The evolving technical taxpayer and voluntary payment rules

For years, the debate in the foreign tax credit area was usually over whether a foreign tax was an income tax. On the other hand, recent changes relating to the technical taxpayer rule and the voluntary payment rule have exposed taxpayers to new challenges. This article presents a summary of the Code Sec 901 voluntary payment rule, and a recap of three developments relating to that rule that impact the technical taxpayer rule. The IRS recently finalized the so-called FTC generator regulation, which creates a new category of voluntary payment. In general, under this new regulation, foreign income taxes paid in a structured passive investment arrangement are considered voluntary payments. Under the technical taxpayer rule the taxpayer would traditionally be allowed a credit for the foreign income taxes paid, the credits are disallowed. The arguments made by the IRS include Code Sec 269 and economic substance doctrines, but even a good business purpose is apparently not sufficient to preclude an IRS challenge.