Income that is otherwise passive but which is subject to high foreign income tax is recharacterized as general basket, or
excluded from Subpart F income. Learn how to tell if this high
tax kickout applies.
Time Topic
00:00 Introduction
00:49 High tax defined
01:45 Item by Item; items defined
03:22 What tax goes with what income item(s)
05:00 Determining effective foreign tax rate
05:55 Example: very simplified
08:18 Quiz, another consideration, and closing
Quiz:
1. Which of these are baskets in (i.) 2017 and (ii) 2018?
a. High withholding tax interest
b. Passive
c. Foreign branch income
d. 10/50 corporation dividends
2. Which of the following are passive basket
a. income from sales of goods on commission
b. Income from an activity in which the taxpayer does not
materially participate
c. interest from a bank account
d. Gain on sale of land used as a vineyard
3. Joe, a U.S. citizen, lives in Slobonia where the tax rate is
40% on all income after a personal exemption of $20,000. Joe
has interest income of $10,000 subject to this tax. His total
income is $100,000. What is the basket of the interest income?
a. General
b. Passive
c. High withholding tax
d. Need more facts to determine
Comment: Hi Tax has generally been ignored in texts, all
written either by attorneys or academics. In my experience, it
has been very important in practice, sometimes to the client's
benefit. The example presented shows all the major twists with
very few numbers. Be sure to understand it.
Resources:
Law: 26 USC 904 [ Ссылка ]=
(title:26%20section:904%20edition:prelim)%20OR%20
(granuleid:USC-prelim-title26-section904)
&f=treesort&edition=prelim&num=0&jumpTo=true
Regulations: 26 CFR 1.904-4(c) [ Ссылка ]-
bin/text-idx?&mc=true&node=se26.11.1_1904_64&rgn=div8
26 CFR 1.904-6 [ Ссылка ]
IRS publication 514 has only 1 paragraph on this. It says:
"Hightaxed income. This is passive income subject to
foreign taxes that are higher than the highest U.S. tax
rate that can be imposed on the income. The hightaxed
income and the taxes imposed on it are moved from
passive category income into general category income. See
Regulations section 1.9044(c) for more information."
Solution:
1.(i).b and d; (ii) b only; 2.c.; 3.d (esp. §199A, but may have enough in 2017)
