Example: On December 31, 1966, Smith, a United States person, sells a share of stock of X Corporation which he has owned continuously since December 31, 1965, and includes $100 of the gain on the sale in his gross income as a dividend under section 1248(a). Both X and Smith use the calendar year as the taxable year. The increase in Smith's income tax liability for 1966 which is attributable (under paragraph (b) of this section) to the inclusion of the $100 in his gross income as a dividend is $70. X was a controlled foreign corporation on each day of 1966. The excess computed under paragraph (c) of this section in respect of the share, of the United States taxes which X would have paid over the taxes (including United States taxes) actually paid by X is $49. Under section 1248(b), the limitation on the tax attributable to the $100 included by Smith in his gross income as a dividend under section 1248(a) is $61.75, computed as follows:
(i) Excess, computed under paragraph (c) of this section, of United States taxes which X Corporation would have paid in 1966 over the taxes actually paid by X in 1966 | $49.00 | |
(ii) The amount determined under subparagraph (1)(ii) of this paragraph: | ||
The amount Smith included in his gross income as a dividend under section 1248(a) | $100.00 | |
Less the excess referred to in subdivision (i) of this example | 49.00 | |
Difference | 51.00 | |
Increase in Smith's tax liability attributable to including $51 in his gross income as long-term capital gain (25 percent of $51) | 12.75 | |
(iii) Limitation on tax | 61.75 |
Computation of income tax liability without regard to section 1248(b) | Computation of income tax liability as if the gain treated as a divided under section 1248(a) had not been recognized | |
Income from salary | $300,000 | $300,000 |
Long-term capital gain resulting from sale of stock, less deduction for capital gains under section 1202 ($4,000 less $2,000) | 2,000 | 2,000 |
Amount treated as a dividend under section 1248(a) | 18,000 | 0 |
Adjusted gross income | 320,000 | 302,000 |
Charitable contribution of $100,000 to church (limited under section 170(b) to 30 percent of adjusted gross income) | (96,000) | (90,600) |
Other itemized deductions and personal exemption | (7,700) | (7,700) |
Taxable income | 216,300 | 203,700 |
Less 50 percent of $4,000 | 2,000 | 2,000 |
Amount subject to partial tax under section 1201(b)(1) | 214,300 | 201,700 |
Partial tax | 169,833 | 158,367 |
25 percent of $4,000 | 1,000 | 1,000 |
Tax liability | 170,833 | 159,367 |
Example:
Amount subject to partial tax under section 1201(a)(1), as computed by Jones: | ||
Taxable income | $300,000 | |
Less excess of net long-term capital gain over net short-term capital loss | 100,000 | |
Amount subject to partial tax | 200,000 | |
Excess determined under subparagraph (1)(i) of this paragraph: | ||
30 percent * $25,000 | $7,500 | |
52 percent * $175,000 | 91,000 | |
Partial tax | 98,500 | |
25 percent * $100,000 | 25,000 | |
United States taxes X would have paid (alternative tax computed under section 1201(a)) | 123,500 | |
Less income taxes X actually paid to: | ||
United States | $10,000 | |
Foreign countries | 90,000 | |
Total | $100,000 | |
Excess | 23,500 | |
Multiplied by: | ||
Percentage determined under subparagraph (1)(ii) of this paragraph: | ||
Since on each day of 1963, Jones held the share of X stock while X was a controlled foreign corporation, the percentage equals | 100% | |
Total | $23,500 |
26 C.F.R. §1.1248-4