#### § 1.902-4 Rules for distributions attributable to accumulated profits for taxable years in which a first-tier corporation was a less developed country corporation.

(a) *In general.* If a domestic shareholder receives a distribution from a first-tier corporation before January 1, 1978, in a taxable year of the domestic shareholder beginning after December 31, 1964, which is attributable to accumulated profits of the first-tier corporation for a taxable year beginning before January 1, 1976, in which the first-tier corporation was a less developed country corporation (as defined in 26 CFR § 1.902-2 revised as of April 1, 1978), then the amount of the credit deemed paid by the domestic shareholder with respect to such distribution shall be calculated under the rules relating to less developed country corporations contained in (26 CFR § 1.902-1 revised as of April 1, 1978).

(b) *Combined distributions.* If a domestic shareholder receives a distribution before January 1, 1978, from a first-tier corporation, a portion of which is described in paragraph (a) of this section, and a portion of which is attributable to accumulated profits of the first-tier corporation for a year in which the first-tier corporation was not a less developed country corporation, then the amount of taxes deemed paid by the domestic shareholder shall be computed separately on each portion of the dividend. The taxes deemed paid on that portion of the dividend described in paragraph (a) shall be computed as specified in paragraph (a). The taxes deemed paid on that portion of the dividend described in this paragraph (b), shall be computed as specified in § 1.902-3.

(c) *Distributions of a first-tier corporation attributable to certain distributions from second- or third-tier corporations.* Paragraph (a) shall apply to a distribution received by a domestic shareholder before January 1, 1978, from a first-tier corporation out of accumulated profits for a taxable year beginning after December 31, 1975, if:

(1) The distribution is attributable to a distribution received by the first-tier corporation from a second- or third-tier corporation in a taxable year beginning after December 31, 1975.

(2) The distribution from the second- or third-tier corporation is made out of accumulated profits of the second- or third-tier corporation for a taxable year beginning before January 1, 1976, and

(3) The first-tier corporation would have qualified as a less developed country corporation under section 902(d) (as in effect on December 31, 1975), in the taxable year in which it received the distribution.

(d) *Illustrations.* The application of this section may be illustrated by the following examples:

# Example 1.

M, a domestic corporation owns all of the one class of stock of foreign corporation A. Both corporations use the calendar year as the taxable year. A Corporation pays a dividend to M Corporation on January 1, 1977, partly out of its accumulated profits for calendar year 1976 and partly out of its accumulated profits for calendar year 1975. For 1975 A Corporation qualified as a less developed country corporation under the former section 902(d) (as in effect on December 31, 1975). M Corporation is deemed under paragraphs (a) and (b) of this section to have paid $63 of foreign income taxes paid by A Corporation on or with respect to its accumulated profits for 1976 and 1975 and M Corporation includes $36 of that amount in gross income as a dividend under section 78, determined as follows upon the basis of the facts assumed:

| Gains, profits, and income of A Corp. for 1976 | $120.00 |
| --- | --- |
| Foreign income taxes imposed on or with respect to such gains, profits, and income | 36.00 |
| Accumulated profits | 120.00 |
| Foreign income taxes paid by A Corp. on or with respect to its accumulated profits (total foreign income taxes) | 36.00 |
| Accumulated profits in excess of foreign income taxes | 84.00 |
| Dividend to M Corp. out of 1976 accumulated profits | 84.00 |
| Foreign income taxes of A for 1976 deemed paid by M Corp. ($84/$84 × $36) | 36.00 |
| Foreign income taxes included in gross income of M Corp. under section 78 as a dividend from A Corp | 36.00 |

1976

| Gains, profits, and income of A Corp. for 1975 | $257.14 |
| --- | --- |
| Foreign income taxes imposed on or with respect to such gains, profits, and income | 77.14 |
| Accumulated profits (under section 902(c)(1)(B) as in effect prior to amendment by the Tax Reform Act of 1976) | 180.00 |
| Foreign income taxes paid by A Corp. on or with respect to its accumulated profits ($77.14 × $180/$257.14) | 54.00 |
| Dividend to M Corp. out of accumulated profits of A Corp. for 1975 | 90.00 |
| Foreign income taxes of A Corp. for 1975 deemed paid by M Corp. (under section 902(a)(2) as in effect prior to amendment by the Tax Reform Act of 1976) ($54 × $90/$180) | 27.00 |
| Foreign income taxes included in gross income of M Corp. under section 78 as a dividend from A Corp | 0 |

1975

# Example 2.

The facts are the same as in example 1, except that the distribution from A Corporation to M Corporation on January 1, 1977, was from accumulated profits of A Corporation for 1976. A Corporation's accumulated profits for 1976 were made up of income from its trade or business, and a dividend paid by B, a second-tier corporation in 1976. The dividend from B Corporation to A Corporation was from accumulated profits of B Corporation for 1975. A Corporation would have qualified as a less developed country corporation for 1976 under the former section 902(d) (as in effect on December 31, 1975). M Corporation is deemed under paragraphs (b) and (c) of this section to have paid $543 of the foreign taxes paid or deemed paid by A Corporation on or with respect to its accumulated profits for 1976, and M Corporation includes $360 of that amount in gross income as a dividend under section 78, determined as follows upon the basis of the facts assumed:

| Total gains, profits, and income of A Corp. for 1976 | $1,500 |
| --- | --- |
| Gains and profits from business operations | 1,200 |
| Gains and profits from dividend A Corp. received in 1976 from B Corp. out of accumulated profits of B Corp. for 1975 | 300 |
| Foreign taxes imposed on or with respect to such profits and income | 450 |
| Foreign taxes paid by A Corp. attributable to gains and profits from A Corp.'s business operations | 360 |
| Foreign taxes paid by A Corp. attributable to dividend from B Corp. in 1976 | 90 |
| Dividends from A Corp. to M Corp. on Jan. 1, 1977 | 1,050 |
| Portion of dividend attributable to gains and profits of A Corp. from business operations. ($1,200/$1,500 × $1,050) | 840 |
| Portion of dividends attributable to gains on profits of A Corp. from dividend from B Corp. ($300/$1,500 × $1,050) | 210 |

(a) *Amount of foreign taxes of A Corp. deemed paid by M Corp. on A Corp.'s gains and profits for 1976 from business operations.*

| Gains, profits, and income of A Corp. from business operations | $1,200 |
| --- | --- |
| Foreign income taxes imposed on or with respect to gains, profits, and income | 360 |
| Accumulated profits | 1,200 |
| Foreign income taxes paid by A Corp. on or with respect to its accumulated profits (total foreign income taxes) | 360 |
| Accumulated profits in excess of foreign income taxes | 840 |
| Dividend to M Corp | 840 |
| Foreign taxes of A Corp. deemed paid by M Corp. ($360 × $840/$840) | 360 |
| Foreign taxes included in gross income of M Corp. under section 78 as a dividend | 360 |

(b) *Amount of foreign taxes of A Corp. deemed paid by M Corp. on portion of the dividend attributable to B Corp.'s accumulated profits for 1975.*

| B Corp. (second-tier corporation): | |
| --- | --- |
| Gains, profits, and income for calendar year 1975 | $1,000 |
| Foreign income taxes imposed on or with respect to gains, profits, and income | 400 |
| Accumulated profits (under section 902(c)(1)(B) as in effect prior to amendment by the Tax Reform Act of 1976) | 600 |
| Foreign income taxes paid by B Corp. on or with respect to its accumulated profits ($400 × $600/$1,000) | 240 |
| Dividend to A Corp. in 1976 | 300 |
| Foreign taxes of B Corp. for 1975 deemed paid by A Corp. (under section 902(b)(1)(B) as in effect prior to amendment by the Tax Reform Act of 1976) ($240 × $300/$600) | 120 |
| A Corp. (first-tier corporation): | |
| Gains, profits, and income for 1976 attributable to dividend from B Corp.'s accumulated profits for 1975 | 300 |
| Foreign income taxes imposed on or with respect to such gains, profits, and income | 90 |
| Accumulated profits (under section 902(c)(1)(B) as in effect prior to amendment by the Tax Reform Act of 1976) | 210 |
| Foreign taxes paid by A Corp. on or with respect to such accumulated profits ($90 × $210/$300) | 63 |
| Foreign income taxes paid and deemed to be paid by A Corp. for 1976 on or with respect to such accumulated profits ($120 + $63) | 183 |
| Dividend paid to M Corp. attributable to dividend from B Corp. out of accumulated profits for 1975) | 210 |
| Foreign taxes of A Corp. deemed paid by M Corp. (under section 902(a)(2) as in effect prior to amendment by the Tax Reform Act of 1976) ($183 × $210/$210) | 183 |
| Amount included in gross income of M Corp. under section 78 | 0 |

[T.D. 7649, 44 FR 60087, Oct. 18, 1979. Redesignated and amended by T.D. 8708, 62 FR 927, 940, Jan. 7, 1997]