Rev. Rul. 68-640
Rev. Rul. 68-640; 1968-2 C.B. 321
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- Code Sections
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- Tax Analysts Electronic Citationnot available
Citations: Rev. Rul. 68-640; 1968-2 C.B. 321
Modified by Rev. Rul. 74-83 Clarified and Amplified by Rev. Rul. 73-182
The special rules provided in 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 Internal Revenue Code of 1954. Therefore, the rules of section 902 of the Code apply with respect to such excess distributions.
The situations set forth below illustrate the proper computation of the foreign tax credit involving minimum distributions under section 963 of the Code.
Situation 1. -Domestic corporation M makes a group election for 1967 under section 1.963-1 of the regulations with respect to controlled foreign corporations X and Y , both of which are wholly owned directly by M . All such corporations use the calendar year as the taxable year. For 1967, 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 under section 902(d) of the Code; M receives a pro rata minimum distribution from the group and applies thereto the special rules of section 1.963-4(b) and (c) of the regulations; M also receives a distribution of $44.50 in excess of the minimum distribution; and M has no other income.
The United States income tax payable by M for 1967, assuming a tax rate of 48 percent, is as follows:
Computation under section 1.963-4 (b) and (c) of the regulations
======================================================================
X Y Total
______________________________________________________________________
Pretax and predistribution earnings and
profits (and deficit) of the group........ $100 ($20) $80
Foreign income tax.......................... 30 0 30
-------------------------
Consolidated earnings and profits........... 70 (20) 50
Allocations of deficit...................... 20 0 0
-------------------------
Adjusted consolidated earnings and profits
of the group.............................. 50 0 0
=========================
Effective foreign tax rate ($30/[$50+$30])
(percent).................................................. 37.5
Statutory percentage under section 963(b)
of the Code (percent)...................................... 51
Amount received by M as minimum distribution (.51 X $50)..... $25.50
Tax deemed paid by M for purposes of gross-up under
section 78 of the Code and foreign tax credit
($25.50/$50 X $30)......................................... 15.30
Remaining 1967 earnings and profits (accumulated profits
for purposes of section 902 in this case) for future
distributions to M ($70-$25.50)............................ 44.50
Foreign income tax attributable to remaining accumulated
profits ($30-$15.30)....................................... 14.70
Computation under section 1.902-3 of the regulations
X Corporation
Remaining accumulated profits in excess of foreign
taxes...................................................... $44.50
Foreign income taxes paid by X for 1967 on or with respect
to its remaining accumulated profits for such year......... 14.70
Additional dividends paid to M for 1967...................... 44.50
M Corporation
Amount received as minimum distribution under section 963 of
the Code................................................... $25.50
Amount of additional distribution............................ 44.50
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Total distribution...................................... 70.00
Gross-up under section 963 of the Code:
Under minimum distribution................... $15.30
Under section 902 of the Code................ 14.70 30.00
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Taxable income............................................... 100.00
======
U.S. tax before foreign tax credit ($100 X .48).............. 48.00
Less: Foreign tax credit (as determined under
gross-up above)................................... 30.00
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U.S. tax payable........................................ 18.00
Situation 2 .-Domestic corporation M makes a chain election for 1967 under section 1.963-1 of the regulations with respect to controlled foreign corporation X which is wholly owned directly by M , and with respect to controlled foreign corporation Y which is wholly owned directly by X . Each corporation uses the calendar year as the taxable year. X is not a less developed country corporation. M complies with the special rules of section 1.963-4(b) and (c) of the regulations for 1967. In 1967 the predistribution and pretax earnings and profits of X and Y are $0 and $100, respectively; Y pays foreign income tax of $30 and distributes $70 to X ; on such $70, X pays foreign income tax of $14; X distributes $40 to M during the year; M has no other income; and M chooses under section 1.963-2(d)(1)(iii) of the regulations to take the $14 of foreign income tax paid by X on the $70 distribution by Y to X into account in determining the effective foreign tax rate rather than count it toward the amount of the minimum distribution as provided in paragraph (b)(2) of section 1.963-3 of the regulations.
The United States income tax payable by M for 1967, assuming a tax rate of 48 percent, is as follows:
Computation under section 1.963-4 (b) and (c) of the regulations
======================================================================
X Y Total
______________________________________________________________________
Pretax earnings and profits............... $70 $100 $170
Reduction for intercorporate dividends.... 70 0 70
-------------------------
Pretax and predistribution earnings and
profits................................. 0 100 100
Foreign income tax................................. 30 30
-------------------------
Predistribution earnings and profits............... 70 70
Reduction for foreign income tax on inter-
corporate distributions................. 14 ....... 14
--------
Consolidated earnings and profits........................... 56
--------
Consolidated foreign income tax ($30+$14)................... 44
Effective foreign tax rate ($44/[$56+$44])
(percent)................................................. 1 44
Statutory percentage under section 963(b)
of the Code............................................... 0
Amount of minimum distribution required..................... 0
Computation under section 1.902-3 of the regulations
Y Corporation
Gains, profits, and income................................... $100
Foreign income taxes paid.................................... 30
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Accumulated profits in excess of foreign taxes............... 70
=======
Dividends paid to X during 1967.............................. 70
Foreign income taxes of Y deemed paid by X for 1967
($30x$70/$70).............................................. 30
X Corporation
Gains, profits, and income (Dividends from Y)................ $70
Foreign income taxes paid.................................... 14
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Accumulated profits in excess of foreign taxes............... 50
=======
Foreign income taxes paid and deemed to be paid by X for 1967
on or with respect to its accumulated profits ($30+$14).... 44
Dividends paid to M during 1967.............................. 40
M Corporation
Amount of distribution from X................................ $40.00
Gross-up under section 78 of the Code ($44/$56x$40).......... 31.43
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Taxable income............................................... 71.43
=======
U.S. tax before foreign tax credit ($71.43x.48).............. 34.29
Less: Foreign tax credit (as determined under gross-up
above)............................................ 31.43
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U.S. tax payable........................................ $ 2.86
1 By applying section 1.963-2(d)(1)(iii) of the regulations an
effective foreign tax rate results which exceeds the highest
effective foreign tax rate requiring a distribution for 1967
under section 963(b) of the Code.
Situation 3 .-Domestic corporation M makes a chain election for 1967 under section 1.963-1 of the regulations with respect to controlled foreign corporation X which is wholly owned directly by M , and with respect to controlled foreign corporation Y which is wholly owned directly by X . Each corporation uses the calendar year as the taxable year. In 1967, X and Y are subject to income tax at the rates of 25 percent and 45 percent, respectively; deduction is allowed for dividends received by X in computing its income subject to tax; X and Y have pretax and predistribution earnings and profits of $20 and $200, respectively; X is not a less developed country corporation; M complies with the special rules of section 1.963-4(b) and (c) of the regulations; Y distributes all of its earnings and profits to X; and M receives a distribution of $110 from X .
The United States income tax payable by M for 1967 assuming a tax rate of 48 percent, is as follows:
Computation under section 1.963-4 (b) and (c) of the regulations
======================================================================
X Y Total
______________________________________________________________________
Pretax and predistribution earnings and
profits.................................. $20 $200 $220
Foreign income tax......................... 5 90 95
--------------------------
Consolidated earnings and profits.......... 15 110 125
==========================
Effective foreign tax rate ($95/$125+$95)
(percent)................................................. 43.2
Statutory percentage under section 963(b)
of the Code............................................... 0
Amount of minimum distribution required..................... 0
Computation under section 1.902-3 of the regulations
Y Corporation
Gains, profits, and income................................... $200
Foreign income taxes paid ($200x.45)......................... 90
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Accumulated profits in excess of foreign taxes............... 110
=======
Dividends paid to X during 1967.............................. $110
Foreign income taxes of Y deemed paid by X for 1967
($90x$110/$110)............................................ 90
X Corporation
Business income.............................................. $20
Dividends from Y............................................. 110
-------
Total income................................................. 130
Foreign income taxes paid ($20x.25).......................... 5
-------
Accumulated profits in excess of foreign taxes............... 125
=======
Foreign income taxes paid and deemed to be paid by X for
1967 on or with respect to its accumulated profits
($90+$5)................................................... 95
Dividends paid to M during 1967.............................. 110
M Corporation
Dividends from X.............................................$110.00
Gross-up under section 78 of the Code ($95/$125x$110)........ 83.60
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Taxable income............................................... 193.60
=======
U.S. tax ($193.60x.48)....................................... 92.93
Foreign tax credit (gross-up above).......................... 83.60
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U.S. tax payable............................................. 9.33
It should be noted that by reason of the amendment to section 963(b) of the Code by section 102(b) of the Revenue and Expenditure Control Act of 1968, Public Law 90-364 page 715, this Bulletin, the statutory percentages under section 963(b) of the Code have been increased from those effective in the above situations.
DOCUMENT ATTRIBUTES
- Code Sections
- LanguageEnglish
- Tax Analysts Electronic Citationnot available
