Third Circuit Upholds IRS' New Timely Filing Regulation

Holding:

In the Swallows case, the U.S. Court of Appeals for the Third Circuit issued a major decision that strengthens the discretion of administrative agencies to interpret ambiguous provisions of their enabling statutes. Specifically, the Third Circuit upheld the validity of a treasury regulation issued by the Internal Revenue Service ("IRS"), Treasury Regulation 1.882-4(a)(i), that imposes a timely tax filing requirement on foreign corporations seeking deductions and credits. The Third Circuit reasoned that the issuance of this regulation is a task properly within the powers and expertise of the IRS. The Third Circuit based its reasoning on the Chevron case, that the Third Circuit believes, recognizes the notion that the IRS is in a superior position to make judgments concerning the administration of the ambiguities in the Internal Revenue Code ("IRC"). In this case, the IRS found that eighteen months served as a balance between its desire for compliance with the federal tax laws and a foreign corporation’s desire to obtain valuable tax deductions. The Third Circuit therefore reversed the decision of the U.S. Tax Court that invalidated the questioned regulation.

Detailed Summary:

The IRS has appealed a Tax Court decision that held Treas. Reg. 1.882-4(a)(3)(i) to be invalid. Opinion, p. 3. Petitioner-appellee Swallows Holdings, Ltd. (“Taxpayer” or “Swallows”) is a Barbados corporation with two principal shareholders, Raimundo Arnaiz- Rosas and Aurora Elsa Arnaiz. On September 14, 1992, Taxpayer filed its first federal income tax return. In its return, Taxpayer reported that it held real property in San Diego, California.

Between 1993 and 1996, Taxpayer generated rental income from the San Diego property. It was not until 1999, however, that Taxpayer filed returns for tax years 1993, 1994, 1995 and 1996.

A foreign corporation,…

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