Court Opinion

ID: 2672593
Source: CourtListenerOpinion
Date Created: 2014-05-05 19:45:59.152964+00
Date Added: 2024-06-11T13:06:09.705784
License: Public Domain

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. 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.
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).