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.
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