Source: https://www.currentfederaltaxdevelopments.com/blog/2017/5/2/fact-that-taxpayer-might-have-to-repay-taxes-received-back-from-uk-did-not-make-the-payment-not-a-refund
Timestamp: 2019-04-24 04:26:46+00:00

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In the case of Sotiropoulos v. Commissioner, TC Memo 2017-75 argued that amounts she received from the United Kingdom for claims she submitted related to what the UK government was claiming in UK courts as tax shelters were not tax refunds. She noted that the UK government was challenging those shelters in court and she believed it was likely she would need to repay those funds.
When a taxpayer claims a foreign tax credit under IRC §905(c)(1), she is required to notify the IRS of any later refund of some or all of the taxes used to compute the credit pursuant to IRC §905(c)(3), normally by filing an amended return.
The taxpayer in this case had taxes withheld from her wages when she worked in the United Kingdom, claiming credits for the amounts withheld from her wages. However, having invested in UK film partnerships, she filed claims for refund of a large portion of the taxes withheld from wages.
The UK government paid those claimed amounts to the taxpayer, but the government still had the right to later challenge those refunds and, in fact, court challenges related to those film partnerships are now underway. Ms. Sotiropoulos pointed that her legal counsel had informed her the UK government was likely to prevail in court and she would eventually have to repay the amounts she had received from the UK government.
Since it was possible and, indeed, likely she would need to pay back those payments, she did not believe she yet had to inform the IRS of those amounts and, as well, she did not yet owe the U.S. government any amounts for a reduction in foreign tax credits. And, in any event, the law allows the IRS to collect such excess foreign tax payments at the time of the refund regardless of the regular statute (see IRC §905). She also believes that its likely that if she is ordered to pay back the UK taxes, she would no longer have income that would allow her to take advantage of the tax benefit of a foreign tax credit for that year.
The IRS argued, first, that she could not challenge this issue in Court. Although the agency had issued a notice of deficiency in the case, the Code provides that the tax due under the refund rule is not subject to the deficiency provisions of the IRC (IRC §905(c)(3)). Thus, the IRS argued, the Tax Court had no jurisdiction to rule on this matter.
The Tax Court did not buy that argument. The Court had held earlier in this case (see the opinion in Sotiropoulos v. Commissioner, 142 TC 269 (2014)) that while it was true if the payment were a tax refund the Tax Court did not have jurisdiction, the Court always has jurisdiction to determine if it had jurisdiction. Since the issue was whether this payment really was a tax refund, the Court had to answer the question of whether the payment was a refund to determine if it had jurisdiction.
It often happens that taxpayers, because of individual circumstances or passage of time, are unable to derive full benefit from contingent tax assets they have booked or expect to receive, such as carryforwards of foreign tax credits, net operating losses, passive losses, or investment interest. This does not demonstrate any structural defect in the Code and does not give rise to “double taxation.” It simply reflects the facts that the future is unpredictable and that taxable income must be determined on an annual basis.
Thus, the Tax Court found that she had received a refund and that the IRS had the right to force her to pay back a large portion of her foreign tax credits previously claimed.

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