SCOTUS Reports

Tag: U.S.-U.K. Income Tax Treaty

  • Adams Challenge (UK) Limited v. Commissioner of Internal Revenue, 156 T.C. No. 2 (2021): Filing Requirements for Deductions under I.R.C. § 882(c)(2)

    Adams Challenge (UK) Limited v. Commissioner of Internal Revenue, 156 T. C. No. 2 (2021)

    The U. S. Tax Court ruled that Adams Challenge (UK) Limited, a U. K. corporation, could not claim deductions for tax years 2009 and 2010 because it failed to file U. S. tax returns before the IRS prepared returns for it under I. R. C. § 6020(b). The decision upholds the statutory requirement that foreign corporations must file timely returns to claim deductions, clarifying that the filing must occur before IRS intervention.

    Parties

    Adams Challenge (UK) Limited, a U. K. corporation, was the petitioner. The Commissioner of Internal Revenue was the respondent. The case was adjudicated by the U. S. Tax Court.

    Facts

    Adams Challenge (UK) Limited (Adams) is a U. K. corporation whose sole income-producing asset during the years in question was a multipurpose support vessel chartered to EPIC Diving & Marine Services, LLC (EPIC), for decommissioning oil and gas wells on the U. S. Outer Continental Shelf in the Gulf of Mexico. Adams earned gross income of approximately $32 million from this charter during 2009 and 2010, which was effectively connected with the conduct of a U. S. trade or business. Adams did not file U. S. income tax returns for these years. On April 9, 2014, the IRS prepared and subscribed returns for Adams under I. R. C. § 6020(b). On November 25, 2014, the IRS issued a notice of deficiency, determining that Adams was not entitled to any deductions or credits for 2009 and 2010 due to its failure to file returns. Adams petitioned the U. S. Tax Court for redetermination on February 20, 2015, and submitted protective returns for these years on February 15, 2017.

    Procedural History

    The IRS issued a notice of deficiency to Adams on November 25, 2014, determining that Adams was entitled to no deductions or credits for 2009 and 2010 due to its failure to file returns. Adams timely petitioned the U. S. Tax Court for redetermination on February 20, 2015. Adams filed protective returns for 2009 and 2010 on February 15, 2017, after the IRS had prepared returns for it. The U. S. Tax Court considered cross-motions for partial summary judgment, with Adams challenging the IRS’s disallowance of deductions and credits, and the IRS urging that its action was consistent with I. R. C. § 882(c)(2) and the U. S. -U. K. income tax treaty.

    Issue(s)

    Whether a foreign corporation that fails to file a U. S. income tax return before the IRS prepares a return for it under I. R. C. § 6020(b) is entitled to deductions and credits under I. R. C. § 882(c)(2)?

    Whether I. R. C. § 882(c)(2), as interpreted, violates the business profits or nondiscrimination articles of the U. S. -U. K. income tax treaty?

    Rule(s) of Law

    I. R. C. § 882(c)(2) states that a foreign corporation shall receive the benefit of deductions and credits only by filing or causing to be filed with the Secretary a true and accurate return, in the manner prescribed in subtitle F, including therein all the information which the Secretary may deem necessary for the calculation of such deductions and credits. I. R. C. § 6020(b) permits the Secretary to make returns for persons who fail to do so. The regulations under § 1. 882-4(a)(3)(i) specify that a foreign corporation must file a return within 18 months after the due date set forth in § 6072 to claim deductions and credits.

    Holding

    The U. S. Tax Court held that Adams was not entitled to deductions or credits for 2009 and 2010 under I. R. C. § 882(c)(2) because it failed to file returns before the IRS prepared returns for it under § 6020(b). The court further held that I. R. C. § 882(c)(2), as interpreted, does not violate the business profits or nondiscrimination articles of the U. S. -U. K. income tax treaty.

    Reasoning

    The court’s reasoning was based on established precedent that a foreign corporation must file a return before the IRS prepares one for it under § 6020(b) to claim deductions and credits. The court cited Taylor Securities, Inc. v. Commissioner, Blenheim Co. v. Commissioner, and Espinosa v. Commissioner, which established that the IRS’s preparation of a return under § 6020(b) constitutes the “terminal date” by which a foreign corporation must file its own return. The court rejected Adams’s argument that the statute’s requirement of a “true and accurate return” should not include a timing element, emphasizing that the statute and regulations work harmoniously to ensure compliance with U. S. tax laws. The court also considered the U. S. -U. K. income tax treaty, finding no conflict between the treaty’s business profits and nondiscrimination articles and the statute’s administrative requirements. The court noted that both the U. S. and U. K. recognized that the treaty does not require a contracting state to alter its existing administrative practices.

    Disposition

    The U. S. Tax Court granted the IRS’s cross-motion for partial summary judgment and denied Adams’s motion for partial summary judgment.

    Significance/Impact

    This decision reinforces the importance of timely filing for foreign corporations seeking to claim deductions and credits under U. S. tax law. It clarifies that the filing must occur before the IRS’s intervention under § 6020(b), emphasizing the administrative necessity of such a requirement to prevent tax evasion. The decision also affirms that the U. S. -U. K. income tax treaty does not override the statutory filing requirements, maintaining the balance between international tax obligations and domestic administrative practices. This ruling may influence future cases involving foreign corporations and their compliance with U. S. tax filing requirements, potentially affecting how such entities structure their tax planning and compliance strategies.

  • Sotiropoulos v. Commissioner, 142 T.C. No. 15 (2014): Jurisdiction over Foreign Tax Credit Adjustments under I.R.C. § 905(c)

    Sotiropoulos v. Commissioner, 142 T. C. No. 15 (2014)

    In Sotiropoulos v. Commissioner, the U. S. Tax Court ruled it has jurisdiction to determine whether U. K. tax payments received by a U. S. citizen are “refunds” under I. R. C. § 905(c), impacting the applicability of deficiency procedures for foreign tax credit adjustments. This decision reaffirms the court’s role as a prepayment forum for taxpayers to contest IRS determinations related to foreign tax credits, despite the IRS’s attempt to bypass these procedures.

    Parties

    Petitioner: Panagiota Pam Sotiropoulos, a U. S. citizen who lived and worked in the U. K. during the years in question.
    Respondent: Commissioner of Internal Revenue, representing the IRS.

    Facts

    Panagiota Pam Sotiropoulos, a U. S. citizen, resided and worked in the U. K. from 2003 to 2005. During these years, she was employed by Goldman Sachs in London, and her employer withheld U. K. income tax from her wages. Sotiropoulos claimed foreign tax credits on her U. S. tax returns corresponding to the U. K. taxes withheld. Subsequently, she filed U. K. tax returns claiming deductions from investments in U. K. film partnerships, resulting in overpayments of U. K. tax. She applied for refunds of these overpayments and received payments from U. K. taxing authorities. However, she argued that these payments were not “refunds” under I. R. C. § 905(c)(1)(C) because her entitlement to refunds was still under investigation by U. K. authorities and possibly affected by the U. S. /U. K. income tax treaty. Consequently, she did not notify the IRS of these payments as required by I. R. C. § 905(c)(1).

    Procedural History

    Following an audit, the IRS determined that Sotiropoulos had received U. K. tax refunds and disallowed corresponding foreign tax credits on her U. S. returns for 2003-2005. The IRS issued a notice of deficiency, which Sotiropoulos contested by timely petitioning the U. S. Tax Court. Approximately a year after filing his answer, the Commissioner moved to dismiss the case for lack of jurisdiction, asserting that I. R. C. § 905(c) authorized the IRS to redetermine her tax and collect it upon notice and demand, thus bypassing deficiency procedures.

    Issue(s)

    Whether the U. S. Tax Court has jurisdiction to determine if the payments received by Sotiropoulos from U. K. taxing authorities constitute “refunds” within the meaning of I. R. C. § 905(c)(1)(C), thereby affecting the applicability of deficiency procedures?

    Rule(s) of Law

    I. R. C. § 905(c)(1) requires a taxpayer to notify the Secretary if a foreign tax claimed as a credit is “refunded in whole or in part. ” The Secretary may then redetermine the U. S. tax for the affected year, and any additional tax due is collectible upon notice and demand per I. R. C. § 905(c)(3). I. R. C. § 6213(h)(2)(A) excludes foreign tax credit adjustments under § 905(c) from deficiency procedures.

    Holding

    The U. S. Tax Court has jurisdiction to determine whether the statutory provision alleged to divest it of jurisdiction applies, specifically whether the U. K. taxes paid by Sotiropoulos have been “refunded in whole or in part” within the meaning of I. R. C. § 905(c)(1)(C).

    Reasoning

    The court reasoned that its jurisdiction to determine its jurisdiction is inherent and necessary to resolve disputes over the application of I. R. C. § 905(c). The court emphasized that Sotiropoulos contested the characterization of the U. K. payments as “refunds,” which is a prerequisite for the application of § 905(c)(1)(C). The court cited precedent where similar disputes over foreign tax credit adjustments were adjudicated under deficiency procedures, underscoring the importance of providing taxpayers a prepayment forum to contest disputed taxes. The court distinguished the case from situations where taxes are uncontested or arise from obvious errors, where summary assessment is permitted. The court’s jurisdiction to determine the nature of the U. K. payments ensures that taxpayers have an opportunity to contest IRS determinations before assessment, aligning with the statutory scheme’s intent.

    Disposition

    The court denied the Commissioner’s motion to dismiss for lack of jurisdiction, affirming its authority to decide whether the U. K. payments constituted “refunds” under I. R. C. § 905(c)(1)(C).

    Significance/Impact

    This decision reinforces the U. S. Tax Court’s role as a prepayment forum for taxpayers contesting foreign tax credit adjustments. It clarifies that the court retains jurisdiction to determine the applicability of I. R. C. § 905(c) when the characterization of foreign tax payments is disputed. The ruling has practical implications for taxpayers and the IRS in handling foreign tax credit disputes, ensuring that taxpayers have a venue to challenge IRS determinations before tax assessments are made. The case also highlights the interplay between domestic tax laws and international tax treaties, affecting how foreign tax credits are administered and contested.