United States v. W. Keith Woodmansee and Teresa Woodmansee

In 1971 and 1972, appellant-taxpayer amended his tax returns for 1964-1967, claiming for the first time credit for foreign income taxes paid in 1961-1963. The Internal Revenue Service allowed the credits and granted refunds. Subsequently, it decided this determination was incorrect and sued to recover the sums refunded. The district court granted summary judgment for ap-pellee ( 388 F.Supp. 36 ), and taxpayer appealed. We reverse.

During the years 1961-1963, taxpayer lived in Germany; his entire income for these years was exempt from U.S. income tax. He did, however, pay income tax to Germany. § 901 of the Internal Revenue Code permits a United States taxpayer to take either a credit or deduction for foreign income taxes. Under § 904(c), the credit may be carried back 2 years and forward 5 years; the carryover is available only if “the taxpayer chooses to have the benefits of this subpart.” Deduction treatment is allowed only in the year the foreign tax is paid.

Appellant first indicated which treatment — deduction or credit — he preferred when he filed his amended returns in 1971 and 1972. For the years 1961-1963, appellant had no income, taxable under U.S. law, against which…