Rev. Rul. 71-141

Advice has been requested whether the taxpayers will be entitled to a credit under section 901(a) of the Internal Revenue Code of 1954 for foreign Country Y's taxes and to a credit, under section 902(a) of the Code, for Country Y's taxes deemed to have been paid with respect to dividends from a Country Y corporation under the circumstances described below.

Two unrelated domestic corporations, M and Q, formed and operated a partnership, M-Q, under the Uniform Partnership Act of the State of Delaware on December 30, 1968. M-Q is engaged in the production, manufacture, use and sale of X products. M and Q share equally in the profits and losses.

M-Q acquired 40 percent of the stock of T a corporation organized under the laws of Country Y. T also produces and sells X products.

M-Q entered into several contracts with T. These contracts provided that M-Q would provide certain technical services to T, sell certain plans, manuals, and other printed matter to T, furnish T with certain technical engineering services, and acquire certain machinery and equipment for T in return for which T would make certain payments to M-Q for such services and purchases.

The interest, fees, reimbursements, and other payments made to M-Q under the aforesaid contracts and all dividends that may be paid by T to M-Q will be subject to Country Y's withholding taxes. In addition, T pays income tax to Country Y. The foreign income taxes in question are creditable taxes under section 901 of the Code.

Section 901(a) of the Code provides that, subject to the applicable limitation of section 904 of the Code, the taxpayer may elect to credit against its United States income tax the amount of any income, war profits, and excess profits taxes paid or accrued to any foreign country plus, in the case of a domestic corporation, the taxes deemed to have been paid under sections 902 and 960 of the Code.

Section 902(a) of the Code provides that 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 a proportionate share of the creditable foreign taxes paid by the foreign corporation.

Section 702(a) of the Code provides that, in determining his income tax, each partner shall take into account separately his distributive share of the partnership's taxes, described in section 901 of the Code, paid or accrued to foreign countries and to possessions of the United States, and other items of income, gain, loss deduction, or credit, to the extent provided by regulations prescribed thereunder. See sections 1.702-1(a)(6) and 1.703-1(b)(2) of the Income Tax Regulations.

Accordingly, the taxpayers in the instant case, M and Q, are entitled to a credit under section 901(a) of the Code, subject to the limitations under section 904 of the Code, for their distributive shares of Country Y's taxes withheld at the source.

Since both M and Q are each a 50 percent owner of all of the assets of the partnership, each is treated as owning 20 percent of the stock of T and, therefore, each meets the 10 percent ownership rule of section 902(a) of the Code.

Accordingly, it is further held that M and Q are entitled to a credit, under section 902 of the Code, for their distributive shares of Country Y's taxes deemed to have been paid with respect to dividends received from T through M-Q.