Rev. Rul. 63-6

Advice has been requested as to the meaning of the term `accumulated profits' as used in section 902 of the Internal Revenue Code of 1954, prior to its amendment by section 9(a) of the Revenue Act of 1962.

Section 902(a) of the Code prior to its amendment by section 9(a) of the Revenue Act of 1962 provides as follows:

(a) TREATMENT OF TAXES PAID BY FOREIGN CORPORATION.-For purposes of this subpart, a domestic corporation which owns at least 10 percent of the voting stock of a foreign corporation from which it receives dividends in any taxable year shall be deemed to have paid the same proportion of any income, war profits, or excess profits taxes paid or deemed to be paid by such foreign corporation to any foreign country or to any possession of the United States, on 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.

Section 902(c) of the Code prior to its amendment by section 9(a) of the Revenue Act of 1962 reads in part as follows:

(1) The term `accumulated profits' when used in this section 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 on or with respect to such profits or income; * * *.

It has been contended that profits for this purpose may be either (1) the profits as shown on the books of the foreign corporation, (2) the profits as shown on the foreign tax return of the foreign corporation, computed pursuant to the laws of the foreign country, or (3) the profits computed according to the United States income tax laws.

In the application of United States income tax laws, the concepts established by that body of law are controlling, despite the fact that a particular transaction under consideration may have had its origin in a foreign country and, to that extent, may have been affected by a foreign income tax law. See Mary Duke Biddle v. Commissioner , 302 U.S. 573, Ct. D. 1303, C.B. 1938-1, 309; Edward D. Utermeyer v. Commissioner , 59 Fed.(2d) 1004, Ct. D. 644, C.B. XII-1, 157 (1933), affirming 24 B.T.A. 906 (1931), certiorari denied, 287 U.S. 647 (1932); Steel Improvement and Forge Co. , v. Commissioner , 36 T.C. 265 (1961).

The `accumulated profits' which enter into the determination of the foreign tax credit must, accordingly, be determined by reference to the concepts of United States law. This is the end result to be reached, regardless of whether, for convenience, the starting point in the computation may be the books of the foreign corporation or the profits as shown in a foreign tax return of such corporation.

Illustrations of various items which might be relevant in the computation of a foreign tax but would be disregarded in the computation of `accumulated profits' may be found in I.T. 2676, C.B. XII-1, 48 (1933), at pages 50 and 51.

The Code does not define the term `accumulated profits,' except to the limited extent outlined in section 902(c)(1). I.T. 2676 states that `accumulated profits' are `based as a fundamental principle upon all income of the foreign corporation available for distribution to its shareholders * * *.' Section 902(a) of the Code refers to `accumulated profits' as being the source from which the `dividends' received by the domestic corporation are paid. `Dividends' are elsewhere in the Code (section 316) defined as distributions of `earnings and profits,' and the definition is stated to be `for purposes of this the income tax subtitle.'

Since both `accumulated profits' and `earnings and profits' denote the same source from which `dividends' are paid, the criteria applicable to the determination of `earnings and profits' are equally applicable to the determination of `accumulated profits.'

Accordingly, for the purpose of deriving the applicable fraction for determining the foreign tax credit under section 902(a) of the Code, prior to its amendment by section 9(a) of the Revenue Act of 1962, the criteria applied under United States income tax law in determining `earnings and profits' which are the source of `dividends' are applicable in the determination of the `accumulated profits' mentioned in section 902(a), prior to its amendment by section 9(a) of the Revenue Act of 1962.