Ten Year Limitations Period Did Not Apply to Taxpayer's Foreign Tax Credit Refund Claim

(Parker Tax Publishing May 2018)

The Fifth Circuit held that the ten year limitations period applicable to refund claims for overpayments attributable to the allowance of a foreign tax credit did not apply to a taxpayer's refund claim because the taxpayer had a net decrease in the foreign tax credit for the year at issue. The Fifth Circuit also held that the taxpayer did not file the refund claim within two years of any payment of the tax because the adjustments to, and carryforward of, the taxpayer's credits on amended returns did not constitute payments for purposes of the statute of limitations. Schaeffler v. U.S., 2018 PTC 125 (5th Cir. 2018).

Background

Georg and Bernadette Schaeffler filed a joint tax return for 2002 in October 2003. They later filed multiple amended returns for 2002. In April 2013, they filed an amended return for 2002 that reflected two changes: a net decrease in foreign tax credit (FTC) of approximately $1.5 million, and an increase in minimum tax credit (MTC) of $6.7 million. A minimum tax credit arises where a taxpayer pays alternative minimum tax (AMT); some or all of the AMT amount is treated as a credit that can be used to reduce regular income tax in future years.

The reduced FTC resulted from an overall reduction in the Schaefflers' German tax liabilities, which stemmed from Mr. Schaeffler's involvement in rental activities and a partnership in Germany. The increase in the Schaefflers' MTC was due to changes made to the Schaefflers' amended return for 2001.

The Schaefflers' original 2001 return showed they paid only regular income tax. In April 2012, they filed an amended 2001 return reflecting a net increase in FTC of $5.6 million and a reduction in MTC of $3.1 million. These changes resulted in an AMT liability of $2.4 million. The Schaefflers said that the changes in their amended return for 2001 did not cause any additional tax liability or payments for that year. That resulted in an increase in their 2002 MTC of $6.7 million -- the sum of the $2.4 million MTC generated by the AMT incurred in 2001, and a $4.3 million MTC carried forward from earlier years.

On their original 2002 return, the Schaefflers elected to claim their FTC in the year when their foreign taxes accrued rather than the when they were paid. The Schaefflers were therefore required under Code Sec. 905(c)(1)(A) to notify the IRS if the accrued foreign taxes, when paid, differed from the amounts claimed as credits. They satisfied this requirement by filing their amended return for 2002 and redetermining their U.S. taxes. This involved incorporating the revised figure for their 2002 MTC, which resulted in an overpayment of approximately $5.1 million.

The Schaefflers requested a refund for the overpayment, which the IRS denied as untimely in January 2014. The Schaefflers then sued for the refund in a district court. The IRS moved to dismiss for lack of subject matter jurisdiction on the basis that (1) the refund claim was filed after the three year limitations period in Code Sec. 6511(a) and (2) the overpayment was not attributable to an FTC, so the special ten year limitations period in Code Sec. 6511(d)(3)(A) did not apply. The district court granted the government's motion to dismiss, and the Schaefflers appealed to the Fifth Circuit.

Analysis

Generally, a refund claim must be filed within the later of three years from the time the return was filed or two years from the time the tax was paid. However, a special ten year period is provided Code Sec. 6511(d)(3)(A), which applies if the refund claim is for an overpayment that is attributable to foreign taxes for which a credit is allowed. The government's position, with which the district court agreed, was that the changes in the German tax liabilities for 2002 resulted in a net decrease in the Schaefflers' foreign tax credit, so their overpayment was therefore not "attributable to" the allowance of the FTC.

The Schaefflers argued that their 2002 overpayment was attributable to the changes in their German tax liabilities because those changes triggered the reporting requirement under Code Sec. 905(c)(1)(A), which required the redetermination in their U.S. taxes that resulted in the overpayment. They contended that, but for the Code Sec. 905 notification, their MTC carryforward would have been carried forward indefinitely to a future year. They also argued that if their refund claim was barred, the result would be to disallow the computational carryforward credit, and the special ten year period would affect only taxpayers whose returns were computed without being affected by MTCs. The Schaefflers also offered two arguments for why they filed their refund claim within two years of making a tax payment. First, they said that the processing of the 2001 increase in their FTC, and the reduction in their MTC for that year on their 2001 amended return, constituted a payment. Second, they argued that a payment resulted from the carryforward of the credit from their amended 2001 return, which offset the 2002 reduction in their FTC.

The Fifth Circuit held that the Schaefflers' refund claim was not timely because the ten year limitations period did not apply and the refund claim was not filed within two years of making a payment. The court found that the Schaefflers' overpayment could not be "attributable to" their German taxes which ultimately resulted in a net decrease in their 2002 FTC. In the court's view, the Code Sec. 905(c)(1)(A) notification requirement did not cause the overpayment, but merely triggered an obligation to report the MTC increase.

The court found that the Schaefflers' MTC carryforward would have been allowable, and therefore absorbed, as an MTC in 2002 regardless of whether they submitted an amended return for that year. Thus, the 2002 absorbed amount would automatically be taken into consideration for all years after 2002, according to the court. The court also rejected the argument that denying the refund claim as untimely would disallow the use of the carryforward credit. It explained that, while there are a variety of scenarios where Code Sec. 6511(a)(3)(A) might apply, they all involve a change in foreign tax liability resulting in an FTC increase that generates an overpayment. Even assuming the Schaefflers' MTC amount for 2002 did not change, Code Sec. 6511(d)(3)(A) would not apply, in the court's view.

The court held that the refund was not filed within two years of a payment because neither the offsetting on the Schaefflers' 2001 amended return, nor the MTC carryforward to 2002, constituted a payment under Code Sec. 6511(a). First, the court found that the payment must be for taxes the year for which the refund is sought (in this case, 2002). Thus, even if the 2001 offsetting constituted a payment, it would not be a payment for 2002, the year for which the Schaefflers claimed the refund. Next, the court found that under Fifth Circuit precedent, adjustments for a single tax year are not a payment for purposes of the limitations period. The court also noted that the Schaefflers stated in their complaint that the changes that prompted the filing of their amended 2001 return did not cause any additional tax liability or payments.

The court concluded that, although the crediting of an overpayment is a payment under Code Sec. 6511(a), the application of an FTC is not. The court explained that neither the FTC nor the MTC are refundable tax credits; as such, neither can generate an overpayment that would constitute a payment for purposes of the statute of limitations. In reaching this conclusion, the Fifth Circuit rejected the portion Dresser Industries, Inc. v U.S., 73 F.Supp. 2d 682 (N.D. Tex. 1999), aff'd 2001 PTC 22 (5th Cir. 2001) holding that the application of an FTC is a payment under Code Sec. 6511(a).

For a discussion of the ten year limitations period for refund claims based on foreign tax credits, see Parker Tax ¶261,180.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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