and his proportionate share (2) of the amount paid by the partnership in which he has one-half interest.

REFERENCES:

Sec. 222 (a): "That the tax computed under Part II1 of this title shall be credited with: ... (2) In the case of a resident of the United States, the amount of any such taxes paid during the taxable year to any possession of the United States; and... (4) In the case of any such individual who is a member of a partnership or a beneficiary of an estate or trust, his proportionate share of such taxes of the partnership of the estate of trust paid during the taxable year to a foreign country or to any possession of the United States, as the case may be."

PROBLEM 181

Illustrating Credit for Taxes Paid to a Foreign Country by An Alien Resident of the United States

FACTS:

A. Fiani, an alien resident of the United States, pays to Italy, of which country he is a citizen, an income tax of $50 in the calendar year 1921. One-fourth of his income is derived from sources within that country, and the balance is derived from sources within the United States. His Federal income tax liability is $400.

QUESTION 1:

Can Mr. Fiani credit his Federal income tax liability with the amount of income tax paid to the country of which he is a citizen?

ANSWER 1:

Yes, because Italy permits a similar credit to citizens of the United States resident in Italy.

REFERENCE:

Sec. 222 (a): "That the tax computed under Part II1 of this title shall be credited with: (3) In the case of an alien resident of the United States, the amount of any such taxes paid during the

1 Relates to income tax on individuals.

taxable year to any foreign country, if the foreign country of which such alien resident is a citizen or subject, in imposing such taxes, allows a similar credit to citizens of the United States residing in such country"; [see Art. 385, Reg. 62, for list of countries allowing similar credit to citizens of the United States].

QUESTION 2:

If, after filing his Federal income tax return and making claim for the credit of $50, Mr. Fiani receives from the Italian Government a refund of a portion of the amount paid to that country, is any further action to be taken by him with respect to his Federal tax status?

ANSWER 2:

Yes, he must notify the Commissioner of Internal Revenue, who will recompute Mr. Fiani's tax liability, and Mr. Fiani will be required to pay an additional tax.

REFERENCE:

Sec. 222 (b): "If accrued taxes when paid differ from the amounts claimed as credits by the taxpayer, or if any tax paid is refunded in whole or in part, the taxpayer shall notify the Commissioner, who shall redetermine the amount of the tax due under Part II1 of this title for the year or years affected, and the amount of tax due upon such redetermination, if any, shall be paid by the taxpayer upon notice and demand by the collector, or the amount of tax overpaid, if any, shall be credited or refunded to the taxpayer, in accordance with the provisions of section 252. In the case of such a tax accrued but not paid, the Commissioner as a condition precedent to the allowance of this credit may require the taxpayer to give a bond with sureties satisfactory to and to be approved by the Commissioner in such penal sum as the Commissioner may require, conditioned for the payment by the taxpayer of any amount of tax found due upon any such redetermination; and the bond herein prescribed shall contain such further conditions as the Commissioner may require."

PROBLEM 182

Illustrating Limitation on Credit for Foreign Income Taxes Paid by a Citizen of the United States

FACTS:

G. Spinola, citizen of the United States, has a total taxable 1 Relates to income tax on individuals.

net income in 1921 amounting to $9,000 before making any deduction for foreign income taxes paid by him. Of this amount $3,000 is derived from foreign sources, upon which he has paid foreign income taxes of $500. His exemption is $1,000. Mr. Spinola files his return on a calendar year basis.

QUESTION:

What portion of the $500 foreign income tax paid may be taken as a credit against Mr. Spinola's Federal tax liability? ANSWER:

Assuming the amount of the credit to be "C," then the amount deductible from income is $500 minus C, and the taxable net income is $9,000 minus ($500 minus C), or $8,500 plus C. Mr. Spinola's normal tax will be 4% of $4,000 plus 8% of ($8,500 plus C minus $5,000). His total normal tax is there

8C

8C

fore $160 plus $680 plus- minus $400, or $440 plus 100

100

His surtax will be $50 plus 3% of ($8,500 plus C minus $8,000),

a total of $50 plus $255 plus minus $240, or $65 plus

3C

100

8C

3C 100

The total Federal tax liability is, therefore, $440 plus

100

11C

100

Therefore C equals 1% ($505 plus- )=$168% plus

300 C equals $505.00 plus 11C

11C

300

Net income before deducting foreign tax .... $9,000.00

Foreign tax deductible ($500.00-$174.74) ..

Taxable net income

Exemption

...

325.26

$8,674.74

1,000.00

REFERENCE:

Sec. 222 (a) "That the tax computed under Part II of this title shall be credited with: . . . (1) In the case of a citizen of the United States the amount of any income, war-profits and excess-profits taxes paid during the taxable year to any foreign country or to any possession of the United States; and... (5) The above credits shall not be allowed in the case of a citizen entitled to the benefits of section 262; and in no other case shall the amount of credit taken under this subdivision exceed the same proportion of the tax, against which such credit is taken, which the taxpayer's net income (computed without deduction for any income, war-profits and excess-profits taxes imposed by any foreign country or possession of the United States) from sources without the United States bears to his entire net income (computed without such deduction) for the same taxable year."

NOTE:

See Problem 183 for comment. Under the facts assumed in this problem, the computation of the approximate credit would be as follows:

Illustrating Credit for Foreign Income Taxes Paid by a Domestic Corporation—1921

FACTS:

The Acme Adding Machine Company, a domestic corporation in the calendar year 1921, pays foreign income and profits taxes amounting to $25,000, on income from foreign sources amounting to $50,000. The company's total taxable net income without deducting any amount for foreign income and profits taxes paid, was $150,000. Its invested capital for 1921 was $500,000. It files its returns on the calendar-year basis.

QUESTION:

What portion of the $25,000 income and profits taxes paid to the foreign country may be taken as a credit against the company's Federal income and profits tax liability for the calendar year 1921?

ANSWER:

Using the letter "C" to indicate the amount of credit that will be allowed, the net income subject to Federal income and profits tax will be $150,000 minus ($25,000 minus C), or $125,000 plus