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TAX CLINIC

of the French entity. The revenue ruling a cash-method taxpayer may amend a Final foreign tax credit
might be interpreted as suggesting that return to claim foreign tax credits on the regulations
the partnership’s federal taxable income accrual basis. Preamble: Treasury adopted
was determined based on the federal That issue was considered in Strong Prop. Regs. Sec. 1.905-1(e) without
classification of the French entity as a v. Willcuts, No. 2497 Law (D. Minn. modification. In the preamble of the
disregarded entity and not on Tennessee’s 1935). The court denied a taxpayer’s final regulations, Treasury disagreed
classification of it as a regarded entity. election to claim foreign tax credits on with a public comment suggesting that
However, this is less than clear, and there an accrual basis that was made on an a taxpayer should be allowed to make an
is no explicit guidance from the Depart- amended return on two grounds. First, election on an amended return because
ment of Revenue on this issue. the court ruled that when the taxpayer the purpose of Sec. 905(a) was to match
Therefore, taxpayers are advised to claimed a foreign tax credit on the cash the timing of the U.S. tax and foreign
review their Tennessee filings closely to basis on his original, timely filed return, tax on the same income and that the ex-
ensure the correct entity or combined the taxpayer fixed the rights of both the isting case law supported the retroactive
group is filing and that sales of partner- taxpayer and the government. Therefore, election. The public comment relied on
ship or membership interests and other the court held that the taxpayer could Dougherty, 60 T.C. 917 (1973), in which
transactions with the federally disregard- not change from claiming foreign tax the court permitted an individual tax-
ed or passthrough entities are properly credits using the cash method of ac- payer to make an election under Sec. 962
analyzed for Tennessee FAE purposes. counting to claiming foreign tax credits to be subject to corporate tax rates on an
From John Harper, CPA, Nashville using the accrual method of accounting amended return. The commenter further
on an amended return because of the argued that Strong did not hold that
doctrine of elections. Second, the court an election to use the accrual method
Tax Accounting found that the foreign taxes at issue did of accounting for purposes of claiming
not accrue in the relevant tax year (1929), foreign tax credits may not be made on
Foreign tax credit: Changing so even if the taxpayer were allowed to an amended return and that the court’s
from cash to accrual basis elect to apply the accrual method, the discussion of the issue was dictum that
On Dec. 28, 2021, Treasury and the IRS foreign income tax in question could did not represent legal authority.
issued final foreign tax credit regulations not be claimed as a foreign tax credit in In response, Treasury cited the statu-
(T.D. 9959) that were officially published the relevant tax year because the foreign tory language of Sec. 905(a) that, by its
in the Federal Register on Jan. 4, 2022. income tax accrued in the subsequent tax terms, allows only a one-time change
These final regulations provide regula- year (1930). from the cash to the accrual method
tory authority for Treasury’s long-held In TAM 8332003, the IRS cited and pointed out that, though timing was
position that an individual taxpayer who Strong in determining that once an elec- of concern, Congress never amended
elects on a timely filed return to claim tion to take the foreign tax credit on the Sec. 905(a) to allow taxpayers to be able
the foreign tax credit on the cash basis cash basis is made on a timely filed tax to make the election on an amended
may not change to the accrual basis on return, an election to take the credit on return. Additionally, Treasury noted that
an amended return. the accrual basis may not be made by a retroactive election would create more
This item discusses the background filing an amended return. Treasury also compliance burdens and administrative
and application of this rule. cited Strong in the preamble to the 2020 complexity as well as time bar collection
foreign tax credit regulations when dis- of taxes due to different expiration dates
Background cussing proposed Regs. Sec. 1.905-1(e), of statutes of limitation for assessments
Under Sec. 905(a), a cash-method which addressed the timing of making and refunds for the foreign tax credit.
taxpayer can elect to claim a foreign tax the accrual-basis election. Under the Treasury disagreed with the commenter’s
credit on either the cash basis or accrual proposed regulations, an election to interpretation of Strong and asserted
basis (Regs. Secs. 1.905-1(c) and (d)). If claim foreign taxes on the accrual basis that the case provided support for the
such a taxpayer elects to claim a foreign must be made on a timely filed, original regulations’ disallowance of a retroactive
tax credit on the accrual basis, that elec- return. The proposed regulations also election, rejecting the argument that the
tion is binding for all future tax years. provided an exception for a taxpayer who case provided little legal authority.
However, prior to the 2020 proposed has never previously claimed a foreign Furthermore, Treasury viewed
foreign tax credit regulations, neither tax credit to elect to claim a foreign the Dougherty court’s holding to be
the Internal Revenue Code nor the tax credit on the accrual basis on an consistent with an exception provided
Treasury regulations addressed whether amended return. under Regs. Sec. 1.905-1(e)(2). As

24 June 2022 The Tax Adviser