CFR > Title 26 - Internal Revenue > CHAPTER I—INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY > SUBCHAPTER A—INCOME TAX (Parts 1–19) > PART 1—INCOME TAXES > 1.901-3—Reduction in amount of foreign taxes on foreign mineral income allowed as a credit.

1.901-3—Reduction in amount of foreign taxes on foreign mineral income allowed as a credit.

(a) Determination of amount of reduction— (1) In general. For purposes of determining the amount of taxes which are allowed as a credit under section 901(a) for taxable years beginning after December 31, 1969, the amount of any income, war profits, and excess profits taxes paid or accrued, or deemed to be paid under section 902, during the taxable year to any foreign country or possession of the United States with respect to foreign mineral income (as defined in paragraph (b) of this section) from sources within such country or possession shall be reduced by the amount, if any, by which—
(i) The smaller of—
(a) The amount of such foreign income, war profits, and excess profits taxes, or
(b) The amount of the tax which would be computed under chapter 1 of the Code for such year with respect to such foreign mineral income if the deduction for depletion were determined under section 611 without regard to the deduction for percentage depletion under section 613, exceeds
(ii) The amount of the tax computed under chapter 1 of the Code for such year with respect to such foreign mineral income.

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The reduction required by this subparagraph must be made on a country-by-country basis whether the taxpayer uses for the taxable year the per-country limitation under section 904(a)(1), or the overall limitation under section 904(a)(2), on the amount of taxes allowed as credit under section 901(a).
(2) Determination of amount of tax on foreign mineral income— (i) Foreign tax. For purposes of subparagraph (1)(i)(a) of this paragraph, the amount of the income, war profits, and excess profits taxes paid or accrued during the taxable year to a foreign country or possession of the United States with respect to foreign mineral income from sources within such country or possession is an amount which is the greater of—
(a) The amount by which the total amount of the income, war profits, and excess profits taxes paid or accrued during the taxable year to such country or possession exceeds the amount of such taxes that would be paid or accrued for such year to such country or possesion without taking into account such foreign mineral income, or
(b) The amount of the income, war profits, and excess profits taxes that would be paid or accrued to such country or possession if such foreign mineral income were the taxpayer's only income for the taxable year, except that in no case shall the amount so determined exceed the total of all income, war profits, and excess profits taxes paid or accrued during the taxable year to such country or possession. For such purposes taxes which are paid or accrued also include taxes which are deemed paid under section 902. In the case of a dividend described in paragraph (b)(2)(i) (a) of this section which is from sources within a foreign country or possession of the United States and is attributable in whole or in part to foreign mineral income, the amount of the income, war profits, and excess profits taxes deemed paid under section 902 during the taxable year to such country or possession with respect to foreign mineral income from sources within such country or possession is an amount which bears the same ratio to the amount of the income, war profits, and excess profits taxes deemed paid under section 902 during such year to such country or possession with respect to such dividend as the portion of the dividend which is attributable to foreign mineral income bears to the total dividend. For purposes of (a) and (b) of this subdivision, foreign mineral income is to be reduced by any credits, expenses, losses, and other deductions which are properly allocable to such income under the law of the foreign country or possession of the United States from which such income is derived.
(ii) U.S. tax. For purposes of subparagraph (1)(ii) of this paragraph, the amount of the tax computed under chapter 1 of the Code for the taxable year with respect to foreign mineral income from sources within a foreign country or possession of the United States is the greater of—
(a) The amount by which the tax under chapter 1 of the Code on the taxpayer's taxable income for the taxable year exceeds a tax determined under such chapter on the taxable income for such year determined without regard to such foreign mineral income, or
(b) The amount of tax that would be determined under chapter 1 of the Code if such foreign mineral income were the taxpayer's only income for the taxable year.

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For purposes of this subdivision the tax is to be determined without regard to any credits against the tax and without taking into account any tax against which a credit is not allowed under section 901(a). For purposes of (b) of this subdivision, the foreign mineral income is to be reduced only by expenses, losses, and other deductions properly allocable under chapter 1 of the Code to such income and is to be computed without any deduction for personal exemptions under section 151 or 642(b).
(iii) U.S. income tax computed without deduction allowed by For purposes of subparagraph (1)(i)(b) of this paragraph, the amount of the tax which would be computed under chapter 1 of the Code (without regard to section 613) for the taxable year with respect to foreign mineral income from sources within a foreign country or possession of the United States is the amount of the tax on such income that would be computed under such chapter by using as the allowance for depletion cost depletion computed upon the adjusted depletion basis of the property. For purposes of this subdivision the tax is to be determined without regard to any credits against the tax and without taking into account any tax against which credit is not allowed under section 901(a). If the greater tax with respect to the foreign mineral income under subdivision (ii) of this subparagraph is the tax determined under (a) of such subdivision, the tax determined for purposes of subparagraph (1)(i)(b) of this paragraph is to be determined by applying the principles of (a) (rather than of (b )) of subdivision (ii) of this subparagraph. On the other hand, if the greater tax with respect to the foreign mineral income under subdivision (ii) of this subparagraph is the tax determined under (b) of such subdivision, the tax determined for purposes of subparagraph (1)(i)(b) of this paragraph is to be determined by applying the principles of (b) (rather than of (a )) of subdivision (ii) of this subparagraph.
(3) Special rules. (i) The reduction required by this paragraph in the amount of taxes paid, accrued, or deemed to be paid to a foreign country or possession of the United States applies only where the taxpayer is allowed a deduction for percentage depletion under section 613 with respect to any part of his foreign mineral income for the taxable year from sources within such country or possession, whether or not such deduction is allowed with respect to the entire foreign mineral income from sources within such country or possession for such year.
(ii) For purposes of this section, the term “foreign country” or “possession of the United States” includes the adjacent continental shelf areas to the extent, and in the manner, provided by section 638(2) and the regulations thereunder.
(iii) The provisions of this section are to be applied before making any reduction required by section 1503(b) in the amount of income, war profits, and excess profits taxes paid or accrued to foreign countries or possessions of the United States by a Western Hemisphere trade corporation.
(iv) If a taxpayer chooses with respect to any taxable year to claim a credit under section 901 and has any foreign mineral income from sources within a foreign country or possession of the United States with respect to which the deduction under section 613 is allowed, he must attach to his return a schedule showing the computations required by subdivisions (i), (ii), and (iii) of subparagraph (2) of this paragraph.
(v) A taxpayer who has elected to use the overall limitation under section 904(a)(2) on the amount of the foreign tax credit for any taxable year beginning before January 1, 1970, may, for his first taxable year beginning after December 31, 1969, revoke his election without first securing the consent of the Commissioner. See paragraph (d) of § 1.904-1.
(b) Foreign mineral income defined— (1) In general. The term “foreign mineral income” means income (determined under chapter 1 of the Code) from sources within a foreign country or possession of the United States derived from—
(i) The extraction of minerals from mines, wells, or other natural deposits,
(ii) The processing of minerals into their primary products, or
(iii) The transportation, distribution, or sale of minerals or of the primary products derived from minerals.

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Any income of the taxpayer derived from an activity described in either subdivision (i), (ii), or (iii) of this subparagraph is foreign mineral income, since it is not necessary that the taxpayer extract, process, and transport, distribute, or sell minerals or their primary products for the income derived from any such activity to be foreign mineral income. Thus, for example, an integrated oil company must treat as foreign mineral income from sources within a foreign country or possession of the United States all income from
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such sources derived from the production of oil, the refining of crude oil into gasoline, the distribution of gasoline to marketing outlets, and the retail sale of gasoline. Similarly, income from such sources from the refining, distribution, or marketing of fuel oil by the taxpayer is foreign mineral income, whether or not the crude oil was extracted by the taxpayer. In further illustration, income from sources within a foreign country or possession of the United States derived from the processing of minerals into their primary products by the taxpayer is foreign mineral income, whether or not the minerals were extracted, or the primary products were sold, by the taxpayer. Section 901(e) and this section apply whether or not the extraction, processing, transportation, distribution, or selling of the minerals or primary products is done by the taxpayer. Thus, for example, an individual who derives royalty income from the extraction of oil from an oil well in a foreign country has foreign mineral income for purposes of this paragraph. Income from the manufacture, distribution, and marketing of petrochemicals is not foreign mineral income. Foreign mineral income is not limited to gross income from the property within the meaning of section 613(c) and § 1.613-3 .
(2) Income included in foreign mineral income— (i) In general. Foreign mineral income from sources within a foreign country or possession of the United States includes, but is not limited to—
(a) Dividends from such sources, as determined under § 1.902-1(h)(1), received from a foreign corporation in respect of which taxes are deemed paid by the taxpayer under section 902, to the extent such dividends are attributable to foreign mineral income described in subparagraph (1) of this paragraph. The portion of such a dividend which is attributable to such income is that amount which bears the same ratio to the total dividend received as the earnings and profits out of which such dividend is paid that are attributable to foreign mineral income bear to the total earnings and profits out of which such dividend is paid. For such purposes, the foreign mineral income of a foreign corporation is its foreign mineral income described in this paragraph (including any dividends described in this (a) which are received from another foreign corporation), whether or not such income is derived from sources within the foreign country or possession of the United States in which, or under the laws of which, the former corporation is created or organized. A foreign corporation is considered to have no foreign mineral income for any taxable year beginning before January 1, 1970.
(b) Any section 78 dividend to which a dividend described in (a) of this subdivision gives rise, but only to the extent such section 78 dividend is deemed paid under paragraph (a)(2)(i) of this section with respect to foreign mineral income from sources within such country or possession and to the extent it is treated under of § 1.902-1(h)(1) as income from sources within such country or possession.
(c) Any amounts includible in income of the taxpayer under section 702(a) as his distributive share of the income of a partnership consisting of income described in subparagraph (1) of this paragraph.
(d) Any amounts includible in income of the taxpayer by virtue of section 652(a), 662(a), 671, 682(a), or 691(a), to the extent such amounts consist of income described in subparagraph (1) of this paragraph.
(ii) Illustration. The provisions of this subparagraph may be illustrated by the following example:

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Example. (a) Throughout 1974, M, a domestic corporation, owns all the one class of stock of N, a foreign corporation which is not a less developed country corporation within the meaning of section 902(d). Both corporations use the calendar year as the taxable year. N is incorporated in foreign country Y. During 1974, N has income from sources within foreign country X, all of which is foreign mineral income. During 1974, N also has income from sources within country Y, none of which is foreign mineral income. N is taxed in each foreign country only on income derived from sources within that country. Neither country X nor country Y allows a credit against its tax for foreign income taxes. N pays a dividend of $40,000 to M for 1974. For purposes of section 902, the dividend is paid from earnings and profits for 1974. (b) N's earnings and profits and taxes for 1974 are determined as follows:
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Foreign mineral income from country X $100,000
Less:
Intangible drilling and development costs $21,000
Cost depletion 3,000 24,000
Taxable income from country X 76,000
Income tax rate of country X ×50%
Tax paid to country X 38,000
Income from country Y 100,000
Less deductions 25,000
Taxable income from country Y 75,000
Income tax rate of country Y ×60%
Tax paid to country Y 45,000
Total taxable income 151,000
Less total foreign income taxes 83,000
Total earnings and profits 68,000
Taxable income from foreign mineral income 76,000
Less: Tax paid on foreign mineral income 38,000
Earnings and profits from foreign mineral income 38,000
(c) For 1974, M has foreign mineral income from country Y of $49,636.68, determined in the following manner and by applying this section, § 1.78-1 , and § 1.902-1(h)(1) :
Portion of dividend from country Y attributable to foreign mineral income (subdivision (i)(a) of this subparagraph) ($40,000×$38,000/$68,000) $22,352.94
Foreign income tax deemed paid by M to country Y under section 902(a)(1) ($83,000×$40,000/$68,000) 48,823.53
Foreign income tax deemed paid by M to country Y with respect to foreign mineral income from country Y (paragraph (a)(2)(i) of this section) ($48,823.53×$22,352.94/$40,000) 27,283.74
Foreign mineral income from country Y:
Dividend attributable to foreign mineral income from country Y 22,352.94
Sec. 78 dividend deemed paid with respect to foreign mineral income (subdivision (i)(b) of this subparagraph) 27,283.74
Total foreign mineral income 49,636.68
(c) Limitations on foreign tax credit— (1) In general. The reduction under section 901(e) and paragraph (a)(1) of this section in the amount of foreign taxes allowed as a credit under section 901(a) is to be made whether the per-country limitation under section 904(a)(1) or the overall limitation under section 904(a)(2) is used for the taxable year, but the reduction in the amount of foreign taxes allowed as a credit under section 901(a) must be made on a country-by-country basis before applying the limitation under section 904(a) to the reduced amount of taxes. If for the taxable year the separate limitation under section 904(f) applies to any foreign mineral income, that limitation must also be applied after making the reduction under section 901(e) and paragraph (a)(1) of this section.
(2) Carrybacks and carryovers of excess tax paid— (i) In general. Any amount by which (a) any income, war profits, and excess profits taxes paid or accrued, or deemed to be paid under section 902, during the taxable year to any foreign country or possession of the United States with respect to foreign mineral income from sources within such country or possession exceed (b) the reduced amount of such taxes as determined under paragraph (a)(1) of this section may not be deemed paid or accrued under section 904(d) in any other taxable year. See § 1.904-2(b)(2)(iii). However, to the extent such reduced amount of taxes exceeds the applicable limitation under section 904(a) for the taxable year it shall be deemed paid or accrued under section 904(d) in another taxable year as a carryback or carryover of an unused foreign tax. The amount so deemed paid or accrued in another taxable year is not, however, deemed paid or accrued with respect to foreign mineral income in such other taxable year. See § 1.904-2(c)(3).
(ii) Carryovers to taxable years beginning after December 31, 1969. Where, under the provisions of section 904(d), taxes paid or accrued, or deemed to be paid under section 902, to any foreign country or possession of the United States in any taxable year beginning before January 1, 1970, are deemed paid or accrued in one or more taxable years beginning after December 31, 1969, the amount of such taxes so deemed paid or accrued shall not be deemed paid or accrued with respect to foreign mineral income and shall not be reduced under section 901(e) and paragraph (a)(1) of this section.
(iii) Carrybacks to taxable years beginning before January 1, 1970. Where income, war profits, and excess profits taxes are paid or accrued, or deemed to be paid under section 902, to any foreign country or possession of the United States in any taxable year beginning after December 31, 1969, with respect to foreign mineral income from sources within such country or possession, they must first be reduced under section 901(e) and paragraph (a)(1) of this section before they may be deemed paid or accrued under section 904(d) in one or more taxable years beginning before January 1, 1970.
(d) Illustrations. The application of this section may be illustrated by the following examples, in which the surtax exemption provided by section 11(d) and the tax surcharge provided by section 51(a) are disregarded for purposes of simplification:

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Example 1. (a) M, a domestic corporation using the calendar year as the taxable year, is an operator drilling for oil in foreign country W. For 1971, M's gross income under chapter 1 of the Code is $100,000, all of which is foreign mineral income from a property in country W and is subject to the allowance for depletion. During 1971, M incurs intangible drilling and development costs of $15,000, which are currently deductible for purposes of the tax of both countries. Cost depletion amounts to $2,000 for purposes of the tax of both countries, and only cost depletion is allowed as a deduction under the law of country W. It is assumed that no other deductions are allowable under the law of either country. Based upon the facts assumed, the income tax paid to country W on such foreign mineral income is $41,500, and the U.S. tax on such income before allowance of the foreign tax credit is $30,240, determined as follows:
U.S. tax W tax
Foreign mineral income $100,000 $100,000
Less:
Intangible drilling and development costs 15,000 15,000
Cost depletion 2,000
Percentage depletion (22% of $100,000, but not to exceed 50% of $85,000) 22,000
Taxable income 63,000 83,000
Income tax rate 48% 50%
Tax 30,240 41,500
(b) Without taking this section into account, M would be allowed a foreign tax credit for 1971 of $30,240 ($30,240×$63,000/$63,000), and foreign income tax in the amount of $11,260 ($41,500 less $30,240) would first be carried back to 1969 under section 904(d). (c) Pursuant to paragraph (a)(1) of this section, however, the foreign income tax allowable as a credit against the U.S. tax is reduced to $31,900, determined as follows:
Foreign income tax paid on foreign mineral income $41,500
Less reduction under sec. 901(e):
Smaller of $41,500 (tax paid to country W on foreign mineral income) or $39,840 (U.S. tax on foreign mineral income of $83,000 ($83,000×48%), determined by deducting cost depletion of $2,000 in lieu of percentage depletion of $22,000) 39,840
Less: U.S. tax on foreign mineral income (before credit) $30,240 9,600
Foreign income tax allowable as a credit 31,900
(d) After taking this section into account, M is allowed a foreign tax credit for 1971 of $30,240 ($30,240×$63,000/$63,000). The amount of foreign income tax which may be first carried back to 1969 under section 904(d) is reduced from $11,260 to $1,660 ($31,900 less $30,240).

Code of Federal Regulations

Example 2. (a) M, a domestic corporation using the calendar year as the taxable year, is an operator drilling for oil in foreign country X. For 1972, M has gross income under chapter 1 of the Code of $100,000, all of which is foreign mineral income from a property in country X and is subject to the allowance for depletion. During 1972, M incurs intangible drilling and development costs of $50,000 which are currently deductible for purposes of the U.S. tax but which must be amortized for purposes of the tax of country X. Percentage depletion of $22,000 is allowed as a deduction by both countries. For purposes of the U.S. tax, cost depletion for 1972 amounts to $15,000. It is assumed that no other deductions are allowable under the law of either country. Based upon these facts, the income tax paid to country X on such foreign mineral income is $27,200, and the U.S. tax on such income before allowance of the foreign tax credit is $13,440, determined as follows:
U.S. tax X tax
Foreign mineral income $100,000 $100,000
Less:
Intangible drilling and development costs 50,000 10,000
Percentage depletion 22,000 22,000
Taxable income 28,000 68,000
Income tax rate 48% 40%
Tax 13,440 27,200
(b) Without taking this section into account, M would be allowed a foreign tax credit for 1972 of $13,440 ($13,440×$28,000/$28,000), and foreign income tax in the amount of $13,760 ($27,200 less $13,440) would first be carried back to 1970 under section 904(d). (c) Pursuant to paragraph (a)(1) of this section, however, the foreign income tax allowable as a credit against the U.S. tax is reduced to $23,840, determined as follows:
Foreign income tax paid on foreign mineral income $27,200
Less reduction under sec. 901(e):
Smaller of $27,200 (tax paid to country X on foreign mineral income) or $16,800 (U.S. tax on foreign mineral income of $35,000 ($35,000×48%), determined by deducting cost depletion of $15,000 in lieu of percentage depletion of $22,000) $16,800
Less: U.S. tax on foreign mineral income (before credit) 13,440 3,360
Foreign income tax allowable as a credit 23,840
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(d) After taking this section into account, M is allowed a foreign tax credit of $13,440 ($13,440×$28,000/$28,000). The amount of foreign income tax which may be first carried back to 1970 under section 904(d) is reduced from $13,760 to $10,400 ($23,840 less $13,440).

Code of Federal Regulations

Example 3. (a) N, a domestic corporation using the calendar year as the taxable year, is an operator drilling for oil in foreign country Y. For 1972, N's gross income under chapter 1 of the Code is $100,000, all of which is foreign mineral income from a property in country Y and is subject to the allowance for depletion. During 1972, N incurs intangible drilling and development costs of $15,000, which are currently deductible for purposes of the U.S. tax but are not deductible under the law of country Y. Depreciation of $40,000 is allowed as a deduction for purposes of the U.S. tax; and of $20,000, for purposes of the Y tax. Cost depletion amounts to $10,000 for purposes of the tax of both countries, and only cost depletion is allowed as a deduction under the law of country Y. It is assumed that no other deductions are allowable under the law of either country. Based upon the facts assumed, the income tax paid to country Y on such foreign mineral income is $14,000, and the U.S. tax on such income before allowance of the foreign tax credit is $11,040, determined as follows:
U.S. tax Y tax
Foreign mineral income $100,000 $100,000
Less:
Intangible drilling and development costs 15,000
Depreciation 40,000 20,000
Cost depletion 10,000
Percentage depletion (22% of $100,000, but not to exceed 50% of $45,000) 22,000
Taxable income 23,000 70,000
Income tax rate 48% 20%
Tax 11,040 14,000
(b) Without taking this section into account, N would be allowed a foreign tax credit for 1972 of $11,040 ($11,040×$23,000/$23,000), and foreign income tax in the amount of $2,960 ($14,000 less $11,040) would first be carried back to 1970 under section 904(d). (c) Pursuant to paragraph (a)(1) of this section, however, the foreign income tax allowable as a credit against the U.S. tax is reduced to $11,040, determined as follows:
Foreign income tax paid on foreign mineral income $14,000
Less reduction under sec. 901(e):
Smaller of $14,000 (tax paid to country Y on foreign mineral income) or $16,800 (U.S. tax on foreign mineral income of $35,000 ($35,000×48%), determined by deducting cost depletion of $10,000 in lieu of percentage depletion of $22,000) $14,000
Less: U.S. tax on foreign mineral income (before credit) 11,040 2,960
Foreign income tax allowable as a credit 11,040
(d) After taking this section into account, N is allowed a foreign tax credit for 1972 of $11,040 ($11,040×$23,000/$23,000), but no foreign income tax is carried back to 1970 under section 904(d) since the allowable credit of $11,040 does not exceed the limitation of $11,040.

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Example 4. (a) D, a domestic corporation using the calendar year as the taxable year, is an operator drilling for oil in foreign country Z. For 1971, D's gross income under chapter 1 of the Code is $100,000, all of which is foreign mineral income from a property in country Z and is subject to the allowance for depletion. During 1971, D incurs intangible drilling and development costs of $85,000, which are currently deductible for purposes of the U.S. Tax but are not deductible under the law of country Z. Cost depletion in the amount of $10,000 is allowed as a deduction for purposes of both the U.S. tax and the tax of country Z. Percentage depletion is not allowed as a deduction under the law of country Z and is not taken as a deduction for purposes of the U.S. tax. It is assumed that no other deductions are allowable under the law of either country. Based upon the facts assumed, the income tax paid to country Z on such foreign mineral income is $27,000, and the U.S. tax on such income before allowance of the foreign tax credit is $2,400, determined as follows:
U.S. tax Z tax
Foreign mineral income $100,000 $100,000
Less:
Intangible drilling and development costs 85,000
Cost depletion 10,000 10,000
Taxable income 5,000 90,000
Income tax rate 48% 30%
Tax 2,400 27,000
(b) Section 901(e) and this section do not apply to reduce the amount of the foreign income tax paid to country Z with respect to the foreign mineral income since for 1971 D is not allowed the deduction for percentage depletion with respect to any foreign mineral income from sources within country Z. Accordingly, D is allowed a foreign tax credit of $2,400 ($2,400×$5,000/$5,000), and foreign income tax in the amount of $24,600 ($27,000 less $2,400) is first carried back to 1969 under section 904(d).

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Example 5. (a) R, a domestic corporation using the calendar year as the taxable year, is an operator drilling for oil in the United States and in foreign country Z. For 1971, R's gross income under chapter 1 of the Code is $250,000, of which $100,000 is foreign mineral income from a property in foreign country Z and $150,000 is from a property in the United States, all being subject to the allowance for depletion. During 1971, R incurs intangible drilling and development costs of $125,000 in the United States and of $25,000 in country Z, all of which are currently deductible for purposes of the U.S. tax. Of these costs of $25,000 incurred in country Z, only $2,500 is currently deductible under the law of country Z. Cost depletion in the case of the U.S. property amounts to $60,000; and in the case of the property in country Z, to $5,000, which is allowed as a deduction under the laws of such country. Percentage depletion is not allowed as a deduction under the law of country Z. In computing the U.S. tax for 1971, R is required to use cost depletion with respect to the mineral income from the U.S. property and percentage depletion with respect to the foreign mineral income from the property in country Z. It is assumed that no other deductions are allowed under the law of either country. Based upon the facts assumed, the income tax paid to country Z on the foreign mineral income from sources therein is $37,000, and the U.S. tax on the entire mineral income before allowance of the foreign tax credit is $8,640, determined as follows:
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U.S. tax Z tax
Gross income (including foreign mineral income) $250,000 $100,000
Less:
Intangible drilling and development costs 150,000 2,500
Cost depletion 60,000 5,000
Percentage depletion on foreign mineral income (22% of $100,000, but not to exceed 50% of [$100,000−$25,000]) 22,000
Taxable income 18,000 92,500
Income tax rate 48% 40%
Tax 8,640 37,000
(b) Without taking this section into account, R would be allowed a foreign tax credit for 1971 of $8,640 ($8,640×$18,000/$18,000), and foreign income tax in the amount of $28,360 ($37,000 less $8,640) would first be carried back to 1969 under section 904(d). (c) Under paragraph (a)(2)(ii) of this section, the amount of the U.S. tax for 1971 with respect to foreign mineral income from country Z is $25,440, which is the greater of the amounts of tax determined under subparagraphs (1) and (2): (1) U.S. tax on total taxable income in excess of U.S. tax on taxable income excluding foreign mineral income from country Z (determined under paragraph (a)(2)(ii)(a) of this section):
U.S. tax on total taxable income $8,640
Less U.S. tax on taxable income other than foreign mineral income from country Z:
Income from U.S. property $150,000
Intangible drilling and development costs 125,000
Cost depletion 60,000
Taxable income 0
Income tax rate 48%
U.S. tax 0 0
Excess tax 8,640
(2) U.S. tax on foreign mineral income from country Z (determined under paragraph (a)(2)(ii) (b) of this section):
Foreign mineral income $100,000
Intangible drilling and development costs 25,000
Percentage depletion (22% of $100,000, but not to exceed 50% of $75,000) 22,000
Taxable income 53,000
Income tax rate 48%
U.S. tax 25,440
(d) Under paragraph (a)(2)(iii) of this section, the amount of the U.S. tax which would be computed for 1971 (without regard to section 613) with respect to foreign mineral income from sources within country Z is $33,600, computed by applying the principles of paragraph (a)(2)(ii)(b) of this section:
Foreign mineral income $100,000
Intangible drilling and development costs 25,000
Cost depletion 5,000
Taxable income 70,000
Income tax rate 48%
U.S. tax 33,600
(e) Pursuant to paragraph (a)(1) of this section, the foreign income tax allowable as a credit against the U.S. tax for 1971 is reduced to $28,840, determined as follows:
Foreign income tax paid on foreign mineral income $37,000
Less reduction under sec. 901(e):
Smaller of $37,000 (tax paid to country Z on foreign mineral income) or $33,600 (U.S. tax on foreign mineral income of $70,000, as determined under paragraph (d) of this example $33,600
Less: U.S. tax on foreign mineral income of $53,000, as determined under paragraph (c) of this example 25,440 8,160
Foreign income tax allowable as a credit $28,840
(f) After taking this section into account, R is allowed a foreign tax credit for 1971 of $8,640 ($8,640×$18,000/$18,000). The amount of foreign income tax which may be first carried back to 1969 under section 904(d) is reduced from $28,360 to $20,200 ($28,840 less $8,640).

Code of Federal Regulations

Example 6. (a) B, a single individual using the calendar year as the taxable year, is an operator drilling for oil in foreign countries X and Y. For 1972, B's gross income under chapter 1 of the Code is $250,000, of which $150,000 is foreign mineral income from a property in country X and $100,000 is foreign mineral income from a property in country Y, all being subject to the allowance for depletion. The assumption is made that B's earned taxable income for 1972 is insufficient to cause section 1348 to apply. During 1972, B incurs intangible drilling and development costs of $16,000 in country X and of $9,000 in country Y, which are currently deductible for purposes of both the U.S. tax and the tax of countries X and Y, respectively. For purposes of both the U.S. tax and the tax of countries X and Y, respectively, cost depletion in the case of the X property amounts to $8,000, and in the case of Y property, to $7,000; and only cost depletion is allowed as a deduction under the law of countries X and Y. For 1972, B uses the overall limitation under section 904(a)(2) on the foreign tax credit. Percentage depletion is not allowed as a deduction under the law of countries X and Y. It is assumed that the only other allowable deductions amount to $2,250. None of these deductions is attributable to the income from the properties in countries X and Y, and none is deductible under the laws of country X or country Y. Based upon the facts assumed, the income tax paid to countries X and Y on the foreign mineral income from each such country is $71,820 and $25,200, respectively, and the U.S. tax on B's total taxable income before allowance of the foreign tax credit is $99,990, determined as follows:
Code of Federal Regulations 676




U.S. Tax X tax Y tax
Total income (including foreign mineral income from countries X and Y) $250,000 $150,000 $100,000
Intangible drilling and development costs 25,000 16,000 9,000
Cost depletion