Rev. Rul. 72-370

Advice has been requested whether the foreign tax credit provisions of section 901 of the Internal Revenue Code of 1954, may be utilized by a taxpayer for foreign income taxes paid or accrued to a foreign government by a related party on income allocated under section 482 of the Code under the circumstances described below.

M, a domestic corporation, had its Federal income tax return for the calendar year 1968 examined by the Internal Revenue Service. As a result of the examination, income and related expense items of S, a wholly-owned foreign subsidiary of M operating in country Y, were allocated to M under the provisions of section 482 of the Code. The allocation of these items to M resulted in an increase in M's taxable income for 1968. The adjustment was necessary in order clearly to reflect the income of M for Federal income tax purposes. S had filed its tax return as required by country Y, prior to the examination and had paid the income tax due for 1968 to country Y. No income taxes would have been paid to country Y either by M or S, except for the misallocation of income and expenses. M's taxable year for 1968 does not come within the purview of Revenue Procedure 64-54, C.B. 1964-2, 1008, as amended by Revenue Procedure 66-33, C.B. 1966-2, 1231 and Revenue Procedure 69-13, C.B. 1969-1, 402, which provides relief in certain enumerated circumstances to a United States controlling taxpayer where there are certain allocations under section 482 of the Code, since those Revenue Procedures are effective for taxable years ending before January 1, 1965.

The specific question is whether M is entitled to take as a credit under section 901(a) of the Code the tax paid by S to country Y on the income allocated to M as a result of the examination.

Section 901 of the Code provides, in part, as follows:

(a) Allowance of credit.--

If the taxpayer chooses to have the benefits of this subpart, the tax imposed by this chapter shall, subject to the applicable limitations of section 904, be credited with the amounts provided in the applicable paragraph of subsection (b) . . .

(b) Amount allowed.--

Subject to the applicable limitation of section 904, the following shall be allowed as the credit under section (a):

(1) Citizens and Domestic Corporations.--

In the case of a citizen of the United States and of a domestic corporation, the amount of any income * * * taxes paid or accrued during the taxable year to any foreign country.

Credits for foreign taxes paid or accrued are allowed only to those who are taxpayers by virtue of the tax for which the credit is claimed, and by virtue of the credit itself in the sense that they are directly liable for the taxes which form the basis of the credit. Irving Air Chute Co. v. Commissioner, 143 F.2d 256 (1944), certiorari denied, 323 U.S. 773 (1945). If the taxpayer has not paid or become subject to the foreign tax, the taxpayer is not entitled to a credit for such tax. Mary Duke Biddle v. Commissioner, 302 U.S. 573 (1938), Ct. D. 1303, C.B. 1938-1, 309. Furthermore, if the income and expenses had been correctly treated as having been earned by M, no foreign tax would have been paid or accrued either by M or by S.

Accordingly, since in the instant case no foreign tax would have been paid either by M or S if the income and expenses had been correctly treated as that of M, the foreign tax credit is not allowable under section 901 of the Code to M for that portion of foreign income tax paid by S upon income which is allocated to M under section 482 of the Code.