26 U.S.C. § 904 : US Code - Section 904: Limitation on credit

Search 26 U.S.C. § 904 : US Code - Section 904: Limitation on credit

(a) Limitation
The total amount of the credit taken under section 901(a) shall
not exceed the same proportion of the tax against which such credit
is taken which the taxpayer's taxable income from sources without
the United States (but not in excess of the taxpayer's entire
taxable income) bears to his entire taxable income for the same
taxable year.
(b) Taxable income for purpose of computing limitation
(1) Personal exemptions
For purposes of subsection (a), the taxable income in the case
of an individual, estate, or trust shall be computed without any
deduction for personal exemptions under section 151 or 642(b).
(2) Capital gains
For purposes of this section -
(A) In general
Taxable income from sources outside the United States shall
include gain from the sale or exchange of capital assets only
to the extent of foreign source capital gain net income.
(B) Special rules where capital gain rate differential
In the case of any taxable year for which there is a capital
gain rate differential -
(i) in lieu of applying subparagraph (A), the taxable
income from sources outside the United States shall include
gain from the sale or exchange of capital assets only in an
amount equal to foreign source capital gain net income
reduced by the rate differential portion of foreign source
net capital gain,
(ii) the entire taxable income shall include gain from the
sale or exchange of capital assets only in an amount equal to
capital gain net income reduced by the rate differential
portion of net capital gain, and
(iii) for purposes of determining taxable income from
sources outside the United States, any net capital loss (and
any amount which is a short-term capital loss under section
1212(a)) from sources outside the United States to the extent
taken into account in determining capital gain net income for
the taxable year shall be reduced by an amount equal to the
rate differential portion of the excess of net capital gain
from sources within the United States over net capital gain.
(C) Coordination with capital gains rates
The Secretary may by regulations modify the application of
this paragraph and paragraph (3) to the extent necessary to
properly reflect any capital gain rate differential under
section 1(h) or 1201(a) and the computation of net capital
gain.
(3) Definitions
For purposes of this subsection -
(A) Foreign source capital gain net income
The term "foreign source capital gain net income" means the
lesser of -
(i) capital gain net income from sources without the United
States, or
(ii) capital gain net income.
(B) Foreign source net capital gain
The term "foreign source net capital gain" means the lesser
of -
(i) net capital gain from sources without the United
States, or
(ii) net capital gain.
(C) Section 1231 gains
The term "gain from the sale or exchange of capital assets"
includes any gain so treated under section 1231.
(D) Capital gain rate differential
There is a capital gain rate differential for any taxable
year if -
(i) in the case of a taxpayer other than a corporation,
subsection (h) of section 1 applies to such taxable year, or
(ii) in the case of a corporation, any rate of tax imposed
by section 11, 511, or 831(a) or (b) (whichever applies)
exceeds the alternative rate of tax under section 1201(a)
(determined without regard to the last sentence of section
11(b)(1)).
(E) Rate differential portion
(i) In general
The rate differential portion of foreign source net capital
gain, net capital gain, or the excess of net capital gain
from sources within the United States over net capital gain,
as the case may be, is the same proportion of such amount as -

(I) the excess of the highest applicable tax rate over
the alternative tax rate, bears to
(II) the highest applicable tax rate.
(ii) Highest applicable tax rate
For purposes of clause (i), the term "highest applicable
tax rate" means -
(I) in the case of a taxpayer other than a corporation,
the highest rate of tax set forth in subsection (a), (b),
(c), (d), or (e) of section 1 (whichever applies), or
(II) in the case of a corporation, the highest rate of
tax specified in section 11(b).
(iii) Alternative tax rate
For purposes of clause (i), the term "alternative tax rate"
means -
(I) in the case of a taxpayer other than a corporation,
the alternative rate of tax determined under section 1(h),
or
(II) in the case of a corporation, the alternative rate
of tax under section 1201(a).
(4) Coordination with section 936
For purposes of subsection (a), in the case of a corporation,
the taxable income shall not include any portion thereof taken
into account for purposes of the credit (if any) allowed by
section 936 (without regard to subsections (a)(4) and (i)
thereof).
(c) Carryback and carryover of excess tax paid
Any amount by which all taxes paid or accrued to foreign
countries or possessions of the United States for any taxable year
for which the taxpayer chooses to have the benefits of this subpart
exceed the limitation under subsection (a) shall be deemed taxes
paid or accrued to foreign countries or possessions of the United
States in the first preceding taxable year and in any of the first
10 succeeding taxable years, in that order and to the extent not
deemed taxes paid or accrued in a prior taxable year, in the amount
by which the limitation under subsection (a) for such preceding or
succeeding taxable year exceeds the sum of the taxes paid or
accrued to foreign countries or possessions of the United States
for such preceding or succeeding taxable year and the amount of the
taxes for any taxable year earlier than the current taxable year
which shall be deemed to have been paid or accrued in such
preceding or subsequent taxable year (whether or not the taxpayer
chooses to have the benefits of this subpart with respect to such
earlier taxable year). Such amount deemed paid or accrued in any
year may be availed of only as a tax credit and not as a deduction
and only if the taxpayer for such year chooses to have the benefits
of this subpart as to taxes paid or accrued for that year to
foreign countries or possessions of the United States.
(d) Separate application of section with respect to certain
categories of income
(1) In general
The provisions of subsections (a), (b), and (c) and sections
902, 907, and 960 shall be applied separately with respect to
each of the following items of income:
(A) passive income,
(B) high withholding tax interest,
(C) financial services income,
(D) shipping income,
[(E) Repealed. Pub. L. 108-357, title IV, Sec. 403(b)(1),
Oct. 22, 2004, 118 Stat. 1493]
(F) dividends from a DISC or former DISC (as defined in
section 992(a)) to the extent such dividends are treated as
income from sources without the United States,
(G) taxable income attributable to foreign trade income
(within the meaning of section 923(b)),(!1)
(H) distributions from a FSC (or a former FSC) out of
earnings and profits attributable to foreign trade income
(within the meaning of section 923(b)) (!1) or interest or
carrying charges (as defined in section 927(d)(1)) (!1) derived
from a transaction which results in foreign trade income (as
defined in section 923(b)) (!1), and
(I) income other than income described in any of the
preceding subparagraphs.
(2) Definitions and special rules
For purposes of this subsection -
(A) Passive income
(i) In general
Except as otherwise provided in this subparagraph, the term
"passive income" means any income received or accrued by any
person which is of a kind which would be foreign personal
holding company income (as defined in section 954(c)).
(ii) Certain amounts included
Except as provided in clause (iii), the term "passive
income" includes, except as provided in subparagraph (E)(iii)
(!1) or paragraph (3)(I), any amount includible in gross
income under section 1293 (relating to certain passive
foreign investment companies).
(iii) Exceptions
The term "passive income" shall not include -
(I) any income described in a subparagraph of paragraph
(1) other than subparagraph (A),
(II) any export financing interest, and
(III) any high-taxed income.
(iv) Clarification of application of section 864(d)(6)
In determining whether any income is of a kind which would
be foreign personal holding company income, the rules of
section 864(d)(6) shall apply only in the case of income of a
controlled foreign corporation.
(B) High withholding tax interest
(i) In general
Except as otherwise provided in this subparagraph, the term
"high withholding tax interest" means any interest if -
(I) such interest is subject to a withholding tax of a
foreign country or possession of the United States (or
other tax determined on a gross basis), and
(II) the rate of such tax applicable to such interest is
at least 5 percent.
(ii) Exception for export financing
The term "high withholding tax interest" shall not include
any export financing interest.
(iii) Regulations
The Secretary may by regulations provide that -
(I) amounts (not otherwise high withholding tax interest)
shall be treated as high withholding tax interest where
necessary to prevent avoidance of the purposes of this
subparagraph, and
(II) a tax shall not be treated as a withholding tax or
other tax imposed on a gross basis if such tax is in the
nature of a prepayment of a tax imposed on a net basis.
(C) Financial services income
(i) In general
Except as otherwise provided in this subparagraph, the term
"financial services income" means any income which is
received or accrued by any person predominantly engaged in
the active conduct of a banking, insurance, financing, or
similar business, and which is -
(I) described in clause (ii),
(II) passive income (determined without regard to
subclauses (I) and (III) of subparagraph (A)(iii)), or
(III) export financing interest which (but for
subparagraph (B)(ii)) would be high withholding tax
interest.
(ii) General description of financial services income
Income is described in this clause if such income is -
(I) derived in the active conduct of a banking,
financing, or similar business,
(II) derived from the investment by an insurance company
of its unearned premiums or reserves ordinary and necessary
for the proper conduct of its insurance business, or
(III) of a kind which would be insurance income as
defined in section 953(a) determined without regard to
those provisions of paragraph (1)(A) of such section which
limit insurance income to income from countries other than
the country in which the corporation was created or
organized.
(iii) Exceptions
The term "financial services income" does not include -
(I) any high withholding tax interest, and
(II) any export financing interest not described in
clause (i)(III).
(D) Shipping income
The term "shipping income" means any income received or
accrued by any person which is of a kind which would be foreign
base company shipping income (as defined in section 954(f)) as
in effect before its repeal. Such term does not include any
financial services income.
(E) Noncontrolled section 902 corporation
(i) In general
The term "noncontrolled section 902 corporation" means any
foreign corporation with respect to which the taxpayer meets
the stock ownership requirements of section 902(a) (or, for
purposes of applying paragraph (3) or (4), the requirements
of section 902(b)). A controlled foreign corporation shall
not be treated as a noncontrolled section 902 corporation
with respect to any distribution out of its earnings and
profits for periods during which it was a controlled foreign
corporation.
(ii) Treatment of inclusions under section 1293
If any foreign corporation is a non-controlled section 902
corporation with respect to the taxpayer, any inclusion under
section 1293 with respect to such corporation shall be
treated as a dividend from such corporation.
(F) High-taxed income
The term "high-taxed income" means any income which (but for
this subparagraph) would be passive income if the sum of -
(i) the foreign income taxes paid or accrued by the
taxpayer with respect to such income, and
(ii) the foreign income taxes deemed paid by the taxpayer
with respect to such income under section 902 or 960,
exceeds the highest rate of tax specified in section 1 or 11
(whichever applies) multiplied by the amount of such income
(determined with regard to section 78). For purposes of the
preceding sentence, the term "foreign income taxes" means any
income, war profits, or excess profits tax imposed by any
foreign country or possession of the United States.
(G) Export financing interest
For purposes of this paragraph, the term "export financing
interest" means any interest derived from financing the sale
(or other disposition) for use or consumption outside the
United States of any property -
(i) which is manufactured, produced, grown, or extracted in
the United States by the taxpayer or a related person, and
(ii) not more than 50 percent of the fair market value of
which is attributable to products imported into the United
States.
For purposes of clause (ii), the fair market value of any
property imported into the United States shall be its appraised
value, as determined by the Secretary under section 402 of the
Tariff Act of 1930 (19 U.S.C. 1401a) in connection with its
importation.
(H) Treatment of income tax base differences
(i) In general
In the case of taxable years beginning after December 31,
2006, tax imposed under the law of a foreign country or
possession of the United States on an amount which does not
constitute income under United States tax principles shall be
treated as imposed on income described in paragraph (1)(B).
(ii) Special rule for years before 2007
(I) In general
In the case of taxes paid or accrued in taxable years
beginning after December 31, 2004, and before January 1,
2007, a taxpayer may elect to treat tax imposed under the
law of a foreign country or possession of the United States
on an amount which does not constitute income under United
States tax principles as tax imposed on income described in
subparagraph (C) or (I) of paragraph (1).
(II) Election irrevocable
Any such election shall apply to the taxable year for
which made and all subsequent taxable years described in
subclause (I) unless revoked with the consent of the
Secretary.
(I) Related person
For purposes of this paragraph, the term "related person" has
the meaning given such term by section 954(d)(3), except that
such section shall be applied by substituting "the person with
respect to whom the determination is being made" for
"controlled foreign corporation" each place it appears.
(J) Transitional rule
For purposes of paragraph (1) -
(i) taxes paid or accrued in a taxable year beginning
before January 1, 1987, with respect to income which was
described in subparagraph (A) of paragraph (1) (as in effect
on the day before the date of the enactment of the Tax Reform
Act of 1986) shall be treated as taxes paid or accrued with
respect to income described in subparagraph (A) of paragraph
(1) (as in effect after such date),
(ii) taxes paid or accrued in a taxable year beginning
before January 1, 1987, with respect to income which was
described in subparagraph (E) of paragraph (1) (as in effect
on the day before the date of the enactment of the Tax Reform
Act of 1986) shall be treated as taxes paid or accrued with
respect to income described in subparagraph (I) of paragraph
(1) (as in effect after such date) except that -
(I) such taxes shall be treated as paid or accrued with
respect to shipping income to the extent the taxpayer
establishes to the satisfaction of the Secretary that such
taxes were paid or accrued with respect to such income,
(II) in the case of a person described in subparagraph
(C)(i), such taxes shall be treated as paid or accrued with
respect to financial services income to the extent the
taxpayer establishes to the satisfaction of the Secretary
that such taxes were paid or accrued with respect to such
income, and
(III) such taxes shall be treated as paid or accrued with
respect to high withholding tax interest to the extent the
taxpayer establishes to the satisfaction of the Secretary
that such taxes were paid or accrued with respect to such
income, and
(iii) taxes paid or accrued in a taxable year beginning
before January 1, 1987, with respect to income described in
any other subparagraph of paragraph (1) (as so in effect
before such date) shall be treated as taxes paid or accrued
with respect to income described in the corresponding
subparagraph of paragraph (1) (as so in effect after such
date).
(3) Look-thru in case of controlled foreign corporations
(A) In general
Except as otherwise provided in this paragraph, dividends,
interest, rents, and royalties received or accrued by the
taxpayer from a controlled foreign corporation in which the
taxpayer is a United States shareholder shall not be treated as
income in a separate category.
(B) Subpart F inclusions
Any amount included in gross income under section
951(a)(1)(A) shall be treated as income in a separate category
to the extent the amount so included is attributable to income
in such category.
(C) Interest, rents, and royalties
Any interest, rent, or royalty which is received or accrued
from a controlled foreign corporation in which the taxpayer is
a United States shareholder shall be treated as income in a
separate category to the extent it is properly allocable (under
regulations prescribed by the Secretary) to income of the
controlled foreign corporation in such category.
(D) Dividends
Any dividend paid out of the earnings and profits of any
controlled foreign corporation in which the taxpayer is a
United States shareholder shall be treated as income in a
separate category in proportion to the ratio of -
(i) the portion of the earnings and profits attributable to
income in such category, to
(ii) the total amount of earnings and profits.
(E) Look-thru applies only where subpart F applies
If a controlled foreign corporation meets the requirements of
section 954(b)(3)(A) (relating to de minimis rule) for any
taxable year, for purposes of this paragraph, none of its
foreign base company income (as defined in section 954(a)
without regard to section 954(b)(5)) and none of its gross
insurance income (as defined in section 954(b)(3)(C)) for such
taxable year shall be treated as income in a separate category,
except that this sentence shall not apply to any income which
(without regard to this sentence) would be treated as financial
services income. Solely for purposes of applying subparagraph
(D), passive income of a controlled foreign corporation shall
not be treated as income in a separate category if the
requirements of section 954(b)(4) are met with respect to such
income.
(F) Separate category
For purposes of this paragraph -
(i) In general
Except as provided in clause (ii), the term "separate
category" means any category of income described in
subparagraph (A), (B), (C), or (D) of paragraph (1).
(ii) Coordination with high-taxed income provisions
(I) In determining whether any income of a controlled
foreign corporation is in a separate category, subclause
(III) of paragraph (2)(A)(iii) shall not apply.
(II) Any income of the taxpayer which is treated as income
in a separate category under this paragraph shall be so
treated notwithstanding any provision of paragraph (2);
except that the determination of whether any amount is high-
taxed income shall be made after the application of this
paragraph.
(G) Dividend
For purposes of this paragraph, the term "dividend" includes
any amount included in gross income in section 951(a)(1)(B).
Any amount included in gross income under section 78 to the
extent attributable to amounts included in gross income in
section 951(a)(1)(A) shall not be treated as a dividend but
shall be treated as included in gross income under section
951(a)(1)(A).
(H) Exception for certain high withholding tax interest
This paragraph shall not apply to any amount which -
(i) without regard to this paragraph, is high withholding
tax interest (including any amount treated as high
withholding tax interest under paragraph (2)(B)(iii)), and
(ii) would (but for this subparagraph) be treated as
financial services income under this paragraph.
The amount to which this paragraph does not apply by reason of
the preceding sentence shall not exceed the interest or
equivalent income of the controlled foreign corporation taken
into account in determining financial services income without
regard to this subparagraph.
(I) Look-thru applies to passive foreign investment company
inclusion
If -
(i) a passive foreign investment company is a controlled
foreign corporation, and
(ii) the taxpayer is a United States shareholder in such
controlled foreign corporation,
any amount included in gross income under section 1293 shall be
treated as income in a separate category to the extent such
amount is attributable to income in such category.
(4) Look-thru applies to dividends from noncontrolled section 902
corporations
(A) In general
For purposes of this subsection, any dividend from a
noncontrolled section 902 corporation with respect to the
taxpayer shall be treated as income described in a subparagraph
of paragraph (1) in proportion to the ratio of -
(i) the portion of earnings and profits attributable to
income described in such subparagraph, to
(ii) the total amount of earnings and profits.
(B) Earnings and profits of controlled foreign corporations
In the case of any distribution from a controlled foreign
corporation to a United States shareholder, rules similar to
the rules of subparagraph (A) shall apply in determining the
extent to which earnings and profits of the controlled foreign
corporation which are attributable to dividends received from a
noncontrolled section 902 corporation may be treated as income
in a separate category.
(C) Special rules
For purposes of this paragraph -
(i) Earnings and profits
(I) In general
The rules of section 316 shall apply.
(II) Regulations
The Secretary may prescribe regulations regarding the
treatment of distributions out of earnings and profits for
periods before the taxpayer's acquisition of the stock to
which the distributions relate.
(ii) Inadequate substantiation
If the Secretary determines that the proper subparagraph of
paragraph (1) in which a dividend is described has not been
substantiated, such dividend shall be treated as income
described in paragraph (1)(A).
(iii) Coordination with high-taxed income provisions
Rules similar to the rules of paragraph (3)(F) shall apply
for purposes of this paragraph.
(iv) Look-thru with respect to carryover of credit
Rules similar to subparagraph (A) also shall apply to any
carryforward under subsection (c) from a taxable year
beginning before January 1, 2003, of tax allocable to a
dividend from a noncontrolled section 902 corporation with
respect to the taxpayer. The Secretary may by regulations
provide for the allocation of any carryback of tax allocable
to a dividend from a noncontrolled section 902 corporation
from a taxable year beginning on or after January 1, 2003, to
a taxable year beginning before such date for purposes of
allocating such dividend among the separate categories in
effect for the taxable year to which carried.
(5) Controlled foreign corporation; United States shareholder
For purposes of this subsection -
(A) Controlled foreign corporation
The term "controlled foreign corporation" has the meaning
given such term by section 957 (taking into account section
953(c)).
(B) United States shareholder
The term "United States shareholder" has the meaning given
such term by section 951(b) (taking into account section
953(c)).
(6) Regulations
The Secretary shall prescribe such regulations as may be
necessary or appropriate for the purposes of this subsection,
including regulations -
(A) for the application of paragraph (3) and subsection
(f)(5) in the case of income paid (or loans made) through 1 or
more entities or between 2 or more chains of entities,
(B) preventing the manipulation of the character of income
the effect of which is to avoid the purposes of this
subsection, and
(C) providing that rules similar to the rules of paragraph
(3)(C) shall apply to interest, rents, and royalties received
or accrued from entities which would be controlled foreign
corporations if they were foreign corporations.
[(e) Repealed. Pub. L. 101-508, title XI, Sec. 11801(a)(31), Nov.
5, 1990, 104 Stat. 1388-521]
(f) Recapture of overall foreign loss
(1) General rule
For purposes of this subpart and section 936, in the case of
any taxpayer who sustains an overall foreign loss for any taxable
year, that portion of the taxpayer's taxable income from sources
without the United States for each succeeding taxable year which
is equal to the lesser of -
(A) the amount of such loss (to the extent not used under
this paragraph in prior taxable years), or
(B) 50 percent (or such larger percent as the taxpayer may
choose) of the taxpayer's taxable income from sources without
the United States for such succeeding taxable year,
shall be treated as income from sources within the United States
(and not as income from sources without the United States).
(2) Overall foreign loss defined
For purposes of this subsection, the term "overall foreign
loss" means the amount by which the gross income for the taxable
year from sources without the United States (whether or not the
taxpayer chooses the benefits of this subpart for such taxable
year) for such year is exceeded by the sum of the deductions
properly apportioned or allocated thereto, except that there
shall not be taken into account -
(A) any net operating loss deduction allowable for such year
under section 172(a), and
(B) any -
(i) foreign expropriation loss for such year, as defined in
section 172(h) (as in effect on the day before the date of
the enactment of the Revenue Reconciliation Act of 1990), or
(ii) loss for such year which arises from fire, storm,
shipwreck, or other casualty, or from theft,
to the extent such loss is not compensated for by insurance or
otherwise.
(3) Dispositions
(A) In general
For purposes of this chapter, if property which has been used
predominantly without the United States in a trade or business
is disposed of during any taxable year -
(i) the taxpayer, notwithstanding any other provision of
this chapter (other than paragraph (1)), shall be deemed to
have received and recognized taxable income from sources
without the United States in the taxable year of the
disposition, by reason of such disposition, in an amount
equal to the lesser of the excess of the fair market value of
such property over the taxpayer's adjusted basis in such
property or the remaining amount of the overall foreign
losses which were not used under paragraph (1) for such
taxable year or any prior taxable year, and
(ii) paragraph (1) shall be applied with respect to such
income by substituting "100 percent" for "50 percent".
In determining for purposes of this subparagraph whether the
predominant use of any property has been without the United
States, there shall be taken into account use during the 3-year
period ending on the date of the disposition (or, if shorter,
the period during which the property has been used in the trade
or business).
(B) Disposition defined and special rules
(i) For purposes of this subsection, the term "disposition"
includes a sale, exchange, distribution, or gift of property
whether or not gain or loss is recognized on the transfer.
(ii) Any taxable income recognized solely by reason of
subparagraph (A) shall have the same characterization it would
have had if the taxpayer had sold or exchanged the property.
(iii) The Secretary shall prescribe such regulations as he
may deem necessary to provide for adjustments to the basis of
property to reflect taxable income recognized solely by reason
of subparagraph (A).
(C) Exceptions
Notwithstanding subparagraph (B), the term "disposition" does
not include -
(i) a disposition of property which is not a material
factor in the realization of income by the taxpayer, or
(ii) a disposition of property to a domestic corporation in
a distribution or transfer described in section 381(a).
(D) Application to certain dispositions of stock in controlled
foreign corporation
(i) In general
This paragraph shall apply to an applicable disposition in
the same manner as if it were a disposition of property
described in subparagraph (A), except that the exception
contained in subparagraph (C)(i) shall not apply.
(ii) Applicable disposition
For purposes of clause (i), the term "applicable
disposition" means any disposition of any share of stock in a
controlled foreign corporation in a transaction or series of
transactions if, immediately before such transaction or
series of transactions, the taxpayer owned more than 50
percent (by vote or value) of the stock of the controlled
foreign corporation. Such term shall not include a
disposition described in clause (iii) or (iv), except that
clause (i) shall apply to any gain recognized on any such
disposition.
(iii) Exception for certain exchanges where ownership
percentage retained
A disposition shall not be treated as an applicable
disposition under clause (ii) if it is part of a transaction
or series of transactions -
(I) to which section 351 or 721 applies, or under which
the transferor receives stock in a foreign corporation in
exchange for the stock in the controlled foreign
corporation and the stock received is exchanged basis
property (as defined in section 7701(a)(44)), and
(II) immediately after which, the transferor owns (by
vote or value) at least the same percentage of stock in the
controlled foreign corporation (or, if the controlled
foreign corporation is not in existence after such
transaction or series of transactions, in another foreign
corporation stock in (!2) which was received by the
transferor in exchange for stock in the controlled foreign
corporation) as the percentage of stock in the controlled
foreign corporation which the taxpayer owned immediately
before such transaction or series of transactions.
(iv) Exception for certain asset acquisitions
A disposition shall not be treated as an applicable
disposition under clause (ii) if it is part of a transaction
or series of transactions in which the taxpayer (or any
member of a controlled group of corporations filing a
consolidated return under section 1501 which includes the
taxpayer) acquires the assets of a controlled foreign
corporation in exchange for the shares of the controlled
foreign corporation in a liquidation described in section 332
or a reorganization described in section 368(a)(1).
(v) Controlled foreign corporation
For purposes of this subparagraph, the term "controlled
foreign corporation" has the meaning given such term by
section 957.
(vi) Stock ownership
For purposes of this subparagraph, ownership of stock shall
be determined under the rules of subsections (a) and (b) of
section 958.
(4) Accumulation distributions of foreign trust
For purposes of this chapter, in the case of amounts of income
from sources without the United States which are treated under
section 666 (without regard to subsections (b) and (c) thereof if
the taxpayer chose to take a deduction with respect to the
amounts described in such subsections under section 667(d)(1)(B))
as having been distributed by a foreign trust in a preceding
taxable year, that portion of such amounts equal to the amount of
any overall foreign loss sustained by the beneficiary in a year
prior to the taxable year of the beneficiary in which such
distribution is received from the trust shall be treated as
income from sources within the United States (and not income from
sources without the United States) to the extent that such loss
was not used under this subsection in prior taxable years, or in
the current taxable year, against other income of the
beneficiary.
(5) Treatment of separate limitation losses
(A) In general
The amount of the separate limitation losses for any taxable
year shall reduce income from sources within the United States
for such taxable year only to the extent the aggregate amount
of such losses exceeds the aggregate amount of the separate
limitation incomes for such taxable year.
(B) Allocation of losses
The separate limitation losses for any taxable year (to the
extent such losses do not exceed the separate limitation
incomes for such year) shall be allocated among (and operate to
reduce) such incomes on a proportionate basis.
(C) Recharacterization of subsequent income
If -
(i) a separate limitation loss from any income category
(hereinafter in this subparagraph referred to as "the loss
category") was allocated to income from any other category
under subparagraph (B), and
(ii) the loss category has income for a subsequent taxable
year,
such income (to the extent it does not exceed the aggregate
separate limitation losses from the loss category not
previously recharacterized under this subparagraph) shall be
recharacterized as income from such other category in
proportion to the prior reductions under subparagraph (B) in
such other category not previously taken into account under
this subparagraph. Nothing in the preceding sentence shall be
construed as recharacterizing any tax.
(D) Special rules for losses from sources in the United States
Any loss from sources in the United States for any taxable
year (to the extent such loss does not exceed the separate
limitation incomes from such year) shall be allocated among
(and operate to reduce) such incomes on a proportionate basis.
This subparagraph shall be applied after subparagraph (B).
(E) Definitions
For purposes of this paragraph -
(i) Income category
The term "income category" means each separate category of
income described in subsection (d)(1).
(ii) Separate limitation income
The term "separate limitation income" means, with respect
to any income category, the taxable income from sources
outside the United States, separately computed for such
category.
(iii) Separate limitation loss
The term "separate limitation loss" means, with respect to
any income category, the loss from such category determined
under the principles of section 907(c)(4)(B).
(F) Dispositions
If any separate limitation loss for any taxable year is
allocated against any separate limitation income for such
taxable year, except to the extent provided in regulations,
rules similar to the rules of paragraph (3) shall apply to any
disposition of property if gain from such disposition would be
in the income category with respect to which there was such
separate limitation loss.
(g) Source rules in case of United States-owned foreign
corporations
(1) In general
The following amounts which are derived from a United States-
owned foreign corporation and which would be treated as derived
from sources outside the United States without regard to this
subsection shall, for purposes of this section, be treated as
derived from sources within the United States to the extent
provided in this subsection:
(A) Any amount included in gross income under -
(i) section 951(a) (relating to amounts included in gross
income of United States shareholders), or
(ii) section 1293 (relating to current taxation of income
from qualified funds).
(B) Interest.
(C) Dividends.
(2) Subpart F and passive foreign investment company inclusions
Any amount described in subparagraph (A) of paragraph (1) shall
be treated as derived from sources within the United States to
the extent such amount is attributable to income of the United
States-owned foreign corporation from sources within the United
States.
(3) Certain interest allocable to United States source income
Any interest which -
(A) is paid or accrued by a United States-owned foreign
corporation during any taxable year,
(B) is paid or accrued to a United States shareholder (as
defined in section 951(b)) or a related person (within the
meaning of section 267(b)) to such a shareholder, and
(C) is properly allocable (under regulations prescribed by
the Secretary) to income of such foreign corporation for the
taxable year from sources within the United States,
shall be treated as derived from sources within the United
States.
(4) Dividends
(A) In general
The United States source ratio of any dividend paid or
accrued by a United States-owned foreign corporation shall be
treated as derived from sources within the United States.
(B) United States source ratio
For purposes of subparagraph (A), the term "United States
source ratio" means, with respect to any dividend paid out of
the earnings and profits for any taxable year, a fraction -
(i) the numerator of which is the portion of the earnings
and profits for such taxable year from sources within the
United States, and
(ii) the denominator of which is the total amount of
earnings and profits for such taxable year.
(5) Exception where United States-owned foreign corporation has
small amount of United States source income
Paragraph (3) shall not apply to interest paid or accrued
during any taxable year (and paragraph (4) shall not apply to any
dividends paid out of the earnings and profits for such taxable
year) if -
(A) the United States-owned foreign corporation has earnings
and profits for such taxable year, and
(B) less than 10 percent of such earnings and profits is
attributable to sources within the United States.
For purposes of the preceding sentence, earnings and profits
shall be determined without any reduction for interest described
in paragraph (3) (determined without regard to subparagraph (C)
thereof).
(6) United States-owned foreign corporation
For purposes of this subsection, the term "United States-owned
foreign corporation" means any foreign corporation if 50 percent
or more of -
(A) the total combined voting power of all classes of stock
of such corporation entitled to vote, or
(B) the total value of the stock of such corporation,
is held directly (or indirectly through applying paragraphs (2)
and (3) of section 958(a) and paragraph (4) of section 318(a)) by
United States persons (as defined in section 7701(a)(30)).
(7) Dividend
For purposes of this subsection, the term "dividend" includes
any gain treated as ordinary income under section 1246 (!3) or as
a dividend under section 1248.
(8) Coordination with subsection (f)
This subsection shall be applied before subsection (f).
(9) Treatment of certain domestic corporations
For purposes of this subsection -
(A) in the case of interest treated as not from sources
within the United States under section 861(a)(1)(A), the
corporation paying such interest shall be treated as a United
States-owned foreign corporation, and
(B) in the case of any dividend treated as not from sources
within the United States under section 861(a)(2)(A), the
corporation paying such dividend shall be treated as a United
States-owned foreign corporation.
(10) Coordination with treaties
(A) In general
If -
(i) any amount derived from a United States-owned foreign
corporation would be treated as derived from sources within
the United States under this subsection by reason of an item
of income of such United States-owned foreign corporation,
(ii) under a treaty obligation of the United States
(applied without regard to this subsection and by treating
any amount included in gross income under section 951(a)(1)
as a dividend), such amount would be treated as arising from
sources outside the United States, and
(iii) the taxpayer chooses the benefits of this paragraph,
this subsection shall not apply to such amount to the extent
attributable to such item of income (but subsections (a), (b),
and (c) of this section and sections 902, 907, and 960 shall be
applied separately with respect to such amount to the extent so
attributable).
(B) Special rule
Amounts included in gross income under section 951(a)(1)
shall be treated as a dividend under subparagraph (A)(ii) only
if dividends paid by each corporation (the stock in which is
taken into account in determining whether the shareholder is a
United States shareholder in the United States-owned foreign
corporation), if paid to the United States shareholder, would
be treated under a treaty obligation of the United States as
arising from sources outside the United States (applied without
regard to this subsection).
(11) Regulations
The Secretary shall prescribe such regulations as may be
necessary or appropriate for purposes of this subsection,
including -
(A) regulations for the application of this subsection in the
case of interest or dividend payments through 1 or more
entities, and
(B) regulations providing that this subsection shall apply to
interest paid or accrued to any person (whether or not a United
States shareholder).
(h) Coordination with nonrefundable personal credits
In the case of any taxable year of an individual to which section
26(a)(2) does not apply, for purposes of subsection (a), the tax
against which the credit is taken is such tax reduced by the sum of
the credits allowable under subpart A of part IV of subchapter A of
this chapter (other than sections 23, 24, and 25B).
(i) Limitation on use of deconsolidation to avoid foreign tax
credit limitations
If 2 or more domestic corporations would be members of the same
affiliated group if -
(1) section 1504(b) were applied without regard to the
exceptions contained therein, and
(2) the constructive ownership rules of section 1563(e) applied
for purposes of section 1504(a),
the Secretary may by regulations provide for resourcing the income
of any of such corporations or for modifications to the
consolidated return regulations to the extent that such resourcing
or modifications are necessary to prevent the avoidance of the
provisions of this subpart.
(j) Certain individuals exempt
(1) In general
In the case of an individual to whom this subsection applies
for any taxable year -
(A) the limitation of subsection (a) shall not apply,
(B) no taxes paid or accrued by the individual during such
taxable year may be deemed paid or accrued under subsection (c)
in any other taxable year, and
(C) no taxes paid or accrued by the individual during any
other taxable year may be deemed paid or accrued under
subsection (c) in such taxable year.
(2) Individuals to whom subsection applies
This subsection shall apply to an individual for any taxable
year if -
(A) the entire amount of such individual's gross income for
the taxable year from sources without the United States
consists of qualified passive income,
(B) the amount of the creditable foreign taxes paid or
accrued by the individual during the taxable year does not
exceed $300 ($600 in the case of a joint return), and
(C) such individual elects to have this subsection apply for
the taxable year.
(3) Definitions
For purposes of this subsection -
(A) Qualified passive income
The term "qualified passive income" means any item of gross
income if -
(i) such item of income is passive income (as defined in
subsection (d)(2)(A) without regard to clause (iii) thereof),
and
(ii) such item of income is shown on a payee statement
furnished to the individual.
(B) Creditable foreign taxes
The term "creditable foreign taxes" means any taxes for which
a credit is allowable under section 901; except that such term
shall not include any tax unless such tax is shown on a payee
statement furnished to such individual.
(C) Payee statement
The term "payee statement" has the meaning given to such term
by section 6724(d)(2).
(D) Estates and trusts not eligible
This subsection shall not apply to any estate or trust.
(k) Cross reference
(1) For increase of limitation under subsection (a) for taxes
paid with respect to amounts received which were included in
the gross income of the taxpayer for a prior taxable year as a
United States shareholder with respect to a controlled foreign
corporation, see section 960(b).
(2) For modification of limitation under subsection (a) for
purposes of determining the amount of credit which can be taken
against the alternative minimum tax, see section 59(a).