Foreign Tax Credit Carryback and Carryover

§ 904. Limitation on credit(a) LimitationThe total amount of the credit taken under section 901(a) shall not exceed the same proportion of the tax against which such credit is taken which the taxpayer’s taxable income from sources without the United States (but not in excess of the taxpayer’s entire taxable income) bears to his entire taxable income for the same taxable year. (b) Taxable income for purpose of computing limitation(1) Personal exemptionsFor purposes of subsection (a), the taxable income in the case of an individual, estate, or trust shall be computed without any deduction for personal exemptions under section 151 or 642(b). (2) Capital gainsFor purposes of this section—(A) In generalTaxable income from sources outside the United States shall include gain from the sale or exchange of capital assets only to the extent of foreign source capital gain net income. (B) Special rules where capital gain rate differentialIn the case of any taxable year for which there is a capital gain rate differential—(i) in lieu of applying subparagraph (A), the taxable income from sources outside the United States shall include gain from the sale or exchange of capital assets only in an amount equal to foreign source capital gain net income reduced by the rate differential portion of foreign source net capital gain, (ii) the entire taxable income shall include gain from the sale or exchange of capital assets only in an amount equal to capital gain net income reduced by the rate differential portion of net capital gain, and (iii) for purposes of determining taxable income from sources outside the United States, any net capital loss (and any amount which is a short-term capital loss under section 1212(a)) from sources outside the United States to the extent taken into account in determining capital gain net income for the taxable year shall be reduced by an amount equal to the rate differential portion of the excess of net capital gain from sources within the United States over net capital gain. (C) Coordination with capital gains ratesThe Secretary may by regulations modify the application of this paragraph and paragraph (3) to the extent necessary to properly reflect any capital gain rate differential under section 1(h) and the computation of net capital gain. (3) DefinitionsFor purposes of this subsection—(A) Foreign source capital gain net incomeThe term “foreign source capital gain net income” means the lesser of—(i) capital gain net income from sources without the United States, or (ii) capital gain net income. (B) Foreign source net capital gainThe term “foreign source net capital gain” means the lesser of—(i) net capital gain from sources without the United States, or (ii) net capital gain. (C) Section 1231 gainsThe term “gain from the sale or exchange of capital assets” includes any gain so treated under section 1231.