scribed in regulations or matures within that period but is not collected within
such period solely by reasons of the debtor’s inability or unwillingness to pay- Certain assets of securities and commodities dealers acquired in the ordinary
course of business, effective for tax years beginning after December 1, 1997.
Amounts previously included in income as Subpart F income are not taxed again
as either an increase in earnings invested in U.S. property or when actually distrib-
uted. Thus, the same income will not be taxed twice.
Although this income is subject to U.S. taxation, the actual U.S. tax on that income
can be mitigated by the foreign tax credit provision discussed in section 30.4.
Generally, when a U.S. shareholder sells its investment in an affiliated company,
the gain qualifies as capital gain. However, a special rule provides for gains from
the sale of CFCs. A U.S. shareholder that owns 10% or more of the total combined
voting power of the CFC, at any time during the five-year period ending on the date
of the sale or exchange, treats as a dividend any gain recognized on the sale or ex-
change, to the extent of the earnings and profits of the CFC attributable to the stock
sold that were accumulated while the stock was held by the U.S. shareholder and
while the foreign corporation was a CFC. If the gain is taxed as a dividend, then
the foreign tax credit provisions apply. Because of the impact of the foreign tax
credit provisions, in most cases, treatment of all or a portion of the gain as a divi-
dend results in a lower federal income tax than treatment of the gain as a capital
gain.
In order to enable the Internal Revenue Service to monitor the activities of con-
trolled foreign corporations, an information return is filed by U.S. persons as an at-
tachment to their federal income tax return. This information return not only reports
items of Subpart F income but also provides information to the Internal Revenue Ser-
vice that it may also use to identify transactions between the U.S. taxpayer and con-
trolled foreign corporations.
30.4 FOREIGN TAX CREDIT. Because the United States taxes domestic corpora-
tions on their worldwide income, income earned both within and without the United
States is subject to tax. Just as the United States exercises taxing jurisdiction over
foreign corporations doing business within the United States, foreign countries exer-
cise similar jurisdiction over U.S. corporations doing business within their borders.
Thus, a U.S. corporation doing business within a foreign country will often be sub-
ject to both U.S. and foreign taxation. This potentially prohibitive double taxation
would inhibit U.S. business from expanding outside the United States. To remove
this obstacle, Congress had a choice of either completely exempting foreign income
from U.S. taxation or permitting domestic corporations to reduce or eliminate the
U.S. tax on their foreign source income by the amount of foreign income tax paid.
The United States has chosen this latter alternative through the use of the foreign tax
credit system. A domestic corporation may, on an annual basis, elect either to claim
the foreign income tax as a deduction, just as it deducts state and local income taxes,
or to claim the foreign tax as a credit. The foreign tax credit can be claimed only to
the extent of U.S. tax attributable to the net foreign source income. This is achieved
by the foreign tax credit limitation discussed below. The effect of the foreign tax
credit limitation is that the taxpayer pays a combined U.S. and foreign income tax
equal to the higher of the effective U.S. and foreign taxes. However, if a taxpayer is
30.4 FOREIGN TAX CREDIT 30 • 9