# US Tax Form 1116 Passive Income



## Alan64 (Apr 22, 2017)

My sister and I (both US expats) have received conflicting advice from our respective tax advisors (both enrolled agents) regarding mutual fund distributions to include on Form 1116 for Passive Income.

1. CAPITAL GAIN DISTRIBUTIONS from mutual funds, which are headquartered in the US and invest 100% in foreign stocks, are included on Form 1116, Part I, Line 1a. Is this correct?

2. The annual report of a mutual fund headquartered in the US states that 24% of the Fund's assets are "Foreign Holdings". 
My understanding is that 24% of the DIVIDENDS, therefore, should be included on Form 1116, Part I, Line 1a. Is this correct?

This is of big impact in calculating the Foreign Tax Credit. The greater the foreign, passive income (Part I, Line 1a), the greater the portion (Part III, Line 19) of the Foreign Tax Credit that can actually be used.

I'd greatly appreciate your help. Can anyone please direct me to the IRS document that confirms or corrects both matters stated above?

Thank you,
Alan


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## Moulard (Feb 3, 2017)

Two points...

One...If the mutual fund is headquartered in the US, and is paying you the distributions from within the US, in US Dollars, then to me sounds to me like it should be treated as US sourced income not foreign income.

Two...The only reason you would have to file Form 1116 on this is if you had a foreign income tax liability on the income generated that you either accrued or paid (depending on whether you use an accrual or cash method of accounting). If it is the fund that is liable for the foreign taxes, you cannot take a FTC even if the fund deducts those taxes from your gains. Are you having to submit a foreign tax return, or are foreign taxes being withheld that you are personally liable for? If the answer is no, then you cannot take a foreign tax credit.


What foreign taxes qualify for the FTC...
https://www.irs.gov/individuals/int...eign-taxes-qualify-for-the-foreign-tax-credit


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## JustLurking (Mar 25, 2015)

Moulard said:


> If it is the fund that is liable for the foreign taxes, you cannot take a FTC even if the fund deducts those taxes from your gains.


But from the IRS document you cited:


> *Mutual Fund Shareholder*
> If you are a shareholder of a mutual fund, or other regulated investment company (RIC), you may be able to claim the credit based on your share of foreign income taxes paid by the fund if it chooses to pass the credit on to its shareholders. You should receive from the mutual fund a Form 1099-DIV, or similar statement, showing the foreign country or U.S. possession, your share of the foreign income, and your share of the foreign taxes paid. If you do not receive this information, you will need to contact the fund.


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## Alan64 (Apr 22, 2017)

Please let me clarify. I live in Germany, file Form 1116 annually and have significant foreign tax credit carryover every year. The amount I enter on Form 1116, Part I, Line 1a determines my ability to use these FTC carryover. 

My question is not about which foreign taxes qualify for FTC. It's about the inclusion of CAPITAL GAIN DISTRIBUTIONS in the passive category income stream, i.e. Part I, Line 1a.

FUND A is headquarted in the US and invests 100% in foreign stock. Two tax advisors confirm, dividends from this fund are included on Form 1116, Part I, Line 1a. To resolve conflicting opinions, I need something in writing from the IRS that confirms that CAPITAL GAIN DISTRIBUTIONS from US-headquartered mutual funds, which invest 100% in foreign stocks, are included on Form 1116, Part I, Line 1a. 

Can someone please help me?

Thank you,
Alan


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## JustLurking (Mar 25, 2015)

Sorry if this thread veered off track; didn't mean to muddy the waters. This discussion from a few years ago appears to confirm that capital gains distributions from US domiciled mutual funds are US source, not foreign source.

That's my best _guess_, though. I don't file form 1116, and haven't for nearly a decade now, so I don't know if this is the answer you are looking for -- that is, whether this increases or decreases you ability to use the FTC here. Sorry then, if it's not the answer you seek (if it's not, maybe keep looking?!).

I also don't know of any place in IRS docs where this is made explicit. In general the IRS only says what to _include_ on forms, and IRS instructions are voluminous enough as it is. If they detailed what _not_ to include there may not be enough trees on the planet to print the instruction booklets.


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## Moulard (Feb 3, 2017)

Alan64. I understood the crux of your question... "is the income foreign sourced?" Because line 1a is where you enter your foreign sourced income for that category. 

In most cases, dividend income received from domestic corporations is U.S. source income. Dividend income from foreign corporations is usually foreign source income. 

It boils down to "is the source for you the mutual fund or the foreign entity that the mutual fund has invested in". In light of the fact that (I gather) mutual funds in the US have special rules that allow them to pass-through income to the investor, It could well be that the source of the income passes through too. I don't know but my gut feeling is that unless it is specifically called out somewhere in your statements, this will be US sourced income for you.

If the answer has significant tax implications for you (and it appears it does) it is probably worth contacting the fund itself - I suspect you will get a more coherent answer from them than you would from the IRS. But you could always contact both.


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## Bevdeforges (Nov 16, 2007)

As far as I know, if you're investing through a mutual fund like that, they should give you a statement of any and all "foreign taxes paid" against your investment income. But I don't believe you can consider part of your net returns to be "foreign source" income. (If you could, the fund should be the one to advise you as to the amount.)

Perhaps you should contact the fund directly to ask your question. 
Cheers,
Bev


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## Moulard (Feb 3, 2017)

Bevdeforges said:


> they should give you a statement of any and all "foreign taxes paid" against your investment income.


Yup. 1099-DIV -- Box 6. But that wasn't his question. His question was more around the treatment of the income.


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## Bevdeforges (Nov 16, 2007)

Right, but the reason I asked is that, if the income itself can be treated as "foreign source income" I would imagine that they would have to give you that information as part of the 1099. (I know here in France, you get a statement about the foreign taxes paid on your behalf in an investment fund, but you don't treat the income as "foreign source" - it just means you report the income net of the taxes paid.)
Cheers,
Bev


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## Alan64 (Apr 22, 2017)

Thank you. I carefully read each comment, including the discussion from several years ago. Many express opinions and guesses. 

What would help me is something in writing from the IRS that confirms that CAPITAL GAIN DISTRIBUTIONS from US-headquartered mutual funds, which invest 100% in foreign stocks, are included on Form 1116, Part I, Line 1a. 

The fund itself is unable to answer my question. The IRS has not responded to my emails. Four tax advisors have given me different opinions.

Here's what I've read in IRS documents:
- Instructions for Form 1116 (page 4) state that "CAPITAL GAINS not related to the active conduct of a trade are also generally passive income."
- Publication 514 (page 17) and Instructions for Form 1116 (page 6) explain which adjustments may be necessary for CAPITAL GAINS DISTRIBUTIONS included on Form 1116.

Does anyone know of anything in writing from the IRS regarding CAPITAL GAIN DISTRIBUTIONS from US-HEADQUARTERED MUTUAL FUNDS that INVEST IN FOREIGN STOCKS?

Thanks, Alan


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## Bevdeforges (Nov 16, 2007)

There are many, many issues like this, where it would indeed be nice to have something definitive in writing from the IRS. But short of a revenue ruling (which costs quite a bit and only applies on an individual basis), I don't believe you're going to find what you're looking for. Even advice you get by calling the IRS hotlines is covered by disclaimers up the wazoo.
Cheers,
Bev


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