Washington Tax Alert January 9, 2020

Washington Tax Alert from Don Barnes, [email protected]
January 9, 2020

The Tax Court issued an opinion yesterday in which it held a foreign corporation had income effectively connected with a U.S. trade or business that was not exempt under the applicable tax treaty. Adams Challenge (UK) Ltd. v. Commissioner.

Although not directly relevant to the Tax Court’s legal analysis, the foreign company’s actions in filing (or not filing) its U.S. tax returns are noteworthy. The foreign company did not file a U.S. tax return for tax years 2009 and 2010, and it filed a U.S. tax return (Form 1120-F) for tax year 2011 more than 14 months late. The late-filed 2011 tax return reported gross income of $2.7 million.

After the Tax Court litigation began, the foreign company amended its petition and took the position that it had no income in 2011 that was subject to U.S. taxation, even though it had reported $2.7 million of gross income on its 2011 tax return.

The foreign corporation’s failure to file tax returns for certain years, filing a tax return late, and changing its tax position after litigation began may have influenced the Tax Court’s decision, even though the foreign corporation had good arguments that its income should not be subject to U.S. tax.

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