Foreign Tax Credits

Issues which involve the complex interplay between Code Secs. 902 and 905 were addressed by the IRS in CCA 201441015. The IRS took the position that based on Code Sec. 902 and the regulations thereunder, the additional foreign taxes paid by the foreign target, which related to pre-acquisition years, should be accounted for by the foreign target under Code Sec. 902 pre-1987 rules and not post-1986 rules. This means that the foreign taxes (and earnings to which they relate) are required to be maintained separately for each relevant year in annual layers, which is what pre-1987 law requires. As a result, the foreign taxes attributable to pre-acquisition years may be claimed as a credit by the US taxpayer only if there are earnings in each pre-acquisition year to which the tax relates and those earnings are distributed to the US taxpayer. did not disappear.