SECTION 2. BACKGROUND

.01 The Election Provided in Section 853

Section 853 allows a RIC that meets certain requirements to make an annual election under which the RIC’s sharehold

ers are treated as if they paid a proportionate share of any foreign tax that was paid by the RIC during the RIC’s taxable year to which the election relates. The election is available to a RIC if: (1) more than 50 percent of the value of its assets, at the close of the taxable year, consists of stock or securities in foreign corporations, and (2) the RIC has complied with the requirements in section 852(a) and § 1.852–1(a) of the Income Tax Regulations. If the RIC makes this election for a taxable year, it forgoes a deduction or credit for foreign taxes. Instead, under section 853(b)(2)(A), the RIC’s shareholders are required to include in their gross income and treat as paid by them their proportionate shares of the foreign taxes and, accordingly, are eligible to claim either a deduction or credit for those foreign taxes in accordance with sections 164 and 901. In addition, each shareholder of an electing RIC, under section 853(b)(2)(B), must treat as gross income from sources without the United States the sum of the shareholder’s proportionate share of the foreign taxes and the portion of any dividend paid by the RIC that represents income derived from sources without the United States.

A RIC that makes the election under section 853(a) must provide certain information to its shareholders and the IRS. First, under section 853(c) and the regulations thereunder, the RIC must identify, in a written statement furnished to each shareholder, each shareholder’s proportionate share of foreign taxes paid by the RIC and each shareholder’s proportionate share of the RIC’s income derived from sources without the United States. Under § 1.853–4(a), the RIC must file a statement as part of its income tax return (Form 1120–RIC, “U.S. Income Tax Return for Regulated Investment Companies,” or its successor) that sets forth the total amount of income received from sources without the United States; the total amount of foreign taxes paid; the amount, if any, of the foreign taxes paid that are not eligible for the section 853(a) election; the date, form, and contents of the written statement furnished to its shareholders; and the proportionate share of income received and taxes paid during the taxable year that are attributable to one share of its stock. Under § 1.853–4(d), the RIC must also file, as part of its return for

the taxable year, a Form 1118, “Foreign Tax Credit—Corporations.”

.02 Requirements under Section 905(c)

Under section 905(c), if a taxpayer claims a credit for taxes paid or accrued under section 901 (or deemed paid under section 902 or 960) and that foreign tax is refunded, the taxpayer generally must notify the IRS, which shall redetermine the amount of the taxpayer’s U.S. tax liability for the year or years affected. Any U.S. tax due by reason of the foreign tax refund must be paid upon notice and demand. Interest accrues under section 6601 on the amount of tax due, but under section 905(c)(5), the amount of interest is capped for the period prior to the receipt of the refund at the amount of interest paid by the foreign country or possession of the United States on the refund.

.03 Exchange Rates and Foreign Currency Gain or Loss

For purposes of calculating the U.S. dollar amount of a refund received by a RIC of foreign tax that is denominated in a foreign currency and the RIC’s basis in the foreign currency refunded, a RIC must translate the refunded foreign tax into dollars using the same exchange rate that it used to translate the foreign taxes into dollars when such taxes were originally reported as paid. See sections 986(a)(1)(E) and 986(a)(2)(B)(ii). Upon disposition of the foreign currency refunded, the RIC must recognize any foreign currency gain or loss. See section 988(c)(1)(C) and the regulations under that section.