Tax Court says foreign refunds affect foreign tax credits even if not yet finally adjudicated

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The Tax Court held in Panagiota Pam Sotiropoulos v. Commissioner, T.C. Memo. No. 2017-075, that a United Kingdom income tax refund the taxpayer had received but was subsequently challenged by the UK tax authority must nevertheless be treated as a refund under Section 905(c).  Accordingly, the IRS could reduce the taxpayer’s claimed foreign tax credits (FTCs) for the year in which the UK tax had originally been paid.

This opinion may color future Tax Court decisions regarding the treatment of foreign tax refunds that have not yet been ultimately adjudicated.  The decision applies Section 905(c) to cash-basis taxpayers using principles similar to Rev. Rul. 84-125, which means that the decision will have an impact on both corporate and individual taxpayers.  The case may also be of broader interest because it arose from information that the IRS received under a tax information exchange agreement with the United Kingdom.  Tax information exchanges continue to expand globally and are increasingly likely to affect US taxpayers going forward.

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Michael DiFronzo

Partner, Washington National Tax Services ITS Leader, PwC US

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