26 C.F.R. § 1.960-6   Overpayments resulting from increase in limitation for taxable year of exclusion.


Title 26 - Internal Revenue


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

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§ 1.960-6   Overpayments resulting from increase in limitation for taxable year of exclusion.

(a) Amount of overpayment. If an increase in the limitation under section 960(b)(1) and §1.960–4 for a taxable year of exclusion exceeds the tax (determined before allowance of any credits against tax) imposed by chapter 1 of the Code for such year, the amount of such excess shall be deemed an overpayment of tax for such year and shall be refunded or credited to the taxpayer in accordance with chapter 65 (section 6401 and following) of the Code.

(b) Illustration. The application of this section may be illustrated by the following example:

Example.  Domestic corporation N owns all the one class of stock of controlled foreign corporation A. Both corporations use the calendar year as the taxable year. For 1978, A Corporation has total income of $100,000 on which it pays foreign income taxes of $20,000. All of A Corporation's earnings and profits for 1978 of $80,000 are attributable to an amount which is required under section 951(a) to be included in N Corporation's gross income for 1978. By reason of such income inclusion N Corporation is deemed for 1978 to have paid under section 960(a)(1), and is required under section 78 to include in gross income for such year, the $20,000 ($20,000×$80,000/$80,000) of foreign income taxes paid by A Corporation for such year. Corporation N also derives $100,000 taxable income from sources within the United States for 1978. For 1979, N Corporation has $25,000 of taxable income, all of which is derived from sources within the United States. No part of A Corporation's earnings and profits for 1979 is attributable to an amount required under section 951(a) to be included in N Corporation's gross income. During 1979, A Corporation makes one distribution consisting of its $80,000 earnings and profits for 1978, all of which is excluded under section 959(a)(1) from N Corporation's gross income for 1979, and from which distribution foreign income taxes of $10,000 are withheld. For 1978 and 1979, N Corporation claims the foreign tax credit under section 901, determined by applying the overall limitation under section 904(a)(2). The United States tax of N Corporation is determined as follows for such years, assuming a corporate tax rate of 22 percent, a surtax of 26 percent and a surtax exemption of $25,000:

                                  1978   Taxable income of N Corporation:  U.S. sources................................     $100,000  Sources without the U.S.:    Amount required to be included in N             $80,000     Corporation's gross income under section     951(a)...................................    Foreign income taxes deemed paid by N            20,000      100,000     Corporation under section 960(a)(1) and     included in N Corporation's gross income     under section 78 ($20,000x$80,000/     $80,000).................................                                               -------------------------     Total taxable income.....................  ...........      200,000                                                            ============U.S. tax payable for 1978:  U.S. tax before credit ([$200,000x                 89,500   0.22]+[$175,000x0.26]).....................  Credit: Foreign income taxes of $20,000, but       20,000   not to exceed overall limitation of $44,750   ($89,500x$100,000/$200,000)................                                               --------------  U.S. tax payable............................       69,500                                               ============== 
                                  1979   Taxable income of N Corporation, consisting of income from       $25,000 U.S. sources..............................................U.S. tax before credit ($25,000x0.22).........        5,500Section 904(a)(2) overall limitation for 1979:  Limitation for 1979 before increase under               0   section 960(b)(1) ($5,500x$0/$25,000)......  Plus: Increase in overall limitation for   1979 under section 960(b)(1):    Amount by which 1978 overall limitation         $44,750     was increased by reason of inclusion in N     Corporation's gross income under section     951(a) for 1978 ($44,750 - [$41,500 x $0/     $100,000])...............................    Less: Foreign income taxes allowed as a          20,000     credit for 1978 which were allowable     solely by reason of such section 951(a)     inclusion ($20,000-$0)...................                                               -------------     Balance..................................       24,750    But: Such balance not to exceed foreign          10,000       10,000     income taxes paid by N Corporation for     1979 with respect to $80,000 distribution     excluded under section 959(a)(1) ($10,000     tax withheld)............................                                               -------------------------  Overall limitation for 1979..............................       10,000                                               ==============U.S. tax payable for 1979:  U.S. tax before credit ($25,000x0.22).......        5,500  Credit: Foreign income taxes of $10,000, but       10,000   not to exceed overall limitation of $10,000   for 1979...................................                                               --------------  U.S. tax payable............................         None                                               ==============Overpayment of tax for 1979:  Increase in limitation under section               10,000   960(b)(1) for 1979.........................  Less: Tax imposed for 1979 under chapter 1          5,500   of the Code................................                                               --------------  Excess treated as overpayment...............        4,500 

[T.D. 7120, 36 FR 10859, June 4, 1971, as amended by T.D. 7649, 44 FR 60089, Oct. 18, 1979]

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