Sotiropoulos v. Commissioner

PANAGIOTA PAM SOTIROPOULOS, PETITIONER v.

COMMISSIONER OF INTERNAL REVENUE,

RESPONDENT

Docket No. 19884–12. Filed May 5, 2014.

I.R.C. sec. 901(a) permits a U.S. citizen or resident to claim

a credit against her Federal income tax liability for income

taxes paid to a foreign country. If such taxes are ‘‘refunded in

whole or in part,’’ the taxpayer is required to notify the Sec-

retary, who is authorized to redetermine the U.S. tax. I.R.C.

sec. 905(c)(1). Any tax due as a result of the Secretary’s

redetermination is due on notice and demand. I.R.C. sec.

905(c)(3). P is a U.S. citizen who lived and worked in the U.K.

during 2003–05. On her U.S. returns for these years P

claimed foreign tax credits in amounts corresponding to the

U.K. tax withheld by her employer. P subsequently filed U.K.

income tax returns showing overpayments and applied for

refunds of U.K. tax. P received payments from U.K. taxing

authorities but contends that the payments were not

‘‘refunds’’ within the meaning of I.R.C. sec. 905(c)(1)(C)

because her entitlement to refunds remains under investiga-

tion in the U.K. P did not notify the Secretary of these pay-

ments pursuant to I.R.C. sec. 905(c)(1). Following examination

of P’s returns, R mailed P a notice of deficiency for 2003–05

determining that the U.K. taxes had been ‘‘refunded’’ and dis-

allowing the claimed foreign tax credits. P petitioned the

Court. Approximately a year after filing his answer, R moved

to dismiss the case for lack of jurisdiction. R contends that he

erred in issuing the notice of deficiency and that I.R.C. sec.

905(c) authorizes him to redetermine P’s 2003–05 tax and col-

lect it upon notice and demand. Held: This Court has jurisdic-

tion to determine, at a minimum, whether the statutory provi-

sion alleged to divest it of jurisdiction applies, that is,

whether the U.K. taxes paid by petitioner have been

‘‘refunded in whole or in part’’ within the meaning of I.R.C.

sec. 905(c)(1)(C).

Jeffrey L. Gould, for petitioner.

Scott A. Hovey, for respondent.

OPINION

LAUBER, Judge: Currently before this Court is respondent’s

motion to dismiss for lack of jurisdiction. The Internal Rev-

enue Service (IRS or respondent) issued petitioner a notice of

deficiency for tax years 2003–05, and petitioner timely peti-

tioned the Court for redetermination of the deficiencies.

269

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270 142 UNITED STATES TAX COURT REPORTS (269)

Respondent now argues that he erred in issuing the notice

and that the Court, by virtue of sections 905 and 6213, 1

lacks subject matter jurisdiction over the substantive tax

issue presented by the petition.

Background

Petitioner is a U.S. citizen who lived and worked in

London, England, during 2003–05 and at the time she peti-

tioned this Court. She was employed by the London office of

Goldman Sachs during 2003–05. She received employee com-

pensation from Goldman Sachs, which withheld United

Kingdom (U.K.) income tax from her wages. She filed U.S.

and U.K. income tax returns for each year at issue. On a

timely filed U.S. return for each year, she claimed a foreign

tax credit in a dollar amount equivalent to the U.K. tax with-

held by Goldman Sachs.

On her U.K. tax return for each year, petitioner claimed

substantial deductions attributable to investments in U.K.

film partnerships. She claimed these deductions under U.K.

tax provisions that allowed investors in film partnerships to

deduct highly leveraged investment costs against their

earned income. In reliance on these deductions, petitioner

applied for refunds on her U.K. returns of the tax that her

employer had withheld and paid over to U.K. taxing authori-

ties.

Section 905(c)(1) provides that, if a taxpayer has claimed

a credit for a foreign tax that is later ‘‘refunded in whole or

in part,’’ the taxpayer ‘‘shall notify the Secretary.’’ The IRS

is then authorized to redetermine the tax for that year and

collect, upon notice and demand, any additional tax due. See

sec. 905(c)(3).

Petitioner received payments from the U.K. taxing authori-

ties resulting from the submission of her 2003–05 U.K.

returns. However, she contends that these payments were

not ‘‘refunds’’ within the meaning of section 905(c)(1)(C) both

because her entitlement to refunds remains under investiga-

tion by U.K. taxing authorities and because the application

1 All

statutory references are to the Internal Revenue Code in effect for

the tax years in issue, and all Rule references are to the Tax Court Rules

of Practice and Procedure. All dollar amounts are rounded to the nearest

dollar.

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(269) SOTIROPOULOS v. COMMISSIONER 271

of section 905(c) is allegedly affected by provisions of the

U.S./U.K. income tax treaty. As a result, petitioner did not

file amended U.S. returns for 2003–05 reporting reduced for-

eign tax credits, nor did she otherwise notify the IRS pursu-

ant to section 905(c)(1).

The IRS commenced an examination of petitioner’s 2003–

05 returns. Before or during the audit, the IRS was informed

by U.K. taxing authorities that petitioner had invested in

film partnerships; had claimed substantial deductions attrib-

utable thereto; and had filed U.K. returns requesting

refunds. The IRS determined that petitioner had received

U.K. income tax refunds of $413,126 in 2003, $292,663 in

2004, and $239,202 in 2005. It therefore disallowed cor-

responding amounts of foreign tax credits that petitioner

claimed on her U.S. returns.

Rather than invoking section 905(c)(3) as authority for col-

lecting the redetermined tax upon notice and demand, the

IRS sent petitioner a notice of deficiency for 2003–05. This

notice showed tax increases flowing from the credit adjust-

ments and determined section 6662(a) accuracy-related pen-

alties. The reductions to petitioner’s foreign tax credits were

the only adjustments the IRS made to her returns for these

years.

Petitioner timely petitioned this Court challenging

respondent’s determinations. Approximately a year after

filing his answer, respondent moved to dismiss the case for

lack of jurisdiction insofar as it concerns the adjustments to

petitioner’s foreign tax credits. Respondent contends that he

erred in issuing the notice of deficiency; that section 905(c)

authorizes him to redetermine petitioner’s 2003–05 tax and

collect it upon notice and demand; and that foreign tax credit

adjustments of the sort involved here ‘‘are expressly removed

from deficiency procedures’’ by a cross-reference from section

6213(h)(2)(A) to section 905(c). Respondent acknowledges

that the accuracy-related penalties determined in the notice

of deficiency ‘‘properly fall under the jurisdiction of this

Court.’’ However, respondent expresses his intention to con-

cede these penalties if the Court grants his motion to dismiss

as to the foreign tax credit adjustments.

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272 142 UNITED STATES TAX COURT REPORTS (269)

Discussion

This Court always has jurisdiction to determine whether it

has jurisdiction. Cooper v. Commissioner, 135 T.C. 70, 73

(2010). The Tax Court is a court of limited jurisdiction, and

we must ascertain whether the case before us is one that

Congress has authorized us to consider. See sec. 7442; Estate

of Young v. Commissioner, 81 T.C. 879, 881 (1983). In deter-

mining whether we have jurisdiction over a given matter,

this Court and the Courts of Appeals have given our jurisdic-

tional provisions a broad, practical construction rather than

a narrow, technical one. Lewy v. Commissioner, 68 T.C. 779,

781 (1977). When a statutory provision is capable of two

interpretations, ‘‘we are inclined to adopt a construction

which will permit us to retain jurisdiction without doing

violence to the statutory language.’’ Traxler v. Commissioner,

61 T.C. 97, 100 (1973).

I. Statutory Framework

A. The Tax Court as a Prepayment Forum

The primary function of this Court is to act as a convenient

prepayment forum in which taxpayers can challenge IRS

deficiency determinations without paying the tax first. See

sec. 6213(a); Lewy v. Commissioner, 68 T.C. at 781; Boris I.

Bittker & Lawrence Lokken, Federal Taxation of Income,

Estates, and Gifts, para. 115.2.2, at 115–13 (2d ed. 2012).

Section 6211 defines a ‘‘deficiency,’’ and section 6212 author-

izes the IRS to send a ‘‘notice of deficiency’’ if it determines

a deficiency with respect to a taxpayer’s tax. Upon receipt of

a notice of deficiency, the taxpayer may petition this Court

for redetermination of the deficiency. Sec. 6213(a). The peti-

tion must be filed within 90 days if the notice is mailed to

a U.S. address or within 150 days if, as was true here, ‘‘the

notice is addressed to a [taxpayer] outside the United

States.’’ Ibid.

Section 6213 also places important restrictions on the IRS’

ability to assess a deficiency and begin collecting the tax. As

a rule, the IRS may not assess an income tax deficiency until

it has mailed a notice of deficiency and the relevant period

(90 or 150 days, as applicable) has elapsed. Sec. 6213(a). If

the applicable time window closes and the taxpayer does not

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(269) SOTIROPOULOS v. COMMISSIONER 273

petition this Court, the IRS may proceed with assessment

and collection. If a taxpayer timely petitions this Court, the

IRS may not assess the tax or proceed to collect it ‘‘until the

decision of the Tax Court has become final.’’ Ibid.

In certain circumstances, the restrictions on assessment

found in section 6213 do not apply. For example, section

6201(a)(1) authorizes the IRS to assess (and begin collection

of ) taxes determined by a taxpayer and shown on his or her

return. Section 6213(b)(1) authorizes the IRS to assess (and

begin collection of ) additional tax arising from a mathe-

matical or clerical error apparent on the face of a return. The

usual restrictions on assessment likewise do not apply to

assessable penalties, see secs. 6671–6725, or in emergency

situations, such as termination and jeopardy assessments,

see secs. 6851, 6852, 6861.

B. Section 905(c)

Section 905(c) includes another, quite specialized, excep-

tion to the restrictions on assessment set forth in section

6213. Subject to certain limitations, a U.S. citizen may elect

to take a foreign tax credit against her U.S. income tax

liability for income taxes paid or accrued to a foreign country

or U.S. possession. Sec. 901(a). Congress anticipated the dif-

ficulty of ascertaining, at the time the U.S. return is filed,

the exact amount of foreign tax that will ultimately be allow-

able as a credit. It accordingly provided, in what is now sec-

tion 905(c), a special procedure for adjusting the credit when

the taxpayer’s ultimate liability varies from the amount

claimed. Section 905(c)(1) specifies three situations in which

a U.S. taxpayer’s foreign tax credit must be adjusted:

(A) accrued taxes when paid differ from the amounts claimed as

credits by the taxpayer,

(B) accrued taxes are not paid before the date 2 years after the close

of the taxable year to which such taxes relate, or

(C) any tax paid is refunded in whole or in part.

The regulations describe these three situations as

involving a ‘‘foreign tax redetermination.’’ Sec. 1.905–3T(c),

Temporary Income Tax Regs., 53 Fed. Reg. 23614 (June 23,

1988). 2 If a ‘‘foreign tax redetermination’’ as thus defined

2 The provisions of the temporary regulations discussed in the text, secs.

Continued

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274 142 UNITED STATES TAX COURT REPORTS (269)

occurs, section 905(c)(1) provides that ‘‘the taxpayer shall

notify the Secretary, who shall redetermine the amount of

the tax for the year or years affected.’’ Because the IRS,

absent notice from the taxpayer, generally will not know of

revisions to the taxpayer’s foreign tax liabilities, the Internal

Revenue Code has long required self-reporting of such

changes. See generally Pac. Metals Corp. v. Commissioner, 1

T.C. 1028, 1029 (1943) (discussing section 131(c) of the Rev-

enue Act of 1936, a predecessor of section 905(c)). Section

6689 provides a strong incentive for taxpayers to comply with

their self-reporting obligations under section 905(c)(1),

imposing a penalty up to 25% of the deficiency for failure to

provide the notice required by section 905(c)(1) unless it is

shown that such failure is due to reasonable cause and not

due to willful neglect.

With exceptions not relevant here, the taxpayer is sup-

posed to notify the Secretary by filing an amended return.

Sec. 1.905–4T(b)(1), Temporary Income Tax Regs., 53 Fed.

Reg. 23617 (June 23, 1988). An individual taxpayer is

instructed to include with her amended return a revised

Form 1116, Foreign Tax Credit, and information sufficient to

enable the IRS to redetermine her U.S. tax liability. See sec.

1.905–4T(b)(1), (3), Temporary Income Tax Regs.

Once the IRS redetermines the taxpayer’s liability in

accordance with section 905(c)(1), ‘‘[t]he amount of tax (if

any) due * * * shall be paid by the taxpayer on notice and

demand by the Secretary, and the amount of tax overpaid (if

any) shall be credited or refunded to the taxpayer.’’ Sec.

905(c)(3). A cross-reference from section 6213 confirms that

the usual restrictions on assessment do not apply to section

905(c) adjustments made by the IRS. See sec. 6213(h)(2)

(‘‘For assessments without regard to restrictions imposed by

this section in the case of—(A) Recovery of foreign income

1.905–3T and 1.905–4T, Temporary Income Tax Regs., 53 Fed. Reg. 23613,

23617 (June 23, 1988), were promulgated in 1988, T.D. 8210, 1988–2 C.B.

248, and were in effect through November 6, 2007. They were amended by

T.D. 9362, 2007–48 I.R.B. 1050, in November 2007, but the provisions dis-

cussed herein remained substantially the same after that amendment. The

applicability of these provisions was set to expire on November 5, 2010.

See secs. 1.905–3T(f ), 1.905–4T(f )(3), Temporary Income Tax Regs., 72

Fed. Reg. 62784, 62787 (Nov. 7, 2007). The provisions discussed in the text

were in effect at all times relevant to this case.

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(269) SOTIROPOULOS v. COMMISSIONER 275

taxes, see section 905(c).’’); sec. 1.905–4T(b)(1), Temporary

Income Tax Regs. (‘‘Subchapter B of chapter 63 of the Code

(relating to deficiency procedures) shall not apply with

respect to the assessment of the amount due upon such

redetermination.’’).

II. Analysis

The IRS determined deficiencies in petitioner’s income tax

for 2003–05 based on its contention that she had received

refunds of U.K. taxes claimed as credits on her U.S. returns

for those years. The IRS issued her a notice of deficiency and

she timely petitioned this Court. Respondent contends that

we nevertheless lack jurisdiction because the increased tax

determined in the notice of deficiency constitutes a ‘‘section

905(c) adjustment.’’

Respondent contends that petitioner received U.K. tax

refunds, which triggered his duty to redetermine her U.S. tax

under section 905(c)(1). This duty arises, respondent con-

tends, regardless whether the Commissioner has received

notification from the taxpayer and regardless whether the

taxpayer disputes the predicate for that section’s application.

Because the IRS has allegedly adjusted petitioner’s foreign

tax credits under section 905(c)(1), respondent argues that

the redetermined tax is due on notice and demand under sec-

tion 905(c)(3) and hence that this Court lacks deficiency

jurisdiction by virtue of the cross-reference to section 905(c)

from section 6213(h)(2)(A). The fact that the IRS sent peti-

tioner a notice of deficiency is irrelevant, according to

respondent, since the mailing and receipt of a notice do not

automatically confer jurisdiction.

As a preliminary matter, we agree with respondent that

the Internal Revenue Code, not merely the issuance of a

notice of deficiency, confers jurisdiction on this Court. See

Thompson v. Commissioner, 137 T.C. 220, 225–226 (2011),

rev’d on other grounds, 729 F.3d 869 (8th Cir. 2013). While

the Thompson decision was reversed and remanded on other

grounds, the Court of Appeals did not disturb this portion of

the holding, and we see no reason to do so now. However, we

do not agree with the other steps of respondent’s argument.

In urging that we lack jurisdiction, respondent cites no

caselaw but rather relies on what he regards as the plain

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276 142 UNITED STATES TAX COURT REPORTS (269)

language of the statute. The problem with respondent’s posi-

tion is that a plain reading of section 905(c) describes a cir-

cumstance that did not necessarily occur here. Section

905(c)(3) empowers the Commissioner to collect on notice and

demand only in the case of a ‘‘redetermination under para-

graph (1).’’ Paragraph 1 is structured as a conditional state-

ment. As relevant here, it provides that if a foreign tax paid

is refunded, then the taxpayer is required to notify the Sec-

retary, who shall then redetermine the tax. Here, petitioner

disputes that she received a ‘‘refund’’ of U.K. tax. She con-

tends that the payments she received from U.K. taxing

authorities were not ‘‘refunds’’ within the meaning of section

905(c)(1)(C), both because her entitlement to refunds remains

under investigation in the U.K. and because the application

of section 905(c) is allegedly affected by provisions of the

U.S./U.K. income tax treaty. 3 And because she allegedly

received no ‘‘refunds,’’ she did not notify—and she contends

that she had no obligation to notify—the Secretary under

section 905(c)(1).

In short, this is not a case where the taxpayer has con-

ceded receipt of a foreign tax refund by notifying the Sec-

retary, filing an amended return, and self-reporting an

increased tax liability. Section 905(c)(1)(C) applies only ‘‘[i]f

* * * any tax paid is refunded in whole or in part,’’ and peti-

tioner contends that this condition has not been satisfied. We

necessarily have jurisdiction to determine whether section

905(c)(1)(C)—the statutory provision alleged to divest us of

jurisdiction—applies.

The Court confronted analogous facts in Comprehensive

Designers Int’l, Ltd. v. Commissioner, 66 T.C. 348 (1976). The

taxpayer there claimed on its U.S. return a foreign tax credit

for an accrued U.K. tax. The taxpayer determined this credit

by translating its accrued liability in British pounds into dol-

lars at the exchange rate prevailing at the end of its fiscal

year, namely, £1.00 = $2.80. The taxpayer’s U.K. tax liability,

when subsequently paid, was the same as its accrued

liability in terms of British pounds. In dollar terms, however,

3 We make no findings at this stage of the case concerning the merits

of petitioner’s arguments. The only issue before us is the legal question

whether we have subject matter jurisdiction to adjudicate her claims. See

Tigers Eye Trading, LLC v. Commissioner, 138 T.C. 67, 75 (2012) (citing

Taylor v. Voss, 271 U.S. 176, 186 (1926)).

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(269) SOTIROPOULOS v. COMMISSIONER 277

its U.K. tax liability when paid was significantly lower than

when accrued, because the pound had depreciated and was

then convertible into dollars at a rate of £1.00 = $2.40. Id.

at 350.

On audit, the taxpayer contended that no adjustment to its

foreign tax credit was required because its U.K. tax liability,

in British pounds, was the same when paid as when accrued.

The IRS disagreed, contending that, because of the exchange

rate differential, the ‘‘accrued taxes when paid differ[ed] from

the amounts claimed as credits by the taxpayer’’ within the

meaning of section 905(c) of the 1954 Code. 4 The IRS sent

the taxpayer a notice of deficiency based on a redetermina-

tion of its foreign tax credit, and the taxpayer timely sought

review in this Court.

The Court in Comprehensive Designers did not address the

jurisdictional issue currently before us, evidently because the

parties had not raised it. Rather, the Court proceeded to the

merits and ruled in favor of the IRS. See 66 T.C. at 354–356.

As Judge Tannenwald framed the question, ‘‘We must decide

whether the amount of [petitioner’s foreign tax] credit should

be adjusted pursuant to section 905(c).’’ Id. at 354.

Like the taxpayer in Comprehensive Designers, petitioner

disputes that a foreign tax redetermination has occurred.

Just as the taxpayer in Comprehensive Designers disagreed

that its ‘‘accrued taxes when paid differ[ed] from the

amounts claimed as credits,’’ petitioner disagrees that her

U.K. tax ‘‘has been refunded in whole or in part.’’ In each

case, the taxpayer did not file an amended return or other-

wise notify the Secretary pursuant to section 905(c)(1); the

IRS determined a deficiency stemming from partial disallow-

ance of the foreign tax credit; the IRS sent the taxpayer a

4 Section

905(c) of the 1954 Code, which was similar in substance to the

current statute, provided: ‘‘If accrued taxes when paid differ from the

amounts claimed as credits by the taxpayer, or if any tax paid is refunded

in whole or in part, the taxpayer shall notify the Secretary [or his dele-

gate], who shall redetermine the amount of the tax for the year or years

affected.’’ The original version of the statute, enacted in 1918, read simi-

larly: ‘‘If accrued taxes when paid differ from the amounts claimed as cred-

its by the taxpayer, or if any tax paid is refunded in whole or in part, the

taxpayer shall notify the Commissioner who shall redetermine the amount

of the tax due * * * and the amount of tax due upon such redetermina-

tion, if any, shall be paid by the taxpayer upon notice and demand.’’ Rev-

enue Act of 1918, Pub. L. No. 65–254, sec. 222(b), 40 Stat. at 1073.

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278 142 UNITED STATES TAX COURT REPORTS (269)

notice of deficiency; and the taxpayer timely sought redeter-

mination of that deficiency in our Court. In Comprehensive

Designers and on other occasions, we decided the merits of

questions concerning foreign tax credit adjustments described

in section 905(c) and its predecessors, in each case without

addressing the jurisdictional issue that respondent raises

now. 5

The statutory scheme that Congress has created generally

affords taxpayers a prepayment forum to contest disputed

taxes. The Code provides limited exceptions to this rule,

allowing the Commissioner to assess the tax summarily (for

example) where the taxpayer has reported a tax on her

return or made obvious mathematical errors in computing

her tax. See secs. 6201(a)(1), 6213(b). The common thread in

these non-emergency situations is that the assessment is

uncontroverted and does not need independent review, since

the taxpayer does not dispute that the tax is owing. This

statutory scheme supports the outcome in Comprehensive

Designers and the other precedents we have cited, which

afforded taxpayers a prepayment forum for contesting the

application of section 905(c)(1), and its predecessors. 6

At this point, we need not decide whether we have subject

matter jurisdiction over all aspects of this controversy. At the

5 See

Steel Improvement & Forge Co. v. Commissioner, 36 T.C. 265, 280–

282 (1961) (discussing sec. 131(c) of 1939 Code), rev’d on another issue, 314

F.2d 96 (6th Cir. 1963); H.H. Robertson Co. v. Commissioner, 8 T.C. 1333,

1340 (1947) (rejecting contention that amounts received from U.K. taxing

authorities ‘‘were not ‘refunded’ within the meaning of that word as used

in’’ sec. 131(c) of the 1939 Code), aff ’d, 176 F.2d 704 (3d Cir. 1949); Pac.

Metals Corp. v. Commissioner, 1 T.C. 1028, 1030 (1943) (determining for-

eign tax credit adjustment when IRS issued notice of deficiency after tax-

payer ‘‘failed to comply with the mandate of section 131(c) by failing to no-

tify the Commissioner in 1939 that it had received a refund of part of the

1936 foreign tax’’).

6 Even in the case of mathematical errors, Congress has determined to

afford taxpayers a prepayment forum by providing that ‘‘the deficiency pro-

cedures prescribed by this subchapter’’ shall apply if the IRS reassesses

the tax after the taxpayer timely requests that the assessment be abated.

See sec. 6213(b)(2)(A). The ability to cure before assessment of some as-

sessable penalties is additional evidence of a system intended to provide

taxpayers meaningful opportunities to remedy the problem before assess-

ment. See, e.g., sec. 6702 (frivolous return penalty does not apply if tax-

payer withdraws frivolous submission within 30 days of receiving notice

from the IRS).

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(269) SOTIROPOULOS v. COMMISSIONER 279

very least, we have jurisdiction to determine our jurisdiction.

We thus have jurisdiction to decide whether the statutory

provision alleged to divest us of jurisdiction applies, i.e.,

whether the U.K. taxes paid by petitioner have been

‘‘refunded in whole or in part’’ within the meaning of section

905(c)(1)(C). This will afford petitioner a prepayment forum

for resolving the central issue that she raises on the merits,

namely, that the amounts she received from U.K. taxing

authorities during 2003–05 were not ‘‘refunds.’’

To reflect the foregoing,

An order will be issued denying respond-

ent’s motion to dismiss for lack of jurisdic-

tion.

f

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