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Treasury explained, the Dougherty court The election illustrated in Example 1 B’s election is permitted under the
interpreted prior case law to mean is not a valid election because B cannot regulations because B did not claim
that when determining the timeliness retroactively elect the accrual method any foreign tax credits in her prior-year
of a delayed election, one should ask once she has chosen the cash method on returns. On her timely filed, original
whether the original action or the failure her original return. Regs. Sec. 1.905-1(e) return, she did not choose a method for
to act was consistent with a taxpayer’s (1) does not allow B to change her elec- purposes of the foreign tax credit, and
final position. tion from the cash basis to the accrual the election made on the amended re-
Applying this approach, the Dough- basis on an amended return. B may elect turn is the first time she chose a method
erty court had allowed a retroactive the accrual-basis method on her timely to claim the foreign tax credit. Unlike
election because the taxpayer in the case filed original return for a subsequent year. the two prior examples, the taxpayer in
did not take a position on an amended Example 3 is claiming the foreign tax
return that was inconsistent with the Example 2: In year 1, B claimed a credit for the first time on her amend-
original return. Though not specifically foreign tax credit using the cash ed return.
discussed in the preamble, the taxpayer method on her timely filed, original The exception illustrated in Example
in Dougherty had not made a Sec. 962 return. In year 2, B did not timely 3 is consistent with the Dougherty and
election prior to the tax year at issue and file her required return for year Strong holdings because the taxpayer
made the election for the first time on 2, and she did not pay any foreign elects the accrual-basis method on an
his amended return. Thus, according to income taxes. In year 5, B filed her amended return as the first and the last
Treasury, the principle that Dougherty year 2 original return and elected to method for purposes of the foreign tax
stands for is, in fact, reflected in the claim the foreign tax credit on the credit. The taxpayer in Example 3 is not
exception provided under the final regu- accrual method. B believed her year taking a position that is inconsistent
lations, which allows a taxpayer to make 2 election with respect to the foreign with her prior position by changing
a retroactive election on an amended tax credit to be a permissible election from the cash to the accrual basis. With-
return if the taxpayer is claiming the because she was making an election out a prior election claiming the foreign
foreign tax credit for the first time. on her original return for year 2 and tax credit on the cash-basis method,
General application of the not on an amended return. the taxpayer’s election on an amended
final regulations: Under Regs. Sec. return is a valid election under the
1.905-1(e)(1), an individual taxpayer In Example 2, even though B made final regulations.
who uses the cash method of accounting the election on her original return, it is
for income may elect to take a foreign not a valid election because that election Clear time frame
tax credit in the tax year in which the must be made on a timely filed, origi- The final regulations provide a clear time
taxes accrue in accordance with the rules nal return. frame for making an election to change
for accrual-method taxpayers. An elec- Exception to the general rule: from the cash basis to the accrual basis
tion to do so must be made on a timely Under Regs. Sec. 1.905-1(e)(2), if a tax- for purposes of the foreign tax credit.
filed, original return by checking the payer claims a foreign tax credit for the The ambiguity that existed before the
appropriate box on Form 1116, Foreign first time, an election to claim the foreign 2020 proposed regulations is no longer
Tax Credit. Once the election is made, tax credit on the accrual basis may be an issue because the final regulations ex-
it is irrevocable and must be followed made on an amended return. pressly state that the taxpayer’s election,
for purposes of claiming the foreign tax to be valid, must be made on a timely
credit for all subsequent years. Example 3: The facts are similar to filed, original return, unless an excep-
Example 1, except that B has never tion applies.
Example 1: B is a U.S. resident who claimed a foreign tax credit in any of From Yoori Sohn, J.D., LL.M.,
has foreign-source income and pays her prior tax years, and she did not Washington, D.C. ■
foreign income taxes. In year 1, B claim the foreign tax credit on her
claimed a foreign tax credit on the timely filed, original return in year
cash-basis method and filed her 1. In year 2, B learned that claiming Editor
year 1 return by April 15, year 2. In the foreign tax credit on the accrual
Mary Van Leuven, J.D., LL.M., is a direc-
year 3, she decided to change her method would benefit her greatly.
tor, Washington National Tax, at KPMG
method from the cash method to the She amended her year 1 return and
LLP in Washington, D.C.
accrual method on an amended year claimed the foreign tax credit on the
1 return. accrual method.

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