[Code of Federal Regulations]
[Title 26, Volume 9]
[Revised as of April 1, 2006]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.853-2]

[Page 43-44]
 
                       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, 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

[[Page 44]]

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.