Rev. Rul. 61-93

Reconsideration has been given to I.T. 4033, C.B. 1950-2, 52, which deals with the question of whether the tax imposed on net income by the Hong Kong Inland Revenue Ordinance of 1947 qualifies as an income tax for which a credit against United States income tax is allowable under section 131 of the Internal Revenue Code of 1939 and, if so, the year in which such credit is allowable.

I.T. 4033, supra , states the Hong Kong Inland Revenue Ordinance of 1947, effective April 1, 1947, imposes a schedular tax with the right of election to lump all income from whatever sources under one tax rate. Under the ordinance, the Hong Kong taxable year is a period of 12 months commencing on the 1st day of April and ending on the 31st day of March of the succeeding year.

After concluding that the Hong Kong tax concerned qualifies as an income tax for which a credit against United States income tax is allowable under section 131(a) of the Internal Revenue Code of 1939 (section 901 of the Internal Revenue Code of 1954), I.T. 4033 refers to section 131(d) of the 1939 Code and states, in part, that a taxpayer who files his Federal income tax returns for the calendar year under the cash receipts and disbursements method of accounting may elect to take credit for foreign taxes for the year in which they accrue provided the credit for all subsequent years is taken upon the same basis. In conclusion I.T. 4033 holds, in pertinent part, as follows:

* * * If such a taxpayer elects to accrue such foreign taxes, the allowable credit for Hong Kong income tax is that portion of the total tax paid to Hong Kong for the Hong Kong taxable year ending on March 31 which bears the same relation to the total tax as the net income received by the taxpayer that is subject to Hong Kong tax for the period April 1 through December 31 bears to the net income received that is subject to Hong Kong tax for the entire Hong Kong taxable year.

Section 905(a) of the 1954 Code, the counterpart of section 131(d) of the 1939 Code, provides that the credit for foreign taxes may, at the option of the taxpayer and irrespective of the method of accounting employed in keeping his books, be taken in the year in which the taxes of the foreign country or possession of the United States accrued, subject to the conditions prescribed in section 905(c) of the 1954 Code.

The accrual of foreign taxes, for the purpose of the foreign tax credit under section 901 of the 1954 Code and section 131 of the 1939 Code, must conform to the general rules laid down under section 461 of the 1954 Code or section 43 of the 1939 Code which state, in effect, that deductions and credits shall be taken for the taxable year which is the proper taxable year under the method of accounting used in computing taxable income.

Under the accrual method of accounting, deductions are allowable for the taxable year in which all the events have occurred which establish the fact of liability giving rise to such deduction and the amount thereof. Where a liability is contingent or dependent upon future events, it may not be accrued until the contingency is removed or the events have occurred.

I.T. 3309, C.B. 1939-2, 183, concerns the year of accrual by a United States company employing the accrual method of accounting and filing its Federal income tax returns on the basis of a calendar year, of the British national defense contribution tax assessed against and payable by the London branch of the company. After considering that such tax becomes a liability of the taxpayer on the last day of its accounting period, I.T. 3309 holds that the British national defense contribution tax may be accrued, for Federal income tax purposes, for the United States taxable year in which falls the end of the British chargeable accounting period upon the profits of which the national defense contribution tax is subsequently computed and assessed. See also, Universal Winding Company v. Commissioner , 39 BTA 962, Acq. C.B. 1940-1, 5.

In I.T. 3201, C.B. 1938-2, 196, the Internal Revenue Service considered the nature and proper accrual date for Federal income tax purposes of the `special property tax' imposed by the Commonwealth of Australia on dividends declared by an Australian corporation and payable to its nonresident foreign stockholders. After concluding that the special property tax is merely an additional income tax to be treated as such for Federal income tax purposes and that liability for such tax becomes fixed on the last day of the Australian financial year, I.T. 3201 holds that such Australian tax should be accrued for the taxpayer's United States taxable year in which the Australian financial year (year of income) ends.

From the foregoing, it is apparent that, for the purpose of the foreign tax credit, foreign income taxes are considered as accrued in the taxable year in which the taxpayer's liability for such foreign taxes becomes fixed and determinable. Generally such accrual occurs in the United States taxable year within which the taxpayer's foreign taxable year ends.

Upon reconsideration of I.T. 4033 in the light of the rulings and the cases cited above, it is concluded that the above quoted portion of the holding in I.T. 4033, which, in effect, allows a calendar year taxpayer who uses the cash method of accounting to prorate the amount of creditable foreign income tax between the two United States taxable years in which his foreign tax year falls, is incorrect. Accordingly, it is held that, if a taxpayer who files his Federal income tax returns under the cash receipts and disbursements method of accounting, elects to claim the income tax imposed by Hong Kong as a credit, under section 901 of the Internal Revenue Code of 1954, for the year in which such tax accrues, the allowable credit shall be taken against the tax for the taxpayer's United States taxable year within which the Hong Kong taxable year ends.

I.T. 4033, C.B. 1950-2, 52, is hereby modified to eliminate therefrom the conclusion that a taxpayer who files his Federal income tax returns for the calendar year under the cash receipts and disbursements method of accounting and who elects to take credit for the Hong Kong tax for the year in which it accrues, may prorate the amount of creditable Hong Kong tax.