PART III—INCOME FROM SOURCES WITHOUT THE UNITED STATES
Amendments
1986—
1984—
1982—
1978—
1976—
1966—
1962—
1 See 1976 Amendment note below.
Subpart A—Foreign Tax Credit
Amendments
1986—
1976—
1975—
1966—
Subpart Referred to in Other Sections
This subpart is referred to in
§901. Taxes of foreign countries and of possessions of United States
(a) Allowance of credit
If the taxpayer chooses to have the benefits of this subpart, the tax imposed by this chapter shall, subject to the limitation of section 904, be credited with the amounts provided in the applicable paragraph of subsection (b) plus, in the case of a corporation, the taxes deemed to have been paid under sections 902 and 960. Such choice for any taxable year may be made or changed at any time before the expiration of the period prescribed for making a claim for credit or refund of the tax imposed by this chapter for such taxable year. The credit shall not be allowed against any tax treated as a tax not imposed by this chapter under section 26(b).
(b) Amount allowed
Subject to the limitation of section 904, the following amounts shall be allowed as the credit under subsection (a):
(1) Citizens and domestic corporations
In the case of a citizen of the United States and of a domestic corporation, the amount of any income, war profits, and excess profits taxes paid or accrued during the taxable year to any foreign country or to any possession of the United States; and
(2) Resident of the United States or Puerto Rico
In the case of a resident of the United States and in the case of an individual who is a bona fide resident of Puerto Rico during the entire taxable year, the amount of any such taxes paid or accrued during the taxable year to any possession of the United States; and
(3) Alien resident of the United States or Puerto Rico
In the case of an alien resident of the United States and in the case of an alien individual who is a bona fide resident of Puerto Rico during the entire taxable year, the amount of any such taxes paid or accrued during the taxable year to any foreign country; and
(4) Nonresident alien individuals and foreign corporations
In the case of any nonresident alien individual not described in section 876 and in the case of any foreign corporation, the amount determined pursuant to section 906; and
(5) Partnerships and estates
In the case of any individual described in paragraph (1), (2), (3), or (4), who is a member of a partnership or a beneficiary of an estate or trust, the amount of his proportionate share of the taxes (described in such paragraph) of the partnership or the estate or trust paid or accrued during the taxable year to a foreign country or to any possession of the United States, as the case may be.
(c) Similar credit required for certain alien residents
Whenever the President finds that—
(1) a foreign country, in imposing income, war profits, and excess profits taxes, does not allow to citizens of the United States residing in such foreign country a credit for any such taxes paid or accrued to the United States or any foreign country, as the case may be, similar to the credit allowed under subsection (b)(3),
(2) such foreign country, when requested by the United States to do so, has not acted to provide such a similar credit to citizens of the United States residing in such foreign country, and
(3) it is in the public interest to allow the credit under subsection (b)(3) to citizens or subjects of such foreign country only if it allows such a similar credit to citizens of the United States residing in such foreign country,
the President shall proclaim that, for taxable years beginning while the proclamation remains in effect, the credit under subsection (b)(3) shall be allowed to citizens or subjects of such foreign country only if such foreign country, in imposing income, war profits, and excess profits taxes, allows to citizens of the United States residing in such foreign country such a similar credit.
(d) Treatment of dividends from a DISC or former DISC
For purposes of this subpart, dividends from a DISC or former DISC (as defined in section 992(a)) shall be treated as dividends from a foreign corporation to the extent such dividends are treated under part I as income from sources without the United States.
(e) Foreign taxes on mineral income
(1) Reduction in amount allowed
Notwithstanding subsection (b), the amount of any income, war profits, and excess profits taxes paid or accrued during the taxable year to any foreign country or possession of the United States with respect to foreign mineral income from sources within such country or possession which would (but for this paragraph) be allowed under such subsection shall be reduced by the amount (if any) by which—
(A) the amount of such taxes (or, if smaller, the amount of the tax which would be computed under this chapter with respect to such income determined without the deduction allowed under section 613), exceeds
(B) the amount of the tax computed under this chapter with respect to such income.
(2) Foreign mineral income defined
For purposes of paragraph (1), the term "foreign mineral income" means income derived from the extraction of minerals from mines, wells, or other natural deposits, the processing of such minerals into their primary products, and the transportation, distribution, or sale of such minerals or primary products. Such term includes, but is not limited to—
(A) dividends received from a foreign corporation in respect of which taxes are deemed paid by the taxpayer under section 902, to the extent such dividends are attributable to foreign mineral income, and
(B) that portion of the taxpayer's distributive share of the income of partnerships attributable to foreign mineral income.
(f) Certain payments for oil or gas not considered as taxes
Notwithstanding subsection (b) and sections 902 and 960, the amount of any income, or profits, and excess profits taxes paid or accrued during the taxable year to any foreign country in connection with the purchase and sale of oil or gas extracted in such country is not to be considered as tax for purposes of section 275(a) and this section if—
(1) the taxpayer has no economic interest in the oil or gas to which section 611(a) applies, and
(2) either such purchase or sale is at a price which differs from the fair market value for such oil or gas at the time of such purchase or sale.
(g) Certain taxes paid with respect to distributions from possessions corporations
(1) In general
For purposes of this chapter, any tax of a foreign country or possession of the United States which is paid or accrued with respect to any distribution from a corporation—
(A) to the extent that such distribution is attributable to periods during which such corporation is a possessions corporation, and
(B)(i) if a dividends received deduction is allowable with respect to such distribution under part VIII of subchapter B, or
(ii) to the extent that such distribution is received in connection with a liquidation or other transaction with respect to which gain or loss is not recognized,
shall not be treated as income, war profits, or excess profits taxes paid or accrued to a foreign country or possession of the United States, and no deduction shall be allowed under this title with respect to any amount so paid or accrued.
(2) Possessions corporation
For purposes of paragraph (1), a corporation shall be treated as a possessions corporation for any period during which an election under section 936 applied to such corporation, during which section 931 (as in effect on the day before the date of the enactment of the Tax Reform Act of 1976) applied to such corporation, or during which section 957(c) (as in effect on the day before the date of the enactment of the Tax Reform Act of 1986) applied to such corporation.
(h) Taxes paid with respect to foreign trade income
No credit shall be allowed under this section for any income, war profits, and excess profits taxes paid or accrued with respect to the foreign trade income (within the meaning of section 923(b)) of a FSC, other than section 923(a)(2) non-exempt income (within the meaning of section 927(d)(6)).
(i) Taxes used to provide subsidies
Any income, war profits, or excess profits tax shall not be treated as a tax for purposes of this title to the extent—
(1) the amount of such tax is used (directly or indirectly) by the country imposing such tax to provide a subsidy by any means to the taxpayer, a related person (within the meaning of section 482), or any party to the transaction or to a related transaction, and
(2) such subsidy is determined (directly or indirectly) by reference to the amount of such tax, or the base used to compute the amount of such tax.
(j) Denial of foreign tax credit, etc., with respect to certain foreign countries
(1) In general
Notwithstanding any other provision of this part—
(A) no credit shall be allowed under subsection (a) for any income, war profits, or excess profits taxes paid or accrued (or deemed paid under section 902 or 960) to any country if such taxes are with respect to income attributable to a period during which this subsection applies to such country, and
(B) subsections (a), (b), and (c) of section 904 and sections 902 and 960 shall be applied separately with respect to income attributable to such a period from sources within such country.
(2) Countries to which subsection applies
(A) In general
This subsection shall apply to any foreign country—
(i) the government of which the United States does not recognize, unless such government is otherwise eligible to purchase defense articles or services under the Arms Export Control Act,
(ii) with respect to which the United States has severed diplomatic relations,
(iii) with respect to which the United States has not severed diplomatic relations but does not conduct such relations, or
(iv) which the Secretary of State has, pursuant to section 6(j) of the Export Administration Act of 1979, as amended, designated as a foreign country which repeatedly provides support for acts of international terrorisms.
(B) Period for which subsection applies
This subsection shall apply to any foreign country described in subparagraph (A) during the period—
(i) beginning on the later of—
(I) January 1, 1987, or
(II) 6 months after such country becomes a country described in subparagraph (A), and
(ii) ending on the date the Secretary of State certifies to the Secretary of the Treasury that such country is no longer described in subparagraph (A).
(3) Taxes allowed as a deduction, etc.
Sections 275 and 78 shall not apply to any tax which is not allowable as a credit under subsection (a) by reason of this subsection.
(4) Regulations
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection, including regulations which treat income paid through 1 or more entities as derived from a foreign country to which this subsection applies if such income was, without regard to such entities, derived from such country.
(k) Cross reference
(1) For deductions of income, war profits, and excess profits taxes paid to a foreign country or a possession of the United States, see sections 164 and 275.
(2) For right of each partner to make election under this section, see section 703(b).
(3) For right of estate or trust to the credit for taxes imposed by foreign countries and possessions of the United States under this section, see section 642(a).
(4) For reduction of credit for failure of a United States person to furnish certain information with respect to a foreign corporation controlled by him, see section 6038.
(Aug. 16, 1954, ch. 736,
References in Text
The date of the enactment of the Tax Reform Act of 1976, referred to in subsec. (g)(2), is the date of enactment of
The date of the enactment of the Tax Reform Act of 1986, referred to in subsec. (g)(2), is the date of enactment of
The Arms Export Control Act, referred to in subsec. (j)(2)(A)(i), is
Section 6(j) of the Export Administration Act of 1979, referred to in subsec. (j)(2)(A)(iv), is classified to
Amendments
1993—Subsec. (j)(2)(C).
"(i)
"(I) beginning on January 1, 1988, and
"(II) ending on the date the Secretary of State certifies to the Secretary of the Treasury that South Africa meets the requirements of section 311(a) of the Comprehensive Anti-Apartheid Act of 1986 (as in effect on the date of the enactment of this subparagraph).
"(ii)
1988—Subsec. (g)(2).
Subsec. (j)(3).
1987—Subsec. (j)(1).
Subsec. (j)(2)(C).
1986—Subsec. (h).
Subsec. (i).
Subsec. (i)(3).
Subsec. (j).
Subsec. (k).
1984—Subsec. (a).
Subsecs. (h), (i).
1982—Subsec. (a).
1978—Subsec. (g)(1).
Subsec. (g)(2).
1976—Subsec. (a).
Subsec. (b).
Subsec. (d).
Subsecs. (g), (h).
1975—Subsecs. (f), (g).
1974—Subsec. (a).
1971—Subsec. (d).
1969—Subsec. (a).
Subsecs. (e), (f).
1966—Subsec. (a).
Subsec. (b)(3).
Subsec. (b)(4), (5).
Subsecs. (c) to (e).
1964—Subsec. (d)(1).
1962—Subsec. (a).
Subsec. (d)(4).
1960—Subsec. (a).
Subsec. (b).
Effective Date of 1988 Amendment
Amendment by section 1012(j) of
Section 2003(c)(2) of
Effective Date of 1987 Amendment
Section 10231(c) of
Effective Date of 1986 Amendments
Amendment by section 112(b)(3) of
Section 1204(b) of
Amendment by section 1876(p)(2) of
Section 8041(c) of
Effective Date of 1984 Amendment
Amendment by section 474(r)(20) of
Amendment by section 612(e)(1) of
Amendment by section 713(c)(1)(C) of
Amendment by section 801(d)(1) of
Effective Date of 1982 Amendment
Amendment by section 201(d)(8)(A) of
Amendment by section 265(b)(2)(A)(iv) of
Effective Date of 1978 Amendment
Section 701(u)(1)(C) of
Effective Date of 1976 Amendment
Amendment by section 1031(b)(1) of
Amendment by section 1051(d)(1) of
Amendment by section 1901(b)(1)(H)(iii), (37)(A) of
Effective Date of 1975 Amendment
Amendment by
Effective Date of 1974 Amendment
Amendment by section 2001(g)(2)(C) of
Amendment by section 2002(g)(3) of
Amendment by section 2005(c)(5) of
Effective Date of 1971 Amendment
Amendment by
Effective Date of 1969 Amendment
Amendment by section 301(b)(9) of
Section 506(c) of
Effective Date of 1966 Amendments
Amendment by section 106(a)(4), (5) of
Section 106(b)(4) of
Amendment by
Effective Date of 1964 Amendment
Amendment by
Effective Date of 1962 Amendment
Amendment by section 12(b)(1) of
Effective Date of 1960 Amendment
Amendment by section 3(a) of
Effect of Amendment by Pub. L. 103–149 on Revenue Ruling 92–62
Amendment by section 4(b)(8)(A) of
Plan Amendments Not Required Until January 1, 1989
For provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§1101–1147 and 1171–1177] or title XVIII [§§1800–1899A] of
Cross References
Credit for foreign taxes, see
Foreign tax credit, applicable rules, see
Income from sources within possessions of the United States, foreign tax credit, see
Investment companies, foreign tax credit allowed to shareholder, see
Limitations, special rules relating to foreign tax credit, see
Nonresident aliens, foreign tax credit not allowed, see
Partners and partnerships, taxes paid or accrued to foreign countries and possessions of the United States, see
Tax on resident foreign corporations, foreign tax credit, see
Taxes of foreign countries and possessions of the United States, see
Section Referred to in Other Sections
This section is referred to in
§902. Deemed paid credit where domestic corporation owns 10 percent or more of voting stock of foreign corporation
(a) Taxes paid by foreign corporation treated as paid by domestic corporation
For purposes of this subpart, a domestic corporation which owns 10 percent or more of the voting stock of a foreign corporation from which it receives dividends in any taxable year shall be deemed to have paid the same proportion of such foreign corporation's post-1986 foreign income taxes as—
(1) the amount of such dividends (determined without regard to section 78), bears to
(2) such foreign corporation's post-1986 undistributed earnings.
(b) Deemed taxes increased in case of certain 2nd and 3rd tier foreign corporations
(1) 2nd tier
If the foreign corporation described in subsection (a) (hereinafter in this section referred to as the "1st tier corporation") owns 10 percent or more of the voting stock of a 2nd foreign corporation from which it receives dividends in any taxable year, the 1st tier corporation shall be deemed to have paid the same proportion of such 2nd foreign corporation's post-1986 foreign income taxes as would be determined under subsection (a) if such 1st tier corporation were a domestic corporation.
(2) 3rd tier
If such 1st tier corporation owns 10 percent or more of the voting stock of a 2nd foreign corporation which, in turn, owns 10 percent or more of the voting stock of a 3rd foreign corporation from which the 2nd corporation receives dividends in any taxable year, such 2nd foreign corporation shall be deemed to have paid the same proportion of such 3rd foreign corporation's post-1986 foreign income taxes as would be determined under subsection (a) if such 2nd foreign corporation were a domestic corporation.
(3) 5 percent stock requirement
For purposes of this subpart—
(A) For 2nd tier
Paragraph (1) shall not apply unless the percentage of voting stock owned by the domestic corporation in the 1st tier corporation and the percentage of voting stock owned by the 1st tier corporation in the 2nd foreign corporation when multiplied together equal at least 5 percent.
(B) For 3rd tier
Paragraph (2) shall not apply unless the percentage arrived at for purposes of applying paragraph (1) when multiplied by the percentage of voting stock owned by the 2nd foreign corporation in the 3rd foreign corporation is equal to at least 5 percent.
(c) Definitions and special rules
For purposes of this section—
(1) Post-1986 undistributed earnings
The term "post-1986 undistributed earnings" means the amount of the earnings and profits of the foreign corporation (computed in accordance with sections 964(a) and 986) accumulated in taxable years beginning after December 31, 1986—
(A) as of the close of the taxable year of the foreign corporation in which the dividend is distributed, and
(B) without diminution by reason of dividends distributed during such taxable year.
(2) Post-1986 foreign income taxes
The term "post-1986 foreign income taxes" means the sum of—
(A) the foreign income taxes with respect to the taxable year of the foreign corporation in which the dividend is distributed, and
(B) the foreign income taxes with respect to prior taxable years beginning after December 31, 1986, to the extent such foreign taxes were not deemed paid with respect to dividends distributed by the foreign corporation in prior taxable years.
(3) Special rule where domestic corporation acquires 10 percent of foreign corporation after December 31, 1986
(A) In general
If the 1st day on which the ownership requirements of subparagraph (B) are met with respect to any foreign corporation is in a taxable year of such corporation beginning after December 31, 1986, the post-1986 undistributed earnings and the post-1986 foreign income taxes of such foreign corporation shall be determined by taking into account only periods beginning on and after the 1st day of the 1st taxable year in which such ownership requirements are met.
(B) Ownership requirements
The ownership requirements of this subparagraph are met with respect to any foreign corporation if—
(i) 10 percent or more of the voting stock of such foreign corporation is owned by a domestic corporation,
(ii) the requirements of subsection (b)(3)(A) are met with respect to such foreign corporation and 10 percent or more of the voting stock of such foreign corporation is owned by another foreign corporation described in clause (i), or
(iii) the requirements of subsection (b)(3)(B) are met with respect to such foreign corporation and 10 percent or more of the voting stock of such foreign corporation is owned by another foreign corporation described in clause (ii).
(4) Foreign income taxes
(A) In general
The term "foreign income taxes" means any income, war profits, or excess profits taxes paid by the foreign corporation to any foreign country or possession of the United States.
(B) Treatment of deemed taxes
Except for purposes of determining the amount of the post-1986 foreign income taxes of a 3rd foreign corporation referred to in subsection (b)(2), the term "foreign income taxes" includes any such taxes deemed to be paid by the foreign corporation under this section.
(5) Accounting periods
In the case of a foreign corporation the income, war profits, and excess profits taxes of which are determined on the basis of an accounting period of less than 1 year, the word "year" as used in this subsection shall be construed to mean such accounting period.
(6) Treatment of distributions from earnings before 1987
(A) In general
In the case of any dividend paid by a foreign corporation out of accumulated profits (as defined in this section as in effect on the day before the date of the enactment of the Tax Reform Act of 1986) for taxable years beginning before the 1st taxable year taken into account in determining the post-1986 undistributed earnings of such corporation—
(i) this section (as amended by the Tax Reform Act of 1986) shall not apply, but
(ii) this section (as in effect on the day before the date of the enactment of such Act) shall apply.
(B) Dividends paid first out of post-1986 earnings
Any dividend in a taxable year beginning after December 31, 1986, shall be treated as made out of post-1986 undistributed earnings to the extent thereof.
(7) Regulations
The Secretary shall provide such regulations as may be necessary or appropriate to carry out the provisions of this section and section 960, including provisions which provide for the separate application of this section and section 960 to reflect the separate application of section 904 to separate types of income and loss.
(d) Cross references
(1) For inclusion in gross income of an amount equal to taxes deemed paid under subsection (a), see section 78.
(2) For application of subsections (a) and (b) with respect to taxes deemed paid in a prior taxable year by a United States shareholder with respect to a controlled foreign corporation, see section 960.
(3) For reduction of credit with respect to dividends paid out of post-1986 undistributed earnings for years for which certain information is not furnished, see section 6038.
(Aug. 16, 1954, ch. 736,
References in Text
The date of the enactment of the Tax Reform Act of 1986, referred to in subsec. (c)(6)(A), is the date of enactment of
The Tax Reform Act of 1986, referred to in subsec. (c)(6)(A)(i), is
Amendments
1988—Subsec. (c)(1).
Subsec. (c)(7).
1986—
1976—
1975—Subsec. (d).
1971—Subsec. (b).
Subsec. (c)(1)(A).
Subsec. (c)(1)(B).
1962—Subsec. (a).
Subsec. (b).
"(1) for purposes of applying subsection (a)(1), the amount of such dividends bears to the amount of the accumulated profits (as defined in subsection (c)(1)(A)) of such other foreign corporation from which such dividends were paid in excess of such income, war profits, and excess profits taxes, or
"(2) for purposes of applying subsection (a)(2), the amount of such dividends bears to the amount of the accumulated profits (as defined in subsection (c)(1)(B)) of such other foreign corporation from which such dividends were paid"
for "from which such dividends were paid, which the amount of such dividends bears to the amount of such accumulated profits".
Subsec. (c).
Subsec. (d).
Subsec. (e).
1960—Subsec. (e).
Effective Date of 1988 Amendment
Amendment by
Effective Date of 1986 Amendment
Section 1202(e) of
Effective Date of 1976 Amendment
Section 1033(c) of
"(1) in respect of any distribution received by a domestic corporation after December 31, 1977, and
"(2) in respect of any distribution received by a domestic corporation before January 1, 1978, in a taxable year of such corporation beginning after December 31, 1975, but only to the extent that such distribution is made out of the accumulated profits of a foreign corporation for a taxable year (of such foreign corporation) beginning after December 31, 1975.
For purposes of paragraph (2), a distribution made by a foreign corporation out of its profits which are attributable to a distribution received from a foreign corporation to which section 902(b) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] applies shall be treated as made out of the accumulated profits of a foreign corporation for a taxable year beginning before January 1, 1976, to the extent that such distribution was paid out of the accumulated profits of such foreign corporation for a taxable year beginning before January 1, 1976."
Effective Date of 1975 Amendment
Amendment by
Effective Date of 1971 Amendment
Section 3 of
Effective Date of 1962 Amendment
Section 9(e) of
"(1) in respect of any distribution received by a domestic corporation after December 31, 1964, and
"(2) in respect of any distribution received by a domestic corporation before January 1, 1965, in a taxable year of such corporation beginning after December 31, 1962, but only to the extent that such distribution is made out of the accumulated profits of a foreign corporation for a taxable year (of such foreign corporation) beginning after December 31, 1962.
For purposes of paragraph (2), a distribution made by a foreign corporation out of its profits which are attributable to a distribution received from a foreign subsidiary to which section 902(b) applies shall be treated as made out of the accumulated profits of a foreign corporation for a taxable year beginning before January 1, 1963, to the extent that such distribution was paid out of the accumulated profits of such foreign subsidiary for a taxable year beginning before January 1, 1963."
Effective Date of 1960 Amendment
Amendment by
Increase in Earnings and Profits of Foreign Corporations Under Section 1023(e)(3)(C) of Pub. L. 99–514
Section 1012(b)(3) of
Section Referred to in Other Sections
This section is referred to in
§903. Credit for taxes in lieu of income, etc., taxes
For purposes of this part and of sections 164(a) and 275(a), the term "income, war profits, and excess profits taxes" shall include a tax paid in lieu of a tax on income, war profits, or excess profits otherwise generally imposed by any foreign country or by any possession of the United States.
(Aug. 16, 1954, ch. 736,
Amendments
1988—
1964—
Effective Date of 1988 Amendment
Amendment by
Effective Date of 1964 Amendment
Amendment by
§904. Limitation on credit
(a) Limitation
The total amount of the credit taken under section 901(a) shall not exceed the same proportion of the tax against which such credit is taken which the taxpayer's taxable income from sources without the United States (but not in excess of the taxpayer's entire taxable income) bears to his entire taxable income for the same taxable year.
(b) Taxable income for purpose of computing limitation
(1) Personal exemptions
For purposes of subsection (a), the taxable income in the case of an individual, estate, or trust shall be computed without any deduction for personal exemptions under section 151 or 642(b).
(2) Capital gains
For purposes of this section—
(A) In general
Taxable income from sources outside the United States shall include gain from the sale or exchange of capital assets only to the extent of foreign source capital gain net income.
(B) Special rules where capital gain rate differential
In the case of any taxable year for which there is a capital gain rate differential—
(i) in lieu of applying subparagraph (A), the taxable income from sources outside the United States shall include gain from the sale or exchange of capital assets only in an amount equal to foreign source capital gain net income reduced by the rate differential portion of foreign source net capital gain,
(ii) the entire taxable income shall include gain from the sale or exchange of capital assets only in an amount equal to capital gain net income reduced by the rate differential portion of net capital gain, and
(iii) for purposes of determining taxable income from sources outside the United States, any net capital loss (and any amount which is a short-term capital loss under section 1212(a)) from sources outside the United States to the extent taken into account in determining capital gain net income for the taxable year shall be reduced by an amount equal to the rate differential portion of the excess of net capital gain from sources within the United States over net capital gain.
(3) Definitions
For purposes of this subsection—
(A) Foreign source capital gain net income
The term "foreign source capital gain net income" means the lesser of—
(i) capital gain net income from sources without the United States, or
(ii) capital gain net income.
(B) Foreign source net capital gain
The term "foreign source net capital gain" means the lesser of—
(i) net capital gain from sources without the United States, or
(ii) net capital gain.
(C) Section 1231 gains
The term "gain from the sale or exchange of capital assets" includes any gain so treated under section 1231.
(D) Capital gain rate differential
There is a capital gain rate differential for any taxable year if—
(i) in the case of a taxpayer other than a corporation, subsection (h) of section 1 applies to such taxable year, or
(ii) in the case of a corporation, any rate of tax imposed by section 11, 511, or 831(a) or (b) (whichever applies) exceeds the alternative rate of tax under section 1201(a) (determined without regard to the last sentence of section 11(b)(1)).
(E) Rate differential portion
(i) In general
The rate differential portion of foreign source net capital gain, net capital gain, or the excess of net capital gain from sources within the United States over net capital gain, as the case may be, is the same proportion of such amount as—
(I) the excess of the highest applicable tax rate over the alternative tax rate, bears to
(II) the highest applicable tax rate.
(ii) Highest applicable tax rate
For purposes of clause (i), the term "highest applicable tax rate" means—
(I) in the case of a taxpayer other than a corporation, the highest rate of tax set forth in subsection (a), (b), (c), (d), or (e) of section 1 (whichever applies), or
(II) in the case of a corporation, the highest rate of tax specified in section 11(b).
(iii) Alternative tax rate
For purposes of clause (i), the term "alternative tax rate" means—
(I) in the case of a taxpayer other than a corporation, the alternative rate of tax determined under section 1(h), or
(II) in the case of a corporation, the alternative rate of tax under section 1201(a).
(4) Coordination with section 936
For purposes of subsection (a), in the case of a corporation, the taxable income shall not include any portion thereof taken into account for purposes of the credit (if any) allowed by section 936 (without regard to subsections (a)(4) and (i) thereof).
(c) Carryback and carryover of excess tax paid
Any amount by which all taxes paid or accrued to foreign countries or possessions of the United States for any taxable year for which the taxpayer chooses to have the benefits of this subpart exceed the limitation under subsection (a) shall be deemed taxes paid or accrued to foreign countries or possessions of the United States in the second preceding taxable year, in the first preceding taxable year, and in the first, second, third, fourth, or fifth succeeding taxable years, in that order and to the extent not deemed taxes paid or accrued in a prior taxable year, in the amount by which the limitation under subsection (a) for such preceding or succeeding taxable year exceeds the sum of the taxes paid or accrued to foreign countries or possessions of the United States for such preceding or succeeding taxable year and the amount of the taxes for any taxable year earlier than the current taxable year which shall be deemed to have been paid or accrued in such preceding or subsequent taxable year (whether or not the taxpayer chooses to have the benefits of this subpart with respect to such earlier taxable year). Such amount deemed paid or accrued in any year may be availed of only as a tax credit and not as a deduction and only if the taxpayer for such year chooses to have the benefits of this subpart as to taxes paid or accrued for that year to foreign countries or possessions of the United States.
(d) Separate application of section with respect to certain categories of income
(1) In general
The provisions of subsections (a), (b), and (c) and sections 902, 907, and 960 shall be applied separately with respect to each of the following items of income:
(A) passive income,
(B) high withholding tax interest,
(C) financial services income,
(D) shipping income,
(E) in the case of a corporation, dividends from each noncontrolled section 902 corporation,
(F) dividends from a DISC or former DISC (as defined in section 992(a)) to the extent such dividends are treated as income from sources without the United States,
(G) taxable income attributable to foreign trade income (within the meaning of section 923(b)),
(H) distributions from a FSC (or a former FSC) out of earnings and profits attributable to foreign trade income (within the meaning of section 923(b)) or interest or carrying charges (as defined in section 927(d)(1)) derived from a transaction which results in foreign trade income (as defined in section 923(b)), and
(I) income other than income described in any of the preceding subparagraphs.
(2) Definitions and special rules
For purposes of this subsection—
(A) Passive income
(i) In general
Except as otherwise provided in this subparagraph, the term "passive income" means any income received or accrued by any person which is of a kind which would be foreign personal holding company income (as defined in section 954(c)).
(ii) Certain amounts included
Except as provided in clause (iii), the term "passive income" includes any amount includible in gross income under section 551 or, except as provided in subparagraph (E)(iii) or paragraph (3)(I), section 1293 (relating to certain passive foreign investment companies).
(iii) Exceptions
The term "passive income" shall not include—
(I) any income described in a subparagraph of paragraph (1) other than subparagraph (A),
(II) any export financing interest, and
(III) any high-taxed income.
(iv) Clarification of application of section 864(d)(6)
In determining whether any income is of a kind which would be foreign personal holding company income, the rules of section 864(d)(6) shall apply only in the case of income of a controlled foreign corporation.
(B) High withholding tax interest
(i) In general
Except as otherwise provided in this subparagraph, the term "high withholding tax interest" means any interest if—
(I) such interest is subject to a withholding tax of a foreign country or possession of the United States (or other tax determined on a gross basis), and
(II) the rate of such tax applicable to such interest is at least 5 percent.
(ii) Exception for export financing
The term "high withholding tax interest" shall not include any export financing interest.
(iii) Regulations
The Secretary may by regulations provide that—
(I) amounts (not otherwise high withholding tax interest) shall be treated as high withholding tax interest where necessary to prevent avoidance of the purposes of this subparagraph, and
(II) a tax shall not be treated as a withholding tax or other tax imposed on a gross basis if such tax is in the nature of a prepayment of a tax imposed on a net basis.
(C) Financial services income
(i) In general
Except as otherwise provided in this subparagraph, the term "financial services income" means any income which is received or accrued by any person predominantly engaged in the active conduct of a banking, insurance, financing, or similar business, and which is—
(I) described in clause (ii),
(II) passive income (determined without regard to subclause (I) of subparagraph (A)(iii)), or
(III) export financing interest which (but for subparagraph (B)(ii)) would be high withholding tax interest.
(ii) General description of financial services income
Income is described in this clause if such income is—
(I) derived in the active conduct of a banking, financing, or similar business,
(II) derived from the investment by an insurance company of its unearned premiums or reserves ordinary and necessary for the proper conduct of its insurance business, or
(III) of a kind which would be insurance income as defined in section 953(a) determined without regard to those provisions of paragraph (1)(A) of such section which limit insurance income to income from countries other than the country in which the corporation was created or organized.
(iii) Exceptions
The term "financial services income" does not include—
(I) any high withholding tax interest,
(II) any dividend from a noncontrolled section 902 corporation, and
(III) any export financing interest not described in clause (i)(III).
(D) Shipping income
The term "shipping income" means any income received or accrued by any person which is of a kind which would be foreign base company shipping income (as defined in section 954(f)). Such term does not include any dividend from a noncontrolled section 902 corporation and does not include any financial services income.
(E) Noncontrolled section 902 corporation
(i) In general
The term "noncontrolled section 902 corporation" means any foreign corporation with respect to which the taxpayer meets the stock ownership requirements of section 902(a) (or, for purposes of applying paragraph (3), the requirements of section 902(b)). A controlled foreign corporation shall not be treated as a noncontrolled section 902 corporation with respect to any distribution out of its earnings and profits for periods during which it was a controlled foreign corporation and except as provided in regulations, the taxpayer was a United States shareholder in such corporation.
(ii) Special rule for taxes on high-withholding tax interest
If a foreign corporation is a noncontrolled section 902 corporation with respect to the taxpayer, taxes on high withholding tax interest (to the extent imposed at a rate in excess of 5 percent) shall not be treated as foreign taxes for purposes of determining the amount of foreign taxes deemed paid by the taxpayer under section 902.
(iii) Treatment of inclusions under section 1293
If any foreign corporation is a non-controlled section 902 corporation with respect to the taxpayer, any inclusion under section 1293 with respect to such corporation shall be treated as a dividend from such corporation.
(F) High-taxed income
The term "high-taxed income" means any income which (but for this subparagraph) would be passive income if the sum of—
(i) the foreign income taxes paid or accrued by the taxpayer with respect to such income, and
(ii) the foreign income taxes deemed paid by the taxpayer with respect to such income under section 902 or 960,
exceeds the highest rate of tax specified in section 1 or 11 (whichever applies) multiplied by the amount of such income (determined with regard to section 78). For purposes of the preceding sentence, the term "foreign income taxes" means any income, war profits, or excess profits tax imposed by any foreign country or possession of the United States.
(G) Export financing interest
For purposes of this paragraph, the term "export financing interest" means any interest derived from financing the sale (or other disposition) for use or consumption outside the United States of any property—
(i) which is manufactured, produced, grown, or extracted in the United States by the taxpayer or a related person, and
(ii) not more than 50 percent of the fair market value of which is attributable to products imported into the United States.
For purposes of clause (ii), the fair market value of any property imported into the United States shall be its appraised value, as determined by the Secretary under section 402 of the Tariff Act of 1930 (
(H) Related person
For purposes of this paragraph, the term "related person" has the meaning given such term by section 954(d)(3), except that such section shall be applied by substituting "the person with respect to whom the determination is being made" for "controlled foreign corporation" each place it appears.
(I) Transitional rule
For purposes of paragraph (1)—
(i) taxes paid or accrued in a taxable year beginning before January 1, 1987, with respect to income which was described in subparagraph (A) of paragraph (1) (as in effect on the day before the date of the enactment of the Tax Reform Act of 1986) shall be treated as taxes paid or accrued with respect to income described in subparagraph (A) of paragraph (1) (as in effect after such date),
(ii) taxes paid or accrued in a taxable year beginning before January 1, 1987, with respect to income which was described in subparagraph (E) of paragraph (1) (as in effect on the day before the date of the enactment of the Tax Reform Act of 1986) shall be treated as taxes paid or accrued with respect to income described in subparagraph (I) of paragraph (1) (as in effect after such date) except that—
(I) such taxes shall be treated as paid or accrued with respect to shipping income to the extent the taxpayer establishes to the satisfaction of the Secretary that such taxes were paid or accrued with respect to such income,
(II) in the case of a person described in subparagraph (C)(i), such taxes shall be treated as paid or accrued with respect to financial services income to the extent the taxpayer establishes to the satisfaction of the Secretary that such taxes were paid or accrued with respect to such income, and
(III) such taxes shall be treated as paid or accrued with respect to high withholding tax interest to the extent the taxpayer establishes to the satisfaction of the Secretary that such taxes were paid or accrued with respect to such income, and
(iii) taxes paid or accrued in a taxable year beginning before January 1, 1987, with respect to income described in any other subparagraph of paragraph (1) (as so in effect before such date) shall be treated as taxes paid or accrued with respect to income described in the corresponding subparagraph of paragraph (1) (as so in effect after such date).
(3) Look-thru in case of controlled foreign corporations
(A) In general
Except as otherwise provided in this paragraph, dividends, interest, rents, and royalties received or accrued by the taxpayer from a controlled foreign corporation in which the taxpayer is a United States shareholder shall not be treated as income in a separate category.
(B) Subpart F inclusions
Any amount included in gross income under section 951(a)(1)(A) shall be treated as income in a separate category to the extent the amount so included is attributable to income in such category.
(C) Interest, rents, and royalties
Any interest, rent, or royalty which is received or accrued from a controlled foreign corporation in which the taxpayer is a United States shareholder shall be treated as income in a separate category to the extent it is properly allocable (under regulations prescribed by the Secretary) to income of the controlled foreign corporation in such category.
(D) Dividends
Any dividend paid out of the earnings and profits of any controlled foreign corporation in which the taxpayer is a United States shareholder shall be treated as income in a separate category in proportion to the ratio of—
(i) the portion of the earnings and profits attributable to income in such category, to
(ii) the total amount of earnings and profits.
(E) Look-thru applies only where subpart F applies
If a controlled foreign corporation meets the requirements of section 954(b)(3)(A) (relating to de minimis rule) for any taxable year, for purposes of this paragraph, none of its foreign base company income (as defined in section 954(a) without regard to section 954(b)(5)) and none of its gross insurance income (as defined in section 954(b)(3)(C)) for such taxable year shall be treated as income in a separate category, except that this sentence shall not apply to any income which (without regard to this sentence) would be treated as financial services income. Solely for purposes of applying subparagraph (D), passive income of a controlled foreign corporation shall not be treated as income in a separate category if the requirements of section 954(b)(4) are met with respect to such income.
(F) Separate category
For purposes of this paragraph—
(i) In general
Except as provided in clause (ii), the term "separate category" means any category of income described in subparagraph (A), (B), (C), (D), or (E) of paragraph (1).
(ii) Coordination with high-taxed income provisions
(I) In determining whether any income of a controlled foreign corporation is in a separate category, subclause (III) of paragraph (2)(A)(iii) shall not apply.
(II) Any income of the taxpayer which is treated as income in a separate category under this paragraph shall be so treated notwithstanding any provision of paragraph (2); except that the determination of whether any amount is high-taxed income shall be made after the application of this paragraph.
(G) Dividend
For purposes of this paragraph, the term "dividend" includes any amount included in gross income in section 951(a)(1)(B). Any amount included in gross income under section 78 to the extent attributable to amounts included in gross income in section 951(a)(1)(A) shall not be treated as a dividend but shall be treated as included in gross income under section 951(a)(1)(A).
(H) Exception for certain high withholding tax interest
This paragraph shall not apply to any amount which—
(i) without regard to this paragraph, is high withholding tax interest (including any amount treated as high withholding tax interest under paragraph (2)(B)(iii)), and
(ii) would (but for this subparagraph) be treated as financial services income under this paragraph.
The amount to which this paragraph does not apply by reason of the preceding sentence shall not exceed the interest or equivalent income of the controlled foreign corporation taken into account in determining financial services income without regard to this subparagraph.
(I) Look-thru applies to passive foreign investment company inclusion
If—
(i) a passive foreign investment company is a controlled foreign corporation, and
(ii) the taxpayer is a United States shareholder in such controlled foreign corporation,
any amount included in gross income under section 1293 shall be treated as income in a separate category to the extent such amount is attributable to income in such category.
(4) Controlled foreign corporation; United States shareholder
For purposes of this subsection—
(A) Controlled foreign corporation
The term "controlled foreign corporation" has the meaning given such term by section 957 (taking into account section 953(c)).
(B) United States shareholder
The term "United States shareholder" has the meaning given such term by section 951(b) (taking into account section 953(c)).
(5) Regulations
The Secretary shall prescribe such regulations as may be necessary or appropriate for the purposes of this subsection, including regulations—
(A) for the application of paragraph (3) and subsection (f)(5) in the case of income paid (or loans made) through 1 or more entities or between 2 or more chains of entities,
(B) preventing the manipulation of the character of income the effect of which is to avoid the purposes of this subsection, and
(C) providing that rules similar to the rules of paragraph (3)(C) shall apply to interest, rents, and royalties received or accrued from entities which would be controlled foreign corporations if they were foreign corporations.
[(e) Repealed. Pub. L. 101–508, title XI, §11801(a)(31), Nov. 5, 1990, 104 Stat. 1388–521 ]
(f) Recapture of overall foreign loss
(1) General rule
For purposes of this subpart and section 936, in the case of any taxpayer who sustains an overall foreign loss for any taxable year, that portion of the taxpayer's taxable income from sources without the United States for each succeeding taxable year which is equal to the lesser of—
(A) the amount of such loss (to the extent not used under this paragraph in prior taxable years), or
(B) 50 percent (or such larger percent as the taxpayer may choose) of the taxpayer's taxable income from sources without the United States for such succeeding taxable year,
shall be treated as income from sources within the United States (and not as income from sources without the United States).
(2) Overall foreign loss defined
For purposes of this subsection, the term "overall foreign loss" means the amount by which the gross income for the taxable year from sources without the United States (whether or not the taxpayer chooses the benefits of this subpart for such taxable year) for such year is exceeded by the sum of the deductions properly apportioned or allocated thereto, except that there shall not be taken into account—
(A) any net operating loss deduction allowable for such year under section 172(a), and
(B) any—
(i) foreign expropriation loss for such year, as defined in section 172(h),1 or
(ii) loss for such year which arises from fire, storm, shipwreck, or other casualty, or from theft,
to the extent such loss is not compensated for by insurance or otherwise.
(3) Dispositions
(A) In general
For purposes of this chapter, if property which has been used predominantly without the United States in a trade or business is disposed of during any taxable year—
(i) the taxpayer, notwithstanding any other provision of this chapter (other than paragraph (1)), shall be deemed to have received and recognized taxable income from sources without the United States in the taxable year of the disposition, by reason of such disposition, in an amount equal to the lesser of the excess of the fair market value of such property over the taxpayer's adjusted basis in such property or the remaining amount of the overall foreign losses which were not used under paragraph (1) for such taxable year or any prior taxable year, and
(ii) paragraph (1) shall be applied with respect to such income by substituting "100 percent" for "50 percent".
In determining for purposes of this subparagraph whether the predominant use of any property has been without the United States, there shall be taken into account use during the 3-year period ending on the date of the disposition (or, if shorter, the period during which the property has been used in the trade or business).
(B) Disposition defined and special rules
(i) For purposes of this subsection, the term "disposition" includes a sale, exchange, distribution, or gift of property whether or not gain or loss is recognized on the transfer.
(ii) Any taxable income recognized solely by reason of subparagraph (A) shall have the same characterization it would have had if the taxpayer had sold or exchanged the property.
(iii) The Secretary shall prescribe such regulations as he may deem necessary to provide for adjustments to the basis of property to reflect taxable income recognized solely by reason of subparagraph (A).
(C) Exceptions
Notwithstanding subparagraph (B), the term "disposition" does not include—
(i) a disposition of property which is not a material factor in the realization of income by the taxpayer, or
(ii) a disposition of property to a domestic corporation in a distribution or transfer described in section 381(a).
(4) Accumulation distributions of foreign trust
For purposes of this chapter, in the case of amounts of income from sources without the United States which are treated under section 666 (without regard to subsections (b) and (c) thereof if the taxpayer chose to take a deduction with respect to the amounts described in such subsections under section 667(d)(1)(B)) as having been distributed by a foreign trust in a preceding taxable year, that portion of such amounts equal to the amount of any overall foreign loss sustained by the beneficiary in a year prior to the taxable year of the beneficiary in which such distribution is received from the trust shall be treated as income from sources within the United States (and not income from sources without the United States) to the extent that such loss was not used under this subsection in prior taxable years, or in the current taxable year, against other income of the beneficiary.
(5) Treatment of separate limitation losses
(A) In general
The amount of the separate limitation losses for any taxable year shall reduce income from sources within the United States for such taxable year only to the extent the aggregate amount of such losses exceeds the aggregate amount of the separate limitation incomes for such taxable year.
(B) Allocation of losses
The separate limitation losses for any taxable year (to the extent such losses do not exceed the separate limitation incomes for such year) shall be allocated among (and operate to reduce) such incomes on a proportionate basis.
(C) Recharacterization of subsequent income
If—
(i) a separate limitation loss from any income category (hereinafter in this subparagraph referred to as "the loss category") was allocated to income from any other category under subparagraph (B), and
(ii) the loss category has income for a subsequent taxable year,
such income (to the extent it does not exceed the aggregate separate limitation losses from the loss category not previously recharacterized under this subparagraph) shall be recharacterized as income from such other category in proportion to the prior reductions under subparagraph (B) in such other category not previously taken into account under this subparagraph. Nothing in the preceding sentence shall be construed as recharacterizing any tax.
(D) Special rules for losses from sources in the United States
Any loss from sources in the United States for any taxable year (to the extent such loss does not exceed the separate limitation incomes from such year) shall be allocated among (and operate to reduce) such incomes on a proportionate basis. This subparagraph shall be applied after subparagraph (B).
(E) Definitions
For purposes of this paragraph—
(i) Income category
The term "income category" means each separate category of income described in subsection (d)(1).
(ii) Separate limitation income
The term "separate limitation income" means, with respect to any income category, the taxable income from sources outside the United States, separately computed for such category.
(iii) Separate limitation loss
The term "separate limitation loss" means, with respect to any income category, the loss from such category determined under the principles of section 907(c)(4)(B).
(F) Dispositions
If any separate limitation loss for any taxable year is allocated against any separate limitation income for such taxable year, except to the extent provided in regulations, rules similar to the rules of paragraph (3) shall apply to any disposition of property if gain from such disposition would be in the income category with respect to which there was such separate limitation loss.
(g) Source rules in case of United States-owned foreign corporations
(1) In general
The following amounts which are derived from a United States-owned foreign corporation and which would be treated as derived from sources outside the United States without regard to this subsection shall, for purposes of this section, be treated as derived from sources within the United States to the extent provided in this subsection:
(A) Any amount included in gross income under—
(i) section 951(a) (relating to amounts included in gross income of United States shareholders),
(ii) section 551 (relating to foreign personal holding company income taxed to United States shareholders), or
(iii) section 1293 (relating to current taxation of income from qualified funds).
(B) Interest.
(C) Dividends.
(2) Subpart F and foreign personal holding or passive foreign investment company inclusions
Any amount described in subparagraph (A) of paragraph (1) shall be treated as derived from sources within the United States to the extent such amount is attributable to income of the United States-owned foreign corporation from sources within the United States.
(3) Certain interest allocable to United States source income
Any interest which—
(A) is paid or accrued by a United States-owned foreign corporation during any taxable year,
(B) is paid or accrued to a United States shareholder (as defined in section 951(b)) or a related person (within the meaning of section 267(b)) to such a shareholder, and
(C) is properly allocable (under regulations prescribed by the Secretary) to income of such foreign corporation for the taxable year from sources within the United States,
shall be treated as derived from sources within the United States.
(4) Dividends
(A) In general
The United States source ratio of any dividend paid or accrued by a United States-owned foreign corporation shall be treated as derived from sources within the United States.
(B) United States source ratio
For purposes of subparagraph (A), the term "United States source ratio" means, with respect to any dividend paid out of the earnings and profits for any taxable year, a fraction—
(i) the numerator of which is the portion of the earnings and profits for such taxable year from sources within the United States, and
(ii) the denominator of which is the total amount of earnings and profits for such taxable year.
(5) Exception where United States-owned foreign corporation has small amount of United States source income
Paragraph (3) shall not apply to interest paid or accrued during any taxable year (and paragraph (4) shall not apply to any dividends paid out of the earnings and profits for such taxable year) if—
(A) the United States-owned foreign corporation has earnings and profits for such taxable year, and
(B) less than 10 percent of such earnings and profits is attributable to sources within the United States.
For purposes of the preceding sentence, earnings and profits shall be determined without any reduction for interest described in paragraph (3) (determined without regard to subparagraph (C) thereof).
(6) United States-owned foreign corporation
For purposes of this subsection, the term "United States-owned foreign corporation" means any foreign corporation if 50 percent or more of—
(A) the total combined voting power of all classes of stock of such corporation entitled to vote, or
(B) the total value of the stock of such corporation,
is held directly (or indirectly through applying paragraphs (2) and (3) of section 958(a) and paragraph (4) of section 318(a)) by United States persons (as defined in section 7701(a)(30)).
(7) Dividend
For purposes of this subsection, the term "dividend" includes any gain treated as ordinary income under section 1246 or as a dividend under section 1248.
(8) Coordination with subsection (f)
This subsection shall be applied before subsection (f).
(9) Treatment of certain domestic corporations
For purposes of this subsection—
(A) in the case of interest treated as not from sources within the United States under section 861(a)(1)(A), the corporation paying such interest shall be treated as a United States-owned foreign corporation, and
(B) in the case of any dividend treated as not from sources within the United States under section 861(a)(2)(A), the corporation paying such dividend shall be treated as a United States-owned foreign corporation.
(10) Coordination with treaties
(A) In general
If—
(i) any amount derived from a United States-owned foreign corporation would be treated as derived from sources within the United States under this subsection by reason of an item of income of such United States-owned foreign corporation,
(ii) under a treaty obligation of the United States (applied without regard to this subsection and by treating any amount included in gross income under section 951(a)(1) as a dividend), such amount would be treated as arising from sources outside the United States, and
(iii) the taxpayer chooses the benefits of this paragraph,
this subsection shall not apply to such amount to the extent attributable to such item of income (but subsections (a), (b), and (c) of this section and sections 902, 907, and 960 shall be applied separately with respect to such amount to the extent so attributable).
(B) Special rule
Amounts included in gross income under section 951(a)(1) shall be treated as a dividend under subparagraph (A)(ii) only if dividends paid by each corporation (the stock in which is taken into account in determining whether the shareholder is a United States shareholder in the United States-owned foreign corporation), if paid to the United States shareholder, would be treated under a treaty obligation of the United States as arising from sources outside the United States (applied without regard to this subsection).
(11) Regulations
The Secretary shall prescribe such regulations as may be necessary or appropriate for purposes of this subsection, including—
(A) regulations for the application of this subsection in the case of interest or dividend payments through 1 or more entities, and
(B) regulations providing that this subsection shall apply to interest paid or accrued to any person (whether or not a United States shareholder).
(h) Coordination with nonrefundable personal credits
In the case of an individual, for purposes of subsection (a), the tax against which the credit is taken is such tax reduced by the sum of the credits allowable under subpart A of part IV of subchapter A of this chapter.
(i) Limitation on use of deconsolidation to avoid foreign tax credit limitations
If 2 or more domestic corporations would be members of the same affiliated group if—
(1) section 1504(b) were applied without regard to the exceptions contained therein, and
(2) the constructive ownership rules of section 1563(e) applied for purposes of section 1504(a),
the Secretary may by regulations provide for resourcing the income of any of such corporations or for modifications to the consolidated return regulations to the extent that such resourcing or modifications are necessary to prevent the avoidance of the provisions of this subpart.
(j) Cross reference
(1) For increase of limitation under subsection (a) for taxes paid with respect to amounts received which were included in the gross income of the taxpayer for a prior taxable year as a United States shareholder with respect to a controlled foreign corporation, see section 960(b).
(2) For modification of limitation under subsection (a) for purposes of determining the amount of credit which can be taken against the alternative minimum tax, see section 59(a).
(Aug. 16, 1954, ch. 736,
References in Text
The date of the enactment of the Tax Reform Act of 1986, referred to in subsec. (d)(2)(I), is the date of the enactment of
Section 172(h), referred to in subsec. (f)(2)(B)(i), was repealed by
Amendments
1993—Subsec. (b)(4).
Subsec. (d)(2)(A)(iii)(II) to (IV).
1990—Subsec. (b)(3)(D)(i).
Subsec. (b)(3)(E)(iii)(I).
Subsec. (e).
1989—Subsec. (d)(1)(H).
Subsecs. (i), (j).
1988—Subsec. (b)(2).
Subsec. (b)(3)(D).
Subsec. (b)(3)(D)(ii).
Subsec. (b)(3)(E).
Subsec. (d)(1)(E).
Subsec. (d)(2)(A)(ii).
Subsec. (d)(2)(A)(iv).
Subsec. (d)(2)(B)(iii).
Subsec. (d)(2(C).
Subsec. (d)(2)(D).
Subsec. (d)(2)(E)(i).
Subsec. (d)(2)(E)(iii).
Subsec. (d)(2)(I)(ii).
"(I) the taxpayer establishes to the satisfaction of the Secretary that such taxes were paid or accrued with respect to shipping income, or
"(II) in the case of an entity meeting the requirements of subparagraph (C)(ii), the taxpayer establishes to the satisfaction of the Secretary that such taxes were paid or accrued with respect to financial services income, and".
Subsec. (d)(3)(E).
Subsec. (d)(3)(F).
Subsec. (d)(3)(H).
Subsec. (d)(3)(I).
Subsec. (f)(5)(F).
Subsec. (g)(9)(A).
Subsec. (g)(10), (11).
1986—Subsec. (a).
Subsec. (b)(3)(C).
"(i) in the case of an individual, is sold or exchanged outside of the country (or possession) of the individual's residence,
"(ii) in the case of a corporation, is stock in a second corporation sold or exchanged other than in a country (or possession) in which such second corporation derived more than 50 percent of its gross income for the 3-year period ending with the close of such second corporation's taxable year immediately preceding the year during which the sale or exchange occurred, or
"(iii) in the case of any taxpayer, is personal property (other than stock in a corporation) sold or exchanged other than in a country (or possession) in which such property is used in a trade or business of the taxpayer or in which such taxpayer derived more than 50 percent of its gross income for the 3-year period ending with the close of its taxable year immediately preceding the year during which the sale or exchange occurred,
unless such gain is subject to an income, war profits, or excess profits tax of a foreign country or possession of the United States, and the rate of tax applicable to such gain is 10 percent or more of the gain from the sale or exchange (computed under this chapter)."
Subsec. (b)(3)(D).
Subsec. (b)(3)(E), (F).
Subsec. (d).
Subsec. (d)(1).
Subsec. (d)(1)(D).
Subsec. (d)(2).
"(A) derived from any transaction which is directly related to the active conduct by the taxpayer of a trade or business in a foreign country or a possession of the United States,
"(B) derived in the conduct by the taxpayer of a banking, financing, or similar business,
"(C) received from a corporation in which the taxpayer (or one or more includible corporations in an affiliated group, as defined in section 1504, of which the taxpayer is a member) owns, directly or indirectly, at least 10 percent of the voting stock, or
"(D) received on obligations acquired as a result of the disposition of a trade or business actively conducted by the taxpayer in a foreign country or possession of the United States or as a result of the disposition of stock or obligations of a corporation in which the taxpayer owned at least 10 percent of the voting stock.
For purposes of subparagraph (C), stock owned, directly or indirectly, by or for a foreign corporation, shall be considered as being proportionately owned by its shareholders. For purposes of this subsection, interest (after the operation of section 904(d)(3)) received from a designated payor corporation described in section 904(d)(3)(E)(iii) by a taxpayer which owns directly or indirectly less than 10 percent of the voting stock of such designated payor corporation shall be treated as interest described in subparagraph (A) to the extent such interest would have been so treated had such taxpayer received it from other than a designated payor corporation."
Subsec. (d)(3).
Subsec. (d)(3)(C).
Subsec. (d)(3)(E).
"(iv) any other corporation formed or availed of for purposes of avoiding the provisions of this paragraph.
For purposes of this paragraph, the rules of paragraph (9) of subsection (g) shall apply."
Subsec. (d)(3)(I).
Subsec. (d)(3)(J).
Subsec. (d)(4), (5).
Subsec. (f)(5).
Subsec. (g)(1)(A)(iii).
Subsec. (g)(2).
Subsec. (g)(9), (10).
Subsec. (i)(2).
1984—Subsec. (d).
Subsec. (d)(1)(B) to (E).
Subsec. (d)(3).
Subsec. (g).
Subsecs. (h), (i).
1983—Subsec. (g).
1982—Subsec. (f)(4) to (6).
1980—Subsec. (b)(3)(F).
1978—Subsec. (b)(2).
Subsec. (b)(3).
Subsec. (f)(2)(A).
Subsec. (f)(4).
Subsec. (f)(5).
Subsec. (h).
1977—Subsec. (a).
1976—Subsec. (a).
Subsec. (b).
Subsec. (c).
Subsec. (d).
Subsec. (e).
Subsec. (f).
Subsec. (g).
Subsec. (h).
1971—Subsec. (f).
Subsec. (f)(1).
Subsec. (f)(3).
Subsec. (f)(5).
1969—Subsec. (b)(1).
Subsec. (b)(2).
1966—Subsec. (f)(2).
1964—Subsec. (g)(2).
1962—Subsec. (f).
Subsec. (g).
1960—Subsec. (a).
Subsec. (b).
Subsec. (c).
Subsec. (d).
Subsecs. (e), (f).
1958—Subsec. (c).
Effective Date of 1993 Amendment
Amendment by section 13227(d) of
Section 13235(c) of
Effective Date of 1990 Amendment
Amendment by section 11101(d)(5) of
Effective Date of 1989 Amendment
Section 7402(b) of
Amendment by section 7811(i)(1) of
Effective Date of 1988 Amendment
Section 1012(bb)(4)(B) of
Amendment by sections 1003(b)(2) and 1012(a)(1)(A), (2)–(4), (6)–(11), (c), (p)(11), (29), (q)(12) of
Amendment by section 2004(l) of
Effective Date of 1986 Amendment
Amendment by section 104(b)(13) of
Amendment by section 701(e)(4)(H) of
Section 1201(e) of
"(1)
"[(2) Repealed.
"(3)
"(A)
"(B)
[Section 7404(b), (c) of
["(b)
["(c)
["(1)
["(2)
["(A)
["(B)
Section 1203(b) of
Amendment by section 1211(b)(3) of
Amendment by section 1235(f)(4) of
Section 1810(a)(1)(B) of
"(i) only income received or accrued by such corporation after such date shall be taken into account under section 904(g) of the Internal Revenue Code of 1954 [now 1986]; except that
"(ii) paragraph (5) of such section 904(g) shall be applied by taking into account all income received or accrued by such corporation during such taxable year."
Section 1810(b)(4)(B) of
"(i) The amendment made by subparagraph (A) [amending this section] insofar as it adds the last sentence to subparagraph (E) of section 905(d)(3) [904(d)(3)] shall take effect on March 28, 1985. In the case of any taxable year ending after such date of any corporation treated as a designated payor corporation by reason of the amendment made by subparagraph (A)—
"(I) only income received or accrued by such corporation after such date shall be taken into account under section 904(d)(3) of the Internal Revenue Code of 1954 [now 1986]; except that
"(II) subparagraph (C) of such section 904(d)(3) shall be applied by taking into account all income received or accrued by such corporation during such taxable year.
"(ii) The amendment made by subparagraph (A) insofar as it adds clause (iv) to subparagraph (E) of section 904(d)(3) shall take effect on December 31, 1985. For purposes of such amendment, the rule of the second sentence of clause (i) shall be applied by taking into account December 31, 1985, in lieu of March 28, 1985."
Amendment by sections 1810(b)(1)–(3) and 1876(d)(2) of
Effective Date of 1984 Amendment
Section 121(b) of
"(1)
"(A) only income received or accrued by such foreign corporation after such date of enactment shall be taken into account under section 904(g) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] (as added by subsection (a)); except that
"(B) paragraph (5) of such section 904(g) (relating to exception where small amount of United States source income) shall be applied by taking into account all income received or accrued by such foreign corporation during such taxable year.
"(2)
"(A)
"(i) such interest shall not be taken into account under section 904(g) of the Internal Revenue Code of 1986 (as added by subsection (a)), except that
"(ii) such interest shall be taken into account for purposes of applying paragraph (5) of such section 904(g) (relating to exception where small amount of United States source income).
"(B)
"(i) the aggregate amount of interest received or accrued during any taxable year by an applicable CFC on United States affiliate obligations held by such applicable CFC, multiplied by,
"(ii) a fraction (not in excess of 1)—
"(I) the numerator of which is the sum of the aggregate principal amount of United States affiliate obligations held by the applicable CFC on March 31, 1984, but not in excess of the applicable limit, and
"(II) the denominator of which is the average daily principal amount of United States affiliate obligations held by such applicable CFC during the taxable year.
Proper adjustments shall be made to the numerator described in clause (ii)(I) for original issue discount accruing after March 31, 1984, on CFC obligations and United States affiliate obligations.
"(C)
"(i) the excess of (I) the aggregate principal amount of CFC obligations which are outstanding on March 31, 1984, but only with respect to obligations issued before March 8, 1984, or issued after March 7, 1984, by the applicable CFC pursuant to a binding commitment in effect on March 7, 1984, over (II) the average daily outstanding principal amount during the taxable year of the CFC obligations described in subclause (I), and
"(ii) the portion of the equity of such applicable CFC allocable to the excess described in clause (i) (determined on the basis of the debt-equity ratio of such applicable CFC on March 31, 1984).
"(D)
"(i) which was in existence on March 31, 1984, and
"(ii) the principal purpose of which on such date consisted of the issuing of CFC obligations (or short-term borrowing from nonaffiliated persons) and lending the proceeds of such obligations (or such borrowing) to affiliates.
"(E)
"(i)
"(ii)
"(iii)
"(I) at least 50 percent of the gross income from all sources of such corporation for the 3-year period ending with the close of its last taxable year ending on or before March 31, 1984, was effectively connected with the conduct of a trade or business within the United States, and
"(II) at least 50 percent of the gross income from all sources of such corporation for the 3-year period ending with the close of its taxable year preceding the payment of such interest was effectively connected with the conduct of a trade or business within the United States.
"(F)
"(G)
"(i) the requirements of clause (i) of section 163(f)(2)(B) of the Internal Revenue Code of 1986 are met with respect to such obligation, and
"(ii) in the case of an obligation issued after December 31, 1982, the requirements of clause (ii) of such section 163(f)(2)(B) are met with respect to such obligation.
"(H)
"(I)
"(i) the equity of the applicable CFC on March 31, 1984, and
"(ii) the aggregate principal amount of CFC obligations outstanding on March 31, 1984, which were issued by an applicable CFC—
"(I) before March 8, 1984, or
"(II) after March 7, 1984, pursuant to a binding commitment in effect on March 7, 1984.
"(3)
"(4)
"(5)
"(6)
"(A) which is a subsidiary of a domestic corporation which has been engaged in manufacturing for more than 50 years, and
"(B) which issued certificates with respect to obligations on—
"(i) September 24, 1979, denominated in French francs,
"(ii) September 10, 1981, denominated in Swiss francs,
"(iii) July 14, 1982, denominated in Swiss francs, and
"(iv) December 1, 1982, denominated in United States dollars,
with a total principal amount of less than 200,000,000 United States dollars.[,]
then paragraph (5) shall not apply to the proceeds from relending such obligations or related capital before January 1, 1986."
Section 122(b) of
"(1)
"(2)
"(A)
"(B)
"(3)
Amendment by section 474(r)(21) of
Amendment by section 801(d)(2) of
Effective Date of 1983 Amendment
Amendment by
Effective Date of 1982 Amendment
Amendment by
Effective Date of 1980 Amendment
Amendment by
Effective Date of 1978 Amendment
Amendment by section 403(c)(4) of
Amendment by section 421(e)(6) of
Amendment by section 701(a)(8)(C) of
Section 701(q)(3)(B) of
Section 701(u)(2)(D) of
Section 701(u)(3)(B) of
Section 701(u)(4)(C) of
"(i) to overall foreign losses sustained in taxable years beginning after December 31, 1975, and
"(ii) to foreign oil related losses sustained in taxable years ending after December 31, 1975."
Effective Date of 1977 Amendment
Amendment by
Effective Date of 1976 Amendment
Amendment by section 503(b)(1) of
Section 1031(c) of
"(1)
"(2)
"(A) been engaged in the active conduct of the trade or business of the extraction of minerals (of a character with respect to which a deduction for depletion is allowable under section 613 of such Code) outside the United States or its possessions for less than 5 years preceding the date of enactment of this Act [Oct. 4, 1976],
"(B) had deductions properly apportioned or allocated to its gross income from such trade or business in excess of such gross income in at least 2 taxable years,
"(C) 80 percent of its gross receipts are from the sale of such minerals, and
"(D) made commitments for substantial expansion of such mineral extraction activities,
the amendments made by this section [amending this section and
"(3)
"(4)
Section 1032(c) of
"(1)
"(2)
"(3)
"(4)
"(5)
"(6)
"(A)
"(i) the taxpayer sustained a loss in a possession of the United States in a taxable year beginning after December 31, 1975, and before January 1, 1979,
"(ii) such loss is attributable to a trade or business engaged in by the taxpayer in such possession on January 1, 1976, and
"(iii) the taxpayer chooses to have the benefits of subpart A of part III of subchapter N apply for such taxable year and section 904(a)(1) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] (as in effect before the enactment of this Act [Oct. 4, 1976]) applies with respect to such taxable year.
"(B)
"(C)
"(i) for purposes of determining the liability for tax of the taxpayer for taxable years beginning after December 31, 1978, section 904(f) of the Internal Revenue Code of 1986 [subsec. (f) of this section] shall be applied with respect to the loss described in subparagraph (A)(i) under the principles of section 904(a)(1) of such Code (as in effect before the enactment of this Act [Oct. 4, 1976]); but
"(ii) in the case of any taxpayer and any possession, the aggregate amount to which such section 904(f) applies by reason of clause (i) shall not exceed the sum of the net incomes of all affiliated corporations from such possession for taxable years of such affiliated corporations beginning after December 31, 1975, and before January 1, 1979.
"(D)
"(E)
Section 1034(b) of
Amendment by section 1051(e) of
Amendment by section 1901(b)(10) of
Effective Date of 1971 Amendment
Amendment by
Effective Date of 1969 Amendment
Amendment by
Effective Date of 1966 Amendment
Section 106(c)(2) of
Effective Date of 1964 Amendment
Amendment by
Effective Date of 1962 Amendment
Section 10(b) of
Effective Date of 1960 Amendment
Section 4 of
Effective Date of 1958 Amendment
Section 42(c) of
Savings Provision
For provisions that nothing in amendment by section 11801(a)(31) of
Applicability of Certain Amendments by Pub. L. 99–514 in Relation to Treaty Obligations of United States
For applicability of amendments by sections 701(e)(4)(H) and 1201(a), (b), (d)(1)–(3) of
Plan Amendments Not Required Until January 1, 1989
For provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§1101–1147 and 1171–1177] or title XVIII [§§1800–1899A] of
Limitation on Carryback of Foreign Tax Credits to Taxable Years Beginning Before 1987
Section 1205 of
"(a)
"(1)
"(2)
"(A) the repeal of the zero bracket amount, and
"(B) the changes in the treatment of capital gains.
"(b)
Coordination With Treaty Obligations
Section 1810(a)(4) of
Separate Application of Section 904 In Case of Income Covered by Transitional Rules
Section 1810(a)(5) of
Section Referred to in Other Sections
This section is referred to in
1 See References in Text note below.
§905. Applicable rules
(a) Year in which credit taken
The credits provided in this subpart may, at the option of the taxpayer and irrespective of the method of accounting employed in keeping his books, be taken in the year in which the taxes of the foreign country or the possession of the United States accrued, subject, however, to the conditions prescribed in subsection (c). If the taxpayer elects to take such credits in the year in which the taxes of the foreign country or the possession of the United States accrued, the credits for all subsequent years shall be taken on the same basis, and no portion of any such taxes shall be allowed as a deduction in the same or any succeeding year.
(b) Proof of credits
The credits provided in this subpart shall be allowed only if the taxpayer establishes to the satisfaction of the Secretary—
(1) the total amount of income derived from sources without the United States, determined as provided in part I,
(2) the amount of income derived from each country, the tax paid or accrued to which is claimed as a credit under this subpart, such amount to be determined under regulations prescribed by the Secretary, and
(3) all other information necessary for the verification and computation of such credits.
(c) Adjustments on payment of accrued taxes
If accrued taxes when paid differ from the amounts claimed as credits by the taxpayer, or if any tax paid is refunded in whole or in part, the taxpayer shall notify the Secretary, who shall redetermine the amount of the tax for the year or years affected. The amount of tax due on such redetermination, if any, shall be paid by the taxpayer on notice and demand by the Secretary, or the amount of tax overpaid, if any, shall be credited or refunded to the taxpayer in accordance with subchapter B of
(Aug. 16, 1954, ch. 736,
Amendments
1982—Subsec. (c).
1980—Subsec. (c).
1976—Subsec. (b).
Subsec. (c).
1958—Subsec. (b).
Effective Date of 1982 Amendment
Section 343(b) of
Effective Date of 1980 Amendment
Amendment by
Effective Date of 1976 Amendment
Amendment by section 1901(a)(114) of
Effective Date of 1958 Amendment
Section 103(c) of
Section Referred to in Other Sections
This section is referred to in
§906. Nonresident alien individuals and foreign corporations
(a) Allowance of credit
A nonresident alien individual or a foreign corporation engaged in trade or business within the United States during the taxable year shall be allowed a credit under section 901 for the amount of any income, war profits, and excess profits taxes paid or accrued during the taxable year (or deemed, under section 902, paid or accrued during the taxable year) to any foreign country or possession of the United States with respect to income effectively connected with the conduct of a trade or business within the United States.
(b) Special rules
(1) For purposes of subsection (a) and for purposes of determining the deductions allowable under sections 873(a) and 882(c), in determining the amount of any tax paid or accrued to any foreign country or possession there shall not be taken into account any amount of tax to the extent the tax so paid or accrued is imposed with respect to income from sources within the United States which would not be taxed by such foreign country or possession but for the fact that—
(A) in the case of a nonresident alien individual, such individual is a citizen or resident of such foreign country or possession, or
(B) in the case of a foreign corporation, such corporation was created or organized under the law of such foreign country or possession or is domiciled for tax purposes in such country or possession.
(2) For purposes of subsection (a), in applying section 904 the taxpayer's taxable income shall be treated as consisting only of the taxable income effectively connected with the taxpayer's conduct of a trade or business within the United States.
(3) The credit allowed pursuant to subsection (a) shall not be allowed against any tax imposed by section 871(a) (relating to income of nonresident alien individual not connected with United States business) or 881 (relating to income of foreign corporations not connected with United States business).
(4) For purposes of sections 902(a) and 78, a foreign corporation choosing the benefits of this subpart which receives dividends shall, with respect to such dividends, be treated as a domestic corporation.
(5) No credit shall be allowed under this section for any income, war profits, and excess profits taxes paid or accrued with respect to the foreign trade income (within the meaning of section 923(b)) of a FSC.
(6) For purposes of section 902, any income, war profits, and excess profits taxes paid or accrued (or deemed paid or accrued) to any foreign country or possession of the United States with respect to income effectively connected with the conduct of a trade or business within the United States shall not be taken into account, and any accumulated profits attributable to such income shall not be taken into account.
(7) No credit shall be allowed under this section against the tax imposed by section 884.
(Added
Amendments
1988—Subsec. (b)(6), (7).
1986—Subsec. (b)(6).
1984—Subsec. (b)(5).
Effective Date of 1988 Amendment
Amendment by
Effective Date of 1986 Amendment
Amendment by section 1241(c) of
Amendment by section 1876(d)(3) of
Effective Date of 1984 Amendment
Amendment by
Effective Date
Section applicable with respect to taxable years beginning after Dec. 31, 1966, and, in applying
Plan Amendments Not Required Until January 1, 1989
For provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§1101–1147 and 1171–1177] or title XVIII [§§1800–1899A] of
Section Referred to in Other Sections
This section is referred to in
§907. Special rules in case of foreign oil and gas income
(a) Reduction in amount allowed as foreign tax under section 901
In applying section 901, the amount of any oil and gas extraction taxes paid or accrued (or deemed to have been paid) during the taxable year which would (but for this subsection) be taken into account for purposes of section 901 shall be reduced by the amount (if any) by which the amount of such taxes exceeds the product of—
(1) the amount of the foreign oil and gas extraction income for the taxable year,
(2) multiplied by—
(A) in the case of a corporation, the percentage which is equal to the highest rate of tax specified under section 11(b), or
(B) in the case of an individual, a fraction the numerator of which is the tax against which the credit under section 901(a) is taken and the denominator of which is the taxpayer's entire taxable income.
(b) Foreign taxes on foreign oil related income
For purposes of this subtitle, in the case of taxes paid or accrued to any foreign country with respect to foreign oil related income, the term "income, war profits, and excess profits taxes" shall not include any amount paid or accrued after December 31, 1982, to the extent that the Secretary determines that the foreign law imposing such amount of tax is structured, or in fact operates, so that the amount of tax imposed with respect to foreign oil related income will generally be materially greater, over a reasonable period of time, than the amount generally imposed on income that is neither foreign oil related income nor foreign oil and gas extraction income. In computing the amount not treated as tax under this subsection, such amount shall be treated as a deduction under the foreign law.
(c) Foreign income definitions and special rules
For purposes of this section—
(1) Foreign oil and gas extraction income
The term "foreign oil and gas extraction income" means the taxable income derived from sources without the United States and its possessions from—
(A) the extraction (by the taxpayer or any other person) of minerals from oil or gas wells, or
(B) the sale or exchange of assets used by the taxpayer in the trade or business described in subparagraph (A).
Such term does not include any dividend or interest income which is passive income (as defined in section 904(d)(2)(A)).
(2) Foreign oil related income
The term "foreign oil related income" means the taxable income derived from sources outside the United States and its possessions from—
(A) the processing of minerals extracted (by the taxpayer or by any other person) from oil or gas wells into their primary products,
(B) the transportation of such minerals or primary products,
(C) the distribution or sale of such minerals or primary products,
(D) the disposition of assets used by the taxpayer in the trade or business described in subparagraph (A), (B), or (C), or
(E) the performance of any other related service.
Such term does not include any dividend or interest income which is passive income (as defined in section 904(d)(2)(A)).
(3) Dividends, interest, partnership distribution, etc.
The term "foreign oil and gas extraction income" and the term "foreign oil related income" include—
(A) dividends and interest from a foreign corporation in respect of which taxes are deemed paid by the taxpayer under section 902,
(B) amounts with respect to which taxes are deemed paid under section 960(a), and
(C) the taxpayer's distributive share of the income of partnerships.1
to the extent such dividends, interest, amounts, or distributive share is attributable to foreign oil and gas extraction income, or to foreign oil related income, as the case may be; except that interest described in subparagraph (A) shall not be taken into account in computing foreign oil and gas extraction income but shall be taken into account in computing foreign oil-related income.
(4) Recapture of foreign oil and gas extraction losses by recharacterizing later extraction income
(A) In general
That portion of the income of the taxpayer for the taxable year which (but for this paragraph) would be treated as foreign oil and gas extraction income shall be treated as income (from sources without the United States) which is not foreign oil and gas extraction income to the extent of the excess of—
(i) the aggregate amount of foreign oil extraction losses for preceding taxable years beginning after December 31, 1982, over
(ii) so much of such aggregate amount as was recharacterized under this subparagraph for preceding taxable years beginning after December 31, 1982.
(B) Foreign oil extraction loss defined
(i) In general
For purposes of this paragraph, the term "foreign oil extraction loss" means the amount by which—
(I) the gross income for the taxable year from sources without the United States and its possessions (whether or not the taxpayer chooses the benefits of this subpart for such taxable year) taken into account in determining the foreign oil and gas extraction income for such year, is exceeded by
(II) the sum of the deductions properly apportioned or allocated thereto.
(ii) Net operating loss deduction not taken into account
For purposes of clause (i), the net operating loss deduction allowable for the taxable year under section 172(a) shall not be taken into account.
(iii) Expropriation and casualty losses not taken into account
For purposes of clause (i), there shall not be taken into account—
(I) any foreign expropriation loss (as defined in section 172(h)) 2 for the taxable year, or
(II) any loss for the taxable year which arises from fire, storm, shipwreck, or other casualty, or from theft,
to the extent such loss is not compensated for by insurance or otherwise.
(5) Oil and gas extraction taxes
The term "oil and gas extraction taxes" means any income, war profits, and excess profits tax paid or accrued (or deemed to have been paid under section 902 or 960) during the taxable year with respect to foreign oil and gas extraction income (determined without regard to paragraph (4)) or loss which would be taken into account for purposes of section 901 without regard to this section.
(d) Disregard of certain posted prices, etc.
For purposes of this chapter, in determining the amount of taxable income in the case of foreign oil and gas extraction income, if the oil or gas is disposed of, or is acquired other than from the government of a foreign country, at a posted price (or other pricing arrangement) which differs from the fair market value for such oil or gas, such fair market value shall be used in lieu of such posted price (or other pricing arrangement).
[(e) Repealed. Pub. L. 101–508, title XI, §11801(a)(32), Nov. 5, 1990, 104 Stat. 1388–521 ]
(f) Carryback and carryover of disallowed credits
(1) In general
If the amount of the oil and gas extraction taxes paid or accrued during any taxable year exceeds the limitation provided by subsection (a) for such taxable year (hereinafter in this subsection referred to as the "unused credit year"), such excess shall be deemed to be oil and gas extraction taxes paid or accrued in the second preceding taxable year, in the first preceding taxable year, and in the first, second, third, fourth, or fifth succeeding taxable year, in that order and to the extent not deemed tax paid or accrued in a prior taxable year by reason of the limitation imposed by paragraph (2). Such amount deemed paid or accrued in any taxable year may be availed of only as a tax credit and not as a deduction and only if the taxpayer for such year chooses to have the benefits of this subpart as to taxes paid or accrued for that year to foreign countries or possessions. For purposes of this subsection, the terms "second preceding taxable year", and "first preceding taxable year" do not include any taxable year ending before January 1, 1975.
(2) Limitation
The amount of the unused oil and gas extraction taxes which under paragraph (1) may be deemed paid or accrued in any preceding or succeeding taxable year shall not exceed the lesser of—
(A) the amount by which the limitation provided by subsection (a) for such taxable year exceeds the sum of—
(i) the oil and gas extraction taxes paid or accrued during such taxable year, plus
(ii) the amounts of the oil and gas extraction taxes which by reason of this subsection are deemed paid or accrued in such taxable year and are attributable to taxable years preceding the unused credit year; or
(B) the amount by which the limitation provided by section 904 for such taxable year exceeds the sum of—
(i) the taxes paid or accrued (or deemed to have been paid under section 902 or 960) to all foreign countries and possessions of the United States during such taxable year,
(ii) the amount of such taxes which were deemed paid or accrued in such taxable year under section 904(c) and which are attributable to taxable years preceding the unused credit year, plus
(iii) the amount of the oil and gas extraction taxes which by reason of this subsection are deemed paid or accrued in such taxable year and are attributable to taxable years preceding the unused credit year.
(3) Special rules
(A) In the case of any taxable year which is an unused credit year under this subsection and which is an unused credit year under section 904(c), the provisions of this subsection shall be applied before section 904(c).
(B) For purposes of determining the amount of taxes paid or accrued in any taxable year which may be deemed paid or accrued in a preceding or succeeding taxable year under section 904(c), any tax deemed paid or accrued in such preceding or succeeding taxable year under this subsection shall be considered to be tax paid or accrued in such preceding or succeeding taxable year.
(Added
References in Text
Section 172(h), referred to in subsec. (c)(4)(B)(iii)(I), was repealed by
Amendments
1993—Subsec. (c)(1), (2).
1990—Subsec. (e).
"(1)
"(2)
Subsec. (f)(3)(C).
1988—Subsec. (c)(3).
Subsec. (c)(3)(B) to (D).
1982—Subsec. (b).
Subsec. (c)(2).
Subsec. (c)(4).
Subsec. (e).
Subsec. (f)(1).
Subsec. (f)(2)(B).
Subsec. (f)(3)(A).
Subsec. (f)(3)(B).
1978—Subsec. (a)(2).
Subsec. (b).
1976—Subsec. (a).
Subsec. (b).
Subsec. (c)(5).
Subsec. (e)(1).
Subsec. (e)(2).
Subsec. (f).
Subsec. (g).
Effective Date of 1993 Amendment
Amendment by
Effective Date of 1988 Amendment
Amendment by
Effective Date of 1982 Amendment
Section 211(e) of
"(1)
"(2)
"(A)
"(B)
"(i) The term 'separate basket foreign loss' means any foreign loss attributable to activities taken into account (or not taken into account) in determining foreign oil related income (as defined in old section 907(c)(2)).
"(ii) An 'old' section is such section as in effect on the day before the date of the enactment of this Act [Sept. 3, 1982]."
Effective Date of 1978 Amendment
Amendment by section 301(b)(14) of
Section 701(u)(8)(D) of
"(i) The amendments made by this paragraph [amending this section and
"(ii) In the case of any taxable year ending after December 31, 1975, with respect to foreign oil related income (within the meaning of section 907(c) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954]), the overall limitation provided by section 904(a)(2) of such Code shall apply and the per-country limitation provided by section 904(a)(1) of such Code shall not apply."
Effective Date of 1976 Amendment
Amendment by section 1031(b)(6)(A) of
Amendment by section 1032(b)(1) of
Section 1035(e) of
"(1) The amendment made by subsection (a) [amending this section] shall apply to taxable years ending after December 31, 1976.
"(2) The amendment made by subsection (b) [amending this section] shall apply to taxable years ending after December 31, 1974; except that the last sentence of section 907(b) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] shall only apply to taxable years ending after December 31, 1975.
"(3) The amendment made by subsection (c) [enacting provisions set out below] shall apply to taxable years beginning after June 29, 1976.
"(4) The amendments made by subsection (d) [amending this section] shall apply to taxes paid or accrued during taxable years ending after the date of the enactment of this Act [Oct. 4, 1976]."
Amendment by section 1052(c)(4) of
Effective Date
Section 601(d) of
"(1) the second sentence of section 907(b) shall apply to taxable years ending after December 31, 1975, and
"(2) the provisions of section 907(f) shall apply to losses sustained in taxable years ending after December 31, 1975."
Savings Provision
For provisions that nothing in amendment by
Tax Credit for Production-Sharing Contracts
Section 1035(c) of
"(1) For purposes of section 901 of the Internal Revenue Code of 1986 [formerly I.R.C. 1954], there shall be treated as income, war profits, and excess profits taxes to be taken into account under section 907(a) of such Code amounts designated as income taxes of a foreign government by such government (which otherwise would not be treated as taxes for purposes of section 901 of such Code) with respect to production-sharing contracts for the extraction of foreign oil or gas.
"(2) The amounts specified in paragraph (1) shall not exceed the lessor of—
"(A) the product of the foreign oil and gas extraction income (as defined in section 907(c) of such Code) with respect to all such production-sharing contracts multiplied by the sum of the normal tax rate and the surtax rate for the taxable year specified in section 11 of such Code, or
"(B) the excess of the total amount of foreign oil and gas extraction income (as so defined) for the taxable year multiplied by the sum of the normal tax rate and the surtax rate for the taxable year specified in section 11 of such Code over the amount of any income, war profits, and excess profits taxes paid or accrued (or deemed to have been paid) without regard to paragraph (1) during the taxable year with respect to foreign oil and gas extraction income.
"(3) The production-sharing contracts taken into account for purposes of paragraph (1) shall be those contracts which were entered into before April 8, 1976, for the sharing of foreign oil and gas production with a foreign government (or an entity owned by such government) with respect to which amounts claimed as taxes paid or accrued to such foreign government for taxable years beginning before June 30, 1976, will not be disallowed as taxes. A contract described in the preceding sentence shall be taken into account under paragraph (1) only with respect to amounts (A) paid or accrued to the foreign government before January 1, 1978, and (B) attributable to income earned before such date."
Section Referred to in Other Sections
This section is referred to in
1 So in original. The period probably should be a comma.
2 See References in Text note below.
§908. Reduction of credit for participation in or co-operation with an international boycott
(a) In general
If a person, or a member of a controlled group (within the meaning of section 993(a)(3)) which includes such person, participates in or cooperates with an international boycott during the taxable year (within the meaning of section 999(b)), the amount of the credit allowable under section 901 to such person, or under section 902 or 960 to United States shareholders of such person, for foreign taxes paid during the taxable year shall be reduced by an amount equal to the product of—
(1) the amount of the credit which, but for this section, would be allowed under section 901 for the taxable year, multiplied by
(2) the international boycott factor (determined under section 999).
(b) Application with sections 275(a)(4) and 78
Section 275(a)(4) and section 78 shall not apply to any amount of taxes denied credit under subsection (a).
(Added
Effective Date
Section 1066(a) of
"(1)
"(2)
Section Referred to in Other Sections
This section is referred to in
Subpart B—Earned Income of Citizens or Residents of United States
Amendments
1981—
1980—
1978—
§911. Citizens or residents of the United States living abroad
(a) Exclusion from gross income
At the election of a qualified individual (made separately with respect to paragraphs (1) and (2)), there shall be excluded from the gross income of such individual, and exempt from taxation under this subtitle, for any taxable year—
(1) the foreign earned income of such individual, and
(2) the housing cost amount of such individual.
(b) Foreign earned income
(1) Definition
For purposes of this section—
(A) In general
The term "foreign earned income" with respect to any individual means the amount received by such individual from sources within a foreign country or countries which constitute earned income attributable to services performed by such individual during the period described in subparagraph (A) or (B) of subsection (d)(1), whichever is applicable.
(B) Certain amounts not included in foreign earned income
The foreign earned income for an individual shall not include amounts—
(i) received as a pension or annuity,
(ii) paid by the United States or an agency thereof to an employee of the United States or an agency thereof,
(iii) included in gross income by reason of section 402(b) (relating to taxability of beneficiary of nonexempt trust) or section 403(c) (relating to taxability of beneficiary under a nonqualified annuity), or
(iv) received after the close of the taxable year following the taxable year in which the services to which the amounts are attributable are performed.
(2) Limitation on foreign earned income
(A) In general
The foreign earned income of an individual which may be excluded under subsection (a)(1) for any taxable year shall not exceed the amount of foreign earned income computed on a daily basis at an annual rate of $70,000.
(B) Attribution to year in which services are performed
For purposes of applying subparagraph (A), amounts received shall be considered received in the taxable year in which the services to which the amounts are attributable are performed.
(C) Treatment of community income
In applying subparagraph (A) with respect to amounts received from services performed by a husband or wife which are community income under community property laws applicable to such income, the aggregate amount which may be excludable from the gross income of such husband and wife under subsection (a)(1) for any taxable year shall equal the amount which would be so excludable if such amounts did not constitute community income.
(c) Housing cost amount
For purposes of this section—
(1) In general
The term "housing cost amount" means an amount equal to the excess of—
(A) the housing expenses of an individual for the taxable year, over
(B) an amount equal to the product of—
(i) 16 percent of the salary (computed on a daily basis) of an employee of the United States who is compensated at a rate equal to the annual rate paid for step 1 of grade GS–14, multiplied by
(ii) the number of days of such taxable year within the applicable period described in subparagraph (A) or (B) of subsection (d)(1).
(2) Housing expenses
(A) In general
The term "housing expenses" means the reasonable expenses paid or incurred during the taxable year by or on behalf of an individual for housing for the individual (and, if they reside with him, for his spouse and dependents) in a foreign country. The term—
(i) includes expenses attributable to the housing (such as utilities and insurance), but
(ii) does not include interest and taxes of the kind deductible under section 163 or 164 or any amount allowable as a deduction under section 216(a).
Housing expenses shall not be treated as reasonable to the extent such expenses are lavish or extravagant under the circumstances.
(B) Second foreign household
(i) In general
Except as provided in clause (ii), only housing expenses incurred with respect to that abode which bears the closest relationship to the tax home of the individual shall be taken into account under paragraph (1).
(ii) Separate household for spouse and dependents
If an individual maintains a separate abode outside the United States for his spouse and dependents and they do not reside with him because of living conditions which are dangerous, unhealthful, or otherwise adverse, then—
(I) the words "if they reside with him" in subparagraph (A) shall be disregarded, and
(II) the housing expenses incurred with respect to such abode shall be taken into account under paragraph (1).
(3) Special rules where housing expenses not provided by employer
(A) In general
To the extent the housing cost amount of any individual for any taxable year is not attributable to employer provided amounts, such amount shall be treated as a deduction allowable in computing adjusted gross income to the extent of the limitation of subparagraph (B).
(B) Limitation
For purposes of subparagraph (A), the limitation of this subparagraph is the excess of—
(i) the foreign earned income of the individual for the taxable year, over
(ii) the amount of such income excluded from gross income under subsection (a) for the taxable year.
(C) 1-year carryover of housing amounts not allowed by reason of subparagraph (B)
(i) In general
The amount not allowable as a deduction for any taxable year under subparagraph (A) by reason of the limitation of subparagraph (B) shall be treated as a deduction allowable in computing adjusted gross income for the succeeding taxable year (and only for the succeeding taxable year) to the extent of the limitation of clause (ii) for such succeeding taxable year.
(ii) Limitation
For purposes of clause (i), the limitation of this clause for any taxable year is the excess of—
(I) the limitation of subparagraph (B) for such taxable year, over
(II) amounts treated as a deduction under subparagraph (A) for such taxable year.
(D) Employer provided amounts
For purposes of this paragraph, the term "employer provided amounts" means any amount paid or incurred on behalf of the individual by the individual's employer which is foreign earned income included in the individual's gross income for the taxable year (without regard to this section).
(E) Foreign earned income
For purposes of this paragraph, an individual's foreign earned income for any taxable year shall be determined without regard to the limitation of subparagraph (A) of subsection (b)(2).
(d) Definitions and special rules
For purposes of this section—
(1) Qualified individual
The term "qualified individual" means an individual whose tax home is in a foreign country and who is—
(A) a citizen of the United States and establishes to the satisfaction of the Secretary that he has been a bona fide resident of a foreign country or countries for an uninterrupted period which includes an entire taxable year, or
(B) a citizen or resident of the United States and who, during any period of 12 consecutive months, is present in a foreign country or countries during at least 330 full days in such period.
(2) Earned income
(A) In general
The term "earned income" means wages, salaries, or professional fees, and other amounts received as compensation for personal services actually rendered, but does not include that part of the compensation derived by the taxpayer for personal services rendered by him to a corporation which represents a distribution of earnings or profits rather than a reasonable allowance as compensation for the personal services actually rendered.
(B) Taxpayer engaged in trade or business
In the case of a taxpayer engaged in a trade or business in which both personal services and capital are material income-producing factors, under regulations prescribed by the Secretary, a reasonable allowance as compensation for the personal services rendered by the taxpayer, not in excess of 30 percent of his share of the net profits of such trade or business, shall be considered as earned income.
(3) Tax home
The term "tax home" means, with respect to any individual, such individual's home for purposes of section 162(a)(2) (relating to traveling expenses while away from home). An individual shall not be treated as having a tax home in a foreign country for any period for which his abode is within the United States.
(4) Waiver of period of stay in foreign country
Notwithstanding paragraph (1), an individual who—
(A) is a bona fide resident of, or is present in, a foreign country for any period,
(B) leaves such foreign country after August 31, 1978—
(i) during any period during which the Secretary determines, after consultation with the Secretary of State or his delegate, that individuals were required to leave such foreign country because of war, civil unrest, or similar adverse conditions in such foreign country which precluded the normal conduct of business by such individuals, and
(ii) before meeting the requirements of such paragraph (1), and
(C) establishes to the satisfaction of the Secretary that such individual could reasonably have been expected to have met such requirements but for the conditions referred to in clause (i) of subparagraph (B),
shall be treated as a qualified individual with respect to the period described in subparagraph (A) during which he was a bona fide resident of, or was present in, the foreign country, and in applying subsections (b)(2)(A) and (c)(1)(B)(ii) with respect to such individual, only the days within such period shall be taken into account.
(5) Test of bona fide residence
If—
(A) an individual who has earned income from sources within a foreign country submits a statement to the authorities of that country that he is not a resident of that country, and
(B) such individual is held not subject as a resident of that country to the income tax of that country by its authorities with respect to such earnings,
then such individual shall not be considered a bona fide resident of that country for purposes of paragraph (1)(A).
(6) Denial of double benefits
No deduction or exclusion from gross income under this subtitle or credit against the tax imposed by this chapter (including any credit or deduction for the amount of taxes paid or accrued to a foreign country or possession of the United States) shall be allowed to the extent such deduction, exclusion, or credit is properly allocable to or chargeable against amounts excluded from gross income under subsection (a).
(7) Aggregate benefit cannot exceed foreign earned income
The sum of the amount excluded under subsection (a) and the amount deducted under subsection (c)(3)(A) for the taxable year shall not exceed the individual's foreign earned income for such year.
(8) Limitation on income earned in restricted country
(A) In general
If travel (or any transaction in connection with such travel) with respect to any foreign country is subject to the regulations described in subparagraph (B) during any period—
(i) the term "foreign earned income" shall not include any income from sources within such country attributable to services performed during such period,
(ii) the term "housing expenses" shall not include any expenses allocable to such period for housing in such country or for housing of the spouse or dependents of the taxpayer in another country while the taxpayer is present in such country, and
(iii) an individual shall not be treated as a bona fide resident of, or as present in, a foreign country for any day during which such individual was present in such country during such period.
(B) Regulations
For purposes of this paragraph, regulations are described in this subparagraph if such regulations—
(i) have been adopted pursuant to the Trading With the Enemy Act (
(ii) include provisions generally prohibiting citizens and residents of the United States from engaging in transactions related to travel to, from, or within a foreign country.
(C) Exception
Subparagraph (A) shall not apply to any individual during any period in which such individual's activities are not in violation of the regulations described in subparagraph (B).
(9) Regulations
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including regulations providing rules—
(A) for cases where a husband and wife each have earned income from sources outside the United States, and
(B) for married individuals filing separate returns.
(e) Election
(1) In general
An election under subsection (a) shall apply to the taxable year for which made and to all subsequent taxable years unless revoked under paragraph (2).
(2) Revocation
A taxpayer may revoke an election made under paragraph (1) for any taxable year after the taxable year for which such election was made. Except with the consent of the Secretary, any taxpayer who makes such a revocation for any taxable year may not make another election under this section for any subsequent taxable year before the 6th taxable year after the taxable year for which such revocation was made.
(f) Cross references
For administrative and penal provisions relating to the exclusions provided for in this section, see sections 6001, 6011, 6012(c), and the other provisions of subtitle F.
(Aug. 16, 1954, ch. 736,
References in Text
The Trading With the Enemy Act, referred to in subsec. (d)(8)(B)(i), is act Oct. 6, 1917, ch. 106,
The International Emergency Economic Powers Act, referred to in subsec. (d)(8)(B)(i), is
Amendments
1986—Subsec. (b)(2)(A).
Subsec. (d)(8), (9).
1984—Subsec. (b)(2)(A).
1983—Subsec. (c)(3)(B)(ii).
Subsec. (d)(7), (8).
1981—
1980—
Subsec. (a).
Subsec. (c)(1)(A).
Subsec. (c)(1)(D), (E).
1978—
Subsec. (a).
Subsec. (c)(1)(A).
Subsec. (c)(1)(B).
Subsec. (c)(1)(C).
Subsec. (c)(1)(D).
Subsec. (c)(7).
Subsec. (c)(8).
Subsec. (d).
Subsec. (d)(1).
Subsecs. (e), (f).
1977—Subsec. (d)(1)(B).
1976—Subsec. (a).
Subsec. (b).
Subsec. (c)(1).
Subsec. (c)(7).
Subsec. (c)(8).
Subsecs. (d) to (f).
1966—Subsec. (d).
1964—Subsec. (c)(1)(B).
1962—Subsec. (a).
Subsecs. (c) and (d).
1958—Subsec. (c).
Effective Date of 1986 Amendment
Section 1233(c) of
Effective Date of 1984 Amendment
Amendment by
Effective Date of 1983 Amendment
Amendment by
Effective Date of 1981 Amendment
Section 115 of subtitle B (§§111–115) of title I of
Effective Date of 1980 Amendments
Section 4(d) of
Amendment by section 107(a)(3)(B) of
Amendment by section 108(a)(1)(A), (C), (D) of
Effective Date of 1978 Amendment
Amendment by section 401(b)(4) of
Section 701(u)(10)(B) of
Amendment by section 703(e) of
Effective Date of 1978 Amendment; Election of Prior Law
Section 209 of
"(a)
"(b)
"(c)
"(1) A taxpayer may elect not to have the amendments made by this title [see section 201(a) of
"(2) An election under this subsection shall be filed with a taxpayer's timely filed return for the first taxable year beginning after December 31, 1977."
Effective Date of 1977 Amendment
Amendment by
Effective Date of 1976 Amendment
Section 1011(d) of
Amendment by section 1901(a)(115) of
Effective Date of 1964 Amendment
Section 237(b) of
Effective Date of 1962 Amendment
Section 11(c)(1) of
"(A) received after March 12, 1962, which are attributable to services performed after December 31, 1962, or
"(B) received after December 31, 1962, which are attributable to services performed on or before December 31, 1962, unless on March 12, 1962, there existed a right (whether forfeitable or nonforfeitable) to receive such amounts."
Effective Date of 1958 Amendment
Amendment by
Repeals
Section 703(e) of
Treatment of Certain Persons in Panama
Section 1232(a) of
Taxable Years Beginning in 1977 or 1978; Individuals Who Leave Foreign Country After August 31, 1978
Rules similar to the rules of
Individuals for Whom Unused Zero Bracket Amount Computation Is Provided for Taxable Years Beginning in 1977
Section 4(b) of
"(1) an individual is entitled to the benefits of section 911 of the Internal Revenue Code of 1986 [formerly I.R.C. 1954], and
"(2) such individual chooses to take to any extent the benefits of section 901 of such Code,
then such individual shall be treated for such taxable year as an individual for whom an unused zero bracket amount computation is provided by section 63(e) of such Code."
Reports to Congressional Committees; Information From Federal Agencies
Section 208 of
"(a)
"(b)
Section Referred to in Other Sections
This section is referred to in
§912. Exemption for certain allowances
The following items shall not be included in gross income, and shall be exempt from taxation under this subtitle:
(1) Foreign areas allowances
In the case of civilian officers and employees of the Government of the United States, amounts received as allowances or otherwise (but not amounts received as post differentials) under—
(A)
(B) section 4 of the Central Intelligence Agency Act of 1949, as amended (
(C) title II of the Overseas Differentials and Allowances Act, or
(D) subsection (e) or (f) of the first section of the Administrative Expenses Act of 1946, as amended, or section 22 of such Act.
(2) Cost-of-living allowances
In the case of civilian officers or employees of the Government of the United States stationed outside the continental United States (other than Alaska), amounts (other than amounts received under title II of the Overseas Differentials and Allowances Act) received as cost-of-living allowances in accordance with regulations approved by the President (or in the case of judicial officers or employees of the United States, in accordance with rules similar to such regulations).
(3) Peace Corps allowances
In the case of an individual who is a volunteer or volunteer leader within the meaning of the Peace Corps Act and members of his family, amounts received as allowances under section 5 or 6 of the Peace Corps Act other than amounts received as—
(A) termination payments under section 5(c) or section 6(1) of such Act,
(B) leave allowances,
(C) if such individual is a volunteer leader training in the United States, allowances to members of his family, and
(D) such portion of living allowances as the President may determine under the Peace Corps Act as constituting basic compensation.
(Aug. 16, 1954, ch. 736,
References in Text
The Foreign Service Act of 1980, referred to in par. (1)(A), is
Title II of the Overseas Differentials and Allowances Act, referred to in pars. (1)(C) and (2), was title II of
Sections 1(e) and (f) and 22 of the Administrative Expenses Act of 1946, referred to in par. (1)(D), were repealed and the provisions thereof reenacted as sections 5726(b), 5727(b) to (e), and 5913 of Title 5, by
The Peace Corps Act, referred to in par. (3), is
Amendments
1988—Par. (2).
1980—Par. (1)(A).
1961—Par. (3).
1960—
Effective Date of 1988 Amendment
Section 6137(b) of
Effective Date of 1980 Amendment
Amendment by
Effective Date of 1961 Amendments
Section 201(d) of
[Section 201(d) of
Effective Date of 1960 Amendment
Section 523(b) of
Repeals; Amendments and Application of Amendments Unaffected
Section 201(a) of
Delegation of Functions
Function of determining the portion of living allowances constituting basic compensation for Peace Corps volunteers or volunteer leaders under par. (3) of this section delegated by President to Director of Peace Corps to be performed in consultation with the Secretary of the Treasury, see section 1–104 of Ex. Ord. No. 12137, May 16, 1979, 44 F.R. 29023, set out as a note under
Authority of President under par. (2) of this section delegated to Secretary of Defense with respect to military departments, and to Secretary of the Treasury with respect to Coast Guard, concerning civilian employees of nonappropriated fund instrumentalities of the armed forces, see section 201 of Ex. Ord. No. 11137, Jan. 7, 1964, set out as a note under
Treatment of Employees of Panama Canal Commission and Department of Defense
Section Referred to in Other Sections
This section is referred to in
[§913. Repealed. Pub. L. 97–34, title I, §112(a), Aug. 13, 1981, 95 Stat. 194 ]
Section, added
Effective Date of Repeal
Repeal applicable with respect to taxable years beginning after Dec. 31, 1981, see section 115 of
Subpart C—Taxation of Foreign Sales Corporations
§921. Exempt foreign trade income excluded from gross income
(a) Exclusion
Exempt foreign trade income of a FSC shall be treated as foreign source income which is not effectively connected with the conduct of a trade or business within the United States.
(b) Proportionate allocation of deductions to exempt foreign trade income
Any deductions of the FSC properly apportioned and allocated to the foreign trade income derived by a FSC from any transaction shall be allocated between—
(1) the exempt foreign trade income derived from such transaction, and
(2) the foreign trade income (other than exempt foreign trade income) derived from such transaction, on a proportionate basis.
(c) Denial of credits
Notwithstanding any other provision of this chapter, no credit (other than a credit allowable under section 27(a), 33, or 34) shall be allowed under this chapter to any FSC.
(d) Foreign trade income, investment income, and carrying charges treated as effectively connected with United States business
For purposes of this chapter—
(1) all foreign trade income of a FSC other than—
(A) exempt foreign trade income, and
(B) section 923(a)(2) non-exempt income,
(2) all interest, dividends, royalties, and other investment income received or accrued by a FSC, and
(3) all carrying charges received or accrued by a FSC,
shall be treated as income effectively connected with a trade or business conducted through a permanent establishment of such corporation within the United States. Income described in paragraph (1) shall be treated as derived from sources within the United States.
(Added
Prior Provisions
A prior section 921, acts Aug. 16, 1954, ch. 736,
Effective Date
Section 805(a) of title VIII of div. A of
"(1)
"(2)
"(A) any lease of more than 3 years duration which was entered into before January 1, 1985,
"(B) any contract with respect to which the taxpayer uses the completed contract method of accounting which was entered into before January 1, 1985, or
"(C) in the case of any contract other than a lease or contract described in subparagraph (A) or (B), any contract which was entered into before January 1, 1985; except that this subparagraph shall only apply to the first 3 taxable years of the FSC ending after January 1, 1985, or such later taxable years as the Secretary of the Treasury or his delegate may prescribe.
"(3)
"(4)
Submission of Biannual Reports to Congress
Section 804(a) of title VIII of div. A of
[Section 6252(b)(2)(B) of
Section Referred to in Other Sections
This section is referred to in
§922. FSC defined
(a) FSC defined
For purposes of this title, the term "FSC" means any corporation—
(1) which—
(A) was created or organized—
(i) under the laws of any foreign country which meets the requirements of section 927(e)(3), or
(ii) under the laws applicable to any possession of the United States,
(B) has no more than 25 shareholders at any time during the taxable year,
(C) does not have any preferred stock outstanding at any time during the taxable year,
(D) during the taxable year—
(i) maintains an office located outside the United States in a foreign country which meets the requirements of section 927(e)(3) or in any possession of the United States,
(ii) maintains a set of the permanent books of account (including invoices) of such corporation at such office, and
(iii) maintains at a location within the United States the records which such corporation is required to keep under section 6001,
(E) at all times during the taxable year, has a board of directors which includes at least one individual who is not a resident of the United States, and
(F) is not a member, at any time during the taxable year, of any controlled group of corporations of which a DISC is a member, and
(2) which has made an election (at the time and in the manner provided in section 927(f)(1)) which is in effect for the taxable year to be treated as a FSC.
(b) Small FSC defined
For purposes of this title, a FSC is a small FSC with respect to any taxable year if—
(1) such corporation has made an election (at the time and in the manner provided in section 927(f)(1)) which is in effect for the taxable year to be treated as a small FSC, and
(2) such corporation is not a member, at any time during the taxable year, of a controlled group of corporations which includes a FSC unless such other FSC has also made an election under paragraph (1) which is in effect for such year.
(Added
Prior Provisions
A prior section 922, acts Aug. 16, 1954, ch. 736,
Effective Date
Section applicable to transactions after Dec. 31, 1984, in taxable years ending after such date, see section 805(a)(1) of
Section Referred to in Other Sections
This section is referred to in
§923. Exempt foreign trade income
(a) Exempt foreign trade income
For purposes of this subpart—
(1) In general
The term "exempt foreign trade income" means the aggregate amount of all foreign trade income of a FSC for the taxable year which is described in paragraph (2) or (3).
(2) Income determined without regard to administrative pricing rules
In the case of any transaction to which paragraph (3) does not apply, 32 percent of the foreign trade income derived from such transaction shall be treated as described in this paragraph. For purposes of the preceding sentence, foreign trade income shall not include any income properly allocable to excluded property described in subparagraph (B) of section 927(a)(2) (relating to intangibles).
(3) Income determined with regard to administrative pricing rules
In the case of any transaction with respect to which paragraph (1) or (2) of section 925(a) (or the corresponding provisions of the regulations prescribed under section 925(b)) applies, 16/23 of the foreign trade income derived from such transaction shall be treated as described in this paragraph.
(4) Special rule for foreign trade income allocable to a cooperative
(A) In general
In any case in which a qualified cooperative is a shareholder of a FSC, paragraph (3) shall be applied with respect to that portion of the foreign trade income of such FSC for any taxable year which is properly allocable to the marketing of agricultural or horticultural products (or the providing of related services) by such cooperative by substituting "100 percent" for "16/23".
(B) Paragraph only to apply to amounts FSC distributes
Subparagraph (A) shall not apply for any taxable year unless the FSC distributes to the qualified cooperative the amount which (but for such subparagraph) would not be treated as exempt foreign trade income. Any distribution under this subparagraph for any taxable year—
(i) shall be made before the due date for filing the return of tax for such taxable year, but
(ii) shall be treated as made on the last day of such taxable year.
(5) Special rule for military property
Under regulations prescribed by the Secretary, that portion of the foreign trading gross receipts of the FSC for the taxable year attributable to the disposition of, or services relating to, military property (within the meaning of section 995(b)(3)(B)) which may be treated as exempt foreign trade income shall equal 50 percent of the amount which (but for this paragraph) would be treated as exempt foreign trade income.
(6) Cross reference
For reduction in amount of exempt foreign trade income, see section 291(a)(4).
(b) Foreign trade income defined
For purposes of this subpart, the term "foreign trade income" means the gross income of a FSC attributable to foreign trading gross receipts.
(Added
Amendments
1986—Subsec. (a)(6).
Effective Date of 1986 Amendment
Amendment by
Effective Date
Section applicable to transactions after Dec. 31, 1984, in taxable years ending after such date, see section 805(a)(1) of
Plan Amendments Not Required Until January 1, 1989
For provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§1101–1147 and 1171–1177] or title XVIII [§§1800–1899A] of
Section Referred to in Other Sections
This section is referred to in
§924. Foreign trading gross receipts
(a) In general
Except as otherwise provided in this section, for purposes of this subpart, the term "foreign trading gross receipts" means the gross receipts of any FSC which are—
(1) from the sale, exchange, or other disposition of export property,
(2) from the lease or rental of export property for use by the lessee outside the United States,
(3) for services which are related and subsidiary to—
(A) any sale, exchange, or other disposition of export property by such corporation, or
(B) any lease or rental of export property described in paragraph (2) by such corporation,
(4) for engineering or architectural services for construction projects located (or proposed for location) outside the United States, or
(5) for the performance of managerial services for an unrelated FSC or DISC in furtherance of the production of foreign trading gross receipts described in paragraph (1), (2), or (3).
Paragraph (5) shall not apply to a FSC for any taxable year unless at least 50 percent of its gross receipts for such taxable year is derived from activities described in paragraph (1), (2), or (3).
(b) Foreign management and foreign economic process requirements
(1) In general
Except as provided in paragraph (2)—
(A) a FSC shall be treated as having foreign trading gross receipts for the taxable year only if the management of such corporation during such taxable year takes place outside the United States as required by subsection (c), and
(B) a FSC has foreign trading gross receipts from any transaction only if economic processes with respect to such transaction take place outside the United States as required by subsection (d).
(2) Exception for small FSC
(A) In general
Paragraph (1) shall not apply with respect to any small FSC.
(B) Limitation on amount of foreign trading gross receipts of small FSC taken into account
(i) In general
Any foreign trading gross receipts of a small FSC for the taxable year which exceed $5,000,000 shall not be taken into account in determining the exempt foreign trade income of such corporation and shall not be taken into account under any other provision of this subpart.
(ii) Allocation of limitation
If the foreign trading gross receipts of a small FSC exceed the limitation of clause (i), the corporation may allocate such limitation among such gross receipts in such manner as it may select (at such time and in such manner as may be prescribed in regulations).
(iii) Receipts of controlled group aggregated
For purposes of applying clauses (i) and (ii), all small FSC's which are members of the same controlled group of corporations shall be treated as a single corporation.
(iv) Allocation of limitation among members of controlled group
The limitation under clause (i) shall be allocated among the foreign trading gross receipts of small FSC's which are members of the same controlled group of corporations in a manner provided in regulations prescribed by the Secretary.
(c) Requirement that FSC be managed outside the United States
The management of a FSC meets the requirements of this subsection for the taxable year if—
(1) all meetings of the board of directors of the corporation, and all meetings of the shareholders of the corporation, are outside the United States,
(2) the principal bank account of the corporation is maintained in a foreign country which meets the requirements of section 927(e)(3) or in a possession of the United States at all times during the taxable year, and
(3) all dividends, legal and accounting fees, and salaries of officers and members of the board of directors of the corporation disbursed during the taxable year are disbursed out of bank accounts of the corporation maintained outside the United States.
(d) Requirement that economic processes take place outside the United States
(1) In general
The requirements of this subsection are met with respect to the gross receipts of a FSC derived from any transaction if—
(A) such corporation (or any person acting under a contract with such corporation) has participated outside the United States in the solicitation (other than advertising), the negotiation, or the making of the contract relating to such transaction, and
(B) the foreign direct costs incurred by the FSC attributable to the transaction equal or exceed 50 percent of the total direct costs attributable to the transaction.
(2) Alternative 85-percent test
A corporation shall be treated as satisfying the requirements of paragraph (1)(B) with respect to any transaction if, with respect to each of at least 2 paragraphs of subsection (e), the foreign direct costs incurred by such corporation attributable to activities described in such paragraph equal or exceed 85 percent of the total direct costs attributable to activities described in such paragraph.
(3) Definitions
For purposes of this subsection—
(A) Total direct costs
The term "total direct costs" means, with respect to any transaction, the total direct costs incurred by the FSC attributable to activities described in subsection (e) performed at any location by the FSC or any person acting under a contract with such FSC.
(B) Foreign direct costs
The term "foreign direct costs" means, with respect to any transaction, the portion of the total direct costs which are attributable to activities performed outside the United States.
(4) Rules for commissions, etc.
The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this subsection and subsection (e) in the case of commissions, rentals, and furnishing of services.
(e) Activities relating to disposition of export property
The activities referred to in subsection (d) are—
(1) advertising and sales promotion,
(2) the processing of customer orders and the arranging for delivery of the export property,
(3) transportation from the time of acquisition by the FSC (or, in the case of a commission relationship, from the beginning of such relationship for such transaction) to the delivery to the customer,
(4) the determination and transmittal of a final invoice or statement of account and the receipt of payment, and
(5) the assumption of credit risk.
(f) Certain receipts not included in foreign trading gross receipts
(1) Certain receipts excluded on basis of use; subsidized receipts and receipts from related parties excluded
The term "foreign trading gross receipts" shall not include receipts of a FSC from a transaction if—
(A) the export property or services—
(i) are for ultimate use in the United States, or
(ii) are for use by the United States or any instrumentality thereof and such use of export property or services is required by law or regulation,
(B) such transaction is accomplished by a subsidy granted by the United States or any instrumentality thereof, or
(C) such receipts are from another FSC which is a member of the same controlled group of corporations of which such corporation is a member.
In the case of gross receipts of a FSC from a transaction involving any property, subparagraph (C) shall not apply if such FSC (and all other FSC's which are members of the same controlled group and which receive gross receipts from a transaction involving such property) do not use the pricing rules under paragraph (1) of section 925(a) (or the corresponding provisions of the regulations prescribed under section 925(b)) with respect to any transaction involving such property.
(2) Investment income; carrying charges
The term "foreign trading gross receipts" shall not include any investment income or carrying charges.
(Added
Amendments
1986—Subsec. (c)(2).
Subsec. (f)(1).
Effective Date of 1986 Amendment
Section 1876(e)(2) of
Amendment by section 1876(l) of
Effective Date
Section applicable to transactions after Dec. 31, 1984, in taxable years ending after such date, with a special rule for application of subsecs. (c) and (d) for certain contracts, see section 805(a)(1) and (2) of
Plan Amendments Not Required Until January 1, 1989
For provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§1101–1147 and 1171–1177] or title XVIII [§§1800–1899A] of
Section Referred to in Other Sections
This section is referred to in
§925. Transfer pricing rules
(a) In general
In the case of a sale of export property to a FSC by a person described in section 482, the taxable income of such FSC and such person shall be based upon a transfer price which would allow such FSC to derive taxable income attributable to such sale (regardless of the sales price actually charged) in an amount which does not exceed the greatest of—
(1) 1.83 percent of the foreign trading gross receipts derived from the sale of such property by such FSC,
(2) 23 percent of the combined taxable income of such FSC and such person which is attributable to the foreign trading gross receipts derived from the sale of such property by such FSC, or
(3) taxable income based upon the sale price actually charged (but subject to the rules provided in section 482).
Paragraphs (1) and (2) shall apply only if the FSC meets the requirements of subsection (c) with respect to the sale.
(b) Rules for commissions, rentals, and marginal costing
The Secretary shall prescribe regulations setting forth—
(1) rules which are consistent with the rules set forth in subsection (a) for the application of this section in the case of commissions, rentals, and other income, and
(2) rules for the allocation of expenditures in computing combined taxable income under subsection (a)(2) in those cases where a FSC is seeking to establish or maintain a market for export property.
(c) Requirements for use of administrative pricing rules
A sale by a FSC meets the requirements of this subsection if—
(1) all of the activities described in section 924(e) attributable to such sale, and
(2) all of the activities relating to the solicitation (other than advertising), negotiation, and making of the contract for such sale,
have been performed by such FSC (or by another person acting under a contract with such FSC).
(d) Limitation on gross receipts pricing rule
The amount determined under subsection (a)(1) with respect to any transaction shall not exceed 2 times the amount which would be determined under subsection (a)(2) with respect to such transaction.
(e) Taxable income
For purposes of this section, the taxable income of a FSC shall be determined without regard to section 921.
(f) Special rule for cooperatives
In any case in which a qualified cooperative sells export property to a FSC, in computing the combined taxable income of such FSC and such organization for purposes of subsection (a)(2), there shall not be taken into account any deduction allowable under subsection (b) or (c) of section 1382 (relating to patronage dividends, per-unit retain allocations, and nonpatronage distributions).
(Added
Effective Date
Section applicable to transactions after Dec. 31, 1984, in taxable years ending after such date, see section 805(a)(1) of
Section Referred to in Other Sections
This section is referred to in
§926. Distributions to shareholders
(a) Distributions made first out of foreign trade income
For purposes of this title, any distribution to a shareholder of a FSC by such FSC which is made out of earnings and profits shall be treated as made—
(1) first, out of earnings and profits attributable to foreign trade income, to the extent thereof, and
(2) then, out of any other earnings and profits.
(b) Distributions by FSC to nonresident aliens and foreign corporations treated as United States connected
For purposes of this title, any distribution by a FSC which is made out of earnings and profits attributable to foreign trade income to any shareholder of such corporation which is a foreign corporation or a nonresident alien individual shall be treated as a distribution—
(1) which is effectively connected with the conduct of a trade or business conducted through a permanent establishment of such shareholder within the United States, and
(2) of income which is derived from sources within the United States.
(c) FSC includes former FSC
For purposes of this section, the term "FSC" includes a former FSC.
(Added
Effective Date
Section applicable to transactions after Dec. 31, 1984, in taxable years ending after such date, see section 805(a)(1) of
Section Referred to in Other Sections
This section is referred to in
§927. Other definitions and special rules
(a) Export property
For purposes of this subpart—
(1) In general
The term "export property" means property—
(A) manufactured, produced, grown, or extracted in the United States by a person other than a FSC,
(B) held primarily for sale, lease, or rental, in the ordinary course of trade or business, by, or to, a FSC, for direct use, consumption, or disposition outside the United States, and
(C) not more than 50 percent of the fair market value of which is attributable to articles imported into the United States.
For purposes of subparagraph (C), the fair market value of any article imported into the United States shall be its appraised value, as determined by the Secretary under section 402 of the Tariff Act of 1930 (
(2) Excluded property
The term "export property" shall not include—
(A) property leased or rented by a FSC for use by any member of a controlled group of corporations of which such FSC is a member,
(B) patents, inventions, models, designs, formulas, or processes whether or not patented, copyrights (other than films, tapes, records, or similar reproductions, for commercial or home use), good will, trademarks, trade brands, franchises, or other like property,
(C) oil or gas (or any primary product thereof),
(D) products the export of which is prohibited or curtailed to effectuate the policy set forth in paragraph (2)(C) of section 3 of the Export Administration Act of 1979 (relating to the protection of the domestic economy), or
(E) any unprocessed timber which is a softwood.
For purposes of subparagraph (E), the term "unprocessed timber" means any log, cant, or similar form of timber.
(3) Property in short supply
If the President determines that the supply of any property described in paragraph (1) is insufficient to meet the requirements of the domestic economy, he may by Executive order designate the property as in short supply. Any property so designated shall not be treated as export property during the period beginning with the date specified in the Executive order and ending with the date specified in an Executive order setting forth the President's determination that the property is no longer in short supply.
(4) Qualified cooperative
The term "qualified cooperative" means any organization to which part I of subchapter T applies which is engaged in the marketing of agricultural or horticultural products.
(b) Gross receipts
(1) In general
For purposes of this subpart, the term "gross receipts" means—
(A) the total receipts from the sale, lease, or rental of property held primarily for sale, lease, or rental in the ordinary course of trade or business, and
(B) gross income from all other sources.
(2) Gross receipts taken into account in case of commissions
In the case of commissions on the sale, lease, or rental of property, the amount taken into account for purposes of this subpart as gross receipts shall be the gross receipts on the sale, lease, or rental of the property on which such commissions arose.
(c) Investment income
For purposes of this subpart, the term "investment income" means—
(1) dividends,
(2) interest,
(3) royalties,
(4) annuities,
(5) rents (other than rents from the lease or rental of export property for use by the lessee outside of the United States),
(6) gains from the sale or exchange of stock or securities,
(7) gains from futures transactions in any commodity on, or subject to the rules of, a board of trade or commodity exchange (other than gains which arise out of a bona fide hedging transaction reasonably necessary to conduct the business of the FSC in the manner in which such business is customarily conducted by others),
(8) amounts includible in computing the taxable income of the corporation under part I of subchapter J, and
(9) gains from the sale or other disposition of any interest in an estate or trust.
(d) Other definitions
For purposes of this subpart—
(1) Carrying charges
The term "carrying charges" means—
(A) carrying charges, and
(B) under regulations prescribed by the Secretary, any amount in excess of the price for an immediate cash sale and any other unstated interest.
(2) Transaction
(A) In general
The term "transaction" means—
(i) any sale, exchange, or other disposition,
(ii) any lease or rental, and
(iii) any furnishing of services.
(B) Grouping of transactions
To the extent provided in regulations, any provision of this subpart which, but for this subparagraph, would be applied on a transaction-by-transaction basis may be applied by the taxpayer on the basis of groups of transactions based on product lines or recognized industry or trade usage. Such regulations may permit different groupings for different purposes.
(3) United States defined
The term "United States" includes the Commonwealth of Puerto Rico.
(4) Controlled group of corporations
The term "controlled group of corporations" has the meaning given to such term by section 1563(a), except that—
(A) "more than 50 percent" shall be substituted for "at least 80 percent" each place it appears therein, and
(B) section 1563(b) shall not apply.
(5) Possessions
The term "possession of the United States" means Guam, American Samoa, the Commonwealth of the Northern Mariana Islands, and the Virgin Islands of the United States.
(6) Section 923(a)(2) non-exempt income
The term "section 923(a)(2) non-exempt income" means any foreign trade income from a transaction with respect to which paragraph (1) or (2) of section 925(a) does not apply and which is not exempt foreign trade income. Such term shall not include any income which is effectively connected with the conduct of a trade or business within the United States (determined without regard to this subpart).
(e) Special rules
(1) Source rules for related persons
Under regulations, the income of a person described in section 482 from a transaction giving rise to foreign trading gross receipts of a FSC which is treated as from sources outside the United States shall not exceed the amount which would be treated as foreign source income earned by such person if the pricing rule under section 994 which corresponds to the rule used under section 925 with respect to such transaction applied to such transaction.
(2) Participation in international boycotts, etc.
Under regulations prescribed by the Secretary, the exempt foreign trade income of a FSC for any taxable year shall be limited under rules similar to the rules of clauses (ii) and (iii) of section 995(b)(1)(F).
(3) Exchange of information requirements
For purposes of this title, the term "FSC" shall not include any corporation which was created or organized under the laws of any foreign country unless there is in effect between such country and the United States—
(A) a bilateral or multilateral agreement described in section 274(h)(6)(C) (determined by treating any reference to a beneficiary country as being a reference to any foreign country and by applying such section without regard to clause (ii) thereof), or
(B) an income tax treaty which contains an exchange of information program—
(i) which the Secretary certifies (and has not revoked such certification) is satisfactory in practice for purposes of this title, and
(ii) to which the FSC is subject.
(4) Disallowance of treaty benefits
Any corporation electing to be treated as a FSC under subsection (f)(1) may not claim any benefits under any income tax treaty between the United States and any foreign country.
(5) Coordination with possessions taxation
(A) Exemption
No tax shall be imposed by any possession of the United States on any foreign trade income derived before January 1, 1987. The preceding sentence shall not apply to any income attributable to the sale of property or the performance of services for ultimate use, consumption, or disposition within the possession.
(B) Clarification that possession may exempt certain income from tax
Nothing in any provision of law shall be construed as prohibiting any possession of the United States from exempting from tax any foreign trade income of a FSC or any other income of a FSC described in paragraph (2) or (3) of section 921(d).
(C) No cover over of taxes imposed on FSC
Nothing in any provision of law shall be construed as requiring any tax imposed by this title on a FSC to be covered over (or otherwise transferred) to any possession of the United States.
(f) Election of status as FSC (and as small FSC)
(1) Election
(A) Time for making
An election by a corporation under section 922(a)(2) to be treated as a FSC, and an election under section 922(b)(1) to be a small FSC, shall be made by such corporation for a taxable year at any time during the 90-day period immediately preceding the beginning of the taxable year, except that the Secretary may give his consent to the making of an election at such other times as he may designate.
(B) Manner of election
An election under subparagraph (A) shall be made in such manner as the Secretary shall prescribe and shall be valid only if all persons who are shareholders in such corporation on the first day of the first taxable year for which such election is effective consent to such election.
(2) Effect of election
If a corporation makes an election under paragraph (1), then the provisions of this subpart shall apply to such corporation for the taxable year of the corporation for which made and for all succeeding taxable years.
(3) Termination of election
(A) Revocation
An election under this subsection made by any corporation may be terminated by revocation of such election for any taxable year of the corporation after the first taxable year of the corporation for which the election is effective. A termination under this paragraph shall be effective with respect to such election—
(i) for the taxable year in which made, if made at any time during the first 90 days of such taxable year, or
(ii) for the taxable year following the taxable year in which made, if made after the close of such 90 days, and
for all succeeding taxable years of the corporation. Such termination shall be made in such manner as the Secretary shall prescribe by regulations.
(B) Continued failure to be a FSC
If a corporation is not a FSC for each of any 5 consecutive taxable years of the corporation for which an election under this subsection is effective, the election to be a FSC shall be terminated and not be in effect for any taxable year of the corporation after such 5th year.
(g) Treatment of shared FSC's
(1) In general
Except as provided in paragraph (2), each separate account referred to in paragraph (3) maintained by a shared FSC shall be treated as a separate corporation for purposes of this subpart.
(2) Certain requirements applied at shared FSC level
Paragraph (1) shall not apply—
(A) for purposes of—
(i) subparagraphs (A), (B), (D), and (E) of section 922(a)(1),
(ii) paragraph (2) of section 922(a),
(iii) subsections (b), (c), and (e) of section 924, and
(iv) subsection (f) of this section, and
(B) for such other purposes as the Secretary may by regulations prescribe.
(3) Shared FSC
For purposes of this subsection, the term "shared FSC" means any corporation if—
(A) such corporation maintains a separate account for transactions with each shareholder (and persons related to such shareholder),
(B) distributions to each shareholder are based on the amounts in the separate account maintained with respect to such shareholder, and
(C) such corporation meets such other requirements as the Secretary may by regulations prescribe.
(Added
References in Text
Paragraph (2)(C) of section 3 of the Export Administration Act of 1979, referred to in subsec. (a)(2)(D), is classified to
Amendments
1993—Subsec. (a)(2).
1990—Subsec. (g)(2)(B).
1988—Subsec. (g).
1986—Subsec. (d)(6).
Subsec. (e)(2).
Subsec. (e)(3).
Subsec. (e)(5).
Effective Date of 1993 Amendment
Amendment by
Effective Date of 1988 Amendment
Section 1012(bb)(8)(B) of
Effective Date of 1986 Amendment
Amendment by
Effective Date
Section applicable to transactions after Dec. 31, 1984, in taxable years ending after such date, see section 805(a)(1) of
Plan Amendments Not Required Until January 1, 1989
For provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§1101–1147 and 1171–1177] or title XVIII [§§1800–1899A] of
Section Referred to in Other Sections
This section is referred to in
Subpart D—Possessions of the United States
Amendments
1986—
1983—
1972—
1960—
§931. Income from sources within Guam, American Samoa, or the Northern Mariana Islands
(a) General rule
In the case of an individual who is a bona fide resident of a specified possession during the entire taxable year, gross income shall not include—
(1) income derived from sources within any specified possession, and
(2) income effectively connected with the conduct of a trade or business by such individual within any specified possession.
(b) Deductions, etc. allocable to excluded amounts not allowable
An individual shall not be allowed—
(1) as a deduction from gross income any deductions (other than the deduction under section 151, relating to personal exemptions), or
(2) any credit,
properly allocable or chargeable against amounts excluded from gross income under this section.
(c) Specified possession
For purposes of this section, the term "specified possession" means Guam, American Samoa, and the Northern Mariana Islands.
(d) Special rules
For purposes of this section—
(1) Employees of the United States
Amounts paid for services performed as an employee of the United States (or any agency thereof) shall be treated as not described in paragraph (1) or (2) of subsection (a).
(2) Determination of source, etc.
The determination as to whether income is described in paragraph (1) or (2) of subsection (a) shall be made under regulations prescribed by the Secretary.
(3) Determination of residency
For purposes of this section and section 876, the determination of whether an individual is a bona fide resident of Guam, American Samoa, or the Northern Mariana Islands shall be made under regulations prescribed by the Secretary.
(Aug. 16, 1954, ch. 736,
Amendments
1986—
1984—Subsec. (d)(2)(B).
1977—Subsec. (d)(3).
1976—Subsec. (a).
Subsec. (c).
Subsec. (d)(1).
Subsec. (f).
Subsecs. (h), (i).
1972—Subsec. (c).
1971—Subsec. (a).
1966—Subsec (d).
Effective Date of 1986 Amendment
Section 1277 of subtitle G (§§1271–1277) of title XII of
"(a)
"(b)
"(c)
"(1)
"(2)
"(A)
"(i) any taxable year beginning after December 31, 1986, and
"(ii) any pre-1987 open year.
"(B)
"(i) the amendment made by section 1275(b) shall not apply to income from sources in the Virgin Islands or income effectively connected with the conduct of a trade or business in the Virgin Islands, and
"(ii) the taxpayer shall be allowed a credit—
"(I) against any additional tax imposed by subtitle A of the Internal Revenue Code of 1954 [now 1986] (by reason of the amendment made by section 1275(b)) on income not described in clause (i),
"(II) for any tax paid to the Virgin Islands before the date of the enactment of this Act [Oct. 22, 1986] and attributable to such income.
For purposes of clause (ii)(II), any tax paid before January 1, 1987, pursuant to a process in effect before August 16, 1986, shall be treated as paid before the date of the enactment of this Act.
"(C)
"(D)
"(i) during the fiscal year which ended May 31, 1986, such corporation was actively engaged directly or through a subsidiary in the conduct of a trade or business in the Virgin Islands and such trade or business consists of business related to marine activities, and
"(ii) such corporation was incorporated on March 31, 1983, in Delaware.
"(E)
"(i)
"(ii)
"(I) the redemptions of limited partnership interests for cash and property described in an agreement (as amended) dated March 12, 1981,
"(II) the subsequent disposition of the properties distributed in such redemptions, and
"(III) interest earned before January 1, 1987, on bank deposits of proceeds received from such redemptions to the extent such deposits are located in the United States Virgin Islands.
"(iii)
"(d)
"(1) the status of such negotiations, and
"(2) the reason why such agreement has not been executed.
"(e)
"(f)
Effective Date of 1984 Amendment
Amendment by
Effective Date of 1977 Amendment
Amendment by
Effective Date of 1976 Amendment
Amendment by section 1051(c) of
Amendment by section 1901(a)(117) of
Effective Date of 1972 Amendment
Section 2 of
Effective Date of 1971 Amendment
Amendment by
Effective Date of 1966 Amendment
Section 107(b) of
Authority of Guam, American Samoa, and the Northern Mariana Islands To Enact Revenue Laws
Section 1271 of
"(a)
"(1) from sources within, or effectively connected with the conduct of a trade or business within, any such possession, or
"(2) received or accrued by any resident of such possession.
"(b)
"(1) the elimination of double taxation involving taxation by such possession and taxation by the United States,
"(2) the establishment of rules under which the evasion or avoidance of United States income tax shall not be permitted or facilitated by such possession,
"(3) the exchange of information between such possession and the United States for purposes of tax administration, and
"(4) the resolution of other problems arising in connection with the administration of the tax laws of such possession or the United States.
Any such implementing agreement shall be executed on behalf of the United States by the Secretary of the Treasury after consultation with the Secretary of the Interior.
"(c)
"(d)
"(e)
"(1)
"(2)
"(f)
"(1)
"(2)
"(3)
Cross References
Consolidated returns, definition of "includible corporation" as not meaning corporation entitled to the benefits of this section, see
Income from sources within the United States, see
Section Referred to in Other Sections
This section is referred to in
§932. Coordination of United States and Virgin Islands income taxes
(a) Treatment of United States residents
(1) Application of subsection
This subsection shall apply to an individual for the taxable year if—
(A) such individual—
(i) is a citizen or resident of the United States (other than a bona fide resident of the Virgin Islands at the close of the taxable year), and
(ii) has income derived from sources within the Virgin Islands, or effectively connected with the conduct of a trade or business within such possession, for the taxable year, or
(B) such individual files a joint return for the taxable year with an individual described in subparagraph (A).
(2) Filing requirement
Each individual to whom this subsection applies for the taxable year shall file his income tax return for the taxable year with both the United States and the Virgin Islands.
(3) Extent of income tax liability
In the case of an individual to whom this subsection applies in a taxable year for purposes of so much of this title (other than this section and section 7654) as relates to the taxes imposed by this chapter, the United States shall be treated as including the Virgin Islands.
(b) Portion of United States tax liability payable to the Virgin Islands
(1) In general
Each individual to whom subsection (a) applies for the taxable year shall pay the applicable percentage of the taxes imposed by this chapter for such taxable year (determined without regard to paragraph (3)) to the Virgin Islands.
(2) Applicable percentage
(A) In general
For purposes of paragraph (1), the term "applicable percentage" means the percentage which Virgin Islands adjusted gross income bears to adjusted gross income.
(B) Virgin Islands adjusted gross income
For purposes of subparagraph (A), the term "Virgin Islands adjusted gross income" means adjusted gross income determined by taking into account only income derived from sources within the Virgin Islands and deductions properly apportioned or allocable thereto.
(3) Amounts paid allowed as credit
There shall be allowed as a credit against the tax imposed by this chapter for the taxable year an amount equal to the taxes required to be paid to the Virgin Islands under paragraph (1) which are so paid.
(c) Treatment of Virgin Islands residents
(1) Application of subsection
This subsection shall apply to an individual for the taxable year if—
(A) such individual is a bona fide resident of the Virgin Islands at the close of the taxable year, or
(B) such individual files a joint return for the taxable year with an individual described in subparagraph (A).
(2) Filing requirement
Each individual to whom this subsection applies for the taxable year shall file an income tax return for the taxable year with the Virgin Islands.
(3) Extent of income tax liability
In the case of an individual to whom this subsection applies in a taxable year for purposes of so much of this title (other than this section and section 7654) as relates to the taxes imposed by this chapter, the Virgin Islands shall be treated as including the United States.
(4) Residents of the Virgin Islands
In the case of an individual—
(A) who is a bona fide resident of the Virgin Islands at the close of the taxable year,
(B) who, on his return of income tax to the Virgin Islands, reports income from all sources and identifies the source of each item shown on such return, and
(C) who fully pays his tax liability referred to in section 934(a) to the Virgin Islands with respect to such income,
for purposes of calculating income tax liability to the United States, gross income shall not include any amount included in gross income on such return, and allocable deductions and credits shall not be taken into account.
(d) Special rule for joint returns
In the case of a joint return, this section shall be applied on the basis of the residence of the spouse who has the greater adjusted gross income (determined without regard to community property laws) for the taxable year.
(e) Special rule for applying section to tax imposed in Virgin Islands
In applying this section for purposes of determining income tax liability incurred to the Virgin Islands, the provisions of this section shall not be affected by the provisions of Federal law referred to in section 934(a).
(Added
Prior Provisions
A prior section 932, acts Aug. 16, 1954, ch. 736,
Amendments
1988—Subsec. (c)(2).
Subsec. (c)(4).
Subsec. (e).
Effective Date of 1988 Amendment
Amendment by
Effective Date
Enactment of section 932 and repeal of prior section 932 applicable to taxable years beginning after Dec. 31, 1986, with certain exceptions and qualifications, see section 1277 of
Regulations
Section 1274(c) of
Authority To Impose Nondiscriminatory Local Income Taxes
Section 1274(b) of
Section Referred to in Other Sections
This section is referred to in
§933. Income from sources within Puerto Rico
The following items shall not be included in gross income and shall be exempt from taxation under this subtitle:
(1) Resident of Puerto Rico for entire taxable year
In the case of an individual who is a bona fide resident of Puerto Rico during the entire taxable year, income derived from sources within Puerto Rico (except amounts received for services performed as an employee of the United States or any agency thereof); but such individual shall not be allowed as a deduction from his gross income any deductions (other than the deduction under section 151, relating to personal exemptions), or any credit, properly allocable to or chargeable against amounts excluded from gross income under this paragraph.
(2) Taxable year of change of residence from Puerto Rico
In the case of an individual citizen of the United States who has been a bona fide resident of Puerto Rico for a period of at least 2 years before the date on which he changes his residence from Puerto Rico, income derived from sources therein (except amounts received for services performed as an employee of the United States or any agency thereof) which is attributable to that part of such period of Puerto Rican residence before such date; but such individual shall not be allowed as a deduction from his gross income any deductions (other than the deduction for personal exemptions under section 151), or any credit, properly allocable to or chargeable against amounts excluded from gross income under this paragraph.
(Aug. 16, 1954, ch. 736,
Amendments
1986—
Effective Date of 1986 Amendment
Amendment by
Cross References
Self-employment income, resident of Puerto Rico to compute his net earnings without regard to this section, see
Section Referred to in Other Sections
This section is referred to in
§934. Limitation on reduction in income tax liability incurred to the Virgin Islands
(a) General rule
Tax liability incurred to the Virgin Islands pursuant to this subtitle, as made applicable in the Virgin Islands by the Act entitled "An Act making appropriations for the naval service for the fiscal year ending June 30, 1922, and for other purposes", approved July 12, 1921 (
(b) Reductions permitted with respect to certain income
(1) In general
Except as provided in paragraph (2), subsection (a) shall not apply with respect to so much of the tax liability referred to in subsection (a) as is attributable to income derived from sources within the Virgin Islands or income effectively connected with the conduct of a trade or business within the Virgin Islands.
(2) Exception for liability paid by citizens or residents of the United States
Paragraph (1) shall not apply to any liability payable to the Virgin Islands under section 932(b).
(3) Special rule for non-United States income of certain foreign corporations
(A) In general
In the case of a qualified foreign corporation, subsection (a) shall not apply with respect to so much of the tax liability referred to in subsection (a) as is attributable to income which is derived from sources outside the United States and which is not effectively connected with the conduct of a trade or business within the United States.
(B) Qualified foreign corporation
For purposes of subparagraph (A), the term "qualified foreign corporation" means any foreign corporation if less than 10 percent of—
(i) the total voting power of the stock of such corporation, and
(ii) the total value of the stock of such corporation, is owned or treated as owned (within the meaning of section 958) by 1 or more United States persons.
(4) Determination of income source, etc.
The determination as to whether income is derived from sources within the Virgin Islands or the United States or is effectively connected with the conduct of a trade or business within the Virgin Islands or the United States shall be made under regulations prescribed by the Secretary.
(Added
Amendments
1986—Subsec. (a).
Subsec. (b).
Subsec. (c).
Subsec. (d).
Subsec. (e).
Subsec. (f).
1984—Subsec. (f).
1983—Subsec. (a).
1982—Subsec. (b)(2).
Subsec. (e).
Subsec. (f).
1976—Subsec. (b).
Subsec. (d).
Effective Date of 1986 Amendment
Amendment by section 1275(a)(2)(A), (c)(1), (2) of
Amendment by section 1876(f)(2) of
Effective Date of 1984 Amendment
Amendment by
Effective Date of 1983 Amendment
Section 1(e) of
"(1)
"(2)
Effective Date of 1982 Amendment
Amendment by
Effective Date of 1976 Amendment
Amendment by section 1901(a)(118) of
Effective Date
Section 4(e)(1) of
Plan Amendments Not Required Until January 1, 1989
For provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§1101–1147 and 1171–1177] or title XVIII [§§1800–1899A] of
Report on Possessions Corporations
For provisions requiring the Secretary of the Treasury to submit a report to Congress respecting the operation and effect of subsec. (b) of this section for the year 1981 and each second calendar year thereafter, see section 441(a) of
Section Referred to in Other Sections
This section is referred to in
[§934A. Repealed. Pub. L. 99–514, title XII, §1275(c)(3), Oct. 22, 1986, 100 Stat. 2599 ]
Section, added
Effective Date of Repeal
Repeal applicable to taxable years beginning after Dec. 31, 1986, with certain exceptions and qualifications, see section 1277 of
[§935. Repealed. Pub. L. 99–514, title XII, §1272(d)(2), Oct. 22, 1986, 100 Stat. 2594 ]
Section, added
Effective Date of Repeal
Repeal applicable to taxable years beginning after Dec. 31, 1986, with certain exceptions and qualifications, see section 1277 of
§936. Puerto Rico and possession tax credit
(a) Allowance of credit
(1) In general
Except as otherwise provided in this section, if a domestic corporation elects the application of this section and if the conditions of both subparagraph (A) and subparagraph (B) of paragraph (2) are satisfied, there shall be allowed as a credit against the tax imposed by this chapter an amount equal to the portion of the tax which is attributable to the sum of—
(A) the taxable income, from sources without the United States, from—
(i) the active conduct of a trade or business within a possession of the United States, or
(ii) the sale or exchange of substantially all of the assets used by the taxpayer in the active conduct of such trade or business, and
(B) the qualified possession source investment income.
(2) Conditions which must be satisfied
The conditions referred to in paragraph (1) are:
(A) 3-year period
If 80 percent or more of the gross income of such domestic corporation for the 3-year period immediately preceding the close of the taxable year (or for such part of such period immediately preceding the close of such taxable year as may be applicable) was derived from sources within a possession of the United States (determined without regard to section 904(f)); and
(B) Trade or business
If 75 percent or more of the gross income of such domestic corporation for such period or such part thereof was derived from the active conduct of a trade or business within a possession of the United States.
(3) Credit not allowed against certain taxes
The credit provided by paragraph (1) shall not be allowed against the tax imposed by—
(A) section 59A (relating to environmental tax),
(B) section 531 (relating to the tax on accumulated earnings),
(C) section 541 (relating to personal holding company tax), or
(D) section 1351 (relating to recoveries of foreign expropriation losses).
(4) Limitations on credit for active business income
(A) In general
The amount of the credit determined under paragraph (1) for any taxable year with respect to income referred to in subparagraph (A) thereof shall not exceed the sum of the following amounts:
(i) 60 percent of the sum of—
(I) the aggregate amount of the possession corporation's qualified possession wages for such taxable year, plus
(II) the allocable employee fringe benefit expenses of the possession corporation for the taxable year.
(ii) The sum of—
(I) 15 percent of the depreciation allowances for the taxable year with respect to short-life qualified tangible property,
(II) 40 percent of the depreciation allowances for the taxable year with respect to medium-life qualified tangible property, and
(III) 65 percent of the depreciation allowances for the taxable year with respect to long-life qualified tangible property.
(iii) If the possession corporation does not have an election to use the method described in subsection (h)(5)(C)(ii) (relating to profit split) in effect for the taxable year, the amount of qualified possession income taxes for the taxable year allocable to nonsheltered income.
(B) Election to take reduced credit
(i) In general
If an election under this subparagraph applies to a possession corporation for any taxable year—
(I) subparagraph (A), and the provisions of subsection (i), shall not apply to such possession corporation for such taxable year, and
(II) the credit determined under paragraph (1) for such taxable year with respect to income referred to in subparagraph (A) thereof shall be the applicable percentage of the credit which would otherwise have been determined under such paragraph with respect to such income.
Notwithstanding subclause (I), a possession corporation to which an election under this subparagraph applies shall be entitled to the benefits of subsection (i)(3)(B) for taxes allocable (on a pro rata basis) to taxable income the tax on which is not offset by reason of this subparagraph.
(ii) Applicable percentage
The term "applicable percentage" means the percentage determined in accordance with the following table:
(iii) Election
(I) In general
An election under this subparagraph by any possession corporation may be made only for the corporation's first taxable year beginning after December 31, 1993, for which it is a possession corporation.
(II) Period of election
An election under this subparagraph shall apply to the taxable year for which made and all subsequent taxable years unless revoked.
(III) Affiliated groups
If, for any taxable year, an election is not in effect for any possession corporation which is a member of an affiliated group, any election under this subparagraph for any other member of such group is revoked for such taxable year and all subsequent taxable years. For purposes of this subclause, members of an affiliated group shall be determined without regard to the exceptions contained in section 1504(b) and as if the constructive ownership rules of section 1563(e) applied for purposes of section 1504(a). The Secretary may prescribe regulations to prevent the avoidance of this subclause through deconsolidation or otherwise.
(C) Cross reference
For definitions and special rules applicable to this paragraph, see subsection (i).
(b) Amounts received in United States
In determining taxable income for purposes of subsection (a), there shall not be taken into account as income from sources without the United States any gross income which was received by such domestic corporation within the United States, whether derived from sources within or without the United States. This subsection shall not apply to any amount described in subsection (a)(1)(A)(i) received from a person who is not a related person (within the meaning of subsection (h)(3) but without regard to subparagraphs (D)(ii)(I) and (E)(i) thereof) with respect to the domestic corporation.
(c) Treatment of certain foreign taxes
For purposes of this title, any tax of a foreign country or a possession of the United States which is paid or accrued with respect to taxable income which is taken into account in computing the credit under subsection (a) shall not be treated as income, war profits, or excess profits taxes paid or accrued to a foreign country or possession of the United States, and no deduction shall be allowed under this title with respect to any amounts so paid or accrued.
(d) Definitions and special rules
For purposes of this section—
(1) Possession
The term "possession of the United States" includes the Commonwealth of Puerto Rico and the Virgin Islands.
(2) Qualified possession source investment income
The term "qualified possession source investment income" means gross income which—
(A) is from sources within a possession of the United States in which a trade or business is actively conducted, and
(B) the taxpayer establishes to the satisfaction of the Secretary is attributable to the investment in such possession (for use therein) of funds derived from the active conduct of a trade or business in such possession, or from such investment,
less the deductions properly apportioned or allocated thereto.
(3) Carryover basis property
(A) In general
Income from the sale or exchange of any asset the basis of which is determined in whole or in part by reference to its basis in the hands of another person shall not be treated as income described in subparagraph (A) or (B) of subsection (a)(1).
(B) Exception for possessions corporations, etc.
For purposes of subparagraph (A), the holding of any asset by another person shall not be taken into account if throughout the period for which such asset was held by such person section 931, this section, or section 957(c) (as in effect on the day before the date of the enactment of the Tax Reform Act of 1986) applied to such person.
(4) Investment in qualified Caribbean Basin countries
(A) In general
For purposes of paragraph (2)(B), an investment in a financial institution shall, subject to such conditions as the Secretary may prescribe by regulations, be treated as for use in Puerto Rico to the extent used by such financial institution (or by the Government Development Bank for Puerto Rico or the Puerto Rico Economic Development Bank)—
(i) for investment, consistent with the goals and purposes of the Caribbean Basin Economic Recovery Act, in—
(I) active business assets in a qualified Caribbean Basin country, or
(II) development projects in a qualified Caribbean Basin country, and
(ii) in accordance with a specific authorization granted by the Commissioner of Financial Institutions of Puerto Rico pursuant to regulations issued by such Commissioner.
A similar rule shall apply in the case of a direct investment in the Government Development Bank for Puerto Rico or the Puerto Rico Economic Development Bank.
(B) Qualified Caribbean Basin country
For purposes of this subsection, the term "qualified Caribbean Basin country" means any beneficiary country (within the meaning of section 212(a)(1)(A) of the Caribbean Basin Economic Recovery Act) which meets the requirements of clauses (i) and (ii) of section 274(h)(6)(A) and the Virgin Islands.
(C) Additional requirements
Subparagraph (A) shall not apply to any investment made by a financial institution (or by the Government Development Bank for Puerto Rico or the Puerto Rico Economic Development Bank) unless—
(i) the person in whose trade or business such investment is made (or such other recipient of the investment) and the financial institution or such Bank certify to the Secretary and the Commissioner of Financial Institutions of Puerto Rico that the proceeds of the loan will be promptly used to acquire active business assets or to make other authorized expenditures, and
(ii) the financial institution (or the Government Development Bank for Puerto Rico or the Puerto Rico Economic Development Bank) and the recipient of the investment funds agree to permit the Secretary and the Commissioner of Financial Institutions of Puerto Rico to examine such of their books and records as may be necessary to ensure that the requirements of this paragraph are met.
(D) Requirement for investment in Caribbean Basin countries
(i) In general
For each calendar year, the government of Puerto Rico shall take such steps as may be necessary to ensure that at least $100,000,000 of qualified Caribbean Basin country investments are made during such calendar year.
(ii) Qualified Caribbean Basin country investment
For purposes of clause (i), the term "qualified Caribbean Basin country investment" means any investment if—
(I) the income from such investment is treated as qualified possession source investment income by reason of subparagraph (A), and
(II) such investment is not (directly or indirectly) a refinancing of a prior investment (whether or not such prior investment was a qualified Caribbean Basin country investment).
(e) Election
(1) Period of election
The election provided in subsection (a) shall be made at such time and in such manner as the Secretary may by regulations prescribe. Any such election shall apply to the first taxable year for which such election was made and for which the domestic corporation satisfied the conditions of subparagraphs (A) and (B) of subsection (a)(2) and for each taxable year thereafter until such election is revoked by the domestic corporation under paragraph (2). If any such election is revoked by the domestic corporation under paragraph (2), such domestic corporation may make a subsequent election under subsection (a) for any taxable year thereafter for which such domestic corporation satisfies the conditions of subparagraphs (A) and (B) of subsection (a)(2) and any such subsequent election shall remain in effect until revoked by such domestic corporation under paragraph (2).
(2) Revocation
An election under subsection (a)—
(A) may be revoked for any taxable year beginning before the expiration of the 9th taxable year following the taxable year for which such election first applies only with the consent of the Secretary; and
(B) may be revoked for any taxable year beginning after the expiration of such 9th taxable year without the consent of the Secretary.
(f) Limitation on credit for DISC's and FSC's
No credit shall be allowed under this section to a corporation for any taxable year—
(1) for which it is a DISC or former DISC, or
(2) in which it owns at any time stock in a—
(A) DISC or former DISC, or
(B) FSC or former FSC.
(g) Exception to accumulated earnings tax
(1) For purposes of section 535, the term "accumulated taxable income" shall not include taxable income entitled to the credit under subsection (a).
(2) For purposes of section 537, the term "reasonable needs of the business" includes assets which produce income eligible for the credit under subsection (a).
(h) Tax treatment of intangible property income
(1) In general
(A) Income attributable to shareholders
The intangible property income of a corporation electing the application of this section for any taxable year shall be included on a pro rata basis in the gross income of all shareholders of such electing corporation at the close of the taxable year of such electing corporation as income from sources within the United States for the taxable year of such shareholder in which or with which the taxable year of such electing corporation ends.
(B) Exclusion from the income of an electing corporation
Any intangible property income of a corporation electing the application of this section which is included in the gross income of a shareholder of such corporation by reason of subparagraph (A) shall be excluded from the gross income of such corporation.
(2) Foreign shareholders; shareholders not subject to tax
(A) In general
Paragraph (1)(A) shall not apply with respect to any shareholder—
(i) who is not a United States person, or
(ii) who is not subject to tax under this title on intangible property income which would be allocated to such shareholder (but for this subparagraph).
(B) Treatment of nonallocated intangible property income
For purposes of this subtitle, intangible property income of a corporation electing the application of this section which is not included in the gross income of a shareholder of such corporation by reason of subparagraph (A)—
(i) shall be treated as income from sources within the United States, and
(ii) shall not be taken into account under subsection (a)(2).
(3) Intangible property income
For purposes of this subsection—
(A) In general
The term "intangible property income" means the gross income of a corporation attributable to any intangible property other than intangible property which has been licensed to such corporation since prior to 1948 and is in use by such corporation on the date of the enactment of this subparagraph.
(B) Intangible property
The term "intangible property" means any—
(i) patent, invention, formula, process, design, pattern, or know-how;
(ii) copyright, literary, musical, or artistic composition;
(iii) trademark, trade name, or brand name;
(iv) franchise, license, or contract;
(v) method, program, system, procedure, campaign, survey, study, forecast, estimate, customer list, or technical data; or
(vi) any similar item,
which has substantial value independent of the services of any individual.
(C) Exclusion of reasonable profit
The term "intangible property income" shall not include any portion of the income from the sale, exchange or other disposition of any product, or from the rendering of services, by a corporation electing the application of this section which is determined by the Secretary to be a reasonable profit on the direct and indirect costs incurred by such electing corporation which are attributable to such income.
(D) Related person
(i) In general
A person (hereinafter referred to as the "related person") is related to any person if—
(I) the related person bears a relationship to such person specified in section 267(b) or section 707(b)(1), or
(II) the related person and such person are members of the same controlled group of corporations.
(ii) Special rule
For purposes of clause (i), section 267(b) and section 707(b)(1) shall be applied by substituting "10 percent" for "50 percent".
(E) Controlled group of corporations
The term "controlled group of corporations" has the meaning given to such term by section 1563(a), except that—
(i) "more than 10 percent" shall be substituted for "at least 80 percent" and "more than 50 percent" each place either appears in section 1563(a), and
(ii) the determination shall be made without regard to subsections (a)(4), (b)(2), and (e)(3)(C) of section 1563.
(4) Distributions to meet qualification requirements
(A) In general
If the Secretary determines that a corporation does not satisfy a condition specified in subparagraph (A) or (B) of subsection (a)(2) for any taxable year by reason of the exclusion from gross income under paragraph (1)(B), such corporation shall nevertheless be treated as satisfying such condition for such year if it makes a pro rata distribution of property after the close of such taxable year to its shareholders (designated at the time of such distribution as a distribution to meet qualification requirements) with respect to their stock in an amount which is equal to—
(i) if the condition of subsection (a)(2)(A) is not satisfied, that portion of the gross income for the period described in subsection (a)(2)(A)—
(I) which was not derived from sources within a possession, and
(II) which exceeds the amount of such income for such period which would enable such corporation to satisfy the condition of subsection (a)(2)(A),
(ii) if the condition of subsection (a)(2)(B) is not satisfied, that portion of the gross income for such period—
(I) which was not derived from the active conduct of a trade or business within a possession, and
(II) which exceeds the amount of such income for such period which would enable such corporation to satisfy the conditions of subsection (a)(2)(B), or
(iii) if neither of such conditions is satisfied, that portion of the gross income which exceeds the amount of gross income for such period which would enable such corporation to satisfy the conditions of subparagraphs (A) and (B) of subsection (a)(2).
(B) Effectively connected income
In the case of a shareholder who is a nonresident alien individual or a foreign corporation, trust, or estate, any distribution described in subparagraph (A) shall be treated as income which is effectively connected with the conduct of a trade or business conducted through a permanent establishment of such shareholder within the United States.
(C) Distribution denied in case of fraud or willful neglect
Subparagraph (A) shall not apply to a corporation if the determination of the Secretary described in subparagraph (A) contains a finding that the failure of such corporation to satisfy the conditions in subsection (a)(2) was due in whole or in part to fraud with intent to evade tax or willful neglect on the part of such corporation.
(5) Election out
(A) In general
The rules contained in paragraphs (1) through (4) do not apply for any taxable year if an election pursuant to subparagraph (F) is in effect to use one of the methods specified in subparagraph (C).
(B) Eligibility
(i) Requirement of significant business presence
An election may be made to use one of the methods specified in subparagraph (C) with respect to a product or type of service only if an electing corporation has a significant business presence in a possession with respect to such product or type of service. An election may remain in effect with respect to such product or type of service for any subsequent taxable year only if such electing corporation maintains a significant business presence in a possession with respect to such product or type of service in such subsequent taxable year. If an election is not in effect for a taxable year because of the preceding sentence, the electing corporation shall be deemed to have revoked the election on the first day of such taxable year.
(ii) Definition
For purposes of this subparagraph, an electing corporation has a "significant business presence" in a possession for a taxable year with respect to a product or type of service if:
(I) the total production costs (other than direct material costs and other than interest excluded by regulations prescribed by the Secretary) incurred by the electing corporation in the possession in producing units of that product sold or otherwise disposed of during the taxable year by the affiliated group to persons who are not members of the affiliated group are not less than 25 percent of the difference between (a) the gross receipts from sales or other dispositions during the taxable year by the affiliated group to persons who are not members of the affiliated group of such units of the product produced, in whole or in part, by the electing corporation in the possession, and (b) the direct material costs of the purchase of materials for such units of that product by all members of the affiliated group from persons who are not members of the affiliated group; or
(II) no less than 65 percent of the direct labor costs of the affiliated group for units of the product produced during the taxable year in whole or in part by the electing corporation or for the type of service rendered by the electing corporation during the taxable year, is incurred by the electing corporation and is compensation for services performed in the possession; or
(III) with respect to purchases and sales by an electing corporation of all goods not produced in whole or in part by any member of the affiliated group and sold by the electing corporation to persons other than members of the affiliated group, no less than 65 percent of the total direct labor costs of the affiliated group in connection with all purchases and sales of such goods sold during the taxable year by such electing corporation is incurred by such electing corporation and is compensation for services performed in the possession.
Notwithstanding satisfaction of one of the foregoing tests, an electing corporation shall not be treated as having a significant business presence in a possession with respect to a product produced in whole or in part by the electing corporation in the possession, for purposes of an election to use the method specified in subparagraph (C)(ii), unless such product is manufactured or produced in the possession by the electing corporation within the meaning of subsection (d)(1)(A) of section 954.
(iii) Special rules
(I) An electing corporation which produces a product or renders a type of service in a possession on the date of the enactment of this clause is not required to meet the significant business presence test in a possession with respect to such product or type of service for its taxable years beginning before January 1, 1986.
(II) For purposes of this subparagraph, the costs incurred by an electing corporation or any other member of the affiliated group in connection with contract manufacturing by a person other than a member of the affiliated group, or in connection with a similar arrangement thereto, shall be treated as direct labor costs of the affiliated group and shall not be treated as production costs incurred by the electing corporation in the possession or as direct material costs or as compensation for services performed in the possession, except to the extent as may be otherwise provided in regulations prescribed by the Secretary.
(iv) Regulations
The Secretary may prescribe regulations setting forth:
(I) an appropriate transitional (but not in excess of three taxable years) significant business presence test for commencement in a possession of operations with respect to products or types of service after the date of the enactment of this clause and not described in subparagraph (B)(iii)(I),
(II) a significant business presence test for other appropriate cases, consistent with the tests specified in subparagraph (B)(ii),
(III) rules for the definition of a product or type of service, and
(IV) rules for treating components produced in whole or in part by a related person as materials, and the costs (including direct labor costs) related thereto as a cost of materials, where there is an independent resale price for such components or where otherwise consistent with the intent of the substantial business presence tests.
(C) Methods of computation of taxable income
If an election of one of the following methods is in effect pursuant to subparagraph (F) with respect to a product or type of service, an electing corporation shall compute its income derived from the active conduct of a trade or business in a possession with respect to such product or type of service in accordance with the method which is elected.
(i) Cost sharing
(I) Payment of cost sharing
If an election of this method is in effect, the electing corporation must make a payment for its share of the cost (if any) of product area research which is paid or accrued by the affiliated group during that taxable year. Such share shall not be less than the same proportion of 110 percent of the cost of such product area research which the amount of "possession sales" bears to the amount of "total sales" of the affiliated group. The cost of product area research paid or accrued solely by the electing corporation in a taxable year (excluding amounts paid directly or indirectly to or on behalf of related persons and excluding amounts paid under any cost sharing agreements with related persons) will reduce (but not below zero) the amount of the electing corporation's cost sharing payment under this method for that year. In the case of intangible property described in subsection (h)(3)(B)(i) which the electing corporation is treated as owning under subclause (II), in no event shall the payment required under this subclause be less than the inclusion or payment which would be required under section 367(d)(2)(A)(ii) or section 482 if the electing corporation were a foreign corporation.
(a) Product area research
For purposes of this section, the term "product area research" includes (notwithstanding any provision to the contrary) the research, development and experimental costs, losses, expenses and other related deductions—including amounts paid or accrued for the performance of research or similar activities by another person; qualified research expenses within the meaning of section 41(b); amounts paid or accrued for the use of, or the right to use, research or any of the items specified in subsection (h)(3)(B)(i); and a proper allowance for amounts incurred for the acquisition of any of the items specified in subsection (h)(3)(B)(i)—which are properly apportioned or allocated to the same product area as that in which the electing corporation conducts its activities, and a ratable part of any such costs, losses, expenses and other deductions which cannot definitely be allocated to a particular product area.
(b) Affiliated group
For purposes of this subsection, the term "affiliated group" shall mean the electing corporation and all other organizations, trades or businesses (whether or not incorporated, whether or not organized in the United States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests, within the meaning of section 482.
(c) Possession sales
For purposes of this section, the term "possession sales" means the aggregate sales or other dispositions for the taxable year to persons who are not members of the affiliated group by members of the affiliated group of products produced, in whole or in part, by the electing corporation in the possession which are in the same product area as is used for determining the amount of product area research, and of services rendered, in whole or in part, in the possession in such product area to persons who are not members of the affiliated group.
(d) Total sales
For purposes of this section, the term "total sales" means the aggregate sales or other dispositions for the taxable year to persons who are not members of the affiliated group by members of the affiliated group of all products in the same product area as is used for determining the amount of product area research, and of services rendered in such product area to persons who are not members of the affiliated group.
(e) Product area
For purposes of this section, the term "product area" shall be defined by reference to the three-digit classification of the Standard Industrial Classification code. The Secretary may provide for the aggregation of two or more three-digit classifications where appropriate, and for a classification system other than the Standard Industrial Classification code in appropriate cases.
(II) Effect of election
For purposes of determining the amount of its gross income derived from the active conduct of a trade or business in a possession with respect to a product produced by, or type of service rendered by, the electing corporation for a taxable year, if an election of this method is in effect, the electing corporation shall be treated as the owner (for purposes of obtaining a return thereon) of intangible property described in subsection (h)(3)(B)(i) which is related to the units of the product produced, or type of service rendered, by the electing corporation. Such electing corporation shall not be treated as the owner (for purposes of obtaining a return thereon) of any intangible property described in subsection (h)(3)(B)(ii) through (v) (to the extent not described in subsection (h)(3)(B)(i)) or of any other nonmanufacturing intangible. Notwithstanding the preceding sentence, an electing corporation shall be treated as the owner (for purposes of obtaining a return thereon) of (a) intangible property which was developed solely by such corporation in a possession and is owned by such corporation, (b) intangible property described in subsection (h)(3)(B)(i) acquired by such corporation from a person who was not related to such corporation (or to any person related to such corporation) at the time of, or in connection with, such acquisition, and (c) any intangible property described in subsection (h)(3)(B)(ii) through (v) (to the extent not described in subsection (h)(3)(B)(i)) and other nonmanufacturing intangibles which relate to sales of units of products, or services rendered, to unrelated persons for ultimate consumption or use in the possession in which the electing corporation conducts its trade or business.
(III) Payment provisions
(a) The cost sharing payment determined under subparagraph (C)(i)(I) for any taxable year shall be made to the person or persons specified in subparagraph (C)(i)(IV)(a) not later than the time prescribed by law for filing the electing corporation's return for such taxable year (including any extensions thereof). If all or part of such payment is not timely made, the amount of the cost sharing payment required to be paid shall be increased by the amount of interest that would have been due under section 6601(a) had the portion of the cost sharing payment that is not timely made been an amount of tax imposed by this title and had the last date prescribed for payment been the due date of the electing corporations 1 return (determined without regard to any extension thereof). The amount by which a cost sharing payment determined under subparagraph (C)(i)(I) is increased by reason of the preceding sentence shall not be treated as a cost sharing payment or as interest. If failure to make timely payment is due in whole or in part to fraud or willful neglect, the electing corporation shall be deemed to have revoked the election made under subparagraph (A) on the first day of the taxable year for which the cost sharing payment was required.
(b) For purposes of this title, any tax of a foreign country or possession of the United States which is paid or accrued with respect to the payment or receipt of a cost sharing payment determined under subparagraph (C)(i)(I) or of an amount of increase referred to in subparagraph (C)(i)(III)(a) shall not be treated as income, war profits, or excess profits taxes paid or accrued to a foreign country or possession of the United States, and no deduction shall be allowed under this title with respect to any amounts of such tax so paid or accrued.
(IV) Special rules
(a) The amount of the cost sharing payment determined under subparagraph (C)(i)(I), and any increase in the amount thereof in accordance with subparagraph (C)(i)(III)(a), shall not be treated as income of the recipient, but shall reduce the amount of the deductions (and the amount of reductions in earnings and profits) otherwise allowable to the appropriate domestic member or members (other than an electing corporation) of the affiliated group, or, if there is no such domestic member, to the foreign member or members of such affiliated group as the Secretary may provide under regulations.
(b) If an election of this method is in effect, the electing corporation shall determine its intercompany pricing under the appropriate section 482 method, provided, however, that an electing corporation shall not be denied use of the resale price method for purposes of such intercompany pricing merely because the reseller adds more than an insubstantial amount to the value of the product by the use of intangible property.
(c) The amount of qualified research expenses, within the meaning of section 41, of any member of the controlled group of corporations (as defined in section 41(f)) of which the electing corporation is a member shall not be affected by the cost sharing payment required under this method.
(ii) Profit split
(I) General rule
If an election of this method is in effect, the electing corporation's taxable income derived from the active conduct of a trade or business in a possession with respect to units of a product produced or type of service rendered, in whole or in part, by the electing corporation shall be equal to 50 percent of the combined taxable income of the affiliated group (other than foreign affiliates) derived from covered sales of units of the product produced or type of service rendered, in whole or in part, by the electing corporation in a possession.
(II) Computation of combined taxable income
Combined taxable income shall be computed separately for each product produced or type of service rendered, in whole or in part, by the electing corporation in a possession. Combined taxable income shall be computed (notwithstanding any provision to the contrary) for each such product or type of service rendered by deducting from the gross income of the affiliated group (other than foreign affiliates) derived from covered sales of such product or type of service all expenses, losses, and other deductions properly apportioned or allocated to gross income from such sales or services, and a ratable part of all expenses, losses, or other deductions which cannot definitely be allocated to some item or class of gross income, which are incurred by the affiliated group (other than foreign affiliates). Notwithstanding any other provision to the contrary, in computing the combined taxable income for each such product or type of service rendered, the research, development, and experimental costs, expenses and related deductions for the taxable year which would otherwise be apportioned or allocated to the gross income of the affiliated group (other than foreign affiliates) derived from covered sales of such product produced or type of service rendered, in whole or in part, by the electing corporation in a possession, shall not be less than the same proportion of the amount of the share of product area research determined under subparagraph (C)(i)(I) (without regard to the third and fourth sentences thereof, but substituting "120 percent" for "110 percent" in the second sentence thereof) in the product area which includes such product or type of service, that such gross income from the product or type of service bears to such gross income from all products and types of services, within such product area, produced or rendered, in whole or part, by the electing corporation in a possession.
(III) Division of combined taxable income
50 percent of the combined taxable income computed as provided in subparagraph (C)(ii)(II) shall be allocated to the electing corporation. Combined taxable income, computed without regard to the last sentence of subparagraph (C)(ii)(II), less the amount allocated to the electing corporation under the preceding sentence, shall be allocated to the appropriate domestic member or members (other than any electing corporation) of the affiliated group and shall be treated as income from sources within the United States, or, if there is no such domestic member, to a foreign member or members of such affiliated group as the Secretary may provide under regulations.
(IV) Covered sales
For purposes of this paragraph, the term "covered sales" means sales by members of the affiliated group (other than foreign affiliates) to persons who are not members of the affiliated group or to foreign affiliates.
(D) Unrelated person
For purposes of this paragraph, the term "unrelated person" means any person other than a person related within the meaning of paragraph (3)(D) to the electing corporation.
(E) Electing corporation
For purposes of this subsection, the term "electing corporation" means a domestic corporation for which an election under this section is in effect.
(F) Time and manner of election; revocation
(i) In general
An election under subparagraph (A) to use one of the methods under subparagraph (C) shall be made only on or before the due date prescribed by law (including extensions) for filing the tax return of the electing corporation for its first taxable year beginning after December 31, 1982. If an election of one of such methods is made, such election shall be binding on the electing corporation and such method must be used for each taxable year thereafter until such election is revoked by the electing corporation under subparagraph (F)(iii). If any such election is revoked by the electing corporation under subparagraph (F)(iii), such electing corporation may make a subsequent election under subparagraph (A) only with the consent of the Secretary.
(ii) Manner of making election
An election under subparagraph (A) to use one of the methods under subparagraph (C) shall be made by filing a statement to such effect with the return referred to in subparagraph (F)(i) or in such other manner as the Secretary may prescribe by regulations.
(iii) Revocation
(I) Except as provided in subparagraph (F)(iii)(II), an election may be revoked for any taxable year only with the consent of the Secretary.
(II) An election shall be deemed revoked for the year in which the electing corporation is deemed to have revoked such election under subparagraph (B)(i) or (C)(i)(III)(a).
(iv) Aggregation
(I) Where more than one electing corporation in the affiliated group produces any product or renders any services in the same product area, all such electing corporations must elect to compute their taxable income under the same method under subparagraph (C).
(II) All electing corporations in the same affiliated group that produce any products or render any services in the same product area may elect, subject to such terms and conditions as the Secretary may prescribe by regulations, to compute their taxable income from export sales under a different method from that used for all other sales and services. For this purpose, export sales means all sales by the electing corporation of products to foreign persons for use or consumption outside the United States and its possessions, provided such products are manufactured or produced in the possession within the meaning of subsection (d)(1)(A) of section 954, and further provided (except to the extent otherwise provided by regulations) the income derived by such foreign person on resale of such products (in the same state or in an altered state) is not included in foreign base company income for purposes of section 954(a).
(III) All members of an affiliated group must consent to an election under this subsection at such time and in such manner as shall be prescribed by the Secretary by regulations.
(6) Treatment of certain sales made after July 1, 1982
(A) In general
For purposes of this section, in the case of a disposition of intangible property made by a corporation after July 1, 1982, any gain or loss from such disposition shall be treated as gain or loss from sources within the United States to which paragraph (5) does not apply.
(B) Exception
Subparagraph (A) shall not apply to any disposition by a corporation of intangible property if such disposition is to a person who is not a related person to such corporation.
(C) Paragraph does not affect eligibility
This paragraph shall not apply for purposes of determining whether the corporation meets the requirements of subsection (a)(2).
(7) Section 864(e)(1) not to apply
This subsection shall be applied as if section 864(e)(1) (relating to treatment of affiliated groups) had not been enacted.
(8) Regulations
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection, including rules for the application of this subsection to income from leasing of products to unrelated persons.
(i) Definitions and special rules relating to limitations of subsection (a)(4)
(1) Qualified possession wages
For purposes of this section—
(A) In general
The term "qualified possession wages" means wages paid or incurred by the possession corporation during the taxable year in connection with the active conduct of a trade or business within a possession of the United States to any employee for services performed in such possession, but only if such services are performed while the principal place of employment of such employee is within such possession.
(B) Limitation on amount of wages taken into account
(i) In general
The amount of wages which may be taken into account under subparagraph (A) with respect to any employee for any taxable year shall not exceed 85 percent of the contribution and benefit base determined under section 230 of the Social Security Act for the calendar year in which such taxable year begins.
(ii) Treatment of part-time employees, etc.
If—
(I) any employee is not employed by the possession corporation on a substantially full-time basis at all times during the taxable year, or
(II) the principal place of employment of any employee with the possession corporation is not within a possession at all times during the taxable year,
the limitation applicable under clause (i) with respect to such employee shall be the appropriate portion (as determined by the Secretary) of the limitation which would otherwise be in effect under clause (i).
(C) Treatment of certain employees
The term "qualified possession wages" shall not include any wages paid to employees who are assigned by the employer to perform services for another person, unless the principal trade or business of the employer is to make employees available for temporary periods to other persons in return for compensation. All possession corporations treated as 1 corporation under paragraph (5) shall be treated as 1 employer for purposes of the preceding sentence.
(D) Wages
(i) In general
Except as provided in clause (ii), the term "wages" has the meaning given to such term by subsection (b) of section 3306 (determined without regard to any dollar limitation contained in such section). For purposes of the preceding sentence, such subsection (b) shall be applied as if the term "United States" included all possessions of the United States.
(ii) Special rule for agricultural labor and railway labor
In any case to which subparagraph (A) or (B) of paragraph (1) of section 51(h) applies, the term "wages" has the meaning given to such term by section 51(h)(2).
(2) Allocable employee fringe benefit expenses
(A) In general
The allocable employee fringe benefit expenses of any possession corporation for any taxable year is an amount which bears the same ratio to the amount determined under subparagraph (B) for such taxable year as—
(i) the aggregate amount of the possession corporation's qualified possession wages for such taxable year, bears to
(ii) the aggregate amount of the wages paid or incurred by such possession corporation during such taxable year.
In no event shall the amount determined under the preceding sentence exceed 15 percent of the amount referred to in clause (i).
(B) Expenses taken into account
For purposes of subparagraph (A), the amount determined under this subparagraph for any taxable year is the aggregate amount allowable as a deduction under this chapter to the possession corporation for such taxable year with respect to—
(i) employer contributions under a stock bonus, pension, profit-sharing, or annuity plan,
(ii) employer-provided coverage under any accident or health plan for employees, and
(iii) the cost of life or disability insurance provided to employees.
Any amount treated as wages under paragraph (1)(D) shall not be taken into account under this subparagraph.
(3) Treatment of possession taxes
(A) Amount of credit for possession corporations not using profit split
(i) In general
For purposes of subsection (a)(4)(A)(iii), the amount of the qualified possession income taxes for any taxable year allocable to nonsheltered income shall be an amount which bears the same ratio to the possession income taxes for such taxable year as—
(I) the increase in the tax liability of the possession corporation under this chapter for the taxable year by reason of subsection (a)(4)(A) (without regard to clause (iii) thereof), bears to
(II) the tax liability of the possession corporation under this chapter for the taxable year determined without regard to the credit allowable under this section.
(ii) Limitation on amount of taxes taken into account
Possession income taxes shall not be taken into account under clause (i) for any taxable year to the extent that the amount of such taxes exceeds 9 percent of the amount of the taxable income for such taxable year.
(B) Deduction for possession corporations using profit split
Notwithstanding subsection (c), if a possession corporation is not described in subsection (a)(4)(A)(iii) for the taxable year, such possession corporation shall be allowed a deduction for such taxable year in an amount which bears the same ratio to the possession income taxes for such taxable year as—
(i) the increase in the tax liability of the possession corporation under this chapter for the taxable year by reason of subsection (a)(4)(A), bears to
(ii) the tax liability of the possession corporation under this chapter for the taxable year determined without regard to the credit allowable under this section.
In determining the credit under subsection (a) and in applying the preceding sentence, taxable income shall be determined without regard to the preceding sentence.
(C) Possession income taxes
For purposes of this paragraph, the term "possession income taxes" means any taxes of a possession of the United States which are treated as not being income, war profits, or excess profits taxes paid or accrued to a possession of the United States by reason of subsection (c).
(4) Depreciation rules
For purposes of this section—
(A) Depreciation allowances
The term "depreciation allowances" means the depreciation deductions allowable under section 167 to the possession corporation.
(B) Categories of property
(i) Qualified tangible property
The term "qualified tangible property" means any tangible property used by the possession corporation in a possession of the United States in the active conduct of a trade or business within such possession.
(ii) Short-life qualified tangible property
The term "short-life qualified tangible property" means any qualified tangible property to which section 168 applies and which is 3-year property or 5-year property for purposes of such section.
(iii) Medium-life qualified tangible property
The term "medium-life qualified tangible property" means any qualified tangible property to which section 168 applies and which is 7-year property or 10-year property for purposes of such section.
(iv) Long-life qualified tangible property
The term "long-life qualified tangible property" means any qualified tangible property to which section 168 applies and which is not described in clause (ii) or (iii).
(v) Transitional rule
In the case of any qualified tangible property to which section 168 (as in effect on the day before the date of the enactment of the Tax Reform Act of 1986) applies, any reference in this paragraph to section 168 shall be treated as a reference to such section as so in effect.
(5) Election to compute credit on consolidated basis
(A) In general
Any affiliated group may elect to treat all possession corporations which would be members of such group but for section 1504(b)(3) or (4) as 1 corporation for purposes of this section. The credit determined under this section with respect to such 1 corporation shall be allocated among such possession corporations in such manner as the Secretary may prescribe.
(B) Election
An election under subparagraph (A) shall apply to the taxable year for which made and all succeeding taxable years unless revoked with the consent of the Secretary.
(6) Possession corporation
The term "possession corporation" means a domestic corporation for which the election provided in subsection (a) is in effect.
(Added
References in Text
The date of the enactment of the Tax Reform Act of 1986, referred to in subsecs. (d)(3)(B) and (i)(4)(B)(v), is the date of enactment of
The Caribbean Basin Economic Recovery Act, referred to in subsec. (d)(4)(A)(i), (B), is title II of
The date of the enactment of this subparagraph, referred to in subsec. (h)(3)(A), means the date of enactment of
The date of the enactment of this clause, referred to in subsec. (h)(5)(B)(iii)(I), (iv), means the date of enactment of
Section 230 of the Social Security Act, referred to in subsec. (i)(1)(B)(i), is classified to
Amendments
1993—Subsec. (a)(1).
Subsec. (a)(4).
Subsec. (i).
1990—Subsec. (d)(4)(D).
Subsec. (e)(1).
1988—Subsec. (d)(3)(B).
Subsec. (d)(4)(A)(ii).
Subsec. (d)(4)(B).
Subsec. (d)(4)(C)(i), (ii).
Subsec. (h)(5)(C)(i)(I).
Subsec. (h)(5)(C)(i)(IV)(c).
Subsec. (h)(7), (8).
1986—Subsec. (a)(2)(B).
Subsec. (a)(2)(C).
Subsec. (a)(3).
Subsec. (b).
Subsec. (d)(1).
Subsec. (d)(4).
Subsec. (h)(3)(D)(ii).
"(I) section 267(b) and section 707(b)(1) shall be applied by substituting '10 percent' for '50 percent', and
"(II) section 267(b)(3) shall be applied without regard to whether a person was a personal holding company or a foreign personal holding company."
Subsec. (h)(5)(C)(i)(I).
Subsec. (h)(5)(C)(i)(I)(a).
Subsec. (h)(5)(C)(ii)(II).
1984—Subsec. (a)(2)(C).
Subsec. (f).
Subsec. (h)(5)(C)(i)(I)(a).
Subsec. (h)(5)(C)(i)(IV)(c).
1982—Subsec. (a)(2)(B).
Subsec. (a)(2)(C).
Subsec. (a)(3)(A).
Subsec. (h).
1978—Subsec. (a).
Subsec. (d).
1976—Subsec. (a)(2)(D).
Effective Date of 1993 Amendment
Amendment by
Effective Date of 1990 Amendment
Section 227(b) of
Effective Date of 1988 Amendment
Amendment by sections 1002(h)(3) and 1012(h)(2)(B), (j), (n)(4), (5) of
Section 6132(b) of
Effective Date of 1986 Amendments
Amendment by section 231(d)(3)(G) of
Amendment by section 701(e)(4)(I) of
Section 1231(g) of
"(1)
"(2)
"(A)
"(B)
"(3)
"(4)
"(A) with respect to which an election under section 936 of the Internal Revenue Code of 1986 (relating to possessions tax credit) is in effect,
"(B) which produced an end-product form in Puerto Rico on or before September 3, 1982,
"(C) which began manufacturing a component of such product in Puerto Rico in its taxable year beginning in 1983, and
"(D) with respect to which a Puerto Rican tax exemption was granted on June 27, 1983,
such corporation shall treat such component as a separate product for such taxable year for purposes of determining whether such corporation had a significant business presence in Puerto Rico with respect to such product and its income with respect to such product.
"(5)
"(A)
"(i) a corporation fails to meet the requirements of subparagraph (B) of section 936(a)(2) of the Internal Revenue Code of 1986 (as amended by subsection (d)(1)) for any taxable year beginning in 1987 or 1988,
"(ii) such corporation would have met the requirements of such subparagraph (B) if such subparagraph had been applied without regard to the amendment made by subsection (d)(1), and
"(iii) 75 percent or more of the gross income of such corporation for such taxable year (or, in the case of a taxable year beginning in 1988, for the period consisting of such taxable year and the preceding taxable year) was derived from the active conduct of a trade or business within a possession of the United States, such corporation shall nevertheless be treated as meeting the requirements of such subparagraph (B) for such taxable year if it elects to reduce the amount of the qualified possession source investment income for the taxable year by the amount of the shortfall determined under subparagraph (B) of this paragraph.
"(B)
"(i) 75 percent of the gross income of the corporation for the 3-year period (or part thereof) referred to in section 936(a)(2)(A) of such Code, over
"(ii) the amount of the gross income of such corporation for such period (or part thereof) which was derived from the active conduct of a trade or business within a possession of the United States.
"(C)
Amendment by section 1275(a)(1) of
Amendment by section 1812(c)(4)(C) of
Amendment by
Effective Date of 1984 Amendment
Amendment by section 474(r)(22) of
Amendment by section 712(g) of
Amendment by section 801(d)(11) of
Effective Date of 1982 Amendment
Amendment by section 201(d)(8)(B) of
Section 213(e) of
"(1)
"(2)
"(3)
Effective Date of 1978 Amendment
Section 701(u)(11)(C) of
Effective Date of 1976 Amendment
Amendment by
Effective Date
Section applicable to taxable years beginning after Dec. 31, 1975, except that qualified possession source investment income as defined in subsec. (d)(2) of this section shall include income from any source outside the United States if the taxpayer establishes to the satisfaction of the Secretary of the Treasury or his delegate that the income from such sources was earned before Oct. 1, 1976, see section 1051(i) of
Applicability of Certain Amendments by Pub. L. 99–514 in Relation to Treaty Obligations of United States
For applicability of amendment by section 701(e)(4)(I) of
Plan Amendments Not Required Until January 1, 1989
For provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§1101–1147 and 1171–1177] or title XVIII [§§1800–1899A] of
Report on Possessions Corporations
Section 441(a) of
[Section 6252(b)(1) of
Section Referred to in Other Sections
This section is referred to in
1 So in original. Probably should be "corporation's".
[Subpart E—Repealed]
[§§941 to 943. Repealed. Pub. L. 94–455, title X, §1053(c), Oct. 4, 1976, 90 Stat. 1648 ]
Section 941, acts Aug. 16, 1954, ch. 736,
Section 942, act Aug. 16, 1954, ch. 736,
Section 943, acts Aug. 16, 1954, ch. 736,
Effective Date of Repeal
Repeal effective with respect to taxable years beginning after Dec. 31, 1977, see section 1053(e) of
Subpart F—Controlled Foreign Corporations
Amendments
1986—
1975—
1962—
Subpart Referred to in Other Sections
This subpart is referred to in
§951. Amounts included in gross income of United States shareholders
(a) Amounts included
(1) In general
If a foreign corporation is a controlled foreign corporation for an uninterrupted period of 30 days or more during any taxable year, every person who is a United States shareholder (as defined in subsection (b)) of such corporation and who owns (within the meaning of section 958(a)) stock in such corporation on the last day, in such year, on which such corporation is a controlled foreign corporation shall include in his gross income, for his taxable year in which or with which such taxable year of the corporation ends—
(A) the sum of—
(i) his pro rata share (determined under paragraph (2)) of the corporation's subpart F income for such year,
(ii) his pro rata share (determined under section 955(a)(3) as in effect before the enactment of the Tax Reduction Act of 1975) of the corporation's previously excluded subpart F income withdrawn from investment in less developed countries for such year, and
(iii) his pro rata share (determined under section 955(a)(3)) of the corporation's previously excluded subpart F income withdrawn from foreign base company shipping operations for such year;
(B) the amount determined under section 956 with respect to such shareholder for such year (but only to the extent not excluded from gross income under section 959(a)(2)); and
(C) the amount determined under section 956A with respect to such shareholder for such year (but only to the extent not excluded from gross income under section 959(a)(3)).
(2) Pro rata share of subpart F income
(The pro rata share referred to in paragraph (1)(A)(i) in the case of any United States shareholder is the amount—
(A) which would have been distributed with respect to the stock which such shareholder owns (within the meaning of section 958(a)) in such corporation if on the last day, in its taxable year, on which the corporation is a controlled foreign corporation it had distributed pro rata to its shareholders an amount (i) which bears the same ratio to its subpart F income for the taxable year, as (ii) the part of such year during which the corporation is a controlled foreign corporation bears to the entire year, reduced by
(B) the amount of distributions received by any other person during such year as a dividend with respect to such stock, but only to the extent of the dividend which would have been received if the distribution by the corporation had been the amount (i) which bears the same ratio to the subpart F income of such corporation for the taxable year, as (ii) the part of such year during which such shareholder did not own (within the meaning of section 958(a)) such stock bears to the entire year.
(3) Limitation on pro rata share of previously excluded subpart F income withdrawn from investment
For purposes of paragraph (1)(A)(iii), the pro rata share of any United States shareholder of the previously excluded subpart F income of a controlled foreign corporation withdrawn from investment in foreign base company shipping operations shall not exceed an amount—
(A) which bears the same ratio to his pro rata share of such income withdrawn (as determined under section 955(a)(3)) for the taxable year, as
(B) the part of such year during which the corporation is a controlled foreign corporation bears to the entire year.
(b) United States shareholder defined
For purposes of this subpart, the term "United States shareholder" means, with respect to any foreign corporation, a United States person (as defined in section 957(c)) who owns (within the meaning of section 958(a)), or is considered as owning by applying the rules of ownership of section 958(b), 10 percent or more of the total combined voting power of all classes of stock entitled to vote of such foreign corporation.
(c) Coordination with election of a foreign investment company to distribute income
A United States shareholder who, for his taxable year, is a qualified shareholder (within the meaning of section 1247(c)) of a foreign investment company with respect to which an election under section 1247 is in effect shall not be required to include in gross income, for such taxable year, any amount under subsection (a) with respect to such company.
(d) Coordination with foreign personal holding company provisions
If, but for this subsection, an amount would be included in the gross income of a United States shareholder for any taxable year both under subsection (a)(1)(A)(i) and under section 551(b) (relating to foreign personal holding company income included in gross income of United States shareholder), such amount shall be included in the gross income of such shareholder only under subsection (a)(1)(A).
(e) Foreign trade income not taken into account
(1) In general
The foreign trade income of a FSC and any deductions which are apportioned or allocated to such income shall not be taken into account under this subpart.
(2) Foreign trade income
For purposes of this subsection, the term "foreign trade income" has the meaning given such term by section 923(b), but does not include section 923(a)(2) non-exempt income (within the meaning of section 927(d)(6)).
(f) Coordination with passive foreign investment company provisions
If, but for this subsection, an amount would be included in the gross income of a United States shareholder for any taxable year both under subsection (a)(1)(A)(i) and under section 1293 (relating to current taxation of income from certain passive foreign investment companies), such amount shall be included in the gross income of such shareholder only under subsection (a)(1)(A).
(Added
References in Text
The Tax Reduction Act of 1975, referred to in subsec. (a)(1)(A)(ii), is
Amendments
1993—Subsec. (a)(1)(B).
Subsec. (a)(1)(C).
Subsec. (a)(4).
1988—Subsec. (b).
1986—Subsec. (e)(1).
Subsec. (f).
1984—Subsec. (d).
Subsec. (e).
1976—Subsec. (a)(1).
1975—Subsec. (a)(1)(A)(i).
Subsec. (a)(1)(A)(ii).
Subsec. (a)(1)(A)(iii).
Subsec. (a)(3).
Effective Date of 1993 Amendment
Section 13231(e) of
Section 13232(d) of
Effective Date of 1988 Amendment
Amendment by
Effective Date of 1986 Amendment
Amendment by section 1235(c) of
Amendment by section 1876(c)(2) of
Effective Date of 1984 Amendment
Section 132(d)(2)(A) of
Amendment by section 801(d)(4) of
Effective Date of 1975 Amendment
Amendment by
Effective Date
Section 12(c) of
Plan Amendments Not Required Until January 1, 1989
For provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§1101–1147 and 1171–1177] or title XVIII [§§1800–1899A] of
Section Referred to in Other Sections
This section is referred to in
§952. Subpart F income defined
(a) In general
For purposes of this subpart, the term "subpart F income" means, in the case of any controlled foreign corporation, the sum of—
(1) insurance income (as defined under section 953),
(2) the foreign base company income (as determined under section 954),
(3) an amount equal to the product of—
(A) the income of such corporation other than income which—
(i) is attributable to earnings and profits of the foreign corporation included in the gross income of a United States person under section 951 (other than by reason of this paragraph), or
(ii) is described in subsection (b),
multiplied by
(B) the international boycott factor (as determined under section 999),
(4) the sum of the amounts of any illegal bribes, kickbacks, or other payments (within the meaning of section 162(c)) paid by or on behalf of the corporation during the taxable year of the corporation directly or indirectly to an official, employee, or agent in fact of a government, and
(5) the income of such corporation derived from any foreign country during any period during which section 901(j) applies to such foreign country.
The payments referred to in paragraph (4) are payments which would be unlawful under the Foreign Corrupt Practices Act of 1977 if the payor were a United States person. For purposes of paragraph (5), the income described therein shall be reduced, under regulations prescribed by the Secretary, so as to take into account deductions (including taxes) properly allocable to such income.
(b) Exclusion of United States income
In the case of a controlled foreign corporation, subpart F income does not include any item of income from sources within the United States which is effectively connected with the conduct by such corporation of a trade or business within the United States unless such item is exempt from taxation (or is subject to a reduced rate of tax) pursuant to a treaty obligation of the United States. For purposes of the preceding sentence, income described in paragraph (2) or (3) of section 921(d) shall be treated as derived from sources within the United States.
(c) Limitation
(1) In general
(A) Subpart F income limited to current earnings and profits
For purposes of subsection (a), the subpart F income of any controlled foreign corporation for any taxable year shall not exceed the earnings and profits of such corporation for such taxable year.
(B) Certain prior year deficits may be taken into account
(i) In general
The amount included in the gross income of any United States shareholder under section 951(a)(1)(A)(i) for any taxable year and attributable to a qualified activity shall be reduced by the amount of such shareholder's pro rata share of any qualified deficit.
(ii) Qualified deficit
The term "qualified deficit" means any deficit in earnings and profits of the controlled foreign corporation for any prior taxable year which began after December 31, 1986, and for which the controlled foreign corporation was a controlled foreign corporation; but only to the extent such deficit—
(I) is attributable to the same qualified activity as the activity giving rise to the income being offset, and
(II) has not previously been taken into account under this subparagraph.
In determining the deficit attributable to qualified activities described in clause (iii)(III) or (IV), deficits in earnings and profits (to the extent not previously taken into account under this section) for taxable years beginning after 1962 and before 1987 also shall be taken into account. In the case of the qualified activity described in clause (iii)(II), the rule of the preceding sentence shall apply, except that "1982" shall be substituted for "1962".
(iii) Qualified activity
For purposes of this paragraph, the term "qualified activity" means any activity giving rise to—
(I) foreign base company shipping income,
(II) foreign base company oil related income,
(III) foreign base company sales income,
(IV) foreign base company services income,
(V) in the case of a qualified insurance company, insurance income or foreign personal holding company income, or
(VI) in the case of a qualified financial institution, foreign personal holding company income.
(iv) Pro rata share
For purposes of this paragraph, the shareholder's pro rata share of any deficit for any prior taxable year shall be determined under rules similar to rules under section 951(a)(2) for whichever of the following yields the smaller share:
(I) the close of the taxable year, or
(II) the close of the taxable year in which the deficit arose.
(v) Qualified insurance company
For purposes of this subparagraph, the term "qualified insurance company" means any controlled foreign corporation predominantly engaged in the active conduct of an insurance business in the taxable year and in the prior taxable years in which the deficit arose.
(vi) Qualified financial institution
For purposes of this paragraph, the term "qualified financial institution" means any controlled foreign corporation predominantly engaged in the active conduct of a banking, financing, or similar business in the taxable year and in the prior taxable year in which the deficit arose.
(vii) Special rules for insurance income
(I) In general
An election may be made under this clause to have section 953(a) applied for purposes of this title without regard to the same country exception under paragraph (1)(A) thereof. Such election, once made, may be revoked only with the consent of the Secretary.
(II) Special rules for affiliated groups
In the case of an affiliated group of corporations (within the meaning of section 1504 but without regard to section 1504(b)(3) and by substituting "more than 50 percent" for "at least 80 percent" each place it appears), no election may be made under subclause (I) for any controlled foreign corporation unless such election is made for all other controlled foreign corporations who are members of such group and who were created or organized under the laws of the same country as such controlled foreign corporation. For purposes of clause (v), in determining whether any controlled corporation described in the preceding sentence is a qualified insurance company, all such corporations shall be treated as 1 corporation.
(C) Certain deficits of member of the same chain of corporations may be taken into account
(i) In general
A controlled foreign corporation may elect to reduce the amount of its subpart F income for any taxable year which is attributable to any qualified activity by the amount of any deficit in earnings and profits of a qualified chain member for a taxable year ending with (or within) the taxable year of such controlled foreign corporation to the extent such deficit is attributable to such activity. To the extent any deficit reduces subpart F income under the preceding sentence, such deficit shall not be taken into account under subparagraph (B).
(ii) Qualified chain member
For purposes of this subparagraph, the term "qualified chain member" means, with respect to any controlled foreign corporation, any other corporation which is created or organized under the laws of the same foreign country as the controlled foreign corporation but only if—
(I) all the stock of such other corporation (other than directors' qualifying shares) is owned at all times during the taxable year in which the deficit arose (directly or through 1 or more corporations other than the common parent) by such controlled foreign corporation, or
(II) all the stock of such controlled foreign corporation (other than directors' qualifying shares) is owned at all times during the taxable year in which the deficit arose (directly or through 1 or more corporations other than the common parent) by such other corporation.
(iii) Coordination
This subparagraph shall be applied after subparagraphs (A) and (B).
(2) Recharacterization in subsequent taxable years
If the subpart F income of any controlled foreign corporation for any taxable year was reduced by reason of paragraph (1)(A), any excess of the earnings and profits of such corporation for any subsequent taxable year over the subpart F income of such foreign corporation for such taxable year shall be recharacterized as subpart F income under rules similar to the rules applicable under section 904(f)(5).
(3) Special rule for determining earnings and profits
For purposes of this subsection, earnings and profits of any controlled foreign corporation shall be determined without regard to paragraphs (4), (5), and (6) of section 312(n). Under regulations, the preceding sentence shall not apply to the extent it would increase earnings and profits by an amount which was previously distributed by the controlled foreign corporation.
(d) Income derived from foreign country
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of subsection (a)(5), including regulations which treat income paid through 1 or more entities as derived from a foreign country to which section 901(j) applies if such income was, without regard to such entities, derived from such country.
(Added
References in Text
The Foreign Corrupt Practices Act of 1977, referred to in subsec. (a), is title I of
Amendments
1988—Subsec. (c)(1)(B)(ii).
Subsec. (c)(1)(B)(iii)(III) to (VI).
Subsec. (c)(1)(B)(vii).
Subsec. (c)(1)(C).
Subsec. (c)(3).
1986—Subsec. (a).
Subsec. (a)(1).
Subsec. (b).
Subsec. (c).
"(1) an amount equal to—
"(A) the sum of the deficits in earnings and profits for prior taxable years beginning after December 31, 1962, plus
"(B) the sum of the deficits in earnings and profits for taxable years beginning after December 31, 1959, and before January 1, 1963 (reduced by the sum of the earnings and profits for such taxable years); exceeds
"(2) an amount equal to the sum of the earnings and profits for prior taxable years beginning after December 31, 1962, allocated to other earnings and profits under section 959(c)(3).
For purposes of the preceding sentence, any deficit in earnings and profits for any prior taxable year shall be taken into account under paragraph (1) for any taxable year only to the extent it has not been taken into account under such paragraph for any preceding taxable year to reduce earnings and profits of such preceding year."
Subsec. (d).
"(1) a United States shareholder owns (within the meaning of section 958(a)) stock of a foreign corporation, and by reason of such ownership owns (within the meaning of such section) stock of any other foreign corporation, and
"(2) any of such foreign corporations has a deficit in earnings and profits for the taxable year,
then the earnings and profits for the taxable year of each such foreign corporation which is a controlled foreign corporation shall, with respect to such United States shareholder, be properly reduced to take into account any deficit described in paragraph (2) in such manner as the Secretary shall prescribe by regulations."
1982—Subsec. (a).
1976—Subsec. (a)(3).
Subsec. (a)(4).
Subsec. (d).
1966—Subsec. (b).
Effective Date of 1988 Amendment
Amendment by section 1012(i)(16), (22)–(25)(A) of
Section 6131(b) of
Effective Date of 1986 Amendments
Amendment by section 1221(b)(3)(A), (f) of
Amendment by section 1876(c)(1) of
Amendment by
Effective Date of 1982 Amendment
Amendment by
Effective Date of 1976 Amendment
Amendment by section 1062 of
Section 1066(b) of
Effective Date of 1966 Amendment
Amendment by
Determination of Corporate Earnings and Profits for Purposes of Applying Subsection (c)(1)(A)
Section 1012(i)(6) of
Plan Amendments Not Required Until January 1, 1989
For provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§1101–1147 and 1171–1177] or title XVIII [§§1800–1899A] of
Section Referred to in Other Sections
This section is referred to in
§953. Insurance income
(a) General rule
For purposes of section 952(a)(1), the term "insurance income" means any income which—
(1) is attributable to the issuing (or reinsuring) of any insurance or annuity contract—
(A) in connection with property in, liability arising out of activity in, or in connection with the lives or health of residents of, a country other than the country under the laws of which the controlled foreign corporation is created or organized, or
(B) in connection with risks not described in subparagraph (A) as the result of any arrangement whereby another corporation receives a substantially equal amount of premiums or other consideration in respect of issuing (or reinsuring) a contract described in subparagraph (A), and
(2) would (subject to the modifications provided by paragraphs (1) and (2) of subsection (b)) be taxed under subchapter L of this chapter if such income were the income of a domestic insurance company.
(b) Special rules
For purposes of subsection (a)—
(1) The following provisions of subchapter L shall not apply:
(A) The small life insurance company deduction.
(B) Section 805(a)(5) (relating to operations loss deduction).
(C) Section 832(c)(5) (relating to certain capital losses).
(2) The items referred to in—
(A) section 803(a)(1) (relating to gross amount of premiums and other considerations),
(B) section 803(a)(2) (relating to net decrease in reserves),
(C) section 805(a)(2) (relating to net increase in reserves), and
(D) section 832(b)(4) (relating to premiums earned on insurance contracts),
shall be taken into account only to the extent they are in respect of any reinsurance or the issuing of any insurance or annuity contract described in subsection (a)(1).
(3) All items of income, expenses, losses, and deductions shall be properly allocated or apportioned under regulations prescribed by the Secretary.
(c) Special rule for certain captive insurance companies
(1) In general
For purposes only of taking into account related person insurance income—
(A) the term "United States shareholder" means, with respect to any foreign corporation, a United States person (as defined in section 957(c)) who owns (within the meaning of section 958(a)) any stock of the foreign corporation,
(B) the term "controlled foreign corporation" has the meaning given to such term by section 957(a) determined by substituting "25 percent or more" for "more than 50 percent", and
(C) the pro rata share referred to in section 951(a)(1)(A)(i) shall be determined under paragraph (5) of this subsection.
(2) Related person insurance income
For purposes of this subsection, the term "related person insurance income" means any insurance income (within the meaning of subsection (a)) attributable to a policy of insurance or reinsurance with respect to which the person (directly or indirectly) insured is a United States shareholder in the foreign corporation or a related person to such a shareholder.
(3) Exceptions
(A) Corporations not held by insureds
Paragraph (1) shall not apply to any foreign corporation if at all times during the taxable year of such foreign corporation—
(i) less than 20 percent of the total combined voting power of all classes of stock of such corporation entitled to vote, and
(ii) less than 20 percent of the total value of such corporation,
is owned (directly or indirectly under the principles of section 883(c)(4)) by persons who are (directly or indirectly) insured under any policy of insurance or reinsurance issued by such corporation or who are related persons to any such person.
(B) De minimis exception
Paragraph (1) shall not apply to any foreign corporation for a taxable year of such corporation if the related person insurance income (determined on a gross basis) of such corporation for such taxable year is less than 20 percent of its insurance income (as so determined) for such taxable year determined without regard to those provisions of subsection (a)(1) which limit insurance income to income from countries other than the country in which the corporation was created or organized.
(C) Election to treat income as effectively connected
Paragraph (1) shall not apply to any foreign corporation for any taxable year if—
(i) such corporation elects (at such time and in such manner as the Secretary may prescribe)—
(I) to treat its related person insurance income for such taxable year as income effectively connected with the conduct of a trade or business in the United States, and
(II) to waive all benefits (other than with respect to section 884) with respect to related person insurance income granted by the United States under any treaty between the United States and any foreign country, and
(ii) such corporation meets such requirements as the Secretary shall prescribe to ensure that the tax imposed by this chapter on such income is paid.
An election under this subparagraph made for any taxable year shall not be effective if the corporation (or any predecessor thereof) was a disqualified corporation for the taxable year for which the election was made or for any prior taxable year beginning after 1986.
(D) Special rules for subparagraph (C)
(i) Period during which election in effect
(I) In general
Except as provided in subclause (II), any election under subparagraph (C) shall apply to the taxable year for which made and all subsequent taxable years unless revoked with the consent of the Secretary.
(II) Termination
If a foreign corporation which made an election under subparagraph (C) for any taxable year is a disqualified corporation for any subsequent taxable year, such election shall not apply to any taxable year beginning after such subsequent taxable year.
(ii) Exemption from tax imposed by section 4371
The tax imposed by section 4371 shall not apply with respect to any related person insurance income treated as effectively connected with the conduct of a trade or business within the United States under subparagraph (C).
(E) Disqualified corporation
For purposes of this paragraph the term "disqualified corporation" means, with respect to any taxable year, any foreign corporation which is a controlled foreign corporation for an uninterrupted period of 30 days or more during such taxable year (determined without regard to this subsection) but only if a United States shareholder (determined without regard to this subsection) owns (within the meaning of section 958(a)) stock in such corporation at some time during such taxable year.
(4) Treatment of mutual insurance companies
In the case of a mutual insurance company—
(A) this subsection shall apply,
(B) policyholders of such company shall be treated as shareholders, and
(C) appropriate adjustments in the application of this subpart shall be made under regulations prescribed by the Secretary.
(5) Determination of pro rata share
(A) In general
The pro rata share determined under this paragraph for any United States shareholder is the lesser of—
(i) the amount which would be determined under paragraph (2) of section 951(a) if—
(I) only related person insurance income were taken into account,
(II) stock owned (within the meaning of section 958(a)) by United States shareholders on the last day of the taxable year were the only stock in the foreign corporation, and
(III) only distributions received by United States shareholders were taken into account under subparagraph (B) of such paragraph (2), or
(ii) the amount which would be determined under paragraph (2) of section 951(a) if the entire earnings and profits of the foreign corporation for the taxable year were subpart F income.
(B) Coordination with other provisions
The Secretary shall prescribe regulations providing for such modifications to the provisions of this subpart as may be necessary or appropriate by reason of subparagraph (A).
(6) Related person
For purposes of this subsection—
(A) In general
Except as provided in subparagraph (B), the term "related person" has the meaning given such term by section 954(d)(3).
(B) Treatment of certain liability insurance policies
In the case of any policy of insurance covering liability arising from services performed as a director, officer, or employee of a corporation or as a partner or employee of a partnership, the person performing such services and the entity for which such services are performed shall be treated as related persons.
(7) Coordination with section 1248
For purposes of section 1248, if any person is (or would be but for paragraph (3)) treated under paragraph (1) as a United States shareholder with respect to any foreign corporation which would be taxed under subchapter L if it were a domestic corporation and which is (or would be but for paragraph (3)) treated under paragraph (1) as a controlled foreign corporation—
(A) such person shall be treated as meeting the stock ownership requirements of section 1248(a)(2) with respect to such foreign corporation, and
(B) such foreign corporation shall be treated as a controlled foreign corporation.
(8) Regulations
The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this subsection, including—
(A) regulations preventing the avoidance of this subsection through cross insurance arrangements or otherwise, and
(B) regulations which may provide that a person will not be treated as a United States shareholder under paragraph (1) with respect to any foreign corporation if neither such person (nor any related person to such person) is (directly or indirectly) insured under any policy of insurance or reinsurance issued by such foreign corporation.
(d) Election by foreign insurance company to be treated as domestic corporation
(1) In general
If—
(A) a foreign corporation is a controlled foreign corporation (as defined in section 957(a) by substituting "25 percent or more" for "more than 50 percent" and by using the definition of United States shareholder under 953(c)(1)(A)),
(B) such foreign corporation would qualify under part I or II of subchapter L for the taxable year if it were a domestic corporation,
(C) such foreign corporation meets such requirements as the Secretary shall prescribe to ensure that the taxes imposed by this chapter on such foreign corporation are paid, and
(D) such foreign corporation makes an election to have this paragraph apply and waives all benefits to such corporation granted by the United States under any treaty,
for purposes of this title, such corporation shall be treated as a domestic corporation.
(2) Period during which election is in effect
(A) In general
Except as provided in subparagraph (B), an election under paragraph (1) shall apply to the taxable year for which made and all subsequent taxable years unless revoked with the consent of the Secretary.
(B) Termination
If a corporation which made an election under paragraph (1) for any taxable year fails to meet the requirements of subparagraphs (A), (B), and (C), of paragraph (1) for any subsequent taxable year, such election shall not apply to any taxable year beginning after such subsequent taxable year.
(3) Treatment of losses
If any corporation treated as a domestic corporation under this subsection is treated as a member of an affiliated group for purposes of
(4) Effect of election
(A) In general
For purposes of section 367, any foreign corporation making an election under paragraph (1) shall be treated as transferring (as of the 1st day of the 1st taxable year to which such election applies) all of its assets to a domestic corporation in connection with an exchange to which section 354 applies.
(B) Exception for pre-1988 earnings and profit
(i) In general
Earnings and profits of the foreign corporation accumulated in taxable years beginning before January 1, 1988, shall not be included in the gross income of the persons holding stock in such corporation by reason of subparagraph (A).
(ii) Treatment of distributions
For purposes of this title, any distribution made by a corporation to which an election under paragraph (1) applies out of earnings and profits accumulated in taxable years beginning before January 1, 1988, shall be treated as a distribution made by a foreign corporation.
(iii) Certain rules to continue to apply to pre-1988 earnings
The provisions specified in clause (iv) shall be applied without regard to paragraph (1), except that, in the case of a corporation to which an election under paragraph (1) applies, only earnings and profits accumulated in taxable years beginning before January 1, 1988, shall be taken into account.
(iv) Specified provisions
The provisions specified in this clause are:
(I) Section 1248 (relating to gain from certain sales or exchanges of stock in certain foreign corporations).
(II) Subpart F of part III of subchapter N to the extent such subpart relates to earnings invested in United States property or amounts referred to in clause (ii) or (iii) of section 951(a)(1)(A).
(III) Section 884 to the extent the foreign corporation reinvested 1987 earnings and profits in United States assets.
(5) Effect of termination
For purposes of section 367, if—
(A) an election is made by a corporation under paragraph (1) for any taxable year, and
(B) such election ceases to apply for any subsequent taxable year,
such corporation shall be treated as a domestic corporation transferring (as of the 1st day of such subsequent taxable year) all of its property to a foreign corporation in connection with an exchange to which section 354 applies.
(6) Additional tax on corporation making election
(A) In general
If a corporation makes an election under paragraph (1), the amount of tax imposed by this chapter for the 1st taxable year to which such election applies shall be increased by the amount determined under subparagraph (B).
(B) Amount of tax
The amount of tax determined under this paragraph shall be equal to the lesser of—
(i) ¾ of 1 percent of the aggregate amount of capital and accumulated surplus of the corporation as of December 31, 1987, or
(ii) $1,500,000.
(Added
Amendments
1989—Subsec. (d)(3).
1988—Subsec. (b)(1).
Subsec. (b)(1)(A).
Subsec. (b)(2) to (4).
Subsec. (c)(1)(C).
Subsec. (c)(2).
Subsec. (c)(3)(A).
Subsec. (c)(3)(B).
Subsec. (c)(3)(C).
Subsec. (c)(3)(D)(i).
Subsec. (c)(3)(E).
Subsec. (c)(5).
Subsec. (c)(6).
Subsec. (c)(7).
Subsec. (c)(8).
Subsec. (d).
1986—
Subsec. (a).
Subsec. (c).
1984—Subsec. (a)(2).
Subsec. (b)(1).
Subsec. (b)(2).
"(A) The special life insurance company deduction and the small life insurance company deduction.
"(B) Section 805(a)(5) (relating to operations loss deduction).
"(C) Section 832(c)(5) (relating to certain capital losses)."
for
"(A) Section 809(d)(4) (operations loss deduction).
"(B) Section 809(d)(5) (certain nonparticipating contracts).
"(C) Section 809(d)(6) (group life, accident, and health insurance)."
and struck out
"(D) Section 809(d)(10) (small business deduction).
"(E) Section 817(b) (gain on property held on December 31, 1958, and certain substituted property acquired after 1958).
"(F) Section 832(c)(5) (certain capital losses)."
Subsec. (b)(3).
Subsec. (b)(3)(A).
Subsec. (b)(3)(B).
Subsec. (b)(3)(C).
Subsec. (b)(4), (5).
1976—Subsec. (b)(5).
1966—Subsec. (b)(3)(F).
Effective Date of 1989 Amendment
Amendment by
Effective Date of 1988 Amendment
Section 1012(i)(3)(C) of
Amendment by section 1012(i)(1), (2), (4), (5), (7)–(9), (21) of
Section 6135(b) of
Effective Date of 1986 Amendment
Amendment by
Effective Date of 1984 Amendment
Amendment by
Effective Date of 1966 Amendment
Amendment by
Section Referred to in Other Sections
This section is referred to in
§954. Foreign base company income
(a) Foreign base company income
For purposes of section 952(a)(2), the term "foreign base company income" means for any taxable year the sum of—
(1) the foreign personal holding company income for the taxable year (determined under subsection (c) and reduced as provided in subsection (b)(5)),
(2) the foreign base company sales income for the taxable year (determined under subsection (d) and reduced as provided in subsection (b)(5)),
(3) the foreign base company services income for the taxable year (determined under subsection (e) and reduced as provided in subsection (b)(5)),
(4) the foreign base company shipping income for the taxable year (determined under subsection (f) and reduced as provided in subsection (b)(5)), and
(5) the foreign base company oil related income for the taxable year (determined under subsection (g) and reduced as provided in subsection (b)(5)).
(b) Exclusion and special rules
[(1) Repealed. Pub. L. 94–12, title VI, §602(c)(1), Mar. 29, 1975, 89 Stat. 58 ]
[(2) Repealed. Pub. L. 99–514, title XII, §1221(c)(1), Oct. 22, 1986, 100 Stat. 2553 ]
(3) De minimis, etc., rules
For purposes of subsection (a) and section 953—
(A) De minimis rule
If the sum of foreign base company income (determined without regard to paragraph (5)) and the gross insurance income for the taxable year is less than the lesser of—
(i) 5 percent of gross income, or
(ii) $1,000,000,
no part of the gross income for the taxable year shall be treated as foreign base company income or insurance income.
(B) Foreign base company income and insurance income in excess of 70 percent of gross income
If the sum of the foreign base company income (determined without regard to paragraph (5)) and the gross insurance income for the taxable year exceeds 70 percent of gross income, the entire gross income for the taxable year shall, subject to the provisions of paragraphs (4) and (5), be treated as foreign base company income or insurance income (whichever is appropriate).
(C) Gross insurance income
For purposes of subparagraphs (A) and (B), the term "gross insurance income" means any item of gross income taken into account in determining insurance income under section 953.
(4) Exception for certain income subject to high foreign taxes
For purposes of subsection (a) and section 953, foreign base company income and insurance income shall not include any item of income received by a controlled foreign corporation if the taxpayer establishes to the satisfaction of the Secretary that such income was subject to an effective rate of income tax imposed by a foreign country greater than 90 percent of the maximum rate of tax specified in section 11. The preceding sentence shall not apply to foreign base company oil-related income described in subsection (a)(5).
(5) Deductions to be taken into account
For purposes of subsection (a), the foreign personal holding company income, the foreign base company sales income, the foreign base company services income,,1 the foreign base company shipping income, and the foreign base company oil related income shall be reduced, under regulations prescribed by the Secretary so as to take into account deductions (including taxes) properly allocable to such income. Except to the extent provided in regulations prescribed by the Secretary, any interest which is paid or accrued by the controlled foreign corporation to any United States shareholder in such corporation (or any controlled foreign corporation related to such a shareholder) shall be allocated first to foreign personal holding company income which is passive income (within the meaning of section 904(d)(2)) of such corporation to the extent thereof. The Secretary may, by regulations, provide that the preceding sentence shall apply also to interest paid or accrued to other persons.
(6) Special rules for foreign base company shipping income
Income of a corporation which is a foreign base company shipping income under paragraph (4) of subsection (a)—
(A) shall not be considered foreign base company income of such corporation under any other paragraph of subsection (a) and
(B) if distributed through a chain of ownership described under section 958(a), shall not be included in foreign base company income of another controlled foreign corporation in such chain.
(7) Special exclusion for foreign base company shipping income
Income of a corporation which is foreign base company shipping income under paragraph (4) of subsection (a) shall be excluded from foreign base company income if derived by a controlled foreign corporation from, or in connection with, the use (or hiring or leasing for use) of an aircraft or vessel in foreign commerce between two points within the foreign country in which such corporation is created or organized and such aircraft or vessel is registered.
(8) Foreign base company oil related income not treated as another kind of base company income
Income of a corporation which is foreign base company oil related income shall not be considered foreign base company income of such corporation under paragraph (2),2 or (3) of subsection (a).
(c) Foreign personal holding company income
(1) In general
For purposes of subsection (a)(1), the term "foreign personal holding company income" means the portion of the gross income which consists of:
(A) Dividends, etc.
Dividends, interest, royalties, rents, and annuities.
(B) Certain property transactions
The excess of gains over losses from the sale or exchange of property—
(i) which gives rise to income described in subparagraph (A) (after application of paragraph (2)(A)),
(ii) which is an interest in a trust, partnership, or REMIC, or
(iii) which does not give rise to any income.
In the case of any regular dealer in property, gains and losses from the sale or exchange of any such property or arising out of bona fide hedging transactions reasonably necessary to the conduct of the business of being a dealer in such property shall not be taken into account under this subparagraph. Gains and losses from the sale or exchange of any property which, in the hands of the controlled foreign corporation, is property described in section 1221(1) also shall not be taken into account under this subparagraph.
(C) Commodities transactions
The excess of gains over losses from transactions (including futures, forward, and similar transactions) in any commodities. This subparagraph shall not apply to gains or losses which—
(i) arise out of bona fide hedging transactions reasonably necessary to the conduct of any business by a producer, processor, merchant, or handler of a commodity in the manner in which such business is customarily and usually conducted by others,
(ii) are active business gains or losses from the sale of commodities, but only if substantially all of the controlled foreign corporation's business is as an active producer, processor, merchant, or handler of commodities, or
(iii) are foreign currency gains or losses (as defined in section 988(b)) attributable to any section 988 transactions.
(D) Foreign currency gains
The excess of foreign currency gains over foreign currency losses (as defined in section 988(b)) attributable to any section 988 transactions. This subparagraph shall not apply in the case of any transaction directly related to the business needs of the controlled foreign corporation.
(E) Income equivalent to interest
Any income equivalent to interest, including income from commitment fees (or similar amounts) for loans actually made.
(2) Exception for certain amounts
(A) Rents and royalties derived in active business
Foreign personal holding company income shall not include rents and royalties which are derived in the active conduct of a trade or business and which are received from a person other than a related person (within the meaning of subsection (d)(3)).
(B) Certain export financing
Foreign personal holding company income shall not include any interest which is derived in the conduct of a banking business and which is export financing interest (as defined in section 904(d)(2)(G)).
(3) Certain income received from related persons
(A) In general
Except as provided in subparagraph (B), the term "foreign personal holding company income" does not include—
(i) dividends and interest received from a related person which (I) is a corporation created or organized under the laws of the same foreign country under the laws of which the controlled foreign corporation is created or organized, and (II) has a substantial part of its assets used in its trade or business located in such same foreign country, and
(ii) rents and royalties received from a corporation which is a related person for the use of, or the privilege of using, property within the country under the laws of which the controlled foreign corporation is created or organized.
To the extent provided in regulations, payments made by a partnership with 1 or more corporate partners shall be treated as made by such corporate partners in proportion to their respective interests in the partnership.
(B) Exception not to apply to items which reduce subpart F income
Subparagraph (A) shall not apply in the case of any interest, rent, or royalty to the extent such interest, rent, or royalty reduces the payor's subpart F income or creates (or increases) a deficit which under section 952(c) may reduce the subpart F income of the payor or another controlled foreign corporation.
(C) Exception for certain dividends
Subparagraph (A)(i) shall not apply to any dividend with respect to any stock which is attributable to earnings and profits of the distributing corporation accumulated during any period during which the person receiving such dividend did not hold such stock either directly, or indirectly through a chain of one or more subsidiaries each of which meets the requirements of subparagraph (A)(i).
(d) Foreign base company sales income
(1) In general
For purposes of subsection (a)(2), the term "foreign base company sales income" means income (whether in the form of profits, commissions, fees, or otherwise) derived in connection with the purchase of personal property from a related person and its sale to any person, the sale of personal property to any person on behalf of a related person, the purchase of personal property from any person and its sale to a related person, or the purchase of personal property from any person on behalf of a related person where—
(A) the property which is purchased (or in the case of property sold on behalf of a related person, the property which is sold) is manufactured, produced, grown, or extracted outside the country under the laws of which the controlled foreign corporation is created or organized, and
(B) the property is sold for use, consumption, or disposition outside such foreign country, or, in the case of property purchased on behalf of a related person, is purchased for use, consumption, or disposition outside such foreign country.
For purposes of this subsection, personal property does not include agricultural commodities which are not grown in the United States in commercially marketable quantities.
(2) Certain branch income
For purposes of determining foreign base company sales income in situations in which the carrying on of activities by a controlled foreign corporation through a branch or similar establishment outside the country of incorporation of the controlled foreign corporation has substantially the same effect as if such branch or similar establishment were a wholly owned subsidiary corporation deriving such income, under regulations prescribed by the Secretary the income attributable to the carrying on of such activities of such branch or similar establishment shall be treated as income derived by a wholly owned subsidiary of the controlled foreign corporation and shall constitute foreign base company sales income of the controlled foreign corporation.
(3) Related person defined
For purposes of this section, a person is a related person with respect to a controlled foreign corporation, if—
(A) such person is an individual, corporation, partnership, trust, or estate which controls, or is controlled by, the controlled foreign corporation, or
(B) such person is a corporation, partnership, trust, or estate which is controlled by the same person or persons which control the controlled foreign corporation.
For purposes of the preceding sentence, control means, with respect to a corporation, the ownership, directly or indirectly, of stock possessing more than 50 percent of the total voting power of all classes of stock entitled to vote or of the total value of stock of such corporation. In the case of a partnership, trust, or estate, control means the ownership, directly or indirectly, of more than 50 percent (by value) of the beneficial interests in such partnership, trust, or estate. For purposes of this paragraph, rules similar to the rules of section 958 shall apply.
(4) Special rule for certain timber products
For purposes of subsection (a)(2), the term "foreign base company sales income" includes any income (whether in the form of profits, commissions, fees, or otherwise) derived in connection with—
(A) the sale of any unprocessed timber referred to in section 865(b), or
(B) the milling of any such timber outside the United States.
Subpart G shall not apply to any amount treated as subpart F income by reason of this paragraph.
(e) Foreign base company services income
(1) In general
For purposes of subsection (a)(3), the term "foreign base company services income" means income (whether in the form of compensation, commissions, fees, or otherwise) derived in connection with the performance of technical, managerial, engineering, architectural, scientific, skilled, industrial, commercial, or like services which—
(A) are performed for or on behalf of any related person (within the meaning of subsection (d)(3)), and
(B) are performed outside the country under the laws of which the controlled foreign corporation is created or organized.
(2) Exception
Paragraph (1) shall not apply to income derived in connection with the performance of services which are directly related to—
(A) the sale or exchange by the controlled foreign corporation of property manufactured, produced, grown, or extracted by it and which are performed before the time of the sale or exchange, or
(B) an offer or effort to sell or exchange such property.
(f) Foreign base company shipping income
For purposes of subsection (a)(4), the term "foreign base company shipping income" means income derived from, or in connection with, the use (or hiring or leasing for use) of any aircraft or vessel in foreign commerce, or from, or in connection with the performance of services directly related to the use of any such aircraft, or vessel, or from the sale, exchange, or other disposition of any such aircraft or vessel. Such term includes, but is not limited to—
(1) dividends and interest received from a foreign corporation in respect of which taxes are deemed paid under section 902, and gain from the sale, exchange, or other disposition of stock or obligations of such a foreign corporation to the extent that such dividends, interest, and gains are attributable to foreign base company shipping income, and
(2) that portion of the distributive share of the income of a partnership attributable to foreign base company shipping income.
Such term includes any income derived from a space or ocean activity (as defined in section 863(d)(2)). Except as provided in paragraph (1), such term shall not include any dividend or interest income which is foreign personal holding company income (as defined in subsection (c)).
(g) Foreign base company oil related income
For purposes of this section—
(1) In general
Except as otherwise provided in this subsection, the term "foreign base company oil related income" means foreign oil related income (within the meaning of paragraphs (2) and (3) of section 907(c)) other than income derived from a source within a foreign country in connection with—
(A) oil or gas which was extracted from an oil or gas well located in such foreign country, or
(B) oil, gas, or a primary product of oil or gas which is sold by the foreign corporation or a related person for use or consumption within such country or is loaded in such country on a vessel or aircraft as fuel for such vessel or aircraft.
Such term shall not include any foreign personal holding company income (as defined in subsection (c)).
(2) Paragraph (1) applies only where corporation has produced 1,000 barrels per day or more
(A) In general
The term "foreign base company oil related income" shall not include any income of a foreign corporation if such corporation is not a large oil producer for the taxable year.
(B) Large oil producer
For purposes of subparagraph (A), the term "large oil producer" means any corporation if, for the taxable year or for the preceding taxable year, the average daily production of foreign crude oil and natural gas of the related group which includes such corporation equaled or exceeded 1,000 barrels.
(C) Related group
The term "related group" means a group consisting of the foreign corporation and any other person who is a related person with respect to such corporation.
(D) Average daily production of foreign crude oil and natural gas
For purposes of this paragraph, the average daily production of foreign crude oil or natural gas of any related group for any taxable year (and the conversion of cubic feet of natural gas into barrels) shall be determined under rules similar to the rules of section 613A except that only crude oil or natural gas from a well located outside the United States shall be taken into account.
(Added
Amendments
1993—Subsec. (b)(8).
Subsec. (c)(3)(C).
Subsec. (d)(4).
Subsec. (f).
Subsec. (g)(1).
1989—Subsec. (c)(3)(A).
Subsec. (c)(3)(A)(i).
Subsec. (c)(3)(A)(ii).
1988—Subsec. (b)(6), (7).
Subsec. (c)(1)(B).
Subsec. (c)(3)(B).
Subsec. (d)(3).
Subsec. (e)(3).
1986—Subsec. (a)(5).
Subsec. (b)(2).
Subsec. (b)(3).
"(A) If the foreign base company income (determined without regard to paragraphs (2) and (5)) is less than 10 percent of gross income, no part of the gross income of the taxable year shall be treated as foreign base company income.
"(B) If the foreign base company income (determined without regard to paragraphs (2) and (5)) exceeds 70 percent of gross income, the entire gross income of the taxable year shall, subject to the provisions of paragraphs (2), (4), and (5), be treated as foreign base company income."
Subsec. (b)(4).
"(A) the creation or organization of such controlled foreign corporation under the laws of the foreign country in which it is incorporated (or, in the case of a controlled foreign corporation which is an acquired corporation, the acquisition of such corporation created or organized under the laws of the foreign country in which it is incorporated), nor
"(B) the effecting of the transaction giving rise to such income through the controlled foreign corporation,
has as one of its significant purposes a substantial reduction of income, war profits, or excess profits or similar taxes. The preceding sentence shall not apply to foreign base company oil related income described in subsection (a)(5)."
Subsec. (b)(5).
Subsec. (c).
Subsec. (d)(3).
"(A) such person is an individual, partnership, trust, or estate which controls the controlled foreign corporation;
"(B) such person is a corporation which controls, or is controlled by, the controlled foreign corporation; or
"(C) such person is a corporation which is controlled by the same person or persons which control the controlled foreign corporation.
For purposes of the preceding sentence, control means the ownership, directly or indirectly, of stock possessing more than 50 percent of the total combined voting power of all classes of stock entitled to vote. For purposes of this paragraph, the rules for determining ownership of stock prescribed by section 958 shall apply."
Subsec. (e).
Subsec. (e)(3).
"(A) such primary insured shall be treated as a related person for purposes of paragraph (1)(A) (whether or not the requirements of subsection (d)(3) are met),
"(B) such services shall be treated as performed in the country within which the insured hazards, risks, losses, or liabilities occur, and
"(C) except as otherwise provided in regulations by the Secretary, rules similar to the rules of section 953(b) shall be applied in determining the income from such services."
Subsec. (f).
Subsecs. (g), (h).
"(1) the qualified investments in foreign base company shipping operations (as defined in section 955(b)) of the controlled foreign corporation at the close of the taxable year, exceed
"(2) the qualified investments in foreign base company shipping operations (as so defined) of the controlled foreign corporation at the close of the preceding taxable year."
1984—Subsec. (e).
Subsec. (h)(1).
1982—Subsec. (a)(5).
Subsec. (b)(4).
Subsec. (b)(5).
Subsec. (b)(8).
Subsec. (h).
1976—Subsecs. (b)(4), (5).
Subsec. (b)(7).
Subsec. (c)(3)(C).
1975—Subsec. (a)(4).
Subsec. (b)(1).
Subsec. (b)(2).
Subsec. (b)(3).
Subsec. (b)(5).
Subsec. (b)(6).
Subsec. (d)(1).
Subsecs. (f), (g).
1969—Subsec. (b)(4).
Effective Date of 1993 Amendment
Section 13233(a)(2) of
Amendment by section 13235(a)(3) and (b) of
Amendment by section 13239(d) of
Effective Date of 1989 Amendment
Amendment by
Effective Date of 1988 Amendment
Amendment by
Effective Date of 1986 Amendment
Amendment by section 1201(c) of
Section 1221(g) of
"(1)
"(2)
"(A)
"(i) the amendments made by subsection (c) [amending this section and
"(ii) sections 955(a)(1)(A) and 955(a)(2)(A) of the Internal Revenue Code of 1986 (as amended by subsection (c)(3)) shall be applied by substituting 'ending before 1992' for 'beginning before 1987'.
"(B)
"(i) if the United States agent of such corporation is a domestic corporation incorporated on March 13, 1951, and
"(ii) if—
"(I) the certificate of incorporation of such corporation is dated November 23, 1963, and
"(II) such corporation has a wholly owned subsidiary and its certificate of incorporation is dated November 2, 1965.
"(3)
"(A)
"(B)
| "In the case of taxable | The phase-in |
| years beginning in: | percentage is: |
| 1987 | 75 |
| 1988 | 50 |
| 1989 | 25. |
"(C)
"(i) any controlled foreign corporation which on August 16, 1986, was a member of an affiliated group (as defined in section 1504(a) of the Internal Revenue Code of 1986 without regard to subsection (b)(3) thereof) which had as its common parent a corporation incorporated in Delaware on June 9, 1967, with executive offices in New York, New York, or
"(ii) any controlled foreign corporation which on August 16, 1986, was a member of an affiliated group (as so defined) which had as its common parent a corporation incorporated in Delaware on November 3, 1981, with executive offices in Philadelphia, Pennsylvania.
"(D)
Amendment by section 1223(a) of
Amendment by section 1810(k) of
Effective Date of 1984 Amendment
Section 137(b) of
Amendment by section 712(f) of
Effective Date of 1982 Amendment
Section 212(f) of
Effective Date of 1976 Amendment
Section 1023(b) of
Section 1024(b) of
Effective Date of 1975 Amendment
Amendment by
Effective Date of 1969 Amendment
Section 909(b) of
Applicability of Certain Amendments by Pub. L. 99–514 in Relation to Treaty Obligations of United States
For applicability of amendment by section 1201(c) of
Plan Amendments Not Required Until January 1, 1989
For provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§1101–1147 and 1171–1177] or title XVIII [§§1800–1899A] of
Special Rule for Application of Section 954 to Certain Dividends
Section 1227 of
"(a)
"(b)
"(c)
Section Referred to in Other Sections
This section is referred to in
2 So in original. The comma probably should not appear.
§955. Withdrawal of previously excluded subpart F income from qualified investment
(a) General rules
(1) Amount withdrawn
For purposes of this subpart, the amount of previously excluded subpart F income of any controlled foreign corporation withdrawn from investment in foreign base company shipping operations for any taxable year is an amount equal to the decrease in the amount of qualified investments in foreign base company shipping operations of the controlled foreign corporation for such year, but only to the extent that the amount of such decrease does not exceed an amount equal to—
(A) the sum of the amounts excluded under section 954(b)(2) from the foreign base company income of such corporation for all prior taxable years beginning before 1987, reduced by
(B) the sum of the amounts of previously excluded subpart F income withdrawn from investment in foreign base company shipping operations of such corporation determined under this subsection for all prior taxable years.
(2) Decrease in qualified investments
For purposes of paragraph (1), the amount of the decrease in qualified investments in foreign base company shipping operations of any controlled foreign corporation for any taxable year is the amount by which—
(A) the amount of qualified investments in foreign base company shipping operations of the controlled foreign corporation as of the close of the last taxable year beginning before 1987 (to the extent such amount exceeds the sum of the decreases in qualified investments determined under this paragraph for prior taxable years beginning after 1986), exceeds
(B) the amount of qualified investments in foreign base company shipping operations of the controlled foreign corporation at the close of the taxable year,
to the extent that the amount of such decrease does not exceed the sum of the earnings and profits for the taxable year and the earnings and profits accumulated for prior taxable years beginning after December 31, 1975, and the amount of previously excluded subpart F income invested in less developed country corporations described in section 955(c)(2) (as in effect before the enactment of the Tax Reduction Act of 1975) to the extent attributable to earnings and profits accumulated for taxable years beginning after December 31, 1962. For purposes of this paragraph, if qualified investments in foreign base company shipping operations are disposed of by the controlled foreign corporation during the taxable year, the amount of the decrease in qualified investments in foreign base company shipping operations of such controlled foreign corporations for such year shall be reduced by an amount equal to the amount (if any) by which the losses on such dispositions during such year exceed the gains on such dispositions during such year.
(3) Pro rata share of amount withdrawn
In the case of any United States shareholder, the pro rata share of the amount of previously excluded subpart F income of any controlled foreign corporation withdrawn from investment in foreign base company shipping operations for any taxable year is his pro rata share of the amount determined under paragraph (1).
(b) Qualified investments in foreign base company shipping operations
(1) In general
For purposes of this subpart, the term "qualified investments in foreign base company shipping operations" means investments in—
(A) any aircraft or vessel used in foreign commerce, and
(B) other assets which are used in connection with the performance of services directly related to the use of any such aircraft or vessel.
Such term includes, but is not limited to, investments by a controlled foreign corporation in stock or obligations of another controlled foreign corporation which is a related person (within the meaning of section 954(d)(3)) and which holds assets described in the preceding sentence, but only to the extent that such assets are so used.
(2) Qualified investments by related persons
For purposes of determining the amount of qualified investments in foreign based company shipping operations, an investment (or a decrease in investment) in such operations by one or more controlled foreign corporations may, under regulations prescribed by the Secretary, be treated as an investment (or a decrease in investment) by another corporation which is a controlled foreign corporation and is a related person (as defined in section 954(d)(3) with respect to the corporation actually making or withdrawing the investment.
(3) Special rule
For purposes of this subpart, a United States shareholder of a controlled foreign corporation may, under regulations prescribed by the Secretary, elect to make the determinations under subsection (a)(2) of this section and under subsection (g) of section 954 as of the close of the years following the years referred to in such subsections, or as of the close of such longer period of time as such regulations may permit, in lieu of on the last day of such years. Any election under this paragraph made with respect to any taxable year shall apply to such year and to all succeeding taxable years unless the Secretary consents to the revocation of such election.
(4) Amount attributable to property
The amount taken into account under this subpart with respect to any property described in paragraph (1) shall be its adjusted basis, reduced by any liability to which such property is subject.
(5) Income excluded under prior law
Amounts invested in less developed country corporations described in section 955(c)(2) (as in effect before the enactment of the Tax Reduction Act of 1975) shall be treated as qualified investments in foreign base company shipping operations and shall not be treated as investments in less developed countries for purposes of section 951(a)(1)(A)(ii).
(Added
References in Text
Section 955(c)(2) (as in effect before the enactment of the Tax Reduction Act of 1975), referred to in subsecs. (a)(2) and (b)(5), refers to section 955(c)(2) as added by
The Tax Reduction Act of 1975, referred to in subsecs. (a)(2) and (b)(5), is
Prior Provisions
A prior section 955, added
Amendments
1988—Subsec. (a)(2)(A).
1986—Subsec. (a)(1)(A).
Subsec. (a)(2)(A).
1976—Subsec. (b)(2), (3).
Effective Date of 1988 Amendment
Amendment by
Effective Date of 1986 Amendment
Amendment by
Effective Date
Section 602(f) of
Section Referred to in Other Sections
This section is referred to in
§956. Investment of earnings in United States property
(a) General rule
In the case of any controlled foreign corporation, the amount determined under this section with respect to any United States shareholder for any taxable year is the lesser of—
(1) the excess (if any) of—
(A) such shareholder's pro rata share of the average of the amounts of United States property held (directly or indirectly) by the controlled foreign corporation as of the close of each quarter of such taxable year, over
(B) the amount of earnings and profits described in section 959(c)(1)(A) with respect to such shareholder, or
(2) such shareholder's pro rata share of the applicable earnings of such controlled foreign corporation.
The amount taken into account under paragraph (1) with respect to any property shall be its adjusted basis as determined for purposes of computing earnings and profits, reduced by any liability to which the property is subject.
(b) Special rules
(1) Applicable earnings
For purposes of this section, the term "applicable earnings" has the meaning given to such term by section 956A(b), except that the provisions of such section excluding earnings and profits accumulated in taxable years beginning before October 1, 1993, shall be disregarded.
(2) Special rule for U.S. property acquired before corporation is a controlled foreign corporation
In applying subsection (a) to any taxable year, there shall be disregarded any item of United States property which was acquired by the controlled foreign corporation before the first day on which such corporation was treated as a controlled foreign corporation. The aggregate amount of property disregarded under the preceding sentence shall not exceed the portion of the applicable earnings of such controlled foreign corporation which were accumulated during periods before such first day.
(3) Special rule where corporation ceases to be controlled foreign corporation
Rules similar to the rules of section 956A(e) shall apply for purposes of this section.
(c) United States property defined
(1) In general
For purposes of subsection (a), the term "United States property" means any property acquired after December 31, 1962, which is—
(A) tangible property located in the United States;
(B) stock of a domestic corporation;
(C) an obligation of a United States person; or
(D) any right to the use in the United States of—
(i) a patent or copyright,
(ii) an invention, model, or design (whether or not patented),
(iii) a secret formula or process, or
(iv) any other similar right,
which is acquired or developed by the controlled foreign corporation for use in the United States.
(2) Exceptions
For purposes of subsection (a), the term "United States property" does not include—
(A) obligations of the United States, money, or deposits with persons carrying on the banking business;
(B) property located in the United States which is purchased in the United States for export to, or use in, foreign countries;
(C) any obligation of a United States person arising in connection with the sale or processing of property if the amount of such obligation outstanding at no time during the taxable year exceeds the amount which would be ordinary and necessary to carry on the trade or business of both the other party to the sale or processing transaction and the United States person had the sale or processing transaction been made between unrelated persons;
(D) any aircraft, railroad rolling stock, vessel, motor vehicle, or container used in the transportation of persons or property in foreign commerce and used predominantly outside the United States;
(E) an amount of assets of an insurance company equivalent to the unearned premiums or reserves ordinary and necessary for the proper conduct of its insurance business attributable to contracts which are not contracts described in section 953(a)(1);
(F) the stock or obligations of a domestic corporation which is neither a United States shareholder (as defined in section 951(b)) of the controlled foreign corporation, nor a domestic corporation, 25 percent or more of the total combined voting power of which, immediately after the acquisition of any stock in such domestic corporation by the controlled foreign corporation, is owned, or is considered as being owned, by such United States shareholders in the aggregate;
(G) any movable property (other than a vessel or aircraft) which is used for the purpose of exploring for, developing, removing, or transporting resources from ocean waters or under such waters when used on the Continental Shelf of the United States;
(H) an amount of assets of the controlled foreign corporation equal to the earnings and profits accumulated after December 31, 1962, and excluded from subpart F income under section 952(b); and
(I) to the extent provided in regulations prescribed by the Secretary, property which is otherwise United States property which is held by a FSC and which is related to the export activities of such FSC.
(3) Certain trade or service receivables acquired from related United States persons
(A) In general
Notwithstanding paragraph (2) (other than subparagraph (H) thereof), the term "United States property" includes any trade or service receivable if—
(i) such trade or service receivable is acquired (directly or indirectly) from a related person who is a United States person, and
(ii) the obligor under such receivable is a United States person.
(B) Definitions
For purposes of this paragraph, the term "trade or service receivable" and "related person" have the respective meanings given to such terms by section 864(d).
(d) Pledges and guarantees
For purposes of subsection (a), a controlled foreign corporation shall, under regulations prescribed by the Secretary, be considered as holding an obligation of a United States person if such controlled foreign corporation is a pledgor or guarantor of such obligations.
(e) Regulations
The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this section, including regulations to prevent the avoidance of the provisons 1 of this section through reorganizations or otherwise.
(Added
Amendments
1993—Subsec. (a).
Subsecs. (b) to (d).
Subsec. (e).
1986—Subsec. (b)(3)(A).
1984—Subsec. (b)(2)(I).
Subsec. (b)(3).
1976—Subsec. (b)(2)(F) to (H).
Subsec. (c).
Effective Date of 1993 Amendment
Amendment by
Effective Date of 1986 Amendment
Amendment by
Effective Date of 1984 Amendment
Amendment by section 123(b) of
Amendment by section 801(d)(8) of
Effective Date of 1976 Amendment
Section 1021(c) of
Plan Amendments Not Required Until January 1, 1989
For provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§1101–1147 and 1171–1177] or title XVIII [§§1800–1899A] of
Section Referred to in Other Sections
This section is referred to in
1 So in original. Probably should be "provisions".
§956A. Earnings invested in excess passive assets
(a) General rule
In the case of any controlled foreign corporation, the amount determined under this section with respect to any United States shareholder for any taxable year is the lesser of—
(1) the excess (if any) of—
(A) such shareholder's pro rata share of the amount of the controlled foreign corporation's excess passive assets for such taxable year, over
(B) the amount of earnings and profits described in section 959(c)(1)(B) with respect to such shareholder, or
(2) such shareholder's pro rata share of the applicable earnings of such controlled foreign corporation determined after the application of section 951(a)(1)(B).
(b) Applicable earnings
For purposes of this section, the term "applicable earnings" means, with respect to any controlled foreign corporation, the sum of—
(1) the amount referred to in section 316(a)(1) to the extent such amount was accumulated in taxable years beginning after September 30, 1993, and
(2) the amount referred to in section 316(a)(2),
but reduced by distributions made during the taxable year and reduced by the earnings and profits described in section 959(c)(1) to the extent that the earnings and profits so described were accumulated in taxable years beginning after September 30, 1993.
(c) Excess passive assets
For purposes of this section—
(1) In general
The excess passive assets of any controlled foreign corporation for any taxable year is the excess (if any) of—
(A) the average of the amounts of passive assets held by such corporation as of the close of each quarter of such taxable year, over
(B) 25 percent of the average of the amounts of total assets held by such corporation as of the close of each quarter of such taxable year.
For purposes of the preceding sentence, the amount taken into account with respect to any asset shall be its adjusted basis as determined for purposes of computing earnings and profits.
(2) Passive asset
(A) In general
Except as otherwise provided in this section, the term "passive asset" means any asset held by the controlled foreign corporation which produces passive income (as defined in section 1296(b)) or is held for the production of such income.
(B) Coordination with section 956
The term "passive asset" shall not include any United States property (as defined in section 956).
(3) Certain rules to apply
For purposes of this subsection, the rules of the following provisions shall apply:
(A) Section 1296(c) (relating to look-thru rules).
(B) Section 1297(d) (relating to leasing rules).
(C) Section 1297(e) (relating to intangible property).
(d) Treatment of certain groups of controlled foreign corporations
(1) In general
For purposes of applying subsection (c)—
(A) all controlled foreign corporations which are members of the same CFC group shall be treated as 1 controlled foreign corporation, and
(B) the amount of the excess passive assets determined with respect to such 1 corporation shall be allocated among the controlled foreign corporations which are members of such group in proportion to their respective amounts of applicable earnings.
(2) CFC group
For purposes of paragraph (1), the term "CFC group" means 1 or more chains of controlled foreign corporations connected through stock ownership with a top tier corporation which is a controlled foreign corporation, but only if—
(A) the top tier corporation owns directly more than 50 percent (by vote or value) of the stock of at least 1 of the other controlled foreign corporations, and
(B) more than 50 percent (by vote or value) of the stock of each of the controlled foreign corporations (other than the top tier corporation) is owned (directly or indirectly) by one or more other members of the group.
(e) Special rule where corporation ceases to be controlled foreign corporation during taxable year
If any foreign corporation ceases to be a controlled foreign corporation during any taxable year—
(1) the determination of any United States shareholder's pro rata share shall be made on the basis of stock owned (within the meaning of section 958(a)) by such shareholder on the last day during the taxable year on which the foreign corporation is a controlled foreign corporation,
(2) the amount of such corporation's excess passive assets for such taxable year shall be determined by only taking into account quarters ending on or before such last day, and
(3) in determining applicable earnings, the amount taken into account by reason of being described in paragraph (2) of section 316(a) shall be the portion of the amount so described which is allocable (on a pro rata basis) to the part of such year during which the corporation is a controlled foreign corporation.
(f) Regulations
The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this section, including regulations to prevent the avoidance of the provisions of this section through reorganizations or otherwise.
(Added
Effective Date
Section applicable to taxable years of foreign corporations beginning after Sept. 30, 1993, and to taxable years of United States shareholders in which or with which such taxable years of foreign corporations end, see section 13231(e) of
Section Referred to in Other Sections
This section is referred to in
§957. Controlled foreign corporations; United States persons
(a) General rule
For purposes of this subpart, the term "controlled foreign corporation" means any foreign corporation if more than 50 percent of—
(1) the total combined voting power of all classes of stock of such corporation entitled to vote, or
(2) the total value of the stock of such corporation,
is owned (within the meaning of section 958(a)), or is considered as owned by applying the rules of ownership of section 958(b), by United States shareholders on any day during the taxable year of such foreign corporation.
(b) Special rule for insurance
For purposes only of taking into account income described in section 953(a) (relating to insurance income), the term "controlled foreign corporation" includes not only a foreign corporation as defined by subsection (a) but also one of which more than 25 percent of the total combined voting power of all classes of stock (or more than 25 percent of the total value of stock) is owned (within the meaning of section 958(a)), or is considered as owned by applying the rules of ownership of section 958(b), by United States shareholders on any day during the taxable year of such corporation, if the gross amount of premiums or other consideration in respect of the reinsurance or the issuing of insurance or annuity contracts described in section 953(a)(1) exceeds 75 percent of the gross amount of all premiums or other consideration in respect of all risks.
(c) United States person
For purposes of this subpart, the term "United States person" has the meaning assigned to it by section 7701(a)(30) except that—
(1) with respect to a corporation organized under the laws of the Commonwealth of Puerto Rico, such term does not include an individual who is a bona fide resident of Puerto Rico, if a dividend received by such individual during the taxable year from such corporation would, for purposes of section 933(1), be treated as income derived from sources within Puerto Rico, and
(2) with respect to a corporation organized under the laws of Guam, American Samoa, or the Northern Mariana Islands—
(A) 80 percent or more of the gross income of which for the 3-year period ending at the close of the taxable year (or for such part of such period as such corporation or any predecessor has been in existence) was derived from sources within such a possession or was effectively connected with the conduct of a trade or business in such a possession, and
(B) 50 percent or more of the gross income of which for such period (or part) was derived from the conduct of an active trade or business within such a possession,
such term does not include an individual who is a bona fide resident of Guam, American Samoa, or the Northern Mariana Islands.
For purposes of subparagraphs (A) and (B) of paragraph (2), the determination as to whether income was derived from sources within a possession, was effectively connected with the conduct of a trade or business within a possession, or derived from the active conduct of a trade or business within a possession shall be made under regulations prescribed by the Secretary.
(Added
Amendments
1986—Subsec. (a).
Subsec. (b).
Subsec. (c).
"(2) with respect to a corporation organized under the laws of the Virgin Islands, such term does not include an individual who is a bona fide resident of the Virgin Islands and whose income tax obligation under this subtitle for the taxable year is satisfied pursuant to section 28(a) of the Revised Organic Act of the Virgin Islands, approved July 22, 1954 (
"(3) with respect to a corporation organized under the laws of any other possession of the United States, such term does not include an individual who is a bona fide resident of any such other possession and whose income derived from sources within possessions of the United States is not, by reason of section 931(a), includible in gross income under this subtitle for the taxable year."
Subsec. (d).
1976—Subsec. (c)
Effective Date of 1986 Amendment
Amendment by section 1221(b)(3)(C) of
Amendment by section 1222(a) of
Section 1224(b) of
"(1)
"(2)
Amendment by section 1273(a) of
Section Referred to in Other Sections
This section is referred to in
§958. Rules for determining stock ownership
(a) Direct and indirect ownership
(1) General rule
For purposes of this subpart (other than sections 955(b)(1)(A) and (B), 955(c)(2)(A)(ii), and 960(a)(1)), stock owned means—
(A) stock owned directly, and
(B) stock owned with the application of paragraph (2).
(2) Stock ownership through foreign entities
For purposes of subparagraph (B) of paragraph (1), stock owned, directly or indirectly, by or for a foreign corporation, foreign partnership, or foreign trust or foreign estate (within the meaning of section 7701(a)(31)) shall be considered as being owned proportionately by its shareholders, partners, or beneficiaries. Stock considered to be owned by a person by reason of the application of the preceding sentence shall, for purposes of applying such sentence, be treated as actually owned by such person.
(3) Special rule for mutual insurance companies
For purposes of applying paragraph (1) in the case of a foreign mutual insurance company, the term "stock" shall include any certificate entitling the holder to voting power in the corporation.
(b) Constructive ownership
For purposes of sections 951(b), 954(d)(3), 956(b)(2),1 and 957, section 318(a) (relating to constructive ownership of stock) shall apply to the extent that the effect is to treat any United States person as a United States shareholder within the meaning of section 951(b), to treat a person as a related person within the meaning of section 954(d)(3), to treat the stock of a domestic corporation as owned by a United States shareholder of the controlled foreign corporation for purposes of section 956(b)(2),1 or to treat a foreign corporation as a controlled foreign corporation under section 957, except that—
(1) In applying paragraph (1)(A) of section 318(a), stock owned by a nonresident alien individual (other than a foreign trust or foreign estate) shall not be considered as owned by a citizen or by a resident alien individual.
(2) In applying subparagraphs (A), (B), and (C) of section 318(a)(2), if a partnership, estate, trust, or corporation owns, directly or indirectly, more than 50 percent of the total combined voting power of all classes of stock entitled to vote of a corporation, it shall be considered as owning all the stock entitled to vote.
(3) In applying subparagraph (C) of section 318(a)(2), the phrase "10 percent" shall be substituted for the phrase "50 percent" used in subparagraph (C).
(4) Subparagraph (A), (B), and (C) of section 318(a)(3) shall not be applied so as to consider a United States person as owning stock which is owned by a person who is not a United States person.
Paragraphs (1) and (4) shall not apply for purposes of section 956(b)(2) 1 to treat stock of a domestic corporation as not owned by a United States shareholder.
(Added
References in Text
Section 955(c)(2)(A)(ii), referred to in subsec. (a)(1), was
Section 956(b)(2), referred to in subsec. (b), was redesignated 956(c)(2) by
Amendments
1976—Subsec. (b).
1964—Subsec. (b).
Effective Date of 1976 Amendment
Amendment by
Effective Date of 1964 Amendment
Amendment by
Section Referred to in Other Sections
This section is referred to in
1 See References in Text note below.
§959. Exclusion from gross income of previously taxed earnings and profits
(a) Exclusion from gross income of United States persons
For purposes of this chapter, the earnings and profits of a foreign corporation attributable to amounts which are, or have been, included in the gross income of a United States shareholder under section 951(a) shall not, when—
(1) such amounts are distributed to,
(2) such amounts would, but for this subsection, be included under section 951(a)(1)(B) in the gross income of, or
(3) such amounts would, but for this subsection, be included under section 951(a)(1)(C) in the gross income of,
such shareholder (or any other United States person who acquires from any person any portion of the interest of such United States shareholder in such foreign corporation, but only to the extent of such portion, and subject to such proof of the identity of such interest as the Secretary may by regulations prescribe) directly or indirectly through a chain of ownership described under section 958(a), be again included in the gross income of such United States shareholder (or of such other United States person). The rules of subsection (c) shall apply for purposes of paragraph (1) of this subsection and the rules of subsection (f) shall apply for purposes of paragraphs (2) and (3) of this subsection.
(b) Exclusion from gross income of certain foreign subsidiaries
For purposes of section 951(a), the earnings and profits of a controlled foreign corporation attributable to amounts which are, or have been, included in the gross income of a United States shareholder under section 951(a), shall not, when distributed through a chain of ownership described under section 958(a), be also included in the gross income of another controlled foreign corporation in such chain for purposes of the application of section 951(a) to such other controlled foreign corporation with respect to such United States shareholder (or to any other United States shareholder who acquires from any person any portion of the interest of such United States shareholder in the controlled foreign corporation, but only to the extent of such portion, and subject to such proof of identity of such interest as the Secretary may prescribe by regulations).
(c) Allocation of distributions
For purposes of subsections (a) and (b), section 316(a) shall be applied by applying paragraph (2) thereof, and then paragraph (1) thereof—
(1) first to the aggregate of—
(A) earnings and profits attributable to amounts included in gross income under section 951(a)(1)(B) (or which would have been included except for subsection (a)(2) of this section), and
(B) earnings and profits attributable to amounts included in gross income under section 951(a)(1)(C) (or which would have been included except for subsection (a)(3) of this section),
with any distribution being allocated between earnings and profits described in subparagraph (A) and earnings and profits described in subparagraph (B) proportionately on the basis of the respective amounts of such earnings and profits,
(2) then to earnings and profits attributable to amounts included in gross income under section 951(a)(1)(A) (but reduced by amounts not included under subparagraph (B) or (C) of section 951(a)(1) because of the exclusions in paragraphs (2) and (3) of subsection (a) of this section), and
(3) then to other earnings and profits.
(d) Distributions excluded from gross income not to be treated as dividends
Except as provided in section 960(a)(3), any distribution excluded from gross income under subsection (a) shall be treated, for purposes of this chapter, as a distribution which is not a dividend; except that such distributions shall immediately reduce earnings and profits.
(e) Coordination with amounts previously taxed under section 1248
For purposes of this section and section 960(b), any amount included in the gross income of any person as a dividend by reason of subsection (a) or (f) of section 1248 shall be treated as an amount included in the gross income of such person (or, in any case to which section 1248(e) applies, of the domestic corporation referred to in section 1248(e)(2)) under section 951(a)(1)(A).
(f) Allocation rules for certain inclusions
(1) In general
For purposes of this section—
(A) amounts that would be included under subparagraph (B) of section 951(a)(1) (determined without regard to this section) shall be treated as attributable first to earnings described in subsection (c)(2), and then to earnings described in subsection (c)(3), and
(B) amounts that would be included under subparagraph (C) of section 951(a)(1) (determined without regard to this section) shall be treated as attributable first to earnings described in subsection (c)(2) to the extent the earnings so described were accumulated in taxable years beginning after September 30, 1993, and then to earnings described in subsection (c)(3).
(2) Treatment of distributions
In applying this section, actual distributions shall be taken into account before amounts that would be included under subparagraphs (B) and (C) of section 951(a)(1) (determined without regard to this section).
(Added
Amendments
1993—Subsec. (a).
Subsec. (a)(3).
Subsec. (b).
Subsec. (c)(1).
Subsec. (c)(2).
Subsec. (f).
1988—Subsec. (e).
1986—Subsec. (d).
1984—Subsec. (e).
1976—Subsecs. (a), (b).
Effective Date of 1993 Amendment
Amendment by
Effective Date of 1988 Amendment
Section 1012(bb)(7)(B) of
Effective Date of 1986 Amendment
Section 1226(c)(2) of
Effective Date of 1984 Amendment
Section 133(d)(2), (3) of
"(2)
"(3)
"(A)
"(B)
"(i) Subparagraph (A) shall apply with respect to transactions to which subsection (a) of section 1248 of such Code applies if the foreign corporation described in such subsection (or its successor in interest) so elects.
"(ii) Subparagraph (A) shall apply with respect to transactions to which subsection (f) of section 1248 of such Code applies if the domestic corporation described in section 1248(f)(1) of such Code (or its successor) so elects.
"(iii) Any election under clause (i) or (ii) shall be made not later than the date which is 1 year after the date of the enactment of the Tax Reform Act of 1986 [Oct. 22, 1986] and shall be made in such manner as the Secretary of the Treasury or his delegate shall prescribe."
Section Referred to in Other Sections
This section is referred to in
§960. Special rules for foreign tax credit
(a) Taxes paid by a foreign corporation
(1) General rule
For purposes of subpart A of this part, if there is included, under section 951(a), in the gross income of a domestic corporation any amount attributable to earnings and profits—
(A) of a foreign corporation (hereafter in this subsection referred to as the "first foreign corporation") at least 10 percent of the voting stock of which is owned by such domestic corporation, or
(B) of a second foreign corporation (hereinafter in this subsection referred to as the "second foreign corporation") at least 10 percent of the voting stock of which is owned by the first foreign corporation, or
(C) of a third foreign corporation (hereinafter in this subsection referred to as the "third foreign corporation") at least 10 percent of the voting stock of which is owned by the second foreign corporation,
then, except to the extent provided in regulations, such domestic corporation shall be deemed to have paid a portion of such foreign corporation's post-1986 foreign income taxes determined under section 902 in the same manner as if the amount so included were a dividend paid by such foreign corporation (determined by applying section 902(c) in accordance with section 904(d)(3)(B)). This paragraph shall not apply with respect to any amount included in the gross income of such domestic corporation attributable to earnings and profits of the second foreign corporation or of the third foreign corporation unless, in the case of the second foreign corporation, the percentage-of-voting-stock requirement of section 902(b)(3)(A) is satisfied, and in the case of the third foreign corporation, the percentage-of-voting-stock requirement of section 902(b)(3)(B) is satisfied.
(2) Taxes previously deemed paid by domestic corporation
If a domestic corporation receives a distribution from a foreign corporation, any portion of which is excluded from gross income under section 959, the income, war profits, and excess profits taxes paid or deemed paid by such foreign corporation to any foreign country or to any possession of the United States in connection with the earnings and profits of such foreign corporation from which such distribution is made shall not be taken into account for purposes of section 902, to the extent such taxes were deemed paid by a domestic corporation under paragraph (1) for any prior taxable year.
(3) Taxes paid by foreign corporation and not previously deemed paid by domestic corporation
Any portion of a distribution from a foreign corporation received by a domestic corporation which is excluded from gross income under section 959(a) shall be treated by the domestic corporation as a dividend, solely for purposes of taking into account under section 902 any income, war profits, or excess profits taxes paid to any foreign country or to any possession of the United States, on or with respect to the accumulated profits of such foreign corporation from which such distribution is made, which were not deemed paid by the domestic corporation under paragraph (1) for any prior taxable year.
(b) Special rules for foreign tax credit in year of receipt of previously taxed earnings and profits
(1) Increase in section 904 limitation
In the case of any taxpayer who—
(A) either (i) chose to have the benefits of subpart A of this part for a taxable year beginning after September 30, 1993, in which he was required under section 951(a) to include any amount in his gross income, or (ii) did not pay or accrue for such taxable year any income, war profits, or excess profits taxes to any foreign country or to any possession of the United States,
(B) chooses to have the benefits of subpart A of this part for any taxable year in which he receives 1 or more distributions or amounts which are excludable from gross income under section 959(a) and which are attributable to amounts included in his gross income for taxable years referred to in subparagraph (A), and
(C) for the taxable year in which such distributions or amounts are received, pays, or is deemed to have paid, or accrues income, war profits, or excess profits taxes to a foreign country or to any possession of the United States with respect to such distributions or amounts,
the limitation under section 904 for the taxable year in which such distributions or amounts are received shall be increased by the lesser of the amount of such taxes paid, or deemed paid, or accrued with respect to such distributions or amounts or the amount in the excess limitation account as of the beginning of such taxable year.
(2) Excess limitation account
(A) Establishment of account
Each taxpayer meeting the requirements of paragraph (1)(A) shall establish an excess limitation account. The opening balance of such account shall be zero.
(B) Increases in account
For each taxable year beginning after September 30, 1993, the taxpayer shall increase the amount in the excess limitation account by the excess (if any) of—
(i) the amount by which the limitation under section 904(a) for such taxable year was increased by reason of the total amount of the inclusions in gross income under section 951(a) for such taxable year, over
(ii) the amount of any income, war profits, and excess profits taxes paid, or deemed paid, or accrued to any foreign country or possession of the United States which were allowable as a credit under section 901 for such taxable year and which would not have been allowable but for the inclusions in gross income described in clause (i).
Proper reductions in the amount added to the account under the preceding sentence for any taxable year shall be made for any increase in the credit allowable under section 901 for such taxable year by reason of a carryback if such increase would not have been allowable but for the inclusions in gross income described in clause (i).
(C) Decreases in account
For each taxable year beginning after September 30, 1993, for which the limitation under section 904 was increased under paragraph (1), the taxpayer shall reduce the amount in the excess limitation account by the amount of such increase.
(3) Distributions of income previously taxed in years beginning before October 1, 1993
If the taxpayer receives a distribution or amount in a taxable year beginning after September 30, 1993, which is excluded from gross income under section 959(a) and is attributable to any amount included in gross income under section 951(a) for a taxable year beginning before October 1, 1993, the limitation under section 904 for the taxable year in which such amount or distribution is received shall be increased by the amount determined under this subsection as in effect on the day before the date of the enactment of the Revenue Reconcilation 1 Act of 1993.
(4) Cases in which taxes not to be allowed as deduction
In the case of any taxpayer who—
(A) chose to have the benefits of subpart A of this part for a taxable year in which he was required under section 951(a) to include in his gross income an amount in respect of a controlled foreign corporation, and
(B) does not choose to have the benefits of subpart A of this part for the taxable year in which he receives a distribution or amount which is excluded from gross income under section 959(a) and which is attributable to earnings and profits of the controlled foreign corporation which was included in his gross income for the taxable year referred to in subparagraph (A),
no deduction shall be allowed under section 164 for the taxable year in which such distribution or amount is received for any income, war profits, or excess profits taxes paid or accrued to any foreign country or to any possession of the United States on or with respect to such distribution or amount.
(5) Insufficient taxable income
If an increase in the limitation under this subsection exceeds the tax imposed by this chapter for such year, the amount of such excess shall be deemed an overpayment of tax for such year.
(Added
References in Text
The date of the enactment of the Revenue Reconciliation Act of 1993, referred to in subsec. (b)(3), is the date of enactment of
Amendments
1993—Subsec. (b).
1986—Subsec. (a)(1).
1976—Subsec. (a)(1).
Subsec. (b).
Effective Date of 1993 Amendment
Section 13233(b)(2) of
Effective Date of 1986 Amendment
Amendment by
Effective Date of 1976 Amendment
Amendment by section 1031(b)(1) of
Amendment by section 1033(b)(2) of
Section 1037(b) of
Section Referred to in Other Sections
This section is referred to in
1 So in original. Probably should be "Reconciliation".
§961. Adjustments to basis of stock in controlled foreign corporations and of other property
(a) Increase in basis
Under regulations prescribed by the Secretary, the basis of a United States shareholder's stock in a controlled foreign corporation, and the basis of property of a United States shareholder by reason of which he is considered under section 958(a)(2) as owning stock of a controlled foreign corporation, shall be increased by the amount required to be included in his gross income under section 951(a) with respect to such stock or with respect to such property, as the case may be, but only to the extent to which such amount was included in the gross income of such United States shareholder. In the case of a United States shareholder who has made an election under section 962 for the taxable year, the increase in basis provided by this subsection shall not exceed an amount equal to the amount of tax paid under this chapter with respect to the amounts required to be included in his gross income under section 951(a).
(b) Reduction in basis
(1) In general
Under regulations prescribed by the Secretary, the adjusted basis of stock or other property with respect to which a United States shareholder or a United States person receives an amount which is excluded from gross income under section 959(a) shall be reduced by the amount so excluded. In the case of a United States shareholder who has made an election under section 962 for any prior taxable year, the reduction in basis provided by this paragraph shall not exceed an amount equal to the amount received which is excluded from gross income under section 959(a) after the application of section 962(d).
(2) Amount in excess of basis
To the extent that an amount excluded from gross income under section 959(a) exceeds the adjusted basis of the stock or other property with respect to which it is received, the amount shall be treated as gain from the sale or exchange of property.
(Added
Amendments
1976—Subsecs. (a), (b)(1).
Dual Resident Companies
Basis adjustments of this section not applicable in certain circumstances involving dual resident companies, see section 6126 of
Section Referred to in Other Sections
This section is referred to in
§962. Election by individuals to be subject to tax at corporate rates
(a) General rule
Under regulations prescribed by the Secretary, in the case of a United States shareholder who is an individual and who elects to have the provisions of this section apply for the taxable year—
(1) the tax imposed under this chapter on amounts which are included in his gross income under section 951(a) shall (in lieu of the tax determined under sections 1 and 55) be an amount equal to the tax which would be imposed under sections 11 and 55 if such amounts were received by a domestic corporation, and
(2) for purposes of applying the provisions of section 960 (relating to foreign tax credit) such amounts shall be treated as if they were received by a domestic corporation.
(b) Election
An election to have the provisions of this section apply for any taxable year shall be made by a United States shareholder at such time and in such manner as the Secretary shall prescribe by regulations. An election made for any taxable year may not be revoked except with the consent of the Secretary.
(c) Pro ration of each section 11 bracket amount
For purposes of applying subsection (a)(1), the amount in each taxable income bracket in the tax table in section 11(b) shall not exceed an amount which bears the same ratio to such bracket amount as the amount included in the gross income of the United States shareholder under section 951(a) for the taxable year bears to such shareholder's pro rata share of the earnings and profits for the taxable year of all controlled foreign corporations with respect to which such shareholder includes any amount in gross income under section 951(a).
(d) Special rule for actual distributions
The earnings and profits of a foreign corporation attributable to amounts which were included in the gross income of a United States shareholder under section 951(a) and with respect to which an election under this section applied shall, when such earnings and profits are distributed, notwithstanding the provisions of section 959(a)(1), be included in gross income to the extent that such earnings and profits so distributed exceed the amount of tax paid under this chapter on the amounts to which such election applied.
(Added
Amendments
1988—Subsec. (a)(1).
1978—Subsec. (c).
1976—Subsecs. (a), (b).
1975—Subsec. (c).
Effective Date of 1988 Amendment
Amendment by
Effective Date of 1978 Amendment
Amendment by
Effective and Termination Dates of 1975 Amendments
Amendment by
Amendment by
Section Referred to in Other Sections
This section is referred to in
[§963. Repealed. Pub. L. 94–12, title VI, §602(a)(1), Mar. 29, 1975, 89 Stat. 58 ]
Section, added
Effective Date of Repeal
Repeal effective with respect to taxable years for foreign corporations beginning after Dec. 31, 1975, and to taxable years of United States shareholders (within the meaning of
§964. Miscellaneous provisions
(a) Earnings and profits
Except as provided in section 312(k)(4), for purposes of this subpart, the earnings and profits of any foreign corporation, and the deficit in earnings and profits of any foreign corporation, for any taxable year shall be determined according to rules substantially similar to those applicable to domestic corporations, under regulations prescribed by the Secretary. In determining such earnings and profits, or the deficit in such earnings and profits, the amount of any illegal bribe, kickback, or other payment (within the meaning of section 162(c)) shall not be taken into account to decrease such earnings and profits or to increase such deficit. The payments referred to in the preceding sentence are payments which would be unlawful under the Foreign Corrupt Practices Act of 1977 if the payor were a United States person.
(b) Blocked foreign income
Under regulations prescribed by the Secretary, no part of the earnings and profits of a controlled foreign corporation for any taxable year shall be included in earnings and profits for purposes of sections 952, 955, and 956, if it is established to the satisfaction of the Secretary that such part could not have been distributed by the controlled foreign corporation to United States shareholders who own (within the meaning of section 958(a)) stock of such controlled foreign corporation because of currency or other restrictions or limitations imposed under the laws of any foreign country.
(c) Records and accounts of United States shareholders
(1) Records and accounts to be maintained
The Secretary may by regulations require each person who is, or has been, a United States shareholder of a controlled foreign corporation to maintain such records and accounts as may be prescribed by such regulations as necessary to carry out the provisions of this subpart and subpart G.
(2) Two or more persons required to maintain or furnish the same records and accounts with respect to the same foreign corporation
Where, but for this paragraph, two or more United States persons would be required to maintain or furnish the same records and accounts as may by regulations be required under paragraph (1) with respect to the same controlled foreign corporation for the same period, the Secretary may by regulations provide that the maintenance or furnishing of such records and accounts by only one such person shall satisfy the requirements of paragraph (1) for such other persons.
(d) Treatment of certain branches
(1) In general
For purposes of this chapter, section 6038, section 6046, and such other provisions as may be specified in regulations—
(A) a qualified insurance branch of a controlled foreign corporation shall be treated as a separate foreign corporation created under the laws of the foreign country with respect to which such branch qualifies under paragraph (2), and
(B) except as provided in regulations, any amount directly or indirectly transferred or credited from such branch to one or more other accounts of such controlled foreign corporation shall be treated as a dividend paid to such controlled foreign corporation.
(2) Qualified insurance branch
For purposes of paragraph (1), the term "qualified insurance branch" means any branch of a controlled foreign corporation which is licensed and predominantly engaged on a permanent basis in the active conduct of an insurance business in a foreign country if—
(A) separate books and accounts are maintained for such branch,
(B) the principal place of business of such branch is in such foreign country,
(C) such branch would be taxable under subchapter L if it were a separate domestic corporation, and
(D) an election under this paragraph applies to such branch.
An election under this paragraph shall apply to the taxable year for which made and all subsequent taxable years unless revoked with the consent of the Secretary.
(3) Regulations
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection.
(Added
References in Text
The Foreign Corrupt Practices Act of 1977, referred to in subsec. (a), is title I of
Amendments
1988—Subsec. (d).
1982—Subsec. (a).
1981—Subsec. (a).
1976—Subsec. (a).
Subsecs. (b), (c)(1), (2).
1969—Subsec. (a).
Effective Date of 1988 Amendment
Section 6129(b) of
Effective Date of 1982 Amendment
Amendment by
Effective Date of 1981 Amendment
Amendment by
Effective Date of 1976 Amendment
Amendment by section 1065(b) of
Section Referred to in Other Sections
This section is referred to in
Subpart G—Export Trade Corporations
Amendments
1976—
1962—
Subpart Referred to in Other Sections
This subpart is referred to in
§970. Reduction of subpart F income of export trade corporations
(a) Export trade income constituting foreign base company income
(1) In general
In the case of a controlled foreign corporation (as defined in section 957) which for the taxable year is an export trade corporation, the subpart F income (determined without regard to this subpart) of such corporation for such year shall be reduced by an amount equal to so much of the export trade income (as defined in section 971(b)) of such corporation for such year as constitutes foreign base company income (as defined in section 954), but only to the extent that such amount does not exceed whichever of the following amounts is the lesser:
(A) an amount equal to 1½ times so much of the export promotion expenses (as defined in section 971(d)) of such corporation for such year as is probably allocable to the export trade income which constitutes foreign base company income of such corporation for such year, or
(B) an amount equal to 10 percent of so much of the gross receipts for such year (or, in the case of gross receipts arising from commissions, fees, or other compensation for its services, so much of the gross amount upon the basis of which such commissions, fees, or other compensation is computed) accruing to such export trade corporation from the sale, installation, operation, maintenance, or use of property in respect of which such corporation derives export trade income as is properly allocable to the export trade income which constitutes foreign base company income of such corporation for such year.
The allocations with respect to export trade income which constitutes foreign base company income under subparagraphs (A) and (B) shall be made under regulations prescribed by the Secretary.
(2) Overall limitation
The reduction under paragraph (1) for any taxable year shall not exceed an amount which bears the same ratio to the increase in the investments in export trade assets (as defined in section 971(c)) of such corporation for such year as the export trade income which constitutes foreign base company income of such corporation for such year bears to the entire export trade income of such corporation for such year.
(b) Inclusion of certain previously excluded amounts
Each United States shareholder of a controlled foreign corporation which for any prior taxable year was an export trade corporation shall include in his gross income under section 951(a)(1)(A)(ii), as an amount to which section 955 (relating to withdrawal of previously excluded subpart F income from qualified investment) applies, his pro rata share of the amount of decrease in the investments in export trade assets of such corporation for such year, but only to the extent that his pro rata share of such amount does not exceed an amount equal to—
(1) his pro rata share of the sum of (A) the amounts by which the subpart F income of such corporation was reduced for all prior taxable years under subsection (a), and (B) the amounts not included in subpart F income (determined without regard to this subpart) for all prior taxable years by reason of the treatment (under section 972 as in effect before the date of the enactment of the Tax Reform Act of 1976) of two or more controlled foreign corporations which are export trade corporations as a single controlled foreign corporation, reduced by
(2) the sum of the amounts which were included in his gross income under section 951(a)(1)(A)(ii) under the provisions of this subsection for all prior taxable years.
(c) Investments in export trade assets
(1) Amount of investments
For purposes of this section, the amount taken into account with respect to any export trade asset shall be its adjusted basis, reduced by any liability to which the asset is subject.
(2) Increase in investments in export trade assets
For purposes of subsection (a), the amount of increase in investments in export trade assets of any controlled foreign corporation for any taxable year is the amount by which—
(A) the amount of such investments at the close of the taxable year, exceeds
(B) the amount of such investments at the close of the preceding taxable year.
(3) Decrease in investments in export trade assets
For purposes of subsection (b), the amount of decrease in investments in export trade assets of any controlled foreign corporation for any taxable year is the amount by which—
(A) the amount of such investments at the close of the preceding taxable year (reduced by an amount equal to the amount of net loss sustained during the taxable year with respect to export trade assets), exceeds
(B) the amount of such investments at the close of the taxable year.
(4) Special rule
A United States shareholder of an export trade corporation may, under regulations prescribed by the Secretary, make the determinations under paragraphs (2) and (3) as of the close of the 75th day after the close of the years referred to in such paragraphs in lieu of on the last day of such years. A United States shareholder of an export trade corporation may, under regulations prescribed by the Secretary, make the determinations under paragraphs (2) and (3) with respect to export trade assets described in section 971(c)(3) as of the close of the years following the years referred to in such paragraphs, or as of the close of such longer period of time as such regulations may permit, in lieu of on the last day of such years and in lieu of on the day prescribed in the preceding sentence. Any election under this paragraph made with respect to any taxable year shall apply to such year and to all succeeding taxable years unless the Secretary consents to the revocation of such election.
(Added
References in Text
The Tax Reform Act of 1976, referred to in subsec. (b)(1), is
Amendments
1976—Subsec. (a)(1).
Subsec. (b)(1).
Subsec. (c)(4).
Effective Date of 1976 Amendment
Amendment by section 1901(b)(27)(A) of
Export Trade Corporations
Section 505(a), (b) of
"(a)
"(b)
"(1)
"(A) notwithstanding section 367 or any other provision of
"(B) the earnings and profits of the DISC shall be increased by the amount transferred to it by the export trade corporation and such amount shall be included in the accumulated DISC income, and for purposes of section 861(a)(2)(D) shall be considered to be qualified export receipts;
"(C) the adjusted basis of the assets transferred to the DISC shall be the same in the hands of the DISC as in the hands of the export trade corporation;
"(D) the earnings and profits of the export trade corporation shall be reduced by the amount transferred to the DISC, to the extent thereof, with the reduction being applied first to the untaxed subpart F income and then to the other earnings and profits in the order in which they were most recently accumulated;
"(E) the basis of the parent's stock in the export trade corporation shall be decreased by the amount obtained by multiplying its basis in such stock by a fraction the numerator of which is the amount transferred to the DISC and the denominator of which is the aggregate adjusted basis of all the assets of the export trade corporation immediately before such transfer;
"(F) the basis of the parent's stock in the DISC shall be increased by the amount of the reduction under subparagraph (E) of its basis in the stock of the export trade corporation;
"(G) the property transferred to the DISC shall not be considered to reduce the investments of the export trade corporation in export trade assets for purposes of applying section 970(b); and
"(H) any foreign income taxes which would have been deemed under section 902 to have been paid by the parent if the transfer had been made to the parent shall be treated as foreign income taxes paid by the DISC.
For purposes of this section, the amount transferred by the export trade corporation to the DISC shall be the aggregate of the adjusted basis of the properties transferred, with proper adjustment for any indebtedness secured by such property or assumed by the DISC in connection with the transfer. For purposes of this section, a foreign corporation which qualified as an export trade corporation for any 3 taxable years beginning before November 1, 1971, shall be treated as an export trade corporation.
"(2)
"(A) the sum of the amount by which the subpart F income of such corporation was reduced for the taxable year and all prior taxable years under section 970(a) and the amounts not included in subpart F income (determined without regard to subpart G of subchapter N of
"(B) the sum of the amounts which were included in the gross income of the shareholders of such corporation under section 951(a)(1)(A)(ii) and under the provision of section 970(b) for all prior taxable years,
determined without regard to the transfer of property described in paragraph (1) of this subsection.
"(3)
"(4)
§971. Definitions
(a) Export trade corporations
For purposes of this subpart, the term "export trade corporation" means—
(1) In general
A controlled foreign corporation (as defined in section 957) which satisfies the following conditions:
(A) 90 percent or more of the gross income of such corporation for the 3–year period immediately preceding the close of the taxable year (or such part of such period subsequent to the effective date of this subpart during which the corporation was in existence) was derived from sources without the United States, and
(B) 75 percent or more of the gross income of such corporation for such period constituted gross income in respect of which such corporation derived export trade income.
(2) Special rule
If 50 percent or more of the gross income of a controlled foreign corporation in the period specified in subsection (a)(1)(A) is gross income in respect of which such corporation derived export trade income in respect of agricultural products grown in the United States, it may qualify as an export trade corporation although it does not meet the requirements of subsection (a)(1)(B).
(3) Limitation
No controlled foreign corporation may qualify as an export trade corporation for any taxable year beginning after October 31, 1971, unless it qualified as an export trade corporation for any taxable year beginning before such date. If a corporation fails to qualify as an export trade corporation for a period of any 3 consecutive taxable years beginning after such date, it may not qualify as an export trade corporation for any taxable year beginning after such period.
(b) Export trade income
For the purposes of this subpart, the term "export trade income" means net income from—
(1) the sale to an unrelated person for use, consumption, or disposition outside the United States of export property (as defined in subsection (e)), or from commissions, fees, compensation, or other income from the performance of commercial, industrial, financial, technical, scientific, managerial, engineering, architectural, skilled, or other services in respect to such sales or in respect of the installation or maintenance of such export property;
(2) commissions, fees, compensation, or other income from commercial, industrial, financial, technical, scientific, managerial, engineering, architectural, skilled, or other services performed in connection with the use by an unrelated person outside the United States of patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises, and other like property acquired or developed and owned by the manufacturer, producer, grower, or extractor of export property in respect of which the export trade corporation earns export trade income under paragraph (1);
(3) commissions, fees, rentals, or other compensation or income attributable to the use of export property by an unrelated person or attributable to the use of export property in the rendition of technical, scientific, or engineering services to an unrelated person; and
(4) interest from export trade assets described in subsection (c)(4).
For purposes of paragraph (3), if a controlled foreign corporation receives income from an unrelated person attributable to the use of export property in the rendition of services to such unrelated person together with income attributable to the rendition of other services to such unrelated person, including personal services, the amount of such aggregate income which shall be considered to be attributable to the use of the export property shall (if such amount cannot be established by reference to transactions between unrelated persons) be that part of such aggregate income which the cost of the export property consumed in the rendition of such services (including a reasonable allowance for depreciation) bears to the total cost and expenses attributable to such aggregate income.
(c) Export trade assets
For purposes of this subpart, the term "export trade assets" means—
(1) working capital reasonably necessary for the production of export trade income,
(2) inventory of export property held for use, consumption, or disposition outside the United States,
(3) facilities located outside the United States for the storage, handling, transportation, packaging, or servicing of export property, and
(4) evidences of indebtedness executed by persons, other than related persons, in connection with payment for purchases of export property for use, consumption, or disposition outside the United States, or in connection with the payment for services described in subsections (b)(2) and (3).
(d) Export promotion expenses
For purposes of this subpart, the term "export promotion expenses" means the following expenses paid or incurred in the receipt or production of export trade income—
(1) a reasonable allowance for salaries or other compensation for personal services actually rendered for such purpose,
(2) rentals or other payments for the use of property actually used for such purpose,
(3) a reasonable allowance for the exhaustion, wear and tear, or obsolescence of property actually used for such purpose, and
(4) any other ordinary and necessary expenses of the corporation to the extent reasonably allocable to the receipt or production of export trade income.
No expense incurred within the United States shall be treated as an export promotion expense within the meaning of the preceding sentence, unless at least 90 percent of each category of expenses described in such sentence is incurred outside the United States.
(e) Export property
For purposes of this subpart, the term "export property" means any property or any interest in property manufactured, produced, grown, or extracted in the United States.
(f) Unrelated person
For purposes of this subpart, the term "unrelated person" means a person other than a related person as defined in section 954(d)(3).
(Added
Amendments
1971—Subsec. (a)(3).
Treatment of Certain Former Export Trade Corporations
"(1) a corporation which is not an export trading corporation for its most recent taxable year ending before the date of the enactment of the Tax Reform Act of 1984 [July 18, 1984] but was an export trading corporation for any prior taxable year, and
"(2)(A) such corporation may not qualify as an export trade corporation for any taxable year beginning after December 31, 1984, by reason of section 971(a)(3) of the Internal Revenue Code of 1954 [now 1986], or (B) such corporation makes an election, before the date 6 months after the date of the enactment of this Act [Oct. 22, 1986], not to be treated as an export trade corporation with respect to taxable years beginning after December 31, 1984,
rules similar to the rules of paragraphs (2) and (4) of section 805(b) of the Tax Reform Act of 1984 [set out as a note under
Section Referred to in Other Sections
This section is referred to in
[§972. Repealed. Pub. L. 94–455, title XIX, §1901(a)(120), Oct. 4, 1976, 90 Stat. 1784 ]
Section,
[Subpart H—Repealed]
[§981. Repealed. Pub. L. 94–455, title X, §1012(b)(2), Oct. 4, 1976, 90 Stat. 1614 ]
Section,
Subpart I—Admissibility of Documentation Maintained in Foreign Countries
Amendments
1982—
§982. Admissibility of documentation maintained in foreign countries
(a) General rule
If the taxpayer fails to substantially comply with any formal document request arising out of the examination of the tax treatment of any item (hereinafter in this section referred to as the "examined item") before the 90th day after the date of the mailing of such request on motion by the Secretary, any court having jurisdiction of a civil proceeding in which the tax treatment of the examined item is an issue shall prohibit the introduction by the taxpayer of any foreign-based documentation covered by such request.
(b) Reasonable cause exception
(1) In general
Subsection (a) shall not apply with respect to any documentation if the taxpayer establishes that the failure to provide the documentation as requested by the Secretary is due to reasonable cause.
(2) Foreign nondisclosure law not reasonable cause
For purposes of paragraph (1), the fact that a foreign jurisdiction would impose a civil or criminal penalty on the taxpayer (or any other person) for disclosing the requested documentation is not reasonable cause.
(c) Formal document request
For purposes of this section—
(1) Formal document request
The term "formal document request" means any request (made after the normal request procedures have failed to produce the requested documentation) for the production of foreign-based documentation which is mailed by registered or certified mail to the taxpayer at his last known address and which sets forth—
(A) the time and place for the production of the documentation,
(B) a statement of the reason the documentation previously produced (if any) is not sufficient,
(C) a description of the documentation being sought, and
(D) the consequences to the taxpayer of the failure to produce the documentation described in subparagraph (C).
(2) Proceeding to quash
(A) In general
Notwithstanding any other law or rule of law, any person to whom a formal document request is mailed shall have the right to begin a proceeding to quash such request not later than the 90th day after the day such request was mailed. In any such proceeding, the Secretary may seek to compel compliance with such request.
(B) Jurisdiction
The United States district court for the district in which the person (to whom the formal document request is mailed) resides or is found shall have jurisdiction to hear any proceeding brought under subparagraph (A). An order denying the petition shall be deemed a final order which may be appealed.
(C) Suspension of 90-day period
The running of the 90-day period referred to in subsection (a) shall be suspended during any period during which a proceeding brought under subparagraph (A) is pending.
(d) Definitions and special rules
For purposes of this section—
(1) Foreign-based documentation
The term "foreign-based documentation" means any documentation which is outside the United States and which may be relevant or material to the tax treatment of the examined item.
(2) Documentation
The term "documentation" includes books and records.
(3) Authority to extend 90-day period
The Secretary, and any court having jurisdiction over a proceeding under subsection (c)(2), may extend the 90-day period referred to in subsection (a).
(e) Suspension of statute of limitations
If any person takes any action as provided in subsection (c)(2), the running of any period of limitations under section 6501 (relating to the assessment and collection of tax) or under section 6531 (relating to criminal prosecutions) with respect to such person shall be suspended for the period during which the proceeding under such subsection, and appeals therein, are pending.
(Added
Amendments
1984—Subsec. (d)(3), (4).
Effective Date of 1984 Amendment
Amendment by
Effective Date
Section 337(c) of
Subpart J—Foreign Currency Transactions
Amendments
1988—
§985. Functional currency
(a) In general
Unless otherwise provided in regulations, all determinations under this subtitle shall be made in the taxpayer's functional currency.
(b) Functional currency
(1) In general
For purposes of this subtitle, the term "functional currency" means—
(A) except as provided in subparagraph (B), the dollar, or
(B) in the case of a qualified business unit, the currency of the economic environment in which a significant part of such unit's activities are conducted and which is used by such unit in keeping its books and records.
(2) Functional currency where activities primarily conducted in dollars
The functional currency of any qualified business unit shall be the dollar if activities of such unit are primarily conducted in dollars.
(3) Election
To the extent provided in regulations, the taxpayer may elect to use the dollar as the functional currency for any qualified business unit if—
(A) such unit keeps its books and records in dollars, or
(B) the taxpayer uses a method of accounting that approximates a separate transactions method.
Any such election shall apply to the taxable year for which made and all subsequent taxable years unless revoked with the consent of the Secretary.
(4) Change in functional currency treated as a change in method of accounting
Any change in the functional currency shall be treated as a change in the taxpayer's method of accounting for purposes of section 481 under procedures to be established by the Secretary.
(Added
Effective Date
Section 1261(e) of
"(1)
"(2)
"(A) earnings and profits of the foreign corporation for taxable years beginning after December 31, 1986, and
"(B) foreign taxes paid or accrued by the foreign corporation with respect to such earnings and profits."
§986. Determination of foreign taxes and foreign corporation's earnings and profits
(a) Foreign taxes
(1) In general
For purposes of determining the amount of the foreign tax credit—
(A) any foreign income taxes shall be translated into dollars using the exchange rates as of the time such taxes were paid to the foreign country or possession of the United States, and
(B) any adjustment to the amount of foreign income taxes shall be translated into dollars using—
(i) except as provided in clause (ii), the exchange rate as of the time when such adjustment is paid to the foreign country or possession, or
(ii) in the case of any refund or credit of foreign income taxes, using the exchange rate as of the time of original payment of such foreign income taxes.
(2) Foreign income taxes
For purposes of paragraph (1), "foreign income taxes" means any income, war profits, or excess profits taxes paid to any foreign country or to any possession of the United States.
(b) Earnings and profits and distributions
For purposes of determining the tax under this subtitle—
(1) of any shareholder of any foreign corporation, the earnings and profits of such corporation shall be determined in the corporation's functional currency, and
(2) in the case of any United States person, the earnings and profits determined under paragraph (1) (when distributed, deemed distributed, or otherwise taken into account under this subtitle) shall (if necessary) be translated into dollars using the appropriate exchange rate.
(c) Previously taxed earnings and profits
(1) In general
Foreign currency gain or loss with respect to distributions of previously taxed earnings and profits (as described in section 959 or 1293(c)) attributable to movements in exchange rates between the times of deemed and actual distribution shall be recognized and treated as ordinary income or loss from the same source as the associated income inclusion.
(2) Distributions through tiers
The Secretary shall prescribe regulations with respect to the treatment of distributions of previously taxed earnings and profits through tiers of foreign corporations.
(Added
Amendments
1988—
Effective Date of 1988 Amendment
Amendment by
Effective Date
Section applicable to taxable years beginning after Dec. 31, 1986, with certain exceptions and qualifications, see section 1261(e) of
Section Referred to in Other Sections
This section is referred to in
§987. Branch transactions
In the case of any taxpayer having 1 or more qualified business units with a functional currency other than the dollar, taxable income of such taxpayer shall be determined—
(1) by computing the taxable income or loss separately for each such unit in its functional currency,
(2) by translating the income or loss separately computed under paragraph (1) at the appropriate exchange rate, and
(3) by making proper adjustments (as prescribed by the Secretary) for transfers of property between qualified business units of the taxpayer having different functional currencies, including—
(A) treating post-1986 remittances from each such unit as made on a pro rata basis out of post-1986 accumulated earnings, and
(B) treating gain or loss determined under this paragraph as ordinary income or loss, respectively, and sourcing such gain or loss by reference to the source of the income giving rise to post-1986 accumulated earnings.
(Added
Amendments
1988—Par. (4).
Effective Date of 1988 Amendment
Amendment by
Effective Date
Section applicable to taxable years beginning after Dec. 31, 1986, with certain exceptions and qualifications, see section 1261(e) of
§988. Treatment of certain foreign currency transactions
(a) General rule
Notwithstanding any other provision of this chapter—
(1) Treatment as ordinary income or loss
(A) In general
Except as otherwise provided in this section, any foreign currency gain or loss attributable to a section 988 transaction shall be computed separately and treated as ordinary income or loss (as the case may be).
(B) Special rule for forward contracts, etc.
Except as provided in regulations, a taxpayer may elect to treat any foreign currency gain or loss attributable to a forward contract, a futures contract, or option described in subsection (c)(1)(B)(iii) which is a capital asset in the hands of the taxpayer and which is not a part of a straddle (within the meaning of section 1092(c), without regard to paragraph (4) thereof) as capital gain or loss (as the case may be) if the taxpayer makes such election and identifies such transaction before the close of the day on which such transaction is entered into (or such earlier time as the Secretary may prescribe).
(2) Gain or loss treated as interest for certain purposes
To the extent provided in regulations, any amount treated as ordinary income or loss under paragraph (1) shall be treated as interest income or expense (as the case may be).
(3) Source
(A) In general
Except as otherwise provided in regulations, in the case of any amount treated as ordinary income or loss under paragraph (1) (without regard to paragraph (1)(B)), the source of such amount shall be determined by reference to the residence of the taxpayer or the qualified business unit of the taxpayer on whose books the asset, liability, or item of income or expense is properly reflected.
(B) Residence
For purposes of this subpart—
(i) In general
The residence of any person shall be—
(I) in the case of an individual, the country in which such individual's tax home (as defined in section 911(d)(3)) is located,
(II) in the case of any corporation, partnership, trust, or estate which is a United States person (as defined in section 7701(a)(30)), the United States, and
(III) in the case of any corporation, partnership, trust, or estate which is not a United States person, a country other than the United States.
If an individual does not have a tax home (as so defined), the residence of such individual shall be the United States if such individual is a United States citizen or a resident alien and shall be a country other than the United States if such individual is not a United States citizen or a resident alien.
(ii) Exception
In the case of a qualified business unit of any taxpayer (including an individual), the residence of such unit shall be the country in which the principal place of business of such qualified business unit is located.
(iii) Special rule for partnerships
To the extent provided in regulations, in the case of a partnership, the determination of residence shall be made at the partner level.
(C) Special rule for certain related party loans
Except to the extent provided in regulations, in the case of a loan by a United States person or a related person to a 10-percent owned foreign corporation which is denominated in a currency other than the dollar and bears interest at a rate at least 10 percentage points higher than the Federal mid-term rate (determined under section 1274(d)) at the time such loan is entered into, the following rules shall apply:
(i) For purposes of section 904 only, such loan shall be marked to market on an annual basis.
(ii) Any interest income earned with respect to such loan for the taxable year shall be treated as income from sources within the United States to the extent of any loss attributable to clause (i).
For purposes of this subparagraph, the term "related person" has the meaning given such term by section 954(d)(3), except that such section shall be applied by substituting "United States person" for "controlled foreign corporation" each place such term appears.
(D) 10-percent owned foreign corporation
The term "10-percent owned foreign corporation" means any foreign corporation in which the United States person owns directly or indirectly at least 10 percent of the voting stock.
(b) Foreign currency gain or loss
For purposes of this section—
(1) Foreign currency gain
The term "foreign currency gain" means any gain from a section 988 transaction to the extent such gain does not exceed gain realized by reason of changes in exchange rates on or after the booking date and before the payment date.
(2) Foreign currency loss
The term "foreign currency loss" means any loss from a section 988 transaction to the extent such loss does not exceed the loss realized by reason of changes in exchange rates on or after the booking date and before the payment date.
(3) Special rule for certain contracts, etc.
In the case of any section 988 transaction described in subsection (c)(1)(B)(iii), any gain or loss from such transaction shall be treated as foreign currency gain or loss (as the case may be).
(c) Other definitions
For purposes of this section—
(1) Section 988 transaction
(A) In general
The term "section 988 transaction" means any transaction described in subparagraph (B) if the amount which the taxpayer is entitled to receive (or is required to pay) by reason of such transaction—
(i) is denominated in terms of a nonfunctional currency, or
(ii) is determined by reference to the value of 1 or more nonfunctional currencies.
(B) Description of transactions
For purposes of subparagraph (A), the following transactions are described in this subparagraph:
(i) The acquisition of a debt instrument or becoming the obligor under a debt instrument.
(ii) Accruing (or otherwise taking into account) for purposes of this subtitle any item of expense or gross income or receipts which is to be paid or received after the date on which so accrued or taken into account.
(iii) Entering into or acquiring any forward contract, futures contract, option, or similar financial instrument.
The Secretary may prescribe regulations excluding from the application of clause (ii) any class of items the taking into account of which is not necessary to carry out the purposes of this section by reason of the small amounts or short periods involved, or otherwise.
(C) Special rules for disposition of nonfunctional currency
(i) In general
In the case of any disposition of any nonfunctional currency—
(I) such disposition shall be treated as a section 988 transaction, and
(II) any gain or loss from such transaction shall be treated as foreign currency gain or loss (as the case may be).
(ii) Nonfunctional currency
For purposes of this section, the term "nonfunctional currency" includes coin or currency, and nonfunctional currency denominated demand or time deposits or similar instruments issued by a bank or other financial institution.
(D) Exception for certain instruments marked to market
(i) In general
Clause (iii) of subparagraph (B) shall not apply to any regulated futures contract or nonequity option which would be marked to market under section 1256 if held on the last day of the taxable year.
(ii) Election out
(I) In general
The taxpayer may elect to have clause (i) not apply to such taxpayer. Such an election shall apply to contracts held at any time during the taxable year for which such election is made or any succeeding taxable year unless such election is revoked with the consent of the Secretary.
(II) Time for making election
Except as provided in regulations, an election under subclause (I) for any taxable year shall be made on or before the 1st day of such taxable year (or, if later, on or before the 1st day during such year on which the taxpayer holds a contract described in clause (i)).
(III) Special rule for partnerships, etc.
In the case of a partnership, an election under subclause (I) shall be made by each partner separately. A similar rule shall apply in the case of an S corporation.
(iii) Treatment of certain partnerships
This subparagraph shall not apply to any income or loss of a partnership for any taxable year if such partnership made an election under subparagraph (E)(iii)(V) for such year or any preceding year.
(E) Special rules for certain funds
(i) In general
In the case of a qualified fund, clause (iii) of subparagraph (B) shall not apply to any instrument which would be marked to market under section 1256 if held on the last day of the taxable year (determined after the application of clause (iv)).
(ii) Special rule where electing partnership does not qualify
If any partnership made an election under clause (iii)(V) for any taxable year and such partnership has a net loss for such year or any succeeding year from instruments referred to in clause (i), the rules of clauses (i) and (iv) shall apply to any such loss year whether or not such partnership is a qualified fund for such year.
(iii) Qualified fund defined
For purposes of this subparagraph, the term "qualified fund" means any partnership if—
(I) at all times during the taxable year (and during each preceding taxable year to which an election under subclause (V) applied), such partnership has at least 20 partners and no single partner owns more than 20 percent of the interests in the capital or profits of the partnership,
(II) the principal activity of such partnership for such taxable year (and each such preceding taxable year) consists of buying and selling options, futures, or forwards with respect to commodities,
(III) at least 90 percent of the gross income of the partnership for the taxable year (and for each such preceding taxable year) consisted of income or gains described in subparagraph (A), (B), or (G) of section 7704(d)(1) or gain from the sale or disposition of capital assets held for the production of interest or dividends,
(IV) no more than a de minimis amount of the gross income of the partnership for the taxable year (and each such preceding taxable year) was derived from buying and selling commodities, and
(V) an election under this subclause applies to the taxable year.
An election under subclause (V) for any taxable year shall be made on or before the 1st day of such taxable year (or, if later, on or before the 1st day during such year on which the partnership holds an instrument referred to in clause (i)). Any such election shall apply to the taxable year for which made and all succeeding taxable years unless revoked with the consent of the Secretary.
(iv) Treatment of certain currency contracts
(I) In general
Except as provided in regulations, in the case of a qualified fund, any bank forward contract, any foreign currency futures contract traded on a foreign exchange, or to the extent provided in regulations any similar instrument, which is not otherwise a section 1256 contract shall be treated as a section 1256 contract for purposes of section 1256.
(II) Gains and losses treated as short-term
In the case of any instrument treated as a section 1256 contract under subclause (I), subparagraph (A) of section 1256(a)(3) shall be applied by substituting "100 percent" for "40 percent" (and subparagraph (B) of such section shall not apply).
(v) Special rules for clause (iii)(I)
(I) Certain general partners
The interest of a general partner in the partnership shall not be treated as failing to meet the 20-percent ownership requirements of clause (iii)(I) for any taxable year of the partnership if, for the taxable year of the partner in which such partnership taxable year ends, such partner (and each corporation filing a consolidated return with such partner) had no ordinary income or loss from a section 988 transaction which is foreign currency gain or loss (as the case may be).
(II) Treatment of incentive compensation
For purposes of clause (iii)(I), any income allocable to a general partner as incentive compensation based on profits rather than capital shall not be taken into account in determining such partner's interest in the profits of the partnership.
(III) Treatment of tax-exempt partners
Except as provided in regulations, the interest of a partner in the partnership shall not be treated as failing to meet the 20-percent ownership requirements of clause (iii)(I) if none of the income of such partner from such partnership is subject to tax under this chapter (whether directly or through 1 or more pass-thru entities).
(IV) Look-thru rule
In determining whether the requirements of clause (iii)(I) are met with respect to any partnership, except to the extent provided in regulations, any interest in such partnership held by another partnership shall be treated as held proportionately by the partners in such other partnership.
(vi) Other special rules
For purposes of this subparagraph—
(I) Related persons
Interests in the partnership held by persons related to each other (within the meaning of sections 267(b) and 707(b)) shall be treated as held by 1 person.
(II) Predecessors
References to any partnership shall include a reference to any predecessor thereof.
(III) Inadvertent terminations
Rules similar to the rules of section 7704(e) shall apply.
(IV) Treatment of certain debt instruments
For purposes of clause (iii)(IV), any debt instrument which is a section 988 transaction shall be treated as a commodity.
(2) Booking date
The term "booking date" means—
(A) in the case of a transaction described in paragraph (1)(B)(i), the date of acquisition or on which the taxpayer becomes the obligor, or
(B) in the case of a transaction described in paragraph (1)(B)(ii), the date on which accrued or otherwise taken into account.
(3) Payment date
The term "payment date" means the date on which the payment is made or received.
(4) Debt instrument
The term "debt instrument" means a bond, debenture, note, or certificate or other evidence of indebtedness. To the extent provided in regulations, such term shall include preferred stock.
(5) Special rules where taxpayer takes or makes delivery
If the taxpayer takes or makes delivery in connection with any section 988 transaction described in paragraph (1)(B)(iii), any gain or loss (determined as if the taxpayer sold the contract, option, or instrument on the date on which he took or made delivery for its fair market value on such date) shall be recognized in the same manner as if such contract, option, or instrument were so sold.
(d) Treatment of 988 hedging transactions
(1) In general
To the extent provided in regulations, if any section 988 transaction is part of a 988 hedging transaction, all transactions which are part of such 988 hedging transaction shall be integrated and treated as a single transaction or otherwise treated consistently for purposes of this subtitle. For purposes of the preceding sentence, the determination of whether any transaction is a section 988 transaction shall be determined without regard to whether such transaction would otherwise be marked-to-market under section 475 or 1256 and such term shall not include any transaction with respect to which an election is made under subsection (a)(1)(B). Sections 475, 1092, and 1256 shall not apply to a transaction covered by this subsection.
(2) 988 hedging transaction
For purposes of paragraph (1), the term "988 hedging transaction" means any transaction—
(A) entered into by the taxpayer primarily—
(i) to reduce risk of currency fluctuations with respect to property which is held or to be held by the taxpayer, or
(ii) to reduce risk of currency fluctuations with respect to borrowings made or to be made, or obligations incurred or to be incurred, by the taxpayer, and
(B) identified by the Secretary or the taxpayer as being a 988 hedging transaction.
(e) Application to individuals
This section shall apply to section 988 transactions entered into by an individual only to the extent expenses properly allocable to such transactions meet the requirements of section 162 or 212 (other than that part of section 212 dealing with expenses incurred in connection with taxes).
(Added
Amendments
1993—Subsec. (d)(1).
1989—Subsec. (a).
1988—Subsec. (a)(3)(B)(i).
Subsec. (a)(3)(B)(iii).
Subsec. (b)(3).
Subsec. (c)(1)(B)(iii).
Subsec. (c)(1)(C)(i)(II).
Subsec. (c)(1)(D), (E).
Subsec. (c)(2)(C).
Subsec. (c)(3).
"(A) in the case of a transaction described in paragraph (1)(B)(i) or (ii), the date on which payment is made or received, or
"(B) in the case of a transaction described in paragraph (1)(B)(iii), the date payment is made or received or the date the taxpayer's rights with respect to the position are terminated."
Subsec. (c)(5).
Subsec. (d)(1).
Effective Date of 1993 Amendment
Amendment by
Effective Date of 1989 Amendment
Amendment by
Effective Date of 1988 Amendment
Section 1012(v)(2)(B) of
Amendment by section 1012(v)(3), (4), (6)–(8) of
Section 6130(d) of
"(1)
"(2)
"(3)
"(A) The requirements of subclause (IV) of section 988(c)(1)(E)(iii) of the 1986 Code (as added by subsection (b)) shall not apply to periods before the date of the enactment of this Act.
"(B) In the case of any partner in an existing partnership, the 20-percent ownership requirements of subclause (I) of such section 988(c)(1)(E)(iii) shall be treated as met during any period during which such partner does not own a percentage interest in the capital or profits of such partnership greater than 331/3 percent (or, if lower, the lowest such percentage interest of such partner during any prior period after October 21, 1988, during which such partnership is in existence). For purposes of the preceding sentence, the term 'existing partnership' means any partnership if—
"(i) such partnership was in existence on October 21, 1988, and principally engaged on such date in buying and selling options, futures, or forwards with respect to commodities, or
"(ii) a registration statement was filed with respect to such partnership with the Securities and Exchange Commission on or before such date and such registration statement indicated that the principal activity of such partnership will consist of buying and selling instruments referred to in clause (i)."
Effective Date
Section applicable to taxable years beginning after Dec. 31, 1986, with certain exceptions and qualifications, see section 1261(e) of
Section Referred to in Other Sections
This section is referred to in
§989. Other definitions and special rules
(a) Qualified business unit
For purposes of this subpart, the term "qualified business unit" means any separate and clearly identified unit of a trade or business of a taxpayer which maintains separate books and records.
(b) Appropriate exchange rate
Except as provided in regulations, for purposes of this subpart, the term "appropriate exchange rate" means—
(1) in the case of an actual distribution of earnings and profits, the spot rate on the date such distribution is included in income,
(2) in the case of an actual or deemed sale or exchange of stock in a foreign corporation treated as a dividend under section 1248, the spot rate on the date the deemed dividend is included in income,
(3) in the case of any amounts included in income under section 951(a)(1)(A), 551(a), or 1293(a), the weighted average exchange rate for the taxable year of the foreign corporation, or
(4) in the case of any other qualified business unit of a taxpayer, the weighted average exchange rate for the taxable year of such qualified business unit.
For purposes of the preceding sentence, any amount included in income under subparagraph (B) or (C) of section 951(a)(1) shall be treated as an actual distribution made on the last day of the taxable year for which such amount was so included.
(c) Regulations
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subpart, including regulations—
(1) setting forth procedures to be followed by taxpayers with qualified business units using a net worth method of accounting before the enactment of this subpart,
(2) limiting the recognition of foreign currency loss on certain remittances from qualified business units,
(3) providing for the recharacterization of interest and principal payments with respect to obligations denominated in certain hyperinflationary currencies,
(4) providing for alternative adjustments to the application of section 905(c), and
(5) providing for the appropriate treatment of related party transactions (including transactions between qualified business units of the same taxpayer).
(Added
References in Text
The enactment of this subpart, referred to in subsec. (c)(1), probably means the date of enactment of
Amendments
1993—Subsec. (b).
1988—Subsec. (b).
Effective Date of 1993 Amendment
Amendment by
Effective Date of 1988 Amendment
Amendment by
Effective Date
Section applicable to taxable years beginning after Dec. 31, 1986, with certain exceptions and qualifications, see section 1261(e) of