Rev. Rul. 74-59

Advice has been requested whether a dividend received by a foreign personal holding company and included in the gross income of its United States parent corporation as undistributed foreign personal holding company income will be treated as a dividend received by the United States parent corporation for purposes of the foreign tax credit provisions of section 902 of the Internal Revenue Code of 1954.

P, a domestic corporation, is the sole shareholder of Y, a holding company organized under the laws of Canada. During the current taxable year Y's wholly-owned Canadian subsidiary S made a dividend distribution to Y from its accumulated earnings and profits. No dividends were paid to P. During the year in question Y was a foreign personal holding company within the meaning of section 552(a) of the Code.

Section 551 of the Code provides the manner and extent that undistributed foreign personal holding company income shall be included in the gross income of a domestic corporation which is a shareholder in such foreign personal holding company.

Section 551(b) of the Code provides, in part and in effect, that in the case of a foreign personal holding company controlled for the entire taxable year by a United States group each United States shareholder shall include in his gross income, as a dividend, the amount he would have received as a dividend if on the last day of its taxable year there had been distributed by the company, and received by the shareholder, the undistributed foreign personal holding company income of the company for the taxable year.

Section 556(a) of the Code provides that the term "undistributed foreign personal holding company income" means the taxable income (including dividends received) of a foreign personal holding company, with certain adjustments, minus the dividends paid deduction. Among the adjustments provided in section 556(b) is a deduction for Federal income and excess profit taxes, and income, war profits, and excess profits taxes of foreign countries and possessions of the United States (to the extent not allowable as a deduction under section 275(a)(4).

Section 561 of the Code provides, in part, that the deduction for dividends paid includes the dividends paid during the taxable year and the consent dividends for the taxable year (determined under section 565).

Section 565(a) of the Code provides, in general, that if any person owns consent stock (as defined in section 565(f)(1)) in a corporation on the last day of the taxable year of such corporation, and such person agrees, in a consent filed with the return of such corporation, to treat as a dividend the amount specified in such consent, the amount so specified shall constitute a consent dividend for the purpose of section 561.

Section 565(c)(1) and (2) of the Code provides that the amount of a consent dividend shall be considered, for the purpose of subtitle A of the Code, (1) as distributed in money by the corporation to the shareholder on the last day of the taxable year of the corporation, and (2) as contributed to the capital of the corporation by the shareholder on such day.

Section 902(a) of the Code provides, in general, that a domestic corporation that owns at least 10 percent of the voting stock of a foreign corporation from which it receives dividends in any taxable year that were paid out of accumulated profits shall be deemed to have paid a certain portion of any creditable income tax paid or deemed to have been paid by such foreign corporation to any foreign country or to any possession of the United States on or with respect to such accumulated profits.

Section 902(b) of the Code provides, in general, that if the foreign corporation described in section 902(a) (first foreign corporation) owns 10 percent or more of a second foreign corporation from which it receives dividends in any taxable year, it shall be deemed to have paid a certain portion of any creditable income tax paid or deemed to be paid by such second corporation to any foreign country, or any possession of the United States on or with respect to the accumulated profits of the second corporation from which such dividends were paid.

The foreign personal holding company provisions, originally enacted as part of the Revenue Act of 1937, were based on proposals of the Joint Committee on Tax Evasion and Avoidance of the Congress of the United States. The Report of the Joint Committee, H.R. Doc. No. 337, 75th Cong., 1st Sess., proposed, in part, that the United States shareholders of foreign personal holding companies should have gross income as if they had received a hypothetical dividend. However, the Report also specifically recommended at page 18 as follows:

The American shareholders should not be allowed any credit against their Federal income taxes for foreign income taxes, if any, paid by the foreign personal holding company in respect to the undistributed adjusted net income returned by them.

See also, Testimony of Assistant General Counsel, Treasury Department, Hearing on Tax Evasion and Avoidance Before the House Committee on Ways and Means, 75th Cong., 1st Sess., at 77 (1937). Congress enacted the Joint Committees' proposals without substantial alteration.

Accordingly, it is held that the dividend paid to Y by its subsidiary S which constitute undistributed foreign personal holding company income includible in the gross income of P under section 551 of the Code will not be considered a dividend received by P for purposes of the allowance of a foreign tax credit under section 902. However, where a consent dividend is utilized by a domestic corporate shareholder and a foreign personal holding company the consent dividend will be considered a dividend received for purposes of the allowance of a foreign tax credit under section 902.