NOL carryback refund cannot use foreign-tax-credit deadline

Plain-English summary

A taxpayer amended a return to deduct foreign taxes instead of claiming a foreign tax credit. The deduction created a net operating loss, which the taxpayer carried back to an earlier year and used as the basis for a refund claim filed many years later. Chief Counsel advised that the claim was attributable to the NOL carryback, its immediate cause, so the three-year limitation period tied to the loss-year return controlled. The separate ten-year period applies only when an overpayment is attributable to foreign taxes for which a section 901 credit is allowed, not when the taxpayer elects a deduction instead. The two special limitation periods also cannot be stacked or combined for the same overpayment. The refund claim was untimely.

Ruling snapshot

• Question: Could an NOL carryback refund claim use the ten-year foreign-tax-credit period when the NOL arose after the taxpayer elected to deduct foreign taxes?
• Outcome: Advice given, claim untimely.
• Key authorities: IRC §§ 164, 172, 6511(d)(2), 6511(d)(3), and 901; Treas. Reg. §§ 1.901-1 and 301.6511(d)-3; Electrolux Holdings, Inc. v. United States, 491 F.3d 1327 (Fed. Cir. 2007).

Full text (IRS public release)

       Office of Chief Counsel
       Internal Revenue Service
       memorandum
       Number: 201517005
       Release Date: 4/24/2015
       CC:PA:01:LRPounders
       POSTN-133619-14

UILC: 6511.00-00, 6511.03-02, 6511.03-03

date: December 08, 2014

 to:   Associate Area Counsel (Atlanta, Group 3)
       (Small Business/Self-Employed)
       Attn: Christopher Bradley

from: Blaise G. Dusenberry
Senior Technician Reviewer, Branch 1
(Procedure & Administration)

subject: Timeliness of a Claim for Refund under Sections 6511(d)(2) and 6511(d)(3)

       This Chief Counsel Advice responds to your request for assistance. This advice may
       not be used or cited as precedent.

       ISSUE

       Whether a refund claim filed in year 13 is timely for taxes paid for year 2 if the claim for
       refund results from a Net Operating Loss (NOL) in year 4 that was generated when the
       taxpayer made a timely election to deduct foreign taxes paid in lieu of the previously
       claimed foreign tax credit?

       CONCLUSIONS

       No. The claim for refund of tax paid with respect to year 2 is the result of an NOL in
       year 4. The timeliness of the claim for refund is governed by section 6511(d)(2)
       because it is attributable to an NOL carryback from year 4. The applicable period
       therefore expired three years after the due date of the return for year 4. Even if the
       claim for refund were viewed as attributable to foreign taxes paid, the ten-year period
       under section 6511(d)(3) is only available for refunds attributable to foreign tax credits; it
       does not apply to refunds attributable to deductions for creditable foreign taxes. The
       extended periods under subsections (d)(2) and (d)(3) are mutually exclusive with
       respect to a given overpayment.

POSTN-133619-14 2

FACTS

In year 13 a taxpayer filed an amended return for year 4. On the amended return, the
taxpayer changed its election in order to deduct creditable foreign taxes under section
164, in lieu of taking the credit under section 901. This new deduction, for foreign taxes
paid or accrued, significantly reduced the taxpayer’s income. The reduction in income
caused by the deduction for foreign taxes resulted in a Net Operating Loss (NOL) for
year 4. On the same day that the taxpayer filed an amended return for year 4, the
taxpayer also filed an amended return for year 2, carrying back the NOL from year 4 to
year 2. The taxpayer’s original returns for fiscal years 2 and 4 were timely filed in
calendar years 2 and 4, respectively. Neither year was the subject of an extension
within the meaning of sections 6501(c)(4) and 6511(c).

LAW AND ANALYSIS

Law

Section 901 (a) provides that if a taxpayer chooses the benefit of the foreign tax credit,
subject to the limitations in section 904, the taxpayer’s income tax will be credited with
the amounts allowed under section 901(b) plus, in the case of a corporation, the taxes
deemed paid under sections 902 and 960. Such choice may be made or changed at
any time prior to the expiration of the period prescribed for making a claim for credit or
refund for the taxable year.

Treasury Regulations section 1.901-1(d) clarifies that the relevant period for a taxpayer
to claim the benefits of section 901 (or claim a deduction in lieu of a foreign tax credit) is
the period prescribed by section 6511(d)(3)(A) (or section 6511(c) if the period is
extended by agreement).

Section 6511(d)(2)(A) provides that when a claim for refund relates to an overpayment
attributable to an NOL carryback, in lieu of the three-year period prescribed in section
6511(a), the period ends three years after the time prescribed by law for the filing of the
return (including extensions) for the taxable year of the NOL which results in the
carryback, or the period prescribed in section 6511(c) in respect of such year, if later.

Section 6511(d)(3)(A) provides that if a claim for credit or refund relates to an
overpayment attributable to a tax paid or accrued to a foreign country for which credit is
allowed under section 901, in lieu of the three-year period prescribed in section 6511(a),
the period is ten years from the date prescribed for the filing of the return for the taxable
year in which the foreign tax was actually paid or accrued.

Treasury Regulation section 301.6511(d)-3(a) provides that in the case of an
overpayment resulting from a credit allowed under section 901 for taxes paid or accrued
to a foreign country, a claim for credit or refund must be filed within ten years from the
due date, without regard to extensions, of the return for the taxable year with respect to

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which the claim is made (the regulation has not been updated to reflect a change in the
statutory language to clarify that the period runs from the due date of the return for the
year in which the foreign tax is actually paid or accrued).

Analysis

You asked whether a claim for refund of tax paid for year 2 is timely filed under section
6511(d)(2) or (d)(3), where an amended return is filed in year 13 claiming a deduction,
in lieu of a credit, for foreign taxes paid in year 4, the timely election to deduct foreign
taxes in year 4 results in an NOL for year 4, and the claim for refund for year 2 is also
filed in year 13 based on an NOL carryback from year 4 to year 2. The claim for refund
filed by the taxpayer for year 2 is not timely under either section 6511(d)(2) or section
6511(d)(3).

1. Timeliness under section 6511(d)(2)

First, refunds attributable to an NOL are generally governed by the special limitation
period set out in section 6511(d)(2). A claim for refund based on an overpayment of tax
attributable to an NOL carryback is timely if filed within three years of the due date
(including extensions) of the return for the loss year. In this case, the loss year is year 4
and the due date of the year 4 return was also in year 4. Therefore, the three-year
period, following the due date of the NOL source year return for year 4, expired in year

7. The taxpayer’s claim for refund made in year 13 is therefore untimely under section
   6511(d)(2).1

   2. Timeliness under section 6511(d)(3)

The taxpayer may argue that an overpayment in year 2 is “attributable to” a foreign tax
paid or accrued and therefore falls within the purview of section 6511(d)(3). However,
this reading is incorrect for several reasons.

First, the taxpayer in this case has elected to take a deduction for foreign taxes paid or
accrued under section 164, not a credit under section 901. The ten-year period of
limitations under section 6511(d)(3) applies only to claims based on foreign tax credits
allowed under section 901, not deductions of foreign tax for which a credit is allowable.
The distinction between allowed and allowable is an important one. A foreign tax credit
or a deduction for foreign taxes paid or accrued may each be allowable, but they are
also mutually exclusive; the taxpayer is required to choose only one option for a given
tax year. This is explicitly outlined in section 275(a)(4) and the regulations under

1
Section 6511(d)(2) is not an exclusive period of limitations. A claim for credit or refund made outside of
the three-year period prescribed in section 6511(d)(2) will still be considered timely, if the claim falls within
the periods prescribed in section 6511(a), (b), or (c), as applicable. Treas. Reg. § 301.6511(d)-2(a)(3).
However, the taxpayer’s claim for refund of taxes paid in year 2 is also untimely under sections 6511(a)
and (b), and on the facts provided, section 6511(c) is inapplicable, since no extension of time for
assessment was granted with respect to year 2.

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sections 164 and 901. A credit is allowable unless a deduction is taken, and a
deduction is allowable unless a credit is taken. However, only one or the other can be
allowed in a given year. A credit is only allowed when chosen; conversely, it is not
allowed when a deduction is taken in lieu of that credit. See Treas. Reg. § 1.901-1(h).

Consequently, since section 6511(d)(3) is only applicable to overpayments attributable
to foreign taxes for which credit is allowed, it is inapplicable to overpayments
attributable to foreign taxes claimed as a deduction. In short, deducted foreign taxes
are not “taxes paid or accrued to any foreign government… for which credit is allowed
against the tax imposed by subtitle A in accordance with section 901,” for purposes of
section 6511(d)(3). This is clarified in Treasury Regulation § 301.6511(d)-3, which only
provides for a ten-year period with respect to claims based on foreign tax credits under
section 901.

Second, even if section 6511(d)(3)(A) could be construed to apply to overpayments
attributable to foreign tax deductions, the overpayment claimed in year 2 is not
attributable to a deduction for foreign tax paid or accrued; rather, it is attributable to an
NOL deduction carried back from year 4. The phrase “attributable to” was defined by
the Federal Circuit as “due to, caused by, or generated by.” Electrolux Holdings, Inc. v.
United States, 491 F.3d 1327, 1331-33 (Fed. Cir. 2007). In Electrolux the court found
that the taxpayer’s claim was “attributable to” the capital loss carryforward that
generated the overpayment, not the original capital loss carryback that was carried back
and then carried forward to generate the overpayment. Id. The court rejected the
taxpayer’s argument that a carryover was “attributable to” a carryback simply because it
could be “traced to” the carryback. Id. This indicates that in a cascading sequence,
such as the one presented here, the most immediate cause of the overpayment should
be considered for purposes of determining what the overpayment is “attributable to.”
But see, First Chicago Corp. v. Commissioner, 742 F.2d 1102 (7th Cir. 1984) (using
tracing in the context of section 6501 period of limitations on assessment, to attribute
the last step in a cascade to the initiating event which is removed by several steps).2

The narrower reading of “attributable” found in Elextrolux, in contrast to the tracing
method used in First Chicago, is consistent with the fact that waivers of sovereign

2
Marshalltown is sometimes referenced with respect to this issue. The court in Marshalltown, on a
motion to dismiss, found that section 6511(d)(2) would allow the case to go forward, where a carryback
from 1985 to 1979 freed credits which could be carried to 1980. Marshalltown Savings & Loan Ass'n v.
United States, No. 4–91–CV–10003, 1991 WL 331376 (S.D.Iowa Dec. 31, 1991). In Marshalltown, the
court finds without citation or analysis that the carryforward of credits from 1979 to 1980 is attributable to
the net operating loss which freed those credits. This is an unreported order without significant analysis
on point which creates more questions than answers. For example, the order fails to explain why this
scenario is distinguishable from the scenario in Rev. Rul. 71-533, 1971-2 C.B. 413, which holds that when
a foreign tax credit is freed up as the result of an NOL carryback, those credits are subject to the period of
limitations applicable to the foreign tax credit at issue, not the NOL which freed those credits. There is no
justification provided to treat the business credit freed in Marshalltown different than the foreign tax
credits freed in Rev. Rul. 71-533.

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immunity and the associated periods of limitations must be construed strictly in favor of
the Government. See e.g., United States v. Brockamp, 519 U.S. 347 (1997); United
States v. Dalm, 494 U.S. 596 (1990). In First Chicago, the Court was required to
construe a limitation on assessment in favor of the Government and thereby took a
broad interpretation of “attributable to” while in Electrolux, the Federal Circuit was
required to strictly construe the waiver of sovereign immunity for suits against the
Government and thus construed “attributable to” narrowly. Therefore, we do not view
Electrolux and First Chicago as inconsistent. On the contrary, the two cases together
provide the book ends of “attributable to” defining the term when it must be read
narrowly, and when it must be read broadly. In the context of a waiver of sovereign
immunity, the phrase must be construed narrowly and therefore applies only to the
immediate cause, while in the context of a statute of limitations on the collection of
taxes, the phrase must be construed broadly in favor of the government and therefore
includes all items within the chain of causation including the initial event which caused
the cascade effect. Since the claim in this case relates to a refund claim, and therefore
a waiver of sovereign immunity, the phrase must be construed narrowly to incorporate
only the immediate cause of the claim.

This result can also be reached by careful statutory construction. Sections 6511(d)(2)
and 6511(d)(3) each provide a period, “in lieu of the 3-year period of limitations
prescribed in subsection (a).” Section 6511(d)(3) states that the period used in lieu of
the three-year period “shall be 10 years from the date prescribed by law for filing the
return for the year in which such taxes were actually paid or accrued,” while section
6511(d)(2) states the period used in lieu of the three-year period “shall be that period
which ends 3 years after the time prescribed by law for filing the return (including
extensions thereof) for the taxable year of the net operating loss or net capital loss
which results in such carryback, or the period prescribed in section (c) in respect of
such taxable year, whichever expires later.” Therefore, a given overpayment cannot be
treated as attributable to both a net operating loss and a foreign tax for purposes of
determining the statute of limitations, without causing a conflict between these two
provisions.

Where statutes seem to conflict, the preferred reading for purposes of statutory
construction is one which allows for the provisions to operate harmoniously with the
most specific provision applying when possible. Therefore, the best reading of section
6511(d) is that the most immediate cause of the overpayment must be the cause to
which the overpayment is “attributable.” In this case, the most immediate cause of the
claimed overpayment is the NOL. It is the NOL deduction which creates the
overpayment in year 2. The foreign tax is only one item which may contribute to an
NOL in year 4, but without the existence of an NOL in year 4, the year 2 tax could not
be an overpayment of tax. Therefore, the NOL is the direct cause and the foreign tax is,
at best, one of multiple indirect causes. Therefore, the period used in lieu of the three-
year period in subsection (a) as determined by the most narrowly tailored statutory
provision would be the period prescribed in 6511(d)(2). In this sense, the stricter
reading of “attributable to” in the context of section 6511(d), but not in the context of

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other provisions, could be justified by the specific context which requires a stricter
construction so as to avoid unnecessary conflicts within the statutory framework.

Furthermore, in a similar context Congress has expressly articulated its intent that more
than one limitations period can apply to a given overpayment based on the cascading
effect of a specific deduction on a carryover or carryback. For example, in section
6511(d)(1) Congress explicitly provided for an extended period of limitations running
from the claim year, when an overpayment results from either a bad debt or worthless
security deduction or from the effect such a deduction has on the application to the
taxpayer of a carryover. Section 6511(d)(1) also provides for an alternative period of
limitations running from the NOL year, and the use of the longer of the period in
subsection (d)(1) and (d)(2), where a bad debt or worthless security deduction affects
the application to the taxpayer of a carryback. By failing to explicitly provide a similar
rule extending the NOL limitations period in section 6511(d)(2) where a foreign tax
deduction, rather than a bad debt deduction, affects the application of the NOL
carryback, Congress has implicitly rejected any attempt to infer such an extension
through a strained reading of section 6511(d)(3). If Congress intended to permit a
taxpayer to use a longer period than that allowed by section 6511(d)(2) where foreign
tax deductions affected the operation of an NOL carryback, then Congress would have
enumerated that intention as it did in subsection (d)(1).

This conclusion is further supported by the holding in Rev. Rul. 71-533, 1971-2 CB 413.
In the revenue ruling, a taxpayer used an NOL to free FTCs which the taxpayer then
carried back to offset its tax in the carryback year. The ruling held that the statute of
limitations applicable to the FTCs was applicable, not the statute of limitations
applicable to an NOL. Consequently, the most immediate cause of the claim controls,
as opposed to items further removed in a sequence of related adjustments.

While it is not a firmly settled principle of law, we believe that the best and most
consistent reading of “attributable to” in the context of sections 6511(d)(2) and (3) is the
most immediate or direct cause of the overpayment. Therefore, even if section
6511(d)(3)(A) were construed to apply to claims based on foreign tax deductions, the
taxpayer is not entitled to the ten year period of limitations because the year 2 claim for
refund is not related to an overpayment of tax “attributable to” a section 164 deduction
for foreign tax paid or accrued in year 4. It is attributable to a section 172 deduction for
an NOL carried from year 4.

Third, even if “attributable to” was interpreted in its broadest sense and the deduction
was traced through the NOL deduction to its component parts, the NOL is unlikely to
comprise deductions for creditable foreign taxes. While an NOL is properly treated as a
separate deduction under section 172, if we were to look through the section 172
deduction, then we must determine which deductions from year 4 make up the NOL.
We do not have sufficient facts to properly allocate the deduction to determine what
portion, if any, of the NOL carryback under section 172 would be attributable to the
deductions taken under section 164 for creditable foreign taxes. However, given the
nature of foreign tax deductions, and the likelihood of them being absorbed by the

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related foreign source income, we find it unlikely that a significant portion of the NOL
would be derived from the section 164 deduction after all deductions are properly
allocated.3

The process of allocating all deductions in the loss year and stacking them in order to
determine which deductions comprise the NOL carryback deduction can be quite
complicated. We do not feel that it is necessary to fully develop this argument here
because the question should be resolved without reaching this difficult factual analysis.
However, we believe that it is an important alternative argument that we can develop in
supplemental advice if it becomes necessary. In fact, the difficulty of the process of
attempting to look through an NOL deduction in order to determine whether the period
of limitations is open provides further support to the notion that Congress could not have
intended for taxpayers and the Service to look through an NOL in order to determine if
another period of limitations could apply based on its component parts. Rather, if
Congress had intended special rules for foreign tax deductions that affect the
application of an NOL carryback, it would likely have provided a different statutory
mechanism (e.g., a mechanism comparable to the one provided in section 6511(d)(1)),
rather than leaving taxpayers and the Service to devise a tracing rule.

3. Stacking of Section 6511(d)(2) and (d)(3)

There is no stacking of benefits under sections 6511(d)(2) and (d)(3) to provide a longer
period. Sections 6511(d)(2) and (d)(3) operate as a set period of three years or ten
years. These periods key-off of specific dates, the due date of the return for the year of
the NOL or FTC, or in some cases the period prescribed under subsection (c). The
plain language of the statutes indicates that the periods are mutually exclusive with
respect to any given overpayment. The overpayment must either be subject to the
period in section 6511(d)(2) or section 6511(d)(3). Compare I.R.C. § 6511(d)(1) (where
Congress explicitly provides for the use of the period in either section 6511(d)(1) or
section 6511(d)(2), whichever is longer, if a bad debt or worthless security deduction
increases an NOL that affects the application of a carryback) with the absence of any
comparable provision in I.R.C. §§ 6511(d)(2) or (d)(3) and Rev. Rul. 71-533, 1971-2
3
According to Treasury Regulation section 1.861-8(e)(8), an NOL deduction allowed under section 172
shall be allocated and apportioned in the same manner as the deductions giving rise to the net operating
loss deduction. Therefore, the deductions for the year of the loss must be allocated under ordinary rules
before determining which deductions make up the deduction carried back under section 172. The NOL
itself should not be viewed as attributable to whatever deduction the taxpayer finds most advantageous,
or the deduction claimed most recently in time. Instead, all deductions for the year should be properly
allocated and then, the deductions that are not absorbed in the year incurred are converted into the NOL
deduction. Foreign tax deductions under section 164 are generally allocated to the class of gross income
to which the taxes factually relate. Treas. Reg. § 1.861-8(e)(6)(i) (“The deduction for state, local, and
foreign income, war profits and excess profits taxes (‘state income taxes’) allowed by section 164 shall be
considered definitely related and allocable to the gross income with respect to which such state income
taxes are imposed.”). Therefore, the foreign tax deductions under section 164 will generally be allocated
to offset the foreign source gross income in the year paid or accrued, before any portion of the deductions
could become part of an NOL.

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C.B. 413, (holding that in the reverse fact pattern, where a foreign tax credit is freed up
and carried back as the result of an NOL carryback, the resulting overpayment is
subject to the period of limitations applicable to the foreign tax credit at issue, not the
NOL that freed up those credits).

CASE DEVELOPMENT, HAZARDS AND OTHER CONSIDERATIONS

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