Tax Court Has Jurisdiction to Determine If Foreign Taxes Were Refunded.
(Parker Tax Publishing May 16, 2014)

The Tax Court has jurisdiction to determine whether U.K. taxes paid by the taxpayer have been "refunded in whole or in part" within the meaning of Code Sec. 905(c)(1)(C). Sotiropoulos v. Comm'r, 142 T.C. No. 15 (5/5/14).

Panagiota Sotiropoulos, a U.S. citizen, lived and worked in the U.K. during 2003-2005. On her U.S. returns for that period, Panagiota claimed foreign tax credits in amounts corresponding to the U.K. tax withheld by her employer. She subsequently filed U.K. income tax returns showing overpayments and applied for, and received, refunds of the U.K. tax.

Generally, under Code Sec. 6213, the IRS may not assess an income tax deficiency until it has mailed a notice of deficiency to the taxpayer and the relevant time period has elapsed. If the applicable time window closes and the taxpayer does not petition the Tax Court, the IRS may proceed with assessment and collection. If a taxpayer timely petitions the Tax Court, the IRS may not assess the tax or proceed to collect it until the decision of the Tax Court becomes final. In certain circumstances, the restrictions on assessment found in Code Sec. 6213 do not apply. For example, Code Sec. 6213(h)(2)(A) provides a cross-reference to Code Sec. 905(c) in cases of a recovery of foreign income tax. Under Code Sec. 905(c)(1)(C), if foreign taxes for which a credit against U.S. taxes are taken are "refunded in whole or in part," the taxpayer must notify the IRS, which can then redetermine the taxpayer's U.S. tax. Under Code Sec. 905(c)(3), any tax due as a result of this redetermination is due on notice and demand.

Upon auditing Panagiota's 2003-2005 tax returns, the IRS disallowed the foreign tax credits claimed on those returns after determining that the U.K. taxes had been "refunded." Rather than invoking Code Sec. 905(c)(3) as authority for collecting the redetermined tax upon notice and demand, the IRS sent Panagiota a notice of deficiency for 2003-2005. The notice showed tax increases flowing from the credit adjustments and determined Code Sec. 6662(a) accuracy-related penalties. The reductions to Panagiota's foreign tax credits were the only adjustments the IRS made to her returns for these years.

Panagiota contended that the payments she received from the U.K. taxing authorities were not refunds within the meaning of Code Sec. 905(c)(1)(C) because her entitlement to those refunds remained under investigation in the U.K. Thus, she was not required to notify the IRS of the payments.

Panagiota petitioned the Tax Court, and the IRS moved to dismiss the case for lack of jurisdiction. According to the IRS, it erred in issuing the deficiency notice and, instead, Code Sec. 905(c)(3) authorized it to redetermine Panagiota's 2003-2005 tax and collect the tax due upon notice and demand. The IRS acknowledged, however, that the accuracy-related penalties determined in the deficiency notice properly fell under the Tax Court's jurisdiction and said it would concede the penalties if the court granted its motion to dismiss as to the foreign tax credit adjustments.

According to the IRS, the receipt of U.K. tax refunds triggered Panagiota's duty to redetermine her U.S. tax under Code Sec. 905(c)(1). Because it allegedly adjusted Panagiota's foreign tax credits under Code Sec. 905(c)(1), the IRS argued that the redetermined tax was due on notice and demand under Code Sec. 905(c)(3) and hence the Tax Court lacked deficiency jurisdiction by virtue of the cross-reference to Code Sec. 905(c) from Code Sec. 6213(h)(2)(A). The fact that the IRS sent Panagiota a deficiency notice was irrelevant, the IRS said, since the mailing and receipt of a notice do not automatically confer jurisdiction.

The Tax Court held that it had jurisdiction to determine, at a minimum, whether the statutory provision alleged to divest it of jurisdiction applied; that is, whether the U.K. taxes paid by Panagiota had been "refunded in whole or in part" within the meaning of Code Sec. 905(c)(1)(C). The court noted that this was not a case where the taxpayer had conceded receipt of a foreign tax refund by notifying the IRS, filing an amended return, and self-reporting an increased tax liability. Code Sec. 905(c)(1)(C), the court stated, applies only if any tax paid is refunded in whole or in part, and Panagiota's contention was that this condition had not been satisfied.

The Tax Court noted that it was confronted with analogous facts in Comprehensive Designers Int'l, Ltd. v. Comm'r, 66 T.C. 348 (1976), but in that case, it did not address the jurisdictional issue because the parties had not raised it. In Comprehensive Designers and on other occasions, the court observed, it decided the merits of questions concerning foreign tax credit adjustments described in Code Sec. 905(c), in each case without addressing the jurisdictional issue that was being raised in the instant case. The court concluded that, at this point, it did not need to decide whether it has subject matter jurisdiction over all aspects of the controversy. At the very least, it concluded, it had jurisdiction to determine its jurisdiction.

For a discussion of the rules relating to IRS assessments of deficiencies, see Parker Tax ¶260,120. (Staff Editor Parker Tax Publishing)

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