§ 904. Limitation on credit
(a)
Limitation
The total amount of the credit taken under section
901
(a) shall not exceed the same proportion of the tax against which such credit is taken which the taxpayer’s taxable income from sources without the United States (but not in excess of the taxpayer’s entire taxable income) bears to his entire taxable income for the same taxable year.
(b)
Taxable income for purpose of computing limitation
(2)
Capital gains
For purposes of this section—
(A)
In general
Taxable income from sources outside the United States shall include gain from the sale or exchange of capital assets only to the extent of foreign source capital gain net income.
(B)
Special rules where capital gain rate differential
In the case of any taxable year for which there is a capital gain rate differential—
(i)
in lieu of applying subparagraph (A), the taxable income from sources outside the United States shall include gain from the sale or exchange of capital assets only in an amount equal to foreign source capital gain net income reduced by the rate differential portion of foreign source net capital gain,
(ii)
the entire taxable income shall include gain from the sale or exchange of capital assets only in an amount equal to capital gain net income reduced by the rate differential portion of net capital gain, and
(iii)
for purposes of determining taxable income from sources outside the United States, any net capital loss (and any amount which is a short-term capital loss under section
1212
(a)) from sources outside the United States to the extent taken into account in determining capital gain net income for the taxable year shall be reduced by an amount equal to the rate differential portion of the excess of net capital gain from sources within the United States over net capital gain.
(3)
Definitions
For purposes of this subsection—
(A)
Foreign source capital gain net income
The term “foreign source capital gain net income” means the lesser of—
(C)
Section
1231 gains
The term “gain from the sale or exchange of capital assets” includes any gain so treated under section
1231.
(D)
Capital gain rate differential
There is a capital gain rate differential for any taxable year if—
(i)
in the case of a taxpayer other than a corporation, subsection (h) of section
1 applies to such taxable year, or
(E)
Rate differential portion
(i)
In general
The rate differential portion of foreign source net capital gain, net capital gain, or the excess of net capital gain from sources within the United States over net capital gain, as the case may be, is the same proportion of such amount as—
(ii)
Highest applicable tax rate
For purposes of clause (i), the term “highest applicable tax rate” means—
(I)
in the case of a taxpayer other than a corporation, the highest rate of tax set forth in subsection (a), (b), (c), (d), or (e) of section
1 (whichever applies), or
(4)
Coordination with section
936
For purposes of subsection (a), in the case of a corporation, the taxable income shall not include any portion thereof taken into account for purposes of the credit (if any) allowed by section
936 (without regard to subsections (a)(4) and (i) thereof).
(c)
Carryback and carryover of excess tax paid
Any amount by which all taxes paid or accrued to foreign countries or possessions of the United States for any taxable year for which the taxpayer chooses to have the benefits of this subpart exceed the limitation under subsection (a) shall be deemed taxes paid or accrued to foreign countries or possessions of the United States in the first preceding taxable year and in any of the first 10 succeeding taxable years, in that order and to the extent not deemed taxes paid or accrued in a prior taxable year, in the amount by which the limitation under subsection (a) for such preceding or succeeding taxable year exceeds the sum of the taxes paid or accrued to foreign countries or possessions of the United States for such preceding or succeeding taxable year and the amount of the taxes for any taxable year earlier than the current taxable year which shall be deemed to have been paid or accrued in such preceding or subsequent taxable year (whether or not the taxpayer chooses to have the benefits of this subpart with respect to such earlier taxable year). Such amount deemed paid or accrued in any year may be availed of only as a tax credit and not as a deduction and only if the taxpayer for such year chooses to have the benefits of this subpart as to taxes paid or accrued for that year to foreign countries or possessions of the United States.
(d)
Separate application of section with respect to certain categories of income
(1)
In general
(2)
Definitions and special rules
For purposes of this subsection—
(A)
Categories
(B)
Passive income
(i)
In general
Except as otherwise provided in this subparagraph, the term “passive income” means any income received or accrued by any person which is of a kind which would be foreign personal holding company income (as defined in section
954
(c)).
(ii)
Certain amounts included
Except as provided in clause (iii), the term “passive income” includes, except as provided in subparagraph (E)(iii) [1] or paragraph (3)(I) [1], any amount includible in gross income under section
1293 (relating to certain passive foreign investment companies).
(iv)
Clarification of application of section
864
(d)(6)
In determining whether any income is of a kind which would be foreign personal holding company income, the rules of section
864
(d)(6) shall apply only in the case of income of a controlled foreign corporation.
(v)
Specified passive category income
The term “specified passive category income” means—
(I)
dividends from a DISC or former DISC (as defined in section
992
(a)) to the extent such dividends are treated as income from sources without the United States, and
(II)
distributions from a former FSC (as defined in section
922) out of earnings and profits attributable to foreign trade income (within the meaning of section
923
(b)) or interest or carrying charges (as defined in section
927
(d)(1)) derived from a transaction which results in foreign trade income (as defined in section
923
(b)).
Any reference in subclause (II) to section
922,
923, or
927 shall be treated as a reference to such section as in effect before its repeal by the FSC Repeal and Extraterritorial Income Exclusion Act of 2000.
(C)
Treatment of financial services income and companies
(i)
In general
Financial services income shall be treated as general category income in the case of—
(ii)
Financial services group
The term “financial services group” means any affiliated group (as defined in section
1504
(a) without regard to paragraphs (2) and (3) of section
1504
(b)) which is predominantly engaged in the active conduct of a banking, insurance, financing, or similar business. In determining whether such a group is so engaged, there shall be taken into account only the income of members of the group that are—
(D)
Financial services income
(i)
In general
Except as otherwise provided in this subparagraph, the term “financial services income” means any income which is received or accrued by any person predominantly engaged in the active conduct of a banking, insurance, financing, or similar business, and which is—
(E)
Noncontrolled section
902 corporation
(i)
In general
The term “noncontrolled section
902 corporation” means any foreign corporation with respect to which the taxpayer meets the stock ownership requirements of section
902
(a) (or, for purposes of applying paragraph (3) or (4), the requirements of section
902
(b)). A controlled foreign corporation shall not be treated as a noncontrolled section
902 corporation with respect to any distribution out of its earnings and profits for periods during which it was a controlled foreign corporation.
(F)
High-taxed income
The term “high-taxed income” means any income which (but for this subparagraph) would be passive income if the sum of—
(ii)
the foreign income taxes deemed paid by the taxpayer with respect to such income under section
902 or
960,
exceeds the highest rate of tax specified in section
1 or
11 (whichever applies) multiplied by the amount of such income (determined with regard to section
78). For purposes of the preceding sentence, the term “foreign income taxes” means any income, war profits, or excess profits tax imposed by any foreign country or possession of the United States.
(G)
Export financing interest
For purposes of this paragraph, the term “export financing interest” means any interest derived from financing the sale (or other disposition) for use or consumption outside the United States of any property—
(i)
which is manufactured, produced, grown, or extracted in the United States by the taxpayer or a related person, and
(H)
Treatment of income tax base differences
(i)
In general
In the case of taxable years beginning after December 31, 2006, tax imposed under the law of a foreign country or possession of the United States on an amount which does not constitute income under United States tax principles shall be treated as imposed on income described in paragraph (1)(B).
(ii)
Special rule for years before 2007
(I)
In general
In the case of taxes paid or accrued in taxable years beginning after December 31, 2004, and before January 1, 2007, a taxpayer may elect to treat tax imposed under the law of a foreign country or possession of the United States on an amount which does not constitute income under United States tax principles as tax imposed on income described in subparagraph (C) or (I) of paragraph (1).
(J)
Transitional rule
For purposes of paragraph (1)—
(i)
taxes paid or accrued in a taxable year beginning before January 1, 1987, with respect to income which was described in subparagraph (A) of paragraph (1) (as in effect on the day before the date of the enactment of the Tax Reform Act of 1986) shall be treated as taxes paid or accrued with respect to income described in subparagraph (A) of paragraph (1) (as in effect after such date),
(ii)
taxes paid or accrued in a taxable year beginning before January 1, 1987, with respect to income which was described in subparagraph (E) of paragraph (1) (as in effect on the day before the date of the enactment of the Tax Reform Act of 1986) shall be treated as taxes paid or accrued with respect to income described in subparagraph (I) of paragraph (1) (as in effect after such date) except that—
(I)
such taxes shall be treated as paid or accrued with respect to shipping income to the extent the taxpayer establishes to the satisfaction of the Secretary that such taxes were paid or accrued with respect to such income,
(iii)
taxes paid or accrued in a taxable year beginning before January 1, 1987, with respect to income described in any other subparagraph of paragraph (1) (as so in effect before such date) shall be treated as taxes paid or accrued with respect to income described in the corresponding subparagraph of paragraph (1) (as so in effect after such date).
(K)
Transitional rules for 2007 changes
For purposes of paragraph (1)—
(i)
taxes carried from any taxable year beginning before January 1, 2007, to any taxable year beginning on or after such date, with respect to any item of income, shall be treated as described in the subparagraph of paragraph (1) in which such income would be described were such taxes paid or accrued in a taxable year beginning on or after such date, and
(ii)
the Secretary may by regulations provide for the allocation of any carryback of taxes with respect to income from a taxable year beginning on or after January 1, 2007, to a taxable year beginning before such date for purposes of allocating such income among the separate categories in effect for the taxable year to which carried.
(3)
Look-thru in case of controlled foreign corporations
(A)
In general
Except as otherwise provided in this paragraph, dividends, interest, rents, and royalties received or accrued by the taxpayer from a controlled foreign corporation in which the taxpayer is a United States shareholder shall not be treated as passive category income.
(C)
Interest, rents, and royalties
Any interest, rent, or royalty which is received or accrued from a controlled foreign corporation in which the taxpayer is a United States shareholder shall be treated as passive category income to the extent it is properly allocable (under regulations prescribed by the Secretary) to passive category income of the controlled foreign corporation.
(D)
Dividends
Any dividend paid out of the earnings and profits of any controlled foreign corporation in which the taxpayer is a United States shareholder shall be treated as passive category income in proportion to the ratio of—
(E)
Look-thru applies only where subpart F applies
If a controlled foreign corporation meets the requirements of section
954
(b)(3)(A) (relating to de minimis rule) for any taxable year, for purposes of this paragraph, none of its foreign base company income (as defined in section
954
(a) without regard to section
954
(b)(5)) and none of its gross insurance income (as defined in section
954
(b)(3)(C)) for such taxable year shall be treated as passive category income, except that this sentence shall not apply to any income which (without regard to this sentence) would be treated as financial services income. Solely for purposes of applying subparagraph (D), passive income of a controlled foreign corporation shall not be treated as passive category income if the requirements of section
954
(b)(4) are met with respect to such income.
(F)
Coordination with high-taxed income provisions
(G)
Dividend
For purposes of this paragraph, the term “dividend” includes any amount included in gross income in section
951
(a)(1)(B). Any amount included in gross income under section
78 to the extent attributable to amounts included in gross income in section
951
(a)(1)(A) shall not be treated as a dividend but shall be treated as included in gross income under section
951
(a)(1)(A).
(H)
Look-thru applies to passive foreign investment company inclusion
If—
any amount included in gross income under section
1293 shall be treated as income in a separate category to the extent such amount is attributable to income in such category.
(4)
Look-thru applies to dividends from noncontrolled section
902 corporations
(A)
In general
For purposes of this subsection, any dividend from a noncontrolled section
902 corporation with respect to the taxpayer shall be treated as income described in a subparagraph of paragraph (1) in proportion to the ratio of—
(B)
Earnings and profits of controlled foreign corporations
In the case of any distribution from a controlled foreign corporation to a United States shareholder, rules similar to the rules of subparagraph (A) shall apply in determining the extent to which earnings and profits of the controlled foreign corporation which are attributable to dividends received from a noncontrolled section
902 corporation may be treated as income in a separate category.
(C)
Special rules
For purposes of this paragraph—
(ii)
Inadequate substantiation
If the Secretary determines that the proper subparagraph of paragraph (1) in which a dividend is described has not been substantiated, such dividend shall be treated as income described in paragraph (1)(A).
(iii)
Coordination with high-taxed income provisions
Rules similar to the rules of paragraph (3)(F) shall apply for purposes of this paragraph.
(iv)
Look-thru with respect to carryover of credit
Rules similar to subparagraph (A) also shall apply to any carryforward under subsection (c) from a taxable year beginning before January 1, 2003, of tax allocable to a dividend from a noncontrolled section
902 corporation with respect to the taxpayer. The Secretary may by regulations provide for the allocation of any carryback of tax allocable to a dividend from a noncontrolled section
902 corporation from a taxable year beginning on or after January 1, 2003, to a taxable year beginning before such date for purposes of allocating such dividend among the separate categories in effect for the taxable year to which carried.
(5)
Controlled foreign corporation; United States shareholder
For purposes of this subsection—
(6)
Separate application to items resourced under treaties
(A)
In general
If—
(i)
without regard to any treaty obligation of the United States, any item of income would be treated as derived from sources within the United States,
(7)
Regulations
The Secretary shall prescribe such regulations as may be necessary or appropriate for the purposes of this subsection, including regulations—
(A)
for the application of paragraph (3) and subsection (f)(5) in the case of income paid (or loans made) through 1 or more entities or between 2 or more chains of entities,
(f)
Recapture of overall foreign loss
(1)
General rule
For purposes of this subpart and section
936, in the case of any taxpayer who sustains an overall foreign loss for any taxable year, that portion of the taxpayer’s taxable income from sources without the United States for each succeeding taxable year which is equal to the lesser of—
(A)
the amount of such loss (to the extent not used under this paragraph in prior taxable years), or
(B)
50 percent (or such larger percent as the taxpayer may choose) of the taxpayer’s taxable income from sources without the United States for such succeeding taxable year,
shall be treated as income from sources within the United States (and not as income from sources without the United States).
(2)
Overall foreign loss defined
For purposes of this subsection, the term “overall foreign loss” means the amount by which the gross income for the taxable year from sources without the United States (whether or not the taxpayer chooses the benefits of this subpart for such taxable year) for such year is exceeded by the sum of the deductions properly apportioned or allocated thereto, except that there shall not be taken into account—
(3)
Dispositions
(A)
In general
For purposes of this chapter, if property which has been used predominantly without the United States in a trade or business is disposed of during any taxable year—
(i)
the taxpayer, notwithstanding any other provision of this chapter (other than paragraph (1)), shall be deemed to have received and recognized taxable income from sources without the United States in the taxable year of the disposition, by reason of such disposition, in an amount equal to the lesser of the excess of the fair market value of such property over the taxpayer’s adjusted basis in such property or the remaining amount of the overall foreign losses which were not used under paragraph (1) for such taxable year or any prior taxable year, and
(ii)
paragraph (1) shall be applied with respect to such income by substituting “100 percent” for “50 percent”.
In determining for purposes of this subparagraph whether the predominant use of any property has been without the United States, there shall be taken into account use during the 3-year period ending on the date of the disposition (or, if shorter, the period during which the property has been used in the trade or business).
(B)
Disposition defined and special rules
(i)
For purposes of this subsection, the term “disposition” includes a sale, exchange, distribution, or gift of property whether or not gain or loss is recognized on the transfer.
(C)
Exceptions
Notwithstanding subparagraph (B), the term “disposition” does not include—
(D)
Application to certain dispositions of stock in controlled foreign corporation
(i)
In general
This paragraph shall apply to an applicable disposition in the same manner as if it were a disposition of property described in subparagraph (A), except that the exception contained in subparagraph (C)(i) shall not apply.
(ii)
Applicable disposition
For purposes of clause (i), the term “applicable disposition” means any disposition of any share of stock in a controlled foreign corporation in a transaction or series of transactions if, immediately before such transaction or series of transactions, the taxpayer owned more than 50 percent (by vote or value) of the stock of the controlled foreign corporation. Such term shall not include a disposition described in clause (iii) or (iv), except that clause (i) shall apply to any gain recognized on any such disposition.
(iii)
Exception for certain exchanges where ownership percentage retained
A disposition shall not be treated as an applicable disposition under clause (ii) if it is part of a transaction or series of transactions—
(I)
to which section
351 or
721 applies, or under which the transferor receives stock in a foreign corporation in exchange for the stock in the controlled foreign corporation and the stock received is exchanged basis property (as defined in section
7701
(a)(44)), and
(II)
immediately after which, the transferor owns (by vote or value) at least the same percentage of stock in the controlled foreign corporation (or, if the controlled foreign corporation is not in existence after such transaction or series of transactions, in another foreign corporation stock in [2] which was received by the transferor in exchange for stock in the controlled foreign corporation) as the percentage of stock in the controlled foreign corporation which the taxpayer owned immediately before such transaction or series of transactions.
(iv)
Exception for certain asset acquisitions
A disposition shall not be treated as an applicable disposition under clause (ii) if it is part of a transaction or series of transactions in which the taxpayer (or any member of an affiliated group of corporations filing a consolidated return under section
1501 which includes the taxpayer) acquires the assets of a controlled foreign corporation in exchange for the shares of the controlled foreign corporation in a liquidation described in section
332 or a reorganization described in