142 T.C. No. 15
UNITED STATES TAX COURT
PANAGIOTA PAM SOTIROPOULOS, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 19884-12. Filed May 5, 2014.
I.R.C. sec. 901(a) permits a U.S. citizen or resident to claim a credit against her Federal income tax liability for income taxes paid to a foreign country. If such taxes are “refunded in whole or in part,” the taxpayer is required to notify the Secretary, who is authorized to redetermine the U.S. tax. I.R.C. sec. 905(c)(1). Any tax due as a result of the Secretary’s redetermination is due on notice and demand. I.R.C. sec. 905(c)(3).
P is a U.S. citizen who lived and worked in the U.K. during 2003-05. On her U.S. returns for these years P claimed foreign tax credits in amounts corresponding to the U.K. tax withheld by her employer. P subsequently filed U.K. income tax returns showing overpayments and applied for refunds of U.K. tax. P received pay- ments from U.K. taxing authorities but contends that the payments were not “refunds” within the meaning of I.R.C. sec. 905(c)(1)(C) because her entitlement to refunds remains under investigation in the -2-
U.K. P did not notify the Secretary of these payments pursuant to I.R.C. sec. 905(c)(1).
Following examination of P’s returns, R mailed P a notice of deficiency for 2003-05 determining that the U.K. taxes had been “refunded” and disallowing the claimed foreign tax credits. P peti- tioned the Court. Approximately a year after filing his answer, R moved to dismiss the case for lack of jurisdiction. R contends that he erred in issuing the notice of deficiency and that I.R.C. sec. 905(c) authorizes him to redetermine P’s 2003-05 tax and collect it upon notice and demand.
Held, this Court has jurisdiction to determine, at a minimum, whether the statutory provision alleged to divest it of jurisdiction applies, that is, whether the U.K. taxes paid by petitioner have been “refunded in whole or in part” within the meaning of I.R.C. sec. 905(c)(1)(C).
Jeffrey L. Gould, for petitioner.
Scott A. Hovey, for respondent.
OPINION
LAUBER, Judge: Currently before this Court is respondent’s motion to dis-
miss for lack of jurisdiction. The Internal Revenue Service (IRS or respondent)
issued petitioner a notice of deficiency for tax years 2003-05, and petitioner timely
petitioned the Court for redetermination of the deficiencies. Respondent now -3-
argues that he erred in issuing the notice and that the Court, by virtue of sections
905 and 6213,1 lacks subject matter jurisdiction over the substantive tax issue
presented by the petition.
Background
Petitioner is a U.S. citizen who lived and worked in London, England, dur-
ing 2003-05 and at the time she petitioned this Court. She was employed by the
London office of Goldman Sachs during 2003-05. She received employee com-
pensation from Goldman Sachs, which withheld United Kingdom (U.K.) income
tax from her wages. She filed U.S. and U.K. income tax returns for each year at
issue. On a timely filed U.S. return for each year, she claimed a foreign tax credit
in a dollar amount equivalent to the U.K. tax withheld by Goldman Sachs.
On her U.K. tax return for each year, petitioner claimed substantial deduc-
tions attributable to investments in U.K. film partnerships. She claimed these de-
ductions under U.K. tax provisions that allowed investors in film partnerships to
deduct highly leveraged investment costs against their earned income. In reliance
on these deductions, petitioner applied for refunds on her U.K. returns of the tax
that her employer had withheld and paid over to U.K. taxing authorities.
1 All statutory references are to the Internal Revenue Code in effect for the tax years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. All dollar amounts are rounded to the nearest dollar. -4-
Section 905(c)(1) provides that, if a taxpayer has claimed a credit for a
foreign tax that is later “refunded in whole or in part,” the taxpayer “shall notify
the Secretary.” The IRS is then authorized to redetermine the tax for that year and
collect, upon notice and demand, any additional tax due. See sec. 905(c)(3).
Petitioner received payments from the U.K. taxing authorities resulting from
the submission of her 2003-05 U.K. returns. However, she contends that these
payments were not “refunds” within the meaning of section 905(c)(1)(C) both
because her entitlement to refunds remains under investigation by U.K. taxing
authorities and because the application of section 905(c) is allegedly affected by
provisions of the U.S./U.K. income tax treaty. As a result, petitioner did not file
amended U.S. returns for 2003-05 reporting reduced foreign tax credits, nor did
she otherwise notify the IRS pursuant to section 905(c)(1).
The IRS commenced an examination of petitioner’s 2003-05 returns. Be-
fore or during the audit, the IRS was informed by U.K. taxing authorities that peti-
tioner had invested in film partnerships; had claimed substantial deductions attri-
butable thereto; and had filed U.K. returns requesting refunds. The IRS deter-
mined that petitioner had received U.K. income tax refunds of $413,126 in 2003,
$292,663 in 2004, and $239,202 in 2005. It therefore disallowed corresponding
amounts of foreign tax credits that petitioner claimed on her U.S. returns. -5-
Rather than invoking section 905(c)(3) as authority for collecting the rede-
termined tax upon notice and demand, the IRS sent petitioner a notice of defi-
ciency for 2003-05. This notice showed tax increases flowing from the credit
adjustments and determined section 6662(a) accuracy-related penalties. The
reductions to petitioner’s foreign tax credits were the only adjustments the IRS
made to her returns for these years.
Petitioner timely petitioned this Court challenging respondent’s determina-
tions. Approximately a year after filing his answer, respondent moved to dismiss
the case for lack of jurisdiction insofar as it concerns the adjustments to petition-
er’s foreign tax credits. Respondent contends that he erred in issuing the notice of
deficiency; that section 905(c) authorizes him to redetermine petitioner’s 2003-05
tax and collect it upon notice and demand; and that foreign tax credit adjustments
of the sort involved here “are expressly removed from deficiency procedures” by a
cross-reference from section 6213(h)(2)(A) to section 905(c). Respondent ac-
knowledges that the accuracy-related penalties determined in the notice of
deficiency “properly fall under the jurisdiction of this Court.” However, respon-
dent expresses his intention to concede these penalties if the Court grants his mo-
tion to dismiss as to the foreign tax credit adjustments. -6-
Discussion
This Court always has jurisdiction to determine whether it has jurisdiction.
Cooper v. Commissioner, 135 T.C. 70, 73 (2010). The Tax Court is a court of
limited jurisdiction, and we must ascertain whether the case before us is one that
Congress has authorized us to consider. See sec. 7442; Estate of Young v.
Commissioner, 81 T.C. 879, 881 (1983). In determining whether we have
jurisdiction over a given matter, this Court and the Courts of Appeals have given
our jurisdictional provisions a broad, practical construction rather than a narrow,
technical one. Lewy v. Commissioner, 68 T.C. 779, 781 (1977). When a statutory
provision is capable of two interpretations, “we are inclined to adopt a
construction which will permit us to retain jurisdiction without doing violence to
the statutory language.” Traxler v. Commissioner, 61 T.C. 97, 100 (1973).
I. Statutory Framework
A. The Tax Court as a Prepayment Forum
The primary function of this Court is to act as a convenient prepayment
forum in which taxpayers can challenge IRS deficiency determinations without
paying the tax first. See sec. 6213(a); Lewy v. Commissioner, 68 T.C. at 781;
Boris I. Bittker & Lawrence Lokken, Federal Taxation of Income, Estates, and
Gifts, para. 115.2.2, at 115-13 (2d ed. 2012). Section 6211 defines a “deficiency,” -7-
and section 6212 authorizes the IRS to send a “notice of deficiency” if it deter-
mines a deficiency with respect to a taxpayer’s tax. Upon receipt of a notice of
deficiency, the taxpayer may petition this Court for redetermination of the
deficiency. Sec. 6213(a). The petition must be filed within 90 days if the notice is
mailed to a U.S. address or within 150 days if, as was true here, “the notice is
addressed to a [taxpayer] outside the United States.” Ibid.
Section 6213 also places important restrictions on the IRS’ ability to assess
a deficiency and begin collecting the tax. As a rule, the IRS may not assess an in-
come tax deficiency until it has mailed a notice of deficiency and the relevant
period (90 or 150 days, as applicable) has elapsed. Sec. 6213(a). If the applicable
time window closes and the taxpayer does not petition this Court, the IRS may
proceed with assessment and collection. If a taxpayer timely petitions this Court,
the IRS may not assess the tax or proceed to collect it “until the decision of the
Tax Court has become final.” Ibid.
In certain circumstances, the restrictions on assessment found in section
6213 do not apply. For example, section 6201(a)(1) authorizes the IRS to assess
(and begin collection of) taxes determined by a taxpayer and shown on his or her
return. Section 6213(b)(1) authorizes the IRS to assess (and begin collection of)
additional tax arising from a mathematical or clerical error apparent on the face of -8-
a return. The usual restrictions on assessment likewise do not apply to assessable
penalties, see secs. 6671-6725, or in emergency situations, such as termination and
jeopardy assessments, see secs. 6851, 6852, 6861.
B. Section 905(c)
Section 905(c) includes another, quite specialized, exception to the restric-
tions on assessment set forth in section 6213. Subject to certain limitations, a U.S.
citizen may elect to take a foreign tax credit against her U.S. income tax liability
for income taxes paid or accrued to a foreign country or U.S. possession. Sec.
901(a). Congress anticipated the difficulty of ascertaining, at the time the U.S.
return is filed, the exact amount of foreign tax that will ultimately be allowable as
a credit. It accordingly provided, in what is now section 905(c), a special pro-
cedure for adjusting the credit when the taxpayer’s ultimate liability varies from
the amount claimed. Section 905(c)(1) specifies three situations in which a U.S.
taxpayer’s foreign tax credit must be adjusted:
(A) accrued taxes when paid differ from the amounts claimed as credits by the taxpayer,
(B) accrued taxes are not paid before the date 2 years after the close of the taxable year to which such taxes relate, or
(C) any tax paid is refunded in whole or in part. -9-
The regulations describe these three situations as involving a “foreign tax
redetermination.” Sec. 1.905-3T(c), Temporary Income Tax Regs., 53 Fed. Reg.
23614 (June 23, 1988).2 If a “foreign tax redetermination” as thus defined occurs,
section 905(c)(1) provides that “the taxpayer shall notify the Secretary, who shall
redetermine the amount of the tax for the year or years affected.” Because the
IRS, absent notice from the taxpayer, generally will not know of revisions to the
taxpayer’s foreign tax liabilities, the Internal Revenue Code has long required self-
reporting of such changes. See generally Pac. Metals Corp. v. Commissioner, 1
T.C. 1028, 1029 (1943) (discussing section 131(c) of the Revenue Act of 1936, a
predecessor of section 905(c)). Section 6689 provides a strong incentive for
taxpayers to comply with their self-reporting obligations under section 905(c)(1),
imposing a penalty up to 25% of the deficiency for failure to provide the notice
required by section 905(c)(1) unless it is shown that such failure is due to
reasonable cause and not due to willful neglect.
2 The provisions of the temporary regulations discussed in the text, secs. 1.905-3T and 1.905-4T, Temporary Income Tax Regs., 53 Fed. Reg. 23613, 23617 (June 23, 1988), were promulgated in 1988, T.D. 8210, 1988-2 C.B. 248, and were in effect through November 6, 2007. They were amended by T.D. 9362, 2007-48 I.R.B. 1050, in November 2007, but the provisions discussed herein remained substantially the same after that amendment. The applicability of these provisions was set to expire on November 5, 2010. See secs. 1.905-3T(f), 1.905-4T(f)(3), Temporary Income Tax Regs., 72 Fed. Reg. 62784, 62787 (Nov. 7, 2007). The provisions discussed in the text were in effect at all times relevant to this case. - 10 -
With exceptions not relevant here, the taxpayer is supposed to notify the
Secretary by filing an amended return. Sec. 1.905-4T(b)(1), Temporary Income
Tax Regs., 53 Fed. Reg. 23617 (June 23, 1988). An individual taxpayer is
instructed to include with her amended return a revised Form 1116, Foreign Tax
Credit, and information sufficient to enable the IRS to redetermine her U.S. tax
liability. See sec. 1.905-4T(b)(1), (3), Temporary Income Tax Regs.
Once the IRS redetermines the taxpayer’s liability in accordance with sec-
tion 905(c)(1), “[t]he amount of tax (if any) due * * * shall be paid by the taxpayer
on notice and demand by the Secretary, and the amount of tax overpaid (if any)
shall be credited or refunded to the taxpayer.” Sec. 905(c)(3). A cross-reference
from section 6213 confirms that the usual restrictions on assessment do not apply
to section 905(c) adjustments made by the IRS. See sec. 6213(h)(2) (“For assess-
ments without regard to restrictions imposed by this section in the case of--(A)
Recovery of foreign income taxes, see section 905(c).”); sec. 1.905-4T(b)(1),
Temporary Income Tax Regs. (“Subchapter B of chapter 63 of the Code (relating
to deficiency procedures) shall not apply with respect to the assessment of the
amount due upon such redetermination.”). - 11 -
II. Analysis
The IRS determined deficiencies in petitioner’s income tax for 2003-05
based on its contention that she had received refunds of U.K. taxes claimed as
credits on her U.S. returns for those years. The IRS issued her a notice of defi-
ciency and she timely petitioned this Court. Respondent contends that we never-
theless lack jurisdiction because the increased tax determined in the notice of
deficiency constitutes a “section 905(c) adjustment.”
Respondent contends that petitioner received U.K. tax refunds, which trig-
gered his duty to redetermine her U.S. tax under section 905(c)(1). This duty
arises, respondent contends, regardless whether the Commissioner has received
notification from the taxpayer and regardless whether the taxpayer disputes the
predicate for that section’s application. Because the IRS has allegedly adjusted
petitioner’s foreign tax credits under section 905(c)(1), respondent argues that the
redetermined tax is due on notice and demand under section 905(c)(3) and hence
that this Court lacks deficiency jurisdiction by virtue of the cross-reference to sec-
tion 905(c) from section 6213(h)(2)(A). The fact that the IRS sent petitioner a no-
tice of deficiency is irrelevant, according to respondent, since the mailing and re-
ceipt of a notice do not automatically confer jurisdiction. - 12 -
As a preliminary matter, we agree with respondent that the Internal Revenue
Code, not merely the issuance of a notice of deficiency, confers jurisdiction on this
Court. See Thompson v. Commissioner, 137 T.C. 220, 225-226 (2011), rev’d on
other grounds, 729 F.3d 869 (8th Cir. 2013). While the Thompson decision was
reversed and remanded on other grounds, the Court of Appeals did not disturb this
portion of the holding, and we see no reason to do so now. However, we do not
agree with the other steps of respondent’s argument.
In urging that we lack jurisdiction, respondent cites no caselaw but rather
relies on what he regards as the plain language of the statute. The problem with
respondent’s position is that a plain reading of section 905(c) describes a circum-
stance that did not necessarily occur here. Section 905(c)(3) empowers the Com-
missioner to collect on notice and demand only in the case of a “redetermination
under paragraph (1).” Paragraph 1 is structured as a conditional statement. As
relevant here, it provides that if a foreign tax paid is refunded, then the taxpayer is
required to notify the Secretary, who shall then redetermine the tax. Here, peti-
tioner disputes that she received a “refund” of U.K. tax. She contends that the
payments she received from U.K. taxing authorities were not “refunds” within the
meaning of section 905(c)(1)(C), both because her entitlement to refunds remains
under investigation in the U.K. and because the application of section 905(c) is al- - 13 -
legedly affected by provisions of the U.S./U.K. income tax treaty.3 And because
she allegedly received no “refunds,” she did not notify--and she contends that she
had no obligation to notify--the Secretary under section 905(c)(1).
In short, this is not a case where the taxpayer has conceded receipt of a for-
eign tax refund by notifying the Secretary, filing an amended return, and self-
reporting an increased tax liability. Section 905(c)(1)(C) applies only “[i]f * * *
any tax paid is refunded in whole or in part,” and petitioner contends that this
condition has not been satisfied. We necessarily have jurisdiction to determine
whether section 905(c)(1)(C)--the statutory provision alleged to divest us of
jurisdiction--applies.
The Court confronted analogous facts in Comprehensive Designers Int’l,
Ltd. v. Commissioner, 66 T.C. 348 (1976). The taxpayer there claimed on its U.S.
return a foreign tax credit for an accrued U.K. tax. The taxpayer determined this
credit by translating its accrued liability in British pounds into dollars at the ex-
change rate prevailing at the end of its fiscal year, namely, £1.00 = $2.80. The
taxpayer’s U.K. tax liability, when subsequently paid, was the same as its accrued
3 We make no findings at this stage of the case concerning the merits of petitioner’s arguments. The only issue before us is the legal question whether we have subject matter jurisdiction to adjudicate her claims. See Tigers Eye Trading, LLC v. Commissioner, 138 T.C. 67, 75 (2012) (citing Taylor v. Voss, 271 U.S. 176, 186 (1926)). - 14 -
liability in terms of British pounds. In dollar terms, however, its U.K. tax liability
when paid was significantly lower than when accrued, because the pound had
depreciated and was then convertible into dollars at a rate of £1.00 = $2.40. Id. at
350.
On audit, the taxpayer contended that no adjustment to its foreign tax credit
was required because its U.K. tax liability, in British pounds, was the same when
paid as when accrued. The IRS disagreed, contending that, because of the ex-
change rate differential, the “accrued taxes when paid differ[ed] from the amounts
claimed as credits by the taxpayer” within the meaning of section 905(c) of the
1954 Code.4 The IRS sent the taxpayer a notice of deficiency based on a redeter-
mination of its foreign tax credit, and the taxpayer timely sought review in this
Court.
4 Section 905(c) of the 1954 Code, which was similar in substance to the current statute, provided: “If accrued taxes when paid differ from the amounts claimed as credits by the taxpayer, or if any tax paid is refunded in whole or in part, the taxpayer shall notify the Secretary [or his delegate], who shall redetermine the amount of the tax for the year or years affected.” The original version of the statute, enacted in 1918, read similarly: “If accrued taxes when paid differ from the amounts claimed as credits by the taxpayer, or if any tax paid is refunded in whole or in part, the taxpayer shall notify the Commissioner who shall redetermine the amount of the tax due * * * and the amount of tax due upon such redetermination, if any, shall be paid by the taxpayer upon notice and demand.” Revenue Act of 1918, Pub. L. No. 65-254, sec. 222(b), 40 Stat. at 1073. - 15 -
The Court in Comprehensive Designers did not address the jurisdictional
issue currently before us, evidently because the parties had not raised it. Rather,
the Court proceeded to the merits and ruled in favor of the IRS. See 66 T.C. at
354-56. As Judge Tannenwald framed the question, “We must decide whether the
amount of [petitioner’s foreign tax] credit should be adjusted pursuant to section
905(c).” Id. at 354.
Like the taxpayer in Comprehensive Designers, petitioner disputes that a
foreign tax redetermination has occurred. Just as the taxpayer in Comprehensive
Designers disagreed that its “accrued taxes when paid differ[ed] from the amounts
claimed as credits,” petitioner disagrees that her U.K. tax “has been refunded in
whole or in part.” In each case, the taxpayer did not file an amended return or
otherwise notify the Secretary pursuant to section 905(c)(1); the IRS determined a
deficiency stemming from partial disallowance of the foreign tax credit; the IRS
sent the taxpayer a notice of deficiency; and the taxpayer timely sought redeter-
mination of that deficiency in our Court. In Comprehensive Designers and on
other occasions, we decided the merits of questions concerning foreign tax credit - 16 -
adjustments described in section 905(c) and its predecessors, in each case without
addressing the jurisdictional issue that respondent raises now.5
The statutory scheme that Congress has created generally affords taxpayers
a prepayment forum to contest disputed taxes. The Code provides limited excep-
tions to this rule, allowing the Commissioner to assess the tax summarily (for
example) where the taxpayer has reported a tax on her return or made obvious
mathematical errors in computing her tax. See secs. 6201(a)(1), 6213(b). The
common thread in these non-emergency situations is that the assessment is uncon-
troverted and does not need independent review, since the taxpayer does not dis-
pute that the tax is owing. This statutory scheme supports the outcome in Compre-
hensive Designers and the other precedents we have cited, which afforded
5 See Steel Improvement & Forge Co. v. Commissioner, 36 T.C. 265, 280- 282 (1961) (discussing sec. 131(c) of 1939 Code), rev’d on another issue, 314 F.2d 96 (6th Cir. 1963); H.H. Robertson Co. v. Commissioner, 8 T.C. 1333, 1340 (1947) (rejecting contention that amounts received from U.K. taxing authorities “were not ‘refunded’ within the meaning of that word as used in” sec. 131(c) of the 1939 Code), aff’d, 176 F.2d 704 (3d Cir. 1949); Pac. Metals Corp. v. Commis- sioner, 1 T.C. 1028, 1030 (1943) (determining foreign tax credit adjustment when IRS issued notice of deficiency after taxpayer “failed to comply with the mandate of section 131(c) by failing to notify the Commissioner in 1939 that it had received a refund of part of the 1936 foreign tax”). - 17 -
taxpayers a prepayment forum for contesting the application of section 905(c)(1)
and its predecessors.6
At this point, we need not decide whether we have subject matter jurisdic-
tion over all aspects of this controversy. At the very least, we have jurisdiction to
determine our jurisdiction. We thus have jurisdiction to decide whether the statu-
tory provision alleged to divest us of jurisdiction applies, i.e., whether the U.K.
taxes paid by petitioner have been “refunded in whole or in part” within the mean-
ing of section 905(c)(1)(C). This will afford petitioner a prepayment forum for
resolving the central issue that she raises on the merits, namely, that the amounts
she received from U.K. taxing authorities during 2003-05 were not “refunds.”
To reflect the foregoing,
An order will be issued denying
respondent’s motion to dismiss for lack of
jurisdiction.
6 Even in the case of mathematical errors, Congress has determined to afford taxpayers a prepayment forum by providing that “the deficiency procedures pre- scribed by this subchapter” shall apply if the IRS reassesses the tax after the tax- payer timely requests that the assessment be abated. See sec. 6213(b)(2)(A). The ability to cure before assessment of some assessable penalties is additional evidence of a system intended to provide taxpayers meaningful opportunities to remedy the problem before assessment. See, e.g., sec. 6702 (frivolous return penalty does not apply if taxpayer withdraws frivolous submission within 30 days of receiving notice from the IRS).