Rev. Rul. 77-483

Advice has been requested concerning the computation of the amount of the deemed paid forign tax credit under section 902(a)(1) of the Internal Revenue Code of 1954 and the consequent reduction in the earnings and profits of the distributing foreign corporation, under the circumstances described below.

X, a domestic corporation, owns all of the voting stock of a foreign corporation Y. X files its Federal income tax return on a calendar year basis. X received a dividend of certain appreciated property from Y on March 15th. Y had earnings and profits sufficient in amount to cover the fair market value of the property distributed. Y paid income taxes to country Z in which it was organized and in which it conducted its business. X has elected to take the foreign tax credit, with respect to the dividend, pursuant to section 902 of the Code, for the taxable year. The country Z tax in question is a creditable income tax for purposes of section 901(b).

The questions in the instant case are:

(1) what amount of the distribution should be taken into account under section 902 of the Code; and

(2) whether the earnings and profits of Y should be reduced by the adjusted basis of the property distributed or by its fair market value at the time of distribution.

Section 902 of the Code provides, in general, that a domestic corporation that owns at least 10 percent of the voting stock of a foreign corporation from which it receives dividends in any taxable year that were paid out of accumulated profits shall be deemed to have paid a certain proportion of any creditable income tax paid by such foreign corporation to any foreign country or to any possession of the United States on or with respect to such accumulated profits.

Section 1.902-(1)(b) of the Income Tax Regulations provides, in general, that such a domestic corporate shareholder that receives dividends in any taxable year from its first-tier corporation shall be deemed to have paid a certain proportion of any creditable foreign income tax paid or accrued by such first-tier foreign corporation and that such deemed paid taxes shall, subject to certain conditions and limitations, be included in the credit for foreign taxes allowed by section 901 of the Code.

Section 301(a) of the Code provides, generally, that a distribution of property made by a corporation to a shareholder with respect to its stock shall be treated in the manner provided in section 301(c).

Section 301(c) of the Code provides, in part, that the portion of the distribution that is a dividend shall be included in gross income.

Section 301(b)(1)(C) of the Code provides, in part, that if the shareholder is a corporation and the distributing corporation is a foreign corporation, the amount taken into account with respect to property (other than money) shall be the fair market value of such property.

Section 301(d)(2) of the Code provides rules for determining the basis of property received in a distribution by a corporate stockholder.

Section 301(d)(4) of the Code provides, in part, that in the case of property described in section 301(b)(1)(C), the basis of property received in a distribution shall be determined by substituting the amount found in such section for the amount described in section 301(d)(2).

Section 312(a)(3) of the Code provides, in part, that on the distribution of property by a corporation with respect to its stock, the earnings and profits of the corporation (to the extent thereof) shall be decreased by the adjusted basis of the distributed property.

Rev. Rul. 71-65, 1971-1 C.B. 212, holds, in part, that a distribution by a foreign corporation to a domestic corporation of appreciated property constituting a dividend is included in computing the foreign tax credit under section 902(a) of the Code as a dividend at the same value as it is included in gross income.

In H. H. Robertson Co. v. Commissioner, 59 T.C. 53 (1972), aff'd unpublished opinion (3rd Cir. 1974), the court held that, pursuant to the provisions of section 312(a)(3) of the Code, where there is a distribution of appreciated property as a dividend, the earnings and profits of the distributing corporation are to be reduced by the amount of the basis of the distributed property rather than by the amount of its fair market value.

Accordingly, for purposes of computing the deemed paid foreign tax credit under section 902(a) of the Code available on the distribution to X, the amount of the distribution to be taken into account will be the fair market value of the property at the time of the distribution. However, the earnings and profits of Y shall be reduced by the adjusted basis of the property distributed. Pursuant to section 301(d)(4), the basis of the property received by X in the distribution will be the fair market value determined as of the date of the distribution.