Rev. Proc. 81-58

SECTION 1. PURPOSE

The purpose of this revenue procedure is to modify sections 3.06 and 3.07 of Rev. Proc. 80-18, 1980-1 C.B. 623, 626.

Section 3.07 of Rev. Proc. 80-18 is modified to reflect the fact that under United Kingdom tax law (1) a partnership cannot claim the Advance Corporation Tax ("ACT") refund on the United Kingdom form U.S./Corporation/Credit as presently indicated in section 3.07 2), or on any other form and, (2) the beneficiaries of an estate or trust must file a claim for the ACT refund on the appropriate United Kingdom form with respect to dividends that are taxable to such beneficiaries rather than to the estate or trust, since the estate or trust may claim the ACT refund only with respect to dividends taxable to it. Both the United Kingdom and the United States look to the definition of "fiscal residence" provided in Article 4 of the United States-United Kingdom Tax Convention, 1980-1 C.B. 394, 396, (the "Convention"), in order to determine the applicability of a particular benefit provided by the Convention. Pursuant to Article 4(1)(b)(i) of the Convention, the residence of a partner seeking the particular benefit and not that of the partnership is determinative. Pursuant to this same Article, an estate or a trust is resident in either the United States or the United Kingdom only to the extent that the income derived by the estate or trust is subject to either country's tax as the income of a resident thereof.

A claim for a refund of the ACT is not available to a partnership, as such, but rather is available to its partners. Thus, the partners must make the claim on the appropriate United Kingdom form, i.e., U.S./Individual/Credit if the partner making the claim is an individual and U.S. 7/Credit or U.S./Corporation/Credit, as the case may be, if the partner is other than an individual, such as a corporation, an estate, or a trust.

An estate or a trust may make a claim for the ACT refund on the appropriate United Kingdom form (U.S. 7/Credit or U.S./Corporation/Credit) only with respect to dividends taxable to the estate or trust as such. If, on the other hand, the dividends with respect to which an ACT refund is sought to be claimed are taxable to the beneficiaries as, for example, currently distributed income, each beneficiary must make the claim on the appropriate United Kingdom form rather than the estate or trust.

This revenue procedure also modifies section 3.06 of Rev. Proc. 80-18, 1980-1 C.B. 623, 626, to add an explanation and an illustrative example of the application of the rate of exchange to United Kingdom tax withheld pursuant to Article 10(2)(a) of the Treaty, 1980-1 C.B. 394, 398, for purposes of computing the direct foreign tax credit for such tax under section 901 of the Internal Revenue Code.

SEC. 2. CHANGES AND THEIR EFFECT ON OTHER REVENUE PROCEDURES

The first paragraph of section 3.07 of Rev. Proc. 80-18 is modified to read as follows:

.07 Manner of Claiming ACT Refunds from United Kingdom. A U.S. shareholder claiming ACT refunds as provided in paragraph (2)(a) of Article 10 must make such claim on the appropriate United Kingdom form. The appropriate United Kingdom forms are: 1) U.S. 7/Credit, for a U.S. direct investor to obtain authorization for a United Kingdom corporation to distribute future dividends with ACT refunds; 2) U.S./Corporation/Credit, for a U.S. corporation owning less than 10 percent of the voting stock of a distributing United Kingdom corporation, for a U.S. direct inventory with respect to ACT which is not subject to a claim for relief pursuant to U.S. 7/Credit (including ACT paid with respect to dividends distributed prior to April 25, 1980), and for any other U.S. resident other than an individual (e.g., an estate or trust in receipt of dividends taxable to the estate or trust); 3) U.S./Individual/Credit, for U.S. individual residents, including an individual partner of a partnership and an individual beneficiary of an estate or trust in receipt of dividends not taxable to the estate trust. (U.S. PERSONS MUST USE OTHER United Kingdom forms for relief under the Convention from United Kingdom tax on other items of income: 1) U.S./Individual (interest, royalties, pensions, annuities, alimony); 2) U.S./Corporation (interest, royalties).) In the United States the United Kingdom forms for ACT refunds may be obtained from the Office of International Operations, Internal Revenue Service, 1325 K Street, NW, ATTN: Taxpayer Service Division, Room 900, Washington, DC 20225. In the United Kingdom forms may be obtained from the Inspector of Foreign Dividends, Lynwood Road, Thames Ditton, Surrey, England, KT70DP.

Section 3.06 is modified to add to the end of the first paragraph the following:

Thus, for purposes of the foreign tax credit, the amount withheld by the United Kingdom from the ACT refund must be proportionately allocated between the year the dividend was received and the year the refund was received at the applicable exchange rates, the proportions being the result of the United Kingdom tax withheld (converted at the applicable exchange rate when withheld) multiplied by (1) the ratio that the dividend received bears to the aggregate of the amount of the dividend and the amount of the refund and (2) the ratio that the refund bears to the aggregate of the amount of the dividend and the amount of the refund. For purposes of computing the ratios, the dividend and the refund are to be converted at the applicable exchange rate when received. The following example illustrates the method of computing the allocation of the United Kingdom tax withheld between the appropriate years in the context of an ACT refund made to a direct investor (the domestic parent of a United Kingdom subsidiary):

Assumptions:

1. Domestic corporation P, received a dividend from wholly-owned United Kingdom subsidiary corporation S on July 1, 1979 in the amount of ???50,000 when the exchange rate was $2.2 (???50,000 = $110,000).

2. S paid ACT with respect to the dividends distributed to P in the amount of ???21,429 (3/7 of the dividends paid).

3. P was entitled to and properly claimed refund (tax credit) pursuant to Article 10(2)(a)(i) of the Treaty from the United Kingdom on June 1, 1980 in the amount of ???10,715 (1/2 of ???21,249) when the exchange rates was $2.3 (???10,715 = $24,645 /*/).

4. Pursuant to Article 10(2)(a)(i) of the Treaty, the United Kingdom withheld a tax of 5 percent of the aggregate of the amount of the dividend and the amount of the refund (tax credit) to be paid to P (grossed-up dividend) when the exchange rate was $2.3 (5% of ???50,000 + ???10,715 = ???3,036 = $6,983).

 Method of Exchange Rate Computation: