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§ 20.3 GIFT OF GOODS OR SERVICES TO BENEFIT FOREIGN CHARITYincome. A shift in the source of net income, from foreign operations to those inthe United States, may increase net U.S. tax for some corporations by reducingthe foreign tax credit limitation and thus the amount of the foreign tax credit thatmay be claimed.For purposes of the foreign tax credit limitation, foreign-source taxableincome generally is computed by: (1) determining the items of gross income thatare from foreign sources, and then (2) subtracting from those items the corporation’sdeductions that are allocated or apportioned to foreign-source gross income.A shift in the allocation or apportionment of expenses, from U.S.-source to foreignsourcegross income, decreases foreign-source taxable income and thus mayincrease U.S. tax by reducing the foreign tax credit limitation.In general, the primary statutory rule for allocating and apportioning deductionsbetween foreign and domestic income is that there must be deducted fromforeign and domestic source gross income, respectively, the expenses, losses, andother deductions properly apportioned or allocated to them and a ratable part ofany expenses, losses, or other deductions that cannot definitively be allocated tosome item or class of gross income. 7 In addition, for a corporation that is a memberof an affiliated group of corporations, expenses that are not directly allocated orapportioned to any specific income-producing activity generally must be allocatedand apportioned under the one-taxpayer rule, that is, as if all of the members of theaffiliated group were a single corporation. 8Charitable contribution deductions generally are treated as not definitelyrelated to any gross income or income-producing activity, and therefore areapportioned ratably and subject to the one-taxpayer rule. 9§ 20.3 GIFT OF GOODS OR SERVICESTO BENEFIT FOREIGN CHARITYA company may choose to support charitable endeavors by making expendituresfrom its marketing or advertising budgets. In this situation, funds benefitingcharitable organizations overseas may be able to flow through the businessexpense budget category and be deductible as a business expense under U.S. taxlaw. 10 This law, however, disallows a business expense deduction of any amountthat meets the definition of a charitable contribution but cannot be deductedunder that section because of the percentage limitations, dollar limitations, ortime-of-payment requirements. 11 These expenditures are sponsorship of broadcastsor concerts of performing arts groups, museum exhibits, public serviceadvertising in support of a charitable cause, purchase of tickets to fundraisingevents, and other activities that directly or indirectly promote sales of a company’sproducts or services through association with cultural or other charitableactivities. To qualify for deduction as business expenses, the corporation must be7 IRC §§ 861(b), 862(b), 863(b).8 IRC § 864(e)(6).9 Reg. § 1.861-8(e)(9)(iv); Notice 89-91, 1989-2 C.B. 408.10 IRC § 162(a).11 Reg. § 1.162-15(b). See § 3(a)(i). 569