PORTFOLIO

Indirect Foreign Tax Credits (Portfolio 902)

Tax Management Portfolio, Indirect Foreign Tax Credits, contains a detailed analysis of §902, under which a domestic corporation may be deemed to have paid, for purposes of the §901 foreign tax credit, foreign income taxes paid by a foreign corporation from which the domestic corporate shareholder receives a dividend.

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DESCRIPTION

The Portfolio also contains a detailed analysis of §960, under which a domestic corporation that is taxed on earnings and profits of a controlled foreign corporation under §951 may be deemed to have paid foreign income taxes paid by the foreign corporation.

The Portfolio examines the election provided by §962 under which a noncorporate domestic shareholder may take advantage of the §960 credit. The Portfolio also examines other special situations in which an indirect credit may arise: when a U.S. shareholder sells stock in a controlled foreign corporation and the gain is recharacterized as a dividend under §1248; when a U.S. shareholder is deemed to receive a dividend in a reorganization or other transaction covered by §367(b); when a U.S. shareholder is taxed on income of a passive foreign investment company; and when a U.S. shareholder receives certain distributions from a DISC or a FSC.
The Portfolio examines in detail the interrelationship of the indirect credit rules and the §904 limitation on the foreign tax credit. The Portfolio also examines the rules of §78, which requires a U.S. shareholder to gross up a dividend or §951 inclusion from a foreign corporation by the amount of foreign taxes deemed paid. Finally, the Portfolio examines the effect on indirect foreign tax credits of §482 adjustments and refunds or redeterminations of foreign tax.


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AUTHORS

Indirect Foreign Tax Credits was authored by the following experts.
JOHN L. CARR
John L. Carr, Jr., B.S., Auburn University (1969); J.D., University of Georgia (1978); retired partner, Winston & Strawn LLP; Editor, University of Georgia Law Review (1977-78); member, International Fiscal Association.

MICHAEL C. MOETELL
Michael C. Moetell, B.S. (cum laude), Villanova University (1982); J.D. (cum laude), Harvard Law School (1985); member, International Fiscal Association, American Bar Association's Section of Taxation, D.C. Bar Association's Tax Section.

TABLE OF CONTENTS

Detailed Analysis

I. Overview of Indirect Foreign Tax Credits

II. Indirect Credit Under § 902

A. Overview

B. Qualification for the § 902 Credit

1. Historical Background

2. Basic Requirements

a. Foreign Corporation Requirement

(1) Classification Issues

(2) Foreign versus Domestic Status

b. Dividend Requirement

c. Domestic Corporate Shareholder Requirement

(1) "Domestic" Requirement

(2) "Corporation" Requirement

3. First-Tier Corporation Ownership Requirement

a. 10% Voting Stock Requirement

(1) In General

(2) Stock Attribution from Corporations

(a) In General

(b) Rev. Rul. 74-459

(c) Rev. Rul. 85-3

(d) First Chicago Corp.

(i) Explanation

(ii) Treatment of Consolidated Groups After First Chicago

(3) Stock Attribution from Pass-Through Entities

b. Measurement of Voting Stock Ownership

(1) In General

(2) Rev. Rul. 84-6

4. Ownership Requirements for Lower-Tier Foreign Corporations

a. In General

b. 10-Percent Direct Ownership Requirement

c. "Qualified Group" Definition

5. Application of Ownership Requirements to § 304 Transactions

C. Computation of the § 902 Credit

1. Section 902 Computational Rules

a. Overview

b. Post-1986 Computational Rules

(1) In General

(2) Post-1986 Foreign Income Taxes

(a) In General

(b) Definition of Foreign Income Taxes

(3) Post-1986 Undistributed Earnings

(4) Dividends

c. Coordination Between Pre-1987 and Post-1986 Computational Rules

(1) In General

(2) Special Effective Date

d. Pre-1987 Computational Rules

(1) In General

(2) Accumulated Profits

2. Special Allocations of Foreign Income Taxes

3. Effect of Losses on § 902 Credit

a. Effect of Losses on Allocation of Dividend Among Pre-1987 Years

b. Effect of Post-1986 Losses

c. Carryforward of Pre-1987 Losses to Post-1986 Years

d. Carryback of Post-1986 Losses to Pre-1987 Years

4. Distributions from Lower-Tier Corporations

a. In General

(1) Step 1: Compute Taxes Deemed Paid by First-Tier Corporation

(2) Step 2: Compute Taxes Deemed Paid by Domestic Shareholder

b. Repatriation of Earnings of Lower-Tier Corporation from Pre-1987 Years

5. Effect of Intervening Noncontrolled Status on Pooling

III. Indirect Credit Under § 960

A. Overview of § 960 Credit

B. Background of § 960 Credit

C. Qualification for § 960 Credit

1. Overview

2. Section 951 Inclusions from First-Tier Corporations

3. Section 951 Inclusions from Lower-Tier Corporations

4. Interaction of § 902 and § 960 Ownership Rules

5. Comparison of § 951 and § 960 Ownership Rules

D. Computation of § 960 Credit

1. Overview

2. Post-1986 Computational Rules

a. In General

b. Post-1986 Foreign Income Taxes

c. Post-1986 Undistributed Earnings

3. Coordination Between Pre-1987 and Post-1986 Computational Rules

a. In General

b. Special Effective Date

4. Pre-1987 Computational Rules

5. Inclusion of § 902 Deemed Paid Taxes Under § 960

E. Coordination Rules for Distributions of Previously Taxed Income

1. Overview

2. Tracing of Distributions to Previously Taxed Income

3. Prevention of Double Credit - Section 960(a)(2)

4. Additional Foreign Taxes Incurred on Distributions of Previously Taxed Income - Section 960(a)(3)

5. Increase in Credit Limitation in Year of Distribution

a. Overview

b. Section 960(b) Rules for Taxable Years Beginning Before September 30, 1993

(1) Eligibility Requirements

(2) Amount of Increase in § 904 Limitation

c. Section 960(b) Mechanics for Taxable Years Beginning After September 30, 1993

(1) Eligibility Requirements

(2) Amount of Increase in § 904 Limitation

d. Transition Rules

IV. Section 960 Credit for Individuals: Section 962

A. Overview

B. Persons Eligible to Make the § 962 Election

C. Making the § 962 Election

1. Timing of Election

2. Contents of Election

3. Duration and Scope of Election

D. Consequences of the § 962 Election

1. Application of Corporate Income Tax Rates to § 951 Income

2. Availability of § 960 Indirect Credit

3. Second Level of Tax on Distributed Income

a. Overview

b. Taxation of Actual Distributions

c. Tracing Distributions to Previously Taxed Earnings

4. Possible Availability of § 960(b) Foreign Tax Credit

E. Deciding Whether to Make the Election

V. Indirect Credit Under § 1248

A. Introduction

B. Section 1248 Credit Qualification

1. In General

2. First-Tier Corporations

3. Lower-Tier Corporations

C. Section 1248 Credit Computation

1. In General

2. Issues Raised by Lower-Tier Corporations

3. Rules Applicable to Transferees

4. Coordination with § 904

D. Treatment of Individual Shareholders Under § 1248(b)

VI. Indirect Credit Under § 367(b)

Introductory Material

A. Historical Background

B. Computation of § 367(b) Credit

VII. Indirect Credit for Passive Foreign Investment Company (PFIC) Taxes

A. Overview of PFIC Rules

B. The Foreign Tax Credit Under the Excess Distribution Regime

1. Overview of § 1291 Fund Taxation

2. Foreign Tax Credit with Respect to Excess Distributions

3. Foreign Tax Credit with Respect to Disposition of Stock

C. The Foreign Tax Credit Under the Qualified Electing Fund (QEF) Regime

1. Computation of Indirect Credit Under § 1293

a. In General

b. Section 904 Limitation

2. Effect of § 1294 Election

3. Coordination with Other Indirect Credit Rules

4. Lower-Tier Issues

VIII. Indirect Credits for Export Subsidiaries

A. Introduction

B. Indirect Credit Under DISC Rules

C. Indirect Credit Under FSC Rules

D. Extraterritorial Income Rules

E. Current Law

IX. Coordination of Indirect Credits with § 904

A. Overview

B. Pre-1987 Distributions or § 951 Inclusions in Pre-1987 Years

C. Post-1986 Distributions or § 951 Inclusions from Post-1986 Undistributed Earnings

1. Noncontrolled § 902 Corporations

2. Controlled Foreign Corporations

a. More-Than-90% Acquisition Rule

b. Effect of Losses on § 904 Limitation

(1) Deficit in Post-1986 Earnings of § 904 Basket

(2) Carryforward of Pre-1987 Deficits to Post-1986 Years

(3) Carryback of Post-1986 Losses to Pre-1987 Years

D. Post-1986 Distributions from Pre-1987 Accumulated Profits

E. Effect of Intervening Noncontrolled Status

X. Dividend Gross-Up Under § 78

A. Background

B. General Rule

C. Timing of the § 78 Dividend

D. Amount of the § 78 Dividend

XI. Collateral Issues

A. Effect of § 482 Allocations

1. In General

2. Step 1 - Recompute Earnings and Profits of Foreign Corporation

3. Step 2 - Effect of § 482 Allocation on Dividend Determination

4. Step 3 - Recompute Foreign Income Tax

B. Section 905(c) Adjustments

1. In General

2. Foreign Tax Redeterminations Made in Taxable Years Beginning Before 1987

3. Foreign Tax Redeterminations Made in Taxable Years Beginning After 1986

a. Prospective Adjustments

b. Retroactive Adjustments


WORKING PAPERS

Working Papers

Table of Worksheets

Worksheet 1 Detailed Numerical Illustration

Worksheet 2 House Ways and Means Committee Report on the Deemed Paid Credit Provisions of the Tax Reform Act of 1985 Excerpts from H.R. Rep. No. 426, 99th Cong., 1st Sess. (1985) (pages 353-358)

Worksheet 3 Conference Report on the Deemed Paid Credit Provisions of the Tax Reform Act of 1986 Excerpts from H.R. Rep. No. 841, 99th Cong., 2d Sess. (1986) (pages II-589-590)

Bibliography

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