Rev. Rul. 74-83

Advice has been requested concerning the proper method of computing the deemed paid credit, under section 902(a)(2) of the Internal Revenue Code of 1954, by a domestic corporate shareholder making a chain or group election to receive a minimum distribution from its controlled less developed country corporation (LDCC) in a situation involving distributions in excess of the required minimum distribution.

Section 902(a)(2) of the Code provides that a corporation which owns at least 10 percent of the voting stock of a foreign corporation from which it receives dividends in any taxable year shall, to the extent such dividends are paid by such foreign corporation out of accumulated profits (as defined in section 902(c)(1)(B)) of a year for which such foreign corporation is a LDCC, be deemed to have paid the same proportion of any income, war profits, or excess profits taxes paid or deemed to be paid by such foreign corporation to any foreign country on such accumulated profits, which the amount of such dividends bears to the amount of such accumulated profits.

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

Section 963(a) of the Code provides, in pertinent 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, no amount shall be included in gross income under section 951(a)(1)(A)(i) 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), the United States shareholder receives a minimum distribution of the consolidated earnings and profits for the taxable year of all such controlled foreign corporations.

Rev. Rul. 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.

Rev. Rul. 68-640, 1968-2 C.B. 321, holds that the special rules of section 1.963-4(b) and (c) of the Income Tax 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 apply with respect to such excess distributions.

Under section 963 of the Code, a chain or group election may permit a domestic corporate shareholder a substantial acceleration of the deemed paid foreign tax credit whenever one or more members of the chain or group have a deficit of earnings and profits for the year of the election. Sections 1.963-4(b)(2)(i) and 1.963-4(c)(2)(i)(c) of the regulations specify that under a minimum distribution election, the deficits of unprofitable foreign subsidiaries shall be allocated against and reduce the earnings and profits of profitable foreign subsidiaries in the chain or group calculating the section 902 credit. Thus, the denominator of the section 902 foreign tax credit fraction of each profitable member of the chain or group may be decreased. Therefore, each dollar of dividends paid by the profitable foreign corporation will generate a higher deemed paid foreign tax credit than if no chain or group election had been made. But, sections 1.963-4(b)(2)(i) and 1.963-4(c)(2)(i)(c) of the regulations offer no specific examples of how they are to be applied in the case of a LDCC.

The LDCC formula for the deemed paid section 902 credit is:

Dividends (accumulated) Deemed

Dividends Foreign income Deemed paid

Dividends from subsi- Accumulated profits of

In Rev. Rul. 73-182, it was held that the method under section 902 of the Code, as modified, should be used for the computation of the foreign tax credit on excess distributions.

Therefore, to prevent the necessity of using different formulas depending on whether an excess distribution or a required minimum distribution is involved, Rev. Rul. 71-406 is hereby revoked.

The formula for determining the deemed paid credit on all required minimum distributions by LDCC's is:

Step 1: Determine maximum deemed paid credit available without regard to section 963 of the Code.

Dividends (maximum

Required minimum

Step 3:

Excess dividend

The application of Steps 1, 2, and 3 is illustrated in the following example:

M, a domestic corporation, wholly owns foreign corporation P, a LDCC. P wholly owns S, which is also a LDCC. M makes a chain or group election for the purpose of section 963 of the Code. P's and S's earnings and profits and foreign income taxes are as follows:

                                            P       S       Total