claim.
But the taxpayer argued that this wasn’t the relevant issue—rather the claim was related to the foreign tax credit originally claimed nine years earlier which was now being converted to a deduction. Since that statute was still open, the taxpayer still had the right to claim the refund from the year the loss was carried back to.
The IRS did not agree with that view.
First the IRS argued that §6511(d)(3) only extends the statute for overpayments attributable to foreign taxes for which the credit is allowed. While a credit was initially allowed on the return nine years earlier (thus keeping it open), once it is amended to change that credit to a deduction there is no longer a credit allowed, since the credit is allowable only if no deduction is taken. And only after there is no credit allowed does a net operating loss come into being.
Second, the memo argues that even if the situation is construed to relate to refund claims related to foreign tax deductions, the refund claim arose principally due to the net operating loss provisions of the IRC and not due to foreign tax deduction rules—that is, the claim was not “attributable to” the foreign taxes. The IRS relies on the holding of the Federal Circuit in Electrolux Holdings v. United States, 491 F.3d 1327, 1331-33 (Fed. Cir. 2007) holding that you look only to the direct cause in the case of a claim that the statute for refunds have been extended.
The memo does note the holding in First Chicago Corp. v. Commissioner, 742 F.2d 1120 (7th Circuit) where the court did not stop at the first level, but rather looked back to the original cause to determine that the IRS was still within the statute of limitations. But the IRS notes that this is not truly inconsistent with the Electrolux case, as waivers of sovereign immunity are to be interpreted narrowly (that is, when the taxpayer is asking for an extended period) while for collection issues a statutory exception to the statute must be construed broadly (that is, when the IRS is going after funds).
Finally the memo notes that even if all of this is ignored, the loss carried back to the year in question does not consist fully of foreign taxes, but rather consists of all of the various items that enter into a net operating loss computation. Thus, the memo argues, even in that case only a small portion of the claim would be available for refund.
Clearly the matter is not necessarily “put to rest” by this memorandum, though it seems likely the taxpayer will need to litigate to have a chance of receiving his refunds. But it does point out the complications that can arise from statute rules, as well as reminding us about the “quirky” nature of the net operating loss special extension of statutes.