[Code of Federal Regulations] [Title 26, Volume 2] [Revised as of April 1, 2004] From the U.S. Government Printing Office via GPO Access [CITE: 26CFR1.78-1] [Page 309-310] TITLE 26--INTERNAL REVENUE CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY (CONTINUED) PART 1_INCOME TAXES--Table of Contents Sec. 1.78-1 Dividends received from certain foreign corporations by certain domestic corporations choosing the foreign tax credit. (a) Taxes deemed paid by certain domestic corporations treated as a section 78 dividend. Any reduction under section 907(a) of the foreign income taxes deemed to be paid with respect to foreign oil and gas extraction income does not affect the amount treated as a section 78 dividend. If a domestic corporation chooses to have the benefits of the foreign tax credit under section 901 for any taxable year, an amount which is equal to the foreign income taxes deemed to be paid by such corporation for such year under section 902(a) in accordance with Sec. Sec. 1.902-1 and 1.902-2 and Sec. 1.902(b)(2), or under section 960(a)(1) in accordance with Sec. 1.960-7, shall, to the extent provided by this section, be treated as a dividend (hereinafter referred to as a section 78 dividend) received by such domestic corporation from the foreign corporation described in section 902(a) in accordance with Sec. Sec. 1.902-1 and 1.902-2 or section 960(c)(1) in accordance with Sec. 1.960-7, as the case may be. A section 78 dividend shall be treated as a dividend for all purposes of the Code, except that it shall not be treated as a dividend under section 245, relating to dividends received from certain foreign corporations, or increase the earnings and profits of the domestic corporation. For purposes of determining the source of a section 78 dividend in computing the limitation on the foreign tax credit under section 904, see Sec. 1.902(h)(1) and the regulations under section 960. For special rules relating to the determination of the foreign tax credit under section 902 with respect to certain minimum distributions received from controlled foreign corporations and the effect of such rules upon the gross-up under section 78, see paragraph (c) of Sec. 1.963-4. For rules respecting the reduction of foreign income taxes under section 6038(b) in applying section 902(a) in accordance with Sec. Sec. 1.902-1 and 1.902-2 or section 960(c)(1) in accordance with Sec. 1.960-7, where there has been a failure to furnish certain information and for an illustration of the effect of such reduction upon the amount of a section 78 dividend, see paragraph (l) of Sec. 1.6038-2. (b) Certain taxes not treated as a section 78 dividend. Foreign income taxes deemed paid by a domestic corporation under section 902(a) in accordance with Sec. Sec. 1.902-1 and 1.902-2 or section 960(c)(1) in accordance with Sec. 1.960-7, shall not, to the extent provided by paragraph (b) of Sec. 1.960-3, be treated as a section 78 dividend where such taxes are imposed on certain distributions from the earnings and profits of a controlled foreign corporation attributable to an amount which is, or has been, included in gross income of the domestic corporation under section 951. (c) United Kingdom income tax included in gross income under treaty. Any amount of United Kingdom income tax appropriate to a dividend paid by a corporation which is a resident of the United Kingdom shall not be treated as a section 78 dividend by a domestic corporation to the extent that such tax is included in the gross income of such domestic corporation in accordance with Article XIII (1) of the income tax convention between the United States and the United Kingdom, as amended by Article II of the supplementary protocol between such Governments signed on August 19, 1957 (9 UST 1331). See Sec. 507.117 of this chapter, relating to credit against United States tax liability for income tax paid or deemed to have been paid to the United Kingdom. (d) Taxable year in which section 78 dividend is received. A section 78 dividend shall be considered received in the [[Page 310]] taxable year of a domestic corporation in which-- (1) The corporation receives the dividend by reason of which there are deemed paid under section 902(a) in accordance with Sec. Sec. 1.902-1 and 1.902-2 the foreign income taxes which give rise to such section 78 dividend, or (2) The corporation includes in gross income under section 951(a) the amounts by reason of which there are deemed paid under section 960(a)(1) in accordance with Sec. 1.960-7 the foreign income taxes which give rise to such section 78 dividend, notwithstanding that such foreign income taxes may be carried back or carried over to another taxable year under section 904(d) and are deemed to be paid or accrued in such other taxable year. (e) Effective dates for the application of section 78--(1) In general. This section shall apply to amounts of foreign income taxes deemed paid under section 902(a) in accordance with Sec. Sec. 1.902-1 and 1.902-2, or under section 960(a)(1) in accordance with Sec. 1.960- 7, by reason of a distribution received by a domestic corporation-- (i) After December 31, 1964, or (ii) Before January 1, 1965, in a taxable year of such domestic corporation beginning after December 31, 1962, but only to the extent that such distribution is made out of the accumulated profits of a foreign corporation for a taxable year of such foreign corporation beginning after December 31, 1962. For special rules relating to determination of accumulated profits for such purposes, see the regulation under section 902. (2) Amounts under section 951 treated as distributions. For purposes of this paragraph, any amount attributable to the earnings and profits for the taxable year of a first-tier corporation (as defined in paragraph (b)(1) of Sec. 1.960-1) which is included in the gross income of a domestic corporation under section 951(a) shall be treated as a distribution received by such domestic corporation on the last day in such taxable year on which such first-tier corporation is a controlled foreign corporation. (f) Illustrations. The application of this section may be illustrated by the examples provided in Sec. 1.902-1, Sec. 1.904-5, Sec. 1.960-3, Sec. 1.960-4, and Sec. 1.963-4. [T.D. 6805, 30 FR 3208, Mar. 9, 1965, as amended by T.D. 7120, 36 FR 10859, June 4, 1971; 36 FR 11924, June 23, 1971; T.D. 7481, 42 FR 20130, Apr. 18, 1977; T.D. 7490; 42 FR 30497, June 15, 1977; 42 FR 32536, June 27, 1977; T.D. 7649, 44 FR 60086, Oct. 18, 1979; T.D. 7961, 49 FR 26225, June 27, 1984]