Rev. Rul. 73-182

The Internal Revenue Service has been asked a series of questions relative to the special rules of the minimum distributions provisions set out in section 1.963-4(b) and (c) of the Income Tax Regulations as they pertain to distributions in excess of the minimum distributions required under section 963 of the Internal Revenue Code of 1954.

Section 963 of the Code operates in conjunction with section 951 of the Code. Section 951(a)(1)(A)(i) of the Code, in pertinent part, requires a United States shareholder of a controlled foreign corporation, as defined in section 957 of the Code, to include in his gross income for his taxable year his pro rata share of the Subpart F income for the taxable year of the foreign corporation.

Section 963(a) of the Code provides, in relevant part, that in the case of a United States shareholder which is a domestic corporation and which consents to all the regulations prescribed by the Secretary or his delegate prior to the last day prescribed by law for filing its income tax return for the taxable year (including extension of time for filing such return), no amount shall be included in gross income under section 951(a)(1)(A)(i) of the Code for the taxable year with respect to the subpart F income of a controlled foreign corporation, if in the case of controlled foreign corporations described in section 963(c)(2) and (3) of the Code, the United States shareholder receives a minimum distribution of the consolidated earnings and profits for the taxable year of all such controlled foreign corporations.

Section 1.963-2 of the regulations provides, in part, that, in the case of a chain or group election, the amount of the minimum distribution required to be received by a United States shareholder with respect to stock to which the election under section 963 of the Code applies shall be the amount, if any, determined by the multiplication of the statutory percentage applicable for the taxable year by the consolidated earnings and profits with respect to such shareholder for the taxable year of the chain or group to which the election relates.

Section 1.963-3(a)(1) of the regulations states, in part, that a distribution to the United States shareholder by a foreign corporation included in a chain or group shall count toward a minimum distribution for the taxable year of such shareholder to which the election under section 963 of the Code relates only to the extent that (i) it is received by such shareholder during such year or within 180 days thereafter, (ii) it is a qualifying distribution as described in section 1.963-3(b) of the regulations, (iii) under section 1.963-3(c) of the regulations it is deemed to be distributed from the earnings and profits of the foreign corporation to which the election relates, and (iv) such shareholder chooses to include it in gross income for the taxable year of such shareholder to which the election relates notwithstanding that such distribution, by reason of its receipt after the close of such year, would ordinarily be includible in the gross income of a subsequent year. Amounts taken into account under section 1.963-3(a)(1) of the regulations as gross income of the United States shareholder for the taxable year to which the election relates shall not be considered to be includible in the gross income of such shareholder for a subsequent taxable year. For purposes of determining the foreign tax credit under sections 901 through 905, foreign income tax paid or accrued by such shareholder on or with respect to such amounts shall be treated as paid or accrued during the taxable year of such election.

Section 1.963-4(a)(1)(ii) of the regulations provides, in pertinent part, that notwithstanding the fact that distributions of the type described in section 1.963-3 of the regulations are made by a chain or group to a United States shareholder in an amount sufficient to constitute a minimum distribution, no exclusion shall be allowable under section 963 of the Code to such shareholder with respect to such chain or group unless with the application of the special rules set forth in section 1.963-4(b) and (c) of the regulations-- (a) such shareholder receives a pro rata minimum distribution (as defined in section 1.963-4(a)(2)(i) of the regulations) from such chain or group for such taxable year, or

(b) to the extent necessary, the amount of foreign income tax allowable as a credit for such year under section 901 of the Code with respect to the distribution which is made is reduced and the credit for the reduction is deferred, so that the overall United States and foreign income tax for the taxable year with respect to such distribution equals or exceeds the lesser of--

(1) the overall United States and foreign income tax which would be paid or accrued for such year with respect to a pro rata minimum distribution received by such shareholder from such chain or group for such year, and

(2) 90 percent of an amount determined by multiplying the sum of the consolidated earnings and profits and the consolidated foreign income taxes of such chain or group for the taxable year with respect to such shareholder by a percentage which equals the sum of the normal tax rate and surtax rate prescribed by section 11 of the Code for the taxable year of the shareholder.

Revenue Ruling 68-640, 1968-2 C.B. 321, holds that the special rules of section 1.963-4(b) and (c) of the regulations do not apply to distributions in excess of the minimum distribution required pursuant to an election made under section 963(a) of the Code. It further holds that the rules of section 902 of the Code apply with respect to such excess distributions.

Revenue Ruling 68-522, 1968-2 C.B. 320, holds that an amount received in excess of the distribution required under section 963 of the Code does not qualify as a minimum distribution. It further holds that the excess distribution which was made within the distribution period but beyond the close of the tax year is to be taken into account as a distribution in the taxable year of receipt.

Question (1): What is the proper method of identification of the amount and source of distribution considered as in excess of the minimum distribution required?

Answer: On the basis of section 1.963-4(a), (b) and (c) of the regulations, the required minimum distribution in the case of a non-pro rata distribution is deemed to be whatever amount is necessary to produce an overall tax burden at least equal to what the burden would have been if the distribution had been a pro rata distribution. In any case in which the actual distribution results in a deferral of foreign tax credit because of the minimum overall tax burden rule, no part of the distribution will be deemed to be an excess distribution.

The criteria for classifying distributions as minimum or excess are as follows:

(i) When no distribution is required under section 963 of the Code, any amount distributed is considered in excess;

(ii) Where the distribution from each foreign corporation in the chain or group is pro rata to the earnings and profits for the taxable year of each foreign corporation, then any excess distribution is deemed as derived pro rata from each corporation;

(iii) Where a non-pro rata distribution is made from only two foreign corporations, the excess amount is deemed to have come entirely from the corporation which distributes more than its pro rata share, the precise amount to be treated as excess being the total distribution from that corporation less so much of the distribution as is necessary to produce the tax burden which would have resulted from a pro rata distribution;

(iv) Where more than two foreign corporations are involved in a non-pro rata distribution, but each corporation distributes more than its pro rata share of the required minimum distribution, the excess amount is the difference between each distributing corporation's actual distribution less its pro rata share of the required minimum distribution;

(v) Where more than two foreign corporations are involved in a non-pro rata distribution, and one or more of the distributing corporations distributes less than its pro rata share of the required minimum distribution, none of the latter distributions is considered excess, and the United States shareholder may designate such portion or portions of the actual distributions in excess of the pro rata distributions from the other corporations, which is to be treated as components of the minimum distribution, so long as the overall tax burden relating to the distributions that were less than pro rata and the portion of other distributions designated as components of the minimum distribution by the shareholder equals what the tax burden would have been if a pro rata minimum distribution had been made. Distributions not in excess of the pro rata minimum distribution are required to be designated as components of the minimum distribution.

Question (2): If some of the distributions counting toward a minimum distribution are received within 180 days after the close of the taxable year of the foreign corporations in the chain or group and within the distribution period elected by the United States shareholder, what is the year of taxability if some of the distributions are deemed to be excess distributions?

Answer: (i) Revenue Ruling 68-522 holds that an amount received in excess of the distribution required under section 963 of the Code does not qualify as a minimum distribution. Revenue Ruling 68-522 further holds, in effect, that the excess distribution is to be taken into account as a distribution in the taxable year of receipt. Therefore, if the excess distribution is made in the tax year (other than during the special extended distribution period), no part of such excess may be treated as a minimum distribution in the subsequent tax year.

(ii) If the excess distribution is made beyond the tax year but within the special extended distribution period then the excess may be treated as a minimum distribution in the subsequent tax year if the United States shareholder so chooses. In effect a legal fiction is created by considering the end of the distribution period to be the date that the excess amount is distributed. The legal fiction is that the excess amount is deemed distributed on the next day which is day 1 of the next tax year. The choice to have the excess amount count toward the minimum distribution in the subsequent tax year does not constitute a modification or revocation of election under section 1.963-1(c)(3)(ii) of the regulations. This rule is illustrated by the following example: A corporate United States shareholder elects a distribution period of 180 days beyond the close of the tax year. The amount of the distribution made on the 178th day beyond the close of the tax year is $105. It is subsequently determined that the minimum distribution required is $100. The excess $5 may be taken into account in determining the minimum distribution required for the subsequent tax year if the shareholder so chooses.

Question (3): What method should be used for computing the foreign tax credit on excess distributions?

Answer: The method under section 902 of the Code as modified herein should be used for the computation of the foreign tax credit on excess distributions. The special rule of section 1.963-4(c)(2)(i) of the regulations only applies to the extent of the minimum distribution required. Therefore, in the computation under section 963 of the Code, the denominator of the foreign tax credit formula is the consolidated earnings and profits of the foreign corporation in the chain or group (after allocation of deficits and after the deduction of foreign taxes paid). This principle is illustrated by the following example in which a group election under section 963 of the Code is made for 1971 consisting of controlled foreign corporations X and Y. X has pretax and predistribution earnings and profits of $100 and Y has sustained a deficit of $20; X is subject to foreign income tax at the rate of 30 percent and is not a less developed country corporation. Applying section 1.963-4(b) and (c) of the regulations, the required minimum distribution and the foreign tax credit attributable thereto are as follows:

                                         X         Y         Total

                                                             X

Distribution - $44.50

Question (4): Should the earnings and profits of chain corporations as determined under section 1.963-2(d) of the regulations for purposes of a minimum distribution be recalculated to determine the foreign tax credit applicable to excess distributions under the traditional averaging concept of section 902 of the Code? Answer: Section 1.963-2(d) of the regulations provides the method of computing earnings and profits for purposes of section 1.963-1 through 1.963-8 of the regulations. It does not provide the method for computing earnings and profits on excess distributions to which section 902 applies. Section 1.902-3(c)(5)(ii) of the regulations provides that for any taxable year of a foreign corporation with respect to which there applies a valid election by a corporate United States shareholder to exclude from its gross income for the taxable year the subpart F income of a controlled foreign corporation, the earnings and profits of such foreign corporation for such year with respect to such shareholder must be determined, for purposes of section 902 of the Code, under the rules provided by section 1.964-1 of the regulations, even though the amount of the minimum distribution required is zero. Accordingly, the traditional averaging concept under section 902 of the Code and the regulations thereunder apply in determining accumulated profits for purposes of computing the deemed paid foreign tax credit on amounts distributed in excess of the minimum distribution required. For this purpose the rules in section 1.964-1(d) and (e) of the regulations, relating to rates involved in translating into United States dollars and exchange gain or loss, apply in determining the amount of earnings and profits.

Revenue Rulings 68-522 and 68-640 are clarified and amplified.