(a) Scope.—This section
provides rules for determining the amount of foreign tax credit that a shareholder may claim on a
distribution from a section 1291 f und, and in certain cases, on a disposition of stock of a section
1291 fund. This section applies to a shareholder that has chosen under section 901 for the current
shareholder year to claim a credit for foreign taxes paid. The rules of this section apply separately
with respect to each section 1291 fund in which the shareholder directly or indirectly owns stock.
For purposes of this section, an S corporation is treated as a partnership, and its shareholders as
partners of the partnership. See section 1373.
(b) Distributions from section 1291 funds to shareholders that are not entitled to a foreign tax
credit for foreign taxes deemed paid.—
(1) Rule.—If a section 1291 fund makes a distribution with
respect to which a shareholder (other than a shareholder described in paragraph (c) of this
section) is subject to tax under § 1.1291-2, and the shareholder would be entitled to a foreign tax
credit for foreign taxes paid (including withholding taxes) with respect to such distribution, but
not for foreign taxes deemed paid with respect to such distribution (determined in both cases
without regard to section 1291 and this section), the foreign tax credit with respect to that
distribution is determined under the steps provided in this paragraph (b). The excess distribution
is treated as foreign source income described in section 904(d)(1)(A).
(i) Step 1.—The shareholder determines the total excess distribution under
§ 1.1291-2 (c)(3), and the excess distribution taxes. The excess distribution taxes are the credita-
ble foreign taxes (within the meaning of section 1291(g)(2)(A)), paid or accrued with respect to
the total distribution for the current shareholder year, allocated to the total excess distribution as
follows:
| Foreign taxes paid with respect to the total distribution |
x | Total excess distribution |
| Total distribution |
The remainder of the creditable foreign taxes are allocated to the nonexcess distribution.
(ii) Step 2.—The shareholder allocates the total excess distribution and the excess
distribution taxes ratably to each distribution received during the shareholder’s taxable year in the
manner provided in § 1.1291-2 (c)(4). The shareholder then allocates each excess distribution and
the excess distribution taxes allocated to that distribution to each taxable year included in the
shareholder’s holding period based on the number of days in each such taxable year.
(iii) Step 3.—The shareholder determines the tentative increase in tax for each prior
PFIC year. The term tentative increase in tax means the increase in tax determined in the manner
provided in § 1.1291-4(c) for each prior PFIC year. The tentative increase in tax for a prior PFIC
year is the foreign tax credit limitation for the excess distribution taxes allocated to that prior PFIC
year.
(iv) Step 4.—The shareholder claims as a foreign tax credit with respect to an
increase in tax for a prior PFIC year the lesser of the tentative increase in tax for that year
determined in Step 3 or the excess distribution taxes allocated to that prior PFIC year in Step 2.
(v) Step 5.—The shareholder determines the net increase in tax for each prior PFIC
year by reducing the tentative increase in tax for a prior PFIC year determined in Step 3 by the
foreign tax credit determined for that year in Step 4. For the calculation of the interest charge for
each net increase in tax, see § 1.1291-4(d).
(vi) Step 6.—The portions of the excess distribution and excess distribution taxes
allocated to the current shareholder year and pre-PFIC years, if any, as well as the creditable
foreign taxes allocated to the nonexcess distribution, are taken into account in the current
shareholder year under the general foreign tax credit rules.
(2) Carryovers disallowed.—The amount by which the excess distribution taxes allocated
to a prior PFIC year exceed the tentative increase in tax for that year may not be claimed as a
foreign tax credit against any federal income tax.
(c) Distributions from section 1291 funds that are CFCs.—
(1) Rule.—If a controlled foreign
corporation (CFC) (as defined in section 904(d)(4)) that is a section 1291 fund makes a distribution
with respect to which a United States shareholder (also as defined in section 904(d)(4)) is
subject to tax under § 1.1291-2, the foreign tax credit with respect to that excess distribution is
determined by applying the rules of section 1291(g) on a separate category basis within the
meaning of section 904. See section 904(d)(3)(A) and the regulations under that section. A
distribution described in this paragraph (c) from a section 1291 fund is foreign source income
except to the extent the distribution is determined to be derived from U.S. sources pursuant to
section 904(g). The foreign tax credit of a United States shareholder with respect to a distribution
by a CFC that is taxable as an excess distribution to the shareholder under § 1.1291-2(e)(2) is
determined according to the following steps.
(i) Step 1.—The shareholder determines—
(A) The separate category or categories (as defined in § 1.904-5(a)(1)) to which
the total distribution (including the amount of the gross-up determined under section 78) for the
taxable year is allocable under the rules of section 904(d)(3) and the regulations under that
section (see § 1.904-5(c)(4));
(B) The creditable foreign taxes, which are the foreign taxes paid or deemed
paid on the distribution (determined without regard to section 1291 and this section) with respect
to each separate category under the rules of sections 901, 902, 904, and 960 and the regulations
under those sections (see § 1.904-6(b)(3)); and
(C) The portion of the total distribution (including the gross-up) in each
separate category that is from U.S. sources pursuant to section 904(g) (see § 1.904-5(m)(4) and
(6)).
Solely for purposes of section 1291, any portion of the total excess distribution that would not be
allocated to a separate category under normally applicable rules because it exceeds the fund’s
earnings and profits is deemed to be foreign source income allocated to the separate category
defined in section 904(d)(1)(A).
(ii) Step 2.—The shareholder determines—
(A) The total excess distribution under § 1.1291-2(c)(3) with respect to the total
distribution (including the gross-up); and
(B) The portion of the total excess distribution allocable to each separate
category (the separate category excess distribution).
Each separate category excess distribution is calculated as follows:
| Distribution allocable to a separate category (including gross-up) (Step 1 (A)) |
x | Total excess distribution (Step 2 (A)) |
| Total distribution (including gross-up) |
(iii) Step 3.—The shareholder determines the U.S. source portion of each separate
category excess distribution as follows:
| U.S. source portion of distribution allocable to a separate category (Step 1 (C)) |
x | Separate category excess distribution (Step 2 (B)) |
| Total distribution allocable to that category (Step 1 (A)) |
(iv) Step 4.—The shareholder determines the excess distribution taxes with respect
to each separate category (separate category excess distribution taxes) as follows:
| Creditable foreign taxes with respect to the distribution and allocable to the separate category (Step 1 (B)) |
x | Separate category excess distribution (Step 2 (B)) |
| Total distribution allocable to that category (Step 1 (A)) |
(v) Step 5.—
(A) The shareholder allocates—
(1) The separate category excess distribution;
(2) The separate category excess distribution taxes; and
(3) The U.S. source portion of the separate category excess distribution
ratably to each distribution received during the shareholder’s taxable year in the manner provided
in § 1.1291-2(c)(4).
(B) The shareholder then allocates—
(1) The amount determined in Step 5 (A)(1) for each distribution to each
taxable year included in the shareholder’s holding period based on the number of days in each
such taxable year;
(2) The amount determined in Step 5 (A)(2) for each distribution to each
taxable year included in the shareholder’s holding period based on the number of days in each
such taxable year; and
(3) The amount determined in Step 5 (A)(3) for each distribution to each
taxable year included in the shareholder’s holding period based on the number of days in each
such taxable year.
Solely for purposes of determining the foreign tax credit limitation for the current shareholder
year, the portion of an excess distribution that is allocated to the current shareholder year and
prePFIC years, and included in income, is treated as a dividend from a CFC that is not a PFIC. The
excess distribution taxes allocated to that portion of the excess distribution are treated as foreign
taxes paid with respect to a dividend from a CFC that is not a PFIC and taken into account in the
current shareholder year under general foreign tax credit rules.
(vi) Step 6.—The shareholder determines a tentative increase in tax for each prior
PFIC year for each allocation of a separate category excess distribution determined under Step 5
(B)(1) (separate category tentative increase in tax).
(vii) Step 7.—The shareholder determines a foreign tax credit limitation for each
prior PFIC year to which the separate category excess distribution is allocated. The limitation is
determined as follows:
| Separate category tentative increase in tax for prior PFIC year (Step 6) |
x | Foreign source separate category excess distribution allocated to that prior PFIC year (Step 5(B)(1) − Step 5(B)(3)) |
| Separate category excess distribution allocated to that prior PFIC year (Step 5(B)(1)) |
(viii) Step 8.—The shareholder may claim a foreign tax credit for each separate
category tentative increase in tax. The foreign tax credit for a prior PFIC year is the lesser of the
foreign tax credit limitation determined in Step 7 for the prior PFIC year or the amount of the
separate category excess distribution taxes allocated to that prior PFIC year under Step 5 (B)(2).
(ix) Step 9.—The shareholder determines the separate category net increase in tax
for each prior PFIC year by reducing the separate category tentative increase in tax determined
for that year in Step 6 by the amount of the foreign tax credit determined for that year in Step 8.
For the calculation of the interest charge on each net increase in tax, see § 1.1291-4(d).
(2) Carryovers disallowed.—The amount by which the excess distribution taxes allocated
to a prior PFIC year exceed the separate category tentative increase in tax for that year may not be
claimed as a foreign tax credit against any federal income tax.
(3) Example.—The following example illustrates the rules of paragraph (c) of this
section.
Example.
(i) Facts. USP, a domestic corporation, has been a United States shareholder of
FC, a CFC that is a section 1291 fund, since December 31, 1986. USP and FC both use the
calendar year as their taxable year. USP has not included any amount in income under section 951
with respect to FC. On March 31, 1989, FC distributed $1000 to USP. As of that date, USP had
held the FC stock for 821 days (365 days in 1987, 366 days in 1988, and 90 days in 1989). USP
elects to credit foreign taxes for 1989, and determines the total creditable taxes with respect to the
distribution from FC to be $485, $425 of which are deemed paid taxes and $60 of which are
withholding taxes. The total distribution for 1989, including the section 78 gross-up, is $1425.
(ii) Step 1: Determination of separate category income, U.S. source portions, and foreign
taxes. Applying the look through rules of section 904(d)(3), USP determines that $1125 of the total
distribution of $1425 is allocable to distributions from a noncontrolled section 902 corporation, and
that the remaining $300 is allocable to general limitation income. USP determines that $390 of
creditable foreign taxes were paid and deemed paid with respect to the distributions from the
noncontrolled section 902 corporation, and $95 were paid and deemed paid with respect to the
general limitation income. USP determines that the distributions from the noncontrolled section
902 corporation and the general limitation income are from foreign sources. Accordingly, Steps 3
and 5 (A)(3) will not be performed.
(iii) Step 2: Calculation of total excess distribution and separate category excess distributions.
USP determines, based on FC distributions during the preceding three taxable years, that the total
excess distribution for the current taxable year is $800. Of that amount, $631.58 [[$1125 (distribu-
tion allocable to distributions from a noncontrolled section 902 corporation)/$1425 (total distribu-
tion)] × $800 (total excess distribution)] is allocable to distributions from a noncontrolled section
902 corporation, and $168.42 [[$300 (distribution allocable to general limitation income)/$1425
(total distribution)]× $800 (total excess distribution)] is allocable to general limitation income.
(iv) Step 4: Calculation of separate category excess distribution taxes. USP calculates the
excess distribution taxes (EDT) allocable to the separate category excess distributions. The
noncontrolled section 902 corporation excess distribution taxes are $218.95 [$390 (creditable
foreign taxes paid and deemed paid with respect to distributions from a noncontrolled section 902
corporation) × [$631.58 (noncontrolled section 902 corporation excess distribution)/$1125 (distri-
bution from noncontrolled section 902 corporation)]], and the general limitation excess distribu-
tion taxes are $53.33 [$95 (creditable foreign taxes paid and deemed paid with respect to general
limitation income) × [$168.42 (general limitation income excess distribution)/$300 (distribution
allocable to general limitation income)]].
(v) Step 5: Allocations of separate category excess distributions and excess distribution taxes
over holding period. The separate category excess distributions and the separate category EDT are
allocated to each taxable year in USP’s holding period based on the number of days in each such
taxable year. (Discrepancies may be observed in the following presentation. These discrepancies
reflect rounding to the nearest penny of the different calculations performed.)
(A) Noncontrolled section 902 corporation excess distribution: $.77 of the noncontrolled
section 902 corporation excess distribution ($631.58/821 days) and $.27 of EDT ($218.95/821
days) are allocated to each day. The allocations to each taxable year are as follows:
|
Taxable year in holding period |
Allocations to taxable year | ||
| Excess distribution | EDT | ||
| 1987 (365 days) | . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | $281.05 | $98.55 |
| 1988 (366 days) | . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | 281.82 | 98.82 |
| 1989 (90 days) | . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | 69.30 | 24.30 |
(B) General limitation excess distribution: $.21 of the general limitation excess distribution ($168.42/821 days) and $.065 of EDT ($53.33/821 days) are allocated to each day. The
allocations to each taxable year are as follows:
|
Taxable year in holding period |
Allocations to taxable year | ||
| Excess distribution | EDT | ||
| 1987 (365 days) | . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | $76.65 | $23.73 |
| 1988 (366 days) | . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | 76.86 | 23.79 |
| 1989 (90 days) | . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | 18.90 | 5.85 |
(vi) Step 6: Calculation of separate category tentative increases in taxes. USP determines
the tentative increases in tax (TIIT) for the allocations of each separate category excess distribu-
tion to 1987 and 1988, the prior PFIC years in USP’s holding period. The noncontrolled section 902
corporation excess distribution TIIT for 1987 is $112.28 [$281.05 (allocation of noncontrolled
section 902 corporation excess distribution to 1987) × 39.95% (the highest corporate tax rate in
effect in 1987)], and for 1988, $95.82 [$281.82 (allocation of noncontrolled section 902 corporation
excess distribution to 1988) × 34% (highest corporate tax rate in effect in 1988)]. The general
limitation excess distribution TIIT for 1987 is $30.62 [$76.65 (allocation of general limitation
income excess distribution to 1987) × 39.95% (highest corporate tax rate in effect in 1987)], and for
1988, $26.13 [$76.86 (allocation of general limitation income excess distribution to 1988) × 34%
(highest corporate tax rate in effect in 1988)].
(vii) Step 7: Calculation of the foreign tax credit limitations. USP determines the foreign
tax credit (FTC) limitations for each prior PFIC year on a separate category basis. The FTC
limitations are the same as the tentative increases in tax because none of the separate category
distributions are from U.S. sources. Therefore, the FTC limitation for the noncontrolled section
902 corporation excess distribution for 1987 is $112.28, and for 1988, $95.82. The FTC limitation
for the general limitation excess distribution for 1987 is $30.62, and for 1988, $26.13.
(viii) Step 8: Calculation of the foreign tax credit. The FTC for the noncontrolled section
902 corporation excess distribution for 1987 is $98.55 [lower of $112.28 (1987 noncontrolled
section 902 corporation FTC limitation) and $98.55 (1987 noncontrolled section 902 corporation
EDT)], and for 1988, $95.82 [lower of $95.82 (1988 noncontrolled section 902 corporation FTC
limitation) and $98.82 (1988 noncontrolled section 902 corporation EDT)]. The FTC for the
general limitation excess distribution for 1987 is $23.73 [lower of $30.62 (1987 general limitation
FTC limitation) and $23.73 (1987 general limitation income EDT)], and for 1988 is $23.79 [lower of
$26.13 (1988 general limitation income FTC limitation) and $23.79 (1988 general limitation EDT)].
(ix) Step 9: Calculation of the separate category net increases in taxes. As provided in
§ 1.1291-4(c)(3), USP determines the net increase in tax (NIIT) for each separate category excess
distribution allocated to a prior PFIC year. The noncontrolled section 902 corporation NIIT for
1987 is $13.73 [$112.28 (1987 noncontrolled section 902 corporation TIIT) less $98.55 (1987
noncontrolled section 902 corporation FTC)], and the noncontrolled section 902 corporation NIIT
for 1988 is 0 [$95.82 (1988 noncontrolled section 902 corporation TIIT) less $95.82 (1988
noncontrolled section 902 corporation FTC)]. The general limitation income NIIT for 1987 is $6.89
[$30.62 (1987 general limitation income TIIT) less $23.73 (1987 general limitation income FTC)],
and the general limitation NIIT for 1988 is $2.34 [$26.13 (1988 general limitation income TIIT) less
$23.79 (1988 general limitation income FTC)]. An interest charge is calculated for each NIIT as
provided in § 1.1291-4(d). The $3 excess of noncontrolled section 902 EDT allocated to 1988
($98.82) over the FTC limitation calculated for the 1988 allocation of the noncontrolled section 902
excess distribution ($95.82) may not be used to reduce any federal income tax. The calculations of
Steps 5 through 9 are summarized as follows:
(A) Noncontrolled section 902 corporation excess distribution:
|
Taxable year (days) in holding period |
Allocations to taxable year—Step 5 |
Step 6 TIIT |
Step 8 FTC |
Step 9 NIIT |
||
| Excess distribution | EDT | |||||
| 1987 (365) | . . . . . . . . . . . . . . . . . . . | $281.05 | $98.55 | $112.28 | $98.55 | $13.73 |
| 1988 (366) | . . . . . . . . . . . . . . . . . . . | 281.82 | 98.82 | 95.82 | 95.82 | 0 |
| 1989 (90) | . . . . . . . . . . . . . . . . . . . | 69.30 | 24.30 | |||
(B) General limitation income excess distribution:
|
Taxable year (days) in holding period |
Allocations to taxable year—Step 5 |
Step 6 TIIT |
Step 8 FTC |
Step 9 NIIT |
||
| Excess distribution | EDT | |||||
| 1987 (365) | . . . . . . . . . . . . . . . . . . . | $76.65 | $23.73 | $30.62 | $23.73 | $6.89 |
| 1988 (366) | . . . . . . . . . . . . . . . . . . . | 76.86 | 23.79 | 26.13 | 23.73 | 2.34 |
| 1989 (90) | . . . . . . . . . . . . . . . . . . . | 69.30 | 24.30 | |||
(x) Current shareholder year foreign tax credit. The allocations of the separate category
excess distributions to 1989, the current shareholder year, are included in USP’s ordinary income.
Such income is treated as a dividend from a CFC that is not a PFIC, and the EDT allocated to that
income are treated as foreign taxes paid with respect to a dividend from a CFC that is not a PFIC.
(d) Distributions from section 1291 funds that are noncontrolled section 902 corporations.—If a
noncontrolled section 902 corporation (as defined in section 904(d)(2)(E) and the regulations
under that section) that is a section 1291 fund makes a distribution with respect to which a
domestic shareholder (as defined in section 902 and the regulations under that section) is subject
to tax under § 1.1291-2, the rules of paragraph (c) of this section apply for purposes of determining
the amount of the foreign tax credit with respect to that distribution; however, the only separate
category is described in section 904(d)(1)(E). This paragraph (d) does not apply to a United States
shareholder of a CFC to whom paragraph (c) of this section applies.
(e) Section 1248 gain.—For purposes of determining the foreign tax credit under this
section, a shareholder treats gain from a disposition of stock of a section 1291 fund as a
distribution only to the extent that the gain would be, but for section 1291, includible in gross
income as a dividend under section 1248. [Prop. Reg. § 1.1291-5.]
[Proposed 4-1-92.]