titled to vote of another foreign corporation which is a less developed country corporation within the meaning of section 955 (c) (1) and paragraph (a) (determined without reference to paragraph (b)) of § 1.955-5 for its taxable year ending with or within such taxable year of such former foreign corporation, (ii) Derives 80 percent or more of its gross income, if any, for the taxable year from sources within less developed countries, as determined under the provisions of § 1.955-6, and (iii) Has 80 percent or more in value of its assets on each day of its taxable year consisting of assets described in section 955 (c) (1) (B), as determined under paragraph (a) (iii) of § 1.955-5. A foreign corporation which qualifies as a less developed country corporation for a taxable year under one subparagraph of this paragraph may qualify as a less developed country corporation for another taxable year under either the same or the other subparagraph of this paragraph. If a foreign corporation would qualify under subaragraph (1) of this paragraph for a part of a taxable year if that part were treated as the entire taxable year and such foreign corporation would qualify under subparagraph (2) of this paragraph for the remainder of that taxable year if the remainder of that year were treated as the entire taxable year, such foreign corporation shall be deemed to be a less developed country corporation under this paragraph for that taxable year. (b) Effect of qualifying or not qualifying as a less developed country corporation for first taxable year beginning after December 31, 1962—(1) Effect of qualifying. A foreign corporation which is a less developed country corporation under paragraph (a) of this section for its first taxable year beginning after December 31, 1962, shall be considered, for purposes of section 902, as having been a less developed country corporation under section 902(d) for each of its taxable years beginning before January 1, 1963, even though such foreign corporation would have been unable to meet the tests of section 902(d) (1) or (2) for such prior taxable year if they had been applicable to such year. Thus, if at any time after December 31, 1964, a domestic shareholder receives a dividend from the profits of a first-tier corporation which were accumulated in a taxable year beginning before January 1, 1963, section 902(a) (2) and section 902(c) (1) (B) shall apply with respect to such dividend if such first-tier corporation is, for its first taxable year beginning after December 31, 1962, a less developed country corporation under section 902(d). See also § 1.902-5. (2) Effect of not qualifying. A foreign corporation which is not a less developed country corporation under paragraph (a) of this section for its first taxable year beginning after December 31, 1962, shall not be considered, for purposes of section 902, as having been a less developed country corporation under section 902 (d) for any taxable year beginning before January 1, 1963. even though such foreign corporation would have been able to meet the tests of section 902(d) (1) or (2) for such prior taxable year if they had been applicable to such year. Thus, if at any time after December 31, 1964, a domestic shareholder receives a dividend from the profits of a first-tier corporation which were accumulated in a taxable year beginning before January 1, 1963, section 902 (a) (1) and section 902 (c) (1) (A) shall apply with respect to such dividend if such first-tier corporation is not, for its first taxable year beginning after December 31, 1962, a less developed country corporation under section 902(d). See also § 1.902-5. (c) Illustrations. The application of this section may be illustrated by the following examples: Example (1) For 1962 through 1965, foreign corporation A owns 50 percent of the one class of stock of foreign corporation B. On December 31, 1965, domestic corporation M purchases all the one class of stock of A Corporation. All corporations use the calendar year as the taxable year. For 1963 through 1965, B Corporation is not a less developed country corporation within the meaning of paragraph (a) of this section, but for such years A Corporation is a less developed country corporation within the meaning of paragraph (a) (1) of this section. On December 31, 1965, A Corporation and B Corporation each distributes all of its accumulated profits for 1962 through 1965. On December 31, 1965, with respect to A Corporation, B Corporation is a secondtier corporation; and on such date, with respect to M Corporation, A Corporation is a first-tier corporation. Since A Corporation is a less developed country corporation for its first taxable year beginning after December 31, 1962, it will also be treated as having been a less developed country corporation for 1962. Accordingly, with respect to the dividends received on December 31, 1965, by A Corporation and M Corporation, the accumulated profits of corporations A and B for 1962 through 1965 shall be determined in accordance with the less-developedCountry-corporation rule provided by paragraph (c) (2) and (3) (11) of § 1.902-3. Example (2). The facts are the same as in example (1) except that, in addition, domestic corporation M on December 31, 1965, owns 10 percent of B Corporation's stock. On such date, with respect to M Corporation, B Corporation is a first-tier corporation. Since B Corporation is not a less developed country corporation for its first taxable year beginning after December 31, 1962, it will not be treated as having been a less developed country corporation for 1962. Accordingly, with respect to the dividend received by A Corporation from B Corporation, and with respect to the dividend received by M Corporation from A Corporation, the accumulated profits of corporations A and B for 1962 through 1965 shall be determined as provided in example (1); however, with respect to the dividend received on December 31, 1965, by M Corporation from B Corporation, the accumulated profits of B Corporation for 1962 through 1965 shall be determined in accordance with the nonless-developed-country-corporation rule provided by paragraph (c)(1) of § 1.902-3. Example (3). For 1962 through 1965, domestic corporation M owns all of the one class of stock of foreign corporation A, which throughout such period owns 10 percent of the one class of stock of foreign corporation B. Corporations M and A use the calendar year, and B Corporation uses the fiscal year ending June 30, as the taxable year. On December 31, 1965, A Corporation distributes all of its accumulated profits for 1962 through 1965 to M Corporation. Corporation B qualifies as a less developed country corporation within the meaning of paragraph (a)(1) of this section for its taxable years ending June 30, 1964, and June 30, 1965, and, since it is a less developed country corporation for its first taxable year beginning after December 31, 1962, it will also be treated as having been a less developed country corporation for its taxable year ending on June 30, 1963. Corporation A satisfies the 80-percent-ofgross-income and 80-percent-of-asset tests of paragraph (a)(2) (ii) and (iii) of this section for 1963, 1964, and 1965, throughout each of which years it owns 10 percent of the total combined voting power of all classes of stock entitled to vote of B Corporation and within each of which years ends a taxable year of B Corporation for which B Corporation is a less developed country corporation within the meaning of paragraph (a)(1) of this section. Accordingly, A Corporation qualifies as a less developed country corpora tion within the meaning of paragraph (a) (2) of this section for 1963, 1964, and 1965, and its accumulated profits for such years shall be determined in accordance with the less-developed-country-corporation rule provided by paragraph (c) (2) of § 1.902-3. [T.D. 6805, 30 F.R. 3213, Mar. 9, 1965] § 1.902-5 Effective dates for the application of section 902 (as amended by Revenue Act of 1962). (a) In general. Sections 1.902-3 and 1.902-4 shall apply, and paragraphs (a) through (e) of § 1.902-1 shall not apply (1) To any distribution received from a first-tier corporation by its domestic shareholder after December 31, 1964, irrespective of the date on which begins the taxable year of such first-tier corporation in which are accumulated the profits from which such distribution is made, and (2) To any distribution received from a first-tier corporation by its domestic shareholder (1) Before January 1, 1965, (ii) In a taxable year of such domestic shareholder beginning after December 31, 1962, but only (iii) To the extent such distribution(a) Is made out of the accumulated profits of such first-tier corporation for a taxable year of such first-tier corporation beginning after December 31, 1962, and (b) Is not attributable to a distribution received by such first-tier corporation out of the accumulated profits of a second-tier corporation for a taxable year beginning before January 1, 1963. (b) Rule of attribution and taxes imposed (1) In general. For purposes of paragraph (a) (2) (iii) of this section, a first-tier corporation's distribution made out of its accumulated profits for a taxable year beginning after December 31, 1962, shall be considered to be made out of its accumulated profits for such year which are attributable to a distribution received from its second-tier corporation's profits accumulated in a taxable year beginning before January 1, 1963, in that amount which bears the same proportion to such distribution made by such first-tier corporation as the amount of the distribution (reduced as provided in subparagraph (2) of this paragraph) received from such second-tier corporation's profits accumulated in such year beginning before January 1, 1963, bears to the total amount of such first-tier corporation's accumulated profits for such year beginning after December 31, 1962. (2) Amount of reduction. For purposes of determining under subparagraph (1) of this paragraph the ratio of the distribution received by the firsttier corporation to its accumulated profits, such distribution shall be reduced by the difference between the amount of income, war profits, and excess profits taxes paid or accrued by the first-tier corporation for the taxable year in which such distribution is received and the amount of income, war profits, and excess profits taxes that would have been paid or accrued for such year if such distribution had not been received. (3) Taxes imposed on or with respect to profits. For purposes of section 902, the foreign income taxes imposed on or with respect to the gains, profits, and income of the first-tier corporation for its taxable year beginning after December 31, 1962, attributable to the distribution received from the second-tier corporation shall be the amount of foreign income taxes by which such distribution is reduced under subparagraph (2) of this paragraph, and the foreign income taxes imposed on or with respect to the remainder of the gains, profits, and income of such first-tier corporation for such year shall be the amount of foreign income taxes that would have been paid or accrued for such year if the distribution from the second-tier corporation had not been received. (c) Distributions out of accumulated profits. For purposes of determining under this section the taxable year of a first-tier corporation or a second-tier corporation out of the accumulated profits of which a distribution is made, the principles of paragraph (c) (6) of § 1.902-3, relating to determinations by the district director, shall apply. (d) Determination of accumulated profits. For purposes of the effective date provisions of section 9(e) of the Revenue Act of 1962 (76 Stat. 1001) and this section, the accumulated profits of a foreign corporation for a taxable year shall be its earnings and profits for such year, determined as provided in paragraph (c) (5) of § 1.902-3. (e) Illustrations. The application of this section may be illustrated by the following examples: Example (1). For 1962 through 1965, domestic corporation M owns all the one class of stock of foreign corporation A, not a less developed country corporation for any of such years. Both corporations use the calendar year as the taxable year. Corporation A has accumulated profits, pays foreign income taxes, and pays dividends for such years as summarized below. For 1963 through 1965, M Corporation is deemed under section 902 (a) to have paid, and includes in income under section 78 as a dividend, foreign income taxes paid by A Corporation, as follows: A CORPORATION Gains, profits, and income.. Foreign income taxes imposed on or with respect to gains, profits, and income.. Accumulated profits: § 1.902-1(a)(2). §1.902-3(c)(1). Foreign income taxes paid by A Corporation on or with respect to its accumulated profits: ($40 X $60/$100) (American Chicle Co. v. United States (1942) 316 U.S. 450).. (total foreign income taxes) (§ 1.902-3(c) (4)). Accumulated profits in excess of foreign income taxes (§ 1.9023(a)(2))... Dividends paid by A Corporation on Jan. 15 of each year to M Corporation (60-day rule of sec. 902(a) being applicable) Source of such dividends paid Total dividends paid by Example (2). For 1963, domestic corporation M owns all the one class of stock of foreign corporation A, not a less developed country corporation for such year, which in turn owns during such year all the one class of stock of foreign corporation B. All corporations use the calendar year as the taxable year. Corporations B and A are incorporated on January 1, 1962, and January 1, 1963, respectively. For 1963, M Corporation is deemed under section 902(a) to have paid, and includes in income under section 78 as Determinations with respect to accumulated profits of, and dividends paid by, A Corporation (first-tier corporation): Gains, profits, and income of A Corporation: Business operations.. Dividends from B Corporation... Total gains, profits, Foreign income taxes im- (Total foreign income Accumulated profits in excess of foreign income taxes.. Dividends paid by A Cor- Portion of A Corporation's Total Determination of taxes deemed paid by, and gross-up of, M Corporation (domestic shareholder): Foreign income taxes deemed paid by M Corporation under sec. 902 for 1963 on or with respect to A Corporation's 1963 accumulated profits attributable to1962 accumulated profits ($29.40X$45/$54).- $24.50 1963 accumulated profits ($102X$165/$198) -- 85.00 Foreign income taxes included in gross income of M Corporation under sec. 78 as a dividend received from A Corporation... [T.D. 6805, 30 F.R. 3214, Mar. 9, 1965] 85.00 § 1.903 Statutory provisions; credit for taxes in lieu of income, etc., taxes. Sec. 903. Credit for taxes in lieu of income, etc., taxes. For purposes of this subpart and of sections 164(a) and 275(a), the term "income, war profits, and excess profits taxes” shall include a tax paid in lieu of a tax on income, war profits, or excess profits otherwise generally imposed by any foreign country or by any possession of the United States. [Sec. 903 as amended by sec. 207(b) (8), Rev. Act 1964 (78 Stat. 42)] [T.D. 6780, 29 F.R. 18148, Dec. 22, 1964] § 1.903-1 Definition of taxes in lieu of income, war profits, or excess profits taxes. (a) In general. For the purposes of subpart A (section 901 and following), part III, subchapter N, chapter 1 of the Code, and sections 164(a) and 275(a), the term "income, war profits, and excess profits taxes" includes a tax imposed by statute or decree by a foreign country or by a possession of the United States if (1) Such country or possession has in force a general income tax law. (2) The taxpayer claiming the credit would, in the absence of a specific provision applicable to such taxpayer, be subject to such general income tax, and (3) Such general income tax is not imposed upon the taxpayer thus subject to such substituted tax. (b) Example. The application of section 903 may be illustrated by the following example: Example. The A Corporation does business in X country, which imposes an income tax upon substantially a taxable income base. The ascertainment of taxable income, though not the determination of gross income, from sources in X country is found administratively difficult. The X country, by decree, provides that corporations circumstanced as was the A Corporation would, in lieu of the income tax at the rate of 20 percent otherwise payable, be subject to tax at the rate of 10 percent upon the amount of gross income from X country. In accordance with such decree the A Corporation paid X country the sum of $25,000 in 1955 7 with respect to its tax liability to the X country for the year 1954. Such amount, subject to the applicable limitations, is available as a credit to the A Corporation as foreign income, war profits, or excess profits taxes against the United States tax liability for the year 1954. [T.D. 6500, 25 F.R. 11910, Nov. 26, 1960, as amended by T.D. 6780, 29 F.R. 18148, Dec. 22, 1964] § 1.904 Statutory provisions; limitation on credit. Sec. 904. Limitation on credit—(a) Alternative limitations—(1) Per-country limitation. In the case of any taxpayer who does not elect the limitation provided by paragraph (2), the amount of the credit in respect of the tax paid or accrued to any foreign country or possession of the United States shall not exceed the same proportion of the tax against which such credit is taken which the taxpayer's taxable income from sources within such country or possession (but not in excess of the taxpayer's entire taxable income) bears to his entire taxable income for the same taxable year. (2) Overall limitation. In the case of any taxpayer who elects the limitation provided by this paragraph, the total amount of the credit in respect of taxes paid or accrued to all foreign countries and possessions of the United States shall not exceed the same proportion of the tax against which such credit is taken which the taxpayer's taxable income from sources without the United States (but not in excess of the taxpayer's entire taxable income) bears to his entire taxable income for the same taxable year. (b) Election of overall limitation—(1) In general. A taxpayer may elect the limitation provided by subsection (a) (2) for any taxable year beginning after December 31, 1960. An election under this paragraph for any taxable year shall remain in effect for all subsequent taxable years, except that it may be revoked with the consent of the Secretary or his delegate with respect to any taxable year. (2) Election after revocation. If a taxpayer has made an election under paragraph (1) and such election has been revoked, such taxpayer shall not be eligible to make a new election under paragraph (1) for any taxable year, unless the Secretary or his delegate consents to such new election. (3) Form and time of election and revocation. An election under paragraph (1), and any revocation of such an election, may be made only in such manner as the Secretary or his delegate may by regulations prescribe. Such an election or revocation with respect to any taxable year may be made or changed at any time before the expiration of the period prescribed for making a claim for credit or refund of the tax imposed by this chapter for such taxable year. (c) Taxable income for purpose of computing limitation. For purposes of computing the applicable limitation under subsec 66-052-67- -8 tion (a), the taxable income in the case of an individual, estate, or trust shall be computed without any deduction for personal exemptions under section 151 or 642(b). (d) Carryback and carryover of excess tax paid. Any amount by which any such tax paid or accrued to any foreign country or possession of the United States for any taxable year beginning after December 31, 1957 for which the taxpayer chooses to have the benefits of this subpart exceeds the applicable limitation under subsection (a) shall be deemed tax paid or accrued to such foreign country or possesison of the United States in the second preceding taxable year in the first preceding taxable year, and in the first, second, third, fourth, or fifth succeeding taxable years, in that order and to the extent not deemed tax paid or accrued in a prior taxable year, in the amount by which the applicable limitation under subsection (a) for such preceding or succeeding taxable year exceeds the sum of the tax paid or accrued to such foreign country or possession for such preceding or succeeding taxable year and the amount of the tax for any taxable year earlier than the current taxable year which shall be deemed to have been paid or accrued in such preceding or subsequent taxable year (whether or not the taxpayer chooses to have the benefits of this subpart with respect to such earlier taxable year). Such amount deemed paid or accrued in any year may be availed of only as a tax credit and not as a deduction and only if taxpayer for such year chooses to have the benefits of this subpart as to taxes paid or accrued for that year to foreign countries or possessions. For purposes of this subsection, the terms "second preceding taxable year" and "first preceding taxable year” do not include any taxable year beginning before January 1, 1958. (e) Carrybacks and carryovers where overall limitation is elected-(1) Foreign taxes to be aggregated for purposes of subsection (d). With respect to each taxable year of the taxpayer to which the limitation provided by subsection (a) (2) applies, the taxes referred to in the first sentence of subsection (d) shall, for purposes of applying such first sentence, be aggregated on an overall basis (rather than taken into account on a percountry basis). (2) Foreign taxes may not be carried from per-country year to overall year or from overall year to per-country year. No amount paid or accrued for any taxable year to which the limitation provided by subsection (a) (1) applies shall (except for purposes of determining the number of taxable years which have elapsed) be deemed paid or accrued under subsection (d) in any taxable year to which the limitation provided by subsection (a) (2) applies. No amount paid or accrued for any taxable year to which the limitation provided by subsection (a) (2) applies shall (except for purposes of determining the number of taxable years which have elapsed) be deemed paid or accrued under subsection |