SECTION 9. RESTRICTION — Internal Revenue Bulletin 2005-36

USE OF CREDITS TO OFFSET TAX ON NONDEDUCTIBLE CFC DIVIDENDS AND COMPUTATION OF ALTERNATIVE MINIMUM TAX PURSUANT TO SECTION 965(e)(1)

.01 In General

Section 965(e)(1) provides that tax on nondeductible CFC dividends is not treated as a tax when determining the amount of any allowable credit or the amount of alternative minimum tax imposed by section 55. However, this rule does not apply to the credit under section 53 for prior year minimum tax, or to the credit under section 27(a) for foreign taxes attributable to nondeductible CFC dividends. Therefore, the portion of the pre-credit U.S. tax that is attributable to the nondeductible CFC dividends may not be offset by any credit other than prior year minimum tax credits and a foreign tax credit for foreign taxes attributable to the nondeductible CFC dividends.

.02 Additional Limitation on Foreign Tax Credits

(a) In general . The limitation under section 965(e) on the use of foreign tax credits against the U.S. tax on nondeductible CFC dividends (the section 965(e) limitation) is implemented through an additional foreign tax credit limitation for each separate category that includes nondeductible CFC dividends. Section 965 does not provide for a distinct separate category for qualifying dividends. Instead, qualifying dividends are characterized as income in separate categories under the generally applicable look-through rules of sections 904(d)(3)(B) and 904(d)(3)(D). See sections 3.02 and 6.01 of this notice. The section 965(e) limitation is applied after gross income and deductible expenses, including the NOL deduction, are

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(ii) Result. Step 1. Determine creditable foreign taxes . USP is entitled to an $850x DRD under section 965(a) with respect to the $1,000x qualifying dividend from CFC1, and has $150x of nondeductible CFC dividends. Under section 965(d)(1) and section 4.01 of this notice, USP may claim a credit for $15x (.15 x $100x) of deemed-paid foreign tax attributable to the nondeductible CFC dividend. Because no section 965 DRD is allowed with respect to the $100x dividend from CFC2, all $100x is taxed, and all $20x of deemed-paid tax attributable to the CFC2 dividend is creditable. Thus, USP’s creditable foreign taxes, prior to the application of the limitation rules, are $35x ($15x + $20x), and USP includes $35x in income under section 78.

Step 2. Determine regular section 904 limitation . Total foreign source taxable income (FSTI) equals $285x ($1,000x CFC1 dividend - $850x DRD + $100x CFC2 dividend + $35x gross-up). Because USP has no other income, worldwide taxable income (WWTI) is also $285x. USP’s pre-credit U.S. tax is $99.75x (.35 x $285x). The regular section 904 limitation is $99.75x (($285x FSTI/$285x WWTI) x $99.75x). Thus, all $35 of foreign taxes are eligible for the credit under the regular section 904 limitation.

Step 3. Determine section 965(e) limitation . Pursuant to this section 9.02, the section 965(e) limitation is the sum of the creditable foreign taxes paid or accrued with respect to the nondeductible CFC dividends and the modified section 904 limitation that results from subtracting the amount of the nondeductible CFC dividends from the numerator and denominator of the regular section 904 limitation fraction and subtracting the pre-credit U.S. tax on the nondeductible CFC dividends from the pre-credit U.S. tax in the regular section 904 limitation. The foreign taxes on the $150x of nondeductible CFC dividends are $15x. Subtracting the $150x of nondeductible CFC dividends from the numerator and denominator of the regular section 904 limitation fraction, USP has $135x of other FSTI and WWTI ($100x CFC2 dividend plus $35x of gross-up income) and a pre-credit U.S. tax on this amount of $47.25x ($99.75x - (.35 x $150x)). The modified section 904 limitation equals $47.25x (($135x FSTI/$135x WWTI) x $47.25x). The section 965(e) limitation equals $62.25x ($15x + $47.25x). Because the total amount of creditable foreign taxes is less than both the section 965(e) limitation and the regular section 904 limitation, USP may credit all $35x of foreign tax in the election year.

Example 2. All High-Taxed Income . (i) Facts . The facts are the same as in Example 1, except that CFC1 has post-1986 undistributed earnings and post-1986 foreign income taxes of $1,000x and $600x, respectively, and CFC2 has post-1986 undistributed earnings and post-1986 foreign income taxes of $1,000x and $750x, respectively. Accordingly, the $1,000x dividend from CFC1 results in foreign taxes deemed paid of $600x (($1,000x/$1,000x) x $600x), and the $100x dividend from CFC2 results in foreign taxes deemed paid of $75x (($100x/$1,000x) x $750x).

allocated and apportioned to determine U.S. source taxable income and foreign source taxable income in the separate categories, as described in sections 6 and 7 of this notice, after the allocation of separate limitation losses, overall foreign losses, and U.S. losses and the recapture of overall foreign losses and separate limitation losses pursuant to section 904(f), as described in section 8 of this notice, and after computing the regular section 904 limitation for each separate category that contains nondeductible CFC dividends.

The section 965(e) limitation for any separate category equals the sum of (i) the creditable foreign taxes paid or accrued with respect to the nondeductible CFC dividends in the separate category and (ii) the modified section 904 limitation for that separate category. The modified section 904 limitation for a separate category is calculated by subtracting the amount of nondeductible CFC dividends in the separate category from both the numerator and denominator of the regular section 904 limitation fraction and subtracting the precredit U.S. tax attributable to the nondeductible CFC dividends in the separate category from the pre-credit U.S. tax used in the regular section 904 limitation calculation. See Examples 1 through 4 of section 9.02(c) of this notice. For this purpose, the pre-credit U.S. tax attributable to the nondeductible CFC dividends in the separate category equals 35 percent (20 percent for alternative minimum tax purposes) of the amount of nondeductible CFC dividends in the separate category.

For purposes of applying the section 965(e) limitation to a separate category that included nondeductible CFC dividends that were reduced by deductions or recharacterized as U.S. source income or income in a different separate category pursuant to sections 6 and 8 of this notice and section 904(f), the amount of nondeductible CFC dividends in the separate category is the portion, if any, of the nondeductible CFC dividends that was not reduced by deductions or recharacterized, and the amount of foreign tax attributable to the nondeductible CFC dividends is the portion of the foreign taxes paid with respect to nondeductible CFC dividends that are attributable to such reduced amount.

The applicable foreign tax credit limitation for each separate category is the smaller of the regular section 904 limita

tion or the section 965(e) limitation, and the allowable foreign tax credit for each separate category is the smaller of the foreign taxes in the separate category or the applicable foreign tax credit limitation. In effect, the section 965(e) limitation will reduce the otherwise allowable foreign tax credit only if nondeductible CFC dividends are considered to bear a lower effective rate of foreign tax than other income in the same separate category and the other income is effectively taxed in excess of the U.S. rate. In this situation, section 965(e)(1) is intended to prevent the excess credits associated with the other income from reducing the U.S. tax on the nondeductible CFC dividends. See Exam- ple 4 in section 9.02(c) of this notice.

(b) No Limitation on Use of Foreign Tax Credits against U.S. Tax on Income Other than Nondeductible CFC Dividends . Section 965(e)(1) does not restrict the use of foreign tax credits, including credits for foreign taxes paid or deemed paid with respect to nondeductible CFC dividends, to reduce the U.S. tax on income other than nondeductible CFC dividends. Therefore, to the extent otherwise allowable, foreign tax credits for foreign taxes paid with respect to nondeductible CFC dividends or other income may reduce the U.S. tax on other foreign source taxable income, including income attributable to the section 78 gross-up for foreign taxes deemed paid with respect to nondeductible CFC dividends.

(c) Examples . The following examples illustrate the application of section 965(e)(1) and this section 9.02. Example 1. All Low-Taxed Income . (i) Facts . USP wholly owns CFC1 and CFC2 and elects to apply section 965 to its 2005 calendar tax year. As of the close of 2005, CFC1 has post-1986 undistributed earnings and post-1986 foreign income taxes of $1,000x and $100x, respectively, and CFC2 has post-1986 undistributed earnings and post-1986 foreign income taxes of $1,000x and $200x, respectively. All post-1986 undistributed earnings of CFC1 and CFC2 are general limitation earnings and profits, and neither CFC1 nor CFC2 has any previously-taxed earnings and profits described in sections 959(c)(1) or 959(c)(2). USP’s base period amount is $100x, and the requirements of section 965 are met for the election year. CFC1 distributes a cash dividend of $1,000x resulting in deemed-paid taxes of $100x (($1,000x/$1,000x) x $100x), CFC2 distributes a cash dividend of $100x resulting in deemed-paid taxes of $20x (($100x/$1,000x) x $200x), and USP accrues no other items of income or expense in the election year. USP identifies the lower-taxed cash dividend from CFC1 as the qualifying dividend.

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x $600x) of deemed-paid foreign tax attributable to the nondeductible CFC dividend. Because no section 965 DRD is allowed with respect to the $100x dividend from CFC2, all $100x is taxed, and all $75x of deemed-paid tax attributable to the CFC2 dividend is creditable. Thus, USP’s creditable foreign taxes, prior to the application of the limitation rules, are $165x ($90x + $75x), and USP includes $165x in income under section 78.

Step 2. Determine regular section 904 limitation . USP’s FSTI equals $415x ($1,000x qualifying dividend from CFC1 - $850x DRD + $100x dividend from CFC2 + $165x gross-up). Because USP has no other income, WWTI is also $415x. USP’s pre-credit U.S. tax is $145.25x (.35 x $415x). Thus, the limitation equals $145.25x (($415x FSTI/$415x WWTI) x $145.25x). Because the limitation is less than the total creditable taxes of $165x, the regular section 904 limitation prevents the excess $19.75x from being credited in the current year.

Step 3. Determine section 965(e) limitation . The foreign taxes on the $150x of nondeductible CFC dividends are $90x. Subtracting the $150x of nondeductible CFC dividends from the numerator and denominator of the regular section 904 limitation fraction, USP has $265x of other FSTI and WWTI ($415x

$150x) and a pre-credit U.S. tax on this amount of $92.75x ($145.25x - (.35 x $150x)). The modified section 904 limitation equals $92.75x (($265x FSTI/$265x WWTI) x $92.75x). The section 965(e) limitation equals $182.75x ($90x + $92.75x). Because the section 965(e) limitation is higher than the regular section 904 limitation, the total amount of creditable foreign taxes are subject to the regular section 904 limitation of $145.25x.

Example 3. High-Taxed Nondeductible CFC Dividend/Low-Taxed Other Income . (i) Facts . The facts are the same as in Example 1, except that CFC1 has post-1986 undistributed earnings and post-1986 foreign income taxes of $1,000x and $400x, respectively, CFC2 does not pay a dividend in the election year, and USP has an additional $100x of general limitation income subject to no foreign tax. Accordingly, the $1,000x dividend from CFC1 results in foreign taxes deemed paid of $400x (($1,000x/$1,000x) x $400x), and no foreign taxes of CFC2 are deemed paid in the election year.

(ii) Result. Step 1. Determine creditable foreign taxes . USP is entitled to an $850x DRD under section 965(a) with respect to the $1,000x qualifying dividend from CFC1, and has $150x of nondeductible CFC dividends. Under section 965(d)(1) and section 4.01 of this notice, USP may claim a credit for $60x (.15 x $400x) of deemed-paid foreign tax attributable to the nondeductible CFC dividend. Thus, USP’s creditable foreign taxes, prior to the application of the limitation rules, are $60x, and USP includes $60x in income under section 78.

Step 2. Determine regular section 904 limitation . USP’s FSTI equals $310x ($1,000x qualifying dividend from CFC1 - $850x DRD + $60x gross-up + $100x of other income). Because USP has no other income, WWTI is also $310x. USP’s pre-credit U.S. tax is $108.50x (.35 x $310x). Thus, the regular section 904 limitation equals $108.50x (($310x FSTI/$310x WWTI) x $108.50x). All $60x of foreign tax would be creditable, because the foreign taxes paid in excess of the U.S. tax on the nondeductible CFC dividend can reduce the U.S. tax on

the gross-up income and the other foreign source income.

Step 3. Determine section 965(e) limitation . The foreign taxes on the $150x of nondeductible CFC dividends are $60x. Subtracting the $150x of nondeductible CFC dividends from the numerator and denominator of the regular section 904 limitation fraction, USP has $160x of other FSTI and WWTI ($310x

$150x) and a pre-credit U.S. tax on this amount of $56x ($108.50x - (.35 x $150x)). The modified section 904 limitation equals $56x (($160x FSTI/$160x WWTI) x $56x). The section 965(e) limitation equals $116x ($60x + $56x). Because the section 965(e) limitation is higher than the regular section 904 limitation, the $60x total amount of creditable foreign taxes are subject to the regular section 904 limitation of $108.50x, and the excess foreign taxes on the nondeductible CFC dividend can reduce the U.S. tax on USP’s other foreign source income.

Example 4. Low-Taxed Nondeductible CFC Dividend/High-Taxed Other Income . (i) Facts . The facts are the same as in Example 1, except that CFC2 has post-1986 undistributed earnings and post-1986 foreign income taxes of $1,000x and $750x, respectively. Accordingly, the $1,000x dividend from CFC1 results in foreign taxes deemed paid of $100x (($1,000x/$1,000x) x $100x), and the $100x dividend from CFC2 results in foreign taxes deemed paid of $75x (($100x/$1,000x) x $750x).

(ii) Result. Step 1. Determine creditable foreign taxes . USP is entitled to an $850x DRD under section 965(a) with respect to the $1,000x qualifying dividend from CFC1, and has $150x of nondeductible CFC dividends. Under section 965(d)(1) and section 4.01 of this notice, USP may claim a credit for $15x (.15 x $100x) of deemed-paid foreign tax attributable to the nondeductible CFC dividend. Because no section 965 DRD is allowed with respect to the $100x dividend from CFC2, all $100x is taxed, and all $75x of deemed-paid tax attributable to the CFC2 dividend is creditable. Thus, USP’s creditable foreign taxes, prior to the application of the limitation rules, are $90x ($15x + $75x), and USP includes $90x in income under section 78.

Step 2. Determine regular section 904 limitation . USP’s FSTI equals $340x ($1,000x qualifying dividend from CFC1 - $850x DRD + $100x dividend from CFC2 + $90x gross-up). Because USP has no other income, WWTI is also $340x. USP’s pre-credit U.S. tax is $119x (.35 x $340x). Thus, the regular section 904 limitation equals $119x (($340x FSTI/$340x WWTI) x $119x). The regular section 904 limitation would allow all $90x of foreign tax to be credited, because the foreign taxes paid in excess of the U.S. tax on the CFC2 dividend could reduce the U.S. tax on the low-taxed nondeductible CFC dividend from CFC1.

Step 3. Determine section 965(e) limitation . The foreign taxes on the $150x of nondeductible CFC dividends are $15x. Subtracting the $150x of nondeductible CFC dividends from the numerator and denominator of the regular section 904 limitation fraction, USP has $190x of other FSTI and WWTI ($340x - $150x) and a pre-credit U.S. tax on this amount of $66.50x ($119x - (.35 x $150x)). The modified section 904 limitation equals $66.50x (($160x FSTI/$160x WWTI) x $66.50x). The section 965(e) limitation equals $81.50x ($15x + $66.50x). Because the section 965(e) limitation is less than the

regular section 904 limitation of $119x, the section 965(e) limitation applies and prevents USP from crediting $8.50x of the $90x of potentially creditable taxes. The $8.50x of tax which is not creditable under the section 965(e) limitation equals the excess foreign taxes on the other foreign source income that would have been creditable against the U.S. tax on the nondeductible CFC dividend under the regular section 904 limitation ( i.e., the excess of the $75x of foreign tax on the CFC2 dividend over $66.50x, the pre-credit U.S. tax on $190x of other foreign source income ($100x CFC2 dividend + $75x gross-up attributable to tax deemed paid on the CFC2 dividend

$15x gross-up attributable to the nondeductible CFC dividend from CFC1)). The excess taxes may be carried over and used as a credit in other years to the extent allowed under section 904(c).

.03 No Use of Credits Other than Credit for Prior Year Minimum Tax to Offset U.S. Tax on Nondeductible CFC Dividends

Section 965(e)(1) provides that no credit other than a foreign tax credit for foreign taxes attributable to nondeductible CFC dividends and the credit for prior year minimum tax under section 53 may offset the U.S. tax on nondeductible CFC dividends. However, section 965 does not limit the application of credits against the U.S. tax on income other than nondeductible CFC dividends. Because other credits, including the possessions tax credit allowed under sections 27(b) and 30A, the nonconventional source fuel credit allowed under section 29, the qualified electric vehicle credit allowed under section 30, and the general business credit allowed under section 38, as well as the credit for prior year minimum tax that is allowed under section 53, are applied after the foreign tax credit, taxpayers must identify the portion of their pre-credit U.S. tax and allowable foreign tax credit for the election year that is attributable to nondeductible CFC dividends and the portion that is attributable to other income in order to determine the amount of their other allowable credits.

For purposes of this determination and section 9.05 of this notice, the portion of a taxpayer’s pre-credit U.S. tax that is attributable to nondeductible CFC dividends equals the smaller of the taxpayer’s total pre-credit U.S. tax or 35 percent of the amount of nondeductible CFC dividends. For this purpose, the amount of nondeductible CFC dividends is the amount determined under section 965(e)(3), without regard to any reduction or recharacterization of nondeductible CFC dividends in

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able income consists of $200x of foreign source general limitation nondeductible CFC dividends subject to no foreign tax and $400x of U.S. source income. USP’s pre-credit regular tax liability is $210x (.35 x $600x). USP has $600x of U.S. source preference items.

(ii) Result . Taking into account the adjustments required by section 965(e)(1)(B) for purposes of computing USP’s alternative minimum tax under section 55 in the election year, USP’s taxable income computed without regard to the $200x of nondeductible CFC dividends is $400x, which would result in a pre-credit regular tax liability of $140x (.35 x $400x). USP’s alternative minimum taxable income computed without regard to the $200x of nondeductible CFC dividends is increased by $600x of preference items from $400x to $1,000x. USP’s tentative minimum tax, computed without regard to the nondeductible CFC dividends, is $200x (.20 x $1,000x). The excess of USP’s adjusted tentative minimum tax of $200x over its adjusted regular tax of $140x results in alternative minimum tax of $60x. USP’s pre-credit tax for the election year is $270x ($210x of regular tax plus $60x of alternative minimum tax). This amount is equivalent to 20 percent of $1,000x, USP’s alternative minimum taxable income exclusive of the nondeductible CFC dividends, plus 35 percent of $200x of nondeductible CFC dividends.

Example 2. Alternative minimum tax foreign tax credit . (i) Facts . The facts are the same as in Ex- ample 1, except that instead of $400x of U.S. source income, USP has $200x of U.S. source income and $200x of other foreign source general limitation income, and USP’s foreign taxes paid or deemed paid with respect to general limitation income are $100x, including $20x of foreign tax paid or accrued with respect to the $200x of nondeductible CFC dividends.

(ii) Result . As in Example 1, USP’s pre-credit regular tax on $400x of taxable income in excess of the $200x of nondeductible CFC dividends is $140x and its pre-credit tentative minimum tax on $1,000x of alternative minimum taxable income in excess of the nondeductible CFC dividends ($400x plus $600x of preference items) is $200x. USP’s allowable foreign tax credit computed for regular tax purposes is $90x, the lesser of $100x, the foreign taxes paid, $140x, the regular section 904 limitation (($400x FSTI/$600x WWTI) x $210x pre-credit U.S. tax), or $90x, the section 965(e) limitation ($20x foreign tax on nondeductible CFC dividends + $70x, the limitation on other income of ($200x FSTI/$400x WWTI) x $140x). The portion of the allowable regular foreign tax credit that is attributable to the nondeductible CFC dividends is $20x, the smaller of the $70x pre-credit U.S. tax on the nondeductible CFC dividends (.35 x $200x) or $20x, the foreign taxes paid or accrued with respect to the nondeductible CFC dividends. The remaining $70x of the allowable regular foreign tax credit is the amount attributable to USP’s other foreign source income. Accordingly, USP’s regular tax described in section 55(c), computed without regard to the tax on nondeductible CFC dividends, is $70x ($140x regular tax

$70x foreign tax credit).

Computed without regard to section 965(e)(1)(B), USP’s alternative minimum tax foreign tax credit is $60x, the lesser of $100x, the foreign taxes paid, $80x, the regular alternative minimum tax for

a separate category for purposes of determining the foreign tax credit limitation as provided in sections 6 through 8 of this notice. The portion of the taxpayer’s precredit U.S. tax that is attributable to other income equals the excess, if any, of the taxpayer’s total pre-credit U.S. tax over the pre-credit U.S. tax attributable to nondeductible CFC dividends. To determine the total allowable foreign tax credit for the election year, the taxpayer must first compute the allowable credit for each separate category, applying the section 965(e) limitation described in section 9.02 of this notice. The portion of the taxpayer’s allowable foreign tax credit in each separate category that is attributable to nondeductible CFC dividends equals the smaller of 35 percent of the amount of nondeductible CFC dividends in the separate category, determined after applying sections 6 through 8 of this notice, or the foreign taxes paid or accrued with respect to the nondeductible CFC dividends in that separate category, determined in accordance with section 9.02(a) of this notice. The portion of the allowable foreign tax credit that is attributable to nondeductible CFC dividends is the sum of the amounts determined under the preceding sentence in all of the taxpayer’s separate categories. The remainder, if any, of the allowable foreign tax credit is considered attributable to other income.

The taxpayer’s residual U.S. tax on nondeductible CFC dividends, as reduced by the portion of the allowable foreign tax credit that is attributable to that income, may not be reduced by any credit other than the prior year minimum tax credit. The taxpayer’s residual U.S. tax on other income, as reduced by the balance of the allowable foreign tax credit, may be reduced by other credits in accordance with the rules generally applicable to such credits.

.04 Computation of Section 53 Credit in Election Year

Under section 965(e)(1), the U.S. tax on nondeductible CFC dividends is taken into account in determining the allowable amount of prior year minimum tax credits under section 53 for the election year. Accordingly, for purposes of section 53 the taxpayer’s regular tax and tentative minimum tax are computed taking into ac

count the regular tax and tentative minimum tax on nondeductible CFC dividends, as reduced by allowable foreign tax credits computed in accordance with section 965(e)(1) and section 9.02 of this notice. As a result, credits for prior year minimum tax may be allowed in the election year to reduce the regular tax on nondeductible CFC dividends and other income, subject to the limitation of section 53(c), even if the taxpayer’s entire taxable income is attributable to nondeductible CFC dividends or if the taxpayer is subject to AMT on taxable income other than nondeductible CFC dividends in the election year. See Exam- ples 3 through 6 of section 9.06 of this notice.

.05 Computation of Alternative Minimum Tax in Election Year

Section 965(e)(1) provides that the U.S. tax on nondeductible CFC dividends is not treated as tax imposed by chapter 1 for purposes of computing the AMT imposed by section 55. For purposes of computing AMT for the election year, the taxpayer’s regular tax described in section 55(c) does not include the portion of the taxpayer’s pre-credit regular tax liability that is attributable to nondeductible CFC dividends, and the foreign tax credit taken into account does not include the portion of the taxpayer’s allowable foreign tax credit that is attributable to nondeductible CFC dividends. Similarly, the taxpayer’s tentative minimum tax determined under section 55(b)(1)(B) does not include the portion of the taxpayer’s tentative minimum tax or alternative minimum tax foreign tax credit that is attributable to nondeductible CFC dividends. In addition, the deductible portion of qualifying dividends is not treated as a preference item in computing alternative minimum taxable income. Accordingly, the additional tax owed by the taxpayer by reason of the AMT in the election year is the same that would be owed if the qualifying dividends were not paid. See Examples 1, 2, 4 and 5 of section 9.06 of this notice.

.06 Examples

The following examples illustrate the application of section 965(e)(1) and sections 9.04 and 9.05 of this notice.

Example 1. Calculation of AMT with no foreign tax credit . (i) Facts . For the election year USP’s tax

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eign tax credit limitation (($400x FSAMTI/$1200x WWAMTI) x $240x), or $60x, the section 965(e) limitation ($20x + ($200x FSAMTI/ $1000x WWAMTI) x $200x). The portion of the alternative minimum tax foreign tax credit that is attributable to nondeductible CFC dividends is $20x, the lesser of $40x, the pre-credit U.S. alternative minimum tax on the nondeductible CFC dividends (.20 x $200x) or $20x, the foreign taxes paid or accrued with respect to the nondeductible CFC dividends. The $40x balance of the alternative minimum tax foreign tax credit is attributable to USP’s other foreign source income.

Accordingly, USP’s tentative minimum tax described in section 55(b)(1)(B), computed without regard to the tax on nondeductible CFC dividends, is $160x ($200x - $40x). Under section 55 as modified by section 965(e)(1)(B), USP’s alternative minimum tax is $90x, the excess of its tentative minimum tax over its regular tax ($160x - $70x). Accordingly, USP’s tax for the election year is $210x ($210x regular tax on $600x of taxable income - $90x regular foreign tax credit + $90x alternative minimum tax). This amount is equivalent to 20 percent of USP’s $1,000x of alternative minimum taxable income exclusive of the nondeductible CFC dividends less the $40x alternative minimum tax foreign tax credit on that amount ($200x - $40x), plus 35 percent of $200x of nondeductible CFC dividends less the $20x regular foreign tax credit on that amount ($70x - $20x).

Example 3. No AMT; prior year minimum tax credit . (i) Facts . For the election year USP’s taxable income consists of $200x of foreign source nondeductible CFC dividends subject to no foreign tax. USP’s pre-credit regular tax liability is $70x (.35 x $200x). USP has no preference items.

(ii) Result . Taking into account the adjustments required by section 965(e)(1)(B) for purposes of computing USP’s alternative minimum tax under section 55 in the election year, USP’s taxable income computed without regard to the $200x of nondeductible CFC dividends is $0, which would result in a precredit regular tax liability of $0. USP’s alternative minimum taxable income computed without regard to the $200x of nondeductible CFC dividends is also $0, so its tentative minimum tax, computed without regard to the nondeductible CFC dividends, is $0. The excess of USP’s adjusted tentative minimum tax of $0 over its adjusted regular tax of $0 results in alternative minimum tax of $0. USP’s pre-credit tax for the election year is $70x ($70x of regular tax plus $0 alternative minimum tax), equal to 35 percent of $200x of nondeductible CFC dividends.

taxable years, up to the $30x limitation computed under section 53(c).

Example 4. AMT with no foreign tax credit and prior year minimum tax credit . (i) Facts . For the election year USP’s taxable income consists of $200x of foreign source general limitation nondeductible CFC dividends subject to no foreign tax and $400x of U.S. source income. USP’s pre-credit regular tax liability is $210x (.35 x $600x). USP has $350x of U.S. source preference items described in section 57(a)(5).

(ii) Result . Taking into account the adjustments required by section 965(e)(1)(B) for purposes of computing USP’s alternative minimum tax under section 55 in the election year, USP’s taxable income computed without regard to the $200x of nondeductible CFC dividends is $400x, which would result in a pre-credit U.S. regular tax liability of $140x (.35 x $400x). USP’s alternative minimum taxable income computed without regard to the $200x of nondeductible CFC dividends is $750x, taxable income of $400x increased by $350x of preference items. USP’s tentative minimum tax, computed without regard to the nondeductible CFC dividends, is $150x (.20 x $750x). The excess of USP’s adjusted tentative minimum tax of $150x over its adjusted regular tax of $140x results in alternative minimum tax of $10x. USP’s pre-credit tax for the election year is $220x ($210x of regular tax plus $10x of alternative minimum tax). This amount is equivalent to $150x (20 percent of $750x, USP’s alternative minimum taxable income exclusive of the nondeductible CFC dividends), plus $70x (35 percent of $200x of nondeductible CFC dividends).

For purposes of computing USP’s prior year minimum tax credit under section 53 for the election year, the modifications to section 55 that are required under section 965(e)(1)(B) do not apply. Accordingly, for purposes of computing the limitation of section 53(c), USP’s regular tax liability is $210x (.35 x $600x of regular taxable income including nondeductible CFC dividends), its tentative minimum tax is $190x (.20 x $950x of alternative minimum taxable income including nondeductible CFC dividends), and the excess of the regular tax liability over the tentative minimum tax for the election year is $20x ($210x - $190x). USP may claim a credit under section 53(a) in the election year for the excess (if any) of its adjusted net minimum tax imposed for all post-1986 taxable years prior to the election year over the amount allowable as a credit under section 53(a) for such prior taxable years, up to the $20x limitation computed under section 53(c).

Example 5. AMT with foreign tax credit and prior year minimum tax credit . (i) Facts . The facts are the same as in Example 2, except that USP has $200x rather than $600x of U.S. source preference items.

USP’s allowable foreign tax credit computed for regular tax purposes is $90x, the lesser of $100x, the foreign taxes paid, $140x, the regular section 904

limitation (($400x FSTI/$600x WWTI) x $210x precredit U.S. tax), or $90x, the section 965(e) limitation ($20x foreign tax on nondeductible CFC dividends

$70x, the limitation on other income of (($200x FSTI/$400x WWTI) x $140x). The portion of the allowable regular foreign tax credit that is attributable to the nondeductible CFC dividends is $20x, the smaller of the $70x pre-credit U.S. tax on the nondeductible CFC dividends (.35 x $200x) or $20x, the foreign taxes paid or accrued with respect to the nondeductible CFC dividends. The remaining $70x of the allowable regular foreign tax credit is the amount attributable to USP’s other foreign source income. Accordingly, USP’s regular tax described in section 55(c), computed without regard to the tax on nondeductible CFC dividends, is $70x ($140x regular tax $70x foreign tax credit).

Computed without regard to section 965(e)(1)(B), USP’s alternative minimum tax foreign tax credit is $60x, the lesser of $100x, the foreign taxes paid, $80x, the regular alternative minimum tax foreign tax credit limitation (($400x FSAMTI/$800x WWAMTI) x $160x), or $60x, the section 965(e) limitation ($20x + ($200x FSAMTI/ $600x WWAMTI) x $120x). The portion of the alternative minimum tax foreign tax credit that is attributable to nondeductible CFC dividends is $20x, the lesser of $40x, the pre-credit tentative minimum tax on the nondeductible CFC dividends (.20 x $200x) or $20x, the foreign taxes paid or accrued with respect to the nondeductible CFC dividends. The $40x balance of the alternative minimum tax foreign tax credit is attributable to USP’s other foreign source income. Accordingly, USP’s tentative minimum tax described in section 55(b)(1)(B), computed without regard to the tax on nondeductible CFC dividends, is $80x ($120x - $40x). Under section 55 as modified by section 965(e)(1)(B), the excess of USP’s tentative minimum tax over its regular tax is $10x ($80x $70x).

For purposes of computing USP’s prior year minimum tax credit under section 53 for the election year, the modifications to section 55 that are required under section 965(e)(1)(B) do not apply. Accordingly, for purposes of computing the limitation of section 53(c), USP’s pre-credit regular tax liability is $210x (.35 x $600x of taxable income including nondeductible CFC dividends) and its pre-credit tentative minimum tax liability is $160x (.20 x $800x of alternative minimum taxable income including nondeductible CFC dividends). As described above, USP’s regular and AMT foreign tax credits are limited under section 965(e) to $90x and $60x, respectively. Therefore, for purposes of section 53(c) USP’s regular tax liability is $120x ($210x - $90x foreign tax credit), its tentative minimum tax is $100x ($160x - $60x alternative minimum tax foreign tax credit), and the excess of its regular tax over its tentative minimum tax is $20x ($120x - $100x). USP may claim a credit under section 53(a) in the election year for the excess (if any) of its adjusted net minimum tax imposed for all post-1986 taxable years prior to the election year over the amount allowable as a credit under section 53(a) for such prior taxable years, up to $20x, the limitation computed under section 53(c).

Example 6. Minimum tax credit after OFL recap- ture . (i) Facts . The facts are the same as in Example 5, except that USP has a pre-2005 general limitation OFL account of $500x.

2005–36 I.R.B. 487 September 6, 2005

(ii) Result . Under section 904(f)(1), unless USP elects to recapture a larger percentage of the OFL account, 50 percent or $250x of USP’s $400x of foreign source general limitation income is recharacterized as U.S. source income. After OFL recapture USP has $150x of foreign source general limitation income, all attributable to nondeductible CFC dividends. See section 8.03 of this notice. Pursuant to section 9.02 of this notice, $15x (($150x/$200x) x $20x) of foreign tax is paid or accrued with respect to the $150x of nondeductible CFC dividends.

Pursuant to sections 9.03 and 9.05 of this notice, for purposes of computing USP’s alternative minimum tax under section 55 in the election year, USP’s pre-credit regular tax and pre-credit tentative minimum tax are computed without regard to the $200x of nondeductible CFC dividends, as determined under section 965(e)(3) without regard to the recharacterization of $50x of nondeductible CFC dividends as U.S. source income pursuant to the recapture of USP’s general limitation OFL account under section 904(f) and section 8.03 of this notice. As in Example 5, USP’s pre-credit regular tax and pre-credit tentative minimum tax, computed without regard to nondeductible CFC dividends, are $140x and $120x, respectively.

USP’s allowable foreign tax credit computed for regular tax purposes is $15x, the lesser of $100x, the foreign taxes paid, $52.50x, the regular section 904 limitation (($150x FSTI/$600x WWTI) x $210x pre-credit U.S. tax), or $15x, the section 965(e) limitation ($15x foreign tax on nondeductible CFC dividends + $0, the limitation on other income of ($0 FSTI/$400x WWTI) x $140x). Pursuant to section 9.03 of this notice, the portion of the allowable regular foreign tax credit that is attributable to the nondeductible CFC dividends is $15x, the smaller of the $52.50x pre-credit U.S. tax on the reduced amount of nondeductible CFC dividends (.35 x $150x) or $15x, the foreign taxes paid or accrued with respect to the reduced amount of nondeductible CFC dividends. Therefore, no foreign tax credit is attributable to USP’s other foreign source income. Accordingly, USP’s regular tax described in section 55(c), computed without regard to the tax on nondeductible CFC dividends, is $140x ($140x regular tax - $0 foreign tax credit).

Computed without regard to section 965(e)(1)(B), USP’s alternative minimum tax foreign tax credit is $15x, the lesser of $100x, the foreign taxes paid, $30x, the regular alternative minimum tax foreign tax credit limitation (($150x FSAMTI/$800x WWAMTI) x $160x) or $15x, the section 965(e) limitation ($15x + ($0 FSAMTI/ $600x WWAMTI) x $120x). Pursuant to section 9.03 of this notice, the portion of the alternative minimum tax foreign tax credit that is attributable to nondeductible CFC dividends is $15x, the lesser of $30x, the pre-credit tentative minimum tax on the nondeductible CFC dividends (.20 x $150x) or $15x, the foreign taxes paid or accrued with respect to the nondeductible CFC dividends. Accordingly, none of the alternative minimum tax foreign tax credit is attributable to USP’s other foreign source income. Therefore, USP’s tentative minimum tax described in section 55(b)(1)(B), computed without regard to the tax on nondeductible CFC dividends, is $120x ($120x tentative minimum tax - $0 alternative minimum tax foreign tax credit). Under section 55 as modified by

section 965(e)(1)(B), USP’s regular tax of $140x exceeds its tentative minimum tax of $120x. Therefore, USP does not owe AMT for the election year.

For purposes of computing USP’s prior year minimum tax credit under section 53 for the election year, the modifications to section 55 that are required under section 965(e)(1)(B) do not apply. Accordingly, for purposes of computing the limitation of section 53(c), USP’s pre-credit regular tax is $210x (.35 x $600x of taxable income including nondeductible CFC dividends) and its pre-credit tentative minimum tax is $160x (.20 x $800x of alternative minimum taxable income including nondeductible CFC dividends). As described above, USP’s regular and AMT foreign tax credits are limited under section 965(e) to $15x, all attributable to nondeductible CFC dividends. Therefore, for purposes of section 53(c) USP’s regular tax liability is $195x ($210x - $15x foreign tax credit), its tentative minimum tax is $145x ($160x - $15x alternative minimum tax foreign tax credit), and the excess of its regular tax over its tentative minimum tax is $50x ($195x - $145x). USP may claim a credit under section 53(a) in the election year for the excess (if any) of its adjusted net minimum tax imposed for all post-1986 taxable years prior to the election year over the amount allowable as a credit under section 53(a) for such prior taxable years, up to $50x, the limitation computed under section 53(c).