NOTE: See reference and comment under preceding problem. Under the circumstances assumed as "facts" in this problem, the computation of the approximate credit would be as follows: 200,000 or 5, of $25,000) 5,000 Deduction from income ($10,000 less $5,000) 5,000 195,000 Illustrating the Computation of the Credits Allowed a FACTS: tributing Company Has Paid Foreign The Tupper Metal Co., Inc., a domestic corporation, owns 80% of the stock (all of one class) of the Bellaire Iron Works, a foreign corporation, which during the five years preceding December 31, 1921, has derived all its income from foreign sources. The net income of the Tupper Metal Company for its accounting year ended December 31, 1921, is shown in the following: Dividend from Bellaire Iron Works Total net income ...... $100,000 100,000 $200,000 The Federal income and profits tax liability of the Tupper Metal Company, Inc., on the above income, before taking any credit for any part of the foreign income and profits taxes paid by the Bellaire Iron Works, was $60,000. The net income of the Bellaire Iron Works for the calendar year 1920 (before deducting income and profits taxes of $40,000 accrued for 1920) was $200,000. The company paid a dividend of $125,000 February 1, 1921 (its only dividend in 1921), of which amount the Tupper Metal Company received 80%, or $100,000, as shown above. QUESTION: What amount of credit will be allowed the Tupper Metal Company against its own income and profits taxes, for income and profits taxes accrued against the Bellaire Iron Works? ANSWER: The above dividend, having been paid in the first sixty days of the 1921 accounting year, is regarded as having been paid from the 'accumulated profits' of 1920 (such being the most recently accumulated earnings, sufficient to meet the dividend paid February 1, 1921, of the year or years preceding 1921). The 'accumulated profits' of the Bellaire Iron Works for 1920, is the excess of the net income for that year ($200,000) over the income and profits taxes on that income ($40,000), or $160,000. As the income and profits taxes of $40,000 are due by the Bellaire Iron Works with respect to the total net income of $200,000 for 1920, the tax applicable to, or with respect to, the 'accumulated profits' may be taken to be that proportion of the total tax which the 'accumulated profits' bears to the total net income, or four-fifths of $40,000, which is $32,000. The dividend received by the Tupper Metal Company from the Bellaire Iron Works, $100,000, is to the 'accumulated profits' out of which the dividend was paid, $160,000, as 5:8. Five-eighths of $32,000 is $20,000, which amount is the credit allowed the Tupper Metal Company against its own income and profits taxes of $60,000. It must be observed that the $20,000 credit is less than the maximum limit upon such credit allowed by the statute. The maximum limitation is that proportion of the tax against which credit is claimed ($60,000 in this case) which the amount of dividends received from the foreign corporation on account of which credit is claimed ($100,000 in this case) bears to the entire net income in which such dividends are included (in this case $200,000). In this case the maximum limit is one-half of $60,000, or $30,000. The credit to be allowed is $20,000. REFERENCE: Sec. 238: "(e) For the purposes of this section a domestic corporation which owns a majority of the voting stock of a foreign corporation from which it receives dividends (not deductible under section 234) in any taxable year shall be deemed to have paid the same proportion of any income, war-profits, or excess-profits taxes paid by such foreign corporation to any foreign country or to any possession of the United States, upon or with respect to the accumulated profits of such foreign corporation from which such dividends were paid, which the amount of such dividends bears to the amount of such accumulated profits: Provided, That the credit allowed to any domestic corporation under this subdivision shall in no case exceed the same proportion of the taxes against which it is credited, which the amount of such dividends bears to the amount of the entire net income of the domestic corporation in which such dividends are included. The term "accumulated profits" when used in this subdivision in reference to a foreign corporation, means the amount of its gains, profits, or income in excess of the income, war-profits, and excess-profits taxes imposed upon or with respect to such profits or income; and the Commissioner with the approval of the Secretary shall have full power to determine from the accumulated profits of what year or years such dividends were paid; treating dividends paid in the first sixty days of any year as having been paid from the accumulated profits of the preceding year or years (unless to his satisfaction shown otherwise), and in other respects treating dividends as having been paid from the most recently accumulated gains, profits, or earnings. In the case of a foreign corporation, the income, warprofits, and excess-profits taxes of which are determined on the basis of an accounting period of less than one year, the word "year" as used in this subdivision shall be construed to mean such accounting period. (f) For the purposes of this section a corporation entitled to the benefits of section 262 shall be treated as a foreign corporation." PROBLEM 186 Illustrating Requirements to be met Before Commissioner will Allow Credit on Account of Foreign Income Taxes Paid FACTS: Walter B. Ames is a citizen of the United States having income from foreign sources as well as from sources within the United States. In 1921, he paid income tax to a foreign government. He is desirous of knowing what steps are necessary for him to take in order to credit his United States income tax with the allowable portion of the foreign income tax (as computed under section 222 (a) (1) and (5), (for illustration see Problem 182). QUESTION: What conditions are precedent to the allowance of a credit of foreign income tax against the income tax due the United States? ANSWER: It will be necessary for Mr. Ames to furnish the Commissioner with such information as will enable him to verify the correctness of the computation of the credit. In 1920 the Bureau prepared form 1116 on which the necessary information could be given. It is probable that a similar form will be issued in 1922, indicating the information required. REFERENCE: Sec. 222 (c): "These credits shall be allowed only if the taxpayer furnishes evidence satisfactory to the Commissioner showing the amount of income derived from sources without the United States, and all other information necessary for the verification and computation of such credits." CORPORATIONS: Corporations are also required to furnish the Commissioner such information as is required from individuals, the form for corporations during 1920 being 1118 instead of 1116 as above. Sec. 238 (c): "These credits shall be allowed only if the taxpayer furnishes evidence satisfactory to the Commissioner showing the amount of income derived from sources without the United States, and all other information necessary for the verification and computation of such credit." PROBLEM 187 Illustrating Computation of Credit for Income Taxes Paid to Foreign Government or Possession of United States in Case Taxpayer Files Return for Fiscal Year Ending in 1921 FACTS: Hiram Wheeler, a citizen of the United States, is about to file his income tax return for the twelve month period ending September 30, 1921. He finds upon an examination of his accounts that he paid to the Dominion of Canada during this period, income taxes in the amount of $490. One-third of his gross income and of his net income was derived from sources within the Dominion of Canada and two-thirds from sources within the United States. Mr. Wheeler finds that his United States income tax liability for the fiscal year ended September 30, 1921, without taking as a deduction from gross income any part of the income tax paid to the Dominion of Canada above mentioned, amounts to $2,465. QUESTION: If Mr. Wheeler should undertake to apply the amount of the income tax paid to the Dominion of Canada as a credit against the income tax due the United States, will such treatment be allowed by the Bureau? ANSWER: The Bureau will allow as a credit only such part of the income taxes paid to the Dominion of Canada, which is not in excess of the limits prescribed in paragraph 5 of section 222 (a). In other words such a credit shall not exceed "the same proportion of the tax, against which such credit is taken, which the tax |