Form 1116, Line 4b Computation Error

I hold several foreign stocks, some directly, and others through ADRs. My foreign source qualified dividends and capital gain distributions for 2004 exceeded $5,000 (the cut off for simplified calculation).

I also have investment interest expense on Form 4952, which flows to Schd A, line 13.

The IRS instructions to Form 1116, Line 4b provide that, for my circumstances, "each type of interest expense is apportioned separately [among the foreign sources and the U.S. source] using an 'asset method.' See Pub. 514 for more information." IRS Pub. 514 states, on p. 13, that investment interest is apportioned based on my basis.

The Foreign Tax Credit Computation Worksheet does not follow the IRS instructions, and produces wrong answers on the Worksheet which of course then flow through to the actual Form 1116.

The Help for Form 1116 Foreign Tax Credit Computation Worksheet, line 4 states as follows--

"Enter in the total column the adjusted basis of investment assets generating this category of foreign income for this copy of the 1116 Computation Worksheet. The program allocates this amount to columns A, B & C ON THE BASIS OF GROSS INCOME from each country ....."

THIS IS FLAT WRONG -- GROSS INCOME (though easier to compute) IS NOT THE SAME AS BASIS. Indeed, my basis for Manulife of Canada, is $0 (but, it does generate qualified dividend income) -- these are shares that trace back (through a corporate merger) to shares I received in the de-mutualization of John Hancock Life).

Overriding the entries in columns A, B & C for line 4(b)(1)(b) of the

1116 Worksheet seems to fix the problem, it being a real snap to pull my actual basis in these stocks from Quicken.

-dllapides

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dllapides
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