IA-56-87 and IA-53-87 Final Minimum Tax

DEPARTMEKT OF THE TREASURY
Int-I

Revenue S m l e e

2 6 CFR Parla 1 and 6 0 2

guiZance necer9ar-y l o d e r r r x n e 7 h t
amounl a! t a x prelertnce iwms !bat do

not provide a t u z e n l lax beneii!
becauseof availabie w~di13
a.7d s:&
arc no1 aublect to ninimum :ax.
~ * r t s : n e s t regulations ere effective
M e y 5. 7 B 2 . They art applicable only a s
rhpy affect items 01 tax prtfe rence t h a t
are subjecr to b c minimum tax imposed

~ G E H C Y :Lnwmal

R e v m u r Service.

Treasury.
ACTKIIC

Fiaal regdetiou.

s u r r ~ u v Tb3
:
dam men1 conbins final
wsulalions relat~ngto L!E applica:ion of
[he tax benefit ruke l o the m ~ n ~ m utax.
m
Changes iu the appilcalhe law were
rriade by the f a x k f o m Act of t 9 7 h
Thc reguiatiom provide w p a y c r s with

by r e c i i a 58 oJ ih~lntemalRevenue
Code 01 1955 and arjse L? laxable yeers
t e g i w eftwDecember 31,325,and

beiore january 1.1987.
FOa FURTHER IMFORMATlOU

COhTACS:

Keliy R. Berg of Ihe Oficf DI AssisLan!
Chief Umel (Income Tax and
AccounClrgE i202) 3 6 6 5 8 6 1 [r&r a-lc!]free call).

1929
-SL

P

Federai

R ~ ~ j s t ef r V

O ~5;. NO.8;

P U E~H T A R Y

5 . l e g 2 ,' Raies a n c Recuidtior.s

of the wrictcn

I)IFoRMATIOC(:

T h e collecrlon ot infornatlon
c o a ~ a i n e dI n r h ~ sf:nal reguiar~onhas
been rerlewed and ap?roced by rhe

OlI~ceof Mezegemenr a n d Budpet in
accordance with :he rtqu~rcrnentsaf rhe
Paperwork R e d u c ~ ~ oAct
n s f 1980 (44
U.S.C. 3 W h ) ) under conirol number
:545-1093 The esllrna~edannual burden
pe; respondent i 6 . 2 hours.
This esrlma!e i s an approx~rnationo f
!he a v e r a g e time cxpecled to be
necessary ID^ a collection 3f

~nformation.It is based on such
t n l o r r n a t i ~ h0 s i s aka~labieto the
l n l e n a l Revenue Serv~ce.ind~vidual
r e s p o n d ~ n l sme}*require rnure or less
lime. depencing on their particular
clrcumslances.
Comments concerning (he accuracy ~f
this burien ~ s ~ ~ o and
a ! esuggestions f o r
redu'ci;.p this burden shocld be dlrecled
10 the Internal Revenue Service- .Aim:
[US Reponr Cleerance Olficrr T;FP.
Washmgion DC 2 0 ~ 4 end
.
t o he Office
of Management and Budget. Attenllon:
Desk Ofhcer lor the Department of the
7:easup. Office o i Iniarmation and

R e g u l a 1 0 9 .4fiairs. \Vashinglon.
20503.
Backgruund

DC

. This documen\ conia~nsfinal
regularions amending the Income Tax
Regulations (28 Ca par! I ) under
section SBih) oi the Intena) Revenue
Code o i 19$4 {Cade). Thb Treasury
D e c l s ~ o nwill conform the regulatrans to
~ e c t i o n3 0 1 ( d ) ( 3 ]of !he Tax Reiorm Act
~t :g;6 ( h b .L. ~ 5 590.Stat. 2553) and
15 ISSUE^ under l h e authority contained
17 iecilon, 58[h) and 7805 01 the Code
(90 S l a t . 1553 and M.4 Slat. 917: 15
'J S C.501tl. 7ao5).
These regula~ionsape eifectix-c May 3.
1992. They are appllcaoie only as they

a.'!ect ras prelnrente irems that are
subject to the rninlmun :ax posed b y
sec?ion 56 of the Inlemal Revenue Code
of 195; and arise i n taxable vears
begrnn:q after December 31. 1975, anb
cefore )acuarl. 1. 198;. Except to the
e x f e c : that rhey aclect taxpayers' c r e ~ 1 1
carpIomards. the rcg:lal:on+ do not

of ae~errnining
a l t e n a u v e rninlrnvm : a x !iabilily
mposed by sectlon 55 i o t any
~ndividual'staxable !ear b c g l ~ n r n gafrcr
December 31. : S 7 8 . or Tor any
co-psratjoe's taxable !.ear beg~nr.:~g
cfler December 21. 1986.
On % f a y 5. 1989.cheln~etnalA e ~ e n b e
2pp)y for purpose3

Serxc? publrchcd la the Federal
Regislet a h'otice of Poposed
Rulemak1n3 (54 F 3 19409j.T h e S e r v l r e
r e c m v e d t k e e comrnerr! lelters in
=.a5

!.!a!

-

~3~erworC
Reduci~on
.
;\cl

reJsunw

1 Ttlesdav.

.

A p u b l ~ cn c a r ~ n s
.%her cons~deraiion

1 0 I ~ B notlc:
!

not rer;lres:ed

cornrncnrs, :he proposed
regulat~onsare anop!ed as :e-15ed in
:hrs Treasury Decrsron.

An Explanallon o l h z v ~ s i o n swas
included In the preamble IQ !he

lernporary r e p l a h n n s . See 5-1 FR 19363.
T h e final rcpula!.->neare subsianttally
unchanged. except a s notcd beiow.

Seclion ?.5&9[e)(Z) o f the pl+oposed
teguiat~onsprovides that the
adjustmenfs o f S : . S W ~ e n e r a i i yapply
in asxesying deitcrencres and r e h n b n g
any Dverpaymcnc or !ax for all v e a r s l o r
which the perlod 91 lirn~talionshas not
exptred regardiean o f w h e : h e r the period

- ..

connent leller potnred out t h a ~:h:5
s ~ a ! c ~ t n at s. well a3 dl1 of !fit h x a- m
o.l -r -5
- r
pwen :n the regula::ons. assumes !httl all
i l e t n s of l a x preference reduced laxable
Income. Hower.cr. dirr~ngthe years
aIiec:ed b y these rcgularlons. ihe
corporate cnprtal pain prc?ererrce w a s
no1 based on a reduction to laxable
inyome but inscead w a s based an 4
lower r a t e o f l a x on cap~lalpiilns undcr
section 1:Ul. In rcsponsc to this
comment. !he final reguidtions c!arify
!hat a c o r ~ o r a r ~ o nnon-preference
's
regular tax i s campuled w l t h o u ~regard
ra sectron 1201.
T h e proposed r e $ u l r t i o n s c a l c u l a ~ e
r h e amour,! of ?references I S a l prnvides
no l a x bench! in the curreni year b y
c ~ r e r a i n ~ nthe
g smount of unused

ot limitarion# ha3 expired lor lhe
credits that would h a r e r*. cn used in the
tarable year In which the non-beneficial absence o f prrferences a n d converting
preferences arose. Oce commenier
these "[reed-up credits" into a
suggested that. in vrew o f c h e d e l a y in
preicrence amount. The second
the ,ssunnCc oI propwed regulaljons
cornmenter painted ooc (ha) because the
under section 58(h). the regulations
p r e p ~ s e dregulailons assume hat more
should bc applied w i l h o u ~repard to
crcdtts would have been ujcd agaisst
limitation periods to 811 years to whtch
son-preference regular l a x than a r e used
'
58(h) applies.
agarcst the actual regular l a x , )he
.
f h e S e n i c e and the Treasury
reguiations i d i l to address certain
Uepe-~mentbelieve that i t is not sttuations in which sectioc 90.4 of the
approptiare to adjust tax liability far a
Code would allow fewer foreign tax
year for whxh rhe peripd o f I~mitations crtsits against non-pnrerence regular
has expired. Thus. the final repulalions
tax than ihe credits allowed against the
relain- he approach o I ihe p r ~ p o s e d
actual rtgular tax. The commtnter was
reguiat~ons.Where !he taxpayer paid
concerned that !he p r ~ p a s e dr~gulaliqns
minimum tax on non-beneficial
do not p:ovide Tor these "aegaiive lrcedpreferences. did not make a claim for a
up credits" lo be t c i e n into
credit or refund of the rr;lnimurn t a x
consideration
in determtning the ne\
paid. and the period of iinitarions for
credit reduclion amoun:. No change lo
claiming a credit or feiund under section
the final reguia tipns was necessav lo
6511 hes expired for the year In wk,ich
~ d c r e $ lsh r ~comment. y ? e "netting"
the non-beneiic~aIprelerezces arose. the
rhal the conmenler requ sled I S airesdy
t a x p a y e r i s not rcqulred ID .-educe 11s
bud! 1n1othe tegi11a11ar.anecause ,n
[xed-up c?edits. In addition. if the
cornputtng a taxpajvcr's total 'reed-u?
laxpaye: d!d not p a y minrmum tax
credils fur lhe laxabie year. "negalive
a ttribu~ableto nsn-benelic~al
prefer~nces.lrsed credits that w r r e i r e c d freed-up credirs" will aulomattcally
reduce [bul no1 be!ow zcrol !he total
up by !hose ptsierencer to r ~ i u c etax
l i a b ~ l ~ t:or
y a laxable year for which lhe amaunt of [reed-up credits c o m p u ~ c d
under 5 1 . S b 9 l c ) l ? J o f the r e g u \ a t ~ o n s .
period of Iimitat~onshas exprred. and
h ~ k i r dcomment letter argued (ha: ;hc
!he treditr 50 used exceed thr a-noun) of
crerfi\s that -.ouid h a v e beer, a c a ~ l a b l e proposed requlations are i n cletlr and
for usc i f the credit reducr~ondescr~bed direct cor.Ctc: w l t : ~both the sci~lurorv
i a the regulations had been made. then
language and )he C3ncress~ofi;llPGrpcse
oi secr:On 58(h). T h - comrnenrer s
the lexpayer 15 lrable for m i n ~ r n ~tm
ax
pasllton i s rhni sec!,on 58(h] glr8cs he
equal to the amount of trcdiis s o used
Secrelaty aurnorrty lo i s s u e rcgulatioas
only i f rhe perrod of lim:ta!rons nas n o l
under which "~remsQI !ax >?elerer.c~
expirec fo: rhc laxable yedr rn tr hlcb
shall t e properly adjasted" where no
I ~ ncn-brnehcial
P
preirrences arose.
l a x beneIi! resulis !:am !he preferences
Thus,the rules o f 3 1.58-9(el(:)d o no1
fcr a n y t a x a b l e yea:. but dues nor
resulk In u a f a ~ rtreaimenr of l a x p a y e r s
empower he Srcrelary ro adopr a credhl
Section im58-9(c!{?]of the grcportd
regulations provtaes hat the first siep in reduc~ionm e c h a n ~ s mtrke the 0r.e se:
in:.'
i.? l h c p r o p o s d repulaii~ns.
comguting the amount of !reed-lr?
Cons~stenlw i ~ hsectton j8(hl and rhc
credlls 11 lo d r ~ e r m ~ nrhe
e regular t a x
hold,ng rn Fthi C h i ~ c g oC O ~1...
( + a t would have been imposed tT
Cp,:..irssroner. % I F.2d 100 (7;h Cir.
~re[e:ence i l e . ~ sh a d r.ul b c e n a l l c i c e d
lt-rbdl, c 2 2 08
W3 j A98;). :tit
rcguia\ior.s praw~d:! t h a ~( a x p a ~ ? t >
W I ! ~

T-c.

F d e r a i Register / Voi. 57. .Yo. 87

/ Tuesday, Maw

5. 1W7
-

raxable v e a r because available ne!
no! currenl)v tncur mlhlmUh~I h X Oh
operallng loss c a y o v e r s w u d d have
preieteace ) t e r n s a n ~ i n gin a laxable
vear iar wnich ~ h cavailabilily ~ T e x c e a a reduced or ellminered l a x liability i f the
preference I f e m s had nor b e e r s l l a w ~ d
&ilg
In e i i t c t defiles the taxpayera
in cornoutlne taxable income
c u m n t bcnefit irom such preferences.
veilher rhe ztature nor the legisleeve
h i ~ ~however,
o ~ . s~lggestsh a ! r n i n i n ~ ~ r nSp&al Xnelyses
11has been determined thal ihese
tax. which would o~herwisehave been
ruies are not malor mles as defined in
d u e a b ~ e n lsuch exce5s credils. rho:r!d
h e c u u v e Order 12291.There[ore. a
be lorgiven. I n this respect. the
Regulatory Impact A n a l y s ~ sI S not
regulations. by wry oI the credit
r e q ~ i r e d I. t hak n h o been determined
reducuan mechenram. ensure that
rhnr section S53(bl of the Adminislrallve
minimum {ax wrll in eflecl be ~rnpoved
Procedurz Act ( 5 U.5.C. chapttrsl dnd
o n l y i l , and to !he exlent that, a
!he Reguiaron Flexlbilll~:let ( 5 c.S.C!axpayer ;rl timately realizes s tax
c5,epler 6) do not apply lo :hese
beneI11from 1h.t p r e f e r e n ~ el l ~ r n 6
regulations, end. therefore. a i ~ n a l
Ihr~ughthe eppllcation crt h e freed-up
iZeguIalory lmpott Analysis I S not
~ r t d i r acarried back or over to reduce
tax liability.
~ q u i r e dPutsuenl to 5ection 7B05(r) OI
Because the slarure and legislative
h e internal Revenue Code. :he no:icc of
history are s~lenrabout how tha
ptopoeed ruIernaking we3 s:bmitttd lo
r p g u l a l i c n ~should deal with a 5~lualion the Chief Counsel for h d v o c e c y or che
where a t a x benefit is reelrzed in a year
Small Busin-6 Adrninist:a:~on To;
a f t e r h e y e a r in which rhe prelerences
c o m m e n t on i t s impac: on smell
arogd. Lke Secretary i s fret to adopt a
bujiness.
reasunable approach to address this
sitsa [ion. The c&ir reduction approach Drafting lnforma'on
T h e ptinctpal au;hor of these
oi the rrgulatiom, which in eflecf
postpone3 the tax until the freed-cp
re€Viat30ns
is
R. Berg
O'licc
of A ~ s i ~ t a Chief
nt
Cauneej (hcome Tax
credits wotlld h uillized, isreasonabic.
and Accounting). lnternai Revenue
Pufi5ermore. the approach is q'sile - - '
s i . ~ i l a rIQ he $upended rnhimum ta* - Se39ce. However. p e r s m e l from o t h e r

-

~ i m e t h a k C ~ n g ~ s ~ ~ ~ c d f ~ d e aolf fvj~c ie at o)flh~e S e r v j c e a n d ~ e T ~ a s q
similar sirua tion under section 561b)
pprtidga led i
?
heir dqveJopment
fie add-on rmnimum tax- We believe
: ~d of subjI - --,:. .,
- .
:her l h i n approach 1s a valid exernst of
a u h r i t y vanled to the Secretary by 26 C.E4 ~or&-1.j6-0 Thmugh f . 5 b 9
Congress under section 58fhl. VJc also
hcvrne taxes. Reporting snd
believe ;hat the zpproach of hfie
reccrdkeeping :cqui:ements.
proposed rrgulatione is easier tb apply
25 V A Part 602
than altcnetivr appmachea t h a t w e
considpred. For e x a c p l e . tht c ~ t k t
Reporting and :ecordLeeplfig
reduct~onapproach doer not allow
reqarrernentt
subsequent :fianges in iha minimum l a x

*,I!

l o aller $e effect oiiusper:detl
9rcierences, and anps n m r-quire
the
comal*xstacklng r i e s 10
brder ~n w n t h suspended Prererences
are deemed to be u \ i l ~ z ~Therefore.
d.
the
:redit r e d u c ~ r c nnethod ol the prnnssed
regura;rons i s adbplad wllhoul chsagc in
the fl:!,! rt:nulatinns.
Ofircr .Aar!ers

~ t final
! ~

cirFlfy that :he

determinaiion of frced-up credits 1 9
m a d e ior each :axabie vear rndcpendenl
o j othsr

are I-ed

Adoption of .'imeodmml?r to the

Zegrrhrioar
Accordingly. 2%CFR parrs 1 and W2

are

~ ~ : ; r t pny;r
d

ant laxable

year may

be

follows:

P A R T 1-IMCOME

TAX: TkXARLE

Paragraph 1. The aurhorltv crta!~oaf c r
pan 1 rs amended by : e i ' n Q ~the
~ ~e~n t o
lor "l.5+9T'and adding !he iollawing
cl[arioc;
,%umo"ty: ~6 u5.c Ts

or cartied back !ahcr b i n S

Ir also trsuca

- - Sec:lon \.se-.

under 26 U.S.C. jqh].

Par. 2. f i n t w

8 l.j+qis addeti

to read

reduced under paragraph (c){5) of
5 l.S&!J and used 10 ceteTmin@nonnenenclal prticrences in the carpover

4

or carryback y e a r .
Tb-e Lnal wgulalions continue l o
reserve on mle9 re!ataig l o the
app)icataon o f !he l a x brneE! r ~ l eIn
c a s e s wnere i a x preicrerce f t p r n . r

( a ] In genera!. For purpojei of
compu tin8 t h e mbairnum lax loability
jmpored under section 50 of !he Inlornal

provide nu t a x b e n c f i : i n

the

cdrrent

-

u s sel

for15 helow:

1.58-9
Apptlutlon a t llu ht bcn?lll
1 0 thr mlntmum l r r 1m LLaPmt rrarl
btglnnlng P W 10 19df.

-

192:s

a:.- no! :iable lo: m~nirnurn
on tar
pre'ownce Items thal do not
[he
Iaxpayur'3 tax. llabillty under subu:le ,+
of the C..de for the 1axablc year. In
general :ax preferrncc rlerns rha~do no!
reducc tax liabiliry under subtitle ;
Ifor
the raxable year are thnse from which
no current tax bener~lis derived
because a v a ~ l a b l ecredia would have
reduced or e~\mina:ed:he :axpa!.erVs
reguiar lax Iiirbli~ryi l th? prrierefice
iiems had nor been allowed i n

computing taxable income. H a w e v e r .
dny credits that. because of such
preference irems. are not nsedea for use
against regular :ax ["l;ecd-up crcd~ts"),
are required 10 be reduced under the
wles of paragraph [c) o I ~hirxction. For
purposes of lhrs sechon. a taxpayer's
regular tax i* 1ht Frdrral ;ncome tax
liability under subchapter h 4fchapter 1

fhe Code. nor In:!udi3glhe mlnrmuttl
by jection 56, Unle3s

l a x imposed

othenuise noled. all ~ I e r e n c t sID
lnlernal Revenut Code section1 reier to

rhe I n i e n a l Revehve Cade 1 ~ .
(blZfleccive dm&. The ruler of i h i ~
section arc eliecrive May 5.199Lbur
oniy a, they aliect [ e x preferaech
that
znlaxable years bcginnlng
after December 31.7976. and before
pnuary 19e7,

~c~ct~~usLrnPnrO~C~~~vPrt.Ce

(1)Ing-eml. A taxpaj-CC*Sfreed-up
credits x u s t be reduced b y the
add:r~onaIminiman lax that wouid have
been ~rnposedi f a zurnnt rax benefit
had been derived T r o ~ppr:etencr i : e n s
tha! did no\as:ually ;lrcduce B current
tax benefit. Tbe amwn! of tLlis
reductiun h l l be calculaled In the
hll~wirrgrnahwtr(i] Derermlne (he amoun! c l freed-up
credits:
[hi] O t t e r m i n e tne armunt of :ax
prtieren:~ items [ i t ar.y] from which a
beneii, w a s derruei ,,r

,,,,,,, ,,,

taxable year ["bene5c;al preierenzes").
an0 the anbunr o i ~ r e i c r t n c e si r o n

YEARS B E G l N H l H O A T E 3
DECEMBER 31,1953

tarable years, Thus. credits !her
UD j ,

3s

1 Rules sad ilepulatlo.ls

rvk

Revenue C o d e v l l g S 4 cod^), laxpayers

wn~cir30 current :ax benefit ;\as
derivtd for the t a x s o l e v e a r (*'.:onbenefic~at?references .): azd
[ ~ i i ]Determine !he pnrmn of !he
mrnlmum tax on aLi \a& pre1r:encc i;tms
ior !be laxable year tha! is attr~ou~able
lo !he ?on.bene:'ici~l>relerences.
f i e freed-sp credits are then reduceti
by an amount equal 10 ~ u t POT:IOT~
h
01
!he minrmurn tax.
12) Determine ,'reed+cg credrrs. :i)To
derenntne the [reed-cp i r t d l ~ for
r the
laxable ytar. Erst deleimint the regular
!ax r h a ~would have i e e n rrnposed fo;

(he f a x a b l e pear

tf

preference (terns h a d

no! been aiiawed In t o n p u t r n g ta.rabie
Income ["non-preference regular lax '1.
:n he case 3f a laxpayer wi!h :!IF
c a p ~ t a gain
l
preferer:ic aescr!r;.d In

3 9326

F d e r e l Regislet

V d - 57,

[ 3 ]Delermlnorion oJbenqiicjul and
nun-benef!c~ulpreierrnces-+i]
In

seer wn 3 7 ( e )!qJ(Bl, nonpreferwlce
, , g ~ m r lax t a compu{ed rv~lhoulreged
lo section 1x1and wlhout sadrrrg

ine

S;(a )19)(81prcfemnce arnounl lo
r u a i ~ l eincome. Second. compute the
amount oi crtallr lhar would hevc becn
a l l o w e d to rtduce the non-preference
regular tax. The crtd~tsavailable to
r e d u c e non-oreiercnce m y l a r i a x shall
include a n y Ireed-up creli~rsfram other
takahie years a s reduced u n d e r
paragrsph lc115) 01 th:s srct~on.that tlre
c a w e d In h e c u r r e n ~taxable year.
ThLrd. subtrect the amount of credils
!hat were acrually alinwed 4 0 reduce rhe
regular t a r for such taxable y e a r from
!he amount oi c r e b ~ that
s would heve
k e n allowed ro reduce nun-preierence
regular tax. The result is the amount ol
: ~ ier e d - u p credlio.
[ i i j T h e :of(owmg examples a u s t r a l e
the de~errn~netion
oi heed-up credite.
Tne f i r s t two e ~ e m p l e sassume thar ~ h c
i o r e l g n l a x credts being used do no1
excged the l~mitationundersecuon 809.
EAomp/c1. In 1982 Corporation B he* n7.0
miUion dallan in lonipn mli ~ r t d i uavrrlmblr
for the ~sl;ableyear. If preltrencc items w t r e
duored
d e l e m n r n g m e d a car, the
~ g u i a re*
r would have been SlO.2 .rjUiclo
and fote~gnt a r crediu wed 10 rcduce m g u l u
ar:w o u d have been g0.1 mrljion. &crust
of tax prtiewnce itemn. howrwr. B'n mgular
t u in M.3 millron and Ihr smovnt of fortign
sect

ho. 87 / Tuesday. M a v 5.
-

pene;ui. The a m w t o[ t d x prt.ierrncea
f r m whch B c m m t tax b n e f i l 19
c r y bed ["beoefrclal preferences") and
the amnunt from which no c u r e a t tax
benefit i s denved ["non-beneficial
prelerruces") for the taxable year are
set fonh below.
(rtj Rc-gu/or ;ox I:obif~;.v
IS fha same
mgcrdless ofprqrerence ][ems. ( A ] lf the

determined ar

R d e s end F l q d ~ t m n s

-the 5 - p c r u n t addiijon ro tar, p r o * d t d
by s a t a n l l ( b )sha!l be tncludrtd In
d e k r r n r h g tne marginal rate. The
a w g e t e o i thme groured-up amounts
15 he 10ia1 srnount or n o n - b z ~ e h c r a l
prefkrences fw the iaxable year. (4 7 h c ireed-up credi;s shall be
grossed up beginning at the loweet
'

rnarpnal tax t a l e t h a t would have
a p p t ~ e dlo the addntlonal taxable Inwnlr!
a r i s l ~ ~i!gtax preferences w e r e not
ejlnwed. Thus, the margrnal lax rare* at
v n l c h the actual r e g u l a r tax was
imposed s h a l l nu1 b t lakcn into account
in grossang u p Ireed.up credit^, even II
all or a port~onor such tax i s not oifset
by credits becauee o f i ~ r n i t a ~ i o non
s rhe
allowance of euch cred~ts[such 4s the
section 9W limit on foreign t a x credlts or
the section 3 8 1 ~ limit
)
on invcjtrnent t a x
credits). For example. i f the first dollar

taxpayer's lax iiabhl~ty( a t ~ e rcred~rs)
would be the same regardless of
whether preference items were e l l o w d
to reduce toxbble income, then a U of !he
taxpayer's preference item are nonbeneficial prrirrencc ltcmr.
(8)
The follorvrng exac:pic ill us vale^
the d e net fc:lh in paragraph
(c)(3)liillA]oi h i s s e u l o n This exampit
assumes that f o m g n tax credits being
used do not exceed the l ~ r n i t a l i o nu ~ d s r of additional non-preference larnble
section W)4.
inmae would have becn r a x d e t a rate
of 46 percmt. then k e d - u p credits shall
Exump/e. (il In 1982 Corporation B ham
be grossed up at s8 percent tren iI
a7.5
dollam in ioreIgn lax c&iu
regular l a x imposed on tcxable income
available {or Lhe lsxabir yeat. U pmlereocc
11ems w e e no1 allowed in determining
at e *percent t a l e was not oilsel b y
hen
n p u i ~ lax.
r
tht W u i ~ lra x would
crrrdils because 01 :he I i r n i t a ~ i o n son
$ 1 0 2 nDLon dad f 0 r e 1 lax
~ C ~ : used
S
la
investmen: lax credits under section
reduce egulat la* would hove been S l Q Z
381~).See Examples 1 and 2 in
rnlllion Demucc 01Lax prefemnce ittmr.
paragraph {dl o f this section lor
h o w e v e : . B'r re*
w 185sJ r n i l L o ~and
~
illuscatians of the p a s up of b e d - u p
the amount of r o r t b tax credits x t u a l l y
credits in ceses,where limitations spply
r w d to t d u c t the x g Jar lax in 9.3 million
to the amauct of credit allowed 13 offset
:ax c d r a attusi!y used ro r e d u e the ~ e p u i v The amount of f m d - n p foreiqn rax crrdttr is
SJ.9 mill~on(Fla.2 rnill~onm r n u s 3 million).
actual regular tax.
- l a * i~ S81 mjll~on.T3c ornoun! of b e e d a p .
(iil f i t total a m n t of 8's tax prtlctenct
f o r c i p tax &IJ
ia n
1
3
mi!Iion [ S f 0 2
13)T b t follov.ing example iUu3t:etes
itcmr i a g L I riltoa. B'r nc+pmtetcne '
'
cullron r n m u 563 d i o n j .
the gross up OF frera-up cteditr to
Eramg'e Z &nume tbc >erne facts ar in
regular tax is S l 0 2 &on
and. r e d ~ e by
d
delemine
non-beneficial preferences.
toretgn t a r cred~ts.ia tern. B'B actual rrgurrr
&cmplc I of paragraph [c)[t](iil of hi* .
tax is 953 rn~tlion~ n reduced
d
5~ loreign trz T h ~ sexarnpie assumes that forelgo rtlx
~ t c t i o nexcept :fat C o p o r a non B h a o 57.2
credits belng bed do no1 exceed the
credits. ~r zero. Since the amount of a t d l t s
aillion dollan m f o m tax
~ :redit*. I!
limi~abanunder section 9 M
7r:ier~nce bttma w e r e not 8 ; ; ,wed. the nunthat would h a v t been miiowed to slfsrt the
P ~ o r n p l e(li
. ~ a r p a t a i ~ oLnhu l i e
non-prelemnce r e p l a t lax w w l d h a v t
;cl.ttenzt rtguiaf tsx w u l d b u t been S l 0 2
m ~ t i o nand the forezgn tax aedits uscG ro
reduced such tax IO or. amounl (El]
rqwl to
following itcmr [or Lhe 1M5 taxable y ~ u r .
recuce the renuiar lax would heve been $13
tnt ncluah regular t x ~ r a o d i t y(a].
0 :eceivd
.TI ii~on.
k c a u c o[ l a x pzcirnzucs rtemL
s lax bcncfil hnm none or ;he 3 . 4 millron or
however. B's tenular tax 1. 56.3 milluon. and
!ax >refcrtnctr antj Ihcrelort all or these
!:le amrranl o f lorelqs (ax credit^ ectuaijy
prefercncer art non-brneficial prdrrr-r
;wd to e d n c t ~ h c--Jar

l a x IS U3 r n ~ l l i o h
ne amount of I r e d - u p f o m g n l a x r d . d i l 3 ia
5,9 millinn IS.: miliion rnlnur 58.3 million).
:xunaie l In 1983 C~rporarronC has
a . 0 0 0 o i Inresimenl tar. crealls s\-ailable.
:i 7rclercnce ~ r t m swcre no1 ;!lowed non:xIertxe ~ F u i a~
r nx
woukl hawe b c t ~
%W.BN and rl; -.OX)
01 hnverCmcnt l a x
-,
t

::tdru r o d 1 h a r e bcen allowed to rcduw
. l D n - p . ~ f c ~ mrcrty l a r t a x 11phil~ty.
&tau4
:i ; a x prtfercnccr, h o v e r e . C3 * C ~ U B \
p u h r ( a x \r U39.750. As a result of h e
~?irm~!on
w d r r ,rc!>on 3BIc). only D ; 1 : 7 . 3 3
> I rhe Invts:mtni l a x c r e d ~ !a ~
re ~ I I n w r d
iO
-eauce the acrual regular tax, i r t e d . u p
-:?dl:% a r t S-2,12W [$jDl).ljDD r r d h r SJ;;t2:).
I x a n p l e 4. I n 1984 Corporalrcn 6 has
)r;iinfwy Income o f S 2 i 3 . w a n d nel J e C I l o E
373 grrn o f Y O O . D . nont of w h ~ r hi r
.nrrbuteole la lorelen m r c t s . B h a 1 no o [ h w
;ems O( t a x p f d e r e n c e In 1% 8.3 nonr r f e m c t F L U lar, lor 19M 7 0 w 6 9W &*
Younr oi l a x
would bc unmwi: w i l r o u l
? g a d to m e o n 1201

[iii) fieguiu: fox !iobili;y I i z e r s
because o f p w e r c ~ c citems. !f :ax
)lability (al:er crediis) is less Sccadse
pretercr.ce lrems a r e allowed LO reduce
taxable income. thr:: some of :hese
preference ttema have ptovldtd a
mmnl lax benefit. to such cases. the
smounl of beneficial end non-beneficial
prclerences a r e

determined

a5

loilows;

(A] Son-bene.ficral prejerences. [ I )
T h t non-ben~i~cml
preferences are
d e t e m t n e d b y cunvctttw the f r e e a - ~ p
c:ezii!s for such taxable y e a r ir:to an
e n o u n l of taxable income Tg m a k e this
conversion. freed-up credi~sare
" g r o s s e d up" ( ~ . e
divided
.
by the regular
tan m a q i n a l t e t e a t whch luch uech:s
would h e v e ~ f l s e non-preterenu
l
regular tar;) to d e ~ e m l n e)he ernovni ot'
:ax prekrences !bar f m d up such
c r e d i t n For p u r p ~ ot
~ e
t h i~s a l c d a t r o ~

~ m r ragur
c
mr *amtry

Prerw%TTsL --.
...,.-......
*rpm8 tm 19as rn
* F w d *n .-r:
U W brSCI

*m d m - & .

. -_..

...................... ...

-..----,-,-..-.

1-w
UxL
G w ~ n~ I W Wio DP=I mrN - @ m

w

hrcreams
rc u w Ilcn
U- t
9 .. ~ 15
Fw-n
:u m n cs~ca
frnbrnhrm 1 9 3
1J.m

CbUs
Cy
I Cn
- ~~

Imqwmen ma unro cur e d I ~ " l & h

1BM

-...- -nm

-

Federal Rqisler

-

I vol.
-

57,

50. 87 1 Tuesdav. Mev 5 . : 3 2 1 P.ul~s 3 r d Repu1a:ions

-

ruou
k+Reh-lnCe

1-r

a
r
,....................-

1m L-

................

1 l.'%

[ii} 7 n e f x d - u p credilo lor 1W arc 53CM
(333.0~0
mlcua s?.?w).
non-pnierence
regular tax ~1571.75018 deiemrned by
apply:ng I k e r q u l a r tau rater X I lonh ih
jecuon l l ( b l l o the m.mo( l a x a ~ l e
income B L follnw~:

ne

b

F

..

"

-

0 0 .rc 1841..+.,..----........-....-

&

h,
30.,.-,--

ITC Isr)

-

Rala

--

v5.m

X

15

?S.OCO
2S.W

X

ie

X

30

w

40

X

di

ZSDIX)

-!WON

.

.....

,
.

-

-

.-

-

,
...,........-......

.

--

,

-

.

4

.........

-

10.000

l a x . b p n n ~ n ger %c Iaueqt
m s r p ~ n e l18.1 t # { t Thc !.red-sp crrcltr
~ - 3 s s r dup beginning a 1 :he l o w e ~ ni a - ~ a a l
( a x r a f t a [ which aodi~ionaltaxabie rncome
would h a v e been taxed if preferences r e r e

'iw
5)r,~w

no1 a:lcwcd- T h u ~ in
. rhis c x a m p l s !retd.up
crrdils are proswd up tealnarng ar 4 0
percent. and the amount OIL'Snon-beneficial
~ r e i t r f n c rlor
~ ~ h 1983
r
razablr y r a r I S
W.158.

s3.750
'W

+

- ........
-+...

6.7%
750
6.000

"

,

-.

"

ailawed aga,nsl ~ n e:egular :ax and
!reedu p m d \ : g ate trtsted R ? of!nert:ng nonprrlerencc :tgula: I a n In tnc lam* orae: a,
such crcdils would h a v e 3cen aiiowed :o

!m ofiset rucn

7.-

=

......-.-..--.--,--..-...-..
-.-....-....,--.....,,

"

...u-......

-

I i ~ iThus,
)
lor purposes o f d c ~ c m r n i n grie
non-bentlic~elp r t l e r r n c e ~ .Irtrd-up c r r d r l ~
are grn9w-d up am follows: The v t d i t s

-........

..-...

s;,,~

=
=

~ 5 0 0 . ~

....................................................................................................
I

FTC 185) ............

......

.-.,.,....._....-2....-

--...-.-..- -......

Investment tax credit

= lTC :year)

to

-15
-18

...--..,. -........

.30

POOL1
'd,250

40

70 000

46

.M
A0

...

w.750

Foreign tax credit = FTC (year)

? Y25;

-

46

-

2

--

=

-

sr0.m
30 978
43.~78

yy

4%

5 c m ? k 2 111 Corporstjon L h a r i ' l s
lollow-ing i t e m for the 1985 rare ble year:

hereinafter as the "credit reduction

amounl".

(ii] T h e follouing exampleg iUustrate
derennination of the credit reduction
amount. These example3 assume that
foreign lax credits k i n g used do not
the non-beneficial preferences for I h e
taxable year horn the total amount of - . exceed the lim~tationunder section W.
r u preferences far S U C ~year. This mlc
.
f i z ~ r n p l1.
~ ( i ) Ln le%r Corporation B has
may be iUus~atedby the following:
Sl7.8 million dollam in luretp tax c w d i ~ s

(3!Bene/iciaf preferences. The
amount of beneficial prtftrences f o r h e
taxable yeer ia cornpuled by subtrecting

'

example:

Sample. Asrumc the ~ e r n facts
t
a* m rhc
5 o m p l t In p a r a p p h [c)(3]/iii)lA){3)of his
$ecdon. T h e amount of t'r btnrficlal
prrlrrtnces for
ir YS.W f l b t d
preferencca of S110.OCX3,mlnub non+bncficial
preIrttnce~u i 581.459).

available for rhe taxable vent. lf preference
ilem w e n nut allowed in dtteimining
rcgdsr i a L thr regular tux would have betn
5102 rnillian end lorrim tax a t d i t s used to

mduct r ~ l e rtax
- would hnvt bctn 902

million. Becaumr of tax preterenct iiema
huwtver. B'r m p l a r tax 5 1 M.3 million and
tht amount of f c r e i e tax crtdiir actually
f 4 ) Det~rminerhe minimum tux
used to d u c t B e regular :A* i s 58.3 m~llion.
otp~butobleto nun-beneficial
T h e emount of h t d - u p iomrgn tax Ereelti 11
prelrrtncts. (i)T h e partiarr o l rhe
rnlll~onmrnum 9.3 militon].
53.9 mdlion
fi\]l h lotel amount of 8') !ax prtlcrrnct
FJnlmurn t a x that IS attributable ro h e
non-benerkaal prefemncea is cornpu~ed ilema 13 Sar uullion. B-r non-prelcrence
regular l a x tr n0.1 r n ~ : l ~ uand.
reduced b!
a s iollow~foreign
lax c e d ~ t a .rs ztm. 8'1 ac!u;rl regular
:A) Comsute the m h i m u m tax that
I** u 9.3 million and. rcduaxl by I o r t ~ g nlax
would be imposed on all tax preference
c..td~\s. is zero. Since thr smowlt of credrts
i1e.m~far !hc !axable yeer if all of the
h a t would n a v e been allowed to ofilrt l h t
preferences had produced a t a x benefit.
non-prc1trtnct regular 1 0 % would h a v e
IB] Conpure the nin~mumtax !hat
reduced scicb lax 10 an amount [SO]equal ro
would be 1mpo5ed cn rhe IrrnrFicial
h e ecruai rqulmr tax Irability (MI.il :ecci\-ed
p z i e r e n c e s i i rhese were the laxpayer's I lax bentfit h o r n none of the S8 4 m~lliono f
tax preference^ and !$eretom a l l or lhcsc
13 Ihe amount of
only preferences.
prtietcncer art non-tenchc~alp r t i e r t ~ c r ~ .
minimum tax ~cruallyimposed for the
I:ii) S ~ n c B
t has SB.4 million in iorel
: a ~ a b l cyear.]
prriemnct l r e m e r d no tcpuder t a x 16ab1ltry.
(C]5.10~-actthe arnaur.1 computed in the minmum tex on tnat a m o u n t would bt
~ a r a p {c)(~](i][B]
~ h
of h i s section from
SlISB.YY3 (lib 4 rniliion rnlnaj n0.m)
h e amount computed i n 2srag:aph
r n u ~ ~ ~ p lby
i t d-15). 5onc of the prcl=rrnct
( c ) ( 4 ) ( i ) l A lof ~ h seclron.
~ r
n e result ra
Items i a s bene.kial preference. Thus. tht
the minimum l a x attributable t r , the c o n - minimum tnx allnbu!able lo mon.benrfic\al
beneiic:ai preierences for the ; e x a b i e m - - - pretercnces (and themlore. the cwdit
year. This amount 1s sornet~mesrefrrred rcductivn arnvcrrr] 11 n . 2 W .VW3

A c W -r
b IubJrV
Relam-*
"
~ a r r ~ +W l s e ~
1 - M
rl
pet--

-

-*

..d...--..--

...-..-...... -.,..,...-.--.-.....

-1

a1-

.-".".---......

~ r n o w w rav 4 r w
........
G
~ m~S
O
I on-I
ncrr
W.IWw.3
-urn
u
7-wwn a m e d m lor 1985 ... 5 t 5 . w ..
F w q n 'ax oer~lncvned
+ w a r e I r a l9B*
25.009 ..
l l h m m l ul UdlU mw I m a m horn 1
W ...-, 70.m

;111

T h t Irerd.up crerl~tstor 1985a r t U G . l j [ l

1W.mminus 53.730). Tht noo-prcierencr
q u l a c 1 . 1 ~ir S:T.?X. The amouni o i t'1 oon.
beneficre1 prttrrences ror h e 1965 I s x z u i e
gear 16 SBl.433.
liii) Tht rn1nlrnu.m l a x or L'a I U T A ~
preference Ifems 0lnl0.Wrvouid be 5
1
5
.
m
1/3110
rnrnur S t 0 W I r n u l l ~ p l ~ rby
d 1j l .
Sloce the amounl o l non+beneilcisl
ortfcrencrs 1s 581.456. :he amount 01 Lo

/ 2 u i and
~
Rerulalions
b r n p f i r , ~prritmlces
:
for : 9 5 I< I 2 . S
rntnur W 4 3 3 1 . Tht xfnlmum t a x o n
151 13
L I b c n e c c ~ s prc!eltncer
l
0 1 5 2 5 , S q 13 z 3 3 2
manus 513m: ~ u i i i p l i e dby .I:?
1.53
!Thtl is the amounl s l mrnlnurn (ex ~ r n p o ~ s d
(or lgaj,)The minimum !ax a t t r i b u t u b l e la
n o " - t e n c l ~ c ~ a7relerence
l
i t e m ;and

ti~:mforr.lhe c:edit rcductlon rrrnoun~]i a

sfz.668 in:
minus S:-3J21
(5) Reduction oj/reed-up crediLF--(i )
I n penera/. The ireed-up credits a r e
r ~ d u ~by
~ cani arnounl equal 10 tire
m:nirnun l a x a ~ u i b u l a b l e10 [ h e nonj r n e f i c i a l prelerenccs ( " c r e d i ~rednction
amount"] 1: the taxpayer h a s only one
t\,pe or freed-up c:ed~t [; P , on!!
kcvestment t a x credit or only f o r e i ~tax
credit) and hat c:~dit wag e a r a e d in
o n i y one year [lhc cumnt ycar or a
carryover year). t3en the credik I S
:educed by the =edit redut:on amount.
This rule may be illustrated by the
fglIowicp example. This examp:e
assumcr lnat Fore~gnl a x ci-ed~u being
u~ed
do not exceed the i ~ r n ~ t a t i ounder
n
gection W.

fioc.gie. (i)jn 1982 Corporerion B hea
nlilron d o l l r r ~I n foreipr! l a x crrdil,
a v ~ i l e b l efor t i t ~ e n a b i ryear. IT preference
!ferns r e r e (101ellowed \n d e ~ e r m ~ n m g
rr;uIar rax. the v ~ l a tra x would have been
h 0 . z million end l o r r i p l a x &its
used to
reduce rrgular rex would have been 3 0 . 2
m t l l ~ u aSecaust o f lax pmitrtoce trcmr. boweve:. B'r repuiar ur II Sed m i U i o ~
and
the amow.1 of I o r c tax
~ ~ credits actually
used to r e d m the regular tax i g f9.3 mil!ion
7 n c amount of freed-up t o r e i p tax m d i h i r
52.9 rni!lron [ S O . : mullion m u s 933 d i i o n ] .
(11) The u a l amom! of F r IU p m i e r ~ m
llcrn* I S 9 . 4 million B's non-pmference
rtau:ar tax ic SIO.2 rmlhor; a n d reduced b y
f7reign l a x credib, il tern. 8'0 ncrual regular
: a x Ir S6 ? mlllion and. reduced by turtlm t a *
n d ~ t sbr. wm. Slnce Lhe amount or crEdlll
rtlat wouid have been allowed b o i r e t the
non-prtitwtrce q ~ i a lax
r would have
d u d such l a x t o a n armunr 1%) equal to
L?r acrual rtpular tax liabrlir)*(fO). 8 received
a :nrc benefit h m none o i .he 5 8 . 4 imllion of

&.;I:

l a & o r e f e t t n c e ~and tbrrrioe all oi these
;references a r t non-Senefic;al preferenccr
( I I ~ Smce
)
B has 9 . 4 mliion m ~ t s l
? : ~ l ~ - n c crlcrna and RQ remiar csx L*blllp.
~ n c
-.ni>urn l n x on h a t e m o m t v w l d b?
=
.
'
e
S
M
;[=.4
rnrllloo rnlnua n0.W)
m d : r p l ~ r Co y .IS). hone ot the preference
) ! e m s 1 3 I beneficlet p r e t c ~ n c eThus. h e

r,lnlmurr: :ax ntmbursble to n o n b t n c k i d
p-lertncer [and tnrr~iom.h e c r e d ~ t
d u c w n amount ,, S1 254.m.
Inv),911 o i ht Y.9 mlllion o[ hted-up
that anae in the
d r r 3re f m l p n r ~ x
3 a n r year and drat orhem re woujd bC
c a r l e a ! ~ n u a r &Sincr h e t n h x amount 01
8.3 l a * ?lfrmnccs I r e non- beneficla1
preierrnas, the minimum tax of n158.m
!-at wodd St ;nlo3cd on t h t turd la*
prtir?encci ta Ihc credit ducti ion s w u n l
T h u B's
~ U . 9 m~lbono l t;ted.up f o m i q tax
credits 18 r k u c e d by n.3m.Tht fom~gn
1 d x crrdr~camfornard from 19aZ rr
9 0 . W r m.Th10 amount [ V kit furn of
5 1 M1.W ( ~ h freed-up
c
I o r p ~ prax crcdlr o i

C.W rOO reduced b! :ht crpdl; r ~ d u c u o n
a m o ~ a ol f n . 2 5 8 ml. plus 6 r m~llion( ~ \ e
h r e t g n lax cred;:
--uud n a v e &en
carried over e v e n I! ran p d e r e n c c rlrms had

not been ailo.*rdl
H o w e v e r . l i t h e (ax?my:t t . d s more [ban
one type o l freed-up credu or the
l a r p s v e r ' s freed-up credi~sare i n m
more chan one taxable year. then the
c n d t l reduction 8mour.r q u s t be
elloczted under the erac: method
desulbed in p~ragraph(c)[S)(ii) of his

section. unle~ran election ir rnnde
under paragraph (c){SJ{iii)of t h 1 5 scctlon
to use h e simplified method.
(111Ernct melnod. For each type o l
freed-ug credits a n d !or each taxallc
).ear witkin such 1::pc from w h r k any
such credits are earned. the amount of

crcdil reduction shall be ecual lo the
amount O[ minimum tax a i ~ i S u t a b ! elo
b e non-benehcial preierences that freed
up the ciedtra ior thal type and :axauie
y e a r . l 3 e amount of !he c r e d ~ treduction
ts computed by nulripiying h e m o m !
ol non-beneficial prelerrnces which
freed up credits lor each type and
taxable year by the rntnimum tax rate.
Foi purposes of this computation, if the
amounl of the taxpayer's mlnlmum tax
exemp~ionfar the taxable year (as
determined under section *a]] exceeds
the amount of the taxpeyerls k n e f i c i a l
prefeiences. auch excesr exemprlon
6nall reciuce the amount ol nonbmeficial preierencea to be mdlipijed
by the min~murntax tale. The ncnbeneficial preferences shall be reduced
b y a n y 6uch excess exemphon in the
aeme order in which the credils t i a t
were k ~ e up
d by EUC;? preferences
would have been allowed to oftset !ax.
Thus, for example, any esceso
exemption a d 1 1 h a t d u c e nonbeneficial preFetencer that heed up
foreign tax credits. .+v yuck excess
e-umption remaining aiter reducing nonbeccficial preferencer t h a ~I r e d up
foreign tax credits to zero would then be
u s e d to reduce the non-beneficla1
preference# Lha! I.need U F i n ~ v c s u n e nt ta x
c:edita.
[ i i i) Simplcied merhod--[A)
Desc.-iption otmethod. In Leu of b e
exact c e d i t r e d u c t ~ o nmechod describd
in paragraph (c)[j](ii) of h w sectioa
taxpayers may eiect to w e 5 e
smplifud credit reauchon method.
Under h e ~ m p l i i i e dcredi~reciuc~~an
metctod. h e ernowl oi freed-up cred~w
for each type of credit and tor e a c h
canable year tn whrch such c r r d l ! I I
earned In rnultipl~edby a fraction. T h e
n u n e r a r o r o i the hacrion 19 the total
credit reduc!ion emount ns deternined
in paragrapb ( c ] ( 4 ) [ i ) ( Cof] thre sec!ton.
The denonmator i e the t o ~ a ltlmounl or
irred-up cn?dJt8 a r dekrrmned in
paragraph (c)(Z)[i) of ~ h i aMXJIO~. Tbe

o f :h.~s m u i ! ~ ~ l ~ c a ; i 1s
o rthe
.
finour.: o l c:ed~: muurnon !or eacn
and 1 a k ~ L l yr e e r o[ ir&--lp c m : :
18)E!CC:IO.T:O use s/.~-r~!i,!ie~tirod, rod,
h laxpayer may e l e c l 10 use ;he
s ~ ~ p l i : ' i e::~d;:
d
r ~ d u ~ t i ometnod
c
lor
all :axabie rears 10 w h ~ c nir.15 S V C U O ~
a p p i ~ e sby airaching a slatemeal
i n d ~ c e t l n gsuch an eiectlon on the
arnended Federal ~ncornctax r e l ~ onr
returns ippl!*ing :he adrr1s:rncnts o! ri-,ls
sec\ion. I f an eleclron 1s made for alty
taxable Fear. i t mus: be madie lor a11
~ a x a h l eycers. Once an eiec:ion t a s
beer. 3 a d c . it can Le tevdhcd onl!. v;\\h
the gcrrnllsion of the C o r m ~ s ~ ~ o n e r .
Srrnliarl!.. once rerums ha%* neen iiied
app1yr.y !he e - ~ a ccred::
i
,~duc:lon
method, an eiec:~on:o app!? :he
s~m?litiedmelhod can be mauc only
pr&uc!

wl:h the consent cf t e C o n c t s s i o n t t .
i t r ) :$en o f C Z U I ! redvc:im oc C.TC'~!
cc,-r:oc.crs. Under both rhc ehact
rneinod and the s~mplif:edn e t h o d !he
determinalion oi credrt c a . T o r e r s to
other taxabie years i s made on the basis
oI freed+up crtdlts remaining a t i t : sut'1 .
reduction. plus h n y othcr unused c;edits.

Thus, an m o u n t of h e d - u ? cred1:s \hat
is e q u i lo the credit reduction amount
shall not be a l l o w d I D k u c e tax
liabiiity m any taxable year. S u t !

disallowance is withmt regard

10

whether sucb vedtr would otherwise
be ailowed a # a carryover. The heed-up

credits. a3 reduced under t h ~ sp a r a p a p n
IC)(S]. shall be carried over or carned
back In applying this sec!ion In a
carryover or a I T j ' ~ a d yea:.
r
No
n m m u m tax Liabili~y~ h a l be
i due w i h
respeci to the non-beneficial preierence*
for sny taxeole year.
(v) E-romples. The f o l l o ~ examples
n ~
illus~ratcreduction of Freed-up ml:!s.

Fed-]

Rqeisi.ter

/ VoI

57. Yo. 87

%fay 5. 1W2 1

/ T&v.

~ n Regulations
d

R:,fc5

....--.- ........
Ftrmq-

?a

d

SLS.DCIO

!-fa

hnm 1%
~ n u e w r m lLU w
ned ~ m * r o~ r w n19M-,-

[liJ T h t

I

2
C
.
m .--A
6
0
m

b-+.wasirq .-

~1

L

Frtrd-uj
lnveslrncnl tax
cred~tstmrn1984

'!.'=

-,.

emaunt

vlarpn
p * * m -0

~20,0011

up 1%
0T34erm

that

x

-

s1tm

=

Thus, the foreign tax credils from 1984
that are carried forward ro l9M arc
S12.104 (Sl5.2s0minu3 S6,146J.
The

(ii) Foreign lax d i t camcd l p a r d
1981:

x

utcilt

=Cndjt reduction r U o c a ~ dlo k d u p
i o r tax
cc
~d ~ cua m d iorrard h r n
lPBl

S S . ~ Krs = u . ? s ~

............

8.ZO

5. Fwapn csx
rquw

-

54% JI m u a f

non-beneficial p r e f c r e n r r ~that h c d up the
1 9 M foreign thx credit are 530.978. Under the
exact credit rcdocrlon mcrhud. the m d r ~
d u c t i o n .mount. lor rack of ihesc m d i t r
n r t drltrrnrnrd sr loll ow^
( i ) Forrlgn t a x credit earrjed l o r u n r d Fmrn

SlO.MK)X.lS=sl.XX)

car rre811, lmin
1989

awn'

UbDlS LllO~sd

#3.47ux.a5-Sgi?2

amount

J

CI edw:

-

-

s a w , ,x

=
mbW

ShM4

1.125

-

(mxmct%rsme

regmu uxl
pel-*
ZS.P~XIX.IS-S~.TT*~..
zs.MX)x.1s =4.%m-

ZS.0MIx,4
25.000~
.3-7.500,
1,0,000,

4o.wax.e=ia.gOL,

-

IForm

U,I-

uwm s-d
rg*lna

r%pvlvurc
JS.Qoo (1984

h

T h u s the forelm tax credit from

1984 that in
19Be i,
rnlnur M.646).
Slncc rhe i o m p n {LX wedit
from 1480 expltes e h e r 1985. none 0 1 I h 4 1

lorrrsrd

bngl

osaul

w m p r e h m s ~ ~rI!urirs~runr
c
01th
a d ~ s t r n e n uwscnbcd m peragmph I4 o l t h r
ItClldn:

E~onlple1. lil 'Fh- trample Itlurh=rc* the
optrotton of !hr c d r .rdueoon
~
adiu*wncnl
when he 8rwunc of h m g n U x tdl(
muowed II aubitct to the over8ll limitation
andtr mrction %. For puqm~tmof thi*
example. m~surnth r r Cowrotion x h a 3 the
followng ifern3 for the 19W taxable ycmr:

Taubit inwmc ( d t r t m ~ n r das though
pmferrnces were not n l l o w ~ d......n
j
a.000
Fmrn lomrqn source#
..... 7 O . m
F0rrq.n tarr E ~ ~ I imm
I J 19&3 --.-- --..-7.000
Aciual ~ n x e b l Income
t
50.m
Fmm Iortrgn jourcrs.
..,.--.--......... -. Z 5 . W
-A-

*

7.m11983
b a g - lax
1..
ftn* m i - 4

-...-..-

--=

0-IS

m
th.

credit i t u m r d [orward ta 1986.
(dl Exomplrr. The lotlowing c x a m p l n src

/

.

I a w m l

LM

w1

-----

1 z . m

Og

bmrn ngn 01

UZ0751

9. Non*Clererr*
Y.

mnr

wMU (hm ?
-5
L, 81

-........

_

Z ~ M

10 F-

crdu 1
wI

mh~
1%

5):

1a-p

ur utwu,.

9.m
-1c.lZS)
5875

"" Iwwn
ruu-U,

Forpiqn tax uedlt* fmm l%----.OO0

512666

.
"

pofaewm

w . ~ a .xi s = s w a

1

Dry)

~ W Wregula

h e non-benehcial umferenctt that h e d up
. Tthe
1 9 foreiqn
~
tax ,-dl\ 910.000,nr

S6ja].

50

mt *tore

Thus, under the simpl16tdcredtr reducuorr
method. L has SI2.2DG ol forr~gntax crcdlts

1gm

Credit reduction

k"

sb.aa

h'an-beothcral pmfertnceg that freed UP tSW
ITC x -15 = Credit mdumon of lQM l7-C

F:@td-u loreinn

.................................

4 . R W ratoh

ffced-up l o h 1 8 n t a r crcdrt rr c n m e d ovcr
!run 1980.Tht other 3 1 4 . 3 of ked-up
j~rrrgntax errdit 4s mmtd over f m m 19M.

investment tan credits Erom 1984 that
are carried forward to 1986 are S13.478

9.m

_.

ilne

"

fonvard from 1984:

U S

mrrus

1

repurgraXMacr
Exomph 2. Assume the same h c t s a s in
w'-'Sa'
f m m p l e 1 0 1 this para rrph [:j(sllv]. except
f"..9"
ur
:ha\ the lorel? tax creftrs r v a ~ l a b t elor use in
.........
1985 include S10.iW in credits carried
R-m*w
fonvdrd horn 1
W and R4.W tn credrtr
u w (kns A
carried forward fmm 79W. rather than S Z 3 . W 5)
carried forward From 19M. 7 l u s 9.m ni l b t 7. R-~,

-'led

(v) The reduction of the freed-up
c;eii~ under the simplified credir
reduction method is a s follows:
(.%) Fore~gnl a x credit carricd forward
5 0 m 1984:

.-

la 198.1

112)

fB.GXl that ere c~;tiedf o ~ r to
d t9&

W.B~BX.IS=%.I~B

'nvegment

,r,,-

U 8 . a

method:

Non+beneficial ~refere-n
nCx.lSfCre*t

s1 JQ.OOQ

Z. far mter-5

imrn 1984

bencfinal preierencef, end 520.000 01
m c . r s a n t lax L-tdl~ru m e d forward lrnm
1984. whlcn were freed up b> H3.1;8 o i nonbeneficla1 preference&.
l ; v ) n e epportronmcnt of I ~ credir
S
reduction * m o u n t 10 each C R I W Oof
~ frecdup credit
tsch faxrbla yeat from which
luc-, credttr are mmtd over i r determined r s
follows urwier the ex=! credit rtduction

(sm.mQW

{ m b r rrs
~~

--d
Ilp.ad) ,.,--

y t a r tr 58.0.458.
[iii) The credit d u c t ~ o nsmounl lor 1985 i n
ST.?-.
(he emgun1 o l rninrmum l a x
e l v ~ b u t a b l tto L's m n - b e n e k k l preferenccl.
Ths ambun t is allou red to reduce each
c a ~ c g ~ rofy irrcd-up credit and lo cnch year
Irom w h ~ c h,uck c r r d i l i s wr5td ovtr L + g
88.150 of freed-up ceho c o a s i ~ h01 51of !~)te!ght u ctedib carried farward from

iaward

m

1.T-e

T ~ t e freed.up
l
credll

=Creci~tmducuon a l l o u t e d to freed-up
invcrr1mcnt !a% credrt cartled foward

replet l a x II S71.7M. The nmonnt of L'B non.
bcntf~cialprtlcrenctr ior rbe 1W leaable

[ A ) Foreign tax credits c w i e d
horn 1981:

( r l l The - 7
reductioa ad,usmmt a d
mlnlmvn l a x h a b i i ~ rfor
rrAr
d e t e m m d a 3 fdlowa:

Cndtr nducyon

x

h . 4 - u p creditm lor 1985 a n 538.93

[%.m
rn~nurJL"t.7Wt The norrprtlemncr

('1

/

(0)Invesrnent tax uedru c a r d
I fomerd hr 1964:

---

19229

- --

s7.m
- -.

0
7 .m

TOW.-.-

57.B75

Fedcral Regisler

19260

/ Val.

:%19

5. 1991 / X ~ l e sa n d P,e+qciations

(dl

L;ndrr :bl
:F,t 1%
f o r e t ~ ntax credlll would SC rcductd by $433

1 1 . Son-benerrcrei preiemnces a:e
cpmsured a s re! I o r ~ h~n:he :able below.

cndrr

50.87 1 Tcesda., \!av

57.

1

-

:I. ~ ' o ~ - b e m f i c i preferences
al
eve
= r o u l e d a3 s e l forth ~n : h t ,able oeiok.

1

c o r ? u t a r ~ o n .non-btncflcial

:ax pretcrenccs

would h a v e been :axed
fol!sw3:
{ a ) W M foreign l u x credi~s
I 5 8 7 5 minus 511331

05

I

Ym-

.............- ...

..

......
....................
0 0 ....................

rate

..

--fa
-

.....

........-. .--.
....-.-

I$. Credit rtduct~onsrnouni (line
13 minus lint irJ
18. atduction oi iretd-up credits
under rht e x a a method (aubtw
tala 01 lint 11 multipllcd by .IS):
fa]1984 foreign lax cred~tl:
S29172r .'.5=5138
(b) 1% foreign tax w d r : ~ :
; S Z C a 3 r S38) x .:5=53.4S3
( c ) Toral rred:: :educuon -....-.-..-

-..---

rhough

lza

I,", 21

..-.-*.-._...........................

line J amount
~ g u l a r tax) before

8. Regular l a x on

(aetuel

arm

credits: - - . --.I.--,
' - S25.OCOx .lS=S3.750

3.891

?S.(XXIX.18=4.500
3.DR)X.N- 7.500

ZS.OWX.#=IO.~~

.-.-.--......

W.000x.QB=dtl.m
5. lnvtsmtnt lax credits ellowed
[limited rrnder secrron 38 ( c ) 10
S Z 5 . W D( net t a x liability. plus
85 prrcrnl of net tax tiebility

e n ~ e s aof SZ5.m
8. Regular t a x alter c.+diu [line

3.891

500.000

.
,
12.

-

,

x.494

57.0 15

4

I

3.MOx .l8= r.Yd

1

3 . m. 3~0 = 7 . m
3 . m x -40-1 o . m

/

(05.mx .51= -%.jiO
9 s . m .18=
~
43.~00
8 . Invtsunent lax c r e d ~ t rr i l o w t d
agaln9t non-pmfertnct regular

.........................................

after m d i t r [ILV

lPM

t r c d l l l would be reduced by s 3 3
( 5 8 7 5 ~rw$nd b c 1983 freed-up Iarergn tax
ued:.l
would be
ttducrd b y ~
3
laX

(~7.m
4%). ~

rubtorals):
42.7

39 7:

-

..............................

10)

IBW tnvc::ment

lax

w.ms x . l S = S B . 6 0 f

159.&77

65.53

19.650

]G.OI~

ved;r~:

(b) 198S inwcsmenr t a x ctrd~:s:

rn.000

{ c ] Total crtdit mductton .............
3e.o:a
17. Fixed-up cmd~tr a l t e r rcducnon leraurnlng t ! q t Corparat~on
X d ~ e sr1.4 e i e r ! the ~ ~ m p l i l r d

mcthod):

[JI

?g84 ~ n v e r ~ t n c:rdit
t
iS'14IU m n u s 9.601).................
(bl 1985 rnve#tmtnl cedi1
[Sl~.ooo~>~bC3.4;1].-

\:.R%
io.Sd9

rcguiar lax
7 m n u s lint

81 .........................................
P r e t d - u cred113
~
[ I r n c minu'

[el ,~f~'scelloneou~
,-ules-41)
In vestment C.-edit Arcoprure. It du:1n3
'lnc 51:
a n y taxable year propeny lo which
:9M~ ~ n v e~s t r n c~n l a * c:rbi: .......
w.m ' section 17 a p p l j e ~is disposed of. then
,
- 137.s37'
f o r purpo!eg al delemining any iccrease
in lax under s:clion 47 :or such yea:. :he
1985 1r.remrmc3t tax utdtt ....... Z ? O O . W
emounl ofa n y reduc[ion under his
sec11011~i !reed-up g e c ~ i o n38 credi!
,m,m which was earned h e year the
?ropefly wag piaced in . e m u i h a l l br
Total
Si92.W
=
= r e a r e d a r a c r e d ~ tthat was a!lowed ~n a
.

'90.000

!

1

(ltnt 10 subtoial min-r line 15

z

Credil

!

F 2 e d . u ~crtdils rlre: rccucunder ;ire ?%act m e b o d

non

( a ) 1964 Iorelgn t a x credlts
15874 minus 55301 ..............
(5) 1983 lorc~gn l a x credils
[3.mn ! n 2 3 U.4j.ll ............

I

Om'w

lax

Noa-prrierrnce

.

SWol8 X .lS=SZ9.411

ZS.PMX .lSaSY.T50

g.

.wlP Q ~ W.- Z ~ 2AfLU3..

reducrion amount (Ime
;J m ~ n u sl i n t 1 4 ) ...........................
1 8 Reduction 01 Irted-up medal3
under the exact me.hod (JU~ID-

mMX]x.4B=rlr.W

f3.e41

-

Benefinal prrference3 {lint

.15

15.

befom cr*&ta:

l ~ l l o - i c g:P:IO:

,,

minur bne 111
...-......,..---......13. Miamurn lax on lotel lax pmfemncls ({Iinc 2 minur h e greater 01 line e or S 1 O . W l X .IS].........
14. Minirnm tax on beneficial
preftrtncer [(line 12 minut i!ic
439.7~
ertster o f kne 6 or nO.ooDJ X

7. Rcplmr lax on lioc 1 amount
{non-prt[crenw rqlular l a x )

mduc~lonwould St dc1erm;lltd b y
muluplvrng ' h e anount of [rttd-up crtdit In
r h c h category and : a x ~ b i r!car O y the

1;.

Q . ~ , ( x K ~

3;?,537

IR

1 i X hag tjecttd to use the simplified

, e h c t r o n amount

....--.x.,....-+...-...s.-..

Z. f a x preienncea for lsa5 - ..........3. Taxable income [line 1 m ~ s u s

=-a::rducr:on method, &t srnounl at ETLCII

Id) under

F r d - m

..............

cmncrs ([line 2 minu. t h e $rearer of 11ne 6 0: n o - ~
x .151.....
l
14. htiilimum :ax on Srneficiat
preiemnce~ [[line 12 minus h e
greater
of
lint
%
or

lolai treed-up aerllt

~ a k c nia:o accouni ilrst.

I

------

?;DIE

19

...

--

IL Beneficial prelcrences (!inr
rnrnua line 11)
.....-.........
13. M~nimurnlax on rota1 tax pttf-

slo.oW]x .IS).-.-,

marginal r a l e [bezause tsmablr l n c n n t :n
or S1~405.00
i 9 no1 subject ! o !ht 5

eXCe6.

-A.

1

prtor :zxabJe year.