Treasury Regulation Declared Invalid in "Swallows Holding"

In Swallows Holding Ltd. v. Commissioner of Internal Revenue Service, 126 TC No. 6 (January 26, 2006) the Internal Revenue Service (IRS) attempted to disallow all deductions claimed on certain late filed tax returns by a foreign corporation because the returns were filed after the expiration of the 18-month grace period set forth in Treasury Regulation 1.882-4(a). In a detailed and well reasoned opinion, the tax court held that a timely filing requirement is not found in Section 882(c)(2) and further held that the 18-month timely filing requirement in Treasury Regulation 1.882-4(a) is invalid and therefore a foreign corporation need not comply with that requirement in order to secure deductions and credits. The court also made clear, however, that such deductions and credits could nonetheless be disallowed if the IRS files a tax return for the taxpayer because the taxpayer has failed to do so. The IRS has not yet indicated whether it will appeal the decision.