Example. X, a U.S. corporation organized on January 1, 1983, uses the accrual method of accounting and the calendar year as its taxable year. X's only income is income which is not subject to a separate tax limitation under section 904(d). X's preliminary U.S. tax liability indicates an effective rate of 46% for taxable years 1983-1985. X has the following foreign tax items for 1983-1985:
1983 | 1984 | 1985 | |
1. FOGEI | $15,000 | $20,000 | $10,000 |
2. FOGEI taxes | 7,500 | 9,200 | 4,200 |
3. Other foreign taxable income | 8,000 | 5,000 | 10,000 |
4. Other foreign taxes | 3,200 | 2,000 | 3,000 |
5. (a) Section 907(a) limitation (.46 * Line 1) | 6,900 | 9,200 | 4,600 |
(b) General section 904 limitation (.46 * (line 1 plus line 3)) | 10,580 | 11,500 | 9,200 |
6. (a) Unused FOGEI taxes (excess of line 2 over line 5(a)) | 600 | 0 | 0 |
(b) Unused general limitation taxes (excess of line 4 plus lesser of line 2 or line 5(a) over line 5(b)) | 0 | 0 | 0 |
7. (a) FOGEI taxes from years preceding 1983 deemed accrued under section 907(f) | 0 | 0 | 0 |
(b) Section 904 general limitation taxes from years preceding 1983 deemed accrued under section 904(c) | 0 | 0 | 0 |
8. (a) Excess section 907(a) limitation (excess of line 5(a) over sum of line 2 and line 7(a)) | 0 | 0 | 400 |
(b) Excess section 904 general limitation (excess of line 5(b) over sum of line 4, lesser of line 2 and line 5(a) and line 7(b)) | 480 | 300 | 2,000 |
9. Limit on FOGEI taxes that will be deemed accrued under section 907(f) (lesser of line 8(a) and line 8(b) | 0 | 0 | 400 |
X has unused 1983 FOGEI taxes of $600. Since the excess section 907(a) limitation for 1984 is zero, the unused FOGEI taxes are carried to 1985. Of the $600 carryover, $400 is deemed accrued in 1985 and the balance of $200 is carried to following years (but not to a year after 1988). After the carryover from 1983 to 1985, the excess section 904 general limitation for 1985 (line 8(b)) is reduced by $400 to $1,600 to reflect the amount of 1983 FOGEI taxes deemed accrued in 1985 under section 907(f).
26 C.F.R. §1.907(f)-1