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20.1.9.4
(11-20-2007)
IRC Section 6038(c) – Reduction of Foreign Tax Credit
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IRC section 6038(c) provides for a reduction in foreign tax credit for a failure to furnish information with respect to a
controlled foreign corporation, or a controlled foreign partnership, that is required to be filed under IRC section 6038.
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The foreign tax credit reduction is limited to the greater of $10,000 or the income of the foreign entity for the applicable
accounting period.
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For reporting/filing requirements, see IRM 20.1.9.3.1. and IRM 20.1.9.3.2.
20.1.9.4.1
(11-20-2007)
Penalty Computation
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Application of IRC section 901. The amount of taxes paid or deemed paid is reduced by 10 percent.
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Application of IRC sections 902 and 960. The amount of taxes paid or deemed paid is reduced by 10 percent. The 10 percent reduction is not limited to the taxes paid
or deemed paid by the foreign corporation with respect to which there is a failure to file information but may apply to the
taxes paid or deemed paid by all foreign corporations controlled by that person.
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Additional Penalty for Continued Failure. If such failure continues for more than 90 days after the Service mails notice of such failure to the taxpayer, the amount
of the reduction is increased by an additional reduction of 5 percent for each 3-month period, or fraction thereof, during
which such failure continues after the expiration of the 90-day period.
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Limitation. The amount of the foreign tax reduction for each failure to furnish information with respect to a foreign corporation may
not exceed the greater of:
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$10,000, or
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The income of the foreign corporation for its annual accounting period with respect to which the failure occurs.
Note:
No taxes may be reduced more than once for the same failure. Also, the regulations have not been updated; where the IRC currently
refers to a foreign corporation’s "post 1986 undistributed income,"
the regulations still refer to "accumulated profits."
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Not every controlled foreign corporation carries a foreign tax credit to the U.S. income tax return. The reduction per IRC
section 6038(c) is rarely asserted.
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Coordination with IRC section 6038(b). The amount of the IRC section 6038(c) penalty of reducing foreign tax credit must be
reduced by the amount of the dollar penalty imposed by IRC section 6038(b).
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