Favorable court decision on FTC carrybacks may necessitate immediate action - refund potential.

• Author: Everidge, Kathy

On May 24, 1996, the Court of Federal Claims rendered a tax payer favorable opinion in Fluor Corporation. The court ruled that when a foreign tax credit (FTC) carried back to an earlier year eliminates a tax underpayment for the earlier year, the carryback also eliminates interest on the underpayment. While it is unclear at this time whether the IRS will appeal the decision, taxpayers with significant FTC carrybacks should analyze their own situations to determine if action is warranted.

Background

In general, if a tax deficiency is "paid" by the application of a carryback from a later year, the taxpayer will owe deficiency interest from the due date of the return for the year in which the deficiency arises until the due date of the return for the carryback year (Sec. 6601 (d)). However, the FTC carryback is not a carryback as defined in Sec. 6601(d). Under Sec. 904(c), foreign taxes carried back are "deemed taxes paid" in the year to which they are carried.

In Fluor, the Service determined that the company owed interest on an underpayment for 1982 that was later satisfied by application of an FTC carryback from 1984, and that interest owed should accrue from the due date of the 1982 return through the due date of the 1984 return. Fluor contended that no interest was due on the portion of the 1982 tax underpayment eliminated by the foreign tax carryback, claiming that the tax relief under the foreign tax carryback (Sec. 904(c)) was retroactive, extinguishing the deficiency and thus eliminating the interest charges on the deficiency.

The court held that an FTC carried back to an earlier year eliminates a tax underpayment for the earlier year and also eliminates interest on that underpayment. The court found Congress's intent could be discerned from the plain language of Sec. 904(c), which provides that the carryback of the credit for excess foreign tax paid "shall be deemed taxes paid or accrued" in the earlier year. The court rejected the IRS's argument that Fluor had use of funds rightfully belonging to the government and found under the statute that Fluor's "tax obligation for 1982 was changed; it was reduced by the foreign tax [credit] carried back which was `deemed' paid in 1982."

Action Required

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