1 Nichols Patrick CPE, Inc. The Tax Curriculum SM

Transcription

1 APRIL 27, 2015 Section: 274 Calendar and Log Book Formed Adequate Records to Support 100% Business Use for Two Autos... 2 Citation: Ressen v. Commissioner, TC Summary Opinion , 4/21/ Section: 911 Flight Attendant Based in Hong Kong Could Not Exclude All Earnings As Foreign Earned Income... 3 Citation: Rogers v. Commissioner, Docket No , CA DC Circuit, 4/17/ Section: 6213 Corporations With Rights Suspended Under California Law Unable to File Tax Court Petition Even Though Certain Corporate Rights Later Retroactively Restored... 5 Citation: Medical Weight Control Specialist v Commissioner, TC Memo , 3/18/15 and Leodis C. Matthews, APC, a California Corporation v. Commissioner, TC Memo , 4/23/ Section: 6320 IRS Issuance of Notice of Determination Concerning Collection Action Violated Automatic Stay 7 Citation: Yuska v. Commissioner, TC Memo , 4/20/ Section: 6511 NOL Created By Foreign Tax Treatment Change Did Not Benefit from Extended Statute... 8 Citation: Chief Counsel Advice , 4/24/

2 SECTION: 274 CALENDAR AND LOG BOOK FORMED ADEQUATE RECORDS TO SUPPORT 100% BUSINESS USE FOR TWO AUTOS Citation: Ressen v. Commissioner, TC Summary Opinion , 4/21/15 Under IRC 274(d) taxpayers are denied any deduction for certain expenses if they do not maintain adequate contemporary documentation to support the expense, even if it is obvious that the taxpayers must have incurred the expense and the amount of expense could be reasonably estimated. This rule was put into the IRC to override the Cohan rule, so called due to the case involving George M. Cohan where the Second Circuit ruled that documentation is not needed if it is clear a taxpayer incurred an expense and it can be reasonably estimated [Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930). The IRS claimed in the case of Ressen v. Commissioner, TC Summary Opinion that the taxpayer s records documenting his use of two vehicles, for which he claimed a 100% business use deduction on each, was inadequate. However the Tax Court did not agree with the IRS on this issue. In the case in question Mr. Ressen was a construction manager with a construction company. He lived away from home for most of the year (all but 1½ months) on remote jobsites, returning home for weekends. When he stayed away from home he stayed in a fifth wheel recreational vehicle. He had two pickups that he used to travel between his home and the jobsites and while at those jobsites. The pickups transported the fifth wheel to the various jobsites, which would then stay there for the duration. Mr. Ressen s employer paid him a per diem for food and lodging. The company also had a policy of reimbursing for airline tickets to remote job sites but would not reimburse employees for any vehicle use. The following constituted the records maintained by Mr. Ressen: Mr. Ressen maintained a calendar and a logbook to record his business activities and the business use of the 2007 and 2008 Chevys. Upon returning home at the end of each week he recorded the miles he drove during the previous week in the calendar. Additionally, as required by ICS, he recorded in general terms his daily business activities and weekly travel in the logbook. He also recorded the beginning and ending mileage for the 2007 and 2008 Chevys in the logbook. He claimed the standard mileage rate for 100% of the mileage on each pickup, resulting in a claimed auto expense deduction on Form 2106 of $28,504. The Tax Court summarized the basic rules provided for adequately documenting expenses covered by the anti- Cohan rule of 274(d): To deduct these expenses, the taxpayer must substantiate[] by adequate records or by sufficient evidence corroborating the taxpayer s own statement : (1) the amount of the expense or other item; (2) the time and place of travel, entertainment, or use of the property; (3) the business purpose of the expense or other item; and (4) the business relationship of the taxpayer to the persons entertained or using the property. See sec. 274(d). With respect to the use of listed property, the taxpayer must establish the amount of business use and the amount of total use for such property. See sec T(b)(6)(i)(B), Temporary Income Tax Regs., 50 Fed. Reg (Nov. 6, 1985). The Court then examined Mr. Ressen s documentation and found it (not surprisingly in the view of this author) perfectly fine to document business use: With respect to the portion of the disallowed deduction attributable to their claimed use of the 2007 and 2008 Chevys, petitioners introduced copies of the calendar in which Mr. Ressen contemporaneously recorded his weekly mileage as an employee of ICS as well as some information regarding where he was working at various times. Petitioners also introduced copies of the pages in the logbook on which 2

3 he contemporaneously recorded the beginning and ending miles for the 2007 and 2008 Chevys. Considering the facts and circumstances of Mr. Ressen's employment arrangement with ICS and his business use of the 2007 and 2008 Chevys we conclude that the calendar is a credible, adequate record of the amount of the business use of the property, the dates of such use, and the business purpose of such use, and the logbook pages are an adequate record of the total use of the property. See sec. 274(d); sec T(b)(6)(i)(B), (c)(2), Temporary Income Tax Regs., supra; see also Lyseng v. Commissioner, T.C. Memo , 102 T.C.M. (CCH) 280, (2011). The Court went on, though, to look at the matter even if the Court accepted the view that the calendar was not an adequate log which, in fact, the Court had not found. But even giving the IRS that concession the Court still found Mr. Ressen met the alternative test: Additionally, even if the calendar is for some reason not an adequate record of the amounts or dates of the business use of the 2007 and 2008 Chevys, Mr. Ressen credibly and with specificity testified as to the business use of the property and the dates of such use. Petitioners corroborated this testimony with the pages from the logbook. See sec T(c)(3)(i), Temporary Income Tax Regs., supra. Although petitioners did not introduce the entire logbook into evidence, we conclude that the pages of the logbook that they did introduce are representative of contemporaneous, adequate records that Mr. Ressen maintained for the entire year and that they sufficiently corroborate his testimony with respect to the amounts and dates of the business use of the 2007 and 2008 Chevys for the entire year. See id. subdiv. (ii)(a). We therefore conclude that petitioners satisfied the substantiation requirements of section 274(d) with respect to their claimed use of the 2007 and 2008 Chevys. At first blush it s tough to figure out how this matter even resulted in a claimed tax liability on exam. A sentence in the final paragraph gives what likely is the key answer the Court notes that communications broke down between the taxpayers an the revenue agent. While the Court does not elaborate, it seems likely that the agent had some request outstanding that the taxpayers did not respond to, resulting in this case moving forward. Regardless, though, Mr. Ressen s bother and expense in having to take this case to Tax Court does give advisers a good look at the types of records that the Tax Court will consider adequate to support a claimed auto expense deduction even when the taxpayer is claiming a 100% business use position. What is not stated in the opinion, but is almost certainly crucial to this result, is that the Court noted Mr. Ressen testified credibly and in detail about the business use and the Court did not note any inconsistencies in the information given to it. Especially when claiming a very high level of business use of a vehicle (and 100% is clearly that) it s important that the taxpayer is believable and refrains from stretching the truth. I suspect the Court would have come to a very different decision had it discovered any sort of enhancing of the facts in Mr. Ressen. SECTION: 911 FLIGHT ATTENDANT BASED IN HONG KONG COULD NOT EXCLUDE ALL EARNINGS AS FOREIGN EARNED INCOME Citation: Rogers v. Commissioner, Docket No , CA DC Circuit, 4/17/15 If a U.S. citizen is a flight attendant based out of Hong Kong, can she exclude all of her income using the foreign earned income exclusion under IRC 911? The taxpayer in the case of Rogers v. Commissioner, Docket No , CA DC Circuit took that position but neither the Tax Court nor the Court of Appeals for the DC Circuit agreed with her. The taxpayer in question was assigned as an employee to Hong Kong by United Airlines. Ms. Rogers flew and worked in and over foreign countries, international waters and the United States. In the year in question she flew a total of 74 flights between destinations in Asia and the United States. 3

4 The airline provided Ms. Rogers with an apportionment of her estimated duty time based on minutes spent: In and over foreign countries; Over international waters; and In and over the United States The taxpayer treated all of her income as eligible for exclusion as foreign earned income. The taxpayers argued that IRC 911 allows them to exclude all of her earnings as foreign earned income because it came from sources within a foreign country. IRC 911(b)(1)(A) defines foreign earned income as the amount received by such individual from sources within a foreign country or countries which constitute earned income attributable to services performed by such individual during the applicable time period. As her income came from her job based in Hong Kong, the taxpayer took the position that all of her income came from sources within a foreign country. Reg (a) interprets the above provision, providing Earned income is from sources within a foreign country if it is attributable to services performed by an individual in a foreign country or countries. The place of receipt of earned income is immaterial in determining whether earned income is attributable to services performed in a foreign country or countries. A key question becomes does the above regulation go too far in interpreting the law, or is it a reasonable interpretation of what is an ambiguous rule. The Court of Appeals, agreeing with the Tax Court, finds that it does not go too far. Rather, the Court notes: The IRS's regulatory limitation of income "from sources within a foreign country" to income attributable to services performed in a foreign country accords with the language of Section 911, particularly in light of the "default rule of statutory interpretation that exclusions from income must be narrowly construed." Schleier, 515 U.S. at 328 (internal quotation marks omitted). Furthermore, the regulation harmonizes with related sections of the Internal Revenue Code, in which the phrase "income from sources within" generally limits personal services income to income earned from services "performed in" a given jurisdiction. See 26 U.S.C. 861(a)(3) (defining income from personal services as being "from sources within the United States" if those "labor or personal services [are] performed in the United States"); id. 862(a)(3) (defining income from personal services as being "from sources without the United States" if those "labor or personal services [are] performed without the United States"). The IRS's regulation and its application here simply mirror the use of similar "source" language in related sections of the Code, where "the source of income is the place where the services are performed." Tipton & Kalmbach, Inc. v. United States, 480 F.2d 1118, 1120 (10th Cir. 1973). In any event, the panel notes that the taxpayers did not explicitly challenge the validity of the regulation in the case. If it is accepted that the regulation is a reasonable interpretation of 911, the taxpayer s exclusion is going to fail. In this case the taxpayer could only exclude the proportion of her time that represented time in and flying over foreign countries, but not any time flying over international waters or the United States, nor time performing services on the ground in the United States. The fact she was based in Hong Kong was not relevant. Some may be wondering about the international waters portion that was deemed taxable after all, that s outside the United States? While that is true, the exclusion is not for earned income outside the United States but that from sources in a foreign country. And, per Reg (h), a foreign country is limited to territory under the sovereignty of a government other than that of the United States, the territorial waters of such country and its airspace. Thus the airspace over international waters is not part of a foreign country, so any amounts earned for that time is also not excludable. 4

5 SECTION: 6213 CORPORATIONS WITH RIGHTS SUSPENDE D UNDER CALIFORNIA LAW UNABLE TO FILE TAX COURT PETITION EVEN THOUGH CERTAIN CORPORATE RIGHTS LATE R RETROACTIVELY RESTORED Citation: Medical Weight Control Specialist v Commissioner, TC Memo , 3/18/15 and Leodis C. Matthews, APC, a California Corporation v. Commissioner, TC Memo , 4/23/15 The corporation in the case of Medical Weight Control Specialist v Commissioner, TC Memo found it could not have its day in Court because its corporate privileges had been suspended by the state of California during the 90 day period available for it to file a challenge of an IRS in Tax Court. This was held to be the case even though the corporation had issued to it by the state a certificate of reviver and certificate of relief from contract voidability later that, in the corporation s view retroactively reinstated its right to bring the suit initially. The taxpayer in question had its corporate privileges revoked by the state of California in 2004 for failure to pay state taxes, a provision of California law found at Cal. Rev. & Tax. Code Section That condition continued for over a decade with the corporation only restoring itself to the state s good graces (and thus getting back corporate privileges) in May of During the period its privileges were suspended the IRS issued a notice of deficiency to the corporation. That notice was issued in May of The taxpayer filed a petition with the Tax Court in June of In April of 2014 the government filed a motion to dismiss the case since the taxpayer lacked the capacity to sue when it filed its petition. While not stated, it certainly appears the corporation may have been motivated to get its situation with the state resolved when facing the very real possibility that it would denied its day before the Tax Court to challenge the assessment of over $1 million in taxes and penalties for The Tax Court noted that this case was virtually identical to the 2000 case of David Dung Le, M.D., Inc. v. Commissioner, 114 TC 268, aff d 22 Fed. Appx. 837 (CA9) where the Court had found the corporation lacked the capacity to sue. In that case the corporation had its privileges suspended when it filed its petition with the Tax Court and obtained a renewal of its privileges after the 90 day deadline had passed. In that case the Tax Court held (with the approval of the Ninth Circuit on appeal) that it lacked jurisdiction. However the taxpayer pointed out that in the current case the corporation had obtained a certificate of relief from contract voidability, something that the corporation in David Dung Le, M.D., Inc. had not. The Court did not find that difference to change the result. The Court first notes: However, that relief applies only to contracts entered into * * * that have not been rescinded and [a]ny sale, transfer, or exchange of real property in California during the period in which the corporation is not qualified to do business. Cal. Rev. & Tax. Code sec (c)(1)(A) and (B) (West 2004). The filing of a petition for redetermination of a Federal tax deficiency neither is contractual nor involves the sale of land in California. This Court s jurisdiction is statutory, not contractual, and a party may not confer jurisdiction on this Court by agreement or concession. See Camous v. Commissioner, 67 T.C. 721, 729 (1977); see also Am. Airlines, Inc. v. Commissioner, 144 T.C., (slip op. at 12) (Jan. 13, 2015). The Court continued to explain that it was bound by both its prior decision and that of the Ninth Circuit in the David Dung Le, M.D., Inc. to come to the same result as in that case: The receipt, therefore, by petitioner of a certificate of relief from contract voidability, by the plain language of California law, does not affect the application of David Dung Le, M.D., Inc. to the present case. Without a difference of material fact, respondent s motion to dismiss must be granted unless we are to ignore or overturn David Dung Le, M.D., Inc. A departure from that precedent would be especially imprudent given that it was appealed to and affirmed by the Court of Appeals for the Ninth Circuit, and both this Court and the Court of Appeals have recently cited it as controlling precedent in holding that a 5

6 revived California corporation may not retroactively validate the filing of a petition that occurred during the suspension of its corporate powers and where the revival did not occur until after the period for timely filing the petition. See AMA Enters., Inc. v. Commissioner, 523 Fed. Appx. 455 (9th Cir. 2013); John C. Hom & Assocs., Inc. v. Commissioner, 140 T.C. 210 (2013). The taxpayer next tries to argue that the Court should consider that California courts make a distinction between procedural and substantive acts. The Tax Court does agree that California courts have noted such a distinction, generally granting a restored corporation that procedural acts had validity (such as maintaining an appeal). The taxpayer argues that the provision granting the Tax Court jurisdiction is just such a procedural item. The Tax Court does not agree. It notes that California courts have not treated statutes of limitation as such merely procedural items and that corporate revival does not eliminate that as a defense by a party that seeks to claim that the adversarial party failed to meet the statute because it lacked a right to file at the time required. The taxpayer contends that IRC 6213(a) (the 90-day filing window) is not a true statute of limitations, but rather merely a procedural item like the window for filing an appeal in existing litigation. The Tax Court determines that, in fact, it doesn t matter if what it has is or is not a statute of limitations. As the Court holds: To the contrary, this Court lacks jurisdiction regardless of whether the 90- day limitation of section 6213(a) is to be regarded as a true statute of limitations. Although section 6213(a) provides a taxpayer may file a petition with the Tax Court within the 90-day period, this language is to be viewed in the light of the section 7421(a) proscription of any suit in any court by any person for the purpose of restraining the assessment or collection of any tax. Cal. Rev. & Tax. Code sec a (West 2004) provides that corporate revival shall be without prejudice to any action, defense or right which has accrued by reason of the original suspension or forfeiture. Thus, even if section 6213(a) is not to be viewed as a statute of limitations, under the above California law limitation on corporate revival section 6213(a) still serves as a limitation on subject-matter jurisdiction, and either party, or the Court sua sponte, may question jurisdiction at any time. See Brown v. Commissioner, 78 T.C. 215, 218 (1982). Unlike a traditional statute of limitations, the 90-day period of section 6213(a) generally cannot be tolled or extended. See Rich v. Commissioner, 250 F.2d 170 (5th Cir. 1957); Joannou v. Commissioner, 33 T.C. 868 (1960). Jurisdictional statutes such as section 6213(a) are conditions on the waiver of the Federal Government s sovereign immunity and must be strictly construed. See Bowen v. City of New York, 476 U.S. 467, 479 (1986). Section 6213(a) provides that a petition may be filed by the taxpayer during the 90-day period. Petitioner s suspension under Cal. Rev. & Tax. Code sec deprived it of the capacity to sue under section 6213(a) and prevents its corporate revival from prejudicing respondent s defense of lack of subject matter jurisdiction. This case reminds us that little things may matter greatly if a client wishes to pursue its rights in Court and just such a little thing is maintaining the good graces of the state which grants the corporation its rights. Such cases will be decided under the particular state law in question, so the details of this decision will not necessarily apply outside of California. But that very fact indicates the potential problems that can arise for CPAs who end up either explicitly or implicitly giving a client advice on issues such as the issues that arise if corporate formalities are not respected. While not an issue that appears to have occurred in this case, things could turn out badly if a CPA representing the client on exam had been aware of this falling out with the state and had failed to advise the client to seek legal counsel to deal with this issue and to document that fact. And it certainly appears the IRS is aware of this particular Golden State problem slightly more than a month after the Tax Court issued the Medical Weight Control Specialist decision it decided another case on virtually 6

7 identical grounds in the case of Leodis C. Matthews, APC, a California Corporation v. Commissioner, TC Memo SECTION: 6320 IRS ISSUANCE OF NOTICE OF DETERMINATION CONCERNING COLLECTION ACTION VIOLATED AUTOMATIC STAY Citation: Yuska v. Commissioner, TC Memo , 4/20/15 The issuance by the IRS of a Notice of Determination Concerning Collection Action following the filing of a bankruptcy petition by the taxpayer was held by the Tax Court to be in violation of the automatic stay imposed by the Bankruptcy Code under 11 USC 362(a). Therefore, in the case of Yuska v. Commissioner, TC Memo , the Tax Court held that, given no valid notice being issued, it had no current jurisdiction in the case. The IRS did not disagree with the Court s lack of jurisdiction but the agency did disagree with the reason, arguing that, instead that the taxpayer s petition was the only item in violation of the automatic stay. This was not a minor matter since, as the Court noted: This case must be dismissed for lack of jurisdiction because the petition was filed in violation of the automatic stay provisions of 11 U.S.C. sec. 362(a)(8). Prevo v. Commissioner, 123 T.C. at 331. However, where the application of the automatic stay may act as an impediment to this Court s jurisdiction, it is incumbent on the Court to determine the proper ground for dismissal. Smith v. Commissioner, 124 T.C. 36, 40 (2005). This principle is particularly compelling in the present case where the Court is confronted with two alternative grounds for dismissal, one of which will have the effect of denying petitioner the opportunity to obtain review of respondent s notice of determination in this Court. The key problem is that there is no tolling provision in the taxpayer s right to petition the Tax Court for the review of the IRS s administrative denial of relief from having a lien imposed, so that if the Court finds that the IRS issuance of the notice was not barred, the taxpayer would lose any right to challenge that finding in the Tax Court. The Tax Court notes that the automatic stay provisions prohibit the continuing of administrative collection actions against the taxpayer. The Court found that the IRS issuing the notice was a continuation of its administrative collection actions, thus was barred under the automatic stay, consistent with its ruling in the case of Smith v. Commissioner, 124 TC 43. The IRS pointed out, though, that the Smith case involved a levy. The IRS argued that a levy, unlike a lien, cannot be effected until after a final notice of intent to levy that provided administrative review rights was issued to the taxpayer. A lien, such as in this case, is complete before the issuance of a notice of the lien filing and rights to a hearing to the taxpayer. The IRS pointed out that in another case (Prevo v. Commissioner, 123 TC 327). However the Court found that the continuation of the lien process was still clearly part of the IRS collection process. The difference between the Prevo and Smith cases was not that one was a lien case while the other was a levy, but rather the exact sequence of events. In Prevo the IRS first issued a notice of determination concerning collection action. After that notice was issued, the taxpayer filed a bankruptcy petition and then filed the petition with the Tax Court. In that case, since the notice had already been issued, the taxpayer s filing of the bankruptcy petition cut off the ability to raise a challenge to the IRS holding in Tax Court. However in both the Smith case and the one before the Court at this time, the bankruptcy petition was filed before the IRS issued its decision. The IRS action after the petition was filed was the problem the IRS had to delay action during the period of the automatic stay. The fact that the taxpayer may have filed a request for 7

8 administrative review under IRC 6320 before the bankruptcy petition was filed, the IRS did not issue a notice of determination before the filing. As such, the notice was invalid and, as such, the time period had not yet begun during which a taxpayer would need to file a petition in Tax Court. SECTION: 6511 NOL CREATED BY FOREIGN TAX TREATMENT CHANGE DID NOT BENEFIT FROM EXTENDED STATUTE Citation: Chief Counsel Advice , 4/24/15 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 , 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. 8

9 That special rule is found immediately following the foreign tax rule at IRC 6511(d)(2(A) which provides: The memo does note the holding in First Chicago Corp. v. Commissioner, 742 F.2d 1120 (7 th 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 9 (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, (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.

10 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. 10