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 ----------------------------------------------------------------------------------------------------------------                                                                     Country A           Country B                                                        U.S.   ----------------------------------------   Total                     Corporation                       taxable   Taxable   Foreign   Taxable   Foreign   taxable                                                       income    income   tax paid   income   tax paid   income----------------------------------------------------------------------------------------------------------------P...................................................   $40,000  ........  ........  ........  ........   $40,000T...................................................  ........   $20,000   $12,000  ........  ........    20,000S...................................................  ........    10,000     6,000   $10,000    $3,000    20,000                                                                                                       ---------                                                      ........  ........  ........  ........  ........   $80,000----------------------------------------------------------------------------------------------------------------

Such taxable income was computed by taking into account the rules provided in §1.1502–12. Thus, the $2,000 deferred profit is not included in T's taxable income for 1966 (but will be included for the taxable year for which one of the events specified in paragraph (d), (e), or (f) of §1.1502–13 occurs). The consolidated taxable income of the group (computed in accordance with §1.1502–11) is $80,000. The consolidated tax liability against which the credit may be taken (computed in accordance with paragraph (d)(3) of this section) is $31,900.

  (i) Assuming P chooses to use the foreign taxes paid as a credit and the group is subject to the per-country limitation, the group may take as a credit against the consolidated tax liability $11,962.50 of the amount paid to country A, plus the $3,000 paid to country B. Such amounts are computed as follows: The aggregate taxes paid to country A of $18,000 is limited to $11,962.50 ($31,900 times $30,000/$80,000). The unused foreign tax with respect to country A is $6,037.50 ($18,000 less $11,962.50), and is a consolidated unused foreign tax which shall be carried to the years prescribed by section 904(d). A credit of $3,000 is available with respect to the taxes paid to country B since such amount is less than the limitation of $3,987.50 ($31,900 times $10,000/$80,000).

(ii) Assuming the overall limitation is in effect for the taxable year, the group may take $15,950 as a credit, computed as follows: The aggregate taxes paid to all foreign countries of $21,000 is limited to $15,950 ($31,900 times $40,000/$80,000). The unused foreign tax is $5,050 ($21,000 less $15,950), and is a consolidated unused foreign tax which shall be carried to the years prescribed by section 904(d).

Example (2).  Assume the same facts as in example (1), except that T has a $10,000 long-term capital gain (derived from a sale to a nonmember in country A) and P has a $10,000 long-term capital loss (derived from a sale to a nonmember in the United States). Notwithstanding that the consolidated net capital gain (capital gain net income for taxable years beginning after December 31, 1976) of the group is zero, T's capital gain shall be reflected in full in the computation of taxable income from foreign sources.

Example (3).  Assume the same facts as in example (1), except that the group had a consolidated section 172 deduction of $8,000 which is attributable to a net operating loss sustained by T. The $8,000 consolidated net operating loss deduction is offset against T's income from country A, thus reducing T's taxable income from country A to $12,000.

[T.D. 6894, 31 FR 11794, Sept. 8, 1966, as amended by T.D. 7728, 45 FR 72650, Nov. 3, 1980; T.D. 8597, 60 FR 36679, July 18, 1995; T.D. 8766, 63 FR 12642, Mar. 16, 1998; T.D. 8884, 65 FR 33758, May 25, 2000]

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