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Rev. Rul. 54-533


Rev. Rul. 54-533; 1954-2 C.B. 210

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Citations: Rev. Rul. 54-533; 1954-2 C.B. 210
Rev. Rul. 54-533

Advice is requested whether a taxpayer, who is a resident of the United States, may claim as a credit against United States income tax the amount of United Kingdom standard income tax on dividends received from a corporation which is a resident of the United Kingdom when the taxpayer claims the optional standard deduction, and whether such amount is required to be included in the taxpayer's gross income.

Section 23(aa)(2) of the Internal Revenue Code of 1939 provides in part as follows:

* * * The standard deduction shall be in lieu of: * * * (B) all credits with respect to taxes of foreign countries and possessions of the United States, * * *.

Article VI(2) of the income tax convention between the United States and the United Kingdom, Treasury Decision 5569, C. B. 1947-2, 100, provides that dividends derived from sources within the United Kingdom shall be exempt from United Kingdom surtax provided that the recipient of such dividends meets certain requirements. Although the surtax is the only tax imposed on dividends in the hands of the shareholder, the United Kingdom imposes a standard tax upon the earnings of corporations, out of which earnings after tax dividends are ultimately paid. Although shareholders in United Kingdom corporations are required to report as income for United Kingdom income tax purposes, in addition to the amount of dividends actually received, amounts which reflect their respective proportions of the standard tax paid by the corporation on its profits, the corporation is, in fact, liable for the standard tax. Therefore, the shareholder is not required to include in his income for Federal tax purposes the amount of tax paid by the corporation and, in the absence of treaty, could not claim credit against his United States tax for the amount of such tax. Biddle v. Commissioner 302 U.S. 573, Ct. D. 1303, C.B. 1938-1, 309.

Article XIII(1) of the income tax convention provides:

Subject to section 131 of the United States Internal Revenue Code as in effect on the 1st day of January, 1945, United Kingdom tax shall be allowed as a credit against United States tax. For this purpose, the recipient of a dividend paid by a corporation which is a resident of the United Kingdom shall be deemed to have paid the United Kingdom income tax appropriate to such dividend if such recipient elects to include in his gross income for the purposes of United States tax the amount of such United Kingdom income tax.

Therefore, the shareholder is permitted by treaty to claim credit against United States tax for the United Kingdom standard tax appropriate to such dividend even though he is not legally liable for the tax.

If A, a United States resident, holds stock in the M Company, Limited, a United Kingdom corporation, and A's so-called gross dividends (i.e., dividends received plus standard tax thereon) derived from his stock during the year amount to $1,000, he will, presuming that the United Kingdom standard tax is 45 percent, actually receive only $550. If A desires, subject to the conditions and limitations of section 131 of the Internal Revenue Code, to claim a credit for the $450 deemed to have been paid by him, he must report in his gross income for the year the amount of $1,000 and may not claim the standard deduction. If, on the other hand, A elects to claim the optional standard deduction he may not claim the foreign tax credit for the United Kingdom standard tax on dividends but he will be required to include only the dividend payment actually received by him ($550 in the illustration above) in his gross income.

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