FC's daily earnings * number of days percentage held by S * percentage of ownership in FC.
Accordingly, S's pro rata share of FC's earnings for the first six months of FC's year deemed earned while S held 50 percent of FC's stock is $24,797x ($274x * 181 days * 50%). S's pro rata share of FC's earnings for remainder of FC's year deemed earned while S held 45 percent of FC's stock is $22,687x ($274x * 184 days * 45%). Therefore, S's total share of FC's earnings to be included in income under section 1293 is $47,484x ($24,797x + $22,687x).
Example: The facts are the same as in § 1.1294-1T(b)(3) , Example 1, with the following exceptions. S, a domestic corporation, did not dispose of any FC stock in 1987. Therefore, because S held 50 percent of the FC stock throughout 1987, S's pro rata share of FC's ordinary earnings was $50,000x. In addition to $50,000x of ordinary earnings from FC, S had $12,500x of domestic source income and $6,000x of expenses (other than interest expense) not definitely related to any gross income. These expenses are apportioned, pursuant to § 1.861-8(c)(2) , on a pro rata basis between the domestic and foreign source income-$1,200x of expenses, or one-fifth, to domestic source income, and $4,800x of expenses, or four-fifths, to the section 1293 inclusion. FC paid foreign taxes of $25,000x in 1987. Accordingly, S is entitled to claim as an indirect foreign tax credit pursuant to section 1293(f) a proportionate amount of the foreign taxes paid by FC, which is $12,500x ($25,000x * $50,000x/$100,000x). S is taxed in the U.S. at the rate of 34 percent. The amount of tax liability for which S may extend the time for payment is determined as follows:
1987 Tax Liability (With Section 1293 Inclusion)
Source | U.S. | Foreign |
Income | 12,500x | 0 |
Section 1293 | 0 | 50,000x |
Expenses | -1,200x | -4,800x |
Taxable income | 11,300x | 45,200x |
Total taxable income | 56,500x | |
U.S. income tax rate | x34% | |
Pre-credit U.S. tax | 19,210x | |
Foreign tax credit | -12,500x | |
1987 Tax Liability | 6,710x |
1987 Tax Liability (Without Section 1293 Inclusion)
Source | U.S. | Foreign |
Income | 12,500x | 0 |
Expenses | -6,000x | |
Taxable income | 6,500x | |
U.S. tax rate | x34% | |
U.S. Tax | 2,210x | |
Foreign tax credit | 0 | |
Hypothetical 1987 Tax Liability | 2,210x |
The amount of tax, payment of which S may defer pursuant to section 1294, is $4,500x ($6,710x less $2,210x).
The electing shareholder also shall file by the due date, as extended, for its return a copy of Form 8621 or the statement with the Philadelphia Service Center, P.O. Box 21086, Philadelphia, Pennsylvania 19114.
26 C.F.R. §1.1294-1T