Rev. Rul. 70-290

The purpose of this Revenue Ruling is to update and restate under the current statute and regulations, the position set forth in S.M. 2243, C.B. IV-1, 231 (1925).

The question presented is the extent to which the taxpayer should under the circumstances described below, be allowed a credit under section 901 of the Internal Revenue Code of 1954 for taxes paid to a foreign government.

The taxpayer, a domestic corporation, had income from a foreign country in 1967 and 1968 and was assessed an income tax by the government of that foreign country. The tax assessed was paid by the taxpayer. However, the taxpayer was not certain that the amount assessed was its true tax liability. The tax assessed by the foreign government was computed upon information furnished by the corporation and was not based upon a return wherein the net income and tax liability are reported. The taxpayer has claims for overassessment of tax pending before the government of the foreign country for the taxable years 1967 and 1968.

The tax levied by the foreign government is an income and excess profits tax within the meaning of section 901(b)(1) of the Code.

Section 901(b)(1) of the Code provides, in part, that subject to the limitations of section 904 of the Code a domestic corporation shall be allowed as a credit under section 901(a) of the Code, the amount of any income, war profit, and excess profits taxes paid or accrued during the taxable year to any foreign country or to any possession of the United States. Section 905(c) of the Code provides that if the accrued taxes when paid differ from the amount claimed as credits by the taxpayer, or if any tax paid is refunded in whole or in part the taxpayer shall notify the Secretary of the Treasury of his delegate, who shall redetermine the amount of the tax for the year or years affected. The amount of tax due on such redetermination, if any, shall be paid by the taxpayer on notice and demand by the Secretary or his delegate or the amount of tax overpaid, if any, shall be credited or refunded to the taxpayer in accordance with subchapter B of Chapter 66 (section 6511 of the Code and following sections).

Section 905(b) of the Code provides, in pertinent part, that credits provided in this subpart shall be allowed only if the taxpayer establishes to the satisfaction of the Secretary of the Treasury or his delegate (1) the total amount of income derived from sources without the United States, (2) the amount of income derived from each country, the tax paid or accrued to which is claimed as a credit under this subpart, and (3) all other information necessary for the verification and computation of such credit.

The foregoing provisions contemplate that credit is to be given for the full taxes paid a foreign government under such circumstances as exist in the instant case and for a redetermination of the credit in the event of a refund to the taxpayer by the foreign government of such taxes. It is not the intention of the law to deprive the taxpayer of the right to obtain credit for foreign taxes because of the fact that the taxpayer contests the validity of the statute under which the amount of taxes were paid or because it protests the assessment and has made application for a refund. The tax assessed constitutes a liability against the taxpayer. In the instant case such liability was met by actual cash disbursements. If the protest by the taxpayers against the original assessment prevails, any difference can readily be adjusted pursuant to the provisions of section 905(c) of the Code.

Accordingly, if the taxpayer in the instant case has complied with the conditions prescribed in section 905(b) of the Code, it is entitled to a credit under section 901 of the Code for the taxes paid to the government of the foreign country upon income derived from sources therein against its Federal income tax for the taxable years involved.

S.M. 2243 is hereby superseded, since the position stated therein is restated under the current law in this Revenue Ruling.

¹ Prepared pursuant to Rev. Proc. 67-6, C.B. 1967-1, 576.