Hart v. United States

• Citation: 585 F.2d 1025
• Decision Date: 18 October 1978
• Docket Number: No. 74-77,263-77.,74-77
• Parties: Robert L. HART v. The UNITED STATES.
• Court: Court of Federal Claims

585 F.2d 1025

Robert L. HART v. The UNITED STATES.

Nos. 74-77, 263-77.

United States Court of Claims.

October 18, 1978.

John S. Brown, Boston, Mass., atty. of record for plaintiff; John H. Ashby, Boston, Mass., Francis A. Boyle, Cambridge, Mass., and Bingham, Dana & Gould, Boston, Mass., of counsel.

David C. Hickman, Washington, D. C., with whom was Asst. Atty. Gen. M. Carr Ferguson, Washington, D. C., for defendant; Theodore D. Peyser and Robert S. Watkins, Washington, D. C., of counsel.

Before FRIEDMAN, Chief Judge, and DAVIS, NICHOLS, KASHIWA, KUNZIG, and BENNETT, Judges, en banc.

ON PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT AND DEFENDANT'S CROSS-MOTION FOR SUMMARY JUDGMENT

NICHOLS, Judge.

This case is before the court on cross-motions for summary judgment. Taxpayer seeks a refund of income taxes paid in calendar years 1967 and 1968, based on a credit for foreign taxes. The issue is whether plaintiff's claim for refund was timely filed. Defendant contends that the election or choice to claim a credit for payment of foreign taxes under Internal Revenue Code section 901(a) must be made within three years from filing of the return (or two years from payment, if later), as required by Code section 6511(a); plaintiff argues that section 6511(d)(3)(A), providing a special ten year period, supersedes section 6511(a). Under defendant's construction, plaintiff's election of the foreign tax credit was untimely, even though had he elected within three years, he could have claimed an increase in the credit within ten. There is no triable issue of fact. We hold, however, that the special ten year statute of limitations applies to the election as well as the increase of the foreign tax credit, and grant plaintiff's motion for summary judgment.

Plaintiff first established his residence in Australia in 1967, and has lived there ever since, acquiring Australian citizenship by naturalization in 1971. For calendar years 1967-70 taxpayer filed U.S. tax returns and timely paid his income taxes. He also filed Australian income tax returns for the same period, and paid Australian income taxes. On his United States tax return in 1967, plaintiff took a deduction with respect to foreign income taxes withheld on foreign source dividends. He did not claim this deduction, or a credit with respect to foreign taxes, on his 1968 return.

In 1971 it was determined that the Australian income tax returns for the years 1968-1970 contained errors. In 1972 plaintiff filed amended Australian returns, reflecting an increased tax liability for each of those years. In 1973, the Australian tax authorities issued notices of amended assessments for the years 1968 and 1969, and a notice of assessment for 1970, and plaintiff duly paid the additional taxes owed. Also in 1973, plaintiff filed amended United States income tax returns for calendar years 1968-70. On November 10, 1976, plaintiff filed an amended United States return for calendar year 1967. On all of these returns he elected foreign tax credits under section 901 for the Australian income taxes he paid or owed. He also carried back to 1967, under section 904(c), excess foreign taxes paid in 1969. There are similar carrybacks to 1968 of excess foreign taxes paid in 1969 and in 1970.

The Internal Revenue Service allowed plaintiff's 1969 refund claim in full, deeming it filed within the general three year period of section 6511(a). The 1968 claim was disallowed in full because not made within the aforesaid three year period. Apparently no action has yet been taken with respect to the 1967 claim.

The Code sections which are offered for our interpretation are sections 901 and 6511. Section 901 offers taxpayers the alternative of taking a credit for foreign taxes in lieu of a deduction under section 164(a). In pertinent part section 901 provides:

(a) Allowance of credit.

If the taxpayer chooses to have the benefits of this subpart, the tax imposed by this chapter shall, subject to the applicable limitation of section 904, be credited with the amounts provided in the applicable paragraph of subsection (b) plus, in the case of a corporation, the taxes deemed to have been paid under sections 902 and 960. Such choice for any taxable year may be made or changed at any time before the expiration of the period prescribed for making a claim for credit or refund of the tax imposed by this chapter for such taxable year. * * *

This credit is limited in amount for any one year to the same proportion of tax as the foreign taxable income bears to total taxable income. To this effect, section 904 provides as follows:

(a) Limitation.

The total amount of the credit taken under section 901(a) shall not exceed the same proportion of the tax against which such credit is taken which the taxpayer's taxable income from sources without the United States (but not in excess of the taxpayer's entire taxable income) bears to his entire taxable income for the same taxable year.

If the foreign taxes paid or accrued exceed the limitation of subsection (a), the excess may be carried back two years, and then carried forward for up to five years. Section 904(c). Use of the carryback and carryover is limited to those taxpayers who timely elect the foreign tax credit under section 901.

To make a timely election of the credit the taxpayer must indicate his choice within the limitations period prescribed in section 6511. Generally, for one claiming a credit or refund, the applicable period is that of section 6511(a):

(a) Period of limitation on filing claim.

Claim for credit or refund of an overpayment of any tax imposed by this title in respect of which tax the taxpayer is required to file a return shall be filed by the taxpayer within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever of such periods expires the later, or if no return was filed by the taxpayer, within 2 years from the time the tax was paid. * * *

Section 6511 contains a number of exceptions to the general rule, however. Among these is subsection (d)(3)(A):

(3) Special rules relating to foreign tax credit.

(A) Special period of limitation with respect to foreign taxes paid or accrued.

If the claim for credit or refund relates to an overpayment attributable to any taxes paid or accrued to any foreign country or to any possession of the United States for which credit is allowed against the tax imposed by subtitle A in accordance with the provisions of section 901 or the provisions of any treaty to which the United States is a party, in lieu of the 3-year period of limitation prescribed in subsection (a), the period shall be 10 years from the date prescribed by law for filing the return for the year with respect to which the claim is made.

In essence, plaintiff argues that the special ten year period altogether pre-empts section 6511(a) and applies across the board to the decision to claim a credit for foreign taxes paid or accrued. Defendant replies that the special ten year period is available only for the purpose of adjusting the size of the credit. Otherwise, the taxpayer's initial choice to take a credit must be made (or changed) within the three year period of section 6511(a). Current Treasury regulations adopt the Service's interpretation:

The taxpayer may, for a particular taxable year, claim the benefits of section 901 (or change his choice if previously made) at any time before the expiration of the period prescribed by section 6511(a) * * for making a claim for credit or refund of the tax imposed by chapter 1 for such taxable year. Such period for such taxable year is determined without regard to the special period prescribed by section 6511(d)(3)(A). Treas.Reg. § 1.901-1(d) (1964).

Since the validity of this regulation depends on whether its interpretation of the statute is correct, we need not mention it further. See also Rev.Rul. 63-248, 1963-2 C.B. 623; Rev.Rul. 56-196, 1956-1 C.B. 655.

Just on the bare language, without reference to the legislative history or to the administrative regulations, we adhere to the view that the "normal reading" of sections 901 and 6511 alone does not reveal a requirement that the election to take a credit be made within three years. We so held in Bank of America v. United States, 377 F.2d 575, 180 Ct.Cl. 111, (1967). Under section 901 the choice to take the credit must be made prior to the expiration of the period prescribed for claiming a refund of the tax paid for the taxable year. The taxpayer must then refer to section 6511 to determine the relevant period. Although section 6511(a) provides a general rule allowing three years to claim a refund, this section contains seven special rules applicable to income taxes as well. It is explicitly stated in section 6511(d)(3)(A) that the ten year period is "in lieu of the 3-year period of limitation * * *." Such special rules following general ones are common in the Internal Revenue Code and it need not be spelled out that the general rule is preempted. Section 6511(d)(3)(A), quoted supra, is couched in broad terms; it certainly does not state that the ten year limitations period applies only to adjustments in the size of the credit. Reading section 6511 as a whole, the natural inference, then, is that Congress intended subsection (d)(3)(A) where it applies to substitute entirely for subsection (a). We have recently noted that the "normal understanding of the bare language is not conclusive but it is entitled to prevail unless overcome by a persuasive showing from the purpose or history of the legislation." Aparacor, Inc. v. United States, 571 F.2d 552, 554, 215 Ct.Cl. 596, 600 (1978), citing Prairie Band of the Pottawatomie Tribe of Indians v. United States, 564 F.2d 38, 46, 215 Ct.Cl. 1, 15 (1977). There is nothing absurd in our construction. Rather, it seems necessary to allow for late and retroactive assertion of additional tax liability by foreign states, as Congress wished to do. On oral argument, counsel for de...