[Code of Federal Regulations] [Title 26, Volume 9] [Revised as of April 1, 2004] From the U.S. Government Printing Office via GPO Access [CITE: 26CFR1.904(b)-2] [Page 743-745] TITLE 26--INTERNAL REVENUE CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY (CONTINUED) PART 1_INCOME TAXES--Table of Contents Sec. 1.904(b)-2 Treatment of capital gains for other taxpayers. (a) In general. For purposes of computing the foreign tax credit limitation of persons other than corporations, the following rules apply: (1) Inclusion in foreign source taxable income. The taxable income from sources without the United States shall include gain from the sale or exchange of capital assets only to the extent of foreign source capital gain net income (as defined in paragraph (b)(2) of Sec. 1.904(b)-1), reduced by an amount determined by multiplying foreign source net capital gain (as defined in paragraph (b)(4) of Sec. 1.904(b)-1) by the percentage specified under section 1202(a). (2) Inclusion in entire taxable income. The entire taxable income of a taxpayer other than a corporation shall include gains from the sale or exchange of capital assets only to the extent of capital gain net income (as defined in paragraph (b)(1) of Sec. 1.904(b)-1), reduced by an amount determined by multiplying net capital gain (as defined in paragraph (b)(3) of Sec. 1.904(b)-1) by the percentage specified under section 1202(a). (3) Treatment of capital losses. The taxable income from sources without the United States shall be reduced by: (i) Any net capital loss (as defined in paragraph (b) of this section) allocable or apportionable to sources without the United States to the extent taken into account in determining capital gain net income, less (ii) An amount equal to the excess of net capital gain from sources within the United States over net capital gain, multiplied by the percentage specified under section 1202(a). (b) Definition of net capital loss. For purposes of paragraph (a) of this section, the term net capital loss means the excess of the losses from the sale or exchange of capital assets treated as capital losses under the Internal Revenue Code and any carryforward as determined under section 1212 over the amount allowed under section 1211(b). In determining net capital loss, gains and losses which are not from the sale or exchange of capital assets but which are treated as capital gains and losses under the Internal Revenue Code are included. [[Page 744]] (c) Illustrations. The principles of paragraph (a) of this section are illustrated by the following examples: Example 1. X, an individual, has $1,500,000 of foreign source taxable income and $2,500,000 of U.S. source taxable income (exclusive of capital gains and losses) for 1979 and the following capital gains and losses: ------------------------------------------------------------------------ In thousands -------------------------- Foreign U.S. All source source sources ------------------------------------------------------------------------ Long-term capital gain....................... $300 $500 $800 Long-term capital loss....................... 100 500 600 Short-term capital gain...................... 100 400 500 Short-term capital loss...................... 100 200 300 ------------------------------------------------------------------------ For purposes of computing the foreign tax credit limitation, the foreign source taxable income and the entire taxable income of X are computed as follows: Step (1) First, compute the net long-term capital gain and net short-term capital gain and the net long-term capital loss and net short-term capital loss allocable or apportionable to such sources, from sources without the United States and from all sources, as follows: ------------------------------------------------------------------------ In thousands ----------------- Sources without All the sources U.S. ------------------------------------------------------------------------ Net long-term capital gain............................ $200 $200 Net long-term capital loss............................ 0 0 Net short-term capital gain........................... 0 200 Net short-term capital loss........................... 0 0 ------------------------------------------------------------------------ Step (2) Next compute capital gain net income and net capital gain from sources without United States and from all sources as follows: ------------------------------------------------------------------------ In thousands ------------------- Sources without All the U.S. sources ------------------------------------------------------------------------ Capital gain net income............................. (a) $200 (b) $400 Net capital gain.................................... (c) 200 (d) 200 ------------------------------------------------------------------------ Step (3) Next calculate foreign source capital gain net income and foreign source net capital gain, which is the lesser (a) or (b) and the lesser of (c) or (d), respectively. Foreign source capital gain net income is $200,000 and foreign source net capital gain is $200,000. Step (4) Compute taxable income from sources without the United States, using 0.60 as the percentage specified in section 1202(a), as follows: Foreign taxable income (exclusive of capital gains and losses)+Foreign source capital gain net income -0.60 (foreign source net capital gain) $1,500,000+$200,000-0.60($200,000)=$1,580,000 Step (5) Compute the entire taxable income as follows: Taxable income (exclusive of capital gains and losses)+Capital gain net income-0.60 (net capital gain) $4,000,000+$400,000-0.60 ($200,000) ($120,000)=$4,280,000 Example 2. Y, an individual, has $2,000,000 of foreign source taxable income and $3,000,000 of U.S. source taxable income (exclusive of capital gains and losses) for 1979 and the following capital gains and losses: ------------------------------------------------------------------------ In thousands -------------------------- Foreign U.S. All source source sources ------------------------------------------------------------------------ Long-term capital gain....................... $200 $800 $1,000 Long-term capital loss....................... 700 100 800 Short-term capital gain...................... 100 300 400 Short-term capital loss...................... 300 200 500 ------------------------------------------------------------------------ For purposes of computing the foreign tax credit limitation, the foreign source taxable income and the entire taxable income of Y are computed as follows: Step (1) First, compute the net long-term capital gain and net short-term capital gain and the net long-term capital loss and net short-term capital loss allocable or apportionable to such sources, from sources without the United States and from all sources, as follows: ------------------------------------------------------------------------ In thousands ----------------- Sources without the All United sources States ------------------------------------------------------------------------ Net long-term capital gain............................ 0 $200 Net lon-term capital loss............................. $500 0 Net short-term capital gain........................... 0 0 Net short-term capital loss........................... 200 100 ------------------------------------------------------------------------ Step (2) Next compute the capital gain net income and net capital gain from sources without the United States and from all sources as follows: ------------------------------------------------------------------------ In thousands ------------------- Sources without the All United sources States ------------------------------------------------------------------------ Capital gain net income........................... (a) 0 (b) $100 Net capital gain.................................. (c) 0 (d) 100 ------------------------------------------------------------------------ Step (3) Next calculate foreign source capital gain net income and foreign source net capital gain, which is the lesser of (a) or (b) and the lesser of (c) or (d), respectively. Foreign source capital gain net income is zero and foreign source net capital gain is also zero. [[Page 745]] Step (4) Under paragraph (a)(3)(i) of this section, the taxable income from sources without the United States is reduced by the amount by which the net capital loss allocable or apportionable to sources without the United States reduces capital gains (long and short-term) from sources within the United States when computing capital gain net income. This is determined by first computing the net capital loss allocable or apportionable to sources without the United States ($700,000) and the capital gain net income from sources within the United States ($800,000). In this case, $700,000 of net capital loss allocable or apportionable to sources without the United States reduces $700,000 of long and short-term capital gain in computing capital gain net income. Step (5) Under paragraph (a)(3)(ii) of this section, the adjustment under paragraph (a)(3)(i) of this section is reduced by an amount equal to the difference between net capital gain from sources within the United States and net capital gain (from all sources), multiplied by the percentage specified under section 1202(a). In this case, the net capital gain from sources within the United States is $700,000 the net capital gain is $100,000 and the percentage specified under section 1202(a) is 0.60. Step (6) Computation of foreign tax credit limitation fraction. (i) Taxable income from sources without the United States is as follows: Foreign income (exclusive of capital gains and losses)+Foreign source capital gain net income -0.60 (foreign source net capital gain)- (paragraph (a)(3)(i) adjustment-paragraph (a)(3)(ii) adjustment) [GRAPHIC] [TIFF OMITTED] TC07OC91.042 (ii) The entire taxable income is as follows: Taxable income (exclusive of capital gains and losses)+Capital gains net income-0.60(net capital gain) $5,000,000+$100,000-$60,000=$5,040,000 Note that no adjustment under paragraph (a)(3) of this section is made with respect to the denominator. [T.D. 7914, 48 FR 44523, Sept. 29, 1983]