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 > 1.960-6—Overpayments resulting from increase in limitation for taxable year of exclusion.

1.960-6—Overpayments resulting from increase in limitation for taxable year of exclusion.

(a) Amount of overpayment. If an increase in the limitation under section 960(b)(1) and § 1.960-4 for a taxable year of exclusion exceeds the tax (determined before allowance of any credits against tax) imposed by chapter 1 of the Code for such year, the amount of such excess shall be deemed an overpayment of tax for such year and shall be refunded or credited to the taxpayer in accordance with chapter 65 ( section 6401 and following) of the Code.
(b) Illustration. The application of this section may be illustrated by the following example:

Code of Federal Regulations

Example. Domestic corporation N owns all the one class of stock of controlled foreign corporation A. Both corporations use the calendar year as the taxable year. For 1978, A Corporation has total income of $100,000 on which it pays foreign income taxes of $20,000. All of A Corporation's earnings and profits for 1978 of $80,000 are attributable to an amount which is required under section 951(a) to be included in N Corporation's gross income for 1978. By reason of such income inclusion N Corporation is deemed for 1978 to have paid under section 960(a)(1), and is required under section 78 to include in gross income for such year, the $20,000 ($20,000×$80,000/$80,000) of foreign income taxes paid by A Corporation for such year. Corporation N also derives $100,000 taxable income from sources within the United States for 1978. For 1979, N Corporation has $25,000 of taxable income, all of which is derived from sources within the United States. No part of A Corporation's earnings and profits for 1979 is attributable to an amount required under section 951(a) to be included in N Corporation's gross income. During 1979, A Corporation makes one distribution consisting of its $80,000 earnings and profits for 1978, all of which is excluded under section 959(a)(1) from N Corporation's gross income for 1979, and from which distribution foreign income taxes of $10,000 are withheld. For 1978 and 1979, N Corporation claims the foreign tax credit under section 901, determined by applying the overall limitation under section 904(a)(2). The United States tax of N Corporation is determined as follows for such years, assuming a corporate tax rate of 22 percent, a surtax of 26 percent and a surtax exemption of $25,000:
1978
Taxable income of N Corporation:
U.S. sources $100,000
Sources without the U.S.:
Amount required to be included in N Corporation's gross income under section 951(a) $80,000
Foreign income taxes deemed paid by N Corporation under section 960(a)(1) and included in N Corporation's gross income under section 78 ($20,000×$80,000/$80,000) 20,000 100,000
Total taxable income 200,000
Code of Federal Regulations 456
U.S. tax payable for 1978:
U.S. tax before credit ([$200,000× 0.22] [$175,000×0.26]) 89,500
Credit: Foreign income taxes of $20,000, but not to exceed overall limitation of $44,750 ($89,500×$100,000/$200,000) 20,000
U.S. tax payable 69,500
1979
Taxable income of N Corporation, consisting of income from U.S. sources $25,000
U.S. tax before credit ($25,000×0.22) 5,500
Section 904(a)(2) overall limitation for 1979:
Limitation for 1979 before increase under section 960(b)(1) ($5,500×$0/$25,000) 0
Plus: Increase in overall limitation for 1979 under section 960(b)(1):
Amount by which 1978 overall limitation was increased by reason of inclusion in N Corporation's gross income under section 951(a) for 1978 ($44,750 − [$41,500 × $0/$100,000]) $44,750
Less: Foreign income taxes allowed as a credit for 1978 which were allowable solely by reason of such section 951(a) inclusion ($20,000−$0) 20,000
Balance 24,750
But: Such balance not to exceed foreign income taxes paid by N Corporation for 1979 with respect to $80,000 distribution excluded under section 959(a)(1) ($10,000 tax withheld) 10,000 10,000
Overall limitation for 1979 10,000
U.S. tax payable for 1979:
U.S. tax before credit ($25,000×0.22) 5,500
Credit: Foreign income taxes of $10,000, but not to exceed overall limitation of $10,000 for 1979 10,000
U.S. tax payable None
Overpayment of tax for 1979:
Increase in limitation under section 960(b)(1) for 1979 10,000
Less: Tax imposed for 1979 under chapter 1 of the Code 5,500
Excess treated as overpayment 4,500

Code of Federal Regulations

[T.D. 7120, 36 FR 10859, June 4, 1971, as amended by T.D. 7649, 44 FR 60089, Oct. 18, 1979]