@Stsxoz wrote:
As for your final point "I wonder if people are seeing what they think should be deductible on 1116 part I line 2 rather than finding authority for what should be deductible there."
The issue here is the authority you are referring to does not exist in certain aspects of 1116, line 2, as evident from different interpretations of the same section by different experts and even by your comments throughout this discussion. In the absence of this, naturally the conversation drifts toward "what should be" instead of "what is".
I see your point, but that's not the way the law works. If a term is defined by statute then that is what it means. If you are suggesting it means something else in a particular context (e.g. I.R.C. 904 is different than all other sections) it is on you to provide authority for why it means something else. Saying it should be something else is at best an argument and, it seems to me, a weak (at least not strong) non-binding argument.
I am totally unconvinced by the argument that line line 3 deductions are US deductions while the line 2 deductions are foreign deductions. That line 3 deductions are allocated among different types of income seems orthogonal to me. Everything else in that section of form 1116 and indeed IRC 904 (which is actually authority) has nothing at all to do with foreign tax rule deductions. (That only comes to play in part II).
Here's another thing. What if under US law you get a definitely related deduction of $X. Under foreign tax law you get a definitely-related deduction of $Y. Assume no overlap. Do you put $X+$Y or line 2? Or $X? Or $Y.
And why don't you put on line 3 any foreign deductions that aren't definitely related, such as a foreign standard deduction?
Fundamentally Part I of 1116 is about calculating the numerator of the I.R.C. 904(a) limitation. This is a US tax rule calculation. It has nothing to do with the amount of any foreign tax (which is where foreign tax rules would matter). It is an input to the limit function.
904 uses "taxable income" and talks about what US deductions are allowed (e.g. no personal exemptions). It has nothing to say about foreign income at all. It only talks about "taxable income from sources without the United States."
Foreign deductions only matter when the amount of foreign tax is determined and allowed by I.R.C. 901 (subject to the 904 limitation).
I remain unconvinced for whatever it is worth.
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