Deductions and credits disallowed, foreign corporation did not file tax returns until after notice of deficiency

Deductions and credits disallowed, foreign corporation

The U.S. Tax Court granted summary judgment for the IRS in a case concerning the disallowance of deductions and credits claimed by a taxpayer (foreign corporation) that did not file tax returns until after the IRS issued a deficiency notice.

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The case is: Adams Challenge (UK) Ltd. v. Commissioner, 156 T.C. No. 2 (January 21, 2021). 

Summary

The taxpayer (a UK corporation) had as its sole income-producing asset a multipurpose support vessel. The vessel was chartered by a U.S. firm to assist in decommissioning oil and gas wells and removing debris on portions of the U.S. outer continental shelf in the Gulf of Mexico. During 2009 and 2010, the taxpayer derived from the charter gross income of about $32 million, which was eventually found to be effectively connected with the conduct of a U.S. trade or business. Read TaxNewsFlash

  • The taxpayer did not file a federal income tax return for 2009 or 2010.
  • The IRS in 2014 prepared and subscribed returns for the taxpayer for 2009 and 2010, and in November 2014, issued a notice of deficiency determining (among other things) that the taxpayer was entitled to no deductions or credits for 2009 or 2010 because it had failed to file returns. 
  • In February 2015, the taxpayer filed a petition with the Tax Court and in February 2017, submitted protective returns for 2009 and 2010.
  • The taxpayer filed a motion for partial summary judgment challenging the IRS’s disallowance of deductions and credits and urging that the IRS action violated the business profits and the nondiscrimination articles of the income tax treaty between the United States and the United Kingdom. The IRS filed a cross-motion urging that disallowance of deductions and credits in these circumstances was consistent with both section 882(c)(2) and the tax treaty.

The Tax Court held that under section 882(c)(2), the taxpayer was not entitled to the benefit of deductions or credits because it did not submit “returns” for 2009 and 2010 until after the IRS had prepared and subscribed returns for it. The court also found that section 882(c)(2) does not violate either the business profits article or the nondiscrimination article of the tax treaty.

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