Rev. Rul. 74-158

Advice has been requested whether, under the circumstances described below, the amount of the credit for foreign income taxes deemed paid under section 902(a)(1) of the Internal Revenue Code of 1954 is affected by an allocation of income from the foreign subsidiary to the domestic parent pursuant to section 482.

X, a corporation that is not a less developed country corporation, is a wholly-owned foreign subsidiary of domestic corporation M. Both corporations use the calendar year as their taxable year. For the taxable year 1972, X reported income of 100x dollars to foreign country Y and paid 40x dollars of income taxes to country Y with respect thereto. X also paid a dividend of 10x dollars during 1972 out of accumulated profits of 1972. Pursuant to section 482 of the Code, an increase in income of 30x dollars was made with respect to M's 1972 income. Under section 482 and section 1.482-1(d)(2) of the Income Tax Regulations, a correlative adjustment was made to X's 1972 expenses whereby X's 1972 expenses were increased by 30x dollars. The income taxes paid to country Y by X were not changed by the section 482 allocation.

Foreign income taxes deemed paid under section 902(a)(1) of the Code are determined in accordance with the following formula:

Dividends (without X Foreign income = Foreign income regard to section 78) taxes taxes deemed ----------------------------- paid Accumulated profits (as defined in section 902(c)(1)(A)) in excess of income taxes paid

Application of the formula to the facts of the instant case (without taking into account the 482 allocation) results in foreign income taxes deemed paid as follows:

10x dollars X 40x dollars = 6.67x dollars ----------------------------- 60x dollars (100x dollars - 40x dollars)

Application of the formula to the facts of the instant case (taking into account the 482 allocation) results in foreign income taxes deemed paid as follows:

10x dollars X 40x dollars = 13.33x dollars ----------------------------- 30x dollars (100x dollars - 30x dollars - 40x dollars)

If X, in the instant case had been a less developed country corporation, the principles set forth above would also apply in the computation of the foreign taxes deemed paid under section 902(a)(2) of the Code and based on the facts of the instant case would result as follows:

10x dollars X 30x dollars ( 70x dollars - 40x dollars) --------------------- ---------------------------------------- 30x dollars 70x dollars (100x dollars - 30x dollars) (70x dollars - 40x) X 40x dollars, or 10x dollars X 40x dollars = 5.71x dollars ----------- 70x dollars