Rev. Rul. 57-106

Advice has been requested whether a domestic corporation doing business in a foreign country is allowed a credit for income taxes paid or accrued under the provisions of section 901 of the Internal Revenue Code of 1954, under the circumstances set forth below.

A foreign corporation purchased for a stated price substantially all the assets of two affiliates of a domestic corporation. The affiliates were doing business in a foreign country but were incorporated in the United States. In addition to the purchase price, the purchaser agreed to pay all taxes relating to the sale. The foreign corporation was granted a subsidy by its country equivalent to 100 percent of the taxes as a result of the acquisition of the property. When the domestic corporation filed its consolidated returns for United States income taxes, it included the income of the affiliated companies. The amount of foreign taxes imposed on the seller but paid by the purchaser was included in the United States income tax return of the domestic corporation and affiliates as a part of the amount realized on the sale and a credit claimed for the foreign taxes as being paid or accrued under the provisions of section 901 of the Internal Revenue Code of 1954.

There is an analogy in this situation with the concept set out in section 39.23(a)-10(a) of Income Tax Regulations 118, which are made applicable to the 1954 Code by Treasury Decision 6091, C.B. 1954-2, 47, wherein the amount of taxes paid by a tenant for a landlord are held to be taxable income to the landlord, and the amount of such taxes are deductible by the landlord.

Under the provisions of section 901(b) of the Code, a domestic corporation shall be allowed a foreign tax credit, subject to the limitation of section 904, with respect to the amount of any income, war profits, and excess profits taxes paid or accrued during the taxable year to any foreign country or to any possession of the United States.

Accordingly, it is held that income taxes payable to a foreign country which have accrued against a domestic corporation and which are assumed by a foreign corporation as an incident to the sale of assets of the domestic corporation, constitute part of the sales price of the assets and are allowable as a credit to the domestic corporation, which is the entity upon whom the foreign government imposed the tax.