CCA 201016072: Foreign tax credit carryovers remain subject to the section 904 limitation

Plain-English summary

Chief Counsel Advice explains how the foreign tax credit limitation applies when creditable foreign taxes exceed the U.S. tax attributable to the relevant foreign-source income category. The excess may be carried back to the immediately preceding year and then carried forward for ten years, but the section 904 limitation applies separately in each year. The advice notes that a taxpayer's failure to leave the United States does not by itself establish that the taxpayer had no foreign-source income, because income and foreign tax may relate to services performed abroad or income reported in a different year. It recommends reviewing the source of the income under sections 861 through 865 and applicable treaty provisions.

Ruling snapshot

• Question: How do the section 904 limitation and carryover rules apply to excess foreign tax credits and foreign-source income?
• Outcome: Advice given
• Key authorities: IRC §§ 861-865 and 904; Treas. Reg. § 1.904-6

Full text (IRS public release)

ID: CCA_2010032419233935 Number: 201016072
Release Date: 4/23/2010
Office: ------------------
UILC: 904.00-00

From: --------------------
Sent: Wednesday, March 24, 2010 7:23:41 PM
To: -------------------
Cc:
Subject: RE: FTC

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Nice to hear from you. You are on the right track here. Compulsory payments of creditable foreign income taxes are eligible for credit in the year paid or accrued, according to the taxpayer's method of accounting for foreign taxes. However, under section 904, the credit may be claimed in that year only to the extent of the pre-credit US tax that would otherwise be due on the foreign source taxable income in the same section 904(d) separate category or "basket" to which the foreign tax is apportioned under the rules of Treas. Reg. 1.904-6. If the pre-credit US tax attributable to the taxpayer's separate basket income is less than the amount of creditable foreign tax paid or accrued in that year, then the excess credit may be carried back to the immediately preceding year and then carried forward to each of the following 10 years until the excess is absorbed or expired.

The taxpayer's ability to use the excess credit in a carryback or carryforward year is limited in each year by the section 904 limitation. So if the taxpayer had foreign source taxable income in the general category in ------- but did not pay or accrue any foreign tax in ------- (and had no excess credits in the general category carried forward to ------- from prior years), then some or all of the general category excess foreign taxes paid or accrued in ------- may be carried back and used as a credit against the US tax on the general category foreign source income that was taxable in -------. The carryover and carryback rules help mitigate the economic double taxation that might otherwise occur if the US and the foreign country tax the same income in different taxable years.

The fact that the taxpayer did not leave the US in ------- does not necessarily mean he had no foreign source income in that year. For example, he might have reported income on the cash basis for work performed abroad in ------- for which he was paid in -------. In addition, he might have paid or accrued foreign tax in ------- on income reported for US tax purposes in -------. The source of income is generally determined under Code sections 861-865 and the regulations thereunder. Compensation for services performed in a foreign country may be treated as foreign source income under these rules. In addition, certain tax treaties may give US taxpayers the option to recharacterize some types of US source income as foreign source income to the extent necessary to relieve double taxation, if the income may be taxed by the foreign treaty partner as well as by the US.

When you get more information about the nature of the foreign source income reported by the taxpayer on his amended return for -------, please feel free to contact me if you have followup questions about how the income was sourced or how the section 904 limitation was computed for that year. Thanks.

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