In the 1990's, the Treasury Department enacted regulations that provide if a foreign corporation did not timely file a U.S. income tax return (with some extension for the time to file over traditional filing deadlines), it can not later take income tax deductions for the applicable tax year. The effect of this regulation is that if a foreign corporation fails to timely file, if it ever does file (including by reason of an audit), its income tax liability will likely be higher by reason of the lost deductions than if it timely filed. Indeed, if the corporation had deductions that completely offset its income, it could find itself owing substantial tax when it really had no net income. This is strong medicine, designed to encourage foreign corporations to file their tax returns.
There is only one problem - there is no authority under the Internal Revenue Code to support it and indeed there is old case law that confirms that filing a timely return is not a prerequisite for obtaining deductions. In a decision favorable to taxpayers, the Tax Court has invalidated the regulations. The Tax Court concluded that it was simply wrong for the Treasury Department to attempt to resurrect a failed litigating position through the issuance of interpretative regulations that are contrary to the Internal Revenue Code.
Swallows Holding, LTD., 126 TC No. 6 (2006)
There is only one problem - there is no authority under the Internal Revenue Code to support it and indeed there is old case law that confirms that filing a timely return is not a prerequisite for obtaining deductions. In a decision favorable to taxpayers, the Tax Court has invalidated the regulations. The Tax Court concluded that it was simply wrong for the Treasury Department to attempt to resurrect a failed litigating position through the issuance of interpretative regulations that are contrary to the Internal Revenue Code.
Swallows Holding, LTD., 126 TC No. 6 (2006)
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