Important potential changes to Foreign Tax Credit carrybacks with NOLs
TAX ALERT |
On April 17, the Department of the Treasury (Treasury) and Internal Revenue Service (IRS) published Revenue Ruling (Rev. Rul.) 2020-8. This ruling suspends, for the time being, Rev. Rul. 71-533, so the IRS and Treasury can consider whether the 10 year limitation period under Internal Revenue Code (IRC) section 6511(d)(3)(A) applies to claims for refund or credit of an overpayment resulting from a foreign tax credit (FTC) carryback arising as a result of a net operating loss (NOL) carryback from a subsequent year. Rev. Rul. 68-150 is also suspended, in part, pending the final decision after reconsideration.
Taxpayers who carry back NOLs under the special rules of the CARES Act should consider whether an NOL carry back to any year in the five year carry back period set forth in the CARES Act will make foreign tax credits available in years that would be open under the 10 year period of section 6511(d)(3)(A) because any refund claims made under section 6511(d)(3)(A) could be disallowed if Treasury and the IRS decide to permanently revoke Rev. Rul. 71-533. It is therefore critical for taxpayers to analyze the impact of an NOL carry back under the CARES Act immediately because it is not clear when Treasury and the IRS will complete their analysis of whether to apply the 10 year or three year statute of limitations.
Section 6511(d)(3)(A) provides, in part, that when “the claim for credit or refund relates to an overpayment attributable to any taxes paid or accrued to any foreign country,” the limitations period is 10 years from the due date of the return for the year in which the foreign taxes were paid or accrued. Section 6511(d)(2)(A) provides, in part, that when “the claim for credit or refund relates to an overpayment attributable to a net operating loss carryback or a capital loss carryback,” the limitations period is three years from the due date of the return for the year of the net operating loss or net capital loss that results in the carryback.
Rev. Rul. 71-533 involved a taxpayer who generated a loss in tax year 1969 and carried the loss back to 1966. This NOL carryback fell within the three year period of limitations under section 6511(d)(2)(A). However, the NOL carryback from 1969 eliminated all the taxpayer’s taxable income for tax year 1966, and resulted in excess FTC in 1966. The taxpayer then carried back its FTC from 1966 to tax year 1964. This carryback, in turn, resulted in an overpayment in 1964, and the taxpayer claimed a refund. The IRS concluded that the 10 year limitations period under IRC section 6511(d)(3)(A) applied. Therefore, the taxpayer’s claim for refund for tax year 1964, made after tax year 1969, was timely, even though the refund resulted from the carryback of the FTC to 1964, five years before the taxpayer incurred its NOL in 1969. The IRS did not consider this interplay between the three year limitation for NOL carryback and the 10 year limitation for FTC carryback in Rev. Rul. 71-533.
In Rev. Rul. 68-150, the IRS “addressed the scope of section 6511(d)(3)(A), and concluded, in relevant part, that it applied to claims for credit or refund based on the correction of mathematical errors in the computation of taxes” including “any other adjustments to the size of the foreign tax credit,” even if the adjustment was due to the payment of additional foreign taxes.
Now, the Treasury and IRS are reconsidering whether the three year limitation period under section 6511(d)(2)(A) should apply, instead of the 10 year limitation under section 6511(d)(3)(A), when a claim for credit or refund based on the carry back of excess FTC arises as a result of an NOL carryback in a subsequent year, and the refund year is more than three years prior to the year that generated the NOL. Until a final determination is made, Rev. Rul. 2020-8 suspends Rev. Rul. 71-533, in its entirety, and the portion of Rev. Rul. 68-150 quoted in the preceding paragraph.
During this reconsideration period, the IRS and Treasury state in Rev. Rul. 2020-8 that the application of any final determination will only be applied prospectively. The suspension of Rev. Rul. 71-533 and the partial suspension of Rev. Rul. 68-150 will not affect any taxpayer that filed or files, a claim for credit or refund within the limitations period of IRC section 6511(d)(3) and in accordance with Rev. Rul. 71-533 and Rev. Rul. 68-150. RSM will await the final determination of the Treasury and the IRS, and RSM will release another alert regarding the Treasury and IRS determination as to which subsection of IRC section 6511(d) applies when a taxpayer has a situation similar to the taxpayer in Rev. Rul. 71-533.