(a) Amount of overpayment. If an increase in the limitation under section 960(c)(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) Example. The application of this section may be illustrated by the following example:
(1) Facts. USP, a domestic corporation, owns all of the one class of stock of CFC, a controlled foreign corporation. Both corporations use the calendar year as the taxable year, and the functional currency of CFC is the U.S. dollar. For Year 1, CFC has total income of $100,000x on which it pays foreign income taxes of $20,000x. All of CFC's earnings and profits for Year 1 of $80,000x are attributable to an amount which is required under section 951(a) to be included in USP's gross income for Year 1 because such income is general category foreign base company services income of CFC. By reason of such income inclusion USP is deemed for Year 1 to have paid under section 960(a), and is required under section 78 to include in gross income for such year, the $20,000x ($20,000x × $80,000x/$80,000x) of foreign income taxes paid by CFC for such year. USP also derives $100,000x of taxable income from sources within the United States for Year 1. For Year 2, USP has $4,000x of taxable income, all of which is derived from sources within the United States. No part of CFC's earnings and profits for Year 2 is attributable to an amount required under section 951(a) or section 951A(a) to be included in USP's gross income. During Year 2, CFC makes one distribution consisting of its $80,000x earnings and profits for Year 1, all of which is excluded under section 959(a)(1) from USP's gross income for Year 2, and from which distribution foreign income taxes of $1,000x are withheld. For Year 1 and Year 2, USP claims the foreign tax credit under section 901, subject to the limitation of section 904.
(2) Analysis. The U.S. tax liability of USP is determined as follows for such years, assuming a corporate tax rate of 21%:
Table 1 to Paragraph (b)(2)
| Year 1 | ||
| Taxable income of USP: | ||
| U.S. sources | $100,000.00x | |
| Sources without the U.S.: | ||
| Amount required to be included in USP's gross income under section 951(a) | $80,000.00x | |
| Foreign income taxes deemed paid by USP under section 960(a) and included in USP's gross income under section 78 ($20,000x × $80,000x/$80,000x) | 20,000.00x | 100,000.00x |
| Total taxable income | 200,000.00x | |
| U.S. tax payable for Year 1: | ||
| U.S. tax before credit ( [$200,000x × 21%] ) | 42,000.00x | |
| Credit: Foreign income taxes of $20,000x, but not to exceed limitation of $21,000x ($42,000x × $100,000x/$200,000x) | 20,000.00x | |
| U.S. tax payable | 22,000.00x | |
Table 2 to Paragraph (b)(2)
| Year 2 | ||
| Taxable income of USP, consisting of income from U.S. sources | $4,000x | |
| U.S. tax before credit ($4,000x × 21%) | 840x | |
| Section 904 limitation for Year 2: | ||
| Limitation for Year 2 before increase under section 960(c)(1) ($840x × $0/$4,000x) | 0 | |
| Plus: Increase in section 904 limitation for Year 2 under section 960(c)(1): | ||
| Amount by which Year 1 limitation was increased by reason of inclusion in USP's gross income under section 951(a) for Year 1 ($21,000x-[$21,000x × $0/$100,000x]) | $21,000x | |
| Less: Foreign income taxes allowed as a credit for Year 1 which were allowable solely by reason of such section 951(a) inclusion ($20,000x-$0) | 20,000x | |
| Balance | 1,000x | |
| But: Such balance not to exceed foreign income taxes paid by USP for Year 2 with respect to $80,000x distribution excluded under section 959(a)(1) ($1,000x tax withheld) | 1,000x | 1,000x |
| Limitation for Year 2 | 1,000x | |
| U.S. tax payable for Year 2: | ||
| U.S. tax before credit ($4,000x × 21%) | 840x | |
| Credit: Foreign income taxes of $1,000x, but not to exceed limitation of $1,000x for Year 2 | 1,000x | |
| U.S. tax payable | None | |
| Overpayment of tax for Year 2: | ||
| Increase in limitation under section 960(c)(1) for Year 2 | 1,000x | |
| Less: Tax imposed for Year 2 under chapter 1 of the Code | 840x | |
| Excess treated as overpayment | 160x | |
[T.D. 7120, 36 FR 10859, June 4, 1971, as amended by T.D. 7649, 44 FR 60089, Oct. 18, 1979; T.D. 9882, 84 FR 69119, Dec. 17, 2019]
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