The opinion of the court was delivered by: CARTER
CARTER, District Judge: Plaintiff ("ATT") and defendant both move pursuant to Rule 56(a), F.R. Civ. P., for summary judgment. They have submitted a joint 9(g) statement, and there are no material issues of fact to be resolved.
When ATT filed its 1964 federal income tax return, it claimed a foreign tax credit of $269,085.10 based on its payment of a 15% Canadian income tax on non-residents for 1964.
In 1966 Canada made an additional assessment of $763,272.90 Canadian dollars against ATT for 1964 under the same 15% Canadian income tax of nonresidents.
Although contesting that assessment, ATT in January 1967 paid Canada the taxes assessed. On that date the exchange rate was such that the value of ATT's payment was $707,859.29. ATT claimed this as an additional foreign tax credit, which claim was allowed by the IRS as an adjustment during its audit of ATT's 1964 income tax return. At this point ATT showed a foreign tax credit of $976,944.39 based on its payment in two parts of the 15% Canadian non-resident tax.
In October of 1972, the Canadian authorities refunded to ATT $763,272.90 Canadian dollars - representing the contested tax assessment against ATT which ATT had paid in 1967. Given the exchange rate at that time, the Canadian refund was worth $777,240.79, or $69,381.50 more than the value of ATT's payment to the Canadian authorities in 1967.
Pursuant to Section 905(c) of the Internal Revenue Code, ATT informed the IRS of this refund. The IRS thereupon redetermined ATT's federal income tax due for 1964 by deducting $777,240.79 from the $976,944.39 foreign tax credit previously claimed by ATT for 1964.
ATT contests this redetermination, arguing that the IRS should have deducted only $707,859.29
from ATT's previously claimed foreign tax credit. ATT therefore seeks a refund of $69,381.50 from the IRS.
As I view it, this case is easily determined once the facts are sorted out. Plaintiff having paid a total of $976,944.39 in taxes to Canada, claimed a foreign tax credit for the same amount on its 1964 adjusted United States income tax return. When Canada refunded $777,240.79 of the tax it had earlier collected, plaintiff's allowable 1964 foreign tax credit was reduced by the IRS by that amount. This reduction was correctly made pursuant to the applicable sections of the Code.
Section 901(b) of the Code allows a taxpayer to credit against his federal income tax the amount of any income taxes paid to any foreign country. Section 905(c) provides that where there is any subsequent refund of the foreign tax on which a credit was claimed, the Secretary of the Treasury shall "redetermine the amount of the tax for the year or years affected."
The issue raised here is how that redetermination shall be made when between the time the foreign tax credit is claimed and a refund is made, there has been a fluctuation in the exchange rate.
The same general issue has been raised previously in other forums and in each case the result has been the same. The redetermination should be made by subtracting from the original foreign tax credit the dollar value of the refund measured at the prevailing exchange rate on the day the refund is made. See S.M. 4747, V-1 C.B. 282 (1926);
Rev. Rul. 58-237, 1958-1 Cum. Bul. 534 (1958);
Owens, The Foreign Tax Credit (1961) § 7/4B (Rev. Rul. 58-237 is theoretically correct). I see no reason to deviate from these previously reached interpretations of § 905(c) and its predecessors, and I decline to do so.
The opinion might end here, but for the rather interesting argument put forth by plaintiff, which ought not be rejected too easily. Plaintiff concedes that in the ordinary situation the mechanics of redetermination pursuant to Section 905(c) should conform with the Government's interpretation. Plaintiff contends that this is no ordinary situation, however, and that a different result is called for.
As plaintiff views the facts of this case, not one tax was paid, but two - the tax of $269,085.10 based on §§ 106(1)(a) and 106(1)(b) of the Canadian Income Tax Act, and the tax of $707,859.29 based on § 1061(1)(d) of the Act.
This fact, asserts plaintiff, makes the maximum amount the IRS can reduce ATT's tax credit $707,859.29. Plaintiff reaches this conclusion based primarily on its analysis of Regulation § 1.905-3(a), which ATT argues indicates that the IRS has abandoned its previous interpretation of § 905(c). Reg. § 1.905-3(a) reads:
... [In] case any tax payment credited is refunded in whole or in part, the taxpayer shall immediately notify the Commissioner. The Commissioner will thereupon redetermine the amount of the tax of such taxpayer for the year or years for which ...