Demise of Chevron May Allow Challenge To Late Filed Form 1120-Fs – Reg. Section 1.882-4

On July 3, 2024 we posted "The Demise of Chevron Will Result In Increased Treasury Regulation Challenges" where we discussed that the decision in the Loper Bright case because the IRS has long relied on the Chevron doctrine, established in a 1984 opinion to defend tax regulations in litigation that it's demise may result in additional challenges to regulations and tax litigation.

One Regulation That May Be Challenged Concerns Late Filed Form 1120 F - U.S. Income Tax Return of A Foreign Corporation.

Under section 882, a foreign corporation engaged in a U.S. trade or business is subject to U.S. tax on its taxable income effectively connected with the conduct of the U.S. taxable business. Section 882(c)(2) ties the corporation’s ability to claim deductions against its gross income to its filing of a U.S. tax return. Reg. section 1.882-4 generally provides that deductions (and credits) otherwise allowed are available only for taxpayers that timely file a return within 18 months of the due date in section 6072.

Swallows Holding Ltd., a foreign corporation, failed to file within that time frame and was later denied the ability to claim deductions. It sued, arguing that the rule setting out an 18-month deadline was an invalid exercise of Treasury’s rulemaking authority. 

The Tax Court Agreed That The Reg Was Invalid, 
Concluding That The Statute Did Not Reflect An Intention
By Congress That The Requirement That A Foreign
Corporation File A Tax Return Included A Filing Deadline 
(Swallows Holding Ltd. v. Commissioner, 126 T.C. 96 (2006)).

The Third Circuit overruled, finding that the reg should be given Chevron deference and applying the Chevron two-step process, that the 18-month time frame was a reasonable exercise of the secretary’s authority (515 F.3d 162 (3d Cir. 2008)). 

The Swallows Holding decision presents an opportunity for taxpayers to challenge Reg. section 1.882-4's requirement that the return must be filed within 18 months of the due date.

Whether it opens an opportunity for taxpayers who made a similar mistake to bring the same claim for prior years, despite the majority’s statement in Loper Bright that it wasn’t questioning prior cases that relied on the Chevron framework, and that holdings in those cases are subject to statutory stare decisis, Remains to be seen?

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Read more at: Tax Times blog