Rev. Rul. 57-116

Advice has been requested concerning the limitation applicable to a foreign tax credit of an affiliated group of corporations filing a consolidated income tax return where consolidated income tax liability was computed according to the alternative tax method.

M corporation is parent corporation of an affiliated group of corporations which filed a consolidated income tax return for the calendar year 1955. The income of M consisted of dividends from domestic corporations, dividends from a wholly-owned foreign subsidiary, and net long-term capital gains. The net long-term capital gains were sufficiently substantial to result in the consolidated income tax liability being computed under the alternative tax method. The foreign subsidiary paid income tax to the foreign country on income received in that country.

Section 904 of the Internal Revenue Code of 1954 provides that the amount of the credit for taxes paid or accrued to any country shall not exceed the same proportion of the tax against which such credit is taken which the taxpayer's taxable income from sources within such country bears to its entire taxable income for the same taxable year. For the purpose of the limiting fraction under section 904, the term `taxable income' as used therein means the taxable income as defined in section 63 of the Code; and the tax to which the limiting fraction is applied is the total United States tax, whether computed by the regular method or by the alternative tax method.

Accordingly, it is held that where substantial net long-term capital gains were realized in a taxable year by a member of an affiliated group of corporations which may result in the consolidated tax liability being computed by the alternative tax method, the fraction limiting a foreign tax credit, as provided in section 904 of the Code, is applicable to the total United States income tax of the affiliated group for the taxable year, whether computed by the regular method or by the alternative method.