Allocating charitable contributions in computing FTC.

• Author: Fox, Stephen C.
• Position: Foreign tax credit - Brief Article

Foreign tax credits (FTCs) are limited to the portion of U.S. tax generated by foreign-source taxable income (FSTI). Expenses that must be deducted in computing FSTI include not only cost of sales but also all other expenses "allocable or apportionable" to foreign source gross income.

On Mar. 12, 1991, the IRS released Prop. Regs. Sec. 1.861-8(e), which deals with allocating charitable contributions in computing FTC limitations. Previously, contributions were apportioned to both U.S. and foreign-source gross income. Thus, a U.S. contribution could have resulted in lost FTC.

Under Prop. Regs. Sec. 1.861-8(e), contributions to foreign charities would be allocated to foreign-source income. Contributions to U.S. charities would be allocated to U.S. -source income--if they are restricted solely for use in the United States. Other contributions would be apportioned based on gross income, in accordance with the old rules.

This proposed change could mean substantial tax savings for taxpayers with excess FTCs. To qualify for allocation to U.S.-source income, contributions would have to be restricted to U.S. use. This could be easily accomplished by endorsing contribution checks to U.S. charities "for use only in the United States."

Example: X Corporation earns half of its gross income in Japan and the other half in the United States. It contributes $200,000 to a U.S. charity in 1992. X's Japanese...