[Code of Federal Regulations] [Title 26, Volume 9] [Revised as of April 1, 2002] From the U.S. Government Printing Office via GPO Access [CITE: 26CFR1.853-2] [Page 42-43] TITLE 26--INTERNAL REVENUE CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY (CONTINUED) PART 1--INCOME TAXES--Table of Contents Sec. 1.853-2 Effect of election. (a) Regulated investment company. A regulated investment company making a valid election with respect to a taxable year under the provisions of section 853(a) is, for such year, denied both the deduction for foreign taxes provided by section 164(a) and the credit for foreign taxes provided by section 901 with respect to all income, war-profits, and excess profits taxes (described in section 901(b)(1)) which it has paid to any foreign country or possession of the United States. See section 853(b)(1)(A). However, under section 853(b)(1)(B), the regulated investment company is permitted to add the amount of such foreign taxes paid to its dividends paid deduction for that taxable year. See paragraph (a) of Sec. 1.852-1. (b) Shareholder. Under section 853(b)(2), a shareholder of an investment company, which has made the election under section 853, is, in effect, [[Page 43]] placed in the same position as a person directly owning stock in foreign corporations, in that he must include in his gross income (in addition to taxable dividends actually received) his proportionate share of such foreign taxes paid and must treat such amount as foreign taxes paid by him for the purposes of the deduction under section 164(a) and the credit under section 901. For such purposes he must treat as gross income from a foreign country or possession of the United States (1) his proportionate share of the taxes paid by the regulated investment company to such foreign country or possession and (2) the portion of any dividend paid by the investment company which represents income derived from such sources. (c) Dividends paid after the close of the taxable year. For additional rules applicable to certain distributions made after the close of the taxable year which may be designated as income received from sources within and taxes paid to foreign countries or possessions of the United States, see section 855(d) and paragraph (f) of Sec. 1.855-1. (d) Example. This section may be illustrated as follows: (1) The X Corporation, a regulated investment company, has total assets, at the close of the taxable year, of $10 million invested as follows: Domestic corporations...................................... $4,000,000 Foreign corporations in: Country A................................... $3,500,000 ........... Country B................................... 2,500,000 ........... ---------- 6,000,000 ------------ Total assets.............................................. 10,000,000 (2) The dividend income of X Corporation is received from the following sources: Domestic corporations....................................... $300,000 Foreign corporations: Country A..................................... $250,000 .......... Country B..................................... 250,000 .......... ------------- .......... 500,000 ----------- Total dividend income...................................... 800,000 Operation and management expenses........................... 80,000 ------------- Net dividend income......................................... 720,000 Taxes withheld by Country B on dividends of 25,000 .......... $250,000 at a rate of 10 percent............... Taxes withheld by Country B on dividends of 50,000 .......... $250,000 at a rate of 20 percent............... ------------- Total foreign taxes withheld............................... 75,000 ------------- Income available for distribution.......................... $645,000 (3) X Corporation has 250,000 shares of common stock outstanding and distributes the entire $645,000 as a dividend of $2.58 per share of stock. (4) The X Corporation meets the 50 percent requirement of section 851(b)(4) and the requirements of section 852(a). It notifies each shareholder by mail, within the time prescribed by section 853(c), that by reason of the election they are to treat as foreign taxes paid $0.30 per share of stock ($75,000 of foreign taxes paid, divided by the 250,000 shares of stock outstanding), of which $0.20 represents taxes paid to Country B and $0.10 taxes paid to Country A. The shareholders must report as income $2.88 per share ($2.58 of dividends actually received plus the $0.30 representing foreign taxes paid). Of the $2.88 per share, $1.80 per share ($450,000 (which represents such part of the net dividend income of $720,000 as the foreign dividend income of $500,000 bears to the total dividend income of $800,000) divided by 250,000 shares) is to be considered as received from foreign sources. Ninety cents is to be considered as received from Country A, and ninety cents from Country B.