Section of Taxation Publications
  VOL. 56
NO. 1
FALL 2002
Contents | TTL Home

 Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.
 Timing and Base Differences Under Section 904(d)
Benjamin J. Cohen* and Jay Geiger**

*Partner, Cahill Gordon & Reindel, New York, New York; Brown University, A.B., 1970; Yale University, J.D., 1974.
**Associate, Cahill Gordon & Reindel, New York, New York; Cornell University, B.A., 1992; Hofstra University, J.D. 1995; New York University, LL.M. 1996. An earlier version of this paper was presented to the Tax Forum in New York City on January 7, 2002.


In an era when the idea of increasing harmonization of international tax rates appears moribund, it should come as no surprise that the taxing systems of the United States and other nations often remain widely divergent with respect to such fundamental concepts as the inclusion of an item in income and the proper time to recognize such income. Predictably, such disparity can give rise to problems of double taxation of income for U.S. taxpayers in instances where the jurisdictions of national taxing authorities overlap, for example, in cross-border transactions involving U.S.-based multinational corporations.

This paper focuses on one aspect of the Treasury Department's ongoing effort to reconcile the differences between foreign taxing systems and that of the United States, ostensibly to reduce the incidence of double taxation for U.S. taxpayers. More specifically, this paper analyzes the treatment of so-called timing differences and base differences in Regulation section 1.904-6(a)(1)(iv), which is one of the myriad of rules relating to the limitation on foreign tax credits under section 904. Before confronting the intricacies of Regulation section 1.904-6(a)(1)(iv), however, Part II of the paper highlights some of the more salient principles relating to foreign tax credits in order to provide a foundation for the detailed discussion which follows. These principles include the purpose of foreign tax credits; the basic requirements of a creditable foreign income tax; the object of the limitation on foreign tax credits under section 904; and the rationale for applying the limitation under section 904 separately to certain discrete categories, or "baskets," of income. In addition, the paper discusses the history and the general mechanics of the foreign tax credit limitation, including the allocation and apportionment of deductible expenses necessary to apply the limitation under section 904 separately to the various income categories. The paper then explores the treatment by the Service of income exempt or excluded from U.S. tax under the expense allocation and foreign tax credit limitation rules. Finally, Part III of the paper examines in detail the specific operation of Regulation section 1.904-6(a)(1)(iv) with the assistance of concrete examples. In connection with that examination, several possible clarifications and modifications of Regulation section 1.904-6(a)(1)(iv) are discussed.


Published by
Section of Taxation, American Bar Association
With the Assistance of
Georgetown University Law Center


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