- Shipping income
- Dividends from each 10% to 50% U.S.-owned foreign corporation
For earnings after 2002, the look-through rules discussed below will apply. For
distributions of pre-2003 earnings, the separate foreign tax credit limitation provi-
sions will continue to apply.
- Dividends from a domestic international sales corporation (DISC) or former
DISC - Taxable income attributable to foreign trade income of a foreign sales corpora-
tion (FSC) - Distribution from an FSC (or former FSC) out of earnings and profits attributa-
ble to foreign trade income or qualified interest or carrying charges - Foreign oil–related income
- Other income (general basket)
The foreign tax credit limitation is limited to the U.S. tax on the foreign source tax-
able income of each of the baskets. Foreign source taxable income is foreign source
gross income less the appropriate deductions. Foreign source gross income is reduced
by the expenses, losses, and deductions properly allocable to the foreign source in-
come plus a ratable share of expenses, losses, and deductions that cannot definitely
be allocated to any item or class of gross income. There are comprehensive regula-
tions that describe how to do this. The interpretation of this provision is one of the
major areas of dispute between taxpayers and the IRS.
Look-through rules apply for purposes of categorizing income of a U.S. taxpayer
received either in the form of interest or dividends paid by U.S.-owned foreign cor-
porations or included in income under the Subpart F provisions. Under these look-
through rules, income is categorized as either U.S. source income or placed in the ap-
propriate foreign tax credit limitation basket based upon the underlying income of the
foreign corporation. To the extent the CFC has separate limitation income, the divi-
dend, interest, rent, or royalties received by the U.S. taxpayer from the related con-
trolled foreign corporation is categorized in the appropriate separate limitation bas-
ket category. Here is an example. The CFC’s income is as follows:
- High withholding tax interest $ 25
- Shipping income 20
- Passive income 10
- General basket income 45
Total $100____
The CFC paid a $100 dividend. The $100 dividend is divided into the four limita-
tion baskets as if the CFC were a conduit—that is, high withholding tax interest of
$25, shipping income of $20, passive income of $10, and general basket income of
$45.
Any amount included in income as Subpart F income is divided in an identical
manner. Thus, in the previous example, the portion of the income that is Subpart F
income is divided among the baskets as if a dividend had been paid. Similar look-
through rules apply to interest, rents, and royalties from CFCs to a 10% U.S. share-
holder.
30.4 FOREIGN TAX CREDIT 30 • 11