# 26 CFR § 1.960-2 - Interrelation of section 902 and section 960 when dividends are paid by third-, second-, or first-tier corporation.

§ 1.960-2 Interrelation of section 902 and section 960 when dividends are paid by third-, second-, or first-tier corporation.

(a) Scope of this section. This section prescribes rules for the application of section 902 in a case where dividends are paid by a third-, second-, or first-tier corporation, as the case may be, from its earnings and profits for a taxable year when an amount attributable to such earnings and profits is included in the gross income of a domestic corporation under section 951, or when such earnings and profits are attributable to an amount excluded from the gross income of such foreign corporation under section 959(b) and § 1.959-2, with respect to the domestic corporation. In making determinations under this section, any portion of a distribution received from a first-tier corporation by the domestic corporation which is excluded from the domestic corporation's gross income under section 959(a) and § 1.959-1, or any portion of a distribution received from an immediately lower-tier corporation by the third-, second-, or first-tier corporation which is excluded from such foreign corporation's gross income under section 959(b) and § 1.959-2, shall be treated as a dividend for purposes of taking into account under section 902 any foreign income taxes paid by such third-, second-, or first-tier corporation which are not deemed paid by the domestic corporation under section 960(a)(1) and § 1.960-1.

(b) Application of section 902(b) to dividends received from an immediately lower-tier corporation. For purposes of paragraph (a) of this section and paragraph (c)(1)(i) of § 1.960-1, section 902(b) shall apply to all dividends received by the first- or second-tier corporation from the immediately lower-tier corporation other than dividends attributable to earnings and profits of such immediately lower-tier corporation in respect of which an amount is, or has been, included in the gross income of a domestic corporation under section 951 with respect to such immediately lower-tier corporation.

(c) Application of section 902(a) to dividends received by domestic corporation from first-tier corporation. For purposes of paragraph (a) of this section, section 902 (a) shall apply to all dividends received by the domestic corporation for its taxable year from the first-tier corporation other than dividends attributable to earnings and profits of such first-tier corporation in respect of which an amount is, or has been, included in the gross income of a domestic corporation under section 951 with respect to such first-tier corporation.

(d) Allocation of earnings and profits of a first- or second-tier corporation having income excluded under section 959(b) -

(1) First-tier corporations. If the first-tier corporation for its taxable year receives dividends from the second-tier corporation to which in accordance with paragraph (b) of this section 902(b)(1) or section 902(b)(2) applies and other dividends from the second-tier corporation to which such sections do not apply, then in applying section 902(a) pursuant to this section and in applying section 960(a)(1) pursuant to § 1.960-1(c)(1)(i), with respect to the foreign income taxes paid and deemed paid by the second-tier corporation which are deemed paid by the first-tier corporation for such taxable year under section 902(b)(1) -

(i) The earnings and profits of the first-tier corporation for such taxable year shall be considered not to include its earnings and profits which are attributable to the dividends to which section 902(b)(1) does not apply (in determining the domestic corporation's credit for the taxes paid by the second-tier corporation) or which are attributable to the dividends to which sections 902(b)(1) and 902(b)(2) do not apply (in determining the domestic corporation's credit for taxes deemed paid by the second-tier corporation) and

(ii) For the purposes of so applying section 902(a), distributions to the domestic corporation from such earnings and profits which are attributable to the dividends to which section 902(b)(1) does not apply (in determining the domestic corporation's credit for taxes paid by the second-tier corporation) or which are attributable to the dividends to which sections 902(b)(1) and 902(b)(2) do not apply (in determining the domestic corporation's credit for taxes deemed paid by the second-tier corporation) shall not be treated as a dividend.

(2) Second-tier corporations. If the second-tier corporation for its taxable year receives dividends from the third-tier corporation to which, in accordance with paragraph (b) of this section, section 902(b)(2) applies and other dividends from the third-tier corporation to which such section does not apply, then in applying section 902(b)(1) pursuant to this section, and in applying section 960(a)(1) pursuant to paragraph (c)(1)(i) of § 1.960-1, with respect to the foreign taxes deemed paid by the second-tier corporation for such taxable year under section 902(b)(2) -

(i) The earnings and profits of the second-tier corporation for such taxable year shall be considered not to include its earnings and profits which are attributable to such other dividends from the third-tier corporation, and

(ii) For the purposes of so applying section 902(b)(1), distributions to the first-tier corporation from such earnings and profits which are attributable to such other dividends from the third-tier corporation shall not be treated as a dividend.

(e) Separate determinations under sections 902(a), 902(b)(1), and 902(b)(2) in the case of a first-, second-, or third-tier corporation having income excluded under section 956(b). If in the case of a first-, second-, or third-tier corporation to which paragraph (b) or (c) of this section is applied -

(1) The earnings and profits of such foreign corporation for its taxable year consist of -

(i) Dividends received from an immediately lower-tier corporation which are attributable to amounts included in the gross income of a domestic corporation under section 951 with respect to the immediately lower- or lower-tier corporations, and

(ii) Other earnings and profits, and

(2) The effective rate of foreign income taxes paid or accrued by such foreign corporation on the dividends described in paragraph (e)(1)(i) of this section is higher or lower than the effective rate of foreign income taxes attributable to its earnings and profits described in paragraph (e)(1)(ii) of this section,

then, for purposes of applying paragraph (b) or (c) of this section to dividends paid by such foreign corporation to the domestic corporation or the first- or second-tier corporation, sections 902(a), 902(b)(1), and 902(b)(2) shall be applied separately to the portion of the dividend which is attributable to the earnings and profits described in paragraph (e)(1)(i) of this section and separately to the portion of the dividend which is attributable to the earnings and profits described in paragraph (e)(1)(ii) of this section. In making a separate determination with respect to the earnings and profits described in paragraph (e)(1)(i) or (e)(1)(ii) of this section, only the foreign income taxes paid or accrued (or, in the case of earnings and profits of a first- or second-tier corporation described in paragraph (e)(1)(ii) of this section, deemed to be paid) by such foreign corporation on the income attributable to such earnings and profits shall be taken into account. For purposes of applying this paragraph (e), no part of the foreign income taxes paid, accrued, or deemed to be paid which are attributable to the earnings and profits described in paragraph (e)(1)(ii) of this section shall be attributed to the dividend described in paragraph (e)(1)(i) of this section; and no part of the foreign income taxes paid or accrued on the dividend described in paragraph (e)(1)(i) of this section shall be attributed to the earnings and profits described in paragraph (e)(1)(ii) of this section. Furthermore, the effective rate of foreign income taxes paid or accrued shall be determined consistently with the principles of paragraphs (b)(3)(iv) and (viii) and (c) of § 1.954-1. Thus, for example, the effective rate of foreign income taxes on dividends received by such foreign corporation shall be determined by taking into account any intercorporate dividends received deduction allowed to such corporation for such dividends.

(f) Illustrations. The application of this section may be illustrated by the following examples. In all of the examples other than examples 6, 7, 9 and 10, it is assumed that the effective rate of foreign income taxes paid or accrued by the first- or second-tier corporation, as the case may be, in respect to dividends received from the immediately lower-tier corporation, is the same as the effective rate of foreign income taxes paid or accrued by the first- or second-tier corporation with respect to its other income:

Example 1.
Domestic corporation N owns all the one class of stock of controlled foreign corporation A, which owns all the one class of stock of controlled foreign corporation B. All such corporations use the calendar year as the taxable year. For 1978, N Corporation is required under section 951 to include $50 in gross income attributable to the earnings and profits of A Corporation for such year, but is not required to include any amount in gross income under section 951 attributable to the earnings and profits of B Corporation. For such year, B Corporation distributes a dividend of$45, but A Corporation does not make any distributions. The foreign income taxes deemed paid by N Corporation for 1978 under section 960(a)(1), after applying section 902(b)(1) for such year of A Corporation, are determined as follows upon the basis of the facts assumed:
B Corporation (second-tier corporation): Pretax earnings and profits $100.00 40.00 60.00$45.00 40.00 30.00 $45.00 100.00 145.00 29.00 116.00 59.00 50.00 0 25.43 Example 2. Domestic corporation N owns all the one class of stock of controlled foreign corporation A, which owns all the one class of stock of controlled foreign corporation B. All such corporations use the calendar year as the taxable year. For 1978, N Corporation is required under section 951 to include in gross income$150 attributable to the earnings and profits of B Corporation for such year, which B Corporation distributes during such year. Corporation N is not required for 1978 to include any amount in gross income under section 951 attributable to the earnings and profits of A Corporation, but A Corporation distributes for such year $135 from its earnings and profits attributable to B Corporation's dividend. The foreign income taxes deemed paid by N Corporation for 1978 under section 960(a)(1)(C) and section 902(a) are determined as follows upon the basis of the facts assumed: B Corporation (second-tier corporation):$250.00 50.00 200.00 150.00 150.00 50.00 $150.00 200.00 350.00 35.00 315.00 135.00 35.00 37.50 15.00 52.50 Example 3. Domestic corporation N owns all the one class of stock of controlled foreign corporation A, which owns all the one class of stock of controlled foreign corporation B. All such corporations use the calendar year as the taxable year. For 1978, N Corporation is required under section 951 to include$180 in gross income attributable to the earnings and profits of A Corporation for such year, but is not required to include any amount in gross income under section 951 attributable to the earnings and profits of B Corporation. Corporation B distributes from its earnings and profits for 1978 a dividend of $50. For 1978, A Corporation distributes$180 from its earnings and profits attributable to the amount required under section 951 to be included in N Corporation's gross income for such year with respect to A Corporation and $20 from its other earnings and profits. The foreign income taxes deemed paid by N Corporation for 1978 under section 960(a)(1) and section 902(a) are determined as follows upon the basis of the facts assumed: B Corporation (second-tier corporation):$100.00 40.00 60.00 50.00 40.00 33.33 $50.00 200.00 250.00 25.00 225.00 58.33 180.00 180.00 20.00$200.00 46.66 5.18 51.84
Example 4.
Domestic corporation N owns all the one class of stock of controlled foreign corporation A, which owns all the one class of stock of controlled foreign corporation B. All such corporations use the calendar year as the taxable year. For 1978, N Corporation is required under section 951 to include in gross income $150 attributable to the earnings and profits of B Corporation for such year and$22.50 attributable to the earnings and profits of A Corporation for such year. For 1978, B Corporation distributes $175, consisting of$150 from its earnings and profits attributable to amounts required under section 951 to be included in N Corporation's gross income with respect to B Corporation and $25 from its other earnings and profits. Corporation A does not distribute any dividends for 1978. The foreign income taxes deemed paid by N Corporation for 1978 under section 960(a)(1) are determined as follows upon the basis of the facts assumed: B Corporation (second-tier corporation): Pretax earnings and profits$250.00 50.00 200.00 150.00 $150.00 25.00 175.00 50.50 6.25 175.00 17.50 157.50 22.50 22.50 0 2.50 6.25 8.75 37.50 46.20 Example 5. Domestic corporation N owns all the one class of stock of controlled foreign corporation A, which owns all the one class of stock of controlled foreign corporation B. All such corporations use the calendar year as the taxable year. For 1978, N Corporation is required under section 951 to include in gross income$150 attributable to the earnings and profits of B Corporation for such year and $22.50 attributable to the earnings and profits of A Corporation for such year. For 1978, B Corporation distributes$175, consisting of $150 from its earnings and profits attributable to amounts required under section 951 to be included in N Corporation's gross income with respect to B Corporation and$25 from its other earnings and profits. For 1978, A Corporation distributes $225, consisting of$135 from its earnings and profits attributable to the amount required under section 951 to be included in N Corporation's gross, income with respect to B Corporation, $22.50 from its earnings and profits attributable to the amount required under section 951 to be included in N Corporation's gross income with respect to A Corporation, and$67.50 from its other earnings and profits. The foreign income taxes deemed paid by N Corporation for 1978 under section 960(a)(1) and section 902(a)(1) are determined as follows upon the basis of the facts assumed:
B Corporation (second-tier corporation): Pretax earnings and profits $250.00 50.00 200.00 150.00$150.00 $25.00$175.00 50.00 6.25 175.00 100.00 275.00 27.50 247.50 112.50 22.50 22.50 202.50 225.00 37.50 2.50 1.25 3.75 41.25 22.50 3.75 26.52 67.05
Example 6.
Domestic corporation N owns all the one class of stock of controlled foreign corporation A, which owns all the one class of stock of controlled foreign corporation B. All such corporations use the calendar year as the taxable year. A and B corporations are organized under the laws of foreign country X. All of B corporation's assets used in a trade or business are located in country X. Country X imposes an income tax of 20 percent on B corporation's income. For 1978, N Corporation is required under section 951 to include in gross income $100 attributable to the earnings and profits of B Corporation for such year. For 1978, B Corporation distributes$150, consisting of $100 from its earnings and profits attributable to the amount required under section 951 to be included in N Corporation's gross income with respect to B Corporation and$50 from its other earnings and profits. Country X imposes an income tax of 10 percent on A Corporation's income but exempts from tax dividends received from B Corporation. N is not required to include any amount in gross income under section 951 for 1978 attributable to the earnings and profits of A Corporation for such year. For 1978, A Corporation distributes $175, consisting of$100 from its earnings and profits attributable to the amount required under section 951 to be included in N Corporation's gross income with respect to B Corporation, and $75 from its other earnings and profits. The foreign income taxes deemed paid by N Corporation for 1978 under section 960(a)(1) and section 902(a) are determined as follows on the basis of the facts assumed: B Corporation (2d-tier corporation): Pretax earnings and profits$200.00 40.00 160.00 100.00 $100.00 50.00 150.00 12.50 150.00 100.00 250.00 None 10.00 10.00 100.00 50.00 90.00 140.00 240.00 140.00 None None$175.00 $175.00 25.00 None 5.36 6.70 12.06 37.06 Example 7. Domestic corporation N owns all the one class of stock of controlled foreign corporation A, which owns all the one class of stock of controlled foreign corporation B. All such corporations use the calendar year as the taxable year. For 1978, N Corporation is required under section 951 to include in gross income$150 attributable to the earnings and profits of B Corporation for such year and $47.50 attributable to the earnings and profits of A Corporation for such year. For 1978, B Corporation distributes$200, consisting of $150 from its earnings and profits attributable to the amount required under section 951 to be included in N Corporation's gross income with respect to B Corporation and$50 from its other earnings and profits. The country under the laws of which A Corporation is incorporated imposes an income tax of 5 percent on dividends received from a subsidiary corporation and 20 percent on other income. For 1978, A Corporation distributes $100 from its earnings and profits to N Corporation, such amount being attributable under paragraph (e) of § 1.959-3 to the amount required under section 951 to be included in N Corporation's gross income with respect to B Corporation. The foreign income taxes deemed paid by N Corporation for 1978 under section 960(a)(1) and section 902(a) are determined as follows on the basis of the facts assumed: B Corporation (2d-tier corporation): Pretax earnings and profits$250.00 150.00 200.00 150.00 $150.00 50.00 200.00 12.50 200.00 100.00 300.00 7.50 2.50 20.00 22.50 30.00 142.50 47.50 80.00 127.50 270.00 127.50 47.50 None$100.00 $100.00 37.50 8.38 4.66 13.04 50.54 5.26 55.80 Example 8. Domestic corporation N owns all the one class of stock of controlled foreign corporation A, which owns all the one class of stock of controlled foreign corporation B, which owns all the one class of stock of controlled foreign corporation C. All such corporations use the calendar year as the taxable year. For 1978, N Corporation is required under section 951 to include$50 attributable to the earnings and profits of C Corporation and $15 attributable to the earnings and profits of B Corporation in its gross income. N Corporation is not required to include any amount in its gross income with respect to A Corporation under section 951 in 1978. For such year, C Corporation distributes$75 to B Corporation. B Corporation in turn distributes $60 of its earnings and profits to A Corporation. A Corporation has no other earnings and profits for 1978 and distributes$45 of its earnings and profits to N Corporation. The foreign income taxes deemed paid by N Corporation under section 960(a)(1) and section 902(a) are determined as follows on the basis of the facts assumed:

C Corporation (third-tier corporation):

Pretax earnings and profits $150.00 45.00 105.00 50.00 75.00 50.00$25.00

$\frac{\begin{array}{c}\text{Dividend to B Corporation less portion}\\ \text{of dividend from earnings included in}\\ \text{N Corporation's gross income under}\\ \text{section}\text{951}\text{with respect to C Corporation}\end{array}}{\text{Earnings and profits of C Corporation}}×\text{Taxes paid by C Corporation}$

($25/$105 × $45)$10.71
B Corporation (second-tier corporation):
Pretax earnings and profits: $75.00 225.00$300.00 120.00 180.00 30.00 150.00 150.00 15.00 60.00 30.00 15.00 15.00

$\frac{\begin{array}{c}\text{Dividend to A Corporation less portion of divi -}\\ \text{dend from earnings included in N Corporation's}\\ \text{gross income under section 951}\\ \text{with respect to B Corporation}\end{array}}{\text{Earnings and profits of B Corporation}}×\text{Taxes paid by B Corporation}$

($45/$180 × 120) $30.00 $\frac{\begin{array}{c}\text{Dividend to A Corporation less portion}\\ \text{of dividend from earnings included in}\\ \text{N Corporation's gross income under}\\ \text{section 951 with respect to}\\ \text{B Corporation and C Corporation}\end{array}}{\begin{array}{c}\text{Earnings and profits of B Corporation}\\ \text{less earnings and profits attributable to}\\ \text{amounts included in N Corporation's gross}\\ \text{income with respect to C Corporation}\end{array}}\phantom{\rule{2mm}{0ex}}×\phantom{\rule{2mm}{0ex}}\begin{array}{c}\text{Taxes paid by C Corporation}\\ \text{which are deemed paid by}\\ \text{B Corporation}\end{array}$  ($15/$150 ×$10.71) 1.07
A Corporation (first-tier corporation):
Pretax earnings and profits: $60.00 0$60.00 6.00 54.00 27.00 13.50 13.50 40.50 13.50 45.00 $27.00 13.50 0 4.50 N Corporation (domestic corporation): $\frac{\begin{array}{c}\text{Amount included in N Corporation's gross income}\\ \text{under section 951 with respect to C Corporation}\end{array}}{\text{Earnings and profits of C Corporation}}×\text{Taxes paid by C Corporation}$ ($50/$105 ×$45.00) $21.43 11.07 Taxes paid by B Corporation: $\frac{\begin{array}{c}\text{Amount included in N Corporation's gross income}\\ \text{under section 951 with respect to B Corporation}\end{array}}{\text{Earnings and profits of B Corporation}}×\text{Taxes paid by B Corporation}$ ($15/$180 ×$120) $10.00 Taxes deemed paid by B Corporation in accordance with § 1.960-2(d)(2)(i): $\frac{\begin{array}{c}\text{Amount included in N Corporation's gross income}\\ \text{under section 951 with respect to B Corporation}\end{array}}{\begin{array}{c}\text{Earnings and profits of B Corporation less earnings}\\ \text{and profits attributable to amounts included}\\ \text{in N Corporation's gross income}\\ \text{with respect to C Corporation}\end{array}}\phantom{\rule{2mm}{0ex}}×\phantom{\rule{2mm}{0ex}}\begin{array}{c}\text{Taxes paid by C Corporation}\\ \text{which are deemed paid by}\\ \text{B Corporation}\end{array}$ ($15/$150 ×$10.71) $1.07$32.50
Taxes paid by A Corporation in accordance with § 1.960-2(c):

$\frac{\begin{array}{c}\text{Dividend to N Corporation less portion}\\ \text{of dividend from earnings included in}\\ \text{N Corporation's gross income under}\\ \text{section 951 with respect to A Corporation}\end{array}}{\text{Earnings and profits of A Corporation}}×\text{Taxes paid by A Corporation}$

($45/$54 × $6)$5.00

$\frac{\begin{array}{c}\text{Dividend to N Corporation less portion of dividend}\\ \text{from earnings included}\\ \text{in N Corporation's gross income}\\ \text{under section 951 with respect to}\\ \text{A and B Corporations}\end{array}}{\begin{array}{c}\text{Earnings and profits of A Corporation}\\ \text{less earnings and profits attributable to}\\ \text{amounts included in N Corporation's}\\ \text{gross income under section 951 with}\\ \text{respect to B Corporation}\end{array}}×\begin{array}{c}\text{Taxes paid by B Corporation which}\\ \text{are deemed payable by A Corporation}\end{array}$

 ($31.50/$40.50 × $30.00) 23.33 Taxes (of C Corporation) deemed paid by B Corporation deemed paid by A Corporation in accordance with §§ 1.960-2(c) and 1.960-2(d)(1)(i) and (ii): $\frac{\begin{array}{c}\text{Dividend to N Corporation less portion}\\ \text{of dividend from earnings included in N}\\ \text{Corporation's gross income under section}\\ \text{951 with respect to A, B, and C Corporations}\end{array}}{\begin{array}{c}\text{Earnings and profits of A Corporation less}\\ \text{earnings and profits attributable to amounts}\\ \text{included in N Corporation's gross income}\\ \text{under section 951 with respect to B}\\ \text{and C Corporations}\end{array}}×\begin{array}{c}\text{Taxes deemed paid by B}\\ \text{Corporation which are deemed}\\ \text{paid by A Corporation}\end{array}$ ($4.50/$13.50 ×$1.07) .36 $28.69$61.19
Example 9.
Domestic corporation N owns all the one class of stock of controlled foreign corporation A, which owns all the one class of stock of controlled foreign corporation B, which owns all the one class of stock of controlled foreign corporation C. A and B Corporations are organized under the laws of foreign country X. C Corporation is organized under the laws of foreign country Y. All of B Corporation's assets used in a trade or business are located in country X. All such corporations use the calendar year as the taxable year. For 1978, N Corporation is required to include in its gross income under section 951, $50 attributable to the earnings and profits of C Corporation and$100 attributable to the earnings and profits of B Corporation. N Corporation is not required to include any amount in its gross income under section 951 with respect to A Corporation. Country X imposes an income tax of 10 percent on dividends from foreign subsidiaries, 20 percent on dividends from domestic subsidiaries, and 40 percent on other earnings and profits. For 1978, C Corporation distributes $75 to B Corporation. For such year, B Corporation distributes$175 of its earnings and profits to A Corporation. A Corporation has no other earnings and profits for 1978 and distributes $130 of its earnings and profits to N Corporation. The foreign income taxes deemed paid by N Corporation under sections 960(a)(1) and 902(a) are determined as follows on the basis of the facts assumed: C Corporation (third-tier corporation): Pretax earnings and profits$150.00 45.00 105.00 50.00 75.00 $50.00 25.00 10.71 B Corporation (second-tier corporation): Pretax earnings and profits:$75.00 225.00 $300.00 97.50$5.00 2.50 90.00 202.50 45.00 $22.50 135.00$157.50 100.00 175.00 $45.00 100.00 30.00 Tax paid by B Corporation on earnings previously taxed with respect to C Corporation or lower-tiers which is deemed paid by A Corporation: $\frac{\begin{array}{c}\text{Portion of dividend to A Corporation}\\ \text{from earnings included in N Corporation's}\\ \text{gross income under section}\phantom{\rule{.2em}{0ex}}\text{951}\phantom{\rule{.2em}{0ex}}\text{with}\\ \text{respect to C Corporation or lower-tiers}\end{array}}{\begin{array}{c}\text{Earnings and profits of B Corporation}\\ \text{included in N Corporation's}\\ \text{gross income under section}\phantom{\rule{.2em}{0ex}}\text{951}\phantom{\rule{.2em}{0ex}}\text{with respect}\\ \text{to C Corporation or lower-tiers}\end{array}}×\begin{array}{c}\text{Taxes deemed paid by B Corporation on}\\ \text{dividend received by B Corporation}\\ \text{from earnings included in N Corpo-}\\ \text{ration's gross income with respect}\\ \text{to C Corporation or lower-tiers}\end{array}$ ($45/$45 ×$5) $5.00 Tax paid by B Corporation on earnings not previously taxed with respect to C Corporation or lower-tiers which is deemed paid by A Corporation: $\frac{\begin{array}{c}\text{Portion of dividend to A Corporation}\\ \text{which is from earnings not included}\\ \text{in N Corporation's gross income}\\ \text{under section}\phantom{\rule{.2em}{0ex}}\text{951}\phantom{\rule{.2em}{0ex}}\text{with respect}\\ \text{to B Corporation or lower-tiers}\end{array}}{\begin{array}{c}\text{Earnings and profits of B Corporation}\\ \text{not included in N Corporation's gross}\\ \text{income under section}\phantom{\rule{.2em}{0ex}}\text{951}\phantom{\rule{.2em}{0ex}}\text{with respect}\\ \text{to C Corporation or lower-tiers}\end{array}}×\begin{array}{c}\text{Tax paid by B Corporation on}\\ \text{earnings not included in N}\\ \text{Corporation's gross income with}\\ \text{respect to C Corporation or lower-tiers}\end{array}$ ($30/157.50 × $92.50)$17.62 2.04
A Corporation (first-tier corporation):
Pretax earnings and profits: $175.00 0$175.00 35.00 140.00 $36.00 80.00 24.00$60.00 24.00 None $130.00$36.00 80.00 0 14.00
N Corporation (domestic corporation):
Foreign income taxes deemed paid by N Corporation under section 960(a)(1) and § 1.960-1(c) with respect to C Corporation ($50/$105 × $45)$21.43 65.53
Taxes paid by B corporation (for formula see § 1.960-2(g)(2)(ii) (A)(2)):

$\frac{\begin{array}{c}\text{Amount included in N Corporation's}\\ \text{gross income under section}\phantom{\rule{.2em}{0ex}}\text{951}\phantom{\rule{.2em}{0ex}}\text{with}\\ \text{respect to B Corporation}\end{array}}{\begin{array}{c}\text{Earnings and profits of B Corporation}\\ \text{not included in N Corporation's gross}\\ \text{income under section}\phantom{\rule{.2em}{0ex}}\text{951}\phantom{\rule{.2em}{0ex}}\text{with respect}\\ \text{to C Corporation or lower-tiers}\end{array}}×\begin{array}{c}\text{Tax paid by B Corporation on earnings}\\ \text{not included in N Corporation's gross}\\ \text{income with respect to C Corporation}\\ \text{or lower-tiers}\end{array}$

($100/$157.50 × $92.50)$58.73 6.80 $86.96$32.50

$\frac{\begin{array}{c}\text{Portion of dividend to N Corporation which}\\ \text{is from earnings included in N Corporation's}\\ \text{gross income under section 951 with respect}\\ \text{to C Corporation or lower tiers}\end{array}}{\begin{array}{c}\text{Earnings and profits of A Corporation}\\ \text{included in N Corporation's gross}\\ \text{income under section 951 with}\\ \text{respect to C Corporation or lower tiers}\end{array}}×\begin{array}{c}\text{Tax paid by B Corporation on}\\ \text{earnings previously taxed with}\\ \text{respect to C Corporation or}\\ \text{lower tiers which is deemed}\\ \text{paid by A Corporation}\end{array}$

($36/$36 × $5)$5.00

$\frac{\begin{array}{c}\text{Portion of dividend to N Corporation}\\ \text{which is from earnings not included in}\\ \text{N Corporation's gross income under}\\ \text{section 951 with respect to}\\ \text{A Corporation or lower tiers}\end{array}}{\begin{array}{c}\text{Earnings and profits of A Corporation}\\ \text{not included in N Corporation's gross}\\ \text{income under section 951 with respect}\\ \text{to B Corporation or lower tiers}\end{array}}×\begin{array}{c}\text{Tax paid by B Corporation on earnings}\\ \text{not previously taxed with respect to}\\ \text{C Corporation or lower tiers which is}\\ \text{deemed paid by A Corporation}\end{array}$

($14/$24 × $17.62)$10.28 1.19 $48.97 135.93 Example 10. The facts are the same as in example 9 except that A Corporation has other earnings and profits of$200 in 1978 and country X imposes a tax of 50 percent on A Corporation's other earnings and profits. A Corporation distributes $200 of its earnings and profits to N Corporation in 1978. The foreign income taxes paid by N Corporation under sections 960 (a)(1) and 902 (a) are determined as follows on the basis of the facts assumed: C Corporation (third-tier corporation): Pretax earnings and profits$150.00 45.00 105.00 $50.00 75.00 50.00 25.00 10.71 B Corporation (second-tier corporation): Pretax earnings and profits:$75.00 225.00 $300.00$97.50 $5.00 2.50 90.00$202.50 $45.00 22.50 135.00 157.50 100.00 175.00$45.00 100.00 30.00 5.00 17.62 2.04
A Corporation (first-tier corporation):
Pretax earnings and profits: $175.00 200.00$375.00 135.00 9.00 20.00 6.00 100.00 240.00 36.00 80.00 124.00 None 160.00 124.00 200.00 $36.00 80.00 0$84.00
N Corporation (domestic corporation).
Foreign income taxes deemed paid by N Corporation under section 960(a)(1) and § 1.960-1(c) with respect to C Corporation ($50/$150 × $45)$21.43 65.53 $58.73 6.80 86.96 Tax paid by A Corporation on earnings previously taxed with respect to B Corporation or lower tiers which is deemed paid by N Corporation: $\frac{\begin{array}{c}\text{Portion of dividend to N Corpora-}\\ \text{tion which is from earnings included}\\ \text{in N Corporation's gross income}\\ \text{under section 951 with respect to B}\\ \text{Corporation or lower tiers}\end{array}}{\begin{array}{c}\text{Earnings and profits of A Corporation}\\ \text{not included in N Corporation's gross}\\ \text{income under section 951 with respect}\\ \text{to B Corporation or lower tiers}\end{array}}×\begin{array}{c}\text{Tax paid by A Corporation on dividends}\\ \text{received by A Corporation from}\\ \text{earnings included in N Corpora-}\\ \text{tion's gross income with respect to}\\ \text{B Corporation or lower tiers}\end{array}$ ($116/$116 ×$29) $29.00 $\frac{\begin{array}{c}\text{Portion of dividend to N Corporation}\\ \text{which is from earnings not included}\\ \text{in N Corporation's gross income}\\ \text{under section 951 with respect to A}\\ \text{Corporation or lower tiers}\end{array}}{\begin{array}{c}\text{Earnings and profits of A Corporation}\\ \text{not included in N Corporation's gross}\\ \text{income under section 951 with respect}\\ \text{to B Corporation or lower tiers}\end{array}}×\begin{array}{c}\text{Tax paid by A Corporation on earnings}\\ \text{not included in N Corporation's gross}\\ \text{income with respect to B Corporation}\\ \text{or lower tiers}\end{array}$ ($84/$124 ×$106) $71.81 5.00 11.94 1.38$119.13 206.09

(g) Formulas. This paragraph contains formulas for determining a domestic corporation's section 902 and 960 credits when amounts distributed through a chain of ownership have been included in whole or in part in the gross income of a domestic corporation under section 951 with respect to first-, second-, third-, or lower-tier corporations.

(1) Determination of the section 902 credit -

(i) Section 902(b)(2) credit. If the second-tier corporation receives a dividend from a third-tier corporation attributable in whole or in part to amounts included in a domestic corporation's gross income under section 951 with respect to the third- or lower-tier corporations, the second-tier corporation's credit for taxes paid by the third-tier corporation under section 902(b)(2) is determined as follows:

(A) If the effective rate of tax on dividends received by the third-tier corporation is the same as the effective rate of tax on its other earnings and profits -

$\frac{\begin{array}{c}\text{Dividend to second-tier corporation less portion of}\\ \text{dividend from earnings included in domestic}\\ \text{corporation's gross income under section 951}\\ \text{with respect to third-tier corporation}\end{array}}{\begin{array}{c}\text{Earnings and profits of third-tier corporation}\end{array}}×\begin{array}{c}\text{Tax paid by}\\ \text{third-tier corporation}\end{array}$

(B) If the effective rate of tax on dividends received by the third-tier corporation is higher or lower than the effective rate of tax on its other earnings and profits -

(1) Credit for tax paid by third-tier corporation on earnings included in domestic corporation's gross income with respect to fourth- or lower-tier corporations -

$\frac{\begin{array}{c}\text{Portion of dividends to second-tier corporation which is}\\ \text{from earnings included in domestic corporation's gross}\\ \text{income under section 951 with respect to fourth- or}\\ \text{lower tier corporations}\end{array}}{\begin{array}{c}\text{Earnings and profits of third-tier corporation included in}\\ \text{domestic corporation's gross income under section 951}\\ \text{with respect to fourth- or lower-tier corporations}\end{array}}×\begin{array}{c}\text{Tax paid by third-tier}\\ \text{corporation on dividend}\\ \text{received by third-tier}\\ \text{corporation from}\\ \text{earnings included in}\\ \text{domestic corporation's}\\ \text{gross income with}\\ \text{respect to fourth- or}\\ \text{lower-tier corporations}\end{array}$

(2) Credit for tax paid by third-tier corporation on earnings not included in domestic corporation's gross income with respect to fourth- or lower-tier corporations -

$\frac{\begin{array}{c}\text{Portion of dividend to second-tier corporation}\\ \text{which is from earnings not included in domestic}\\ \text{corporation's gross income under section 951}\\ \text{with respect to third- or lower-tier corporations}\end{array}}{\begin{array}{c}\text{Earnings and profits of third-tier corporation}\\ \text{included in domestic corporation's gross}\\ \text{income under section 951 with respect}\\ \text{to fourth- or lower-tier corporations}\end{array}}×\begin{array}{c}\text{Tax paid by third-tier}\\ \text{corporation on earnings}\\ \text{not included in domestic}\\ \text{corporation's gross in-}\\ \text{come with respect to}\\ \text{fourth- or lower-tier}\\ \text{corporations}\end{array}$

(ii) Section 902(b)(1) credit. If the first-tier corporation receives a dividend from a second-tier corporation attributable in a whole or in part to amounts included in a domestic corporation's gross income under section 951 with respect to the second- or lower-tier corporations, the first-tier corporation's credit for taxes paid and deemed paid by the second-tier corporation under section 902(b)(1) is determined as follows:

(A) Taxes paid by the second-tier corporation which are deemed paid by the first-tier corporation -

(1) If the effective rate of tax on dividends received by the second-tier corporation is the same as the effective rate of tax on its other earnings and profits -

$\frac{\begin{array}{c}\text{Dividend to first-tier corporation less portion of}\\ \text{dividend from earnings included in domestic}\\ \text{corporation's gross income under section 951}\\ \text{with respect to second-tier corporation}\end{array}}{\begin{array}{c}\text{Earnings and profits of second-tier corporation}\end{array}}×\begin{array}{c}\text{Tax paid by second-tier}\\ \text{corporation}\end{array}$

(2) If the effective rate of tax on dividends received by the second-tier corporation is higher or lower than the effective rate of tax on its other earnings and profits -

(i) Credit for tax paid by second-tier corporation on earnings previously taxed with respect to third- or lower-tier corporations -

$\frac{\begin{array}{c}\text{Portion of dividend to first-tier corporation which is}\\ \text{from earnings included in domestic corporation's}\\ \text{gross income under section 951 with respect to}\\ \text{third- or lower-tier corporations}\end{array}}{\begin{array}{c}\text{Earnings and profits of second-tier corporation}\\ \text{included in domestic corporation's gross income}\\ \text{under section 951 with respect to third- or lower-}\\ \text{tier corporations}\end{array}}×\begin{array}{c}\text{Tax paid by second-tier}\\ \text{corporation on dividend}\\ \text{received by second-tier}\\ \text{corporation from earn-}\\ \text{ings included in domestic}\\ \text{corporation's gross income}\\ \text{with respect to third- or}\\ \text{lower-tier corporations}\end{array}$

(ii) Credit for tax paid by second-tier corporation on earnings not previously taxed with respect to third- or lower-tier corporations -

$\frac{\begin{array}{c}\text{Portion of dividend to first-tier corpora-}\\ \text{tion which is from earnings not included}\\ \text{in domestic corporation's gross income}\\ \text{under section 951 with respect to}\\ \text{second- or lower-tier corporations}\end{array}}{\begin{array}{c}\text{Earnings and profits of second-tier cor-}\\ \text{poration not included in domestic cor-}\\ \text{poration's fross income under section}\\ \text{951 with respect to third- or lower-tier}\\ \text{corporations}\end{array}}×\begin{array}{c}\text{Tax paid by second-tier corporation on}\\ \text{earnings not included in domestic}\\ \text{corporation's gross income with}\\ \text{respect to third- or lower-tier}\\ \text{corporations}\end{array}$

(B) Taxes deemed paid by the second-tier corporation which are deemed paid by the first-tier corporation -

(1) If the effective rate of tax dividends received by the third-tier corporation is the same as the effective rate of tax on its other earnings and profits -

$\frac{\begin{array}{c}\text{Dividend to first-tier corporation less}\\ \text{portion of dividend from earnings included}\\ \text{in domestic corporation's gross income}\\ \text{under section 951 with respect to}\\ \text{second- and third-tier corporations}\end{array}}{\begin{array}{c}\text{Earnings and profits of second-tier corporation}\\ \text{less earnings and profits attributable to amounts}\\ \text{included in domestic corporation's gross}\\ \text{income under section 951}\\ \text{with respect to third-tier corporation}\end{array}}×\begin{array}{c}\text{Tax paid by third-tier}\\ \text{corporation which are deemed}\\ \text{paid by second-tier corporation}\end{array}$

(2) If the effective rate of tax on dividends received by the third-tier corporation is higher or lower than the effective rate of tax on its other earnings and profits -

(i) Credit for tax paid by third-tier corporation on earnings previously taxed with respect to fourth- or lower-tier corporations -

$\frac{\begin{array}{c}\text{Portion of dividend to first-tier corporation}\\ \text{which is from earnings included in domestic}\\ \text{corporation's gross income under}\\ \text{section 951 with respect to}\\ \text{fourth- or lower-tier corporations}\end{array}}{\begin{array}{c}\text{Earnings and profits of second-tier cor-}\\ \text{porations included in domestic corporation's}\\ \text{gross income under section 951 with respect}\\ \text{to fourth- or lower-tier corporations}\end{array}}×\begin{array}{c}\text{Tax paid by third-tier corporation}\\ \text{on earnings previously taxed with}\\ \text{respect to fourth- or lower-tier}\\ \text{corporations which is deemed paid}\\ \text{by second-tier corporation}\end{array}$

(ii) Credit for tax paid by third-tier corporation on earnings not previously taxed with respect to fourth- or lower-tier corporations -

$\frac{\begin{array}{c}\text{Portion of dividend to first-tier corporation}\\ \text{which is from earnings included in}\\ \text{domestic corporation's gross income}\\ \text{under section 951 with respect to}\\ \text{second- or lower-tier corporations}\end{array}}{\begin{array}{c}\text{Earnings and profits of second-tier cor-}\\ \text{poration not included in domestic}\\ \text{corporation's gross income under}\\ \text{section 951 with respect to third-}\\ \text{or lower-tier corporations}\end{array}}×\begin{array}{c}\text{Tax paid by third-tier corporation}\\ \text{on earnings not previously taxed}\\ \text{with respect to fourth- or lower-}\\ \text{tier corporations which is}\\ \text{deemed paid by second-tier}\\ \text{corporation}\end{array}$

(iii) Section 902(a) credit. If the domestic corporation receives a dividend from a first-tier corporation attributable in whole or in part to amounts included in a domestic corporation's gross income under section 951 with respect to the first- or lower-tier corporations, the domestic corporation's credit for taxes paid and deemed paid by the first-tier corporation under section 902(a) is determined as follows:

(A) Taxes paid by the first-tier corporation which are deemed paid by domestic corporation -

(1) If the effective rate of tax on dividends received by the first-tier corporation is the same as the effective rate of tax on its other earnings and profits -

$\frac{\begin{array}{c}\text{Dividend to domestic corporation less}\\ \text{portion of dividend from earnings}\\ \text{included in domestic corporation's}\\ \text{gross income under section 951 with}\\ \text{respect to first-tier corporation}\end{array}}{\begin{array}{c}\text{Earnings and profits of first-tier}\\ \text{corporation}\end{array}}×\begin{array}{c}\text{Tax paid by first-tier corporation}\end{array}$

(2) If the effective rate of tax on dividends received by the first-tier corporation is higher or lower than the effective rate of tax on its other earnings and profits -

(i) Credit for tax paid by first-tier corporation on earnings previously taxed with respect to second- or lower-tier corporations -

$\frac{\begin{array}{c}\text{Portion of dividend to domestic copora-}\\ \text{tion which is from earnings included}\\ \text{in domestic corporation's gross income}\\ \text{under section 951 with respect to}\\ \text{second- or lower-tier corporations}\end{array}}{\begin{array}{c}\text{Earnings and profits of first-tier corpora-}\\ \text{tion included in domestic corporation's}\\ \text{gross income under section 951 with}\\ \text{respect to second or lower-tier}\\ \text{corporations}\end{array}}×\begin{array}{c}\text{Tax paid by first-tier corporation on}\\ \text{dividends received by first-tier cor-}\\ \text{poration from earnings included in}\\ \text{domestic corporation's gross in-}\\ \text{come with respect to second- or}\\ \text{lower-tier corporations}\end{array}$

(ii) Credit for tax paid by first-tier corporation on earnings not previously taxed with respect to second- or lower-tier corporations -

$\frac{\begin{array}{c}\text{Portion of dividend to domestic copora-}\\ \text{tion which is from earnings not included}\\ \text{in domestic corporation's gross income}\\ \text{under section 951 with respect to}\\ \text{first- or lower-tier corporations}\end{array}}{\begin{array}{c}\text{Earnings and profits of first-tier corpora-}\\ \text{tion not included in domestic corporation's}\\ \text{gross income under section 951 with}\\ \text{respect to second or lower-tier}\\ \text{corporations}\end{array}}×\begin{array}{c}\text{Tax paid by first-tier corporation on}\\ \text{earnings not included in domestic}\\ \text{corporation's gross income with}\\ \text{respect to second- or lower-tier}\\ \text{corporations}\end{array}$

(B) Taxes (paid by second-tier corporation) deemed paid by first-tier corporation which are deemed paid by domestic corporation -

(1) If the effective rate of tax on dividends received by the second-tier corporation is the same as its tax rate on other earnings and profits -

$\frac{\begin{array}{c}\text{Dividend to domestic corporation less por-}\\ \text{tion of dividend from earnings included}\\ \text{in domestic corporation's gross income}\\ \text{under section 951 with respect to}\\ \text{first- and second-tier corporations}\end{array}}{\begin{array}{c}\text{Earnings and profits of first-tier corpora-}\\ \text{tion less earnings and profits attributable to}\\ \text{amounts included in domestic corporation's}\\ \text{gross income under section 951 with}\\ \text{respect to second-tier corporation}\end{array}}×\begin{array}{c}\text{Tax paid by second-tier corpora-}\\ \text{tion which are deemed paid by}\\ \text{first-tier corporation}\end{array}$

(2) If the effective rate of tax on dividends received by the second-tier corporation is higher or lower than the effective rate of tax on its other earnings and profits -

(i) Credit for tax paid by second-tier corporation on earnings previously taxed with respect to third-tier or lower-tier corporations -

$\frac{\begin{array}{c}\text{Portion of dividend to domestic copora-}\\ \text{tion which is from earnings included in}\\ \text{domestic corporation's gross income}\\ \text{under section 951 with respect to}\\ \text{first- or lower-tier corporations}\end{array}}{\begin{array}{c}\text{Earnings and profits of first-tier corpora-}\\ \text{tion included in domestic corporation's}\\ \text{gross income under section 951 with}\\ \text{respect to third or lower-tier}\\ \text{corporations}\end{array}}×\begin{array}{c}\text{Tax paid by second-tier corpora-}\\ \text{tion on earnings previously taxed}\\ \text{with respect to third- or lower-}\\ \text{tier corporations which is}\\ \text{deemed paid by first-tier corporation}\end{array}$

(ii) Credit for tax paid by second-tier corporation on earnings not previously taxed with respect to third- or lower-tier corporations -

$\frac{\begin{array}{c}\text{Portion of dividend to domestic corpora-}\\ \text{tion which is from earnings not included}\\ \text{in domestic corporation's gross income}\\ \text{under section 951 with respect to}\\ \text{first- or lower-tier corporations}\end{array}}{\begin{array}{c}\text{Earnings and profits of first-tier corpora-}\\ \text{tion not included in domestic corporation's}\\ \text{gross income under section 951 with}\\ \text{respect to second or lower-tier}\\ \text{corporations}\end{array}}×\begin{array}{c}\text{Tax paid by second-tier corporation}\\ \text{on earnings not previously taxed}\\ \text{with respect to third- or lower-}\\ \text{tier corporations which is}\\ \text{deemed paid by first-tier}\\ \text{corporations}\end{array}$

(C) Taxes (of third-tier corporation) deemed paid by first-tier corporation which are deemed paid by domestic corporation -

(1) If the effective rate of tax on dividends received by the third-tier corporation is the same as the effective rate of tax on its other earnings and profits -

$\frac{\begin{array}{c}\text{Dividend to domestic corporation less}\\ \text{portion of dividend from earnings}\\ \text{included in domestic corporation's}\\ \text{gross income under section 951}\\ \text{with respect to first- second-}\\ \text{and third-tier corporations}\end{array}}{\begin{array}{c}\text{Earnings and profits of first-tier corpora-}\\ \text{tion less earnings and profits attributable}\\ \text{to amounts included in domestic corpora-}\\ \text{tion's gross income with respect to}\\ \text{second- and third-tier corporations}\end{array}}×\begin{array}{c}\text{Tax deemed paid by second-tier}\\ \text{corporation which are deemed}\\ \text{paid by first-tier corporation}\end{array}$

(2) If the effective rate of tax on dividends received by the third-tier corporation is higher or lower than the effective rate of tax on its other earnings and profits -

(i) Credit for tax (of third-tier corporation) deemed paid by second-tier corporation on earnings previously taxed with respect to fourth- or lower-tier corporations -

$\frac{\begin{array}{c}\text{Portion of dividend to domestic corporation}\\ \text{which is from earnings included in}\\ \text{domestic corporation's gross income}\\ \text{under section 951 with respect to}\\ \text{first- or lower-tier corporations}\end{array}}{\begin{array}{c}\text{Earnings and profits of first-tier corpora-}\\ \text{tion included in domestic corpora-}\\ \text{tion's gross income under section}\\ \text{951 with respect to fourth- or}\\ \text{lower-tier corporations}\end{array}}×\begin{array}{c}\text{Tax deemed paid by second-tier}\\ \text{corporation on earnings previ-}\\ \text{ously taxed with respect to}\\ \text{fourth- or lower-tier cor-}\\ \text{porations which is deemed}\\ \text{paid by first-tier corporation}\end{array}$

(ii) Credit for tax (of third-tier corporation) deemed paid by second-tier on earnings not previously taxed with respect to fourth- or lower-tier corporations -

$\frac{\begin{array}{c}\text{Portion of dividend to domestic corporation}\\ \text{which is from earnings not included in}\\ \text{domestic corporation's gross income}\\ \text{under section 951 with respect to}\\ \text{first- or lower-tier corporations}\end{array}}{\begin{array}{c}\text{Earnings and profits of first-tier corpora-}\\ \text{tion not included in domestic corpora-}\\ \text{tion's gross income under section}\\ \text{951 with respect to second- or}\\ \text{lower-tier corporations}\end{array}}×\begin{array}{c}\text{Tax deemed paid by second-tier}\\ \text{corporation on earnings not pre-}\\ \text{viously taxed with respect to}\\ \text{fourth- or lower-tier corp-}\\ \text{orations which is deemed}\\ \text{paid by first-tier corporation}\end{array}$

(2) Determination of domestic corporation's section 960 credit for amounts included in its gross income with respect to a first-, second-, or third-tier corporation which has received a distribution previously included in the gross income of a domestic corporation under section 951 -

(i) Third-tier credit. If a domestic corporation is required to include an amount in its gross income under section 951 with respect to a third-tier corporation which has received a distribution from a fourth-tier corporation of amounts included in a domestic corporation's gross income under section 951 with respect to the fourth- or lower-tier corporations, the domestic corporation's credit for taxes paid by the third-tier corporation under section 960(a)(1) is determined as follows:

(A) If the effective rate of tax on dividends received by the third-tier corporation is the same as the effective rate of tax on its other earnings and profits -

$\frac{\begin{array}{c}\text{Amount included in domestic corporation's}\\ \text{gross income under section 951 with}\\ \text{respect to third-tier corporation}\end{array}}{\begin{array}{c}\text{Earnings and profits of}\\ \text{third-tier corporation}\end{array}}×\begin{array}{c}\text{Tax paid by third-tier corporation}\end{array}$

(B) If the effective rate of tax on dividends received by the third-tier corporation is higher or lower than the effective rate of tax on its other earnings and profits -

$\frac{\begin{array}{c}\text{Amount included in domestic corporation's}\\ \text{gross income under section 951 with}\\ \text{respect to third-tier corporation}\end{array}}{\begin{array}{c}\text{Earnings and profits of third-tier}\\ \text{corporation not included in domestic}\\ \text{corporation's gross income under section}\\ \text{951 with respect to fourth- or lower-tier}\\ \text{corporations}\end{array}}×\begin{array}{c}\text{Tax paid by third-tier corporation}\\ \text{on earnings not included in}\\ \text{domestic corporation's gross}\\ \text{income with respect to fourth-}\\ \text{or lower-tier corporation}\end{array}$

(ii) Second-tier credit. If a domestic corporation is required to include an amount in its gross income under section 951 with respect to a second-tier corporation which has received a distribution from a third-tier corporation of amounts included in a domestic corporation's gross income under section 951 with respect to the third- or lower-tier corporations, the domestic corporation's credit for taxes paid and deemed paid by the second-tier corporation under section 960(a)(1) is determined as follows:

(A) Credit for taxes paid by the second-tier corporation which are deemed paid by the domestic corporation.

(1) If the effective rate of tax on dividends received by the second-tier corporation is the same as the effective rate of tax on its other earnings and profits -

$\frac{\begin{array}{c}\text{Amount included in domestic corporation's}\\ \text{gross income under section 951 with}\\ \text{respect to second-tier corporation}\end{array}}{\begin{array}{c}\text{Earnings and profits of}\\ \text{second-tier corporation}\end{array}}×\begin{array}{c}\text{Tax paid by second-tier corporation}\end{array}$

(2) If the effective rate of tax on dividends received by the second-tier is higher or lower than the effective rate of tax on its other earnings and profits -

$\frac{\begin{array}{c}\text{Amount included in domestic corporation's}\\ \text{gross income under section 951 with}\\ \text{respect to second-tier corporation}\end{array}}{\begin{array}{c}\text{Earnings and profits of second-tier}\\ \text{corporation not included in domestic}\\ \text{corporation's gross income under section}\\ \text{951 with respect to fourth- or lower-tier}\\ \text{corporations}\end{array}}×\begin{array}{c}\text{Tax paid by second-tier}\\ \text{corporation on earnings not}\\ \text{included in domestic}\\ \text{corporation's gross income}\\ \text{with respect to third- or}\\ \text{lower-tier corporations}\end{array}$

(B) Credit for taxes (of the third-tier corporation) deemed paid by the second-tier corporation under section 902(b)(2),

(1) If the effective rate of tax on dividends received by the third-tier corporation is the same as the effective rate of tax on its other earnings and profits -

$\frac{\begin{array}{c}\text{Amount included in domestic corporation's}\\ \text{gross income under section 951 with}\\ \text{respect to second-tier corporation}\end{array}}{\begin{array}{c}\text{Earnings and profits of second-tier}\\ \text{corporation less earnings and profits}\\ \text{attributable to amounts included in}\\ \text{domestic corporation's gross income}\\ \text{with respect to third-tier corporation}\end{array}}×\begin{array}{c}\text{Taxes paid by third-tier corporation}\\ \text{which are deemed paid by}\\ \text{second-tier corporation}\end{array}$

(2) If the effective rate of tax on dividends received by the third-tier corporation is higher or lower than the effective rate of tax on its other earnings and profits -

$\frac{\begin{array}{c}\text{Amount included in domestic corporation's}\\ \text{gross income under section 951 with}\\ \text{respect to second-tier corporation}\end{array}}{\begin{array}{c}\text{Earnings and profits of second-tier}\\ \text{corporation not included in domestic}\\ \text{corporation's gross income under}\\ \text{section 951 with respect to third- or}\\ \text{lower-tier corporation}\end{array}}×\begin{array}{c}\text{Taxes paid by third-tier corporation}\\ \text{on earnings not previously taxed}\\ \text{with respect to fourth- or lower-}\\ \text{tier corporations which is deemed}\\ \text{paid by second-tier corporation}\end{array}$

(iii) First-tier credit. If a domestic corporation is required to include amounts in its gross income under section 951 with respect to a first-tier corporation which has received a distribution from a second-tier corporation of amounts included in a domestic corporation's gross income under section 951 with respect to the second- or lower-tier corporations, the domestic corporation's credit for taxes paid and deemed paid by the first-tier corporation under section 960(a)(1) shall be determined as follows:

(A) Credit for taxes paid by the first-tier corporation.

(1) If the effective rate of tax on dividends received by the first-tier corporation is the same as the effective rate of tax on its other earnings and profits -

$\frac{\begin{array}{c}\text{Amount included in domestic corporation's}\\ \text{gross income under section 951 with}\\ \text{respect to first-tier corporation}\end{array}}{\begin{array}{c}\text{Earnings and profits of first-tier corporations}\end{array}}×\begin{array}{c}\text{Tax paid by first-tier corporation}\end{array}$

(2) If the effective rate of tax on dividends received by the first-tier corporation is higher or lower than the effective rate of tax on its other earnings and profits -

$\frac{\begin{array}{c}\text{Amount included in domestic corporation's}\\ \text{gross income under section 951 with}\\ \text{respect to first-tier corporation}\end{array}}{\begin{array}{c}\text{Earnings and profits of first-tier}\\ \text{corporation not included in domestic}\\ \text{corporation's gross income under section}\\ \text{951 with respect to second- or}\\ \text{lower-tier corporations}\end{array}}×\begin{array}{c}\text{Taxes paid by first-tier corpora-}\\ \text{tion on earnings not included}\\ \text{in domestic corporation's gross}\\ \text{income with respect to second-}\\ \text{or lower-tier corporations}\end{array}$

(B) Credit for taxes paid by the second-tier corporation deemed paid by the first-tier corporation under section 902(b)(1).

(1) If the effective rate of tax on dividends received by the second-tier corporation is the same as the effective rate of tax on its other earnings and profits -

$\frac{\begin{array}{c}\text{Amount included in domestic corporation's}\\ \text{gross income under section 951 with}\\ \text{respect to first-tier corporation}\end{array}}{\begin{array}{c}\text{Earnings and profits of first-tier}\\ \text{corporation less earnings and profits}\\ \text{attributable to amounts included in}\\ \text{domestic corporation's gross income}\\ \text{under section 951 with respect to}\\ \text{second-tier corporations}\end{array}}×\begin{array}{c}\text{Taxes paid by second-tier cor-}\\ \text{poration which are deemed}\\ \text{paid by first-tier corporation}\end{array}$

(2) If the effective rate of tax on dividends received by the second-tier corporation is higher or lower than the effective rate of tax on its other earnings and profits -

$\frac{\begin{array}{c}\text{Amount included in domestic corporation's}\\ \text{gross income under section 951 with}\\ \text{respect to first-tier corporation}\end{array}}{\begin{array}{c}\text{Earnings and profits of first-tier}\\ \text{corporation not included in}\\ \text{domestic corporation's gross income}\\ \text{under section 951 with respect to}\\ \text{second- or lower-tier corporations}\end{array}}×\begin{array}{c}\text{Tax paid by second-tier corpora-}\\ \text{tion on earnings not previoiusly}\\ \text{taxed with respect to third- or}\\ \text{lower-tier corporations which}\\ \text{is deemed paid by first-tier}\\ \text{corporation}\end{array}$

(C) Credit for taxes (of the third-tier corporation) deemed paid by the second-tier corporation which are deemed paid by first-tier corporation under section 902(b)(1).

(1) If the effective rate of tax on dividends received by the third-tier corporation is the same as the effective rate of tax on its other earnings and profits -

$\frac{\begin{array}{c}\text{Amount included in domestic corporation's}\\ \text{gross income under section 951 with}\\ \text{respect to first-tier corporation}\end{array}}{\begin{array}{c}\text{Earnings and profits of first-tier}\\ \text{corporation less earnings and profits}\\ \text{attributable to amounts included in}\\ \text{domestic corporation's gross income}\\ \text{with respect to second- and}\\ \text{third-tier corporation}\end{array}}×\begin{array}{c}\text{Taxes deemed paid by second-tier}\\ \text{corporation which are deemed}\\ \text{paid by first-tier corporation}\end{array}$

(2) If the effective rate of tax on dividends received by the third-tier corporation is higher or lower than the effective rate of tax on its other earnings and profits -

$\frac{\begin{array}{c}\text{Amount included in domestic corporation's}\\ \text{gross income under section 951 with}\\ \text{respect to first-tier corporation}\end{array}}{\begin{array}{c}\text{Earnings and profits of first-tier}\\ \text{corporation not included in domestic}\\ \text{corporation's gross income under section}\\ \text{951 with respect to second- or}\\ \text{lower-tier corporation}\end{array}}×\begin{array}{c}\text{Tax deemed paid by second-tier}\\ \text{corporation on earnings not}\\ \text{previously taxed with respect}\\ \text{to fourth- or lower-tier}\\ \text{corporations which is deemed}\\ \text{paid by first-tier corporation}\end{array}$

[T.D. 7120, 36 FR 10854, June 4, 1971; 36 FR 11924, June 23, 1971, as amended by T.D. 7334, 39 FR 44212, Dec. 23, 1974; 40 FR 1014, Jan. 6, 1975; 40 FR 2802, Jan. 16, 1975; T.D. 7649, 44 FR 60089, Oct. 18, 1979; T.D. 7843, 47 FR 50476, Nov. 8, 1982; 47 FR 55477, Dec. 10, 1982]