26 C.F.R. § 1.960-2   Interrelation of section 902 and section 960 when dividends are paid by third-, second-, or first-tier corporation.


Title 26 - Internal Revenue


Title 26: Internal Revenue
PART 1—INCOME TAXES
controlled foreign corporations

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§ 1.960-2   Interrelation of section 902 and section 960 when dividends are paid by third-, second-, or first-tier corporation.

(a) Scope of this section. This section prescribes rules for the application of section 902 in a case where dividends are paid by a third-, second-, or first-tier corporation, as the case may be, from its earnings and profits for a taxable year when an amount attributable to such earnings and profits is included in the gross income of a domestic corporation under section 951, or when such earnings and profits are attributable to an amount excluded from the gross income of such foreign corporation under section 959(b) and §1.959–2, with respect to the domestic corporation. In making determinations under this section, any portion of a distribution received from a first-tier corporation by the domestic corporation which is excluded from the domestic corporation's gross income under section 959(a) and §1.959–1, or any portion of a distribution received from an immediately lower-tier corporation by the third-, second-, or first-tier corporation which is excluded from such foreign corporation's gross income under section 959(b) and §1.959–2, shall be treated as a dividend for purposes of taking into account under section 902 any foreign income taxes paid by such third-, second-, or first-tier corporation which are not deemed paid by the domestic corporation under section 960(a)(1) and §1.960–1.

(b) Application of section 902(b) to dividends received from an immediately lower-tier corporation. For purposes of paragraph (a) of this section and paragraph (c)(1)(i) of §1.960–1, section 902(b) shall apply to all dividends received by the first- or second-tier corporation from the immediately lower-tier corporation other than dividends attributable to earnings and profits of such immediately lower-tier corporation in respect of which an amount is, or has been, included in the gross income of a domestic corporation under section 951 with respect to such immediately lower-tier corporation.

(c) Application of section 902(a) to dividends received by domestic corporation from first-tier corporation. For purposes of paragraph (a) of this section, section 902 (a) shall apply to all dividends received by the domestic corporation for its taxable year from the first-tier corporation other than dividends attributable to earnings and profits of such first-tier corporation in respect of which an amount is, or has been, included in the gross income of a domestic corporation under section 951 with respect to such first-tier corporation.

(d) Allocation of earnings and profits of a first- or second-tier corporation having income excluded under section 959(b)—(1) First-tier corporations. If the first-tier corporation for its taxable year receives dividends from the second-tier corporation to which in accordance with paragraph (b) of this section 902(b)(1) or section 902(b)(2) applies and other dividends from the second-tier corporation to which such sections do not apply, then in applying section 902(a) pursuant to this section and in applying section 960(a)(1) pursuant to §1.960–1(c)(1)(i), with respect to the foreign income taxes paid and deemed paid by the second-tier corporation which are deemed paid by the first-tier corporation for such taxable year under section 902(b)(1)—

(i) The earnings and profits of the first-tier corporation for such taxable year shall be considered not to include its earnings and profits which are attributable to the dividends to which section 902(b)(1) does not apply (in determining the domestic corporation's credit for the taxes paid by the second-tier corporation) or which are attributable to the dividends to which sections 902(b)(1) and 902(b)(2) do not apply (in determining the domestic corporation's credit for taxes deemed paid by the second-tier corporation) and

(ii) For the purposes of so applying section 902(a), distributions to the domestic corporation from such earnings and profits which are attributable to the dividends to which section 902(b)(1) does not apply (in determining the domestic corporation's credit for taxes paid by the second-tier corporation) or which are attributable to the dividends to which sections 902(b)(1) and 902(b)(2) do not apply (in determining the domestic corporation's credit for taxes deemed paid by the second-tier corporation) shall not be treated as a dividend.

(2) Second-tier corporations. If the second-tier corporation for its taxable year receives dividends from the third-tier corporation to which, in accordance with paragraph (b) of this section, section 902(b)(2) applies and other dividends from the third-tier corporation to which such section does not apply, then in applying section 902(b)(1) pursuant to this section, and in applying section 960(a)(1) pursuant to paragraph (c)(1)(i) of §1.960–1, with respect to the foreign taxes deemed paid by the second-tier corporation for such taxable year under section 902(b)(2)—

(i) The earnings and profits of the second-tier corporation for such taxable year shall be considered not to include its earnings and profits which are attributable to such other dividends from the third-tier corporation, and

(ii) For the purposes of so applying section 902(b)(1), distributions to the first-tier corporation from such earnings and profits which are attributable to such other dividends from the third-tier corporation shall not be treated as a dividend.

(e) Separate determinations under sections 902(a), 902(b)(1), and 902(b)(2) in the case of a first-, second-, or third-tier corporation having income excluded under section 956(b). If in the case of a first-, second-, or third-tier corporation to which paragraph (b) or (c) of this section is applied—

(1) The earnings and profits of such foreign corporation for its taxable year consist of—

(i) Dividends received from an immediately lower-tier corporation which are attributable to amounts included in the gross income of a domestic corporation under section 951 with respect to the immediately lower- or lower-tier corporations, and

(ii) Other earnings and profits, and

(2) The effective rate of foreign income taxes paid or accrued by such foreign corporation on the dividends described in paragraph (e)(1)(i) of this section is higher or lower than the effective rate of foreign income taxes attributable to its earnings and profits described in paragraph (e)(1)(ii) of this section,

then, for purposes of applying paragraph (b) or (c) of this section to dividends paid by such foreign corporation to the domestic corporation or the first- or second-tier corporation, sections 902(a), 902(b)(1), and 902(b)(2) shall be applied separately to the portion of the dividend which is attributable to the earnings and profits described in paragraph (e)(1)(i) of this section and separately to the portion of the dividend which is attributable to the earnings and profits described in paragraph (e)(1)(ii) of this section. In making a separate determination with respect to the earnings and profits described in paragraph (e)(1)(i) or (e)(1)(ii) of this section, only the foreign income taxes paid or accrued (or, in the case of earnings and profits of a first- or second-tier corporation described in paragraph (e)(1)(ii) of this section, deemed to be paid) by such foreign corporation on the income attributable to such earnings and profits shall be taken into account. For purposes of applying this paragraph (e), no part of the foreign income taxes paid, accrued, or deemed to be paid which are attributable to the earnings and profits described in paragraph (e)(1)(ii) of this section shall be attributed to the dividend described in paragraph (e)(1)(i) of this section; and no part of the foreign income taxes paid or accrued on the dividend described in paragraph (e)(1)(i) of this section shall be attributed to the earnings and profits described in paragraph (e)(1)(ii) of this section. Furthermore, the effective rate of foreign income taxes paid or accrued shall be determined consistently with the principles of paragraphs (b)(3)(iv) and (viii) and (c) of §1.954–1. Thus, for example, the effective rate of foreign income taxes on dividends received by such foreign corporation shall be determined by taking into account any intercorporate dividends received deduction allowed to such corporation for such dividends.

(f) Illustrations. The application of this section may be illustrated by the following examples. In all of the examples other than examples 6, 7, 9 and 10, it is assumed that the effective rate of foreign income taxes paid or accrued by the first- or second-tier corporation, as the case may be, in respect to dividends received from the immediately lower-tier corporation, is the same as the effective rate of foreign income taxes paid or accrued by the first- or second-tier corporation with respect to its other income:

Example 1.  Domestic corporation N owns all the one class of stock of controlled foreign corporation A, which owns all the one class of stock of controlled foreign corporation B. All such corporations use the calendar year as the taxable year. For 1978, N Corporation is required under section 951 to include $50 in gross income attributable to the earnings and profits of A Corporation for such year, but is not required to include any amount in gross income under section 951 attributable to the earnings and profits of B Corporation. For such year, B Corporation distributes a dividend of $45, but A Corporation does not make any distributions. The foreign income taxes deemed paid by N Corporation for 1978 under section 960(a)(1), after applying section 902(b)(1) for such year of A Corporation, are determined as follows upon the basis of the facts assumed:

   B Corporation (second-tier corporation):  Pretax earnings and profits........................  $100.00  Foreign income taxes (40%).........................    40.00  Earnings and profits...............................    60.00  Dividends paid to A Corporation....................   $45.00  Foreign income taxes paid by B Corporation on or       40.00   with respect to its accumulated profits...........  Foreign income taxes of B Corporation deemed paid      30.00   by A Corporation for 1978 under section 902(b)(1)   ($45/$60x$40).....................................A Corporation (first-tier corporation):  Pretax earnings and profits:    Dividends from B Corporation.....................   $45.00    Other income.....................................   100.00                                                      ---------     Total pretax earnings and profits...............  .......    145.00  Foreign income taxes (20%).........................  .......     29.00  Earnings and profits...............................  .......    116.00  Foreign income taxes paid, and deemed to be paid, by A           59.00   Corporation on or with respect to its earnings and profits   ($29+$30)..................................................  Amount required to be included in N Corporation's      50.00   gross income under section 951 with respect to A   Corporation.......................................  Dividends paid to N Corporation....................        0N Corporation (domestic corporation):  Foreign income taxes of A Corporation deemed paid      25.43   by N Corporation for 1978 under section 960(a)(1)   ($50/$116x$59).................................... 

Example 2.  Domestic corporation N owns all the one class of stock of controlled foreign corporation A, which owns all the one class of stock of controlled foreign corporation B. All such corporations use the calendar year as the taxable year. For 1978, N Corporation is required under section 951 to include in gross income $150 attributable to the earnings and profits of B Corporation for such year, which B Corporation distributes during such year. Corporation N is not required for 1978 to include any amount in gross income under section 951 attributable to the earnings and profits of A Corporation, but A Corporation distributes for such year $135 from its earnings and profits attributable to B Corporation's dividend. The foreign income taxes deemed paid by N Corporation for 1978 under section 960(a)(1)(C) and section 902(a) are determined as follows upon the basis of the facts assumed:

   B Corporation (second-tier corporation):  Pretax earnings and profits.......................   $250.00  Foreign income taxes (20%)........................     50.00  Earnings and profits..............................    200.00  Amounts required to be included in N Corporation's    150.00   gross income under section 951 with respect to B   Corporation......................................  Dividends paid to A Corporation...................    150.00  Foreign income taxes paid on or with respect to        50.00   earnings and profits of B Corporation............A Corporation (first-tier corporation):  Pretax earnings and profits:    Dividends from B Corporation....................   $150.00    Other income....................................    200.00                                                     ----------     Total pretax earnings and profits........................    350.00  Foreign income taxes (10%)........................     35.00  Earnings and profits..............................    315.00  Dividends paid to N Corporation...................    135.00  Foreign income taxes paid by A Corporation on or       35.00   with respect to its accumulated profits..........N Corporation (domestic corporation):  Foreign income taxes of B Corporation deemed paid      37.50   by N Corporation for 1978 under section 960(a)(1)   ($150/$200x$50)..................................  Foreign income taxes of A Corporation deemed paid      15.00   by N Corporation for 1978 under section 902(a)   ($135/$315x$35)..................................                                                     -----------     Total foreign income taxes deemed paid by N         52.50     Corporation under section 901.................. 

Example 3.  Domestic corporation N owns all the one class of stock of controlled foreign corporation A, which owns all the one class of stock of controlled foreign corporation B. All such corporations use the calendar year as the taxable year. For 1978, N Corporation is required under section 951 to include $180 in gross income attributable to the earnings and profits of A Corporation for such year, but is not required to include any amount in gross income under section 951 attributable to the earnings and profits of B Corporation. Corporation B distributes from its earnings and profits for 1978 a dividend of $50. For 1978, A Corporation distributes $180 from its earnings and profits attributable to the amount required under section 951 to be included in N Corporation's gross income for such year with respect to A Corporation and $20 from its other earnings and profits. The foreign income taxes deemed paid by N Corporation for 1978 under section 960(a)(1) and section 902(a) are determined as follows upon the basis of the facts assumed:

   B Corporation (second-tier corporation):  Pretax earnings and profits.......................   $100.00  Foreign income taxes (40%)........................     40.00  Earnings and profits..............................     60.00  Dividends paid to A Corporation...................     50.00  Foreign income taxes paid by B Corporation on or       40.00   with respect to its accumulated profits..........  Foreign income taxes of B Corporation deemed paid      33.33   by A Corporation for 1978 under section 902(b)(1)   ($50/$60x$40)....................................A Corporation (first-tier corporation):  Pretax earnings and profits:    Dividends from B Corporation....................    $50.00    Other income....................................    200.00                                                     ----------    Total pretax earnings and profits.........................    250.00  Foreign income taxes (10%)........................     25.00  Earnings and profits..............................    225.00  Foreign income taxes paid, and deemed to be paid,      58.33   by A Corporation on or with respect to its   earnings and profits ($25.00+$33.33).............  Amounts required to be included in N Corporation's    180.00   gross income for 1978 under section 951 with   respect to A Corporation.........................  Dividends paid to N Corporation:    Dividends to which section 902(a) does not apply    180.00     (from A Corporation's earnings and profits in     respect of which an amount is required under     section 951 to be included in N Corporation's     gross income with respect to A Corporation)....    Dividends to which section 902(a) applies (from      20.00     A Corporation's other earnings and profits)....                                                     ----------    Total dividends paid to N Corporation.....................   $200.00N Corporation (domestic corporation):  Foreign income taxes of corporations A and B           46.66   deemed paid by N Corporation under section   960(a)(1) ($180/$225x$58.33).....................  Foreign income taxes of corporations A and B            5.18   deemed paid by N Corporation under section 902(a)   ($20/$225x$58.33)................................                                                     -----------     Total foreign income taxes deemed paid by N         51.84     Corporation under section 901.................. 

Example 4.  Domestic corporation N owns all the one class of stock of controlled foreign corporation A, which owns all the one class of stock of controlled foreign corporation B. All such corporations use the calendar year as the taxable year. For 1978, N Corporation is required under section 951 to include in gross income $150 attributable to the earnings and profits of B Corporation for such year and $22.50 attributable to the earnings and profits of A Corporation for such year. For 1978, B Corporation distributes $175, consisting of $150 from its earnings and profits attributable to amounts required under section 951 to be included in N Corporation's gross income with respect to B Corporation and $25 from its other earnings and profits. Corporation A does not distribute any dividends for 1978. The foreign income taxes deemed paid by N Corporation for 1978 under section 960(a)(1) are determined as follows upon the basis of the facts assumed:

   B Corporation (second-tier corporation):  Pretax earnings and profits.......................   $250.00  Foreign income taxes (20%)........................     50.00  Earnings and profits..............................    200.00  Amounts required to be included in N Corporation's    150.00   gross income under section 951 for 1978 with   respect to B Corporation.........................  Dividends paid by B Corporation:    Dividends to which section 902(b) does not apply   $150.00     (from B Corporation's earnings and profits in     respect of which an amount is required under     section 951 to be included in N Corporation's     gross income with respect to B Corporation)....    Dividends to which section 902(b)(1) applies         25.00     (from B Corporation's other earnings and     profits).......................................                                                     ----------     Total dividends paid to A Corporation....................    175.00  Foreign income taxes paid by B Corporation on or       50.50   with respect to its accumulated profits..........  Foreign income taxes of B Corporation deemed paid       6.25   by A Corporation for 1978 under section 902(b)(1)   ($25/$200x$50)...................................A Corporation (first-tier corporation):  Pretax earnings and profits.......................    175.00  Foreign income tax (10 percent)...................     17.50  Earnings and profits..............................    157.50  Earnings and profits after exclusion of amounts        22.50   attributable to dividends to which section 902(b)   does not apply ($157.50 less [$150- ($150x0.10)])  Amount required to be included in N Corporation's      22.50   gross income for 1978 under section 951 with   respect to A Corporation.........................  Dividends paid to N Corporation...................         0N Corporation (domestic corporation):  Foreign income taxes deemed paid by N Corporation   under section 960(a)(1)(C) with respect to A   Corporation:    Tax actually paid by A Corporation ($22.50/           2.50     $157.50x$17.50)................................    Tax of B Corporation deemed paid by A                 6.25     Corporation under section 902(b)(1) ($22.50/     $22.50x$6.25)..................................                                                     -----------                                                      ........      8.75  Foreign income taxes deemed paid by N Corporation under          37.50   section 960(a)(1)(C) with respect to B Corporation ($150/   $200x$50)..................................................                                                     -----------      Total taxes deemed paid under section              46.20       960(a)(1)(C)................................. 

Example 5.  Domestic corporation N owns all the one class of stock of controlled foreign corporation A, which owns all the one class of stock of controlled foreign corporation B. All such corporations use the calendar year as the taxable year. For 1978, N Corporation is required under section 951 to include in gross income $150 attributable to the earnings and profits of B Corporation for such year and $22.50 attributable to the earnings and profits of A Corporation for such year. For 1978, B Corporation distributes $175, consisting of $150 from its earnings and profits attributable to amounts required under section 951 to be included in N Corporation's gross income with respect to B Corporation and $25 from its other earnings and profits. For 1978, A Corporation distributes $225, consisting of $135 from its earnings and profits attributable to the amount required under section 951 to be included in N Corporation's gross, income with respect to B Corporation, $22.50 from its earnings and profits attributable to the amount required under section 951 to be included in N Corporation's gross income with respect to A Corporation, and $67.50 from its other earnings and profits. The foreign income taxes deemed paid by N Corporation for 1978 under section 960(a)(1) and section 902(a)(1) are determined as follows upon the basis of the facts assumed:

   B Corporation (second-tier corporation):  Pretax earnings and profits.......................   $250.00  Foreign income taxes (20%)........................     50.00  Earnings and profits..............................    200.00  Amounts required to be included in N Corporation's    150.00   gross income for 1978 under section 951 with   respect to B Corporation.........................  Dividends paid by B Corporation:    Dividends to which section 902(b) does not apply   $150.00     (from B Corporation's earnings and profits in     respect of which an amount is required under     section 951 to be included in N Corporation's     gross income with respect to B Corporation)....    Dividends to which section 902(b) applies (from     $25.00     B Corporation's other earnings and profits)....                                                     ----------     Total dividends paid to A Corporation....................   $175.00  Foreign income taxes paid by B Corporation on or       50.00   with respect to its accumulated profits..........  Foreign income taxes of B Corporation deemed paid       6.25   by A Corporation for 1978 under section 902(b)(1)   ($25/$200x$50)...................................A Corporation (first-tier corporation):  Pretax earnings and profits:    Dividends received from B Corporation...........    175.00    Other income....................................    100.00                                                     ----------     Total pretax earnings and profits........................    275.00  Foreign income taxes (10 percent).................     27.50  Earnings and profits..............................    247.50  Earnings and profits after exclusion of amounts       112.50   attributable to dividends to which section 902(b)   does not apply ($247.50 less [$150 -($150x0.10)])  Amount required to be included in N Corporation's      22.50   gross income for 1978 under section 951 with   respect to A Corporation.........................Distributions paid by A Corporation:  Dividends to which section 902(a) does not apply       22.50   (From A Corporation's earnings and profits in   respect of which an amount is required under   section 951 to be included in N Corporation's   gross income with respect to A Corporation)......  Dividends to which section 902(a) applies (from A     202.50   Corporation's other earnings and profits)........                                                     ----------    Total dividends paid to N Corporation...........    225.00N Corporation (domestic corporation):  Foreign income taxes deemed paid by N Corporation   under section 960(a)(1) with respect to_    B Corporation ($150/$200x$50)...................  ........     37.50    A Corporation:      Tax paid by A Corporation ($22.50/                  2.50       $247.50x$27.50)..............................      Tax of B Corporation deemed paid by A               1.25      3.75       Corporation under section 902(b)(1) ($22.50/       $112.50x$6.25)...............................                                                     -----------        Total taxes deemed paid under section 960(a)(1).......     41.25  Foreign income taxes deemed paid by N Corporation   under section 902(a)(1) with respect to A   Corporation:    Tax paid by A Corporation ($200.50/                  22.50     $247.50x$27.50)................................    Tax of B Corporation deemed paid by A                 3.75     Corporation ($67.50/ $112.50x$6.25)............                                                     ----------      Total taxes deemed paid under section 902(a)(1).........     26.52                                                     -----------    Total foreign income taxes deemed paid by N          67.05     Corporation under section 901.................. 

Example 6.  Domestic corporation N owns all the one class of stock of controlled foreign corporation A, which owns all the one class of stock of controlled foreign corporation B. All such corporations use the calendar year as the taxable year. A and B corporations are organized under the laws of foreign country X. All of B corporation's assets used in a trade or business are located in country X. Country X imposes an income tax of 20 percent on B corporation's income. For 1978, N Corporation is required under section 951 to include in gross income $100 attributable to the earnings and profits of B Corporation for such year. For 1978, B Corporation distributes $150, consisting of $100 from its earnings and profits attributable to the amount required under section 951 to be included in N Corporation's gross income with respect to B Corporation and $50 from its other earnings and profits. Country X imposes an income tax of 10 percent on A Corporation's income but exempts from tax dividends received from B Corporation. N is not required to include any amount in gross income under section 951 for 1978 attributable to the earnings and profits of A Corporation for such year. For 1978, A Corporation distributes $175, consisting of $100 from its earnings and profits attributable to the amount required under section 951 to be included in N Corporation's gross income with respect to B Corporation, and $75 from its other earnings and profits. The foreign income taxes deemed paid by N Corporation for 1978 under section 960(a)(1) and section 902(a) are determined as follows on the basis of the facts assumed:

   B Corporation (2d-tier corporation):  Pretax earnings and profits.......................   $200.00  Foreign income taxes (20%)........................     40.00  Earnings and profits..............................    160.00  Amount required to be included in N Corporation's     100.00   gross income for 1978 under section 951 with   respect to B Corporation.........................Dividends paid by B Corporation:  Dividends to which section 902(b) does not apply     $100.00   (from B corporation's earnings and profits in   respect of which an amount is required under   section 951 to be included in N corporation's   gross income with respect to B corporation)......  Dividends to which section 902(b)(1) applies (from     50.00   B corporation's other earnings and profits)......                                                     ----------   Total dividends paid to A corporation......................    150.00  Foreign income taxes of B corporation deemed paid      12.50   by A corporation for 1978 under section 902(b)(1)   ($50/$100x $40)..................................A corporation (1st-tier corporation):  Pretax earnings and profits:    Dividends received from B corporation...........    150.00    Other income....................................    100.00                                                     ----------      Total pretax earnings and profits.............  ........    250.00  Foreign income taxes:    On dividends received from B corporation........      None    On other income ($100x0.10).....................     10.00     Total foreign income taxes.....................  ........     10.00Earnings and profits:  Attributable to dividends received from B             100.00   corporation to which section 902(b) does not   apply............................................Attributable to other income:  Attributable to dividends received from B              50.00   Corporation to which section 902(b)(1) applies...  Attributable to other income ($100-$10)...........     90.00                                                     ----------   Subtotal...................................................    140.00   Total earnings and profits.......................    240.00  Earnings and profits after exclusion of amounts       140.00   attributable to dividends to which section 902(b)   does not apply ($240-$100).......................  Amount required to be included in N corporation's       None   gross income for 1978 under section 951 with   respect to A corporation.........................  Dividends paid by A corporation:    Dividends to which section 902(a) does not apply      None     (from A corporation's earnings and profits in     respect of which an amount is required under     section 951 to be included in N corporation's     gross income with respect to A corporation)....    Dividends to which section 902(a) applies (from    $175.00     A corporation's other earnings and profits)....                                                     ----------     Total dividends paid to N corporation....................   $175.00N corporation (domestic corporation):  Foreign income taxes deemed paid by N corporation      25.00   under section 960(a)(1) with respect to B   corporation ($100/$160x$40)......................  Foreign income taxes deemed paid by N corporation   under section 902(a) with respect to A   corporation (allocation of earnings and profits   being made under pars. (c)(2) and (d) of this   section):    Tax paid by A corporation in respect to               None     dividends received from B Corporation to which     section 902(b) does not apply ($100/ $100x$0)..    Tax paid by A corporation in respect to its           5.36     other income ($75/ $140x$10)...................    Tax paid by B corporation deemed paid by A            6.70     corporation in respect to such other income     ($75/$140x$12.50)..............................                                                     ----------      Total taxes deemed paid under section 902(a)............     12.06    Total foreign income taxes deemed paid by N          37.06  ........     corporation under section 901.................. 

Example 7.  Domestic corporation N owns all the one class of stock of controlled foreign corporation A, which owns all the one class of stock of controlled foreign corporation B. All such corporations use the calendar year as the taxable year. For 1978, N Corporation is required under section 951 to include in gross income $150 attributable to the earnings and profits of B Corporation for such year and $47.50 attributable to the earnings and profits of A Corporation for such year. For 1978, B Corporation distributes $200, consisting of $150 from its earnings and profits attributable to the amount required under section 951 to be included in N Corporation's gross income with respect to B Corporation and $50 from its other earnings and profits. The country under the laws of which A Corporation is incorporated imposes an income tax of 5 percent on dividends received from a subsidiary corporation and 20 percent on other income. For 1978, A Corporation distributes $100 from its earnings and profits to N Corporation, such amount being attributable under paragraph (e) of §1.959–3 to the amount required under section 951 to be included in N Corporation's gross income with respect to B Corporation. The foreign income taxes deemed paid by N Corporation for 1978 under section 960(a)(1) and section 902(a) are determined as follows on the basis of the facts assumed:

   B Corporation (2d-tier corporation):  Pretax earnings and profits.......................   $250.00  Foreign income taxes (20 percent).................    150.00  Earnings and profits..............................    200.00  Amount required to be included in N Corporation's     150.00   gross income for 1978 under section 951 with   respect to B corporation.........................Dividends paid by B corporation:    Dividends to which section 902(b) does not apply   $150.00     (from B corporation's earnings and profits in     respect of which an amount is required under     section 951 to be included in N corporation's     gross income with respect to B corporation)....    Dividends to which section 902(b)(1) applies         50.00     (from B corporation's other earnings and     profits).......................................                                                     ----------   Total dividends paid to A corporation......................    200.00  Foreign income taxes of B corporation deemed paid      12.50   by A corporation for 1978 under section 902(b)(1)   ($50/$200x$50)...................................A corporation (1st-tier corporation):  Pretax earnings and profits:    Dividends received from B corporation...........    200.00    Other income....................................    100.00                                                     ----------     Total pretax earnings and profits........................    300.00  Foreign income taxes:    On dividends received from B corporation to           7.50     which section 902(b) does not apply ($150x     0.05)..........................................    On other income:      Dividends received from B corporation to which      2.50       section 902(b)(1) applies ($50x 0.05)........      Other income of A corporation ($100x0.20).....     20.00                                                     ----------     Total....................................................     22.50                                                     -----------    Total foreign income taxes......................     30.00Earnings and profits:  Attributable to dividends received from B             142.50   corporation to which section 902(b) does not   apply ($150-$7.50)...............................  Attributable to other income:    Attributable to dividends received from B            47.50     corporation to which section 902(b)(1) applies     ($50-$2.50)....................................    Attributable to other income ($100-$20..........     80.00                                                     ----------     Total....................................................    127.50                                                     -----------     Total earnings and profits.....................    270.00Earnings and profits after exclusion of amounts         127.50 attributable to dividends to which section 902(b) does not apply ($270 less $142.50).................Amount required to be included in N corporation's        47.50 gross income for 1978 under section 951 with respect to A corporation...........................Dividends paid by A Corporation:  Dividends to which section 902(a) does not apply        None   (from A corporation's earnings and profits in   respect of which an amount is required under   section 951 to be included in N corporation's   gross income with respect to A corporation)......  Dividends to which section 902(a)(1) applies (from   $100.00   A corporation's other earnings and profits)......                                                     ----------     Total dividends paid to N corporation....................   $100.00N Corporation (domestic corporation):  Foreign income taxes deemed paid by N corporation      37.50   under section 960(a)(1) with respect to_B   corporation ($150/$200x$50)  A corporation (allocation of earnings and profits   being made under § 1.960-1(c)(3) and par.   (d) of this section):    Tax paid by A corporation ($47.50/                    8.38     $127.50x$22.50)................................    Tax of B corporation deemed paid by A                 4.66     corporation under section 902(b)(1) ($47.50/     $127.50x$12.50)................................                                                     ----------     Total..........................................  ........     13.04                                                               =========     Total taxes deemed paid under section 960(a)(1)  ........     50.54  Foreign income taxes deemed paid by N corporation       5.26   under section 902(a) with respect to A   corporation (allocations of earnings and profits   being made under pars. (c)(2) and (d) of this   section) ($100/$142.50x$7.50)....................                                                     ----------    Total foreign income taxes deemed paid by N Corporation        55.80     under section 901........................................ 

Example 8.  Domestic corporation N owns all the one class of stock of controlled foreign corporation A, which owns all the one class of stock of controlled foreign corporation B, which owns all the one class of stock of controlled foreign corporation C. All such corporations use the calendar year as the taxable year. For 1978, N Corporation is required under section 951 to include $50 attributable to the earnings and profits of C Corporation and $15 attributable to the earnings and profits of B Corporation in its gross income. N Corporation is not required to include any amount in its gross income with respect to A Corporation under section 951 in 1978. For such year, C Corporation distributes $75 to B Corporation. B Corporation in turn distributes $60 of its earnings and profits to A Corporation. A Corporation has no other earnings and profits for 1978 and distributes $45 of its earnings and profits to N Corporation. The foreign income taxes deemed paid by N Corporation under section 960(a)(1) and section 902(a) are determined as follows on the basis of the facts assumed:

C Corporation (third-tier corporation):

   Pretax earnings and profits...................................   $150.00Foreign taxes paid by C Corporation (30%)...........     45.00Earnings and profits................................    105.00Amount required to be included in gross income of N      50.00 Corporation under section 951 with respect to C Corporation........................................Dividend to B Corporation...........................     75.00  Dividend from earnings and profits to which            50.00   section 902(b)(2) does not apply (attributable to   amounts included in N Corporation's gross income   under section 951 with respect to C Corporation).  Dividend from earnings and profits to which           $25.00   section 902(b)(2) applies (attributable to   amounts not included in N Corporation's gross   income with respect to C Corporation)............Amount of foreign income taxes of C Corporation deemed paid by B Corporation under section 902(b)(2) and § 1.960-2(b): 
     ($25/$105x$45)..............................................    $10.71 
  B Corporation (second-tier corporation):
   Pretax earnings and profits:  Dividend from C Corporation.......................    $75.00  Other earnings and profits........................    225.00                                                     -----------    Total pretax earnings and profits.........................   $300.00Foreign income taxes paid by B Corporation (40%)....    120.00Earnings and profits................................    180.00  Earnings and profits attributable to amounts to        30.00   which section 902(b)(2) does not apply (amounts   included in N Corporation's gross income under   section 951 with respect to C Corporation ($50-   ($50x.40)).......................................  Other earnings and profits........................    150.00Earnings and profits of B Corporation after exclusion for         150.00 amounts to which section 902(b)(2) does not apply (amounts attributable to earnings and profits which are included in N Corporation's gross income under section 951 with respect to C Corporation) ($180-$30)....................................Amount to be included in gross income under section      15.00 951 of N Corporation with respect to B Corporation.Amount of dividend to A Corporation.................     60.00  Dividend from earnings and profits to which            30.00   section 902(b)(2) does not apply (attributable to   amounts included in N Corporation's gross income   under section 951 with respect to C Corporation).  Dividend from earnings and profits to which            15.00   section 902(b)(1) does not apply (attributable to   amounts included in N Corporation's gross income   under section 951 with respect to B Corporation).  Dividend from other earnings and profits               15.00   (attributable to amounts not included in N   Corporation's gross income under section 951 with   respect to B or C Corporation)...................Foreign income taxes of B Corporation deemed paid by A Corporation under section 902(b)(1) and § 1.960-2(b): 
     ($45/$180x120)..............................................    $30.00Foreign income taxes (of C Corporation) deemed paid by B Corporation deemed paid by A Corporation under section 902(b)(1) in accordance with § 1.960-2(b) and § 1.960-2(d)(2)(i) and (ii): 
     ($15/$150x$10.71)...........................................      1.07 
  A Corporation (first-tier corporation):
   Pretax earnings and profits:  Dividend from B Corporation.......................    $60.00  Other earnings and profits........................         0                                                     -----------    Total pretax earnings and profits.........................    $60.00Foreign income taxes paid by A Corporation (10%)....      6.00Earnings and profits................................     54.00  Earnings and profits attributable to amounts to        27.00   which section 902(b)(2) does not apply   (attributable to amounts previously included in N   Corporation's gross income under section 951 with   respect to C Corporation) ($30-($30X.10))........  Earnings and profits attributable to amounts to        13.50   which section 902(b)(1) does not apply   (attributable to amounts included in N   Corporation's gross income under section 951 with   respect to B Corporation) ($15- ($15X.10)).......  Other earnings and profits ($15_($15X.10))........     13.50Earnings and profits of A Corporation after exclusion for          40.50 amounts to which section 902(b)(1) does not apply (attributable to amounts included in N Corporation's gross income under section 951 with respect to B Corporation) ($54.00-$13.50)..............................................Earnings and profits of A Corporation after              13.50 exclusion for amounts to which sections 902(b)(1) and (2) do not apply (attributable to amounts included in N Corporation's gross income under section 951 with respect to B or C Corporation) ($40.50-$27.00)....................................Dividend to N Corporation...........................     45.00  Dividend from earnings and profits to which           $27.00   section 902(b)(2) does not apply (attributable to   amounts included in N Corporation's gross income   under section 951 with respect to C Corporation).  Dividend from earnings and profits to which            13.50   section 902(b)(1) does not apply (attributable to   amounts included in N Corporation's gross income   under section 951 with respect to B Corporation).  Dividend from earnings and profits to which                0   section 902(a) does not apply (attributable to   amounts included in N Corporation's gross income   under section 951 with respect to A Corporation).  Dividend from other earnings and profits                4.50   (attributable to amounts not included in N   Corporation's gross income under section 951 with   respect to A, B, or C Corporation)............... 
  N Corporation (domestic corporation):
   Foreign income taxes deemed paid by N Corporation under section 960(a)(1) and § 1.960-1(c)(1)(ii) with respect to C Corporation: 
     ($50/$105x$45.00)...........................................    $21.43Foreign income taxes deemed paid by N Corporation under            11.07 section 960(a)(1) and § 1.960-1(c)(1)(i) with respect to B Corporation................................................ 
  Taxes paid by B Corporation:
     ($15/$180x$120)...................................    $10.00 
  Taxes deemed paid by B Corporation in accordance with §1.960–2(d)(2)(i):
     ($15/$150x$10.71).................................     $1.07                                                     -----------    Total taxes deemed paid by N Corporation under section        $32.50     960(a)(1)................................................Foreign income taxes deemed paid by N Corporation under section 902(a): 
  Taxes paid by A Corporation in accordance with §1.960–2(c):
     ($45/$54x$6)......................................     $5.00  Taxes paid by B Corporation deemed paid by A   Corporation in accordance with §§ 1.960-   2(c) and 1.960-2(d)(1)(i) and (ii): 
     ($31.50/$40.50x$30.00)............................     23.33 
  Taxes (of C Corporation) deemed paid by B Corporation deemed paid by A Corporation in accordance with §§1.960–2(c) and 1.960–2(d)(1)(i) and (ii):
     ($4.50/$13.50x$1.07)..............................       .36                                                     -----------    Total taxes deemed paid by N Corporation under section        $28.69     902(a)...................................................                                                               ---------    Total foreign income taxes deemed paid by N         $61.19     Corporation under section 901..................                                                     =========== 

Example 9.  Domestic corporation N owns all the one class of stock of controlled foreign corporation A, which owns all the one class of stock of controlled foreign corporation B, which owns all the one class of stock of controlled foreign corporation C. A and B Corporations are organized under the laws of foreign country X. C Corporation is organized under the laws of foreign country Y. All of B Corporation's assets used in a trade or business are located in country X. All such corporations use the calendar year as the taxable year. For 1978, N Corporation is required to include in its gross income under section 951, $50 attributable to the earnings and profits of C Corporation and $100 attributable to the earnings and profits of B Corporation. N Corporation is not required to include any amount in its gross income under section 951 with respect to A Corporation. Country X imposes an income tax of 10 percent on dividends from foreign subsidiaries, 20 percent on dividends from domestic subsidiaries, and 40 percent on other earnings and profits. For 1978, C Corporation distributes $75 to B Corporation. For such year, B Corporation distributes $175 of its earnings and profits to A Corporation. A Corporation has no other earnings and profits for 1978 and distributes $130 of its earnings and profits to N Corporation. The foreign income taxes deemed paid by N Corporation under sections 960(a)(1) and 902(a) are determined as follows on the basis of the facts assumed:

C Corporation (third-tier corporation):

   Pretax earnings and profits...................................   $150.00Foreign income taxes paid by C Corporation (30%)....     45.00Earnings and profits................................    105.00Amount required to be included in gross income of N      50.00 Corporation under section 951 with respect to C Corporation........................................Dividend to B Corporation...........................     75.00  Dividend to which section 902(b)(2) does not apply    $50.00   (attributable to amounts included in N   Corporation's gross income under section 951 with   respect to C Corporation)........................  Dividend to which section 902(b)(2) applies            25.00   (attributable to amounts not included in N   Corporation's gross income under section 951 with   respect to C Corporation)........................Amount of foreign income taxes of C Corporation deemed paid by     10.71 B Corporation under section 902(b)(2) and § 1.960-2(b) ($25/$105x$45)...............................................  (For formula see § 1.960-2(g)(1)(i)(A)) 
  B Corporation (second-tier corporation):
   Pretax earnings and profits:  Dividend from C Corporation.......................    $75.00  Other earnings and profits........................    225.00                                                     -----------    Total pretax earnings and profits.........................   $300.00Foreign income taxes paid by B Corporation..........     97.50  On dividends received from C Corporation to which      $5.00   section 902(b)(2) does not apply (attributable to   amounts included in N Corporation's gross income   under section 951 with respect to C Corporation)   ($50x.10)........................................  On dividend from C Corporation to which section         2.50   902(b)(2) applies (attributable to amounts not   included in N Corporation's gross income under   section 951 with respect to C Corporation)   ($25x.10)........................................  On other income of B Corporation ($225x.40).......     90.00Earnings and profits..........................................    202.50  Attributable to dividend to which section              45.00   902(b)(2) does not apply (attributable to amounts   included in N Corporation's gross income under   section 951 with respect to C Corporation) ($50-   $5)..............................................  Attributable to dividend from C Corporation to        $22.50   which section 902(b)(2) applies (attributable to   amounts not included in N Corporation's gross   income under section 951 with respect to C   Corporation) ($25-$2.50).........................  Attributable to other income of B Corporation         135.00   ($225-$90).......................................Earnings and profits after exclusion of amounts attributable     $157.50 to dividend to which section 902(b)(2) does not apply (attributable to amounts included in N Corporation's gross income under section 951 with respect to C Corporation) ($202.50-$45)................................................Amount required to be included in N Corporation's       100.00 gross income under section 951 with respect to B Corporation........................................Dividend paid by B Corporation......................    175.00  Dividend to which section 902(b)(2) does not apply    $45.00   (attributable to amounts included in N   Corporation's gross income under section 951 with   respect to C Corporation)........................  Dividend to which section 902(b)(1) does not apply    100.00   (attributable to amounts included in N   Corporation's gross income under section 951 with   respect to B Corporation)........................  Dividend from other earnings and profits               30.00   (attributable to amounts not included in N   Corporation's gross income with respect to B or C   Corporation).....................................Foreign income taxes of B Corporation deemed paid by A Corporation under section 902(b)(1) (separate tax rate applicable to dividend received by B Corporation allocation in accordance with § 1.960-2(e)) (for formula see § 1.960-2(g)(1)(ii)(A)(2) (i) and (ii)): 
  Tax paid by B Corporation on earnings previously taxed with respect to C Corporation or lower-tiers which is deemed paid by A Corporation:
     ($45/$45x$5)................................................     $5.00 
  Tax paid by B Corporation on earnings not previously taxed with respect to C Corporation or lower-tiers which is deemed paid by A Corporation:
     ($30/157.50x$92.50).........................................    $17.62Foreign income taxes (of C Corporation) deemed paid by B            2.04 Corporation deemed paid by A Corporation under section 902(b)(1) ($30/$157.50x$10.71)...............................  (For formula see § 1.960-2(g)(1)(ii)(B)(1)) 
  A Corporation (first-tier corporation):
   Pretax earnings and profits:  Dividend from B Corporation.......................   $175.00  Other income......................................         0                                                     -----------    Total pretax earnings and profits.........................   $175.00Foreign income taxes paid by A Corporation (20%)....     35.00Earnings and profits................................    140.00  Attributable to dividend to which section             $36.00   902(b)(2) does not apply (attributable to amounts   included in N Corporation's gross income under   section 951 with respect to C Corporation) ($45-   ($45x.20)).......................................  Attributable to amounts to which section 902(b)(1)     80.00   does not apply (Attributable to amounts included   in N Corporation's gross income under section 951   with respect to B Corporation) ($100-($100x.20)).  Attributable to other earnings and profits             24.00   (attributable to amounts not included in N   Corporation's gross income with respect to B or C   Corporation).....................................Earnings and profits after exclusion for amounts to which         $60.00 section 902(b)(1) does not apply (attributable to amounts included in N Corporation's gross income under section 951 with respect to B Corporation) ($140-$80)....................Earnings and profits after exclusion for amounts to      24.00 which sections 902(b)(1) and 902(b)(2) do not apply (attributable to amounts included in N Corporation's gross income under section 951 with respect to B or C Corporation) ($60-$36)...........Amount required to be included in N Corporation's         None gross income under section 1951 with respect to A Corporation........................................Dividend to N Corporation...........................   $130.00  Dividend to which section 902(b)(2) does not apply    $36.00   (attributable to amounts included in N   Corporation's gross income under section 951 with   respect to C Corporation)........................  Dividend to which section 902(b)(1) does not apply     80.00   (attributable to amounts included in N   Corporation's gross income under section 951 with   respect to B Corporation)........................  Dividend to which section 902(a) does not apply            0   (attributable to amounts included in N   Corporation's gross income under section 951 with   respect to A Corporation)........................  Dividend from other earnings and profits               14.00   (attributable to amounts not included in N   Corporation's gross income with respect to A, B,   or C Corporation)................................ 
  N Corporation (domestic corporation):
   Foreign income taxes deemed paid by N Corporation under           $21.43 section 960(a)(1) and § 1.960-1(c) with respect to C Corporation ($50/$105x$45)...................................  (for formula see § 1.960-2(g)(2)(i)(A))Foreign income taxes deemed paid by N Corporation        65.53 under section 960(a)(1) with respect to B Corporation (allocation of earnings and profits being made in accordance with § 1.960-1(c)(3) and § 1.960-2(e)) (Separate tax rate applicable to dividend received by B Corporation).. 
  Taxes paid by B corporation (for formula see §1.960–2(g)(2)(ii) (A)(2)):
     ($100/$157.50x$92.50).............................    $58.73  Taxes (of C Corporation) deemed paid by B               6.80   Corporation under section 902(b)(2) which are   deemed paid by N Corporation under section   960(a)(1) ($100/$157.50x$10.71)..................  (for formula see § 1.960-2(g)(2)(ii)(B)(1))                                                     -----------    Total taxes deemed paid by N Corporation under section        $86.96     960(a)(1)................................................Foreign income taxes deemed paid by N Corporation under section 902(a):  Taxes paid by A Corporation ($130/$140x$35).......    $32.50  (for formula see § 1.960-2(g)(1)(iii)(A)(1))  Taxes paid by B Corporation deemed paid by A Corporation   (Separate tax rate applicable to dividend received by B   Corporation allocation required by § 1.960-2(e)) (for   formula see § 1.960-2(g)(1)(iii)(B)(2) (i) and (ii)):  Tax paid by B Corporation on earnings previously   taxed with respect to C Corporation or lower   tiers which is deemed paid by N Corporation: 
     ($36/$36x$5)......................................     $5.00  Tax paid by B Corporation on earnings not   previously taxed with respect to C Corporation or   lower tiers which is deemed paid by N   Corporation: 
     ($14/$24x$17.62)..................................    $10.28  Taxes (of C Corporation) deemed paid by B               1.19   Corporation deemed paid by A Corporation ($14/   $24x$2.04).......................................                                                     -----------  (for formula see § 1.960-2(g)(1)(iii)(C)(1))    Total taxes deemed paid by N Corporation under section        $48.97     902(a)...................................................                                                     -----------    Total foreign income taxes deemed paid by N         135.93     Corporation under section 901..................                                                     =========== 

Example 10.  The facts are the same as in example 9 except that A Corporation has other earnings and profits of $200 in 1978 and country X imposes a tax of 50 percent on A Corporation's other earnings and profits. A Corporation distributes $200 of its earnings and profits to N Corporation in 1978. The foreign income taxes paid by N Corporation under sections 960 (a)(1) and 902 (a) are determined as follows on the basis of the facts assumed:

C Corporation (third-tier corporation):

   Pretax earnings and profits...................................   $150.00Foreign income taxes paid by C Corporation (30%)....     45.00Earnings and profits................................    105.00Amount required to be included in gross income of N     $50.00 Corporation under section 951 with respect to C Corporation........................................Dividend to B Corporation...........................     75.00  Dividend to which section 902(b)(2) does not apply     50.00   (attributable to amounts included in N   Corporation's gross income under section 951 with   respect to C Corporation)........................  Dividend to which section 902(b)(2) applies            25.00   (attributable to amounts not included in N   Corporation's gross income under section 951 with   respect to C Corporation)........................Amount of foreign income taxes of C Corporation deemed paid by     10.71 B Corporation under section 902(b)(2) and § 1.960-2(b) ($25/$105x$45)...............................................  (for formula see § 1.960-2(g)(1)(i)(A)) 
  B Corporation (second-tier corporation):
   Pretax earnings and profits:  Dividend from C Corporation.......................    $75.00  Other earnings and profits........................    225.00                                                     -----------    Total pretax earnings and profits.........................   $300.00Foreign income taxes of B Corporation...............    $97.50  On dividends received from C Corporation to which      $5.00   section 902(b)(2) does not apply (attributable to   amounts included in N Corporation's gross income   under section 951 with respect to C Corporation)   ($50x.10)........................................  On dividend from C Corporation to which section         2.50   902(b)(2) applies (attributable to amounts not   included in N Corporation's gross income under   section 951 with respect to C Corporation)   ($25x.10)........................................  On other income of B Corporation ($225x.40).......     90.00Earnings and profits..........................................   $202.50  Attributable to dividend to which section             $45.00   902(b)(2) does not apply (attributable to amounts   included in N Corporation's gross income under   section 951 with respect to C Corporation) ($50-   $5)..............................................  Attributable to dividend from C Corporation to         22.50   which section 902(b)(2) applies (attributable to   amounts not included in N Corporation's gross   income under section 951 with respect to C   Corporation) ($25-$2.50).........................  Attributable to other income of B Corporation         135.00   ($225-$90).......................................Earnings and profits after exclusion of amounts attributable      157.50 to dividend to which section 902(b)(2) does not apply (attributable to amounts included in N Corporation's gross income under section 951 with respect to C Corporation) ($202.50-$45)................................................Amount required to be included in N Corporation's       100.00 gross income under section 951 with respect to B Corporation........................................Dividend paid by B Corporation......................    175.00  Dividend to which section 902(b)(2) does not apply    $45.00   (attributable to amounts included in N   Corporation's gross income under section 951 with   respect to C Corporation)........................  Dividend to which section 902(b)(1) does not apply    100.00   (attributable to amounts included in N   Corporation's gross income under section 951 with   respect to B Corporation)........................  Dividend from other earnings and profits               30.00   (attributable to amounts not included in N   Corporation's gross income with respect to B or C   Corporation).....................................Foreign income taxes of B Corporation deemed paid by A Corporation under section 902(b)(1) with allocation required by § 1.960-2 (e):  ($45/$45x$5)......................................      5.00  ($30/$157.50x$92.50)..............................     17.62  (for formula see § 1.960-2(g)(1)(ii)(A)(2)   (i) and (ii))Foreign income taxes (of C Corporation) deemed paid       2.04 by B Corporation deemed paid by A Corporation under section 902(b)(1): ($30/$157.50 x $10.71)  (for formula see § 1.960-2(g)(1)(ii)(B)(1)) 
  A Corporation (first-tier corporation):
   Pretax earnings and profits:  Dividend from B Corporation.......................   $175.00  Other earnings and profits........................    200.00                                                     -----------    Total pretax earnings and profits.........................   $375.00Foreign income taxes paid by A Corporation..........    135.00  On dividend received from B Corporation to which        9.00   section 902(b)(2) does not apply (attributable to   amounts included in N Corporation's gross income   under section 951 with respect to C Corporation)   ($45x.20)........................................  On dividend received from B Corporation to which       20.00   section 902(b)(1) does not apply (attributable to   amounts included in N Corporation's gross income   under section 951 with respect to B Corporation)   ($100x.20).......................................  On dividend from B Corporation attributable to B        6.00   Corporation's other earnings and profits   (attributable to amounts not included in N   Corporation's gross income with respect to B or C   Corporation) ($30x.20)...........................  On other income of A Corporation ($200x.50).......    100.00Earnings and profits..........................................    240.00  Attributable to dividend to which section              36.00   902(b)(2) does not apply (attributable to amounts   included in N Corporation's gross income under   section 951 with respect to C Corporation) ($45-   $9)..............................................  Attributable to dividend to which section              80.00   902(b)(1) does not apply (attributable to amounts   included in N Corporation's gross income with   respect to B Corporation) ($100-$20).............  Attributable to other earnings and profits of A       124.00   Corporation (attributable to amounts not included   in N Corporation's gross income with respect to   A, B, or C Corporation) [($30-$6)+($200-$100)]...Amount required to be included in N Corporation's gross income      None under section 951 with respect to A Corporation..............Earnings and profits after exclusion of amounts         160.00 attributable to dividend to which section 902(b)(1) does not apply (attributable to amounts included in N Corporation's gross income under section 951 with respect to B Corporation)..........................Earnings and profits after exclusion of amounts         124.00 attributable to dividend to which sections 902(b)(1) and 902(b)(2) do not apply (attributable to amounts included in N Corporation's gross income under section 951 with respect to B and C Corporation).......................................Dividend to N Corporation...........................    200.00  Dividend attributable to amounts to which section     $36.00   902(b)(2) does not apply (attributable to amounts   included in N Corporation's gross income under   section 951 with respect to C Corporation).......  Dividend attributable to amounts to which section      80.00   902(b)(1) does not apply (attributable to amounts   included in N Corporation's gross income with   respect to B Corporation)........................  Dividend attributable to amounts to which section          0   902(a) does not apply (attributable to amounts   included in N Corporation's gross income under   section 951 with respect to A Corporation).......  Dividend attributable to A Corporation's other        $84.00   earnings and profits (attributable to amounts not   included in N Corporation's gross income under   section 951 with respect to A, B, or C   Corporation)..................................... 
  N Corporation (domestic corporation).
   Foreign income taxes deemed paid by N Corporation under           $21.43 section 960(a)(1) and § 1.960-1(c) with respect to C Corporation ($50/$150x$45)...................................  (for formula see § 1.960-2(g)(2)(i)(A))Foreign income taxes deemed paid by N Corporation        65.53 under section 960(a)(1) with respect to B Corporation (allocation of earning and profits being made in accordance with § 1.960-1(c)(3) and § 1.960-2(e)).............................  Taxes paid by B Corporation ($100/$157.50x$92.50).    $58.73  (for formula see § 1.960-2(g)(2)(ii)(A)(2))  Taxes deemed paid by B Corporation                      6.80   ($100x$157.50x$10.71)............................  (for formula see § 1.960-2(g)(2)(ii)(B)(1))                                                     ----------    Total taxes deemed paid by N Corporation under section         86.96     960(a)(1)................................................Foreign income taxes deemed paid by N Corporation under section 902(a) (separate tax rate applicable to dividends received by A Corporation allocation required by § 1.960-2(e)) (for formula see § 1.960-2(g)(1)(iii)(A)(2) (i) and (ii)): 
  Tax paid by A Corporation on earnings previously taxed with respect to B Corporation or lower tiers which is deemed paid by N Corporation:
     ($116/$116x$29)...................................    $29.00  Tax paid by A Corporation on earnings not   previously taxed with respect to B Corporation or   lower tiers which is deemed paid by N   Corporation: 
     ($84/$124x$106)...................................    $71.81  Taxes (paid by B Corporation) deemed paid by A   Corporation allocation required by § 1.960-   2(e):  ($36/$36x$5)......................................      5.00  ($84/$124x$17.62).................................     11.94  (for formula see § 1.960-2(g)(1)(iii)(B)(2)   (i) and (ii))  Taxes (of C Corporation) deemed paid by B               1.38   Corporation deemed paid by A Corporation ($84/   $124x$2.04)......................................                                                     -----------  (for formula see § 1.960-2(g)(1)(iii)(C)(1))    Total taxes deemed paid by N Corporation under section       $119.13     902(a) credit............................................                                                     -----------    Total foreign income taxes deemed paid by N         206.09     Corporation under section 901..................                                                     =========== 

(g) Formulas. This paragraph contains formulas for determining a domestic corporation's section 902 and 960 credits when amounts distributed through a chain of ownership have been included in whole or in part in the gross income of a domestic corporation under section 951 with respect to first-, second-, third-, or lower-tier corporations.

(1) Determination of the section 902 credit—(i) Section 902(b)(2) credit. If the second-tier corporation receives a dividend from a third-tier corporation attributable in whole or in part to amounts included in a domestic corporation's gross income under section 951 with respect to the third- or lower-tier corporations, the second-tier corporation's credit for taxes paid by the third-tier corporation under section 902(b)(2) is determined as follows:

(A) If the effective rate of tax on dividends received by the third-tier corporation is the same as the effective rate of tax on its other earnings and profits—

(B) If the effective rate of tax on dividends received by the third-tier corporation is higher or lower than the effective rate of tax on its other earnings and profits—

(1) Credit for tax paid by third-tier corporation on earnings included in domestic corporation's gross income with respect to fourth- or lower-tier corporations—

(2) Credit for tax paid by third-tier corporation on earnings not included in domestic corporation's gross income with respect to fourth- or lower-tier corporations—

(ii) Section 902(b)(1) credit. If the first-tier corporation receives a dividend from a second-tier corporation attributable in a whole or in part to amounts included in a domestic corporation's gross income under section 951 with respect to the second- or lower-tier corporations, the first-tier corporation's credit for taxes paid and deemed paid by the second-tier corporation under section 902(b)(1) is determined as follows:

(A) Taxes paid by the second-tier corporation which are deemed paid by the first-tier corporation—(1) If the effective rate of tax on dividends received by the second-tier corporation is the same as the effective rate of tax on its other earnings and profits—

(2) If the effective rate of tax on dividends received by the second-tier corporation is higher or lower than the effective rate of tax on its other earnings and profits—

(i) Credit for tax paid by second-tier corporation on earnings previously taxed with respect to third- or lower-tier corporations—

(ii) Credit for tax paid by second-tier corporation on earnings not previously taxed with respect to third- or lower-tier corporations—

(B) Taxes deemed paid by the second-tier corporation which are deemed paid by the first-tier corporation—(1) If the effective rate of tax dividends received by the third-tier corporation is the same as the effective rate of tax on its other earnings and profits—

(2) If the effective rate of tax on dividends received by the third-tier corporation is higher or lower than the effective rate of tax on its other earnings and profits—

(i) Credit for tax paid by third-tier corporation on earnings previously taxed with respect to fourth- or lower-tier corporations—

(ii) Credit for tax paid by third-tier corporation on earnings not previously taxed with respect to fourth- or lower-tier corporations—

(iii) Section 902(a) credit. If the domestic corporation receives a dividend from a first-tier corporation attributable in whole or in part to amounts included in a domestic corporation's gross income under section 951 with respect to the first- or lower-tier corporations, the domestic corporation's credit for taxes paid and deemed paid by the first-tier corporation under section 902(a) is determined as follows:

(A) Taxes paid by the first-tier corporation which are deemed paid by domestic corporation—(1) If the effective rate of tax on dividends received by the first-tier corporation is the same as the effective rate of tax on its other earnings and profits—

(2) If the effective rate of tax on dividends received by the first-tier corporation is higher or lower than the effective rate of tax on its other earnings and profits—

(i) Credit for tax paid by first-tier corporation on earnings previously taxed with respect to second- or lower-tier corporations—

(ii) Credit for tax paid by first-tier corporation on earnings not previously taxed with respect to second- or lower-tier corporations—

(B) Taxes (paid by second-tier corporation) deemed paid by first-tier corporation which are deemed paid by domestic corporation—(1) If the effective rate of tax on dividends received by the second-tier corporation is the same as its tax rate on other earnings and profits—

(2) If the effective rate of tax on dividends received by the second-tier corporation is higher or lower than the effective rate of tax on its other earnings and profits—

(i) Credit for tax paid by second-tier corporation on earnings previously taxed with respect to third-tier or lower-tier corporations—

(ii) Credit for tax paid by second-tier corporation on earnings not previously taxed with respect to third- or lower-tier corporations—

(C) Taxes (of third-tier corporation) deemed paid by first-tier corporation which are deemed paid by domestic corporation—(1) If the effective rate of tax on dividends received by the third-tier corporation is the same as the effective rate of tax on its other earnings and profits—

(2) If the effective rate of tax on dividends received by the third-tier corporation is higher or lower than the effective rate of tax on its other earnings and profits—

(i) Credit for tax (of third-tier corporation) deemed paid by second-tier corporation on earnings previously taxed with respect to fourth- or lower-tier corporations—

(ii) Credit for tax (of third-tier corporation) deemed paid by second-tier on earnings not previously taxed with respect to fourth- or lower-tier corporations—

(2) Determination of domestic corporation's section 960 credit for amounts included in its gross income with respect to a first-, second-, or third-tier corporation which has received a distribution previously included in the gross income of a domestic corporation under section 951—(i) Third-tier credit. If a domestic corporation is required to include an amount in its gross income under section 951 with respect to a third-tier corporation which has received a distribution from a fourth-tier corporation of amounts included in a domestic corporation's gross income under section 951 with respect to the fourth- or lower-tier corporations, the domestic corporation's credit for taxes paid by the third-tier corporation under section 960(a)(1) is determined as follows:

(A) If the effective rate of tax on dividends received by the third-tier corporation is the same as the effective rate of tax on its other earnings and profits—

(B) If the effective rate of tax on dividends received by the third-tier corporation is higher or lower than the effective rate of tax on its other earnings and profits—

(ii) Second-tier credit. If a domestic corporation is required to include an amount in its gross income under section 951 with respect to a second-tier corporation which has received a distribution from a third-tier corporation of amounts included in a domestic corporation's gross income under section 951 with respect to the third- or lower-tier corporations, the domestic corporation's credit for taxes paid and deemed paid by the second-tier corporation under section 960(a)(1) is determined as follows:

(A) Credit for taxes paid by the second-tier corporation which are deemed paid by the domestic corporation.

(1) If the effective rate of tax on dividends received by the second-tier corporation is the same as the effective rate of tax on its other earnings and profits—

(2) If the effective rate of tax on dividends received by the second-tier is higher or lower than the effective rate of tax on its other earnings and profits—

(B) Credit for taxes (of the third-tier corporation) deemed paid by the second-tier corporation under section 902(b)(2)—(1) If the effective rate of tax on dividends received by the third-tier corporation is the same as the effective rate of tax on its other earnings and profits—

(2) If the effective rate of tax on dividends received by the third-tier corporation is higher or lower than the effective rate of tax on its other earnings and profits—

(iii) First-tier credit. If a domestic corporation is required to include amounts in its gross income under section 951 with respect to a first-tier corporation which has received a distribution from a second-tier corporation of amounts included in a domestic corporation's gross income under section 951 with respect to the second- or lower-tier corporations, the domestic corporation's credit for taxes paid and deemed paid by the first-tier corporation under section 960(a)(1) shall be determined as follows:

(A) Credit for taxes paid by the first-tier corporation.

(1) If the effective rate of tax on dividends received by the first-tier corporation is the same as the effective rate of tax on its other earnings and profits—

(2) If the effective rate of tax on dividends received by the first-tier corporation is higher or lower than the effective rate of tax on its other earnings and profits—

(B) Credit for taxes paid by the second-tier corporation deemed paid by the first-tier corporation under section 902(b)(1).

(1) If the effective rate of tax on dividends received by the second-tier corporation is the same as the effective rate of tax on its other earnings and profits—

(2) If the effective rate of tax on dividends received by the second-tier corporation is higher or lower than the effective rate of tax on its other earnings and profits—

(C) Credit for taxes (of the third-tier corporation) deemed paid by the second-tier corporation which are deemed paid by first-tier corporation under section 902(b)(1).

(1) If the effective rate of tax on dividends received by the third-tier corporation is the same as the effective rate of tax on its other earnings and profits—

(2) If the effective rate of tax on dividends received by the third-tier corporation is higher or lower than the effective rate of tax on its other earnings and profits—

[T.D. 7120, 36 FR 10854, June 4, 1971; 36 FR 11924, June 23, 1971, as amended by T.D. 7334, 39 FR 44212, Dec. 23, 1974; 40 FR 1014, Jan. 6, 1975; 40 FR 2802, Jan. 16, 1975; T.D. 7649, 44 FR 60089, Oct. 18, 1979; T.D. 7843, 47 FR 50476, Nov. 8, 1982; 47 FR 55477, Dec. 10, 1982]

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