IRS Concerns About Foreign Tax Credit Abuses Raise Questions About Mitt Romney Foreign Tax Credits And How Those Tax Credits Were Determined

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The Tax Law Firm of Alvin Brown & Associates Highlights IRS Concerns of Tax Avoidance and Tax Evasion by Taxpayers Creating Unlawful Foreign Tax Credits

Governor Romney's release of his 2010 and 2011 have created a lot of discussion. Vanity Fair discussed the Romney tax returns in their their August 2012 publication.

As noted by Vanity Fair, the Romney joint tax return showedr an average tax rate just shy of 15 percent, substantially less than what most middle-income Americans pay. The tax return reflects foreign sourced income and payment of taxes to foreign governments which generate foreign tax credits. A foreign tax credit is a direct offset to the Romney U.S. tax liability and a factor in the 15 percent tax rate.

The following document purports to be the IRS Form 1116 use to claim the Romney foreign tax credit for 2010 Foreign Tax Credit IRS Note also the following supplemental document dealing with the Romney foreign tax credit for 2011 Tax attorney Alvin Brown sets forth this data for the limited purpose to demonstrate that the Romney foreign tax credits for 2010 and 2011 are obviously large and complex as a consequence of their substantial disclosed foreign source income.

Tax Attorney Alvin Brown has noted that while there is no evidence that Mitt Romney’s foreign tax credits have violated the law, abuse of the foreign tax credit has been a problem for the Internal Revenue Service. The IRS has identified multiple foreign tax credit abuses of tax law such as IRS Notice 2004-19, IRB 2004-11, March 15, 2004, which describes the approach that the Treasury Department and the IRS are using to address transactions involving inappropriate foreign tax results, referenced IRS Notice 98-5, 1998-1 C. B. 334. Notice 98-5 identifies two types of foreign tax abuse transactions.

IRS Notice 2004-19 identifies Treasury and the IRS concern about transactions that involve inappropriate foreign tax credit results. The tax benefits claimed in these transactions are inconsistent with the purposes of the foreign tax credit provisions, including the foreign tax credit limitation of section 904, which are intended to reduce or eliminate double taxation of income.

Tax attorney Alvin Brown cites the following except from IRS Notice 2004-19: "The IRS will continue to scrutinize abusive transactions that are designed to generate foreign tax credits. In appropriate circumstances, the IRS will challenge the claimed tax consequences of such transactions under the following principles of existing law: the substance over form doctrine, the step transaction doctrine, debt-equity principles, section 269, the partnership anti-abuse rules of § 1.701-2, and the substantial economic effect rules of § 1.704-1. * * * * * Treasury and the IRS will use existing authority under section 901 and other provisions of the Code to address transactions or structures that produce inappropriate foreign tax credit results."

IRS Notice 2004-20, IRB 2004-11, March 15, 2004, identifying certain foreign tax credit issues as" tax avoidance transactions" for purposes of the tax shelter disclosure, registration, and list maintenance regulations a purported stock acquisition that is intended to generate credits for foreign taxes paid on gain that is not subject to tax in the United States. IRS Notice 2004-11 provides, as follows:

"The Internal Revenue Service and the Treasury Department are aware of a type of transaction, described below, in which, pursuant to a prearranged plan, a domestic corporation purports to acquire stock in a foreign target corporation and make an election under section 338 of the Internal Revenue Code before selling all or substantially all of the target corporation’s assets in a transaction that is subject to foreign income tax. This notice alerts taxpayers and their representatives that these transactions are tax avoidance transactions and identifies these transactions, and substantially similar transactions, as listed transactions for purposes of § 1.6011-4(b)(2) of the Income Tax Regulations and §§ 301.6111-2(b)(2) and 301.6112-1(b)(2) of the Procedure and Administration Regulations. This notice also alerts parties involved with these transactions to certain responsibilities that may arise from their involvement with these transactions."

Tax Attorney Alvin Brown does not express any opinion that the size of the Mitt Romney tax credits, along with the complexity of his foreign accounts and investments, represent any form of tax avoidance or tax evasion of the kind described by the IRS published notices dealing with abusive foreign tax credit transactions. However, Mr. Brown notes the complexity of the computation of the foreign tax credits and the foreign business income that generated large foreign tax debt may be part of the reasons Mitt Romney is reluctant to make further disclosure of earlier tax returns. It is also important for U.S. citizens and businesses working abroad be aware of the problematic foreign tax credit issues.

Questions involving foreign tax credit abuses and tax planning regarding foreign income tax issues may be forwarded to Mr. Brown at ab(at)irstaxattorney(dot)com or the contact information in his web page at

Tax AttorneyAlvin S. Brown, Esq.
575 Madison Ave., 8th Floor
New York, N.Y. 10022-8511
(212) 588-1113

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