Foreign Tax Redeterminations under Â§ 905(c) - Fenwick & West LLP

Foreign Tax Redeterminations under § 905(c) and 

Other Procedural Issues in Claiming the Foreign Tax Credit 

© William Skinner, Esq., 

Fenwick & West LLP 

Last Updated January 18, 2013 

This publication has been prepared for general guidance on matters of interest only, and 

does not constitute professional advice. You should not act upon the information contained 

in this publication without obtaining specific professional advice. No representative or 

warranty (expressed or implied) is given as to the accuracy or completeness of the 

information contained in this publication, and, to the extent permitted by law, Fenwick & 

West LLP, its members, employees and agents do not accept or assume any liability, 

responsibility or duty of care for any consequences of you or anyone else acting, or 

refraining to act, in reliance on the information contained in this publication or for any 

decision based on it. The views expressed herein are those of the author, and not 

necessarily those of Fenwick & West LLP. 

CIRCULAR 230 DISCLOSURE 

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. 

federal tax advice in this communication is not intended or written by Fenwick & West 

LLP to be used, and cannot be used, for the purpose of (i) avoiding penalties under the 

Internal Revenue Code or (ii) promoting, marketing, or recommending to another party 

any transaction or matter addressed herein. 

1) Authorities on the Statute of Limitations. 

a) ILM 201204008 – The ILM addresses two statute of limitations issues arising from an 

election to deduct rather than credit FTCs on an amended return under § 1.901-1(d). In 

scenario #1, Taxpayer amends its Year 2 return on “Date 5,” to deduct FTCs, which 

resulted in a carry-back of an NOL to Year 1 that created a refund. The question is 

whether § 6511(d)(2)(A) (three-year NOL carryback statute) or § 6511(d)(3)(A) (10-year 

FTC statute) allowed the refund from the election to deduct FTCs. 

With respect to this issue, the Service found that the claim was untimely because “Date 

5” was more than 3 years from the filing of the return for Year 2 (the source year). The 

NOL statute was applicable, but not satisfied in the case. 

The IRS did not find § 6511(d)(3) to be applicable because it refers to claims of FTCs 

that are “allowed” to the taxpayer, as opposed to “allowable.” The IRS found this 

© 2013, William R. Skinner, Esq. 


wrskinner@fenwick.com 

1

inapplicable in the case of an election to deduct FTCs. 

b) CCA 201136021 – Taxpayer filed an amended return under § 1.901-1(d) in 2012 to 

deduct FTCs in 2003. This created an NOL that carried back to 2000. Then the NOL 

carryback eliminated taxable income in 2000 on which FTCs had been claimed, causing 

FTCs to carryback and obtain a refund in 1998. The IRS ruled that the claim for refund 

attributable to FTCs in 1998 was untimely because filed after the 10-year statute 

applicable to 1998 and more than 3 years after the 3-year statute applicable to the 2000 

NOL. 

The IRS relied on Rev. Rul. 71-533, where 1969 NOLs were carried back to 1966, which 

freed up a 1966 FTC to carry back to 1964. The IRS held there that the taxpayer had a 

10-year statute from 1966 to claim the refund in 1964, because it looked to the attribute 

that proximately carried back to create the refund. 

The taxpayer also sought to file a “protective claim” for one of the years, to change back 

electing the deduction to electing the credit, in case the IRS assessed more foreign source 

income for the year. However, the CCA did not view this as a valid protective claim 

because it was not contingent on future change in law or determination by the Service. 

c) FAA 20105001F – In 1997, there was a withholdable payment potentially subject to 

foreign withholding tax; taxpayer, however, contested the tax liability. In 2000, the 

foreign government assessed the tax, which the taxpayer continued to contest. In 2009, 

the taxpayer settled the dispute, which resulted in a payment of foreign tax. The taxpayer 

promptly filed a refund claim as to 2000, to treat the additional assessment of 

withholding tax as an FTR in that year. 

The IRS Chief Counsel found the refund claim untimely. Under the relation-back 

doctrine of Central Cuba Sugar, the 10-year statute of limitations began to run in 1997, 

the foreign taxable year in which the underlying liability arose. 

d) Rev. Rul. 83-80, 1983-1 C.B. 130 (statute of limitations and § 905(c)) – In the ruling, the 

CFC’s foreign tax was increased as a result to disallowing a deduction claimed for 

foreign tax purposes. When, after the 3-year statute of limitations, the parent claimed a 

refund resulting from the additional foreign tax, the Service argued that it was permitted 

to offset the refund with an adjustment to the CFC’s E&P conforming to the foreign tax 

authority’s underlying adjustment (disallowing the deduction). 

The ruling cites § 905(c) as re-opening the statute of limitations for this purpose. The 

ruling distinguished Rev. Rul. 72-525, where the IRS stated that “additional assessments 

permitted under section 905(c) of the Code are limited to adjustments of foreign tax 

credits caused by factors which are not ascertainable either at the time of the computation 

of the credit originally claimed or within the period of limitations provided by section 

6501(a) of the Code.” 




2

In the alternative, the IRS cited Lewis v. Reynolds as an authority for the Service’s power 

to make an offsetting E&P adjustment as a defense to the refund allowed under § 905(c). 

See also PLR 8646009 (asserting Lewis v. Reynolds theory in another § 905(c) case). 

2) Proving Entitlement to Foreign Tax Credits. 

a) Generally, the best evidence of payment of a foreign tax is an original receipt or certified 

copy of the receipt showing payment to the foreign tax authority. Under the regulations, 

the Service has discretion to accept secondary evidence of payment, such as a copy of the 

check and excerpts of laws showing the amount of tax imposed. However, under 

regulations, it appears that a certified copy of the receipt is the only means of proof that 

the Service is required to accept. See Treas. Reg. § 1.905-2(a)(2). 

b) Receipts from a foreign government showing payment of a tax enjoy the “presumption of 

regularity” accorded by common law to acts of government officials. See Riggs National 

Corp. & Subs v. Commissioner, 295 F.3d 16, 21 (D.C. Cir. 2002), rev’g T.C. Memo. 

2001-12. While foreign tax receipts are not conclusive proof of foreign tax payment, the 

IRS appears to be limited to challenging the validity of the documents. To overcome the 

“presumption of regularity,” it must adduce “clear and specific evidence” that the tax 

receipts are inaccurate representations of the amount of tax paid. See id. 

In the case of an accrual method taxpayer, the amount of foreign tax credit must be 

supported by a certified statement of the amount of the tax, excerpts from the taxpayer’s 

books of account, summary of foreign tax calculations. The Service has authority to 

request a bond to be posted for the amount of the credit. 

In the case of withholding taxes, the taxpayer is required to produce evidence not only 

that the taxes were withheld by the withholding agent, but that the taxes were paid to the 

foreign taxing authority. See Continental Illinois Corp. v. Commissioner, 998 F.2d 513 

(7 th Cir. 1993) (applying these rules in a potentially collusive sitation). Under the 

regulations, again, the only conclusive evidence that must be accepted by the Service is a 

certified copy of a receipt of payment. In cases where the taxpayer cannot secure this 

evidence, it may prove that the taxes were paid through secondary evidence (i.e., a copy 

of the check submitted by the borrower to the government). In Contintenal Illinois, 

however, the court rejected the taxpayer’s efforts to substantiate the credit by means of a 

naked letter from the borrowers regarding payment. Thus, it is important for the 

agreement to provide that the taxpayer is entitled to obtain proof of the foreign tax 

payment. 

3) Section 905(c) Redeterminations. 

a) Background on § 905(c). 

§ 905(c) governs situations in which the amount of foreign taxes claimed as credits under 

§ 901 or § 902 are subsequently adjusted, increased, or refunded. There is a need for 




3

§ 905(c) because of the “relation back doctrine” that is applied to accrual foreign taxes 

and the “contested taxes” doctrine. 

Unlike other liabilities, a contested tax liability is accrued for the underlying foreign 

assessment year, not the year in which the tax is finally determined. See Rev. Rul. 70- 

290, 1970-1 C.B. 160, clarified by Rev. Rul. 84-125, 1984-2 C.B. 125; see also, e.g., IBM 

Corp. v. United States, 38 Fed. Cl. 661 (1997). However, when the liability ultimately is 

fixed, it “relates back” to the year of the original assessment and is deemed to arise as a 

foreign income tax expense in the original assessment year. Similarly, if a tax that has 

paid is refunded, the refund is treated as reducing foreign tax expense in the earlier year. 

Under § 905(c), the amount of the § 901 credit for the earlier year generally must be 

adjusted up or down for amended return, rather than accruing an adjustment to the § 901 

credits in the current year. 

The overall purpose for this rule appears to be sync up the amount of FTC claimed in the 

year with the foreign income on which the tax is imposed. This prevents the 

mismatching of credits with the § 904 limitation to which the credits relate. 

b) Status of § 905(c) Regulations. 

In late 2007, § 905(c) regulations were issued in temporary and proposed form. Under 

the 3-year sunset rule, the Temporary Regulations expired in December 2010. However, 

since the regulations were issued in proposed form, it is appropriate to continue to rely on 

the Temporary Regulations. It appears that the IRS will provide transitional relief to the 

extent the Final Regulations differ from the current Proposed Regulations. See CCA 

201145015. 

c) Rules for Accrual of Foreign Tax as a Liability. 

i) To be accrued as a liability, a foreign tax must satisfy the three-pronged test of 

§ 461(h): (1) fixed in fact; (2) determinable in amount; and (3) economic performance. 

Economic performance of a tax liability generally occurs when the tax is paid. 

However, for foreign taxes that are creditable under § 901, this requirement is waived 

and economic performance is deemed to occur in the assessment year to match taxes 

with the related § 904 income. See Reg. § 1.461-4(g)(6)(ii)(B). 

ii) The contested taxes doctrine determines the year for which the tax accrues, but does not 

determine when the tax meets the requirements of § 461. Thus, a contested tax is not 

accrued as a creditable tax until it is finally determined. See Rev. Rul. 84-125, 

amplifying Rev. Rul. 58-55. However, the U.S. year may be closed to refund under 

§ 6511(d)(3) at the time of the final settlement. Rev. Rul. 84-125 allows the taxpayer to 

pay the tax under protest, subject to later redetermination under § 905(c) if the refund 

claim succeeds. 

iii) Generally, the accrual date is the end of the foreign taxable period in which the relevant 




4

income is computed. (Until the end of that year, the existence of a tax liability is 

uncertain). See A.M. 2008-005 (citing Rev. Rul. 61-93). This is the case if no further 

event after the close of the foreign computation year could remove the liability. See 

Universal Winding Co. v. Commissioner, 39 BTA 962 (1939). In some cases, where 

the assessment is delayed from the income year, and depends, e.g., on the foreign 

corporation remaining in business in the assessment year, the IRS has ruled that the 

taxes do not accrue until the end of the later assessment year. See Rev. Rul. 76-39. 

iv) The accrual of foreign taxes on the foreign year end can create difficulties in cases 

where the foreign year end differs from the U.S. year-end: 

(1) Section 338 election. Foreign T’s year is deemed to close. For FTC purposes, 

T’s taxes for the year of the election are allocated under Reg. § 1.1502-76(b) 

between the two short periods. See Reg. § 1.338-9(d). 

(2) Incorporation or sale of a DRE / Hybrid Entity. Treas. Reg. § 1.901-2(f)(4) (Feb. 

2012) prevents the separation of income from credits in cases where a hybrid 

entity undergoes a midyear change of status. The new Regulation prorates taxes 

in that case under principles of Reg. § 1.1502-76(b). 

(3) Section 898. If the CFC does not conform to the US shareholder’s year for 

foreign tax purposes, or its 1-month deferral election year under § 898, then the 

CFC’s US year will not include its foreign year. Prop. Reg. § 1.898-4(c)(2) 

provides rules to compute income and E&P across the short years. However, it 

does not address foreign tax accruals. Chief Counsel Advice 03681 ruled that sub 

F income in an § 898 year would not include foreign taxes associated with the 

same income accruing in the later foreign year. The CCA viewed the IRS and 

Treasury as concluding it lacked authority to pro rate taxes in this case. 

d) Events Constituting Foreign Tax Redeterminations. 

i) Taxes, when paid, differ from taxes accrued. 

ii) Accrued taxes are not paid within two years of the end of the year to which the tax 

relates. 

(1) If the taxes accrued are not paid within this two year period, the foreign tax is 

redetermined to eliminate any accrued, but unpaid, tax. 

(2) Subsequent payments of the tax that was eliminated under this rule are treated as 

additional redeterminations of the tax. In the case of a foreign tax directly paid by 

the U.S. taxpayer, the redetermination is made with respect to the year to which 

the tax originally relates. If the tax was paid by a CFC, then the subsequent 

payment is treated as an additional foreign tax in the year for which § 902 / § 960 

credits were claimed. 




5

(3) Special currency translation rules are applicable to additional taxes covered by the 

two-year rule. 

iii) Taxes paid are refunded by the foreign tax authority. 

The regulations define a “foreign tax redetermination” as a “change in the foreign tax 

liability that may affect the amount of a taxpayer’s foreign tax credit.” Reg. § 1.905- 

3T(c). Thus, it appears that there must be an adjustment to the foreign tax liability, not 

some other item that affects the FTC. 

The regulations also provide a currency-related adjustment of less than the lesser of 2% 

of the foreign taxes or $10,000 are not taken into account under this rule. 

e) Consequences of a redetermination. 

i) U.S. taxpayer’s direct credits. The redetermination of a domestic taxpayer’s foreign 

taxes that have been credited under § 901 generally results in an adjustment to the U.S. 

taxpayer’s liability for the year in which the foreign tax credits affected by the 

redetermination were originally claimed. The U.S. taxpayer must report the 

redetermination of the liability on pursuant to the reporting rules set out in Temp. 

Treas. Reg. § 1.905-4T(b). The one exception for redetermination of a U.S. taxpayer’s 

direct tax credits is where the redetermination results solely from a difference between 

exchange rates between the date when the taxes were accrued and the date when the 

taxes were paid and where the total adjustment is less than 2% of the total taxes 

credited from that foreign country in the year. 

ii) Where a redetermination is required by § 905(c), the statute of limitations on assessing 

a deficiency resulting from the redetermination remains open until the taxpayer reports 

the redetermination. See Pacific Metals Co. v. Commissioner, 1 T.C. 1028 (1943). It is 

unclear what time period limits the IRS’s assessment of the deficiency after receiving 

the notice of the redetermination, since the statute simply requires payment “on notice 

and demand by the Secretary.” § 905(c)(3). 

iii) Scope of the Reopening of the Statute of Limitations. It has been stated that the 

extended statute of limitations under § 905(c)(3) only permits the IRS additional time to 

assess deficiencies that are “caused by factors which are not ascertainable either at the 

time of the computation of the credit originally claimed or within the period of 

limitations provided by section 6501(a) of the Code.” Rev. Rul. 72-525, 1972-2 C.B. 

443, which follows Texas Co (Carribean) Ltd. v. Commissioner, 12 T.C. 925 (1949). 

Thus, these authorities held that a computational error in the FTC could not be adjusted 

by the IRS under the extended statute of limitations granted by § 905(c). 

However, the question remains as to how broadly the effect of § 905(c) extends to 

allow the IRS to make other changes after the statute of limitations has closed on the 

original year: 




6

(1) Rev. Rul. 83-80 & underlying GCM. IRS could make an adjustment to E&P to 

conform to foreign disallowance of deduction that triggered the additional foreign 

tax claimed for a refund. The IRS sought to limit and distinguish Rev. Rul. 72- 

525. 

(2) TAM 9817001 – refunded taxes had been claimed as a deduction in computing 

subpart F income in the prior year under § 954(b)(5). The IRS ruled that refund 

of the tax, therefore, required recapture of the reduction in subpart F income. 

This should be done through a recharacterization of current-year E&P, not an 

amendment to prior year returns, at least where the § 905(c) adjustment was made 

to the foreign tax pools. 

(3) Rev. Rul. 71-454, obsoleted by Rev. Rul. 2003-99 – taxpayer should re-do its 

§ 963 minimum distribution calculation to reflect the reduction of foreign taxes. 

Unclear exactly what this calculation entailed, since § 963 was repealed in 1976. 

(4) Reg. §§1.904-4(c)(6) and 1.904-4(c)(7) – complex rules relating to whether an 

adjustment to subpart F income is taken into account in determining whether (1) 

the item is eligible for the high-tax kick out and (2) eligible for the subpart F hightaxed 

exception of § 954(b)(4). 

(5) Analogous authority – Rev. Rul. 77-79. Taxpayer calculated its percentage 

depletion allowance taking into account certain state severance taxes. It was 

audited by the state and paid additional taxes under protest, which it deducted in 

the year of payment under § 461(f). The allocation of the taxes to its taxable 

income from the property caused its depletion allowance to be limited under 

§ 613(a). 

iv) Special rules 

Subsequently, the taxes were refunded and the taxpayer included an item in 

income under § 111 (Tax Benefit Rule). In calculating the amount included in 

income under the § 111 regulations, the taxpayer was entitled to reduce the 

$1,500 refund by the $500 that would have been excluded through additional 

depletion in the original year had the taxes not been originally paid. 

(1) Tolling of interest. Where the redetermination results in an increase in U.S. tax 

liability, U.S. underpayment interest is limited to the foreign overpayment rate on 

the refund for the period up to the date on which the foreign refund is paid. 

§ 905(c)(5). 

(2) Foreign tax on a foreign refund. If the foreign country imposes tax on a refund of 

taxes paid, then the tax is treated as an offset to the amount of the redetermination 

under § 905(c), rather than as a separate creditable tax. See Temp. Treas. Reg. 

§ 1.905-3T(e). 




7

v) Reporting the Re-determination. 

The taxpayer generally must report each redetermination separately on an amended 

return, with new Form 1116 / Form 1118, and a statement under penalties of perjury 

with the information required by Temp. Treas. Reg. § 1.905-4T(c). If the 

redetermination increases the U.S. taxpayer’s liability, the filing must be made by the 

due date (with extensions) for the original return for the year in which the 

redetermination occurs. However, the status of the statute of limitations for the original 

credit year does not limit the taxpayer’s requirement to report under § 905(c). 

If the redetermination reduces U.S. tax liability, it may be reported at any time within 

the 10-year statute of limitations for seeking a refund under § 6511(d)(3)(A). The 10- 

year statute on seeking a refund for additional taxes paid may limit the claim for refund 

at a certain point. See § 6511(d)(3). 

Generally, if foreign taxes are re-determined multiple times for a single year, multiple 

amended returns must be filed reporting the re-determinations. However, multiple 

redeterminations as to a single taxable year that occur within two years may be 

combined on a single statement if that would be timely reporting of both 

redeterminations. See Temp. Treas. Reg. § 1.905-4T(b)(1)(vi) (providing example of 

filing requirements and timing). 

Finally, special procedures apply for reporting a redetermination affecting a year that is 

under examination by the LMSB. Id., § 1.905-4T(b)(3). In this case, the Taxpayer 

must notify its examiner, generally within 120 days of the latest of the (1) foreign event 

triggering § 905(c), (2) the opening exam conference, or (3) the opening letter for the 

Exam. However, if the event occurs more than 180 days after the later of the opening 

conference or opening letter, then notification of Exam in lieu of filing an amended 

return is optional for the taxpayer; also, the Examiner may require the taxpayer to file 

an amended return under the normal procedures instead. 

If there is only a pooling adjustment, then the taxpayer must reflect the § 905(c) event 

on a Form 1118 filed by the due date of the first return for which the § 905(c) event 

affects the § 902 / § 960 credit. If no retroactive adjustment is made, this would 

typically involve the current year. 

Section 904(c) carryovers. Where the redetermination has no effect on the U.S. 

taxpayer’s liability for a prior year due to carryover of unused foreign tax credits under 

§ 904(c), the taxpayer may file an information statement adjusting the § 904(c) 

carryover credoits with its original return for the year of the redetermination in lieu of 

amending the earlier affected years. 

Penalties for failure to comply with reporting requirements. If the taxpayer fails to 

report an FTC redetermination in a timely manner, § 6689 prescribes a penalty equal to 

5% of the deficiency for each month (or part of a month) that the report is late. The 




8

maximum penalty is 25% of the deficiency. There is an exception for failures due to 

reasonable cause and not wilful neglect. See Temp. Treas. Reg. § 301.6689-1T(d). 

f) Adjustments to Post-’86 Tax and E&P pools. 

i) If the redetermination occurs at the CFC level, the general rule is that no U.S. level 

redetermination is required, and instead the CFC’s pools of E&P and taxes are adjusted 

to reflect the increase or decrease in the CFC’s taxes. Absent one of the triggering 

events below, there is no immediate effect on the U.S. shareholder. Rather, the 

increased or decreased amount of foreign taxes affects the rate on future distributions 

out of the CFC. Examples of how pooling adjustments occur: 

(1) Temp. Treas. Reg. § 1.905-3T(d)(2), Ex. 2. In 2008, CFC had general post-1986 

undistributed earnings of 200u and $160u of related foreign taxes. In 2008, CFC 

distributed 50u to its US shareholder. In 2009, CFC received a 5u foreign tax 

refund. Since this amount is not subject to a triggering rule, the CFC’s 2009 

pools are adjusted to 155u of E&P and 35u of remaining foreign taxes. When P 

receives a distribution in 2009, the amount of deemed paid foreign taxes takes 

into account the FTC redetermination. 

ii) As noted above, the pooling adjustment to taxes results in a corresponding adjustment 

to E&P. The corresponding adjustment has the same § 904 and subpart F character as 

the original allocation of tax expense. See Reg. § 1.905-3T(b)(4). 

iii) A foreign tax redetermination that requires only an adjustment to the CFC’s E&P and 

tax pools on an adjusted Form 1118 that must be reported in the first year it is relevant 

to the U.S. taxpayer’s computation of § 902 credits. See Reg. 1.905-4T(b)(2). This 

typically would be the year of the redetermination. 

g) Triggering events with respect to a redetermination of a CFC’s foreign taxes. 

A U.S. shareholder is required to re-determine its U.S. tax liability to reflect a CFC-level 

redetermination in any one of the following four circumstances: 

(1) The foreign tax liability being re-determined is denominated in a hyperinflationary 

currency. 

(2) The redetermination reduces the U.S. shareholder’s deemed paid tax credits by 

10% or more with respect to a distribution or subpart F inclusion in any prior year 

from the original assessment year through the present. 

Note that this requires the adjustment to roll-forward through the intervening 

years to see whether the effect on the pools in any year would be large enough to 

result in a 10% reduction. The test is applied cumulatively to all § 905(c) events 

that have occurred. 




9

Temp. Treas. Reg. § 1.905-3T(d)(3)(iii) Example 1: 

(i) At the beginning of 2008, CFC had E&P of 500u and taxes of $200 in the 

general basket. 

(ii) During the year, at an average exchange rate of $1:1u, CFC earned 500u 

of E&P and accrued 100u ($100) of additional foreign taxes in the general 

basket. CFC’s cumulative totals at the end of 2008 were 1,000u of E&P 

and $300 of taxes, respectively. 

(iii) During 2008, CFC distributed 100u. USP is deemed to pay $30 in foreign 

taxes. 

(iv) In 2009, CFC makes payment of its 2008 taxes in the amount of 80u. This 

corrects the overaccrual of 20u in taxes. This is a redetermination that 

reduces CFC’s 2008 taxes by $20. (Note: per Temp. Treas. Reg. § 1.905- 

3T(b)(3), the correction of the overaccrual is translated at the 2008 

exchange rate). 

(v) § 905(c) reduction calculation: If 2008 taxes had been only 80u, the tax 

pool in 2008 would have been $280. This would have resulted in deemed 

paid credits of $28. The reduction in 902 credits ($2) is less than 10% of 

the amount of credits originally claimed ($30). Therefore, no triggering 

event has occurred. 

(vi) As a result, as of 2009, CFC’s taxes are decreased by $20 from $270 to 

$250. CFC’s remaining general basket E&P are increased by 20u from 

900u to 920u. 

(3) In the case of multiple redeterminations, the effect of the redeterminations is 

rolled forward cumulatively to determine whether a triggering event has occurred. 

Consider Reg. § 1.905-3T(d)(2), Example 2: 

(i) In 2009, when the exchange rate is 1.5u:$1, CFC earns general basket 

E&P of 350u and accrues taxes of 150u ($100). Therefore, at end of the 

2009, its cumulative totals are 1,270u and $350. 

(ii) In 2009, CFC distributes 100u. This distribution carries a deemed paid 

credit of $27.55. This reduced its E&P to 1,170u and its tax pool to 

$322.45. 

(iii)In 2010, the CFC lost 500u in the general basket and paid no foreign tax. 

Its closing balances were, therefore, 670u and $322.45 of E&P and taxes, 

respectively. 




10

(iv) In 2011, the carry-back of the loss for foreign purposes triggers a refund of 

2008 taxes of 80u. This is analyzed in the following manner: 

1. In 2008, E&P would have been increased by 80u to a total of 1,100u. 

This is equal to 500u opening balance + 500u current E&P as 

originally calculated + 20u corrected overaccrual + 80u carryback 

refund. 

2. Foreign taxes available for credit in 2008 would have been reduced to 

$200. This is equal to the opening balance in the tax pool in 2008, 

since, as finally determined, there were no 2009 taxes. 

3. The dividend in 2008 would have carried 902 credits of only $18.18 

(100u/1,100u x $200), instead of $30. This $11.82 cumulative 

reduction is more than 10% of the amount of 902 credits originally 

claimed ($30). Therefore, the U.S. shareholder must file an amended 

return and § 905(c) notice for 2008 to report a reduction in § 902 

credits of $11.82. 

4. The CFC’s E&P and tax pools for 2008 are correspondingly adjusted 

for the refund. 

5. The effect on 2009 also must be analyzed. Had the redetermination 

occurred and the 2008 distribution carried $18.18 of foreign tax 

credits, the CFC’s E&P and tax pools in 2009 (after including current 

E&P and taxes) would have been 1,350u and $281.82, respectively. 

6. Had the taxes for 2009 been so affected, the 2009 distribution of 100u 

would have carried deemed paid taxes of $20.87, rather than $27.55. 

Since the resulting difference is greater than a 10% reduction, 2009 tax 

liability must also be redetermined. 

(b) Note that the 10% reduction rule only goes one way—i.e., it only applies if 

the redetermination would net an underpayment of U.S. tax. While a foreign 

tax assessment resulting in additional post-’86 foreign income tax would 

never “require” a redetermination under the 10% rule, is the taxpayer 

nonetheless permitted to make an adjustment at the U.S. parent level 

In PLR 200127011, the IRS addressed a case where a CFC (Corp B) paid 

additional taxes in year X relating back to Years 2 -5. In years 2 – 5, the 

CFC’s U.S. shareholder had included all of the CFC’s income under subpart F 

and claimed all of the credits under § 960. After year 5, the CFC liquidated 

into the U.S. group as a result of a Form 8832 election. 

Generally, an increase to foreign taxes paid would be reflected as a pooling 




11

adjustment, rather than as additional § 960 credits in years 2 – 5. However, 

the pools no longer existed, since Corp B was now a branch of the U.S. 

parent. To avoid the FTCs disappearing, the IRS allowed the taxpayer to 

make an adjustment to the pools of post-86 E&P and taxes in Years 1 – 5 for 

purposes of calculating the § 960 credit in those years. 

See also FSA 200035019 (seeming to require that an increase to a CFC’s 

foreign tax be treated as a forward pooling adjustment, rather than a correction 

to the § 902 / § 960 credit in the prior year). 

(4) The redetermination of taxes deemed paid would create a deficit in a foreign 

corporation’s tax pools. This rule is essentially the same as the rule concerning 

upper-tier and lower-tier CFCs discussed above. A deficit in a foreign tax pool is 

untenable and must be immediately corrected. 

(a) Temp. Treas. Reg. § 1.905-3T(d)(2), Ex. 3. This example illustrates the effect 

of redetermination when earnings and taxes are distributed to a higher-tier 

CFC. Both examples assume that a lower-tier CFC (CFC2) distributes 

earnings to a higher-tier CFC (CFC1). CFC2 then receives a refund of the 

distributed taxes. 

(i) Situation 1. The refund is small enough that it does not cause CFC2’s tax 

pool to go negative after making the redetermination. Thus, CFC2 adjusts 

its pools to take into account the redetermination and there is no effect on 

CFC1. 

(ii) Situation 2. The refund is large enough that it causes CFC2’s remaining 

tax pool (after distribution to CFC1) to become negative. Since this 

situation cannot be maintained, CFC1 must also make an adjustment to its 

E&P and tax pools. 

Specifically, the regulations redetermine CFC1’s tax pools to reflect the 

amount of credits that would have been deemed paid by CFC1 if CFC2 

had never paid the refunded tax. This amount of foreign taxes is removed 

from CFC1’s pools. There is no effect on CFC1’s earnings pool (since the 

redetermination does not affect the amount of CFC1’s dividend. 

(iii)CFC2 must adjust its earnings pool to reflect the full amount of the 

increase due to the refund. CFC2’s tax pools are decreased solely by the 

amount of tax refund not already allocated to CFC1. 

(5) Redetermination is triggered by distribution of PTI. If corporate tax is refunded 

on a distribution by the CFC, and the distribution is made out of PTI, then the 

U.S. shareholder must re-determine its U.S. tax liability. 




12

h) Acquisitions. 

i) Consider possible inequity – separation of FTC from economic liability for the tax in 

the case of a CFC that is sold, and then has an FTR for a pre-closing period. 

(1) Acquisition agreement likely requires US Seller to indemnify buyer for CFC’s 

pre-closing taxes. US seller may also be entitled to any refund of CFC’s preclosing 

taxes received in a post-closing period. 

(2) § 905(c) regulations always require an increase to foreign tax credits to be 

accounted for as a pooling adjustment, effective during the Buyer’s post-closing 

ownership period. Thus, the Buyer obtains an FTC funded by the Seller. 

(3) § 905(c) regulations may also cause a refund to be reflected as a detriment to the 

Buyer’s pools, or even if accounted for through a reduction of the FTC, will the 

Buyer notify the seller of the redetermination. 

(4) TD 9362 (2007 Temp. Regs.) – IRS acknowledged receipt of comments on this 

issue, and is studying whether to require mandatory pooling adjustments in this 

case. However, still no action on this point. 

(5) Caren Shein, in her 2002 Article on § 905(c), considers some other permutations 

here, including application of PLR 200217002’s “disappearing pools” rationale in 

the case of a sale without a § 338 election. 

i) Currency translation rules. 

i) General rule. Translate foreign taxes, and any adjustments thereto, at the average 

exchange rate for the year to which the foreign taxes relate. § 986(a)(1)(A). Thus, 

payments of foreign tax are generally translated at the average exchange rate for the 

assessment of year. The payment, therefore, does not cause a change in Foreign Tax 

that must be reported under § 905(c). 

(1) Exception – two-year rule. If foreign taxes are not paid within two years of the 

end of the assessment year, they must be reversed under § 905(c) until paid. The 

payment of the taxes then becomes a new foreign tax redetermination that is 

translated at the spot rate on the date of payment. See § 986(a)(1)(B)(i) & 

§ 986(a)(2). 

(2) Exception – estimated tax payments. Estimated tax payments made before the 

beginning of the foreign tax year to which they relate are translated at the spot 

rate on the date of payment. See § 986(a)(1)(B)(ii). In this case, the actual 

accrual of liability will give rise to an adjustment to foreign tax under § 905(c) to 

the extent exchange rates differ. This may fall into the de minimis rule for direct 




13

credits, or may be treated as a pooling adjustment at a CFC level. 

(3) Exception – Spot Rate Election (§ 986(a)(1)(D)). For years after 2004, the 

taxpayer may elect to make a one time election to translate all foreign income 

taxes into dollars at the spot rate on the date of payment. See § 1.905- 

3T(b)(1)(ii)(D). The election may apply to all foreign income taxes of the 

taxpayer, or only for foreign taxes attributable to QBUs with a dollar functional 

currency. The election is binding and may be revoked only with consent of the 

Commissioner. 

(a) The election can be beneficial to tie withholding taxes on royalties, dividends, 

etc. paid to the U.S. taxpayer to the rate on which the dividend, royalty, etc., is 

translated into dollars. This sort of use of the election would be limited to 

“the dollar QBUs only” approach. 

(b) The election could also apply more broadly to all § 901 and § 902 credits. 

However, since a non-dollar QBU’s profit and loss is translated at the average 

exchange rate for the year under § 987, it typically would be better to use the 

default rule that translates the QBU’s taxes at the same average exchange rate. 

ii) Translation of Refunds (§ 1.905-3T(b)(3)). Refunds of foreign tax are translated at the 

exchange rate for the year to which the refunds relate (including deemed refunds as a 

result of the two-year rule). Thus, a refund received many years after the fact will be 

translated at the exchange rate of the original assessment year. This rate may be far 

different from the exchange rate in the current year. E&P is also adjusted at the same 

exchange rate. 

iii) § 988 consequences of receiving the refunded currency (§ 1.905-3T(b)(5)). 

(1) If the tax is denominated in a non-functional currency, then the units of refunded 

currency take a tax basis equal to their translated value under the rules above. 

Thus, the refunded units have a built-in currency gain or loss under § 988. This 

gain or loss would typically be recognized as the units are disposed of – reversing 

some of the currency effects of receiving a refund at a non-market exchange rate. 

(2) Query whether the business needs exception should apply to the § 988 gain or loss 

on the refunded units of currency. 

j) Interesting private rulings applying § 905(c). 

i) TAM 9817001 (Sept. 30, 1997) (issues #3 and 4). 

(1) Simplified facts of TAM. The TAM concerns the application of the U.K. 

Advance Corporation Tax (“ACT”) rules. In the TAM, UK Holding (Parent) 

surrendered a Year 2 ACT refund to UK Sub 1. UK Sub 1, in part, used this 




14

efund to reduce its Year 2 corporate tax liability. It also carried back the 

surrendered ACT refund to obtain a refund, in part, of its Year 1 corporation 

taxes. Issue #3 of the TAM concludes that this was properly treated as a § 905(c) 

redetermination with respect to UK Sub 1’s Year 1 foreign taxes. Under the 

former § 905(c) regulations, this was treated as an adjustment to UK Sub 1’s E&P 

and tax pools. 

(2) Analysis. In Year 1, UK Sub 1’s foreign tax liability was allocated as a deduction 

against UK Sub 1’s gross foreign base company income under § 954(b)(5). Had 

the refunded Year 1 tax never been paid, UK Sub 1 would have had an additional 

subpart F inclusion. In light of this fact, the TAM considered how to account for 

the redetermination: 

(a) Alternative #1 – adjust USP’s subpart F income in Year 1 to reflect the redetermined 

foreign taxes deductille under § 954(b)(5). 

(b) Alternative #2 – leave Year 1 untouched. However, account for the increase 

in E&P in Year 2 as additional subpart F E&P in the same amount as the 

redetermined taxes were deducted in Year 1. 

(c) The Service applied Alternative #2. It relied on the tax benefit principles of 

Hillsborough National Bank to conclude that the tax benefit doctrine required 

the benefit of the redetermined tax deduction in Year 1 to be recaptured in 

Year 2. 

(3) Consider how this common law “tax benefit” analysis might interact with the 

statutory recapture rules under § 952. 

ii) PLR 200127011 (Apr. 3, 2001). 

(1) Simplified facts of the PLR. In several prior years, a lower-tier CFC (Corp. B) 

earned subpart F income that was reported by members of the U.S. consolidated 

group. This income was subject to foreign taxes for which the U.S. parent 

claimed § 960 credits. 

(a) As part of a restructuring plan, Corp B merged into its first-tier CFC parent 

(Corp. H). In other steps in the same plan, Corp. H adopted a plan of 

complete liquidation and also elected to be treated as a partnership for U.S. 

tax purposes. Corp H is wholly owned by members of the U.S. consolidated 

group. Corp. H then transferred substantially all of its assets to a disregarded 

entity owned by members of the same consolidated group. 

(b) As a result of the steps above, Corp. B now had become part of Corp. H, 

which was now a branch of a member of the same consolidated group. 




15

(c) After the restructuring was completed, the foreign country imposed additional 

taxes on Corp. B for the years in which its income was deemed distributed 

under subpart F. 

(2) Rulings. Since Corp B no longer exists, the foreign tax redetermination cannot be 

reflected in an adjustment to Corp B’s foreign tax pools. Therefore, Corp B must 

adjust its E&P and taxes, and the U.S. consolidated group must redetermine its 

U.S. tax liability to reflect the effect of the adjustment. 

(3) Comments. This was a favorable result in the taxpayer’s case because it allowed 

the consolidated group to claim additional foreign tax credits. The ruling would 

seem to apply a refund awarded after a liquidation as well. 

(4) Although the integrated transaction appeared to be an upstream merger or 

liquidation into a member of the same consolidated group, the ruling does not cite 

§ 381 in reaching its conclusion. Would the same result have applied if Corp B 

liquidated into a partnership in a § 331 transaction 

(5) The ruling does not address the treatment of FTC redeterminations occurring 

before or after the sale of the foreign corporation that is subject to the 

redetermination. 

iii) FSA 200035019 

(1) In year 4, FSUB sold stock in a 10/50 company and recognized a gain. The gain 

was treated as non-taxable under local law, and no foreign taxes were paid or 

accrued. However, for U.S. tax purposes, the US taxpayer recognized a subpart F 

inclusion for FPHC income of F Sub. 

(2) From year 5 – 9, Local authorities challenged F Sub’s position that the stock sale 

was nontaxable. Ultimately, in year 9, F Sub settled the audit by agreeing to pay 

additional year 4 tax. 

(3) Under the contested taxes doctrine, the IRS treated this is as a redetermination of 

year 4 tax. The IRS interpreted the pooling adjustment rules to be mandatory, 

such that the increase in passive basket tax and decrease in passive basket E&P 

were required to be reflected in an adjustment to the pools as of Year 9. 

(4) The IRS noted possible inequity in that the passive basket E&P was reduced 

below zero, which might cause the credits to be trapped under § 1.902-1(b)(4). 




16

Foreign Tax Redeterminations under Â§ 905(c) - Fenwick & West LLP

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?