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reduced. Where ACT is used to offset mainstream tax,
the offset will be viewed as a refund of the ACT
initially allowed as a credit and as a tax paid in
respect of the year for which the ACT is applied as an
offset. Consequently, a reduction in the foreign tax
credit for the year from which the ACT is carried must
be made in accordance with section 905(c) of the Code.
[Technical Explanation, 1980-1 C.B. at 473.]
The Technical Explanation's view of the ACT, as a tax, originally
imposed but then refunded, upon the use of the corporate offset,
is the basis of Rev. Proc. 80-18, 1980-1 C.B. at 625, which, in
turn, states in relevant part:
Paragraph 1(c) of Article 23 provides, in
addition, that the one-half of the ACT paid by a United
Kingdom corporation that is not refunded to a U.S.
direct investor and that would be credited or refunded
to a United Kingdom individual resident is treated as
an income tax imposed on the distributing United
Kingdom corporation (rather than the U.S. shareholder).
Under United Kingdom law, a United Kingdom corporation
that pays ACT may, however, transfer to a related
United Kingdom corporation the right to apply ACT
against mainstream tax liability. Thus, for example, a
United Kingdom subsidiary of a United Kingdom
corporation may benefit from the parent's ACT payment
by offsetting part or all of the ACT against its own
liability for United Kingdom mainstream tax. In such a
case, for U.S. foreign tax credit purposes and pursuant
to Article 23, the parent corporation has not paid or
accrued the unrefunded ACT offset against the
subsidiary's mainstream tax and has contributed to the
capital of the subsidiary an amount equal to the
unrefunded ACT offset. The subsidiary is considered to
have paid or accrued only mainstream tax paid or
accrued in excess of the ACT offset, plus the amount of
unrefunded ACT so offset.
According to respondent, the allocation of the corporate offset
to a subsidiary must be viewed as a capital contribution of the
unrefunded ACT from the parent to the subsidiary and, at such
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