FTC1116 HTKO high tax Swiss dividends. Passive cat. to General cat. is HTKO based on the 35% Swiss tax gross or net after recovery to 15%

[charleslye]

1040 USA client has $100k 1099-div taxed in Swiss currency at 35% gross. After some recovery net Swiss

tax is 15%.  Can i use the gross Swiss 35% to use the HTKO definition to go from the Passive Cat. to General Cat.?  This gives a better Line 19 (FTC 1116 form) percentage for getting FTC (44% vs 15%).

I appreciate some feedback.  I read all the IRS instruction.  

Charles L

[email address removed]

[itonewbie · Accepted solution]

Dividends are governed by Article 10 of the DTA, which generally limits source country taxation to 15%.

Even if Swiss tax was withheld at the wrong rate (e.g. 35%), your client would be expected to file a refund claim for any excess beyond what the treaty provision provides for and not be permitted to include for FTC purposes voluntary taxes paid to or withheld by Switzerland.

HTKO requires grouping of passive income before a determination is made.  You cannot arbitrarily KO income that should be in the passive basket and move it to G/L.

[charleslye]

Thanks for the reply, really appreciate it!