Internal Revenue Service
Revenue Ruling

TaxLinks.com   sm

 Rev. Rul. 79-74

1979-1 C.B. 242

Section 902

IRS Headnote

Foreign tax credit; dividends on nonvoting stock. A domestic corporation that owns 10 percent of the voting stock and five percent of the nonvoting stock of a foreign corporation is entitled to a deemed paid foreign tax credit under section 902 of the Code for qualifying foreign taxes paid by the foreign corporation with respect to dividends received by the domestic corporation on the nonvoting stock, for a year in which no dividends were paid on the voting stock.

Full Text

Rev. Rul. 79-74

ISSUE

Is X entitled under section 902(a) of the Internal Revenue Code of 1954 to a deemed paid credit for foreign income, war profits, or excess profits taxes paid by Y with respect to dividends received by X from Y, when such dividends are paid on Y's nonvoting stock?

FACTS

X is a domestic corporation that owns 10 percent of the voting shares and 5 percent of the nonvoting shares of Y. Y is a foreign corporation organized under the laws of country Z, with its principal office located in that country.

Y has two classes of stock, voting and nonvoting. In 1977, Y paid a dividend on the outstanding nonvoting stock. In that year, Y did not pay a dividend on its voting stock.

LAW AND ANALYSIS

The applicable sections of the Code and the Income Tax Regulations are 902 and 1.902-1, relating to the foreign tax credit that is available to domestic corporations that own at least 10 percent of the voting stock of a foreign corporation.

Section 902(a) of the Code provides that when a domestic corporation owns at least 10 percent of the voting stock of a foreign corporation and receives dividends therefrom, the domestic corporation may be entitled to a foreign tax credit under section 901 for a certain portion of the taxes paid by the foreign corporation to a foreign country or a United States possession.

Section 1.902-1(a)(7) of the regulations provides that a dividend for purposes of applying section 902 of the Code is defined in section 316. Section 316(a) defines a dividend as any distribution of property made by a corporation to its shareholders out of its current or accumulated earnings and profits. Section 1.902-1(a)(8) states that a dividend shall be considered received for purposes of section 902 when the cash or other property is unqualifiedly made subject to the demands of the distributee.

A domestic corporation is entitled to a foreign tax credit under section 902 of the Code when it owns at least 10 percent of the foreign corporation's voting stock at the time it receives a dividend from the foreign corporation. There is no requirement in section 902 or the regulations thereunder that for purposes of computing the foreign tax credit allowed under section 902 a dividend received means only a dividend paid on the voting stock of the foreign corporation. Therefore, the dividends received for purposes of section 902 include dividends on both voting and nonvoting stock of the foreign corporation provided the domestic corporation owns at least 10 percent of the foreign corporation's voting stock. Compare Rev. Rul. 74-459, 1974-2 C.B. 207, in which a section 902 deemed paid foreign tax credit was disallowed to the domestic parent corporation receiving a dividend distribution directly from its second-tier foreign subsidiary because such parent corporation owned only nonvoting stock of such second-tier subsidiary.

HOLDING

X is entitled to a deemed paid tax credit under section 902 of the Code for foreign income, war profits, or excess profits taxes paid by Y with respect to the dividends received by X on Y's nonvoting stock.