United States: Federal Circuit Narrowly Interprets Limitations Period For Foreign Tax Credit Refund Claims

In Albemarle Corp. v. United States, No. 2015-5015 (Fed. Cir. Aug. 13, 2015), the United States Court of Appeals for the Federal Circuit disallowed claims for refund related to foreign taxes paid by Albemarle Corporation (Albemarle) on the ground that it failed to file its claims within section 6511(d)(3)(A)'s 10-year limitations period. The Federal Circuit is the first appellate court to address this issue, and taxpayers paying foreign taxes need to be aware of the ramifications of the decision.

Generally, a taxpayer must file a claim for refund within the later of three years from the time the return was filed, or two years from the time the tax was paid. Congress extended this period for refund claims related to foreign tax credits (FTC).  Internal Revenue Code (IRC) § 6511(d)(3)(A) extends the refund limitation period to "10 years from the date prescribed by law for filing the return for the year in which such taxes were actually paid or accrued." Before IRC § 6511(d)(3)(A) was amended in 1997, the statute required that such claims be made within 10 years from the date prescribed by law for filing the return for the year with respect to which the claim was made.

Background

Albemarle's Belgian subsidiary issued 20-year debentures to Albemarle and certain U.S. subsidiaries of Albemarle (that collectively filed a U.S. consolidated income tax return). The Belgian subsidiary paid interest on the debentures from 1997–2001. The Belgian subsidiary did not pay Belgian withholding tax because it took the position that the interest payments were tax-exempt, which the Belgian taxing authority challenged. Ultimately, Albemarle and the Belgian taxing authority compromised in 2002, and Albemarle agreed to pay Belgian withholding tax at a rate of 15 percent on all interest paid from 1997–2001. Albemarle made two payments (in January and August 2002, respectively) to the Belgian taxing authority in satisfaction of the owed tax.

On May 15, 2009, Albemarle filed refund claims for its 1997–2001 tax years. The Internal Revenue Service (IRS) permitted the refund claims except for 1997 and 1998. The IRS disallowed the 1997 and 1998 refund claims as untimely. The IRS interpreted IRC § 6511(d)(3)(A) to require a taxpayer to file a refund claim within 10 years from the date the tax return for that year was due, without extension. Albemarle, however, argued that the plain language of IRC § 6511(d)(3)(A) permits a taxpayer to file a claim for refund within 10 years from the date the payment was in fact (actually) made (i.e., 10 years from 2002), not from the date the original tax return for the tax year was due. The U.S. Court of Federal Claims upheld the IRS's interpretation and Albemarle appealed. For prior coverage of the Court of Federal Claims' decision, see Court Weighs in on Deadline for Filing FTC Refund Claims.

Federal Circuit's Decision

The Federal Circuit rejected Albemarle's argument that the word "actually" as used in IRC § 6511(d)(3)(A) ("the year in which such taxes were actually paid or accrued") must be given its ordinary meaning of "in fact" or "in reality." According to the Federal Circuit, "actually . . . accrued" is ambiguous because it could mean either the year of origin for the foreign tax liability or the year in which the contested foreign tax liability is finalized. The court observed that the year in which the taxes "in fact" accrue does not answer which year should serve as the start point for IRC § 6511(d)(3)(A)'s 10-year limitations period.

Because the Federal Circuit found IRC § 6511(d)(3)(A)'s use of the word "actually . . . accrued" ambiguous, it turned to the legislative history for interpretative guidance.  IRC § 6511(d)(3)(A) was amended in 1997 as a result of Ampex Corp. v. United States, 223 Ct. Cl. 428 (1980).  Before IRC § 6511(d)(3)(A) was amended, the 10-year limitations period began on the date "prescribed by law for filing the return for the year with respect to which the [refund] claim is made." This language caused considerable uncertainty when IRC § 6511(d)(3)(A)'s 10-year limitations period should have been considered to start when a taxpayer carried forward foreign tax credits pursuant to IRC § 904(c) and Treas. Reg. § 1.904-2. That is, the question was whether the 10-year limitations period begins running by reference to the year the excess foreign tax arose or to the year the excess foreign taxes were carried. In Ampex Corp., the Court of Federal Claims determined IRC § 6511(d)(3)(A)'s limitations period should begin by reference to the year in which the excess foreign taxes were carried. The IRS disagreed with the result and issued Rev. Rul. 84-125, 1984-2 C.B. 125, where it held IRC § 6511(d)(3)(A)'s 10-year limitations period should begin by reference to the year in which the excess foreign taxes arose.

According to the Federal Circuit, the relevant legislative history explained that Congress amended IRC § 6511(d)(3)(A) in 1998 "to clarify that, consistent with the IRS's position, the limitations period of section 6511(d)(3)(A) would be determined by reference to the year 'in which the foreign taxes were paid or accrued (and not the year to which the foreign tax credits are carried).'" (Citations omitted). Based on this single sentence, the court further observed that Congress did not intend to change the pre-1997 rule that IRC § 6511(d)(3)(A)'s 10-year limitations period begins to run by reference to "the year with respect to which the [refund] claim is made." It is interesting to note that the court found the revised language ambiguous given that Congress's stated intent was to clarify the statute and remove any uncertainty resulting from Ampex Corp.

To further support its position, the Federal Circuit looked to Treas. Reg. § 1.904-2(c), which uses the same phrase, "actually paid or accrued." The court concluded that because the phrase "actually paid or accrued" . . . "appears to have been taken directly from" Treas. Reg. § 1.904, as a matter of statutory construction, the court should assume the language "is intended to have the same meaning." Accordingly, the Federal Circuit observed that because the IRS's interpretation of "actually . . . accrued" provided the best result under Treas. Reg. § 1.904-2, that interpretation should apply to IRC § 6511(d)(3)(A) and thus the 10-year limitations period should begin to run by reference to the year the foreign taxes arose, and not the year they were finalized. Again, this is interesting because this statutory construction tool generally subscribes the same meaning to identical language in statutes; the Federal Circuit, on the other hand, looked to regulatory guidance to interpret a statutory provision.

The Federal Circuit also rejected Albemarle's argument that the "contested tax doctrine" and IRC § 461's "all events test" should apply when interpreting IRC § 6511(d)(3)(A). In Dixie Pine Products v. Commissioner, 320 U.S. 516 (1944), the United States Supreme Court developed the "contested tax doctrine." According to the Supreme Court, for an accrual-based taxpayer (such as Albemarle), a tax liability cannot accrue when "the liability is contingent and is contested by the taxpayer." Rather, the taxpayer must wait and claim a deduction "only for the taxable year in which its liability for the tax was finally adjudicated."  IRC § 461 adopts a similar approach for accrual-based taxpayers in the "all events test." Under that test, a federal income tax liability is deemed to have been incurred for accrual-based taxpayers when (1) all the events have occurred that establish the fact of the liability, (2) the amount of the liability can be determined with reasonable accuracy, and (3) economic performance has occurred with respect to the liability.

The Federal Circuit supported its position that neither the "contested tax doctrine" nor the "all events test" should apply for interpreting IRC § 6511(d)(3)(A) based on a 1954 U.S. district court opinion, a revenue ruling, and a scholarly publication. These sources indicate that either the "contested tax doctrine" and "all events test" (or both) should not apply to foreign tax credits and that instead, the relation-back doctrine should apply. The Federal Circuit did note, however, that the relation-back doctrine addresses the year for which the foreign tax credits relate, but not when the foreign tax credits may be claimed.  Even under the relation-back doctrine, a taxpayer cannot claim the foreign tax credits until the foreign tax liability is finalized. 

Finally, the Federal Circuit opined that the purpose of IRC § 6511(d)(3)(A)'s extended 10-year limitations period is to "take account of the time needed to resolve foreign tax" liabilities. The court observed that it "is highly unlikely that Congress intended to provide the prolonged 10-year limitations period simply to enable a taxpayer to complete the filing process following the resolution of its foreign tax liability." The court then concluded that IRC § 6511(d)(3)(A)'s 10-year limitations period should be interpreted to begin to run by reference to the foreign taxes year of origin rather than by reference to the year in which the taxpayer's foreign tax liability was finalized. However, it is just as likely that, in the case of a taxpayer-friendly limitations period provision, Congress may have realized the fact that many taxpayers have contested foreign tax liabilities for the same year in multiple countries and that it may take 10 years or longer to resolve those disputes.

Observations

Given that there is not a split in the appellate courts on this issue, it is doubtful that the Supreme Court would consider the issue should Albemarle seek review of the Federal Circuit's decision. Taxpayers in similar situations wishing to take positions contrary to the Federal Circuit's decision, and without any option other than litigation, may want to file suits in local district court to avoid the negative precedent. Taxpayers may also want to consider filing protective refund claims in situations where it does not appear that a tax payment to a foreign jurisdiction will actually be made (and there will be enough time to file a formal refund claim with the IRS) within 10 years from the date the U.S. federal income tax return was filed to avoid the situation in Albemarle.

Federal Circuit Narrowly Interprets Limitations Period For Foreign Tax Credit Refund Claims

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