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(iii) Under paragraph (a)(3) of this section, FOGEI and FORI are subject to foreign taxation under one tax base. This foreign tax is allocated between FOGEI tax and FORI tax in accordance with paragraph (a) (4) and (5) of this section.
(iv) The modified gross income for FOGEI is $11, i.e., fair market value in the immediate vicinity of the well ($9) plus the excess at the port of posted price over fair market value ($2). The modified gross income for FORI is $1, i.e., value added to the oil beyond the well-head which is part of Y's tax base ($10-$9).
(v) The royalty deductions are all directly attributable to FOGEI.
(vi) Under paragraph (a)(4) of this section, the income of each class is determined as follows:
port and Y imposes its tax on the basis of crude oil equivalences of $12 per barrel, rather than the value of the primary products, to establish port prices. Assume that this arrangement is a pricing arrangement described in section 907(d). Thus, Y does not tax the refinery income. The results are the same as in Example 3 even if $12 per barrel is equal to, more than, or less than, the value of the primary products at the port. See paragraph (a)(5)(vi) of this section. [T.D. 8338, 56 FR 11073, Mar. 15, 1991)
81.907(d)-1 Disregard of posted prices
for purposes of chapter 1 of the Code (for taxable years beginning
after December 31, 1982). (a) In general—(1) Scope. Section 907(d) applies if a person has FOGEI from the
(i) Acquisition (other than from a foreign government) or
(ii) Disposition of minerals at a posted price that differs from the fair market value at the time of the transaction. Also, if a seller (other than a foreign government) derives FOGEI upon a disposition described in the preceding sentence, section 907(d) applies to the acquisition by the purchaser whether or not the purchaser has FOGEI. Thus, section 907(d) may apply in determining a person's FORI.
(2) Initial computation requirement. If section 907(d) applies to any person, income on the transaction as initially reflected on the person's return shall be computed as if the transaction were effected at fair market value. This requirement applies the first time a person has taxable income derived from either the transaction or an item (such
a dividend described in section 907(C)(3)(A)) determined with reference to that income.
(3) Burden of proof. The taxpayer must be able to demonstrate the transaction as it actually occurred and the basis for reporting the transaction under the principles of paragraph (a)(2) of this section.
(4) Related parties. Section 907(d) (as a rule of characterization) applies whether or not the parties to the transaction are related. Thus, the excess of the posted price over the fair market value may never be taken into account in determining a person's FOGEI under section 907(a) but may be taken into account in determining a person's FORI.
(vii) Under paragraph (a)(4) of this section, the total tax paid to Y is allocated to FOGEI and FORI in proportion to the income in each class. The calculation is as follows: FOGEI tax=$4.78x$9.36/$9.56=$4.68 FORI tax=$4.78x$0.20/$9.56=$0.10 Thus, for the 10,000,000 barrels, the FOGEI tax is $46,800,000 and the FORI tax is $1,000,000.
(viii) The allocation under paragraph (a)(4) of this section, rather than the direct application of stated foreign tax rates to foreignlaw taxable income in each class of income (which would produce the same results in the facts of this example), is necessary when a foreign country taxes more than one class of income under a progressive rate structure. See Example 4 in this paragraph (e).
Example 4. Assume the same facts as in Example 3 except that Y's tax is imposed at 40 percent for the first $20,000,000 of income and at 60 percent for all other income. The foreign taxes are allocated under paragraph (a)(4) of this section between FOGEI and FORI in the same manner as in paragraphs (vi) and (vii) of Example 3, as follows: (1) Taxable income
$95,600,000 (2) Tax: (a) 40% of $20,000,000
8,000,000 (b) 60% of $75,600,000
45,360,000 (c) Total tax
53,360,000 (3) FOGEI tax (line 2(C)$9.36/ $9.56)
52,243,680 (4) FORI tax (line 2(c)*$0.20/$9.56) 1,116,320
Erample 5. Assume the same facts as in Example 3. Assume further that X refines the crude oil into primary products prior to ex
8 1.907(e)-1 [Reserved)
(b) Adjustments. If a taxpayer does not comply with the initial requirement of paragraph (a)(2) of this section, adjustments under section 907(d) may be made only by the Commissioner in the same manner that section 482 is administered. Correlative and similar adjustments consistent with the substantive and procedural principles of section 482 and $1.482-1(d) apply. However, section 907(d) is not a limitation on section 482. If a taxpayer disposing of minerals at a posted price does comply with the initial computation requirement of this section, adjustments and correlative and similar adjustments consistent with the substantive and procedural aspects of section 482 and $1.482-1(d) shall apply, whether made on the return by the taxpayer or on a later audit. This paragraph (b) does not apply to an actual sale or exchange of minerals made between persons with respect to whom adjustments under section 482 would never apply (but see paragraph (a)(4) of this section).
(c) Definitions. For purposes of this section
(1) Foreign government. The term foreign government means only the integral parts or controlled entities of a foreign sovereign and political subdivisions of a foreign country.
(2) Minerals. The term minerals has the same meaning as in $1.907(c)-1(f)(1).
(3) Posted price. The term posted price means the price set by, or at the direction of, a foreign government to calculate income for purposes of its tax or at which minerals must be sold.
(4) Other pricing arrangement. The term other pricing arrangement in section 907(d) means a pricing arrangement having the effect of a posted price.
(5) Fair market value. The term fair market value, whether or not at the port prior to export, is determined in the same way that the wellhead price is determined under $1.907(c)-1(b)(6). (T.D. 8338, 56 FR 11075, Mar. 15, 1991)
81.907(f)-1 Carryback and carryover
of credits disallowed by section 907(a) (for amounts carried between taxable years that each begin
after December 31, 1982). (a) In general. If a taxpayer chooses the benefits of section 901, any unused FOGEI tax paid or accrued in a taxable year beginning after December 31, 1982, may be carried to the taxable years specified in section 907(f) under the carryback and carryover principles of this section $1.904–2(b). See section 907(e) and $1.907(e)-1 for transitional rules that apply to unused FOGEI taxes carried back or forward between a taxable year beginning before January 1, 1983, and a taxable year beginning after December 31, 1982.
(b) Unused FOGEI tar—(1) In general. The “unused FOGEI tax" for purposes of this section is the excess of the FOGEI taxes for a taxable year (year of origin) over that year's limitation level (as defined in $1.907(a)-1(b)).
(2) Year of origin. The term “year of origin" in the regulations under section 904 corresponds to the term “unused credit year" under section 907(f).
(c) Tar deemed paid or accrued. The unused FOGEI tax from a year of origin that may be deemed paid or accrued under section 907(f) in any preceding or succeeding taxable year (“excess limitation year') may not exceed the lesser of
(1) The excess extraction limitation for the excess limitation year, or
(2) The excess general section 904 limitation for the excess limitation year.
(d) Excess extraction limitation. Under section 907(f)(2)(A), the “excess extraction limitation" for an excess limitation year is the amount by which that year's section 907(a) extraction limitation exceeds the sum of
(1) The FOGEI taxes paid or accrued, and
(2) The FOGEI taxes deemed paid or accrued in that year by reason of a section 907(f) carryback or carryover from preceding years of origin.
(f) Section 907(f) priority. If a taxable year is a year of origin under both section 907(f) and section 904(c), section 907(f) applies first. See section 907(f)(3)(A).
(g) Cross-reference. In computing the carryback and carryover of disallowed credits under section 907(f), the principles of $1.904–2 (d), (e), and (f) apply.
(h) Example. The following example illustrates the application of section 907(f).
Example. X, a U.S. corporation organized on January 1, 1983, uses the accrual method of accounting and the calendar year as its taxable year. X's only income is income which is not subject to a separate tax limitation under section 904(d). X's preliminary U.S. tax liability indicates an effective rate of 46% for taxable years 1983-1985. X has the following foreign tax items for 1983-1985:
(e) Excess general section 904 limitation. Under section 907(f)(2)(B), the "excess general section 904 limitation" for an excess limitation year is the amount by which that year's section 904 general limitation exceeds the sum of
(1) The general limitation taxes paid or accrued (or deemed to have been paid under section 902 or 960) to all foreign countries and possessions of the United States during the taxable year,
(2) The general limitation taxes deemed paid or accrued in such taxable year under section 904(c) and which are attributable to taxable years preceding the unused credit year, plus
(3) The FOGEI taxes deemed paid or accrued in that year by reason of a section 907(f) carryover (or carryback) from preceding years of origin.
2. FOGEI taxes
3. Other foreign taxable income
4. Other foreign taxes
5. (a) Section 907(a) limitation (.46 x Line 1)
(b) General section 904 limitation (.46 x (line 1 plus line 3))
6. (a) Unused FOGEI taxes (excess of line 2 over line 5(a))
(b) Unused general limitation taxes (excess of line 4 plus lesser of line 2 or line 5(a) over line 5(b))
X has unused 1983 FOGEI taxes of $600. Since the excess section 907(a) limitation for 1984 is zero, the unused FOGEI taxes are carried to 1985. Of the $600 carryover, $400 is deemed accrued in 1985 and the balance of $200 is carried to following years (but not to a year after 1988). After the carryover from
7. (a) FOGEI taxes from years preceding 1983 deemed accrued under section 907(f)
(b) Section 904 general limitation taxes from years preceding 1983 deemed accrued under section 904(c)
8. (a) Excess section 907(a) limitation (excess of line 5(a) over sum of line 2 and line 7(a)) (b) Excess section 904 general limitation (excess of line 5(b) over sum of line 4, lesser of line 2 and line 5(a) and line 7(b))
9. Limit on FOGEI taxes that will be deemed accrued under section 907(f) (lesser of line 8(a) and line 8(b)
1983 to 1985, the excess section 904 general limitation for 1985 (line 8(b)) is reduced by $400 to $1,600 to reflect the amount of 1983 FOGEI taxes deemed accrued in 1985 under section 907(f).
[T.D. 8338, 56 FR 11079, Mar. 15, 1991]
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