26 U.S.C. § 986

Determination of foreign taxes and foreign corporation’s earnings and profits

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(a) Foreign income taxes(1) Translation of accrued taxes(A) In general

For purposes of determining the amount of the foreign tax credit, in the case of a taxpayer who takes foreign income taxes into account when accrued, the amount of any foreign income taxes (and any adjustment thereto) shall be translated into dollars by using the average exchange rate for the taxable year to which such taxes relate.

(B) Exception for certain taxesSubparagraph (A) shall not apply to any foreign income taxes—(i) paid after the date 2 years after the close of the taxable year to which such taxes relate, or(ii) paid before the beginning of the taxable year to which such taxes relate.(C) Exception for inflationary currencies

Subparagraph (A) shall not apply to any foreign income taxes the liability for which is denominated in any inflationary currency (as determined under regulations).

(D) Elective exception for taxes paid other than in functional currency(i) In general

At the election of the taxpayer, subparagraph (A) shall not apply to any foreign income taxes the liability for which is denominated in any currency other than in the taxpayer’s functional currency.

(ii) Application to qualified business units

An election under this subparagraph may apply to foreign income taxes attributable to a qualified business unit in accordance with regulations prescribed by the Secretary.

(iii) Election

Any such election shall apply to the taxable year for which made and all subsequent taxable years unless revoked with the consent of the Secretary.

(E) Special rule for regulated investment companies

In the case of a regulated investment company which takes into account income on an accrual basis, subparagraphs (A) through (D) shall not apply and foreign income taxes paid or accrued with respect to such income shall be translated into dollars using the exchange rate as of the date the income accrues.

(F) Cross reference

For adjustments where tax is not paid within 2 years, see section 905(c).

(2) Translation of taxes to which paragraph (1) does not applyFor purposes of determining the amount of the foreign tax credit, in the case of any foreign income taxes to which subparagraph (A) or (E) of paragraph (1) does not apply—(A) such taxes shall be translated into dollars using the exchange rates as of the time such taxes were paid to the foreign country or possession of the United States, and(B) any adjustment to the amount of such taxes shall be translated into dollars using—(i) except as provided in clause (ii), the exchange rate as of the time when such adjustment is paid to the foreign country or possession, or(ii) in the case of any refund or credit of foreign income taxes, using the exchange rate as of the time of the original payment of such foreign income taxes.(3) Authority to permit use of average rates

To the extent prescribed in regulations, the average exchange rate for the period (specified in such regulations) during which the taxes or adjustment is paid may be used instead of the exchange rate as of the time of such payment.

(4) Foreign income taxes

For purposes of this subsection, the term “foreign income taxes” means any income, war profits, or excess profits taxes paid or accrued to any foreign country or to any possession of the United States.

(b) Earnings and profits and distributionsFor purposes of determining the tax under this subtitle—(1) of any shareholder of any foreign corporation, the earnings and profits of such corporation shall be determined in the corporation’s functional currency, and(2) in the case of any United States person, the earnings and profits determined under paragraph (1) (when distributed, deemed distributed, or otherwise taken into account under this subtitle) shall (if necessary) be translated into dollars using the appropriate exchange rate.(c) Previously taxed earnings and profits(1) In general

Foreign currency gain or loss with respect to distributions of previously taxed earnings and profits (as described in section 959 or 1293(c)) attributable to movements in exchange rates between the times of deemed and actual distribution shall be recognized and treated as ordinary income or loss from the same source as the associated income inclusion.

(2) Distributions through tiers

The Secretary shall prescribe regulations with respect to the treatment of distributions of previously taxed earnings and profits through tiers of foreign corporations.

(Added Pub. L. 99–514, title XII, § 1261(a), Oct. 22, 1986, 100 Stat. 2586; amended Pub. L. 100–647, title I, § 1012(v)(1)(A), Nov. 10, 1988, 102 Stat. 3528; Pub. L. 105–34, title XI, § 1102(a)(1), (b)(1), Aug. 5, 1997, 111 Stat. 963, 965; Pub. L. 108–357, title IV, § 408(a), (b), Oct. 22, 2004, 118 Stat. 1499.)Editorial NotesAmendments

2004—Subsec. (a)(1)(D). Pub. L. 108–357, § 408(a), added subpar. (D). Former subpar. (D) redesignated (E).

Subsec. (a)(1)(E). Pub. L. 108–357, § 408(b)(1), added subpar. (E). Former subpar. (E) redesignated (F).

Pub. L. 108–357, § 408(a), redesignated subpar. (D) as (E).

Subsec. (a)(1)(F). Pub. L. 108–357, § 408(b)(1), redesignated subpar. (E) as (F).

Subsec. (a)(2). Pub. L. 108–357, § 408(b)(2), inserted “or (E)” after “subparagraph (A)” in introductory provisions.

1997—Subsec. (a). Pub. L. 105–34, § 1102(a)(1), amended subsec. (a) generally. Prior to amendment, subsec. (a) read as follows:

“(a) Foreign Taxes.—

“(1) In general.—For purposes of determining the amount of the foreign tax credit—

“(A) any foreign income taxes shall be translated into dollars using the exchange rates as of the time such taxes were paid to the foreign country or possession of the United States, and

“(B) any adjustment to the amount of foreign income taxes shall be translated into dollars using—

“(i) except as provided in clause (ii), the exchange rate as of the time when such adjustment is paid to the foreign country or possession, or

“(ii) in the case of any refund or credit of foreign income taxes, using the exchange rate as of the time of original payment of such foreign income taxes.

“(2) Foreign income taxes.—For purposes of paragraph (1), ‘foreign income taxes’ means any income, war profits, or excess profits taxes paid to any foreign country or to any possession of the United States.”

Subsec. (a)(3), (4). Pub. L. 105–34, § 1102(b)(1), added par. (3) and redesignated former par. (3) as (4).

1988—Pub. L. 100–647 substituted “foreign taxes and foreign corporation’s earnings and profits” for “foreign corporation’s earnings and profits and foreign taxes” in heading, and revised and restructured the provisions of subsecs. (a) and (b).

Statutory Notes and Related SubsidiariesEffective Date of 2004 Amendment

Pub. L. 108–357, title IV, § 408(c), Oct. 22, 2004, 118 Stat. 1500, provided that: “The amendments made by this section [amending this section] shall apply to taxable years beginning after December 31, 2004.”

Effective Date of 1997 Amendment

Pub. L. 105–34, title XI, § 1102(c)(1), Aug. 5, 1997, 111 Stat. 966, provided that: “The amendments made by subsections (a)(1) and (b) [amending this section and section 989 of this title] shall apply to taxes paid or accrued in taxable years beginning after December 31, 1997.”

Effective Date of 1988 Amendment

Amendment by Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title.

Effective Date

Section applicable to taxable years beginning after Dec. 31, 1986, with certain exceptions and qualifications, see section 1261(e) of Pub. L. 99–514, set out as a note under section 985 of this title.

Notes of Decisions

Cited in 69 cases, 1928–1935 · leading case: Baltimore & OR Co. v. Commissioner of Internal Rev.

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Baltimore & OR Co. v. Commissioner of Internal Rev. (1935) ca4 · cites it 4× “issuance of stock, as a deduction from its gross income under section 234 (a) (2) of the Revenue Act 1926, 26 USCA § 986 (a) (2). The Commissioner of Internal Revenue denied this deduction and the Board approved his action, holding that this amount was not interest, even though…”

American Cigar Co. v. Commissioner of Internal Revenue (1933) ca2 · cites it 2× “254 , 26 U. S. C. § 986 (a) (5), the advances made to the Havana Company, to the extent to which these advances were used to pay interest on the bonds held by the petitioner.”

Elko Lamoille Power Co. v. Commissioner of Int. Rev. (1931) ca9 · cites it 3× “Section 234 (a) (2) of the Revenue Act of 1926 (26 USCA § 986 (a) (2) provides that to determine the net income of a corporation there may be deducted 'from the gross income all interest paid on indebtedness.”

Johnson, Drake & Piper, Inc. v. Helvering (1934) ca8 · cites it 3× “90, which was the net amount of notes of the Drake Company which petitioner in 1926 surrendered to that company for cancellation and charged off! on its own books, an allowable deduction in computing net income for 1926, within the meaning of section 234 (a) (4) and (5) of the…”

Central Bank Block Ass'n v. Commissioner of Int. Rev. (1932) ca5 · cites it 2× “Such an outlay made in 1924 to secure the enjoyment of income in subsequent years cannot reasonably be considered to be an expense in carrying on trade or business in 1924, within the meaning of the provision, contained in both the Revenue Act of 1924 and the Revenue Act of…”

Corning Glass Works v. Lucas (1929) cadc · cites it 2× “275, to the effect that the commission paid to market preferred stock is a nondeduetible capital expenditure.”

Strother v. Commissioner (1932) ca4 · cites it 2× “9 , 42 (26 USCA § 986 (a), that in computing the net income of a corporation subject to the income tax, in the ease of mines and other natural deposits, there shall be allowed as a deduction a reasonable allowance for depletion, according to the peculiar conditions in each ease.”

Glendinning, McLeish & Co. v. Commissioner of Internal Rev. (1932) ca2 “254¡; Revenue Acts 1924, 1926, § 234 (a) (1), 26 USCA § 986 (a) (1), permitting the deduction of ordinary and necessary business expenses, since they could not be expenses of any kind provided the petitioner could and did enforce its right to reimbursement.”

Baton Coal Co. v. Commissioner of Internal Revenue (1931) ca3 “” 26 USCA § 986 (a) (1), (7), 'and (8). The pertinent part of the Treasury Department Regulation, prescribed in accordance with the authority granted by that act, is as follows: “Art.”

Simmons Co. v. Commissioner of Internal Revenue (1929) ca1 “799 (26 USCA §§ 986, 2023). See, also, Brewster v.”

Amtorg Trading Corp. v. Commissioner of Internal Revenue (1933) ca2 · cites it 2× “283 , 26 USCA § 986 (a) (1) or as' “taxes paid or accrued,” under section 234 (a) (3), 26 USCA § 986 (a) (3).”

F. M. Hubbell Son & Co. v. Burnet (1931) ca8 · cites it 2× “Section 234(a) (7) of the Revenue Act of 1924, 26 USCA § 986(a) (7), provides that: "In computing the net income of a corporation subject to the tax imposed by section 981 of this title there shall be allowed as deductions: *645 * * * (7) A reasonable allowance for the…”

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— 26 U.S.C. § 986(a) — 5 cases

Elko Lamoille Power Co. v. Commissioner of Int. Rev. (1931) ca9 “Section 234 (a) (2) of the Revenue Act of 1926 (26 USCA § 986 (a) (2) provides that to determine the net income of a corporation there may be deducted 'from the gross income all interest paid on indebtedness.”

F. M. Hubbell Son & Co. v. Burnet (1931) ca8 “Section 234(a) (7) of the Revenue Act of 1924, 26 USCA § 986(a) (7), provides that: "In computing the net income of a corporation subject to the tax imposed by section 981 of this title there shall be allowed as deductions: *645 * * * (7) A reasonable allowance for the…”

Freeman-Hampton Oil Corporation v. Commissioner of Internal Revenue (1933) ca5

Commonwealth Commercial State Bank v. Lucas (1930) cadc

Dakota-Montana Oil Co. v. United States (1932) cc

Annotations are extracted automatically from the opinions in the Syfert caselaw corpus and ranked by authority, recency, and treatment. Dots show Syfertize treatment of the citing case itself.