§ 986. Determination of foreign taxes and foreign corporation’s earnings and profits
(a)
Foreign income taxes
(1)
Translation of accrued taxes
(A)
In general
For purposes of determining the amount of the foreign tax credit, in the case of a taxpayer who takes foreign income taxes into account when accrued, the amount of any foreign income taxes (and any adjustment thereto) shall be translated into dollars by using the average exchange rate for the taxable year to which such taxes relate.
(C)
Exception for inflationary currencies
Subparagraph (A) shall not apply to any foreign income taxes the liability for which is denominated in any inflationary currency (as determined under regulations).
(D)
Elective exception for taxes paid other than in functional currency
(i)
In general
At the election of the taxpayer, subparagraph (A) shall not apply to any foreign income taxes the liability for which is denominated in any currency other than in the taxpayer’s functional currency.
(E)
Special rule for regulated investment companies
In the case of a regulated investment company which takes into account income on an accrual basis, subparagraphs (A) through (D) shall not apply and foreign income taxes paid or accrued with respect to such income shall be translated into dollars using the exchange rate as of the date the income accrues.
(2)
Translation of taxes to which paragraph (1) does not apply
For purposes of determining the amount of the foreign tax credit, in the case of any foreign income taxes to which subparagraph (A) or (E) of paragraph (1) does not apply—
(A)
such taxes shall be translated into dollars using the exchange rates as of the time such taxes were paid to the foreign country or possession of the United States, and
(b)
Earnings and profits and distributions
For purposes of determining the tax under this subtitle—
(c)
Previously taxed earnings and profits
(1)
In general
Foreign currency gain or loss with respect to distributions of previously taxed earnings and profits (as described in section
959 or
1293
(c)) attributable to movements in exchange rates between the times of deemed and actual distribution shall be recognized and treated as ordinary income or loss from the same source as the associated income inclusion.