Estate of Austin D. Herrick v. USA
MEMORANDUM DECISION and order granting 24 Motion for Summary Judgment. Signed by Judge Dale A. Kimball on 3/25/16. (jlw)
IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF UTAH
ESTATE OF AUSTIN D. HERRICK,
Case No. 2:12CV671DAK
UNITED STATES OF AMERICA,
Judge Dale A. Kimball
This matter is before the court on Plaintiff Estate of Austin D. Herrick’s Motion for
Summary Judgment. On March 16, 2016, the court held a hearing on the motion. At the hearing,
Plaintiff was represented by Paul W. Jones, and Defendant was represented by Rick Watson.
The court took the motion under advisement. The court has considered carefully the memoranda
submitted by the parties, as well as the law and facts relating to the motion. Now being fully
advised, the court issues the following Memorandum Decision and Order.
Plaintiff seeks a tax refund from the Internal Revenue Service for the calendar years 2000
through 2006. Plaintiff is the Estate of Austin D. Herrick. Herrick, a U.S. citizen, lived and
worked in the Philippines during the time frame relevant to the claims for a refund. Plaintiff
contends that Herrick mistakenly believed that he would not owe any United States taxes on the
income he earned in the Philippines because of the high rate of tax he paid on that income in the
Philippines. Therefore, Herrick did not file United States tax returns from 2000 through 2006.
When Herrick failed to file United States tax returns, the IRS prepared “substitute” tax
returns for Herrick for the years 2000 through 2006. The IRS’s substitute tax returns did not take
into account the foreign taxes Herrick paid. The IRS determined that Herrick owed
$1,330,162.66 in Unites States taxes. The IRS then levied that amount from Herrick’s United
States investment accounts to pay the amounts assessed due from the IRS-prepared substitute tax
Herrick died on March 11, 2011. During the administration of his estate, Herrick’s
daughter, the administrator of his estate, learned of the tax issues and had U.S. income tax returns
prepared and filed for the tax years 2000 through 2006. Unlike the IRS-prepared returns, these
tax returns take into account Herrick’s foreign taxes paid and apply the foreign earned income
exclusion. Based on these returns, Plaintiff seeks a refund.
American taxpayers living and working overseas are, under certain circumstances,
permitted to adjust their U.S. tax liabilities by excluding some of the foreign-earned income (26
U.S.C. § 911) and through the application of a credit for foreign taxes actually paid (26 U.S.C. §
901). The parties dispute whether Plaintiff is entitled to the benefit of the exclusion and/or
Plaintiff’s Motion for Summary Judgment
The parties agree that Plaintiff has satisfied the three jurisdictional requirements for
seeking a tax refund: (1) full payment of the tax assessed; (2) timely filing of a refund claim with
the IRS; and (3) compliance with the statute of limitations for filing a refund suit. After meeting
these requirements, the taxpayer must then demonstrate that the IRS’s assessment is incorrect
and prove the correct amount of tax. United States v. General Dynamics, 481 U.S. 239 (1987).
In this case, the parties dispute whether Plaintiff has established the amount of refund, if any, is
due because they disagree on whether Plaintiff is entitled to the foreign tax credit and the foreign
earned income exclusion.
1. Foreign Tax Credit
First, Plaintiff argues that the IRS’s assessments for the years 2000 through 2006 are not
correct because they fail to account for the foreign tax credit. Plaintiff asserts that Herrick was
entitled to the credit because of his payment of income tax to the Philippines during those years.
Plaintiff must establish the actual amount of taxes ultimately paid to the Bureau of Internal
Revenue of the Philippines (“BIR”) before this credit can be applied and accurately calculated.
The parties agree that Herrick lived, worked, and paid taxes in the Philippines. Prior to
the filing of this action, Plaintiff provided the IRS with Herrick’s copies of the tax returns he
filed in the Philippines. During discovery in this case, Plaintiff obtained Herrick’s employer’s
records relating to Herrick’s tax filings from 2000 through 2006 and a certification from the BIR
with respect to the taxes Herrick paid from 2001 through 2006. The BIR did not provide a
certification for the year 2000 because neither the BIR nor Herrick’s employer could locate the
specific form, Form 1604-CF, showing the transmittal of the tax payment. However, Herrick and
his employer both have record of his Philippines tax returns (Forms 1700 and 2316) for the year
Defendant argues that the tax returns from Herrick’s records and his employer’s records
are not sufficient for the year 2000. In addition, Defendant contends that the information for the
years 2001-2006 does not demonstrate whether subsequent adjustments were made that could
have resulted in a reduced amount of those liabilities. Therefore, Defendant claims that the
present record does not allow any party to calculate the correct amount of tax refund due, if any,
to Plaintiff. In the alternative, Defendant asks the court to defer ruling on Plaintiff’s motion until
Defendant can obtain additional information from the BIR. Plaintiff unsuccessfully attempted to
obtain complete account transcripts for each tax year from the BIR. After being informed of this
fact, Defendant requested the information under a tax treaty between the United States and the
Philippines. A response to that request was due December 15, 2015, but has not yet been
received. Defendant requests the court to defer action on the motion under FRCP 56(d) until
such information is received.
However, there is no evidence that the amount of taxes on the year 2000 returns is
incorrect or that adjustments were later made to the taxes paid for 2001-2006, which have been
certified by the Philippines BIR. Defendant is merely speculating that there may be additional
information. Rule 56(b) requires more than speculation that there may be additional facts that
could be found. Plaintiff explained, and Defendant did not disagree, that under the Philippines’
tax law, adjustments and refunds are facilitated through employers rather than the Philippines
BIR. Employers are required by the National Internal Revenue Code to deduct and withhold
income tax from the compensation of their employees. If it is determined that the tax withheld
from the employee’s compensation has exceeded his or her tax due for the entire year, the
employer is required to give the tax refund by a given date. Any information regarding
adjustments or refunds, therefore, would be in the possession of Herrick’s employer, not the BIR,
and there is no such evidence. Therefore, the court concludes that, based on the evidence before
the court, which the court finds sufficient, Plaintiff is entitled to apply the foreign tax credit to his
2000-2006 tax returns.
2. Foreign Earned Income Exclusion
Second, Plaintiff contends that the IRS’s assessments of Herrick’s taxes are incorrect
because it does not apply the foreign earned income exclusion. See 26 U.S.C. § 911. Herrick
was eligible for the exclusion because he spent more than 330 days of each calendar year in a
country other than the United States and qualified as a “bona fide resident” of the Philippines
from 2000 through 2006.
However, Defendant contends that Plaintiff is not entitled to the foreign earned income
exclusion, set out in 26 U.S.C. § 911, because that exclusion is only available if a taxpayer makes
an election on a timely filed income tax return, an amendment to a timely filed return, or within
one year after the due date of the return. Id.; 26 C.F.R. § 1.911-7(a)(2). In this case, it is
undisputed that Herrick did not file timely returns. In addition, the estate did not file returns until
May 2, 2011, well beyond one year after the due date of the return for the last year at issue
Defendants argument, however, relies only on the first three subsections of Treasury
Regulation § 1.911-7(a)(2)(i) and ignores the fourth subsection, Subsection (D). Subsection (D)
applies when the income tax return is filed after the periods described in subsections (A) through
(C). Subsection (D) allows a section 911 election to be made
(D) With an income tax return filed after the period described in paragraphs
(a)(2)(I) (A), (B), or (C) of this section provided (1) The taxpayer owes no federal income tax after taking into account the
exclusion and files Form 1040 with Form 2555 or a comparable form attached
either before or after the Internal Revenue Service discovers that the taxpayer
failed to elect the exclusion; or
(2) The taxpayer owes federal income tax after taking into account the
exclusion and files Form 1040 with Form 2555 or a comparable form attached
before the Internal Revenue Service discovers that the taxpayer failed to elect the
Treasury Regulation § 1.911-7(a)(2)(i)(D) plainly allows a taxpayer to make the foreign
earned income exclusion after the time periods cited by Defendant have expired in certain
situations. In addition, Plaintiff cites to IRS Chief Counsel Advice 200226010, issued March 20,
2002, referring to the Treasury Regulation, as support for its assertion that the foreign earned
income exclusion can be filed at any time: “The intent of this [treasury] regulation is to allow a
taxpayer whose only income at issue is excluded foreign earned income to file a late section 911
election.” Counsel Advise 20022610 further states that “the tax examiner should examine
whether a taxpayer has a refund or a balance due. If the taxpayer has a refund or no balance due,
the taxpayer ‘owes no federal income tax under Treas. Reg. §§ 1.911-7(a)(2)(D)(1) and (2) and
does not need to request a private letter ruling from us.”
Plaintiff asserts that Herrick owes no federal income tax under Treasury Regulation §
1.911-7(a)(2)(i)(D) because it is undisputed that all assessed tax payments have been paid prior
to the filing of these refund claims. Therefore, Plaintiff claims that its foreign earned income
elections were validly filed under Subsection (D) even though they were filed after the periods
set forth in Treasury Regulation § 1.911-7(a)(2)(i)(A), (B), or (C).
In analyzing whether Plaintiff fits within Treasury Regulation § 1.911-7(a)(2)(i)(D), the
court notes that there are two prongs to Subsection (D). Under the first prong of subsection (D),
if Herrick owes no federal income tax after taking into account the exclusion, he can file late and
take advantage of the exclusion whether or not the IRS has discovered his failure to elect the
exclusion. Plaintiff claims that the first prong of subsection (D) applies because the IRS already
has Herrick’s money and it does not owe the IRS. This analysis, however, ignores that Herrick
had income in addition to his foreign earned income. Herrick had interest and dividend interest
in addition to his foreign earned income and Plaintiff admits that Herrick would have had about
$73,000 in tax liability for 2000-2006 even with the exclusion applied. Therefore, although there
is no tax owing, the first prong of Subsection (D) does not appear to apply to this case.
The second prong of Subsection (D), however, applies if there is still some tax liability
owing but the IRS has not discovered that Herrick failed to elect the exclusion. Because Herrick
has some tax liability for interest and dividend income in addition to his foreign earned income,
the second prong applies if Plaintiff made the election before the IRS discovered Herrick’s
failure to elect the exclusion. In this case, the IRS discovered that Herrick failed to file tax
returns from 2000-2006, but that does not necessarily mean that the IRS discovered Herrick’s
failure to elect the exclusion. The IRS did not apply the foreign earned income exclusion when it
filed the substitute tax returns for Herrick. Therefore, there is no evidence that the IRS
discovered that Herrick failed to elect the exclusion. Plaintiff notified the IRS that the exclusion
applied when it filed Herrick’s tax returns. Therefore, the court concludes that Plaintiff timely
made a § 911 election of the foreign earned income exclusion under the second prong of
Subsection (D) and the foreign earned income exclusion applies to Herrick’s 2000-2006 tax
3. Refund Amount
Based on the above analysis, the court concludes that the facts necessary for determining
the proper refund are before the court. Plaintiff is entitled to a refund when the foreign tax credit
and the foreign earned income exclusion are correctly applied to Herrick’s 2000-2006 tax returns.
In addition, when a taxpayer overpays tax and is not paid the overpayment until after the due date
of the return, 26 U.S.C. § 6611 interest accrues on the balance of the overpayment and is also
payable to the taxpayer. Plaintiff’s counsel has provided the court with detailed calculations,
including the refund amount and interest due to Plaintiff and the tax, penalties, and interest due
to the IRS. The court has reviewed these calculations and supporting documentation and
concludes that such calculations are correct. Plaintiff calculates that it is entitled to a refund plus
interest, less tax, penalties, and interest due the IRS, in the amount of $1,197,979.15. The court
concludes that Plaintiff has properly met its burden of establishing the correct amount of refund
and Plaintiff is entitled to summary judgment in its favor in the amount of $1,197,979.15.
Based on the above reasoning, Plaintiff’s Motion for Summary Judgment [Docket No.
24] is GRANTED. Plaintiff is entitled to judgment against Defendant in the amount of
$1,197,979.15. The Clerk of Court is directed to enter Judgment in Plaintiff’s favor and close
the case, each party to bear its own fees and costs.
Dated this 25th day of March, 2016.
BY THE COURT:
Dale A. Kimball,
United States District Judge
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