Rev. Rul. 73-572

Advice has been requested whether, under the circumstances described below, in computing the foreign tax credit gain on the sale of stock in a foreign corporation is includible in the numerator of the limiting fraction without being reduced by capital losses from sources within the United States.

During his taxable year ended December 31, 1972, the taxpayer, a United States citizen, sold his shares of stock in a foreign corporation through the stock exchange of country X for $6,000. The taxpayer had purchased such stock in 1970 on the foreign stock market for $2,000. The taxpayer paid a foreign income tax to country X in 1972 as a result of the sale of such stock and chose the foreign tax credit provisions of section 901 of the Internal Revenue Code of 1954, as limited by the per-country limitation provisions of section 904(a)(1). During 1972 the taxpayer had other long-term capital transactions from sources within the United States which resulted in a $10,000 loss. In computing his taxable income for the taxable year ended December 31, 1972, the taxpayer reduced the long-term capital loss from sources within the United States ($10,000) by the long-term capital gains from foreign sources ($4,000) to arrive at a net long-term capital loss of $6,000, but limited such loss to $1,000, as provided by section 1211(b). The taxpayer's taxable income for 1972 from all sources before taking into account the long-term capital loss deduction was $1,500. Thus, the taxpayer's taxable income for 1972 amounted to $500 ($1,500 less the capital loss deduction of $1,000).

Section 862(a) of the Code lists items of gross income to be treated as income from sources without the United States. Section 1.862-1(a)(6) of the Income Tax Regulations provides, in part, that for determining the time and place of sale of personal property for the purpose of this paragraph, see paragraph (c) of section 1.861-7 of the regulations.

Section 1.861-7 of the regulations provides that gains, profits, and income derived from the purchase or sale of personal property shall be treated as derived entirely from the country in which the property is sold. Thus, the gain from the sale of the foreign stock in the instant case is considered as income from sources without the United States.

The question involves the elements of the numerator and denominator in the equation prescribed by section 904(a)(1) of the Code, expressed as follows:

Taxable income from sources within a foreign country / Total taxable income X United States Tax = Foreign Tax Credit Limitation

The specific question is whether the numerator, which constitutes capital gain from sources within country X, is to be reduced by the capital losses from sources within the United States since the denominator (total taxable income) takes into account only $1,000 capital loss instead of a net long term capital loss of $6,000.

Subject to the applicable limitations of section 904 of the Code, section 901 allows a credit against the United States income tax for foreign income, war profits, and excess profits taxes paid or accrued during the taxable year.

Section 904(a)(1) of the Code provides in the case of the per-country limitation that the amount of the credit in respect to taxes paid or accrued to any foreign country or possession of the United States shall not exceed the same proportion of the tax against which such credit is taken which the taxpayer's taxable income from sources within such country or possession (but not in excess of the taxpayer's entire taxable income) bears to his entire taxable income for the same taxable year.

Section 1202 of the Code provides, in part, that in the case of a taxpayer other than a corporation, if for any taxable year the net long-term capital gain exceeds the net short-term capital loss, 50 percent of the amount of such excess shall be a deduction from gross income.

Section 1211(b) of the Code provides, in part, that in the case of a taxpayer other than a corporation, losses from sales or exchanges of capital assets shall be allowed only to the extent of the gain from such sales or exchanges, plus (if such losses exceed such gains) a maximum of $1,000.

In the instant case, since under the provisions of section 904(a)(1) of the Code, the numerator of the limiting fraction includes only taxable income (capital gains) from sources within country X, it may not be reduced by the long term capital losses attributable to sources within the United States.

Accordingly, in computing the limitation under section 904(a)(1) of the Code, the numerator of the limiting fraction (taxable income from sources within the foreign country) is not reduced by the long-term capital loss from sources within the United States. However, section 904(a)(1) provides that the taxable income from sources within the foreign country (numerator) may not exceed the total taxable income from all sources (denominator). Thus, in the instant case, the numerator is limited to $500 since the total taxable income from all sources (the denominator) in the instant case is $500. The amount of foreign tax paid in the taxable year in excess of the credit allowed by the above computation may be carried as provided in section 904(d) and section 1.904-2(c)(1) of the regulations.