In Uncategorized on 01/21/2021 at 17:13

All of my readers who are “hanging breathless on thy fate,” as a better writer than I wrote about a different ship, now can know the fate of the Challenge Vessel’s deductions and credits. Just check out Judge Albert G (“Scholar Al”) Lauber’s exegesis of Section 882(c)(2), Reg Section 1.882-4(a)(3)(i), and the Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital Gains, U.K.-U.S., July 24, 2001, T.I.A.S. No. 13,161 (entered into force Mar. 31, 2003).

But before you delve into Adams Challenge (UK) Limited, 156 T. C. 2, filed 1/21/21 (Happy Palindrome Day!), check out my blogpost ““Related To,” “In Connection With,” “With Respect To”, 1/8/20.

IRS hit the Adams gang with a jeopardy assessment they later dropped, but gave them a couple SFRs (hi, Judge Holmes) showing zero deductions. The Adams gang riposted with protective zero returns per Reg Section 1.882-4(a)(3)(vi) after the SFRs, claiming the statute had no time limit, the Reg was invalid and the treaty prevented any limit. So the Adams gang could claim deductions and credits whenever.

The issue is whether denying the Adams gang deductions and credits falls foul of statute, regs, or the US-UK tax treaty. And Judge Lauber says no, and goes back to 1918 to find consistent US policy to keep foreigners from playing roulette with US taxes. The US statute and regs say that foreigners lose deductions and credits if they don’t file returns before IRS hits them with SFRs, unless they have a great excuse (which the Adams gang doesn’t).

The problem is that IRS may not even know that an offshore has US-connected income if the offshore never files. IRS tracked down the Adams gang via satellite; Adams had to tell the US Coast Guard they were on the Outer Continental Shelf, but never told IRS.

“Congress enacted section 882(c)(2) to ensure that foreign corporations comply with the internal revenue laws. Predicating a foreign corporation’s entitlement to deductions and credits on the filing of a return is justified in the light of the administrative difficulties the IRS faces. The Fourth Circuit described this situation as ‘pregnant with possibilities of tax evasion.’ Blenheim Co., 125 F.2d at 909. ‘[U]nless a foreign corporation is induced voluntarily to advise the Commissioner of all of its income attributable to sources within the United States * * *, the Commissioner may never learn even of the corporation’s existence.’ Ibid.

“Allowing a foreign taxpayer an endless period to file a return, moreover, would enable it to game the system. If a foreign taxpayer could ‘wait and see what information the Commissioner puts on a substitute return before the taxpayer has to file a return of his own,’ Espinosa, 107 T.C. at 157, the foreign taxpayer could elect to report its actual gross income or the income the IRS alleged, whichever amount was less. The foreign taxpayer would thus enjoy a one-way street in its favor. That outcome ‘would put a premium on tax evasion and would reduce the administration of the tax laws to mere idle activity.’ Blenheim Co., 125 F.2d at 912. Congress’ enactment of an administrative provision to prevent that result is not ‘discriminatory.’” 156 T. C. 2, at p. 57.

In practice, the offshore has 23-1/2 months to come clean after the end of each tax year, before IRS can whang their deduction pate.


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