§ 1.78-1 - Gross up for deemed paid foreign tax credit.

§ 1.78-1 Dividends received from certain foreign corporations by certain domestic corporations choosing the foreign Gross up for deemed paid foreign tax credit.

(a) Taxes deemed paid by certain domestic corporations treated as a section 78 dividend. Any reduction under section 907(a) of the foreign income taxes deemed to be paid with respect to foreign oil and gas extraction income does not affect the amount treated as a section 78 dividend. If a domestic corporation chooses to have the benefits of the foreign tax credit under section 901 for any taxable year, an amount which that is equal to the U.S. dollar amount of foreign income taxes deemed to be paid by such the corporation for such the year under section 902960 (a) in accordance with §§ 1.902-1 and 1.902-2 and § 1.902(b)(2), or under section 960(a)(1) in accordance with § 1.960-7, shall, in the case of section 960(d), determined without regard to the phrase “80 percent of” in section 960(d)(1)) is, to the extent provided by this section, be treated as a dividend (hereinafter referred to as a section 78 dividend) received by such the domestic corporation from the foreign corporation described in section 902(a) in accordance with §§ 1. 902-1 and 1.902-2 or section 960(c)(1) in accordance with § 1.960-7, as the case may be. A section 78 dividend shall be is treated as a dividend for all purposes of the Code, except that it shall is not be treated as a dividend under for purposes of section 245 , relating to dividends received from certain foreign corporations, or or 245A, and does not increase the earnings and profits of the domestic corporation . For purposes of determining the source of a section 78 dividend in computing the limitation on the foreign tax credit under section 904, see § 1.902(h)(1) and the regulations under section 960. For rules respecting the reduction of foreign income taxes under section 6038(b) in applying section 902(a) in accordance with §§ 1.902-1 and 1.902-2 or section 960or decrease the earnings and profits of the foreign corporation. Any reduction under section 907(a) of the foreign income taxes deemed paid with respect to combined foreign oil and gas income does not affect the amount treated as a section 78 dividend. See § 1.907(a)-1(e)(3). Similarly, any reduction under section 901(e) of the foreign income taxes deemed paid with respect to foreign mineral income does not affect the amount treated as a section 78 dividend. See § 1.901-3(a)(2)(i), (b)(2)(i)(b), and (d) Example 8. Any reduction under section 6038(c)(1) in accordance with § 1.960-7, where there has been a failure to furnish certain information and for an illustration of the effect of such reduction upon the amount of (B) in the foreign taxes paid or accrued by a foreign corporation is taken into account in determining foreign taxes deemed paid and the amount treated as a section 78 dividend, see paragraph (l) of . See, for example, § 1.6038-2. (

b) Certain taxes not treated as a section 78 dividend. Foreign income taxes deemed paid by a domestic corporation under section 902(a) in accordance with §§ 1.902-1 and 1.902-2 or section 960(c)(1) in accordance with § 1.960-7, shall not, to the extent provided by paragraph (b) of § 1.960-3, be treated as a section 78 dividend where such taxes are imposed on certain distributions from the earnings and profits of a controlled foreign corporation attributable to an amount which is, or has been, included in gross income of the domestic corporation under section 951.

(c) United Kingdom income tax included in gross income under treaty. Any amount of United Kingdom income tax appropriate to a dividend paid by a corporation which is a resident of the United Kingdom shall not be treated as a section 78 dividend by a domestic corporation to the extent that such tax is included in the gross income of such domestic corporation in accordance with Article XIII (1) of the income tax convention between the United States and the United Kingdom, as amended by Article II of the supplementary protocol between such Governments signed on August 19, 1957 (9 UST 1331). See § 507.117 of this chapter, relating to credit against United States tax liability for income tax paid or deemed to have been paid to the United Kingdom.

(d) Taxable year in

k)(5) Example 1. To the extent provided in the Code, section 78 does not apply to any tax not allowed as a credit. See, for example, sections 901(j)(3), 901(k)(7), 901(l)(4), 901(m)(6), and 908(b). For rules on determining the source of a section 78 dividend in computing the limitation on the foreign tax credit under section 904, see §§ 1.861-3(a)(3), 1.862-1(a)(1)(ii), and 1.904-5(m)(6). For rules on assigning a section 78 dividend to a separate category, see § 1.904-4.

(b) Date on which section 78 dividend is received. A section 78 dividend

shall be

is considered received

in the taxable year of

by a domestic corporation

in

on the date on which -

(1) The corporation

receives the dividend by reason of which there are deemed paid under section 902(a) in accordance with §§ 1.902-1 and 1.902-2 the foreign income taxes which give rise to such section 78 dividend, or (2) The corporation

includes in gross income under section 951(a)(1)(A) the amounts by reason of which there are deemed paid under section 960(a)

(1) in accordance with § 1.960-7

the foreign income taxes

which

that give rise to

such

that section 78 dividend, notwithstanding that

such

the foreign income taxes may be carried back or carried over to another taxable year

under section 904(d)

and

are

deemed to be paid or accrued in such other taxable year

.

under section 904(

e) Effective dates for the application of section 78 -

(1) In general. This section shall apply to amounts of foreign income taxes deemed paid under section 902(a) in accordance with §§ 1.902-1 and 1.902-2, or under section 960(a)(1) in accordance with § 1.960-7, by reason of a distribution received by a domestic corporation -

(i) After December 31, 1964, or

(ii) Before January 1, 1965, in a taxable year of such domestic corporation beginning after December 31, 1962, but only to the extent that such distribution is made out of the accumulated profits of a foreign corporation for a taxable year of such foreign corporation beginning after December 31, 1962.

For special rules relating to determination of accumulated profits for such purposes, see the regulation under section 902.

(2) Amounts under section 951 treated as distributions. For purposes of this paragraph, any amount attributable to the earnings and profits for the taxable year of a first-tier corporation (as defined in paragraph (b)(1) of § 1.960-1) which is included in the gross income of a domestic corporation under section 951(a) shall be treated as a distribution received by such domestic corporation on the last day in such taxable year on which such first-tier corporation is a controlled foreign corporation.

(f) Illustrations. The application of this section may be illustrated by the examples provided in §§1.902-1, 1.904-5, 1.960-3, and 1.960-4.

[T.D. 6805, 30 FR 3208, Mar. 9, 1965, as amended by T.D. 7120, 36 FR 10859, June 4, 1971; 36 FR 11924, June 23, 1971; T.D. 7481, 42 FR 20130, Apr. 18, 1977; T.D. 7490; 42 FR 30497, June 15, 1977; 42 FR 32536, June 27, 1977; T.D. 7649, 44 FR 60086, Oct. 18, 1979; T.D. 7961, 49 FR 26225, June 27, 1984; T.D. 9849, 84 FR 9233, Mar. 14,

c); or

(2) The corporation includes in gross income under section 951A(a) the amounts by reason of which there are deemed paid under section 960(d) the foreign income taxes that give rise to that section 78 dividend.

(c) Applicability date. This section applies to taxable years of foreign corporations that begin after December 31, 2017, and to taxable years of United States shareholders in which or with which such taxable years of foreign corporations end. The second sentence of paragraph (a) of this section also applies to section 78 dividends that are received after December 31, 2017, by reason of taxes deemed paid under section 960(a) with respect to a taxable year of a foreign corporation beginning before January 1, 2018.

[T.D. 9866, 84 FR 29335, June 21, 2019]