Importance of Foreign Corporations Filing Form 1120F

Form 1120F is filed by foreign corporations in order to report income, deductions and credits to determine its U.S. tax liability. Generally, all foreign corporations are required to file Form 1120F if they are engaged in a U.S. trade or business. 

In the court case of Adams Challenge (UK) Limited v. Commissioner of Internal Revenue, the court ruled against Adams Challenge (UK) Limited in concluding that they were not entitled to deductions and credits for 2009 and 2010.  The Tax Court sided with the IRS to deny deductions and credits to a foreign corporation that failed to file timely Forms 1120-F. For 2009 and 2010, the UK company filed Federal income tax returns in February of 2017, waiting almost 2 years after the IRS prepared the returns for the company and sent them a notice to file.  In backing this, the IRS used Internal Revenue Code section 882(c)(2) which states “a foreign corporation shall receive the benefit of the deductions and credits allowed only by filing or causing to be filed a true and accurate return in the manner prescribed.” As we know, foreign corporations are not technically required to file returns timely if there is no US sourced income, so the big question for the courts was, does Internal Revenue Code section 882(c)(2) establish some sort of cutoff date when it is too late to file a return while still getting the benefit of those deductions and credits? In the end, the court ruled that the terminal date was established when the notice of deficiency and IRS prepared returns were sent to the UK based company.

The next factor, since dealing with a UK company, was whether deductions must be allowed in accordance with the US-UK tax treaty. It was argued deductions should be permitted based on the treaty business profits article that “expenses incurred shall be allowed as deductions.”  The court ruled against the company stating the interpretation is that "shall be allowed" does not mean "must be allowed", but instead means "shall be allowed so long as certain conditions are met." In this case, the court ruled those certain conditions were not met.

The tax court’s ruling represents a clear signal to foreign taxpayers:  they should timely file nonresident tax returns – including protective filings – in order to prevent the IRS denial of deductions and credits. Please contact your SD tax advisor if you need assistance. 

You’ve heard our thoughts… We’d like to hear yours

The Schneider Downs Our Thoughts On blog exists to create a dialogue on issues that are important to organizations and individuals. While we enjoy sharing our ideas and insights, we’re especially interested in what you may have to say. If you have a question or a comment about this article – or any article from the Our Thoughts On blog – we hope you’ll share it with us. After all, a dialogue is an exchange of ideas, and we’d like to hear from you. Email us at [email protected].

Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

© 2021 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

our thoughts on
Tax Reform 2021 - Build Back Better: Excess Business Losses Further Limited than Under 2017 Tax Cut and Jobs Act
Tax, Tax Reform BY Kirk Mitchell
Tax Reform 2021 – Build Back Better: Proposed Changes to Increase Net Investment (NII) Income Tax on S Corporation Shareholders and Limited Partners
Tax, Tax Reform BY Kirk Mitchell
Tax Reform 2021 – Build Back Better: Temporary Rule for S-Corporation Conversions to Partnerships
Tax, Tax Reform BY Kirk Mitchell
Tax Reform 2021 – Build Back Better: Surcharge on High Income Taxpayers and its Impact on Capital Gain Rate Taxes and Planning
Proposed Legislation Targets Estate and Gift Tax Planning
Tax, Tax Reform BY Kirk Mitchell
Tax Reform 2021: Build Back Better Act Update as of Wednesday September 15, 2021
Register to receive our weekly newsletter with our most recent columns and insights.
Have a question? Ask us!

We’d love to hear from you. Drop us a note, and we’ll respond to you as quickly as possible.

Ask us
contact us

This site uses cookies to ensure that we give you the best user experience. Cookies assist in navigation, analyzing traffic and in our marketing efforts as described in our Privacy Policy.