Subchapter N—Tax Based on Income From Sources Within or Without the United States
Editorial Notes
Amendments
1988—
1976—
PART I—SOURCE RULES AND OTHER GENERAL RULES RELATING TO FOREIGN INCOME
Editorial Notes
Amendments
1988—
1986—
§861. Income from sources within the United States
(a) Gross income from sources within United States
The following items of gross income shall be treated as income from sources within the United States:
(1) Interest
Interest from the United States or the District of Columbia, and interest on bonds, notes, or other interest-bearing obligations of noncorporate residents or domestic corporations not including—
(A) interest—
(i) on deposits with a foreign branch of a domestic corporation or a domestic partnership if such branch is engaged in the commercial banking business, and
(ii) on amounts satisfying the requirements of subparagraph (B) of section 871(i)(3) which are paid by a foreign branch of a domestic corporation or a domestic partnership, and
(B) in the case of a foreign partnership, which is predominantly engaged in the active conduct of a trade or business outside the United States, any interest not paid by a trade or business engaged in by the partnership in the United States and not allocable to income which is effectively connected (or treated as effectively connected) with the conduct of a trade or business in the United States.
(2) Dividends
The amount received as dividends—
(A) from a domestic corporation, or
(B) from a foreign corporation unless less than 25 percent of the gross income from all sources of such foreign corporation for the 3-year period ending with the close of its taxable year preceding the declaration of such dividends (or for such part of such period as the corporation has been in existence) was effectively connected (or treated as effectively connected other than income described in section 884(d)(2)) with the conduct of a trade or business within the United States; but only in an amount which bears the same ratio to such dividends as the gross income of the corporation for such period which was effectively connected (or treated as effectively connected other than income described in section 884(d)(2)) with the conduct of a trade or business within the United States bears to its gross income from all sources; but dividends (other than dividends for which a deduction is allowable under section 245(b)) from a foreign corporation shall, for purposes of subpart A of part III (relating to foreign tax credit), be treated as income from sources without the United States to the extent (and only to the extent) exceeding the amount which is 100/50th of the amount of the deduction allowable under section 245 in respect of such dividends, or
(C) from a foreign corporation to the extent that such amount is required by section 243(e) (relating to certain dividends from foreign corporations) to be treated as dividends from a domestic corporation which is subject to taxation under this chapter, and to such extent subparagraph (B) shall not apply to such amount, or
(D) from a DISC or former DISC (as defined in section 992(a)) except to the extent attributable (as determined under regulations prescribed by the Secretary) to qualified export receipts described in section 993(a)(1) (other than interest and gains described in section 995(b)(1)).
In the case of any dividend from a 20-percent owned corporation (as defined in section 243(c)(2)), subparagraph (B) shall be applied by substituting "100/65th" for "100/50th".
(3) Personal services
Compensation for labor or personal services performed in the United States; except that compensation for labor or services performed in the United States shall not be deemed to be income from sources within the United States if—
(A) the labor or services are performed by a nonresident alien individual temporarily present in the United States for a period or periods not exceeding a total of 90 days during the taxable year,
(B) such compensation does not exceed $3,000 in the aggregate, and
(C) the compensation is for labor or services performed as an employee of or under a contract with—
(i) a nonresident alien, foreign partnership, or foreign corporation, not engaged in trade or business within the United States, or
(ii) an individual who is a citizen or resident of the United States, a domestic partnership, or a domestic corporation, if such labor or services are performed for an office or place of business maintained in a foreign country or in a possession of the United States by such individual, partnership, or corporation.
In addition, compensation for labor or services performed in the United States shall not be deemed to be income from sources within the United States if the labor or services are performed by a nonresident alien individual in connection with the individual's temporary presence in the United States as a regular member of the crew of a foreign vessel engaged in transportation between the United States and a foreign country or a possession of the United States.
(4) Rentals and royalties
Rentals or royalties from property located in the United States or from any interest in such property, including rentals or royalties for the use of or for the privilege of using in the United States patents, copyrights, secret processes and formulas, good will, trade-marks, trade brands, franchises, and other like property.
(5) Disposition of United States real property interest
Gains, profits, and income from the disposition of a United States real property interest (as defined in section 897(c)).
(6) Sale or exchange of inventory property
Gains, profits, and income derived from the purchase of inventory property (within the meaning of section 865(i)(1)) without the United States (other than within a possession of the United States) and its sale or exchange within the United States.
(7) Amounts received as underwriting income (as defined in section 832(b)(3)) derived from the issuing (or reinsuring) of any insurance or annuity contract—
(A) in connection with property in, liability arising out of an activity in, or in connection with the lives or health of residents of, the United States, or
(B) in connection with risks not described in subparagraph (A) as a result of any arrangement whereby another corporation receives a substantially equal amount of premiums or other consideration in respect to issuing (or reinsuring) any insurance or annuity contract in connection with property in, liability arising out of activity in, or in connection with the lives or health of residents of, the United States.
(8) Social security benefits
Any social security benefit (as defined in section 86(d)).
(9) Guarantees
Amounts received, directly or indirectly, from—
(A) a noncorporate resident or domestic corporation for the provision of a guarantee of any indebtedness of such resident or corporation, or
(B) any foreign person for the provision of a guarantee of any indebtedness of such person, if such amount is connected with income which is effectively connected (or treated as effectively connected) with the conduct of a trade or business in the United States.
(b) Taxable income from sources within United States
From the items of gross income specified in subsection (a) as being income from sources within the United States there shall be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any expenses, losses, or other deductions which cannot definitely be allocated to some item or class of gross income. The remainder, if any, shall be included in full as taxable income from sources within the United States. In the case of an individual who does not itemize deductions, an amount equal to the standard deduction shall be considered a deduction which cannot definitely be allocated to some item or class of gross income.
(c) Special rule for application of subsection (a)(2)(B)
For purposes of subsection (a)(2)(B), if the foreign corporation has no gross income from any source for the 3-year period (or part thereof) specified, the requirements of such subsection shall be applied with respect to the taxable year of such corporation in which the payment of the dividend is made.
(d) Income from certain railroad rolling stock treated as income from sources within the United States
(1) General rule
For purposes of subsection (a) and section 862(a), if—
(A) a taxpayer leases railroad rolling stock which is section 1245 property (as defined in section 1245(a)(3)) to a domestic common carrier by railroad or a corporation which is controlled, directly or indirectly, by one or more such common carriers, and
(B) the use under such lease is expected to be use within the United States,
all amounts includible in gross income by the taxpayer with respect to such railroad rolling stock (including gain from sale or other disposition of such railroad rolling stock) shall be treated as income from sources within the United States. The requirements of subparagraph (B) of the preceding sentence shall be treated as satisfied if the only expected use outside the United States is use by a person (whether or not a United States person) in Canada or Mexico on a temporary basis which is not expected to exceed a total of 90 days in any taxable year.
(2) Paragraph (1) not to apply where lessor is a member of controlled group which includes a railroad
Paragraph (1) shall not apply to a lease between two members of the same controlled group of corporations (as defined in section 1563) if any member of such group is a domestic common carrier by railroad or a switching or terminal company all of whose stock is owned by one or more domestic common carriers by railroad.
(3) Denial of foreign tax credit
No credit shall be allowed under section 901 for any payments to foreign countries with respect to any amount received by the taxpayer with respect to railroad rolling stock which is subject to paragraph (1).
(e) Cross reference
For treatment of interest paid by the branch of a foreign corporation, see section 884(f).
(Aug. 16, 1954, ch. 736,
Editorial Notes
Amendments
2018—Subsec. (a)(2)(A).
2017—Subsec. (a)(2).
Subsec. (a)(2)(B).
2010—Subsec. (a)(1).
Subsec. (a)(9).
Subsecs. (c) to (f).
2004—Subsec. (a)(1)(C).
2001—Subsec. (a)(3).
1997—Subsec. (a)(3).
1996—Subsec. (e)(1)(A).
1990—Subsec. (a)(1)(A), (B).
"(C) interest on a debt obligation which was part of an issue with respect to which an election has been made under subsection (c) of section 4912 (as in effect before July 1, 1974) and which, when issued (or treated as issued under subsection (c)(2) of such section), had a maturity not exceeding 15 years and, when issued, was purchased by one or more underwriters with a view to distribution through resale, but only with respect to interest attributable to periods after the date of such election, and
"(D) interest on a debt obligation which was part of an issue which—
"(i) was part of an issue outstanding on April 1, 1971,
"(ii) was guaranteed by a United States person,
"(iii) was treated under
"(iv) as of June 30, 1974, had a maturity of not more than 15 years, and
"(v) when issued, was purchased by one or more underwriters for the purpose of distribution through resale."
Subsec. (e)(1)(A).
Subsec. (e)(2).
1989—Subsec. (a)(6).
Subsec. (e)(1).
1988—Subsec. (a)(2)(B).
Subsec. (a)(2)(C).
Subsec. (a)(6).
Subsec. (a)(7).
Subsec. (c)(1)(B).
Subsec. (c)(2)(B)(ii).
Subsec. (f).
1987—Subsec. (a)(2).
Subsec. (a)(2)(B).
1986—Subsec. (a)(1).
Subsec. (a)(1)(A).
Subsec. (a)(1)(B).
Subsec. (a)(1)(C).
Subsec. (a)(1)(D).
Subsec. (a)(1)(E).
Subsec. (a)(1)(F).
Subsec. (a)(1)(G).
Subsec. (a)(1)(H).
Subsec. (a)(2)(A).
Subsec. (a)(2)(B).
Subsec. (a)(6).
Subsec. (b).
Subsec. (c).
Subsec. (d).
Subsecs. (e), (f).
1983—Subsec. (a)(8).
1980—Subsec. (a)(5).
Subsec. (e).
1978—Subsec. (a)(1)(F).
Subsec. (f).
1977—Subsec. (b).
1976—Subsec. (a)(1).
Subsec. (a)(2)(A).
Subsec. (a)(2)(D).
Subsec. (a)(5), (6).
Subsec. (a)(7).
Subsec. (c)(3).
Subsec. (e)(1).
Subsecs. (e)(2), (3).
1975—Subsec. (a)(1)(H).
Subsec. (c)(3).
1971—Subsec. (a)(1)(G).
Subsec. (a)(2)(D).
Subsec. (e).
1969—Subsec. (a)(1)(C), (D).
Subsec. (c)(3).
1966—Subsec. (a)(1)(A).
Subsec. (a)(1)(B).
Subsec. (a)(1)(C) to (F).
Subsec. (a)(2)(B).
Subsec. (a)(3)(C)(ii).
Subsecs. (c), (d).
1962—Subsec. (a)(2)(B).
1960—Subsec. (a)(2)(C).
Statutory Notes and Related Subsidiaries
Effective Date of 2017 Amendment
Amendment by
Effective Date of 2010 Amendment
"(1)
"(2)
"(A)
"(B)
"(C)
Effective Date of 2004 Amendment
Effective Date of 2001 Amendment
Effective Date of 1997 Amendment
Amendment by
Effective Date of 1996 Amendment
Amendment by
Effective Date of 1990 Amendment
Amendment by section 11813(b)(17) of
Effective Date of 1989 Amendment
Amendment by section 7811(i)(2) of
Effective Date of 1988 Amendment
Amendment by
Effective Date of 1987 Amendment
Amendment by
Effective Date of 1986 Amendment
Amendment by section 104(b)(11) of
Amendment by section 1211(b)(1)(B) of
Amendment by section 1212(d) of
"(1)
"(2)
"(A)
"(B)
"(3)
"(A)
"(B)
"(4)
"(A)
"(B)
"(i) was incorporated in Delaware in February, 1979,
"(ii) is headquartered in Garden City, New York, and
"(iii) the parent corporation of which is a resident of Sweden."
[
Amendment by section 1241(b) of
Effective Date of 1983 Amendment
Amendment by
Effective Date of 1980 Amendment
Amendment by
Effective Date of 1978 Amendment
"(1)
"(2)
"(A)
"(B)
Effective Date of 1977 Amendment
Amendment by
Effective Date of 1976 Amendment
For effective date of amendment by section 1051(h)(3) of
Amendment by section 1901(b)(26)(A), (B), (c)(7) of
Amendment by section 1904(b)(10)(B) of
Effective Date of 1975 Amendment
Effective Date of 1971 Amendments
Amendment by section 503 of
Effective Date of 1969 Amendment
Effective Date of 1966 Amendment
"(1) The amendments made by subsections (a), (c), and (d) [amending this section and
"(2) The amendments made by subsection (b) [amending this section] shall apply with respect to amounts received after December 31, 1966."
Effective Date of 1962 Amendment
Amendment by
Effective Date of 1960 Amendment
Amendment by
Short Title of 1971 Amendment
Short Title of 1966 Amendment
Savings Provisions
For provisions that nothing in amendment by
For provisions that nothing in amendment by
Dividends Received or Accrued During 1987
Subsec. (a)(2)(B) of this section to be applied by substituting "100/80ths" for the fraction specified therein with regard to dividends received or accrued during 1987, see section 1006(b)(1)(B) of
Applicability of Certain Amendments by Pub. L. 99–514 in Relation to Treaty Obligations of United States
"(2)
"(A) The amendments made by section 1201 of the Reform Act [amending
"(B) The amendments made by title VII of the Reform Act [enacting
"(3)
"(A) The amendments made by section 1211 of the Reform Act [enacting
"(i) such amendments apply in the case of an individual treated as a resident of a foreign country under a treaty obligation of the United States as so in effect, or
"(ii) such amendments relate to income of a nonresident from the sale or exchange of inventory property which would otherwise be sourced under section 865(e)(2) of the 1986 Code.
"(B) The amendments made by section 1212(a) of the Reform Act [amending
"(C) The amendments made by subsections (b) and (c) of section 1212 of the Reform Act [enacting
"(D) The amendments made by section 1214 of the Reform Act [amending this section and
"(E) The amendment made by section 1241(a) of the Reform Act [enacting
"(F) The amendment made by section 1241(b)(2)(A) of the Reform Act [amending this section].
"(G) The amendment made by section 1241(a) of the Reform Act [enacting
"(H) The amendments made by section 1242 of the Reform Act [amending
"(I) The amendment made by section 1247(a) of the Reform Act [amending
"(J) The amendments made by section 123 of the Reform Act [amending
"(4)
Qualified Research and Experimental Expenditures; Allocation and Apportionment; Definitions; Special Rules; Effective Dates
"(a)
"(1) Any qualified research and experimental expenditures expended solely to meet legal requirements imposed by a political entity with respect to the improvement or marketing of specific products or processes for purposes not reasonably expected to generate gross income (beyond de minimis amounts) outside the jurisdiction of the political entity shall be allocated only to gross income from sources within such jurisdiction.
"(2) In the case of any qualified research and experimental expenditures (not allocated under paragraph (1)) to the extent—
"(A) that such expenditures are attributable to activities conducted in the United States, 64 percent of such expenditures shall be allocated and apportioned to income from sources within the United States and deducted from such income in determining the amount of taxable income from sources within the United States, and
"(B) that such expenditures are attributable to activities conducted outside the United States, 64 percent of such expenditures shall be allocated and apportioned to income from sources outside the United States and deducted from such income in determining the amount of taxable income from sources outside the United States.
"(3) The remaining portion of qualified research and experimental expenditures (not allocated under paragraphs (1) and (2)) shall be apportioned, at the annual election of the taxpayer, on the basis of gross sales or gross income, except that, if the taxpayer elects to apportion on the basis of gross income, the amount apportioned to income from sources outside the United States shall be at least 30 percent of the amount which would be so apportioned on the basis of gross sales.
"(b)
"(c)
"(1)
"(A) if incurred by a United States person, shall be allocated and apportioned under this section in the same manner as if they were attributable to activities conducted in the United States, and
"(B) if incurred by a person other than a United States person, shall be allocated and apportioned under this section in the same manner as if they were attributable to activities conducted outside the United States.
"(2)
"(A) in space,
"(B) on or under water not within the jurisdiction (as recognized by the United States) of a foreign country, possession of the United States, or the United States, or
"(C) in Antarctica.
"(d)
"(1) Except as provided in paragraph (2), the allocation and apportionment required by subsection (a) shall be determined as if all members of the affiliated group (as defined in subsection (e)(5) of section 864 of the 1986 Code) were a single corporation.
"(2) For purposes of the allocation and apportionment required by subsection (a)—
"(A) sales and gross income from products produced in whole or in part in a possession by an electing corporation (within the meaning of [former] section 936(h)(5)(E) of the 1986 Code); and
"(B) dividends from an electing corporation,
shall not be taken into account, except that this paragraph shall not apply to sales of (and gross income and dividends attributable to sales of) products with respect to which an election under [former] section 936(h)(5)(F) of the 1986 Code is not in effect.
"(3) The qualified research and experimental expenditures taken into account for purposes of subsection (a) shall be adjusted to reflect the amount of such expenditures included in computing the cost-sharing amount (determined under [former] section 936(h)(5)(C)(i)(I) of the 1986 Code).
"(4) The Secretary of the Treasury or his delegate may prescribe such regulations as may be necessary to carry out the purposes of this subsection, including regulations providing for the source of gross income and the allocation and apportionment of deductions to take into account the adjustments required by paragraph (3).
"(5) Paragraph (6) of section 864(e) of the 1986 Code shall not apply to qualified research and experimental expenditures.
"(e)
"(1)
"(2)
"(A) the lesser of 4 months or the number of months in the taxable year, bears to
"(B) the number of months in the taxable year."
1-Year Modification in Regulations Providing for Allocation of Research and Experimental Expenditures
"(a)
"(1) 50 percent of all amounts allowable as a deduction for qualified research and experimental expenditures shall be apportioned to income from sources within the United States and deducted from such income in determining the amount of taxable income from sources within the United States, and
"(2) the remaining portion of such amounts shall be apportioned on the basis of gross sales or gross income.
The preceding sentence shall not apply to any expenditures described in section 1.861–8(e)(3)(i)(B) of the Income Tax Regulations.
"(b)
"(1)
"(A) which are research and experimental expenditures within the meaning of section 174 of such Code, and
"(B) which are attributable to activities conducted in the United States.
"(2)
"(c)
Allocation Under Section 861 of Research and Experimental Expenditures
"(a)
"(b)
"(1)
"(A) which are research and experimental expenditures within the meaning of section 174 of such Code, and
"(B) which are attributable to activities conducted in the United States.
"(2)
"(c)
"(1)
"(2)
Conformity of Amendments Made by Foreign Investors Tax Act of 1966 With Treaty Obligations of the United States
§862. Income from sources without the United States
(a) Gross income from sources without United States
The following items of gross income shall be treated as income from sources without the United States:
(1) interest other than that derived from sources within the United States as provided in section 861(a)(1);
(2) dividends other than those derived from sources within the United States as provided in section 861(a)(2);
(3) compensation for labor or personal services performed without the United States;
(4) rentals or royalties from property located without the United States or from any interest in such property, including rentals or royalties for the use of or for the privilege of using without the United States patents, copyrights, secret processes and formulas, good will, trade-marks, trade brands, franchises, and other like properties;
(5) gains, profits, and income from the sale or exchange of real property located without the United States;
(6) gains, profits, and income derived from the purchase of inventory property (within the meaning of section 865(i)(1)) within the United States and its sale or exchange without the United States;
(7) underwriting income other than that derived from sources within the United States as provided in section 861(a)(7);
(8) gains, profits, and income from the disposition of a United States real property interest (as defined in section 897(c)) when the real property is located in the Virgin Islands; and
(9) amounts received, directly or indirectly, from a foreign person for the provision of a guarantee of indebtedness of such person other than amounts which are derived from sources within the United States as provided in section 861(a)(9).
(b) Taxable income from sources without United States
From the items of gross income specified in subsection (a) there shall be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto, and a ratable part of any expenses, losses, or other deductions which cannot definitely be allocated to some item or class of gross income. The remainder, if any, shall be treated in full as taxable income from sources without the United States. In the case of an individual who does not itemize deductions, an amount equal to the standard deduction shall be considered a deduction which cannot definitely be allocated to some item or class of gross income.
(Aug. 16, 1954, ch. 736,
Editorial Notes
Amendments
2010—Subsec. (a)(9).
1989—Subsec. (a)(6).
1988—Subsec. (c).
"(c)
1986—Subsec. (a)(6).
Subsec. (b).
1981—Subsec. (a)(8).
1977—Subsec. (b).
1976—Subsec. (a)(5), (6).
Subsec. (a)(7).
1971—Subsec. (c).
Statutory Notes and Related Subsidiaries
Effective Date of 2010 Amendment
Amendment by
Effective Date of 1989 Amendment
Amendment by
Effective Date of 1988 Amendment
Amendment by
Effective Date of 1986 Amendment
Amendment by section 104(b)(12) of
Amendment by section 1211(b)(1)(C) of
Effective Date of 1981 Amendment
Amendment by
Effective Date of 1977 Amendment
Amendment by
Effective Date of 1976 Amendment
Amendment by section 1036(b) of
Amendment by section 1901(b)(26)(C) of
Effective Date of 1971 Amendment
Amendment by
Applicability of Certain Amendments by Pub. L. 99–514 in Relation to Treaty Obligations of United States
For nonapplication of amendment by section 1211(b)(1)(C) of
Qualified Research and Experimental Expenditures; Allocation and Apportionment; Definitions; Special Rules; Effective Dates
For allocation and apportionment of qualified research and experimental expenditures for purposes of
1-Year Modification in Regulations Providing for Allocation of Research and Experimental Expenditures
For rule governing allocation under subsec. (b) of this section of amounts allowable as a deduction for qualified research and experimental expenditures during taxable years beginning after Aug. 1, 1986, and on or before Aug. 1, 1987, see section 1216 of
Allocation Under Section 861 of Research and Experimental Expenditures
For purposes of subsec. (b) of this section, all amounts allowable as a deduction for qualified research and experimental expenditures are to be allocated to income from sources within the United States and deducted from such income in determining the amount of taxable income from sources within the United States for taxable years beginning after Aug. 13, 1983, and on or before Aug. 1, 1986, see section 126 of
§863. Special rules for determining source
(a) Allocation under regulations
Items of gross income, expenses, losses, and deductions, other than those specified in sections 861(a) and 862(a), shall be allocated or apportioned to sources within or without the United States, under regulations prescribed by the Secretary. Where items of gross income are separately allocated to sources within the United States, there shall be deducted (for the purpose of computing the taxable income therefrom) the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of other expenses, losses, or other deductions which cannot definitely be allocated to some item or class of gross income. The remainder, if any, shall be included in full as taxable income from sources within the United States.
(b) Income partly from within and partly from without the United States
In the case of gross income derived from sources partly within and partly without the United States, the taxable income may first be computed by deducting the expenses, losses, or other deductions apportioned or allocated thereto and a ratable part of any expenses, losses, or other deductions which cannot definitely be allocated to some item or class of gross income; and the portion of such taxable income attributable to sources within the United States may be determined by processes or formulas of general apportionment prescribed by the Secretary. Gains, profits, and income—
(1) from services rendered partly within and partly without the United States,
(2) from the sale or exchange of inventory property (within the meaning of section 865(i)(1)) produced (in whole or in part) by the taxpayer within and sold or exchanged without the United States, or produced (in whole or in part) by the taxpayer without and sold or exchanged within the United States, or
(3) derived from the purchase of inventory property (within the meaning of section 865(i)(1)) within a possession of the United States and its sale or exchange within the United States,
shall be treated as derived partly from sources within and partly from sources without the United States. Gains, profits, and income from the sale or exchange of inventory property described in paragraph (2) shall be allocated and apportioned between sources within and without the United States solely on the basis of the production activities with respect to the property.
(c) Source rule for certain transportation income
(1) Transportation beginning and ending in the United States
All transportation income attributable to transportation which begins and ends in the United States shall be treated as derived from sources within the United States.
(2) Other transportation having United States connection
(A) In general
50 percent of all transportation income attributable to transportation which—
(i) is not described in paragraph (1), and
(ii) begins or ends in the United States,
shall be treated as from sources in the United States.
(B) Special rule for personal service income
Subparagraph (A) shall not apply to any transportation income which is income derived from personal services performed by the taxpayer, unless such income is attributable to transportation which—
(i) begins in the United States and ends in a possession of the United States, or
(ii) begins in a possession of the United States and ends in the United States.
In the case of transportation income derived from, or in connection with, a vessel, this subparagraph shall only apply if the taxpayer is a citizen or resident alien.
(3) Transportation income
For purposes of this subsection, the term "transportation income" means any income derived from, or in connection with—
(A) the use (or hiring or leasing for use) of a vessel or aircraft, or
(B) the performance of services directly related to the use of a vessel or aircraft.
For purposes of the preceding sentence, the term "vessel or aircraft" includes any container used in connection with a vessel or aircraft.
(d) Source rules for space and certain ocean activities
(1) In general
Except as provided in regulations, any income derived from a space or ocean activity—
(A) if derived by a United States person, shall be sourced in the United States, and
(B) if derived by a person other than a United States person, shall be sourced outside the United States.
(2) Space or ocean activity
For purposes of paragraph (1)—
(A) In general
The term "space or ocean activity" means—
(i) any activity conducted in space, and
(ii) any activity conducted on or under water not within the jurisdiction (as recognized by the United States) of a foreign country, possession of the United States, or the United States.
Such term includes any activity conducted in Antarctica.
(B) Exception for certain activities
The term "space or ocean activity" shall not include—
(i) any activity giving rise to transportation income (as defined in section 863(c)),
(ii) any activity giving rise to international communications income (as defined in subsection (e)(2)), and
(iii) any activity with respect to mines, oil and gas wells, or other natural deposits to the extent within the United States or any foreign country or possession of the United States (as defined in section 638).
For purposes of applying section 638, the jurisdiction of any foreign country shall not include any jurisdiction not recognized by the United States.
(e) International communications income
(1) Source rules
(A) United States persons
In the case of any United States person, 50 percent of any international communications income shall be sourced in the United States and 50 percent of such income shall be sourced outside the United States.
(B) Foreign persons
(i) In general
Except as provided in regulations or clause (ii), in the case of any person other than a United States person, any international communications income shall be sourced outside the United States.
(ii) Special rule for income attributable to office or fixed place of business in the United States
In the case of any person (other than a United States person) who maintains an office or other fixed place of business in the United States, any international communications income attributable to such office or other fixed place of business shall be sourced in the United States.
(2) Definition
For purposes of this section, the term "international communications income" includes all income derived from the transmission of communications or data from the United States to any foreign country (or possession of the United States) or from any foreign country (or possession of the United States) to the United States.
(Aug. 16, 1954, ch. 736,
Editorial Notes
Amendments
2017—Subsec. (b).
1997—Subsec. (c)(2)(B).
1989—Subsec. (b)(2), (3).
1988—
Subsec. (e)(2).
1986—Subsec. (b)(1).
Subsec. (b)(2), (3).
Subsec. (c)(2).
Subsecs. (d), (e).
1984—Subsec. (c).
1976—Subsec. (a).
Subsec. (b).
Statutory Notes and Related Subsidiaries
Effective Date of 2017 Amendment
Effective Date of 1997 Amendment
Amendment by
Effective Date of 1989 Amendment
Amendment by
Effective Date of 1988 Amendment
Amendment by
Effective Date of 1986 Amendment
Amendment by section 1211(b)(1)(A) of
"(1)
"(2)
"(3)
"(A)
"(B)
| "March 5, 1986 | $176,844,000 |
| February 5, 1986 | 64,567,000 |
| April 22, 1986 | 64,598,000 |
| May 22, 1986 | 175,300,000." |
Effective Date of 1984 Amendment
Effective Date of 1976 Amendment
Amendment by section 1901(b)(26)(C), (D) of
Applicability of Certain Amendments by Pub. L. 99–514 in Relation to Treaty Obligations of United States
For nonapplication of amendments by sections 1211(b)(1)(A) and 1212(a) of
Qualified Research and Experimental Expenditures; Allocation and Appointment; Definitions; Special Rules; Effective Dates
For allocation and apportionment of qualified research and experimental expenditures for purposes of
1-Year Modification in Regulations Providing for Allocation of Research and Experimental Expenditures
For rule governing allocation under subsec. (b) of this section of amounts allowable as a deduction for qualified research and experimental expenditures during taxable years beginning after Aug. 1, 1986, and on or before Aug. 1, 1987, see section 1216 of
Allocation Under Section 861 of Research and Experimental Expenditures
For purposes of subsec. (b) of this section, all amounts allowable as a deduction for qualified research and experimental expenditures are to be allocated to income from sources within the United States and deducted from such income in determining the amount of taxable income from sources within the United States for taxable years beginning after Aug. 13, 1983, and on or before Aug. 1, 1986, see section 126 of
§864. Definitions and special rules
(a) Produced
For purposes of this part, the term "produced" includes created, fabricated, manufactured, extracted, processed, cured, or aged.
(b) Trade or business within the United States
For purposes of this part, part II, and
(1) Performance of personal services for foreign employer
The performance of personal services—
(A) for a nonresident alien individual, foreign partnership, or foreign corporation, not engaged in trade or business within the United States, or
(B) for an office or place of business maintained in a foreign country or in a possession of the United States by an individual who is a citizen or resident of the United States or by a domestic partnership or a domestic corporation,
by a nonresident alien individual temporarily present in the United States for a period or periods not exceeding a total of 90 days during the taxable year and whose compensation for such services does not exceed in the aggregate $3,000.
(2) Trading in securities or commodities
(A) Stocks and securities
(i) In general
Trading in stocks or securities through a resident broker, commission agent, custodian, or other independent agent.
(ii) Trading for taxpayer's own account
Trading in stocks or securities for the taxpayer's own account, whether by the taxpayer or his employees or through a resident broker, commission agent, custodian, or other agent, and whether or not any such employee or agent has discretionary authority to make decisions in effecting the transactions. This clause shall not apply in the case of a dealer in stocks or securities.
(B) Commodities
(i) In general
Trading in commodities through a resident broker, commission agent, custodian, or other independent agent.
(ii) Trading for taxpayer's own account
Trading in commodities for the taxpayer's own account, whether by the taxpayer or his employees or through a resident broker, commission agent, custodian, or other agent, and whether or not any such employee or agent has discretionary authority to make decisions in effecting the transactions. This clause shall not apply in the case of a dealer in commodities.
(iii) Limitation
Clauses (i) and (ii) shall apply only if the commodities are of a kind customarily dealt in on an organized commodity exchange and if the transaction is of a kind customarily consummated at such place.
(C) Limitation
Subparagraphs (A)(i) and (B)(i) shall apply only if, at no time during the taxable year, the taxpayer has an office or other fixed place of business in the United States through which or by the direction of which the transactions in stocks or securities, or in commodities, as the case may be, are effected.
(c) Effectively connected income, etc.
(1) General rule
For purposes of this title—
(A) In the case of a nonresident alien individual or a foreign corporation engaged in trade or business within the United States during the taxable year, the rules set forth in paragraphs (2), (3), (4), (6), (7), and (8) shall apply in determining the income, gain, or loss which shall be treated as effectively connected with the conduct of a trade or business within the United States.
(B) Except as provided in paragraph (6) 1 (7), or (8) or in section 871(d) or sections 882(d) and (e), in the case of a nonresident alien individual or a foreign corporation not engaged in trade or business within the United States during the taxable year, no income, gain, or loss shall be treated as effectively connected with the conduct of a trade or business within the United States.
(2) Periodical, etc., income from sources within United States—factors
In determining whether income from sources within the United States of the types described in section 871(a)(1), section 871(h), section 881(a), or section 881(c), or whether gain or loss from sources within the United States from the sale or exchange of capital assets, is effectively connected with the conduct of a trade or business within the United States, the factors taken into account shall include whether—
(A) the income, gain, or loss is derived from assets used in or held for use in the conduct of such trade or business, or
(B) the activities of such trade or business were a material factor in the realization of the income, gain, or loss.
In determining whether an asset is used in or held for use in the conduct of such trade or business or whether the activities of such trade or business were a material factor in realizing an item of income, gain, or loss, due regard shall be given to whether or not such asset or such income, gain, or loss was accounted for through such trade or business.
(3) Other income from sources within United States
All income, gain, or loss from sources within the United States (other than income, gain, or loss to which paragraph (2) applies) shall be treated as effectively connected with the conduct of a trade or business within the United States.
(4) Income from sources without United States
(A) Except as provided in subparagraphs (B) and (C), no income, gain, or loss from sources without the United States shall be treated as effectively connected with the conduct of a trade or business within the United States.
(B) Income, gain, or loss from sources without the United States shall be treated as effectively connected with the conduct of a trade or business within the United States by a nonresident alien individual or a foreign corporation if such person has an office or other fixed place of business within the United States to which such income, gain, or loss is attributable and such income, gain, or loss—
(i) consists of rents or royalties for the use of or for the privilege of using intangible property described in section 862(a)(4) derived in the active conduct of such trade or business;
(ii) consists of dividends, interest, or amounts received for the provision of guarantees of indebtedness, and either is derived in the active conduct of a banking, financing, or similar business within the United States or is received by a corporation the principal business of which is trading in stocks or securities for its own account; or
(iii) is derived from the sale or exchange (outside the United States) through such office or other fixed place of business of personal property described in section 1221(a)(1), except that this clause shall not apply if the property is sold or exchanged for use, consumption, or disposition outside the United States and an office or other fixed place of business of the taxpayer in a foreign country participated materially in such sale.
Any income or gain which is equivalent to any item of income or gain described in clause (i), (ii), or (iii) shall be treated in the same manner as such item for purposes of this subparagraph.
(C) In the case of a foreign corporation taxable under part I or part II of subchapter L, any income from sources without the United States which is attributable to its United States business shall be treated as effectively connected with the conduct of a trade or business within the United States.
(D) No income from sources without the United States shall be treated as effectively connected with the conduct of a trade or business within the United States if it either—
(i) consists of dividends, interest, or royalties paid by a foreign corporation in which the taxpayer owns (within the meaning of section 958(a)), or is considered as owning (by applying the ownership rules of section 958(b)), more than 50 percent of the total combined voting power of all classes of stock entitled to vote, or
(ii) is subpart F income within the meaning of section 952(a).
(5) Rules for application of paragraph (4)(B)
For purposes of subparagraph (B) of paragraph (4)—
(A) in determining whether a nonresident alien individual or a foreign corporation has an office or other fixed place of business, an office or other fixed place of business of an agent shall be disregarded unless such agent (i) has the authority to negotiate and conclude contracts in the name of the nonresident alien individual or foreign corporation and regularly exercises that authority or has a stock of merchandise from which he regularly fills orders on behalf of such individual or foreign corporation, and (ii) is not a general commission agent, broker, or other agent of independent status acting in the ordinary course of his business,
(B) income, gain, or loss shall not be considered as attributable to an office or other fixed place of business within the United States unless such office or fixed place of business is a material factor in the production of such income, gain, or loss and such office or fixed place of business regularly carries on activities of the type from which such income, gain, or loss is derived, and
(C) the income, gain, or loss which shall be attributable to an office or other fixed place of business within the United States shall be the income, gain, or loss property allocable thereto, but, in the case of a sale or exchange described in clause (iii) of such subparagraph, the income which shall be treated as attributable to an office or other fixed place of business within the United States shall not exceed the income which would be derived from sources within the United States if the sale or exchange were made in the United States.
(6) Treatment of certain deferred payments, etc.
For purposes of this title, in the case of any income or gain of a nonresident alien individual or a foreign corporation which—
(A) is taken into account for any taxable year, but
(B) is attributable to a sale or exchange of property or the performance of services (or any other transaction) in any other taxable year,
the determination of whether such income or gain is taxable under section 871(b) or 882 (as the case may be) shall be made as if such income or gain were taken into account in such other taxable year and without regard to the requirement that the taxpayer be engaged in a trade or business within the United States during the taxable year referred to in subparagraph (A).
(7) Treatment of certain property transactions
For purposes of this title, if—
(A) any property ceases to be used or held for use in connection with the conduct of a trade or business within the United States, and
(B) such property is disposed of within 10 years after such cessation,
the determination of whether any income or gain attributable to such disposition is taxable under section 871(b) or 882 (as the case may be) shall be made as if such sale or exchange occurred immediately before such cessation and without regard to the requirement that the taxpayer be engaged in a trade or business within the United States during the taxable year for which such income or gain is taken into account.
(8) Gain or loss of foreign persons from sale or exchange of certain partnership interests
(A) In general
Notwithstanding any other provision of this subtitle, if a nonresident alien individual or foreign corporation owns, directly or indirectly, an interest in a partnership which is engaged in any trade or business within the United States, gain or loss on the sale or exchange of all (or any portion of) such interest shall be treated as effectively connected with the conduct of such trade or business to the extent such gain or loss does not exceed the amount determined under subparagraph (B).
(B) Amount treated as effectively connected
The amount determined under this subparagraph with respect to any partnership interest sold or exchanged—
(i) in the case of any gain on the sale or exchange of the partnership interest, is—
(I) the portion of the partner's distributive share of the amount of gain which would have been effectively connected with the conduct of a trade or business within the United States if the partnership had sold all of its assets at their fair market value as of the date of the sale or exchange of such interest, or
(II) zero if no gain on such deemed sale would have been so effectively connected, and
(ii) in the case of any loss on the sale or exchange of the partnership interest, is—
(I) the portion of the partner's distributive share of the amount of loss on the deemed sale described in clause (i)(I) which would have been so effectively connected, or
(II) zero if no loss on such deemed sale would be have been so effectively connected.
For purposes of this subparagraph, a partner's distributive share of gain or loss on the deemed sale shall be determined in the same manner as such partner's distributive share of the non-separately stated taxable income or loss of such partnership.
(C) Coordination with United States real property interests
If a partnership described in subparagraph (A) holds any United States real property interest (as defined in section 897(c)) at the time of the sale or exchange of the partnership interest, then the gain or loss treated as effectively connected income under subparagraph (A) shall be reduced by the amount so treated with respect to such United States real property interest under section 897.
(D) Sale or exchange
For purposes of this paragraph, the term "sale or exchange" means any sale, exchange, or other disposition.
(E) Secretarial authority
The Secretary shall prescribe such regulations or other guidance as the Secretary determines appropriate for the application of this paragraph, including with respect to exchanges described in section 332, 351, 354, 355, 356, or 361.
(d) Treatment of related person factoring income
(1) In general
For purposes of the provisions set forth in paragraph (2), if any person acquires (directly or indirectly) a trade or service receivable from a related person, any income of such person from the trade or service receivable so acquired shall be treated as if it were interest on a loan to the obligor under the receivable.
(2) Provisions to which paragraph (1) applies
The provisions set forth in this paragraph are as follows:
(A) Section 904 (relating to limitation on foreign tax credit).
(B) Subpart F of part III of this subchapter (relating to controlled foreign corporations).
(3) Trade or service receivable
For purposes of this subsection, the term "trade or service receivable" means any account receivable or evidence of indebtedness arising out of—
(A) the disposition by a related person of property described in section 1221(a)(1), or
(B) the performance of services by a related person.
(4) Related person
For purposes of this subsection, the term "related person" means—
(A) any person who is a related person (within the meaning of section 267(b)), and
(B) any United States shareholder (as defined in section 951(b)) and any person who is a related person (within the meaning of section 267(b)) to such a shareholder.
(5) Certain provisions not to apply
The following provisions shall not apply to any amount treated as interest under paragraph (1) or (6):
(A) Section 904(d)(2)(B)(iii)(I) (relating to exceptions for export financing interest).
(B) Subparagraph (A) of section 954(b)(3) (relating to exception where foreign base company income is less than 5 percent or $1,000,000).
(C) Subparagraph (B) of section 954(c)(2) (relating to certain export financing).
(D) Clause (i) of section 954(c)(3)(A) (relating to certain income received from related persons).
(6) Special rule for certain income from loans of a controlled foreign corporation
Any income of a controlled foreign corporation (within the meaning of section 957(a)) from a loan to a person for the purpose of financing—
(A) the purchase of property described in section 1221(a)(1) of a related person, or
(B) the payment for the performance of services by a related person,
shall be treated as interest described in paragraph (1).
(7) Exception for certain related persons doing business in same foreign country
Paragraph (1) shall not apply to any trade or service receivable acquired by any person from a related person if—
(A) the person acquiring such receivable and such related person are created or organized under the laws of the same foreign country and such related person has a substantial part of its assets used in its trade or business located in such same foreign country, and
(B) such related person would not have derived any foreign base company income (as defined in section 954(a), determined without regard to section 954(b)(3)(A)), or any income effectively connected with the conduct of a trade or business within the United States, from such receivable if it had been collected by such related person.
(8) Regulations
The Secretary shall prescribe such regulations as may be necessary to prevent the avoidance of the provisions of this subsection or section 956(c)(3).
(e) Rules for allocating interest, etc.
For purposes of this subchapter—
(1) Treatment of affiliated groups
The taxable income of each member of an affiliated group shall be determined by allocating and apportioning interest expense of each member as if all members of such group were a single corporation.
(2) Gross income and fair market value methods may not be used for interest
All allocations and apportionments of interest expense shall be determined using the adjusted bases of assets rather than on the basis of the fair market value of the assets or gross income.
(3) Tax-exempt assets not taken into account
For purposes of allocating and apportioning any deductible expense, any tax-exempt asset (and any income from such an asset) shall not be taken into account. A similar rule shall apply in the case of the portion of any dividend (other than a qualifying dividend as defined in section 243(b)) equal to the deduction allowable under section 243 or 245(a) with respect to such dividend and in the case of a like portion of any stock the dividends on which would be so deductible and would not be qualifying dividends (as so defined).
(4) Basis of stock in nonaffiliated 10-percent owned corporations adjusted for earnings and profits changes
(A) In general
For purposes of allocating and apportioning expenses on the basis of assets, the adjusted basis of any stock in a nonaffiliated 10-percent owned corporation shall be—
(i) increased by the amount of the earnings and profits of such corporation attributable to such stock and accumulated during the period the taxpayer held such stock, or
(ii) reduced (but not below zero) by any deficit in earnings and profits of such corporation attributable to such stock for such period.
(B) Nonaffiliated 10-percent owned corporation
For purposes of this paragraph, the term "nonaffiliated 10-percent owned corporation" means any corporation if—
(i) such corporation is not included in the taxpayer's affiliated group, and
(ii) members of such affiliated group own 10 percent or more of the total combined voting power of all classes of stock of such corporation entitled to vote.
(C) Earnings and profits of lower tier corporations taken into account
(i) In general
If, by reason of holding stock in a nonaffiliated 10-percent owned corporation, the taxpayer is treated under clause (iii) as owning stock in another corporation with respect to which the stock ownership requirements of clause (ii) are met, the adjustment under subparagraph (A) shall include an adjustment for the amount of the earnings and profits (or deficit therein) of such other corporation which are attributable to the stock the taxpayer is so treated as owning and to the period during which the taxpayer is treated as owning such stock.
(ii) Stock ownership requirements
The stock ownership requirements of this clause are met with respect to any corporation if members of the taxpayer's affiliated group own (directly or through the application of clause (iii)) 10 percent or more of the total combined voting power of all classes of stock of such corporation entitled to vote.
(iii) Stock owned through entities
For purposes of this subparagraph, stock owned (directly or indirectly) by a corporation, partnership, or trust shall be treated 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.
(D) Coordination with subpart F, etc.
For purposes of this paragraph, proper adjustment shall be made to the earnings and profits of any corporation to take into account any earnings and profits included in gross income under section 951 or under any other provision of this title and reflected in the adjusted basis of the stock.
(5) Affiliated group
For purposes of this subsection—
(A) In general
Except as provided in subparagraph (B), the term "affiliated group" has the meaning given such term by section 1504. Notwithstanding the preceding sentence, a foreign corporation shall be treated as a member of the affiliated group if—
(i) more than 50 percent of the gross income of such foreign corporation for the taxable year is effectively connected with the conduct of a trade or business within the United States, and
(ii) at least 80 percent of either the vote or value of all outstanding stock of such foreign corporation is owned directly or indirectly by members of the affiliated group (determined with regard to this sentence).
(B) Treatment of certain financial institutions
For purposes of subparagraph (A), any corporation described in subparagraph (C) shall be treated as an includible corporation for purposes of section 1504 only for purposes of applying such section separately to corporations so described. This subparagraph shall not apply for purposes of paragraph (6).
(C) Description
A corporation is described in this subparagraph if—
(i) such corporation is a financial institution described in section 581 or 591,
(ii) the business of such financial institution is predominantly with persons other than related persons (within the meaning of subsection (d)(4)) or their customers, and
(iii) such financial institution is required by State or Federal law to be operated separately from any other entity which is not such an institution.
(D) Treatment of bank holding companies
To the extent provided in regulations—
(i) a bank holding company (within the meaning of section 2(a) of the Bank Holding Company Act of 1956), and
(ii) any subsidiary of a financial institution described in section 581 or 591 or of any bank holding company if such subsidiary is predominantly engaged (directly or indirectly) in the active conduct of a banking, financing, or similar business,
shall be treated as a corporation described in subparagraph (C).
(6) Allocation and apportionment of other expenses
Expenses other than interest which are not directly allocable or apportioned to any specific income producing activity shall be allocated and apportioned as if all members of the affiliated group were a single corporation.
(7) Regulations
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including regulations providing—
(A) for the resourcing of income of any member of an affiliated group or modifications to the consolidated return regulations to the extent such resourcing or modification is necessary to carry out the purposes of this section,
(B) for direct allocation of interest expense incurred to carry out an integrated financial transaction to any interest (or interest-type income) derived from such transaction and in other circumstances where such allocation would be appropriate to carry out the purposes of this subsection,
(C) for the apportionment of expenses allocated to foreign source income among the members of the affiliated group and various categories of income described in section 904(d)(1),
(D) for direct allocation of interest expense in the case of indebtedness resulting in a disallowance under section 246A,
(E) for appropriate adjustments in the application of paragraph (3) in the case of an insurance company,
(F) preventing assets or interest expense from being taken into account more than once, and
(G) that this subsection shall not apply for purposes of any provision of this subchapter to the extent the Secretary determines that the application of this subsection for such purposes would not be appropriate.
[(f) Repealed. Pub. L. 117–2, title IX, §9671(a), Mar. 11, 2021, 135 Stat. 184 ]
(g) Allocation of research and experimental expenditures
(1) In general
For purposes of sections 861(b), 862(b), and 863(b), qualified research and experimental expenditures shall be allocated and apportioned as follows:
(A) Any qualified research and experimental expenditures expended solely to meet legal requirements imposed by a political entity with respect to the improvement or marketing of specific products or processes for purposes not reasonably expected to generate gross income (beyond de minimis amounts) outside the jurisdiction of the political entity shall be allocated only to gross income from sources within such jurisdiction.
(B) In the case of any qualified research and experimental expenditures (not allocated under subparagraph (A)) to the extent—
(i) that such expenditures are attributable to activities conducted in the United States, 50 percent of such expenditures shall be allocated and apportioned to income from sources within the United States and deducted from such income in determining the amount of taxable income from sources within the United States, and
(ii) that such expenditures are attributable to activities conducted outside the United States, 50 percent of such expenditures shall be allocated and apportioned to income from sources outside the United States and deducted from such income in determining the amount of taxable income from sources outside the United States.
(C) The remaining portion of qualified research and experimental expenditures (not allocated under subparagraphs (A) and (B)) shall be apportioned, at the annual election of the taxpayer, on the basis of gross sales or gross income, except that, if the taxpayer elects to apportion on the basis of gross income, the amount apportioned to income from sources outside the United States shall at least be 30 percent of the amount which would be so apportioned on the basis of gross sales.
(2) Qualified research and experimental expenditures
For purposes of this section, the term "qualified research and experimental expenditures" means amounts which are research and experimental expenditures within the meaning of section 174. For purposes of this paragraph, rules similar to the rules of subsection (c) 2 of section 174 shall apply. Any qualified research and experimental expenditures treated as deferred expenses under subsection (b) 2 of section 174 shall be taken into account under this subsection for the taxable year for which such expenditures are allowed as a deduction under such subsection.
(3) Special rules for expenditures attributable to activities conducted in space, etc.
(A) In general
Any qualified research and experimental expenditures described in subparagraph (B)—
(i) if incurred by a United States person, shall be allocated and apportioned under this section in the same manner as if they were attributable to activities conducted in the United States, and
(ii) if incurred by a person other than a United States person, shall be allocated and apportioned under this section in the same manner as if they were attributable to activities conducted outside the United States.
(B) Description of expenditures
For purposes of subparagraph (A), qualified research and experimental expenditures are described in this subparagraph if such expenditures are attributable to activities conducted—
(i) in space,
(ii) on or under water not within the jurisdiction (as recognized by the United States) of a foreign country, possession of the United States, or the United States, or
(iii) in Antarctica.
(4) Affiliated group
(A) Except as provided in subparagraph (B), the allocation and apportionment required by paragraph (1) shall be determined as if all members of the affiliated group (as defined in subsection (e)(5)) were a single corporation.
(B) For purposes of the allocation and apportionment required by paragraph (1)—
(i) sales and gross income from products produced in whole or in part in a possession by an electing corporation (within the meaning of section 936(h)(5)(E)),2 and
(ii) dividends from an electing corporation,
shall not be taken into account, except that this subparagraph shall not apply to sales of (and gross income and dividends attributable to sales of) products with respect to which an election under section 936(h)(5)(F) 2 is not in effect.
(C) The qualified research and experimental expenditures taken into account for purposes of paragraph (1) shall be adjusted to reflect the amount of such expenditures included in computing the cost-sharing amount (determined under section 936(h)(5)(C)(i)(I)).2
(D) The Secretary may prescribe such regulations as may be necessary to carry out the purposes of this paragraph, including regulations providing for the source of gross income and the allocation and apportionment of deductions to take into account the adjustments required by subparagraph (B) or (C).
(E) Paragraph (6) of subsection (e) shall not apply to qualified research and experimental expenditures.
(5) Regulations
The Secretary shall prescribe such regulations as may be appropriate to carry out the purposes of this subsection, including regulations relating to the determination of whether any expenses are attributable to activities conducted in the United States or outside the United States and regulations providing such adjustments to the provisions of this subsection as may be appropriate in the case of cost-sharing arrangements and contract research.
(6) Applicability
This subsection shall apply to the taxpayer's first taxable year (beginning on or before August 1, 1994) following the taxpayer's last taxable year to which Revenue Procedure 92–56 applies or would apply if the taxpayer elected the benefits of such Revenue Procedure.
(Aug. 16, 1954, ch. 736,
Editorial Notes
References in Text
Section 2(a) of the Bank Holding Company Act of 1956, referred to in subsec. (e)(5)(D)(i), is classified to
Section 174, referred to in subsec. (g)(2), was amended generally by
Section 936, referred to in subsec. (g)(4)(B), (C), was repealed by
Amendments
2021—Subsec. (f).
2018—Subsec. (d)(5).
Subsec. (d)(8).
Subsec. (e)(5)(A).
Subsec. (f)(1)(C)(i).
Subsec. (f)(2).
2017—Subsec. (c)(1)(A).
Subsec. (c)(1)(B).
Subsec. (c)(8).
Subsec. (e)(2).
2010—Subsec. (c)(4)(B)(ii).
Subsec. (e)(5)(A).
Subsec. (f)(5)(D), (6).
2009—Subsec. (f)(5)(D), (6).
Subsec. (f)(7).
2008—Subsec. (f)(5)(D), (6).
Subsec. (f)(7).
2004—Subsec. (c)(4)(B).
Subsec. (d)(2).
Subsec. (d)(5)(A)(i).
Subsec. (e)(3).
Subsec. (e)(7)(B).
Subsec. (e)(7)(F), (G).
Subsecs. (f), (g).
2000—Subsec. (e)(3).
1999—Subsecs. (c)(4)(B)(iii), (d)(3)(A), (6)(A).
1997—Subsec. (b)(2)(A)(ii).
1993—Subsec. (f)(1)(B).
Subsec. (f)(4)(D).
Subsec. (f)(5), (6).
"(A)
"(B)
1991—Subsec. (f)(5).
1990—Subsec. (f)(5).
"(A)
"(B)
"(i) the lesser of 9 months or the number of months in the taxable year, bears to
"(ii) the number of months in the taxable year."
1989—Subsec. (f).
1988—Subsec. (b)(2)(A)(ii).
Subsec. (c)(2).
Subsec. (c)(4)(B)(i), (ii).
Subsec. (c)(4)(B)(iii).
Subsec. (c)(6).
Subsec. (c)(7).
Subsec. (d)(5)(A)(i).
Subsec. (e).
Subsec. (e)(1).
Subsec. (e)(3).
Subsec. (e)(4).
"(A) increased by the amount of the earnings and profits of such corporation attributable to such stock and accumulated during the period the taxpayer held such stock, or
"(B) reduced (but not below zero) by any deficit in earnings and profits of such corporation attributable to such stock for such period."
Subsec. (e)(5)(B).
Subsec. (e)(5)(D).
Subsec. (e)(6).
Subsec. (e)(7)(D) to (F).
1987—Subsec. (c)(4)(C).
1986—
Subsec. (c)(1)(A).
Subsec. (c)(1)(B).
Subsec. (c)(2).
Subsec. (c)(4)(B)(iii).
Subsec. (c)(6), (7).
Subsec. (d)(5)(A)(i).
Subsec. (d)(5)(A)(ii).
Subsec. (d)(5)(A)(iii).
Subsec. (d)(5)(A)(iv).
Subsec. (d)(5)(B).
Subsec. (d)(7), (8).
Subsec. (e).
1984—Subsec. (c)(2).
Subsec. (d).
1976—Subsec. (a).
Subsec. (c)(4)(B)(i).
Subsec. (c)(4)(B)(iii).
Subsec. (c)(5)(C).
1966—
Statutory Notes and Related Subsidiaries
Effective Date of 2021 Amendment
Effective Date of 2017 Amendment
Effective Date of 2010 Amendment
Amendment by
Effective Date of 2009 Amendment
Effective Date of 2008 Amendment
Effective Date of 2004 Amendment
Amendment by section 101(b)(6) of
"(1) the amendments made by this section [amending this section and
"(2) in the case of taxable years beginning after December 31, 2004, clause (iv) of section 904(d)(4)(C) of the Internal Revenue Code of 1986 (as amended by this section) shall be applied by substituting 'January 1, 2005' for 'January 1, 2003' both places it appears."
[Amendment by
Amendment by section 413(c)(12) of
Effective Date of 2000 Amendment
Amendment by
Effective Date of 1999 Amendment
Amendment by
Effective Date of 1997 Amendment
Effective Date of 1991 Amendment
Effective Date of 1990 Amendment
Effective Date of 1988 Amendment
Amendment by
Effective Date of 1987 Amendment
Amendment by
Effective Date of 1986 Amendment
Amendment by section 1201(d)(4) of
Amendment by section 1211(b)(2) of
"(1)
"(2)
"(A)
"(i)
"(ii)
| The applicable | |
| "In the case of the: | percentage is: |
| 1st taxable year | 75 |
| 2nd taxable year | 50 |
| 3rd taxable year | 25. |
"(iii)
"(B)
"(i)
"(I) subparagraph (A) shall not apply for purposes of paragraph (1) of section 864(e) of the Internal Revenue Code of 1986 (as added by this section), but
"(II) such paragraph (1) shall not apply to interest expenses paid or accrued by the taxpayer during the taxable year with respect to an aggregate amount of indebtedness which does not exceed the special phase-in amount.
"(ii)
"(I) the general phase-in amount as determined for purposes of subparagraph (A),
"(II) the 5-year phase-in amount, and
"(III) the 4-year phase-in amount.
For purposes of applying this subparagraph to interest expense attributable to any month, the special phase-in amount shall in no event exceed the limitation determined under subparagraph (A)(iii).
"(iii) 5-
"(I) the applicable percentage (determined under the following table for purposes of this subclause) of the 5-year debt amount, or
"(II) the applicable percentage (determined under the following table for purposes of this subclause) of the 5-year debt amount reduced by paydowns:
| "In the case of the: | The applicable percentage for purposes of subclause (I) is: | The applicable percentage for purposes of subclause (II) is: |
|---|---|---|
| 1st taxable year | 81/3 | 10 |
| 2nd taxable year | 162/3 | 25 |
| 3rd taxable year | 25 | 50 |
| 4th taxable year | 331/3 | 100 |
| 5th taxable year | 162/3 | 100. |
"(iv) 4-
"(I) the applicable percentage (determined under the following table for purposes of this subclause) of the 4-year debt amount, or
"(II) the applicable percentage (determined under the following table for purposes of this subclause) of the 4-year debt amount reduced by paydowns to the extent such paydowns exceed the 5-year debt amount:
| "In the case of the: | The applicable percentage for purposes of subclause (I) is: | The applicable percentage for purposes of subclause (II) is: |
|---|---|---|
| 1st taxable year | 5 | 6¼ |
| 2nd taxable year | 10 | 162/3 |
| 3rd taxable year | 15 | 37½ |
| 4th taxable year | 20 | 100 |
| 5th taxable year | 0 | 0. |
"(v) 5-
"(I) the amount of the outstanding indebtedness of the taxpayer on May 29, 1985, over
"(II) the amount of the outstanding indebtedness of the taxpayer as of the close of December 31, 1983.
The 5-year debt amount shall not exceed the aggregate amount of indebtedness of the taxpayer outstanding on November 16, 1985.
"(vi) 4-
"(I) the amount referred to in clause (v)(II), over
"(II) the amount of the outstanding indebtedness of the taxpayer as of the close of December 31, 1982.
The 4-year debt amount shall not exceed the aggregate amount of indebtedness of the taxpayer outstanding on November 16, 1985, reduced by the 5-year debt amount.
"(vii)
"(I) the aggregate amount of indebtedness of the taxpayer outstanding on November 16, 1985, over
"(II) the lowest amount of indebtedness of the taxpayer outstanding as of the close of any preceding month beginning after November 16, 1985 (or, to the extent provided in regulations under subparagraph (A)(iii), the average amount of indebtedness outstanding during any such month).
"(C)
"(D)
"(i) In the case of the 1st 9 taxable years of the taxpayer beginning after December 31, 1986, the amendments made by this section shall not apply to interest expenses paid or accrued by the taxpayer during the taxable year with respect to an aggregate amount of indebtedness which does not exceed the applicable percentage (determined under the following table) of the indebtedness described in clause (iii) or (iv):
| "In the case of the: | The applicable percentage is: |
|---|---|
| 1st taxable year | 90 |
| 2nd taxable year | 80 |
| 3rd taxable year | 70 |
| 4th taxable year | 60 |
| 5th taxable year | 50 |
| 6th taxable year | 40 |
| 7th taxable year | 30 |
| 8th taxable year | 20 |
| 9th taxable year | 10. |
"(ii) The provisions of this subparagraph shall apply in lieu of the provisions of subparagraphs (A) and (B).
"(iii)
"(iv)
"(E)
"(F)
"(3)
"(A)
"(i) the indebtedness was incurred to develop or improve existing property that is owned by the taxpayer on November 16, 1985, and was acquired with the intent to develop or improve the property,
"(ii) the loan agreement with respect to the indebtedness provides that the funds are to be utilized for purposes of developing or improving the above property, and
"(iii) the debt to equity ratio of the companies that join in the filing of the consolidated return is less than 15 percent.
"(B)
"(i) which was incorporated in Delaware on June 29, 1964,
"(ii) the principal subsidiary of which is a resident of Arkansas, and
"(iii) which is a member of an affiliated group the average daily United States production of oil of which is less than 50,000 barrels and the average daily United States refining of which is less than 150,000 barrels.
"(4)
"(A) $100,000,000 face amount of 11¾ percent notes due in 1990,
"(B) $100,000,000 of 8¾ percent notes due in 1989,
"(C) 6¾ percent Japanese yen notes due in 1991, and
"(D) 53/8 percent Swiss franc bonds due in 1994.
For purposes of this paragraph, the term 'applicable dollar amount' means $600,000,000 in the case of taxable years beginning in 1987 through 1991, $500,000,000 in the case of the taxable year beginning in 1992, $400,000,000 in the case of the taxable year beginning in 1993, $300,000,000 in the case of the taxable year beginning in 1994, $200,000,000 in the case of the taxable year beginning in 1995, $100,000,000 in the case of the taxable year beginning in 1996, and zero in the case of taxable years beginning after 1996.
"[(5) Repealed.
"(6)
"(A)
"(B)
| "In the case of taxable | The phase-in |
| years beginning in: | percentage is: |
| 1987 | 75 |
| 1988 | 50 |
| 1989 | 25." |
[
["(1)
["(2)
Amendment by section 1221(a)(2) of
Amendment by section 1275(c)(7) of
Amendment by section 1810(c)(2), (3) of
Effective Date of 1984 Amendment
"(1)
"(2)
"(A) $15,000,000 or
"(B) the amount of the Belgian corporation's adjusted basis on March 1, 1984, in stock of a foreign corporation formed to issue bonds outside the United States to the public."
Amendment by section 127(c) of
Effective Date of 1976 Amendment
Amendment by
Effective Date of 1966 Amendment
Amendment by
Savings Provision
For provisions that nothing in amendment by section 401(d)(1)(D)(x), (xvii)(IV), (V) 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(d)(4) 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
1 So in original. Probably should be followed by a comma.
2 See References in Text note below.
§865. Source rules for personal property sales
(a) General rule
Except as otherwise provided in this section, income from the sale of personal property—
(1) by a United States resident shall be sourced in the United States, or
(2) by a nonresident shall be sourced outside the United States.
(b) Exception for inventory property
In the case of income derived from the sale of inventory property—
(1) this section shall not apply, and
(2) such income shall be sourced under the rules of sections 861(a)(6), 862(a)(6), and 863.
Notwithstanding the preceding sentence, any income from the sale of any unprocessed timber which is a softwood and was cut from an area in the United States shall be sourced in the United States and the rules of sections 862(a)(6) and 863(b) shall not apply to any such income. For purposes of the preceding sentence, the term "unprocessed timber" means any log, cant, or similar form of timber.
(c) Exception for depreciable personal property
(1) In general
Gain (not in excess of the depreciation adjustments) from the sale of depreciable personal property shall be allocated between sources in the United States and sources outside the United States—
(A) by treating the same proportion of such gain as sourced in the United States as the United States depreciation adjustments with respect to such property bear to the total depreciation adjustments, and
(B) by treating the remaining portion of such gain as sourced outside the United States.
(2) Gain in excess of depreciation
Gain (in excess of the depreciation adjustments) from the sale of depreciable personal property shall be sourced as if such property were inventory property.
(3) United States depreciation adjustments
For purposes of this subsection—
(A) In general
The term "United States depreciation adjustments" means the portion of the depreciation adjustments to the adjusted basis of the property which are attributable to the depreciation deductions allowable in computing taxable income from sources in the United States.
(B) Special rule for certain property
Except in the case of property of a kind described in section 168(g)(4), if, for any taxable year—
(i) such property is used predominantly in the United States, or
(ii) such property is used predominantly outside the United States,
all of the depreciation deductions allowable for such year shall be treated as having been allocated to income from sources in the United States (or, where clause (ii) applies, from sources outside the United States).
(4) Other definitions
For purposes of this subsection—
(A) Depreciable personal property
The term "depreciable personal property" means any personal property if the adjusted basis of such property includes depreciation adjustments.
(B) Depreciation adjustments
The term "depreciation adjustments" means adjustments reflected in the adjusted basis of any property on account of depreciation deductions (whether allowed with respect to such property or other property and whether allowed to the taxpayer or to any other person).
(C) Depreciation deductions
The term "depreciation deductions" means any deductions for depreciation or amortization or any other deduction allowable under any provision of this chapter which treats an otherwise capital expenditure as a deductible expense.
(d) Exception for intangibles
(1) In general
In the case of any sale of an intangible—
(A) this section shall apply only to the extent the payments in consideration of such sale are not contingent on the productivity, use, or disposition of the intangible, and
(B) to the extent such payments are so contingent, the source of such payments shall be determined under this part in the same manner as if such payments were royalties.
(2) Intangible
For purposes of paragraph (1), the term "intangible" means any patent, copyright, secret process or formula, goodwill, trademark, trade brand, franchise, or other like property.
(3) Special rule in the case of goodwill
To the extent this section applies to the sale of goodwill, payments in consideration of such sale shall be treated as from sources in the country in which such goodwill was generated.
(4) Coordination with subsection (c)
(A) Gain not in excess of depreciation adjustments sourced under subsection (c)
Notwithstanding paragraph (1), any gain from the sale of an intangible shall be sourced under subsection (c) to the extent such gain does not exceed the depreciation adjustments with respect to such intangible.
(B) Subsection (c)(2) not to apply to intangibles
Paragraph (2) of subsection (c) shall not apply to any gain from the sale of an intangible.
(e) Special rules for sales through offices or fixed places of business
(1) Sales by residents
(A) In general
In the case of income not sourced under subsection (b), (c), (d)(1)(B) or (3), or (f), if a United States resident maintains an office or other fixed place of business in a foreign country, income from sales of personal property attributable to such office or other fixed place of business shall be sourced outside the United States.
(B) Tax must be imposed
Subparagraph (A) shall not apply unless an income tax equal to at least 10 percent of the income from the sale is actually paid to a foreign country with respect to such income.
(2) Sales by nonresidents
(A) In general
Notwithstanding any other provisions of this part, if a nonresident maintains an office or other fixed place of business in the United States, income from any sale of personal property (including inventory property) attributable to such office or other fixed place of business shall be sourced in the United States. The preceding sentence shall not apply for purposes of section 971 (defining export trade corporation).
(B) Exception
Subparagraph (A) shall not apply to any sale of inventory property which is sold for use, disposition, or consumption outside the United States if an office or other fixed place of business of the taxpayer in a foreign country materially participated in the sale.
(3) Sales attributable to an office or other fixed place of business
The principles of section 864(c)(5) shall apply in determining whether a taxpayer has an office or other fixed place of business and whether a sale is attributable to such an office or other fixed place of business.
(f) Stock of affiliates
If—
(1) a United States resident sells stock in an affiliate which is a foreign corporation,
(2) such sale occurs in a foreign country in which such affiliate is engaged in the active conduct of a trade or business, and
(3) more than 50 percent of the gross income of such affiliate for the 3-year period ending with the close of such affiliate's taxable year immediately preceding the year in which the sale occurred was derived from the active conduct of a trade or business in such foreign country,
any gain from such sale shall be sourced outside the United States. For purposes of paragraphs (2) and (3), the United States resident may elect to treat an affiliate and all other corporations which are wholly owned (directly or indirectly) by the affiliate as one corporation.
(g) United States resident; nonresident
For purposes of this section—
(1) In general
Except as otherwise provided in this subsection—
(A) United States resident
The term "United States resident" means—
(i) any individual who—
(I) is a United States citizen or a resident alien and does not have a tax home (as defined in section 911(d)(3)) in a foreign country, or
(II) is a nonresident alien and has a tax home (as so defined) in the United States, and
(ii) any corporation, trust, or estate which is a United States person (as defined in section 7701(a)(30)).
(B) Nonresident
The term "nonresident" means any person other than a United States resident.
(2) Special rules for United States citizens and resident aliens
For purposes of this section, a United States citizen or resident alien shall not be treated as a nonresident with respect to any sale of personal property unless an income tax equal to at least 10 percent of the gain derived from such sale is actually paid to a foreign country with respect to that gain.
(3) Special rule for certain stock sales by residents of Puerto Rico
Paragraph (2) shall not apply to the sale by an individual who was a bona fide resident of Puerto Rico during the entire taxable year of stock in a corporation if—
(A) such corporation is engaged in the active conduct of a trade or business in Puerto Rico, and
(B) more than 50 percent of its gross income for the 3-year period ending with the close of such corporation's taxable year immediately preceding the year in which such sale occurred was derived from the active conduct of a trade or business in Puerto Rico.
For purposes of the preceding sentence, the taxpayer may elect to treat a corporation and all other corporations which are wholly owned (directly or indirectly) by such corporation as one corporation.
(h) Treatment of gains from sale of certain stock or intangibles and from certain liquidations
(1) In general
In the case of gain to which this subsection applies—
(A) such gain shall be sourced outside the United States, but
(B) subsections (a), (b), and (c) of section 904 and sections 907 and 960 shall be applied separately with respect to such gain.
(2) Gain to which subsection applies
This subsection shall apply to—
(A) Gain from sale of certain stock or intangibles
Any gain—
(i) which is from the sale of stock in a foreign corporation or an intangible (as defined in subsection (d)(2)) and which would otherwise be sourced in the United States under this section,
(ii) which, under a treaty obligation of the United States (applied without regard to this section), would be sourced outside the United States, and
(iii) with respect to which the taxpayer chooses the benefits of this subsection.
(B) Gain from liquidation in possession
Any gain which is derived from the receipt of any distribution in liquidation of a corporation—
(i) which is organized in a possession of the United States, and
(ii) more than 50 percent of the gross income of which during the 3-taxable year period ending with the close of the taxable year immediately preceding the taxable year in which the distribution is received is from the active conduct of a trade or business in such possession.
(i) Other definitions
For purposes of this section—
(1) Inventory property
The term "inventory property" means personal property described in paragraph (1) of section 1221(a).
(2) Sale includes exchange
The term "sale" includes an exchange or any other disposition.
(3) Treatment of possessions
Any possession of the United States shall be treated as a foreign country.
(4) Affiliate
The term "affiliate" means a member of the same affiliated group (within the meaning of section 1504(a) without regard to section 1504(b)).
(5) Treatment of partnerships
In the case of a partnership, except as provided in regulations, this section shall be applied at the partner level.
(j) Regulations
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purpose of this section, including regulations—
(1) relating to the treatment of losses from sales of personal property,
(2) applying the rules of this section to income derived from trading in futures contracts, forward contracts, options contracts, and other instruments, and
(3) providing that, subject to such conditions (which may include provisions comparable to section 877) as may be provided in such regulations, subsections (e)(1)(B) and (g)(2) shall not apply for purposes of sections 931 and 933.
(k) Cross references
(1) For provisions relating to the characterization as dividends for source purposes of gains from the sale of stock in certain foreign corporations, see section 1248.
(2) For sourcing of income from certain foreign currency transactions, see section 988.
(Added
Editorial Notes
Amendments
2018—Subsec. (j)(3).
2017—Subsec. (h)(1)(B).
1999—Subsec. (i)(1).
1996—Subsec. (b)(2).
1993—Subsec. (b).
1990—Subsec. (c)(3)(B).
1988—Subsec. (d)(2).
Subsec. (d)(4).
Subsec. (e)(1)(A).
Subsec. (e)(2)(B).
"(i) any sale of inventory property which is sold for use, disposition, or consumption outside the United States if an office or other fixed place of business of the taxpayer outside the United States materially participated in the sale, or
"(ii) any amount included in gross income under section 951(a)(1)(A)."
Subsec. (f).
"(1) a United States resident sells stock in an affiliate which is a foreign corporation,
"(2) such affiliate is engaged in the active conduct of a trade or business, and
"(3) such sale occurs in the foreign country in which the affiliate derived more than 50 percent of its gross income for the 3-year period ending with the close of the affiliate's taxable year immediately preceding the year during which such sale occurred,
any gain from such sale shall be sourced outside the United States."
Subsec. (g)(1)(A)(i).
Subsec. (g)(1)(A)(ii).
Subsec. (g)(3).
Subsec. (h).
Subsec. (i).
Subsec. (i)(5).
Subsec. (j).
Subsec. (j)(3).
Subsec. (k).
Statutory Notes and Related Subsidiaries
Effective Date of 2017 Amendment
Amendment by
Effective Date of 1999 Amendment
Amendment by
Effective Date of 1996 Amendment
Effective Date of 1993 Amendment
Effective Date of 1990 Amendment
Amendment by
Effective Date of 1988 Amendment
Amendment by section 1012(d)(1)–(4), (6), (8), (9), (11), (12) of
Effective Date
"(1)
"(2)
Savings Provision
For provisions that nothing in amendment by
For provisions that nothing in amendment by
Applicability of Certain Amendments by Pub. L. 99–514 in Relation to Treaty Obligations of United States
For nonapplication of amendment by section 1211(a) of
Study of Source Rules for Sales of Inventory Property
PART II—NONRESIDENT ALIENS AND FOREIGN CORPORATIONS
Editorial Notes
Amendments
1986—
Subpart A—Nonresident Alien Individuals
Editorial Notes
Amendments
2008—
1986—
1984—
1976—
1966—
§871. Tax on nonresident alien individuals
(a) Income not connected with United States business—30 percent tax
(1) Income other than capital gains
Except as provided in subsection (h), there is hereby imposed for each taxable year a tax of 30 percent of the amount received from sources within the United States by a nonresident alien individual as—
(A) interest (other than original issue discount as defined in section 1273), dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income,
(B) gains described in subsection (b) or (c) of section 631,
(C) in the case of—
(i) a sale or exchange of an original issue discount obligation, the amount of the original issue discount accruing while such obligation was held by the nonresident alien individual (to the extent such discount was not theretofore taken into account under clause (ii)), and
(ii) a payment on an original issue discount obligation, an amount equal to the original issue discount accruing while such obligation was held by the nonresident alien individual (except that such original issue discount shall be taken into account under this clause only to the extent such discount was not theretofore taken into account under this clause and only to the extent that the tax thereon does not exceed the payment less the tax imposed by subparagraph (A) thereon), and
(D) gains from the sale or exchange after October 4, 1966, of patents, copyrights, secret processes and formulas, good will, trademarks, trade brands, franchises, and other like property, or of any interest in any such property, to the extent such gains are from payments which are contingent on the productivity, use, or disposition of the property or interest sold or exchanged,
but only to the extent the amount so received is not effectively connected with the conduct of a trade or business within the United States.
(2) Capital gains of aliens present in the United States 183 days or more
In the case of a nonresident alien individual present in the United States for a period or periods aggregating 183 days or more during the taxable year, there is hereby imposed for such year a tax of 30 percent of the amount by which his gains, derived from sources within the United States, from the sale or exchange at any time during such year of capital assets exceed his losses, allocable to sources within the United States, from the sale or exchange at any time during such year of capital assets. For purposes of this paragraph, gains and losses shall be taken into account only if, and to the extent that, they would be recognized and taken into account if such gains and losses were effectively connected with the conduct of a trade or business within the United States, except that such gains and losses shall be determined without regard to section 1202 and such losses shall be determined without the benefits of the capital loss carryover provided in section 1212. Any gain or loss which is taken into account in determining the tax under paragraph (1) or subsection (b) shall not be taken into account in determining the tax under this paragraph. For purposes of the 183-day requirement of this paragraph, a nonresident alien individual not engaged in trade or business within the United States who has not established a taxable year for any prior period shall be treated as having a taxable year which is the calendar year.
(3) Taxation of social security benefits
For purposes of this section and section 1441—
(A) 85 percent of any social security benefit (as defined in section 86(d)) shall be included in gross income (notwithstanding section 207 of the Social Security Act), and
(B) section 86 shall not apply.
(b) Income connected with United States business—graduated rate of tax
(1) Imposition of tax
A nonresident alien individual engaged in trade or business within the United States during the taxable year shall be taxable as provided in section 1 or 55 on his taxable income which is effectively connected with the conduct of a trade or business within the United States.
(2) Determination of taxable income
In determining taxable income for purposes of paragraph (1), gross income includes only gross income which is effectively connected with the conduct of a trade or business within the United States.
(c) Participants in certain exchange or training programs
For purposes of this section, a nonresident alien individual who (without regard to this subsection) is not engaged in trade or business within the United States and who is temporarily present in the United States as a nonimmigrant under subparagraph (F), (J), (M), or (Q) of section 101(a)(15) of the Immigration and Nationality Act, as amended (
(d) Election to treat real property income as income connected with United States business
(1) In general
A nonresident alien individual who during the taxable year derives any income—
(A) from real property held for the production of income and located in the United States, or from any interest in such real property, including (i) gains from the sale or exchange of such real property or an interest therein, (ii) rents or royalties from mines, wells, or other natural deposits, and (iii) gains described in section 631(b) or (c), and
(B) which, but for this subsection, would not be treated as income which is effectively connected with the conduct of a trade or business within the United States,
may elect for such taxable year to treat all such income as income which is effectively connected with the conduct of a trade or business within the United States. In such case, such income shall be taxable as provided in subsection (b)(1) whether or not such individual is engaged in trade or business within the United States during the taxable year. An election under this paragraph for any taxable year shall remain in effect for all subsequent taxable years, except that it may be revoked with the consent of the Secretary with respect to any taxable year.
(2) Election after revocation
If an election has been made under paragraph (1) and such election has been revoked, a new election may not be made under such paragraph for any taxable year before the 5th taxable year which begins after the first taxable year for which such revocation is effective, unless the Secretary consents to such new election.
(3) Form and time of election and revocation
An election under paragraph (1), and any revocation of such an election, may be made only in such manner and at such time as the Secretary may by regulations prescribe.
[(e) Repealed. Pub. L. 99–514, title XII, §1211(b)(5), Oct. 22, 1986, 100 Stat. 2536 ]
(f) Certain annuities received under qualified plans
(1) In general
For purposes of this section, gross income does not include any amount received as an annuity under a qualified annuity plan described in section 403(a)(1), or from a qualified trust described in section 401(a) which is exempt from tax under section 501(a), if—
(A) all of the personal services by reason of which the annuity is payable were either—
(i) personal services performed outside the United States by an individual who, at the time of performance of such personal services, was a nonresident alien, or
(ii) personal services described in section 864(b)(1) performed within the United States by such individual, and
(B) at the time the first amount is paid as an annuity under the annuity plan or by the trust, 90 percent or more of the employees for whom contributions or benefits are provided under such annuity plan, or under the plan or plans of which the trust is a part, are citizens or residents of the United States.
(2) Exclusion
Income received during the taxable year which would be excluded from gross income under this subsection but for the requirement of paragraph (1)(B) shall not be included in gross income if—
(A) the recipient's country of residence grants a substantially equivalent exclusion to residents and citizens of the United States; or
(B) the recipient's country of residence is a beneficiary developing country under title V of the Trade Act of 1974 (
(g) Special rules for original issue discount
For purposes of this section and section 881—
(1) Original issue discount obligation
(A) In general
Except as provided in subparagraph (B), the term "original issue discount obligation" means any bond or other evidence of indebtedness having original issue discount (within the meaning of section 1273).
(B) Exceptions
The term "original issue discount obligation" shall not include—
(i) Certain short-term obligations
Any obligation payable 183 days or less from the date of original issue (without regard to the period held by the taxpayer).
(ii) Tax-exempt obligations
Any obligation the interest on which is exempt from tax under section 103 or under any other provision of law without regard to the identity of the holder.
(2) Determination of portion of original issue discount accruing during any period
The determination of the amount of the original issue discount which accrues during any period shall be made under the rules of section 1272 (or the corresponding provisions of prior law) without regard to any exception for short-term obligations.
(3) Source of original issue discount
Except to the extent provided in regulations prescribed by the Secretary, the determination of whether any amount described in subsection (a)(1)(C) is from sources within the United States shall be made at the time of the payment (or sale or exchange) as if such payment (or sale or exchange) involved the payment of interest.
(4) Stripped bonds
The provisions of section 1286 (relating to the treatment of stripped bonds and stripped coupons as obligations with original issue discount) shall apply for purposes of this section.
(h) Repeal of tax on interest of nonresident alien individuals received from certain portfolio debt investments
(1) In general
In the case of any portfolio interest received by a nonresident individual from sources within the United States, no tax shall be imposed under paragraph (1)(A) or (1)(C) of subsection (a).
(2) Portfolio interest
For purposes of this subsection, the term "portfolio interest" means any interest (including original issue discount) which—
(A) would be subject to tax under subsection (a) but for this subsection, and
(B) is paid on an obligation—
(i) which is in registered form, and
(ii) with respect to which—
(I) the United States person who would otherwise be required to deduct and withhold tax from such interest under section 1441(a) receives a statement (which meets the requirements of paragraph (5)) that the beneficial owner of the obligation is not a United States person, or
(II) the Secretary has determined that such a statement is not required in order to carry out the purposes of this subsection.
(3) Portfolio interest not to include interest received by 10-percent shareholders
For purposes of this subsection—
(A) In general
The term "portfolio interest" shall not include any interest described in paragraph (2) which is received by a 10-percent shareholder.
(B) 10-Percent shareholder
The term "10-percent shareholder" means—
(i) in the case of an obligation issued by a corporation, any person who owns 10 percent or more of the total combined voting power of all classes of stock of such corporation entitled to vote, or
(ii) in the case of an obligation issued by a partnership, any person who owns 10 percent or more of the capital or profits interest in such partnership.
(C) Attribution rules
For purposes of determining ownership of stock under subparagraph (B)(i) the rules of section 318(a) shall apply, except that—
(i) section 318(a)(2)(C) shall be applied without regard to the 50-percent limitation therein,
(ii) section 318(a)(3)(C) shall be applied—
(I) without regard to the 50-percent limitation therein; and
(II) in any case where such section would not apply but for subclause (I), by considering a corporation as owning the stock (other than stock in such corporation) which is owned by or for any shareholder of such corporation in that proportion which the value of the stock which such shareholder owns in such corporation bears to the value of all stock in such corporation, and
(iii) any stock which a person is treated as owning after application of section 318(a)(4) shall not, for purposes of applying paragraphs (2) and (3) of section 318(a), be treated as actually owned by such person.
Under regulations prescribed by the Secretary, rules similar to the rules of the preceding sentence shall be applied in determining the ownership of the capital or profits interest in a partnership for purposes of subparagraph (B)(ii).
(4) Portfolio interest not to include certain contingent interest
For purposes of this subsection—
(A) In general
Except as otherwise provided in this paragraph, the term "portfolio interest" shall not include—
(i) any interest if the amount of such interest is determined by reference to—
(I) any receipts, sales or other cash flow of the debtor or a related person,
(II) any income or profits of the debtor or a related person,
(III) any change in value of any property of the debtor or a related person, or
(IV) any dividend, partnership distributions, or similar payments made by the debtor or a related person, or
(ii) any other type of contingent interest that is identified by the Secretary by regulation, where a denial of the portfolio interest exemption is necessary or appropriate to prevent avoidance of Federal income tax.
(B) Related person
The term "related person" means any person who is related to the debtor within the meaning of section 267(b) or 707(b)(1), or who is a party to any arrangement undertaken for a purpose of avoiding the application of this paragraph.
(C) Exceptions
Subparagraph (A)(i) shall not apply to—
(i) any amount of interest solely by reason of the fact that the timing of any interest or principal payment is subject to a contingency,
(ii) any amount of interest solely by reason of the fact that the interest is paid with respect to nonrecourse or limited recourse indebtedness,
(iii) any amount of interest all or substantially all of which is determined by reference to any other amount of interest not described in subparagraph (A) (or by reference to the principal amount of indebtedness on which such other interest is paid),
(iv) any amount of interest solely by reason of the fact that the debtor or a related person enters into a hedging transaction to manage the risk of interest rate or currency fluctuations with respect to such interest,
(v) any amount of interest determined by reference to—
(I) changes in the value of property (including stock) that is actively traded (within the meaning of section 1092(d)) other than property described in section 897(c)(1) or (g),
(II) the yield on property described in subclause (I), other than a debt instrument that pays interest described in subparagraph (A), or stock or other property that represents a beneficial interest in the debtor or a related person, or
(III) changes in any index of the value of property described in subclause (I) or of the yield on property described in subclause (II), and
(vi) any other type of interest identified by the Secretary by regulation.
(D) Exception for certain existing indebtedness
Subparagraph (A) shall not apply to any interest paid or accrued with respect to any indebtedness with a fixed term—
(i) which was issued on or before April 7, 1993, or
(ii) which was issued after such date pursuant to a written binding contract in effect on such date and at all times thereafter before such indebtedness was issued.
(5) Certain statements
A statement with respect to any obligation meets the requirements of this paragraph if such statement is made by—
(A) the beneficial owner of such obligation, or
(B) a securities clearing organization, a bank, or other financial institution that holds customers' securities in the ordinary course of its trade or business.
The preceding sentence shall not apply to any statement with respect to payment of interest on any obligation by any person if, at least one month before such payment, the Secretary has published a determination that any statement from such person (or any class including such person) does not meet the requirements of this paragraph.
(6) Secretary may provide subsection not to apply in cases of inadequate information exchange
(A) In general
If the Secretary determines that the exchange of information between the United States and a foreign country is inadequate to prevent evasion of the United States income tax by United States persons, the Secretary may provide in writing (and publish a statement) that the provisions of this subsection shall not apply to payments of interest to any person within such foreign country (or payments addressed to, or for the account of, persons within such foreign country) during the period—
(i) beginning on the date specified by the Secretary, and
(ii) ending on the date that the Secretary determines that the exchange of information between the United States and the foreign country is adequate to prevent the evasion of United States income tax by United States persons.
(B) Exception for certain obligations
Subparagraph (A) shall not apply to the payment of interest on any obligation which is issued on or before the date of the publication of the Secretary's determination under such subparagraph.
(7) Registered form
For purposes of this subsection, the term "registered form" has the same meaning given such term by section 163(f).
(i) Tax not to apply to certain interest and dividends
(1) In general
No tax shall be imposed under paragraph (1)(A) or (1)(C) of subsection (a) on any amount described in paragraph (2).
(2) Amounts to which paragraph (1) applies
The amounts described in this paragraph are as follows:
(A) Interest on deposits, if such interest is not effectively connected with the conduct of a trade or business within the United States.
(B) The active foreign business percentage of—
(i) any dividend paid by an existing 80/20 company, and
(ii) any interest paid by an existing 80/20 company.
(C) Income derived by a foreign central bank of issue from bankers' acceptances.
(D) Dividends paid by a foreign corporation which are treated under section 861(a)(2)(B) as income from sources within the United States.
(3) Deposits
For purposes of paragraph (2), the term "deposits" means amounts which are—
(A) deposits with persons carrying on the banking business,
(B) deposits or withdrawable accounts with savings institutions chartered and supervised as savings and loan or similar associations under Federal or State law, but only to the extent that amounts paid or credited on such deposits or accounts are deductible under section 591 (determined without regard to sections 265 and 291) in computing the taxable income of such institutions, and
(C) amounts held by an insurance company under an agreement to pay interest thereon.
(j) Exemption for certain gambling winnings
No tax shall be imposed under paragraph (1)(A) of subsection (a) on the proceeds from a wager placed in any of the following games: blackjack, baccarat, craps, roulette, or big-6 wheel. The preceding sentence shall not apply in any case where the Secretary determines by regulation that the collection of the tax is administratively feasible.
(k) Exemption for certain dividends of regulated investment companies
(1) Interest-related dividends
(A) In general
Except as provided in subparagraph (B), no tax shall be imposed under paragraph (1)(A) of subsection (a) on any interest-related dividend received from a regulated investment company which meets the requirements of section 852(a) for the taxable year with respect to which the dividend is paid.
(B) Exceptions
Subparagraph (A) shall not apply—
(i) to any interest-related dividend received from a regulated investment company by a person to the extent such dividend is attributable to interest (other than interest described in subparagraph (E)(i) or (iii)) received by such company on indebtedness issued by such person or by any corporation or partnership with respect to which such person is a 10-percent shareholder,
(ii) to any interest-related dividend with respect to stock of a regulated investment company unless the person who would otherwise be required to deduct and withhold tax from such dividend under
(iii) to any interest-related dividend paid to any person within a foreign country (or any interest-related dividend payment addressed to, or for the account of, persons within such foreign country) during any period described in subsection (h)(6) with respect to such country.
Clause (iii) shall not apply to any dividend with respect to any stock which was acquired on or before the date of the publication of the Secretary's determination under subsection (h)(6).
(C) Interest-related dividend
For purposes of this paragraph—
(i) In general
Except as provided in clause (ii), an interest related dividend is any dividend, or part thereof, which is reported by the company as an interest related dividend in written statements furnished to its shareholders.
(ii) Excess reported amounts
If the aggregate reported amount with respect to the company for any taxable year exceeds the qualified net interest income of the company for such taxable year, an interest related dividend is the excess of—
(I) the reported interest related dividend amount, over
(II) the excess reported amount which is allocable to such reported interest related dividend amount.
(iii) Allocation of excess reported amount
(I) In general
Except as provided in subclause (II), the excess reported amount (if any) which is allocable to the reported interest related dividend amount is that portion of the excess reported amount which bears the same ratio to the excess reported amount as the reported interest related dividend amount bears to the aggregate reported amount.
(II) Special rule for noncalendar year taxpayers
In the case of any taxable year which does not begin and end in the same calendar year, if the post-December reported amount equals or exceeds the excess reported amount for such taxable year, subclause (I) shall be applied by substituting "post-December reported amount" for "aggregate reported amount" and no excess reported amount shall be allocated to any dividend paid on or before December 31 of such taxable year.
(iv) Definitions
For purposes of this subparagraph—
(I) Reported interest related dividend amount
The term "reported interest related dividend amount" means the amount reported to its shareholders under clause (i) as an interest related dividend.
(II) Excess reported amount
The term "excess reported amount" means the excess of the aggregate reported amount over the qualified net interest income of the company for the taxable year.
(III) Aggregate reported amount
The term "aggregate reported amount" means the aggregate amount of dividends reported by the company under clause (i) as interest related dividends for the taxable year (including interest related dividends paid after the close of the taxable year described in section 855).
(IV) Post-December reported amount
The term "post-December reported amount" means the aggregate reported amount determined by taking into account only dividends paid after December 31 of the taxable year.
(D) Qualified net interest income
For purposes of subparagraph (C), the term "qualified net interest income" means the qualified interest income of the regulated investment company reduced by the deductions properly allocable to such income.
(E) Qualified interest income
For purposes of subparagraph (D), the term "qualified interest income" means the sum of the following amounts derived by the regulated investment company from sources within the United States:
(i) Any amount includible in gross income as original issue discount (within the meaning of section 1273) on an obligation payable 183 days or less from the date of original issue (without regard to the period held by the company).
(ii) Any interest includible in gross income (including amounts recognized as ordinary income in respect of original issue discount or market discount or acquisition discount under part V of subchapter P and such other amounts as regulations may provide) on an obligation which is in registered form; except that this clause shall not apply to—
(I) any interest on an obligation issued by a corporation or partnership if the regulated investment company is a 10-percent shareholder in such corporation or partnership, and
(II) any interest which is treated as not being portfolio interest under the rules of subsection (h)(4).
(iii) Any interest referred to in subsection (i)(2)(A) (without regard to the trade or business of the regulated investment company).
(iv) Any interest-related dividend includable in gross income with respect to stock of another regulated investment company.
(F) 10-percent shareholder
For purposes of this paragraph, the term "10-percent shareholder" has the meaning given such term by subsection (h)(3)(B).
(2) Short-term capital gain dividends
(A) In general
Except as provided in subparagraph (B), no tax shall be imposed under paragraph (1)(A) of subsection (a) on any short-term capital gain dividend received from a regulated investment company which meets the requirements of section 852(a) for the taxable year with respect to which the dividend is paid.
(B) Exception for aliens taxable under subsection (a)(2)
Subparagraph (A) shall not apply in the case of any nonresident alien individual subject to tax under subsection (a)(2).
(C) Short-term capital gain dividend
For purposes of this paragraph—
(i) In general
Except as provided in clause (ii), the term "short-term capital gain dividend" means any dividend, or part thereof, which is reported by the company as a short-term capital gain dividend in written statements furnished to its shareholders.
(ii) Excess reported amounts
If the aggregate reported amount with respect to the company for any taxable year exceeds the qualified short-term gain of the company for such taxable year, the term "short-term capital gain dividend" means the excess of—
(I) the reported short-term capital gain dividend amount, over
(II) the excess reported amount which is allocable to such reported short-term capital gain dividend amount.
(iii) Allocation of excess reported amount
(I) In general
Except as provided in subclause (II), the excess reported amount (if any) which is allocable to the reported short-term capital gain dividend amount is that portion of the excess reported amount which bears the same ratio to the excess reported amount as the reported short-term capital gain dividend amount bears to the aggregate reported amount.
(II) Special rule for noncalendar year taxpayers
In the case of any taxable year which does not begin and end in the same calendar year, if the post-December reported amount equals or exceeds the excess reported amount for such taxable year, subclause (I) shall be applied by substituting "post-December reported amount" for "aggregate reported amount" and no excess reported amount shall be allocated to any dividend paid on or before December 31 of such taxable year.
(iv) Definitions
For purposes of this subparagraph—
(I) Reported short-term capital gain dividend amount
The term "reported short-term capital gain dividend amount" means the amount reported to its shareholders under clause (i) as a short-term capital gain dividend.
(II) Excess reported amount
The term "excess reported amount" means the excess of the aggregate reported amount over the qualified short-term gain of the company for the taxable year.
(III) Aggregate reported amount
The term "aggregate reported amount" means the aggregate amount of dividends reported by the company under clause (i) as short-term capital gain dividends for the taxable year (including short-term capital gain dividends paid after the close of the taxable year described in section 855).
(IV) Post-December reported amount
The term "post-December reported amount" means the aggregate reported amount determined by taking into account only dividends paid after December 31 of the taxable year.
(D) Qualified short-term gain
For purposes of subparagraph (C), the term "qualified short-term gain" means the excess of the net short-term capital gain of the regulated investment company for the taxable year over the net long-term capital loss (if any) of such company for such taxable year. For purposes of this subparagraph, the net short-term capital gain of the regulated investment company shall be computed by treating any short-term capital gain dividend includible in gross income with respect to stock of another regulated investment company as a short-term capital gain.
(E) Certain distributions
In the case of a distribution to which section 897 does not apply by reason of the second sentence of section 897(h)(1), the amount which would be treated as a short-term capital gain dividend to the shareholder (without regard to this subparagraph)—
(i) shall not be treated as a short-term capital gain dividend, and
(ii) shall be included in such shareholder's gross income as a dividend from the regulated investment company.
(l) Rules relating to existing 80/20 companies
For purposes of this subsection and subsection (i)(2)(B)—
(1) Existing 80/20 company
(A) In general
The term "existing 80/20 company" means any corporation if—
(i) such corporation met the 80-percent foreign business requirements of section 861(c)(1) (as in effect before the date of the enactment of this subsection) for such corporation's last taxable year beginning before January 1, 2011,
(ii) such corporation meets the 80-percent foreign business requirements of subparagraph (B) with respect to each taxable year after the taxable year referred to in clause (i), and
(iii) there has not been an addition of a substantial line of business with respect to such corporation after the date of the enactment of this subsection.
(B) Foreign business requirements
(i) In general
Except as provided in clause (iv), a corporation meets the 80-percent foreign business requirements of this subparagraph if it is shown to the satisfaction of the Secretary that at least 80 percent of the gross income from all sources of such corporation for the testing period is active foreign business income.
(ii) Active foreign business income
For purposes of clause (i), the term "active foreign business income" means gross income which—
(I) is derived from sources outside the United States (as determined under this subchapter), and
(II) is attributable to the active conduct of a trade or business in a foreign country or possession of the United States.
(iii) Testing period
For purposes of this subsection, the term "testing period" means the 3-year period ending with the close of the taxable year of the corporation preceding the payment (or such part of such period as may be applicable). If the corporation has no gross income for such 3-year period (or part thereof), the testing period shall be the taxable year in which the payment is made.
(iv) Transition rule
In the case of a taxable year for which the testing period includes 1 or more taxable years beginning before January 1, 2011—
(I) a corporation meets the 80-percent foreign business requirements of this subparagraph if and only if the weighted average of—
(aa) the percentage of the corporation's gross income from all sources that is active foreign business income (as defined in subparagraph (B) of section 861(c)(1) (as in effect before the date of the enactment of this subsection)) for the portion of the testing period that includes taxable years beginning before January 1, 2011, and
(bb) the percentage of the corporation's gross income from all sources that is active foreign business income (as defined in clause (ii) of this subparagraph) for the portion of the testing period, if any, that includes taxable years beginning on or after January 1, 2011,
is at least 80 percent, and
(II) the active foreign business percentage for such taxable year shall equal the weighted average percentage determined under subclause (I).
(2) Active foreign business percentage
Except as provided in paragraph (1)(B)(iv), the term "active foreign business percentage" means, with respect to any existing 80/20 company, the percentage which—
(A) the active foreign business income of such company for the testing period, is of
(B) the gross income of such company for the testing period from all sources.
(3) Aggregation rules
For purposes of applying paragraph (1) (other than subparagraphs (A)(i) and (B)(iv) thereof) and paragraph (2)—
(A) In general
The corporation referred to in paragraph (1)(A) and all of such corporation's subsidiaries shall be treated as one corporation.
(B) Subsidiaries
For purposes of subparagraph (A), the term "subsidiary" means any corporation in which the corporation referred to in subparagraph (A) owns (directly or indirectly) stock meeting the requirements of section 1504(a)(2) (determined by substituting "50 percent" for "80 percent" each place it appears and without regard to section 1504(b)(3)).
(4) Regulations
The Secretary may issue such regulations or other guidance as is necessary or appropriate to carry out the purposes of this section, including regulations or other guidance which provide for the proper application of the aggregation rules described in paragraph (3).
(m) Treatment of dividend equivalent payments
(1) In general
For purposes of subsection (a), sections 881 and 4948(a), and chapters 3 and 4, a dividend equivalent shall be treated as a dividend from sources within the United States.
(2) Dividend equivalent
For purposes of this subsection, the term "dividend equivalent" means—
(A) any substitute dividend made pursuant to a securities lending or a sale-repurchase transaction that (directly or indirectly) is contingent upon, or determined by reference to, the payment of a dividend from sources within the United States,
(B) any payment made pursuant to a specified notional principal contract that (directly or indirectly) is contingent upon, or determined by reference to, the payment of a dividend from sources within the United States, and
(C) any other payment determined by the Secretary to be substantially similar to a payment described in subparagraph (A) or (B).
(3) Specified notional principal contract
For purposes of this subsection, the term "specified notional principal contract" means—
(A) any notional principal contract if—
(i) in connection with entering into such contract, any long party to the contract transfers the underlying security to any short party to the contract,
(ii) in connection with the termination of such contract, any short party to the contract transfers the underlying security to any long party to the contract,
(iii) the underlying security is not readily tradable on an established securities market,
(iv) in connection with entering into such contract, the underlying security is posted as collateral by any short party to the contract with any long party to the contract, or
(v) such contract is identified by the Secretary as a specified notional principal contract,
(B) in the case of payments made after the date which is 2 years after the date of the enactment of this subsection, any notional principal contract unless the Secretary determines that such contract is of a type which does not have the potential for tax avoidance.
(4) Definitions
For purposes of paragraph (3)(A)—
(A) Long party
The term "long party" means, with respect to any underlying security of any notional principal contract, any party to the contract which is entitled to receive any payment pursuant to such contract which is contingent upon, or determined by reference to, the payment of a dividend from sources within the United States with respect to such underlying security.
(B) Short party
The term "short party" means, with respect to any underlying security of any notional principal contract, any party to the contract which is not a long party with respect to such underlying security.
(C) Underlying security
The term "underlying security" means, with respect to any notional principal contract, the security with respect to which the dividend referred to in paragraph (2)(B) is paid. For purposes of this paragraph, any index or fixed basket of securities shall be treated as a single security.
(5) Payments determined on gross basis
For purposes of this subsection, the term "payment" includes any gross amount which is used in computing any net amount which is transferred to or from the taxpayer.
(6) Prevention of over-withholding
In the case of any chain of dividend equivalents one or more of which is subject to tax under subsection (a) or section 881, the Secretary may reduce such tax, but only to the extent that the taxpayer can establish that such tax has been paid with respect to another dividend equivalent in such chain, or is not otherwise due, or as the Secretary determines is appropriate to address the role of financial intermediaries in such chain. For purposes of this paragraph, a dividend shall be treated as a dividend equivalent.
(7) Coordination with chapters 3 and 4
For purposes of chapters 3 and 4, each person that is a party to any contract or other arrangement that provides for the payment of a dividend equivalent shall be treated as having control of such payment.
(n) Cross references
(1) For tax treatment of certain amounts distributed by the United States to nonresident alien individuals, see section 402(e)(2).
(2) For taxation of nonresident alien individuals who are expatriate United States citizens, see section 877.
(3) For doubling of tax on citizens of certain foreign countries, see section 891.
(4) For adjustment of tax in case of nationals or residents of certain foreign countries, see section 896.
(5) For withholding of tax at source on nonresident alien individuals, see section 1441.
(6) For election to treat married nonresident alien individual as resident of United States in certain cases, see subsections (g) and (h) of section 6013.
(7) For special tax treatment of gain or loss from the disposition by a nonresident alien individual of a United States real property interest, see section 897.
(Aug. 16, 1954, ch. 736,
Editorial Notes
References in Text
Section 207 of the Social Security Act, referred to in subsec. (a)(3)(A), is classified to
The Trade Act of 1974, referred to in subsec. (f)(2)(B), is
The date of the enactment of this subsection, referred to in subsec. (l)(1)(A)(i), (iii), (B)(iv)(I)(aa), is the date of enactment of
The date of the enactment of this subsection, referred to in subsec. (m)(3)(B), is the date of enactment of
Amendments
2018—Subsec. (a)(3).
2015—Subsec. (k)(1)(C)(v).
Subsec. (k)(2)(C)(v).
2014—Subsec. (a)(1)(B).
Subsec. (k)(1)(C)(v), (2)(C)(v).
2013—Subsec. (k)(1)(C)(v), (2)(C)(v).
2010—Subsec. (h)(2).
Subsec. (h)(3)(A).
Subsec. (i)(2)(B).
Subsec. (k)(1)(A).
Subsec. (k)(1)(C).
Subsec. (k)(2)(A).
Subsec. (k)(2)(C).
Subsec. (k)(2)(D).
"(i) the net short-term capital gain of the regulated investment company shall be computed by treating any short-term capital gain dividend includible in gross income with respect to stock of another regulated investment company as a short-term capital gain, and
"(ii) the excess of the net short-term capital gain for a taxable year over the net long-term capital loss for a taxable year (to which an election under section 4982(e)(4) does not apply) shall be determined without regard to any net capital loss or net short-term capital loss attributable to transactions after October 31 of such year, and any such net capital loss or net short-term capital loss shall be treated as arising on the 1st day of the next taxable year.
To the extent provided in regulations, clause (ii) shall apply also for purposes of computing the taxable income of the regulated investment company."
Subsec. (l).
Subsec. (m).
Subsec. (n).
2008—Subsec. (k)(1)(C), (2)(C).
2006—Subsec. (k)(2)(E).
2004—Subsec. (i)(2)(D).
Subsecs. (k), (l).
2000—Subsec. (f)(2)(B).
1999—Subsec. (h)(4)(C)(iv).
1998—Subsec. (f)(2)(B).
1996—Subsec. (b)(1).
Subsec. (f)(2)(B).
1994—Subsec. (a)(3)(A).
Subsec. (c).
1993—Subsec. (a)(2).
Subsec. (h)(2)(B)(ii).
Subsec. (h)(4) to (7).
1992—Subsec. (a)(1)(B).
Subsec. (b)(1).
Subsec. (k)(1).
1988—Subsec. (c).
Subsecs. (j), (k).
1986—Subsec. (a)(1).
Subsec. (a)(1)(C).
"(i) a sale or exchange of an original issue discount obligation, the amount of any gain not in excess of the original issue discount accruing while such obligation was held by the nonresident alien individual (to the extent such discount was not theretofore taken into account under clause (ii)), and
"(ii) the payment of interest on an original issue discount obligation, an amount equal to the original issue discount accrued on such obligation since the last payment of interest thereon (except that such original issue discount shall be taken into account under this clause only to the extent that the tax thereon does not exceed the interest payment less the tax imposed by subparagraph (A) thereon), and".
Subsec. (a)(1)(D).
Subsec. (a)(2).
Subsec. (a)(3).
Subsec. (e).
Subsec. (h)(2).
Subsec. (h)(3)(C)(ii), (iii).
Subsecs. (i), (j).
1984—Subsec. (a)(1).
Subsec. (a)(1)(A).
Subsec. (a)(1)(C).
Subsec. (g).
Subsec. (g)(6) to (8).
Subsec. (h).
Subsec. (i).
1983—Subsec. (a)(3).
Subsec. (a)(3)(A).
1981—Subsec. (g)(6).
1980—Subsec. (b)(1).
Subsec. (f).
Subsec. (g)(8).
1978—Subsec. (b)(1).
1976—Subsec. (a)(1)(C)(i), (ii).
Subsec. (d).
Subsec. (g)(7).
1974—Subsec. (b)(1).
1971—Subsec. (a)(1)(A).
Subsec. (a)(1)(C).
1966—Subsecs. (a), (b).
Subsec. (c).
Subsecs. (d) to (f).
Subsec. (g).
1964—Subsec. (a).
Subsec. (b).
1961—Subsecs. (d), (e).
1960—Subsec. (d).
1958—Subsec. (a)(1).
Subsec. (b).
Statutory Notes and Related Subsidiaries
Effective Date of 2015 Amendment
Effective Date of 2014 Amendment
Amendment by section 221(a)(71) of
Effective Date of 2013 Amendment
Effective Date of 2010 Amendment
Amendment by section 301(f) of
Amendment by section 302(b)(2) of
Amendment by section 308(b)(3) of
Amendment by
Amendment by section 502(b)(1), (2)(A) of
Effective Date of 2008 Amendment
Effective Date of 2006 Amendment
Amendment by
Effective Date of 2004 Amendment
"(1)
"(2)
"(3)
Effective Date of 1999 Amendment
Amendment by
Effective Date of 1996 Amendment
Amendment by section 1401(b)(10) of
Amendment by section 1954(b)(1) of
Effective Date of 1994 Amendment
Effective Date of 1993 Amendment
Amendment by section 13113(d)(5) of
Effective Date of 1992 Amendment
Amendment by
Effective Date of 1988 Amendment
Amendment by section 1001(d)(2)(B) of
Effective Date of 1986 Amendment
Amendment by section 301(b)(9) of
Amendment by section 1211(b)(4), (5) of
Amendment by section 1214(c)(1) of
Amendment by section 1810(d)(1)(A), (2), (3)(A), (B), (e)(2)(A) of
Effective Date of 1984 Amendment
Amendment by section 42(a)(9) of
"(1)
"(2)
"(3)
"(A)
"(B)
"(C)
"(i) The term 'applicable CFC' has the meaning given such term by section 121(b)(2)(D) of this Act [set out as a note under
"(ii) The term 'United States affiliate obligation' means an obligation described in section 121(b)(2)(F) of this Act [set out as a note under
[
"(1)
"(2)
Amendment by section 412(b)(1) of
Effective Date of 1983 Amendment
Amendment by section 121(c)(1) of
Effective Date of 1981 Amendment
Effective Date of 1980 Amendment
Amendment by
Amendment by
Effective Date of 1978 Amendment
Amendment by section 401(b)(3) of
Amendment by section 421(e)(4) of
Effective Date of 1976 Amendment
Amendment by section 1012(a)(2) of
Amendment by section 1901(b)(3)(I) of
Effective Date of 1974 Amendment
Amendment by
Effective Date of 1971 Amendment
Effective Date of 1966 Amendment
"(1) The amendments made by this section (other than the amendments made by subsections (h), (i), and (k)) [amending this section and
"(2) The amendments made by subsection (h) [amending
"(3) The amendments made by subsection (i) [amending
"(4) The amendments made by subsection (k) [amending
Effective Date of 1964 Amendment
Amendment by section 113(b)(1) of
Amendment by section 201(d)(12) of
Effective Date of 1961 Amendment
Amendment by
Effective Date of 1960 Amendment
Amendment by
Effective Date of 1958 Amendment
Savings Provision
For provisions that nothing in amendment by
Applicability of Certain Amendments by Pub. L. 99–514 in Relation to Treaty Obligations of United States
For nonapplication of amendments by sections 1211(b)(4), (5) and 1214(c)(1) of
Plan Amendments Not Required Until January 1, 1998
For provisions directing that if any amendments made by subtitle D [§§1401–1465] of title I of
Plan Amendments Not Required Until January 1, 1994
For provisions directing that if any amendments made by subtitle B [§§521–523] of title V 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
§872. Gross income
(a) General rule
In the case of a nonresident alien individual, except where the context clearly indicates otherwise, gross income includes only—
(1) gross income which is derived from sources within the United States and which is not effectively connected with the conduct of a trade or business within the United States, and
(2) gross income which is effectively connected with the conduct of a trade or business within the United States.
(b) Exclusions
The following items shall not be included in gross income of a nonresident alien individual, and shall be exempt from taxation under this subtitle:
(1) Ships operated by certain nonresidents
Gross income derived by an individual resident of a foreign country from the international operation of a ship or ships if such foreign country grants an equivalent exemption to individual residents of the United States.
(2) Aircraft operated by certain nonresidents
Gross income derived by an individual resident of a foreign country from the international operation of aircraft if such foreign country grants an equivalent exemption to individual residents of the United States.
(3) Compensation of participants in certain exchange or training programs
Compensation paid by a foreign employer to a nonresident alien individual for the period he is temporarily present in the United States as a nonimmigrant under subparagraph (F), (J), or (Q) of section 101(a)(15) of the Immigration and Nationality Act, as amended. For purposes of this paragraph, the term "foreign employer" means—
(A) a nonresident alien individual, foreign partnership, or foreign corporation, or
(B) an office or place of business maintained in a foreign country or in a possession of the United States by a domestic corporation, a domestic partnership, or an individual who is a citizen or resident of the United States.
(4) Certain bond income of residents of the Ryukyu Islands or the Trust Territory of the Pacific Islands
Income derived by a nonresident alien individual from a series E or series H United States savings bond, if such individual acquired such bond while a resident of the Ryukyu Islands or the Trust Territory of the Pacific Islands.
(5) Income derived from wagering transactions in certain parimutuel pools
Gross income derived by a nonresident alien individual from a legal wagering transaction initiated outside the United States in a parimutuel pool with respect to a live horse race or dog race in the United States.
(6) Certain rental income
Income to which paragraphs (1) and (2) apply shall include income which is derived from the rental on a full or bareboat basis of a ship or ships or aircraft, as the case may be.
(7) Application to different types of transportation
The Secretary may provide that this subsection be applied separately with respect to income from different types of transportation.
(8) Treatment of possessions
To the extent provided in regulations, a possession of the United States shall be treated as a foreign country for purposes of this subsection.
(Aug. 16, 1954, ch. 736,
Editorial Notes
References in Text
Section 101 of the Immigration and Nationality Act, referred to in subsec. (b)(3), is classified to
Amendments
2004—Subsec. (b)(5) to (8).
1994—Subsec. (b)(3).
1989—Subsec. (b)(7).
1988—Subsec. (a).
Subsec. (b)(1), (2).
1986—Subsec. (b)(1).
Subsec. (b)(2).
Subsec. (b)(5), (6).
1966—Subsec. (a).
Subsec. (b)(3)(B).
Subsec. (b)(4).
1961—Subsec. (b)(3).
Statutory Notes and Related Subsidiaries
Effective Date of 2004 Amendment
Effective Date of 1994 Amendment
Amendment by
Effective Date of 1989 Amendment
Amendment by
Effective Date of 1988 Amendment
Amendment by
Effective Date of 1986 Amendment
Amendment by
Effective Date of 1966 Amendment
Amendment by
Effective Date of 1961 Amendment
Amendment by
Applicability of Certain Amendments by Pub. L. 99–514 in Relation to Treaty Obligations of United States
For nonapplication of amendment by section 1212(c)(1), (2) of
Executive Documents
Termination of Trust Territory of the Pacific Islands
For termination of Trust Territory of the Pacific Islands, see note set out preceding
§873. Deductions
(a) General rule
In the case of a nonresident alien individual, the deductions shall be allowed only for purposes of section 871(b) and (except as provided by subsection (b)) only if and to the extent that they are connected with income which is effectively connected with the conduct of a trade or business within the United States; and the proper apportionment and allocation of the deductions for this purpose shall be determined as provided in regulations prescribed by the Secretary.
(b) Exceptions
The following deductions shall be allowed whether or not they are connected with income which is effectively connected with the conduct of a trade or business within the United States:
(1) Losses
The deduction allowed by section 165 for casualty or theft losses described in paragraph (2) or (3) of section 165(c), but only if the loss is of property located within the United States.
(2) Charitable contributions
The deduction for charitable contributions and gifts allowed by section 170.
(3) Personal exemption
The deduction for personal exemptions allowed by section 151, except that only one exemption shall be allowed under section 151 unless the taxpayer is a resident of a contiguous country or is a national of the United States.
(c) Cross reference
For rule that certain foreign taxes are not to be taken into account in determining deduction or credit, see section 906(b)(1).
(Aug. 16, 1954, ch. 736,
Editorial Notes
Amendments
1998—Subsec. (b)(1).
1984—Subsec. (b)(1).
1977—Subsec. (c).
1976—Subsec. (a).
1972—Subsec. (b)(3).
1966—
Statutory Notes and Related Subsidiaries
Effective Date of 1998 Amendment
Amendment by
Effective Date of 1984 Amendment
Amendment by
Effective Date of 1977 Amendment
Amendment by
Effective Date of 1972 Amendment
Amendment by
Effective Date of 1966 Amendment
Amendment by
§874. Allowance of deductions and credits
(a) Return prerequisite to allowance
A nonresident alien individual shall receive the benefit of the deductions and credits allowed to him in this subtitle only by filing or causing to be filed with the Secretary a true and accurate return, in the manner prescribed in subtitle F (sec. 6001 and following, relating to procedure and administration), including therein all the information which the Secretary may deem necessary for the calculation of such deductions and credits. This subsection shall not be construed to deny the credits provided by sections 31 and 33 for tax withheld at source or the credit provided by section 34 for certain uses of gasoline and special fuels.
(b) Tax withheld at source
The benefit of the deduction for exemptions under section 151 may, in the discretion of the Secretary, and under regulations prescribed by the Secretary, be received by a non-resident alien individual entitled thereto, by filing a claim therefor with the withholding agent.
(c) Foreign tax credit
Except as provided in section 906, a nonresident alien individual shall not be allowed the credits against the tax for taxes of foreign countries and possessions of the United States allowed by section 901.
(Aug. 16, 1954, ch. 736,
Editorial Notes
Amendments
1984—Subsec. (a).
1983—Subsec. (a).
1976—Subsecs. (a), (b).
1970—Subsec. (a).
1966—Subsec. (a).
Subsec. (c).
1965—Subsec. (a).
Statutory Notes and Related Subsidiaries
Effective Date of 1984 Amendment
Amendment by
Effective Date of 1983 Amendment
Amendment by
Effective Date of 1970 Amendment
Amendment by
Effective Date of 1966 Amendment
Amendment by section 103(d) of
Effective Date of 1965 Amendment
Amendment by
§875. Partnerships; beneficiaries of estates and trusts
For purposes of this subtitle—
(1) a nonresident alien individual or foreign corporation shall be considered as being engaged in a trade or business within the United States if the partnership of which such individual or corporation is a member is so engaged, and
(2) a nonresident alien individual or foreign corporation which is a beneficiary of an estate or trust which is engaged in any trade or business within the United States shall be treated as being engaged in such trade or business within the United States.
(Aug. 16, 1954, ch. 736,
Editorial Notes
Amendments
1966—
Statutory Notes and Related Subsidiaries
Effective Date of 1966 Amendment
Amendment by
§876. Alien residents of Puerto Rico, Guam, American Samoa, or the Northern Mariana Islands
(a) General rule
This subpart shall not apply to any alien individual who is a bona fide resident of Puerto Rico, Guam, American Samoa, or the Northern Mariana Islands during the entire taxable year and such alien shall be subject to the tax imposed by section 1.
(b) Cross references
For exclusion from gross income of income derived from sources within—
(1) Guam, American Samoa, and the Northern Mariana Islands, see section 931, and
(2) Puerto Rico, see section 933.
(Aug. 16, 1954, ch. 736,
Editorial Notes
Amendments
1986—
Subsec. (a).
Subsec. (b).
Statutory Notes and Related Subsidiaries
Effective Date of 1986 Amendment
Amendment by
§877. Expatriation to avoid tax
(a) Treatment of expatriates
(1) In general
Every nonresident alien individual to whom this section applies and who, within the 10-year period immediately preceding the close of the taxable year, lost United States citizenship shall be taxable for such taxable year in the manner provided in subsection (b) if the tax imposed pursuant to such subsection (after any reduction in such tax under the last sentence of such subsection) exceeds the tax which, without regard to this section, is imposed pursuant to section 871.
(2) Individuals subject to this section
This section shall apply to any individual if—
(A) the average annual net income tax (as defined in section 38(c)(1)) of such individual for the period of 5 taxable years ending before the date of the loss of United States citizenship is greater than $124,000,
(B) the net worth of the individual as of such date is $2,000,000 or more, or
(C) such individual fails to certify under penalty of perjury that he has met the requirements of this title for the 5 preceding taxable years or fails to submit such evidence of such compliance as the Secretary may require.
In the case of the loss of United States citizenship in any calendar year after 2004, such $124,000 amount shall be increased by an amount equal to such dollar amount multiplied by the cost-of-living adjustment determined under section 1(f)(3) for such calendar year by substituting "2003" for "1992" in subparagraph (B) thereof. Any increase under the preceding sentence shall be rounded to the nearest multiple of $1,000.
(b) Alternative tax
A nonresident alien individual described in subsection (a) shall be taxable for the taxable year as provided in section 1 or 55, except that—
(1) the gross income shall include only the gross income described in section 872(a) (as modified by subsection (d) of this section), and
(2) the deductions shall be allowed if and to the extent that they are connected with the gross income included under this section, except that the capital loss carryover provided by section 1212(b) shall not be allowed; and the proper allocation and apportionment of the deductions for this purpose shall be determined as provided under regulations prescribed by the Secretary.
For purposes of paragraph (2), the deductions allowed by section 873(b) shall be allowed; and the deduction (for losses not connected with the trade or business if incurred in transactions entered into for profit) allowed by section 165(c)(2) shall be allowed, but only if the profit, if such transaction had resulted in a profit, would be included in gross income under this section. The tax imposed solely by reason of this section shall be reduced (but not below zero) by the amount of any income, war profits, and excess profits taxes (within the meaning of section 903) paid to any foreign country or possession of the United States on any income of the taxpayer on which tax is imposed solely by reason of this section.
(c) Exceptions
(1) In general
Subparagraphs (A) and (B) of subsection (a)(2) shall not apply to an individual described in paragraph (2) or (3).
(2) Dual citizens
(A) In general
An individual is described in this paragraph if—
(i) the individual became at birth a citizen of the United States and a citizen of another country and continues to be a citizen of such other country, and
(ii) the individual has had no substantial contacts with the United States.
(B) Substantial contacts
An individual shall be treated as having no substantial contacts with the United States only if the individual—
(i) was never a resident of the United States (as defined in section 7701(b)),
(ii) has never held a United States passport, and
(iii) was not present in the United States for more than 30 days during any calendar year which is 1 of the 10 calendar years preceding the individual's loss of United States citizenship.
(3) Certain minors
An individual is described in this paragraph if—
(A) the individual became at birth a citizen of the United States,
(B) neither parent of such individual was a citizen of the United States at the time of such birth,
(C) the individual's loss of United States citizenship occurs before such individual attains age 18½, and
(D) the individual was not present in the United States for more than 30 days during any calendar year which is 1 of the 10 calendar years preceding the individual's loss of United States citizenship.
(d) Special rules for source, etc.
For purposes of subsection (b)—
(1) Source rules
The following items of gross income shall be treated as income from sources within the United States:
(A) Sale of property
Gains on the sale or exchange of property (other than stock or debt obligations) located in the United States.
(B) Stock or debt obligations
Gains on the sale or exchange of stock issued by a domestic corporation or debt obligations of United States persons or of the United States, a State or political subdivision thereof, or the District of Columbia.
(C) Income or gain derived from controlled foreign corporation
Any income or gain derived from stock in a foreign corporation but only—
(i) if the individual losing United States citizenship owned (within the meaning of section 958(a)), or is considered as owning (by applying the ownership rules of section 958(b)), at any time during the 2-year period ending on the date of the loss of United States citizenship, more than 50 percent of—
(I) the total combined voting power of all classes of stock entitled to vote of such corporation, or
(II) the total value of the stock of such corporation, and
(ii) to the extent such income or gain does not exceed the earnings and profits attributable to such stock which were earned or accumulated before the loss of citizenship and during periods that the ownership requirements of clause (i) are met.
(2) Gain recognition on certain exchanges
(A) In general
In the case of any exchange of property to which this paragraph applies, notwithstanding any other provision of this title, such property shall be treated as sold for its fair market value on the date of such exchange, and any gain shall be recognized for the taxable year which includes such date.
(B) Exchanges to which paragraph applies
This paragraph shall apply to any exchange during the 10-year period beginning on the date the individual loses United States citizenship if—
(i) gain would not (but for this paragraph) be recognized on such exchange in whole or in part for purposes of this subtitle,
(ii) income derived from such property was from sources within the United States (or, if no income was so derived, would have been from such sources), and
(iii) income derived from the property acquired in the exchange would be from sources outside the United States.
(C) Exception
Subparagraph (A) shall not apply if the individual enters into an agreement with the Secretary which specifies that any income or gain derived from the property acquired in the exchange (or any other property which has a basis determined in whole or part by reference to such property) during such 10-year period shall be treated as from sources within the United States. If the property transferred in the exchange is disposed of by the person acquiring such property, such agreement shall terminate and any gain which was not recognized by reason of such agreement shall be recognized as of the date of such disposition.
(D) Secretary may extend period
To the extent provided in regulations prescribed by the Secretary, subparagraph (B) shall be applied by substituting the 15-year period beginning 5 years before the loss of United States citizenship for the 10-year period referred to therein. In the case of any exchange occurring during such 5 years, any gain recognized under this subparagraph shall be recognized immediately after such loss of citizenship.
(E) Secretary may require recognition of gain in certain cases
To the extent provided in regulations prescribed by the Secretary—
(i) the removal of appreciated tangible personal property from the United States, and
(ii) any other occurrence which (without recognition of gain) results in a change in the source of the income or gain from property from sources within the United States to sources outside the United States,
shall be treated as an exchange to which this paragraph applies.
(3) Substantial diminishing of risks of ownership
For purposes of determining whether this section applies to any gain on the sale or exchange of any property, the running of the 10-year period described in subsection (a) and the period applicable under paragraph (2) shall be suspended for any period during which the individual's risk of loss with respect to the property is substantially diminished by—
(A) the holding of a put with respect to such property (or similar property),
(B) the holding by another person of a right to acquire the property, or
(C) a short sale or any other transaction.
(4) Treatment of property contributed to controlled foreign corporations
(A) In general
If—
(i) an individual losing United States citizenship contributes property during the 10-year period beginning on the date the individual loses United States citizenship to any corporation which, at the time of the contribution, is described in subparagraph (B), and
(ii) income derived from such property immediately before such contribution was from sources within the United States (or, if no income was so derived, would have been from such sources),
any income or gain on such property (or any other property which has a basis determined in whole or part by reference to such property) received or accrued by the corporation shall be treated as received or accrued directly by such individual and not by such corporation. The preceding sentence shall not apply to the extent the property has been treated under subparagraph (C) as having been sold by such corporation.
(B) Corporation described
A corporation is described in this subparagraph with respect to an individual if, were such individual a United States citizen—
(i) such corporation would be a controlled foreign corporation (as defined in section 957), and
(ii) such individual would be a United States shareholder (as defined in section 951(b)) with respect to such corporation.
(C) Disposition of stock in corporation
If stock in the corporation referred to in subparagraph (A) (or any other stock which has a basis determined in whole or part by reference to such stock) is disposed of during the 10-year period referred to in subsection (a) and while the property referred to in subparagraph (A) is held by such corporation, a pro rata share of such property (determined on the basis of the value of such stock) shall be treated as sold by the corporation immediately before such disposition.
(D) Anti-abuse rules
The Secretary shall prescribe such regulations as may be necessary to prevent the avoidance of the purposes of this paragraph, including where—
(i) the property is sold to the corporation, and
(ii) the property taken into account under subparagraph (A) is sold by the corporation.
(E) Information reporting
The Secretary shall require such information reporting as is necessary to carry out the purposes of this paragraph.
(e) Comparable treatment of lawful permanent residents who cease to be taxed as residents
(1) In general
Any long-term resident of the United States who ceases to be a lawful permanent resident of the United States (within the meaning of section 7701(b)(6)) shall be treated for purposes of this section and sections 2107, 2501, and 6039G in the same manner as if such resident were a citizen of the United States who lost United States citizenship on the date of such cessation or commencement.
(2) Long-term resident
For purposes of this subsection, the term "long-term resident" means any individual (other than a citizen of the United States) who is a lawful permanent resident of the United States in at least 8 taxable years during the period of 15 taxable years ending with the taxable year during which the event described in paragraph (1) occurs. For purposes of the preceding sentence, an individual shall not be treated as a lawful permanent resident for any taxable year if such individual is treated as a resident of a foreign country for the taxable year under the provisions of a tax treaty between the United States and the foreign country and does not waive the benefits of such treaty applicable to residents of the foreign country.
(3) Special rules
(A) Exceptions not to apply
Subsection (c) shall not apply to an individual who is treated as provided in paragraph (1).
(B) Step-up in basis
Solely for purposes of determining any tax imposed by reason of this subsection, property which was held by the long-term resident on the date the individual first became a resident of the United States shall be treated as having a basis on such date of not less than the fair market value of such property on such date. The preceding sentence shall not apply if the individual elects not to have such sentence apply. Such an election, once made, shall be irrevocable.
(4) Authority to exempt individuals
This subsection shall not apply to an individual who is described in a category of individuals prescribed by regulation by the Secretary.
(5) Regulations
The Secretary shall prescribe such regulations as may be appropriate to carry out this subsection, including regulations providing for the application of this subsection in cases where an alien individual becomes a resident of the United States during the 10-year period after being treated as provided in paragraph (1).
(f) Burden of proof
If the Secretary establishes that it is reasonable to believe that an individual's loss of United States citizenship would, but for this section, result in a substantial reduction for the taxable year in the taxes on his probable income for such year, the burden of proving for such taxable year that such loss of citizenship did not have for one of its principal purposes the avoidance of taxes under this subtitle or subtitle B shall be on such individual.
(g) Physical presence
(1) In general
This section shall not apply to any individual to whom this section would otherwise apply for any taxable year during the 10-year period referred to in subsection (a) in which such individual is physically present in the United States at any time on more than 30 days in the calendar year ending in such taxable year, and such individual shall be treated for purposes of this title as a citizen or resident of the United States, as the case may be, for such taxable year.
(2) Exception
(A) In general
In the case of an individual described in any of the following subparagraphs of this paragraph, a day of physical presence in the United States shall be disregarded if the individual is performing services in the United States on such day for an employer. The preceding sentence shall not apply if—
(i) such employer is related (within the meaning of section 267 and 707) to such individual, or
(ii) such employer fails to meet such requirements as the Secretary may prescribe by regulations to prevent the avoidance of the purposes of this paragraph.
Not more than 30 days during any calendar year may be disregarded under this subparagraph.
(B) Individuals with ties to other countries
An individual is described in this subparagraph if—
(i) the individual becomes (not later than the close of a reasonable period after loss of United States citizenship or termination of residency) a citizen or resident of the country in which—
(I) such individual was born,
(II) if such individual is married, such individual's spouse was born, or
(III) either of such individual's parents were born, and
(ii) the individual becomes fully liable for income tax in such country.
(C) Minimal prior physical presence in the United States
An individual is described in this subparagraph if, for each year in the 10-year period ending on the date of loss of United States citizenship or termination of residency, the individual was physically present in the United States for 30 days or less. The rule of section 7701(b)(3)(D) shall apply for purposes of this subparagraph.
(h) Termination
This section shall not apply to any individual whose expatriation date (as defined in section 877A(g)(3)) is on or after the date of the enactment of this subsection.
(Added
Inflation Adjusted Items for Certain Years
For inflation adjustment of certain items in this section, see Revenue Procedures listed in a table under
Editorial Notes
References in Text
The date of the enactment of this subsection, referred to in subsec. (h), is the date of enactment of
Prior Provisions
A prior section 877 was renumbered
Amendments
2018—Subsec. (d)(4)(B)(i).
2014—Subsec. (e)(2).
2008—Subsec. (e)(1).
"(A) ceases to be a lawful permanent resident of the United States (within the meaning of section 7701(b)(6)), or
"(B) commences to be treated as a resident of a foreign country under the provisions of a tax treaty between the United States and the foreign country and who does not waive the benefits of such treaty applicable to residents of the foreign country,
shall be treated for purposes of this section and sections 2107, 2501, and 6039G in the same manner as if such resident were a citizen of the United States who lost United States citizenship on the date of such cessation or commencement."
Subsec. (h).
2005—Subsec. (g)(2)(C).
2004—Subsec. (a).
Subsec. (c).
Subsec. (g).
1997—Subsec. (d)(2)(B).
Subsec. (d)(2)(D).
Subsec. (d)(3).
Subsec. (d)(4)(A).
Subsec. (d)(4)(A)(i).
Subsec. (d)(4)(A)(ii).
Subsec. (e)(1).
1996—Subsec. (a).
"(a)
Subsec. (a)(1).
Subsec. (b).
Subsec. (b)(1).
Subsec. (c).
Subsec. (d).
"(d)
"(1)
"(2)
For purposes of this section, gain on the sale or exchange of property which has a basis determined in whole or in part by reference to property described in paragraph (1) or (2) shall be treated as gain described in paragraph (1) or (2)."
"(d)
Subsecs. (e), (f).
1992—Subsec. (b).
1986—Subsec. (c).
1980—Subsec. (b).
1978—Subsec. (b).
1976—Subsecs. (b)(2), (e).
1974—Subsec. (b).
Statutory Notes and Related Subsidiaries
Effective Date of 2014 Amendment
Amendment by
Effective Date of 2008 Amendment
Amendment by
Effective Date of 2005 Amendment
Amendment by
Effective Date of 2004 Amendment
Effective Date of 1997 Amendment
Amendment by
Effective Date of 1996 Amendment
"(1)
"(A) individuals losing United States citizenship (within the meaning of section 877 of the Internal Revenue Code of 1986) on or after February 6, 1995, and
"(B) long-term residents of the United States with respect to whom an event described in [former] subparagraph (A) or (B) of section 877(e)(1) of such Code occurs on or after February 6, 1995.
"(2)
"(3)
"(A)
"(B)
Amendment by
Effective Date of 1992 Amendment
Amendment by
Effective Date of 1986 Amendment
Effective Date of 1980 Amendment
Amendment by
Effective Date of 1978 Amendment
Amendment by
Effective Date of 1974 Amendment
Amendment by
Effective Date
Section applicable with respect to taxable years beginning after Dec. 31, 1966, see section 103(n)(1) of
Plan Amendments Not Required Until January 1, 1998
For provisions directing that if any amendments made by subtitle D [§§1401–1465] of title I of
Plan Amendments Not Required Until January 1, 1994
For provisions directing that if any amendments made by subtitle B [§§521–523] of title V of
§877A. Tax responsibilities of expatriation
(a) General rules
For purposes of this subtitle—
(1) Mark to market
All property of a covered expatriate shall be treated as sold on the day before the expatriation date for its fair market value.
(2) Recognition of gain or loss
In the case of any sale under paragraph (1)—
(A) notwithstanding any other provision of this title, any gain arising from such sale shall be taken into account for the taxable year of the sale, and
(B) any loss arising from such sale shall be taken into account for the taxable year of the sale to the extent otherwise provided by this title, except that section 1091 shall not apply to any such loss.
Proper adjustment shall be made in the amount of any gain or loss subsequently realized for gain or loss taken into account under the preceding sentence, determined without regard to paragraph (3).
(3) Exclusion for certain gain
(A) In general
The amount which would (but for this paragraph) be includible in the gross income of any individual by reason of paragraph (1) shall be reduced (but not below zero) by $600,000.
(B) Adjustment for inflation
(i) In general
In the case of any taxable year beginning in a calendar year after 2008, the dollar amount in subparagraph (A) shall be increased by an amount equal to—
(I) such dollar amount, multiplied by
(II) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, by substituting "calendar year 2007" for "calendar year 2016" in subparagraph (A)(ii) thereof.
(ii) Rounding
If any amount as adjusted under clause (i) is not a multiple of $1,000, such amount shall be rounded to the nearest multiple of $1,000.
(b) Election to defer tax
(1) In general
If the taxpayer elects the application of this subsection with respect to any property treated as sold by reason of subsection (a), the time for payment of the additional tax attributable to such property shall be extended until the due date of the return for the taxable year in which such property is disposed of (or, in the case of property disposed of in a transaction in which gain is not recognized in whole or in part, until such other date as the Secretary may prescribe).
(2) Determination of tax with respect to property
For purposes of paragraph (1), the additional tax attributable to any property is an amount which bears the same ratio to the additional tax imposed by this chapter for the taxable year solely by reason of subsection (a) as the gain taken into account under subsection (a) with respect to such property bears to the total gain taken into account under subsection (a) with respect to all property to which subsection (a) applies.
(3) Termination of extension
The due date for payment of tax may not be extended under this subsection later than the due date for the return of tax imposed by this chapter for the taxable year which includes the date of death of the expatriate (or, if earlier, the time that the security provided with respect to the property fails to meet the requirements of paragraph (4), unless the taxpayer corrects such failure within the time specified by the Secretary).
(4) Security
(A) In general
No election may be made under paragraph (1) with respect to any property unless adequate security is provided with respect to such property.
(B) Adequate security
For purposes of subparagraph (A), security with respect to any property shall be treated as adequate security if—
(i) it is a bond which is furnished to, and accepted by, the Secretary, which is conditioned on the payment of tax (and interest thereon), and which meets the requirements of section 6325, or
(ii) it is another form of security for such payment (including letters of credit) that meets such requirements as the Secretary may prescribe.
(5) Waiver of certain rights
No election may be made under paragraph (1) unless the taxpayer makes an irrevocable waiver of any right under any treaty of the United States which would preclude assessment or collection of any tax imposed by reason of this section.
(6) Elections
An election under paragraph (1) shall only apply to property described in the election and, once made, is irrevocable.
(7) Interest
For purposes of section 6601, the last date for the payment of tax shall be determined without regard to the election under this subsection.
(c) Exception for certain property
Subsection (a) shall not apply to—
(1) any deferred compensation item (as defined in subsection (d)(4)),
(2) any specified tax deferred account (as defined in subsection (e)(2)), and
(3) any interest in a nongrantor trust (as defined in subsection (f)(3)).
(d) Treatment of deferred compensation items
(1) Withholding on eligible deferred compensation items
(A) In general
In the case of any eligible deferred compensation item, the payor shall deduct and withhold from any taxable payment to a covered expatriate with respect to such item a tax equal to 30 percent thereof.
(B) Taxable payment
For purposes of subparagraph (A), the term "taxable payment" means with respect to a covered expatriate any payment to the extent it would be includible in the gross income of the covered expatriate if such expatriate continued to be subject to tax as a citizen or resident of the United States. A deferred compensation item shall be taken into account as a payment under the preceding sentence when such item would be so includible.
(2) Other deferred compensation items
In the case of any deferred compensation item which is not an eligible deferred compensation item—
(A)(i) with respect to any deferred compensation item to which clause (ii) does not apply, an amount equal to the present value of the covered expatriate's accrued benefit shall be treated as having been received by such individual on the day before the expatriation date as a distribution under the plan, and
(ii) with respect to any deferred compensation item referred to in paragraph (4)(D), the rights of the covered expatriate to such item shall be treated as becoming transferable and not subject to a substantial risk of forfeiture on the day before the expatriation date,
(B) no early distribution tax shall apply by reason of such treatment, and
(C) appropriate adjustments shall be made to subsequent distributions from the plan to reflect such treatment.
(3) Eligible deferred compensation items
For purposes of this subsection, the term "eligible deferred compensation item" means any deferred compensation item with respect to which—
(A) the payor of such item is—
(i) a United States person, or
(ii) a person who is not a United States person but who elects to be treated as a United States person for purposes of paragraph (1) and meets such requirements as the Secretary may provide to ensure that the payor will meet the requirements of paragraph (1), and
(B) the covered expatriate—
(i) notifies the payor of his status as a covered expatriate, and
(ii) makes an irrevocable waiver of any right to claim any reduction under any treaty with the United States in withholding on such item.
(4) Deferred compensation item
For purposes of this subsection, the term "deferred compensation item" means—
(A) any interest in a plan or arrangement described in section 219(g)(5),
(B) any interest in a foreign pension plan or similar retirement arrangement or program,
(C) any item of deferred compensation, and
(D) any property, or right to property, which the individual is entitled to receive in connection with the performance of services to the extent not previously taken into account under section 83 or in accordance with section 83.
(5) Exception
Paragraphs (1) and (2) shall not apply to any deferred compensation item to the extent attributable to services performed outside the United States while the covered expatriate was not a citizen or resident of the United States.
(6) Special rules
(A) Application of withholding rules
Rules similar to the rules of subchapter B of
(B) Application of tax
Any item subject to the withholding tax imposed under paragraph (1) shall be subject to tax under section 871.
(C) Coordination with other withholding requirements
Any item subject to withholding under paragraph (1) shall not be subject to withholding under section 1441 or
(e) Treatment of specified tax deferred accounts
(1) Account treated as distributed
In the case of any interest in a specified tax deferred account held by a covered expatriate on the day before the expatriation date—
(A) the covered expatriate shall be treated as receiving a distribution of his entire interest in such account on the day before the expatriation date,
(B) no early distribution tax shall apply by reason of such treatment, and
(C) appropriate adjustments shall be made to subsequent distributions from the account to reflect such treatment.
(2) Specified tax deferred account
For purposes of paragraph (1), the term "specified tax deferred account" means an individual retirement plan (as defined in section 7701(a)(37)) other than any arrangement described in subsection (k) or (p) of section 408, a qualified tuition program (as defined in section 529), a qualified ABLE program (as defined in section 529A), a Coverdell education savings account (as defined in section 530), a health savings account (as defined in section 223), and an Archer MSA (as defined in section 220).
(f) Special rules for nongrantor trusts
(1) In general
In the case of a distribution (directly or indirectly) of any property from a nongrantor trust to a covered expatriate—
(A) the trustee shall deduct and withhold from such distribution an amount equal to 30 percent of the taxable portion of the distribution, and
(B) if the fair market value of such property exceeds its adjusted basis in the hands of the trust, gain shall be recognized to the trust as if such property were sold to the expatriate at its fair market value.
(2) Taxable portion
For purposes of this subsection, the term "taxable portion" means, with respect to any distribution, that portion of the distribution which would be includible in the gross income of the covered expatriate if such expatriate continued to be subject to tax as a citizen or resident of the United States.
(3) Nongrantor trust
For purposes of this subsection, the term "nongrantor trust" means the portion of any trust that the individual is not considered the owner of under subpart E of part I of subchapter J. The determination under the preceding sentence shall be made immediately before the expatriation date.
(4) Special rules relating to withholding
For purposes of this subsection—
(A) rules similar to the rules of subsection (d)(6) shall apply, and
(B) the covered expatriate shall be treated as having waived any right to claim any reduction under any treaty with the United States in withholding on any distribution to which paragraph (1)(A) applies unless the covered expatriate agrees to such other treatment as the Secretary determines appropriate.
(5) Application
This subsection shall apply to a nongrantor trust only if the covered expatriate was a beneficiary of the trust on the day before the expatriation date.
(g) Definitions and special rules relating to expatriation
For purposes of this section—
(1) Covered expatriate
(A) In general
The term "covered expatriate" means an expatriate who meets the requirements of subparagraph (A), (B), or (C) of section 877(a)(2).
(B) Exceptions
An individual shall not be treated as meeting the requirements of subparagraph (A) or (B) of section 877(a)(2) if—
(i) the individual—
(I) became at birth a citizen of the United States and a citizen of another country and, as of the expatriation date, continues to be a citizen of, and is taxed as a resident of, such other country, and
(II) has been a resident of the United States (as defined in section 7701(b)(1)(A)(ii)) for not more than 10 taxable years during the 15-taxable year period ending with the taxable year during which the expatriation date occurs, or
(ii)(I) the individual's relinquishment of United States citizenship occurs before such individual attains age 18½, and
(II) the individual has been a resident of the United States (as so defined) for not more than 10 taxable years before the date of relinquishment.
(C) Covered expatriates also subject to tax as citizens or residents
In the case of any covered expatriate who is subject to tax as a citizen or resident of the United States for any period beginning after the expatriation date, such individual shall not be treated as a covered expatriate during such period for purposes of subsections (d)(1) and (f) and section 2801.
(2) Expatriate
The term "expatriate" means—
(A) any United States citizen who relinquishes his citizenship, and
(B) any long-term resident of the United States who ceases to be a lawful permanent resident of the United States (within the meaning of section 7701(b)(6)).
(3) Expatriation date
The term "expatriation date" means—
(A) the date an individual relinquishes United States citizenship, or
(B) in the case of a long-term resident of the United States, the date on which the individual ceases to be a lawful permanent resident of the United States (within the meaning of section 7701(b)(6)).
(4) Relinquishment of citizenship
A citizen shall be treated as relinquishing his United States citizenship on the earliest of—
(A) the date the individual renounces his United States nationality before a diplomatic or consular officer of the United States pursuant to paragraph (5) of section 349(a) of the Immigration and Nationality Act (
(B) the date the individual furnishes to the United States Department of State a signed statement of voluntary relinquishment of United States nationality confirming the performance of an act of expatriation specified in paragraph (1), (2), (3), or (4) of section 349(a) of the Immigration and Nationality Act (
(C) the date the United States Department of State issues to the individual a certificate of loss of nationality, or
(D) the date a court of the United States cancels a naturalized citizen's certificate of naturalization.
Subparagraph (A) or (B) shall not apply to any individual unless the renunciation or voluntary relinquishment is subsequently approved by the issuance to the individual of a certificate of loss of nationality by the United States Department of State.
(5) Long-term resident
The term "long-term resident" has the meaning given to such term by section 877(e)(2).
(6) Early distribution tax
The term "early distribution tax" means any increase in tax imposed under section 72(t), 220(f)(4), 223(f)(4), 409A(a)(1)(B), 529(c)(6), 529A(c)(3), or 530(d)(4).
(h) Other rules
(1) Termination of deferrals, etc.
In the case of any covered expatriate, notwithstanding any other provision of this title—
(A) any time period for acquiring property which would result in the reduction in the amount of gain recognized with respect to property disposed of by the taxpayer shall terminate on the day before the expatriation date, and
(B) any extension of time for payment of tax shall cease to apply on the day before the expatriation date and the unpaid portion of such tax shall be due and payable at the time and in the manner prescribed by the Secretary.
(2) Step-up in basis
Solely for purposes of determining any tax imposed by reason of subsection (a), property which was held by an individual on the date the individual first became a resident of the United States (within the meaning of section 7701(b)) shall be treated as having a basis on such date of not less than the fair market value of such property on such date. The preceding sentence shall not apply if the individual elects not to have such sentence apply. Such an election, once made, shall be irrevocable.
(3) Coordination with section 684
If the expatriation of any individual would result in the recognition of gain under section 684, this section shall be applied after the application of section 684.
(i) Regulations
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section.
(Added
Inflation Adjusted Items for Certain Years
For inflation adjustment of certain items in this section, see Revenue Procedures listed in a table under
Editorial Notes
Amendments
2018—Subsec. (g)(6).
2017—Subsec. (a)(3)(B)(i)(II).
2014—Subsec. (e)(2).
Subsec. (g)(6).
Statutory Notes and Related Subsidiaries
Effective Date of 2017 Amendment
Amendment by
Effective Date of 2014 Amendment
Amendment by
Effective Date
Section applicable to any individual whose expatriation date is on or after June 17, 2008, see section 301(g)(1) of
§878. Foreign educational, charitable, and certain other exempt organizations
For special provisions relating to foreign educational, charitable, and other exempt organizations, see sections 512(a) and 4948.
(Aug. 16, 1954, ch. 736,
Editorial Notes
Amendments
1969—
Statutory Notes and Related Subsidiaries
Effective Date of 1969 Amendment
Amendment by
§879. Tax treatment of certain community income in the case of nonresident alien individuals
(a) General rule
In the case of a married couple 1 or both of whom are nonresident alien individuals and who have community income for the taxable year, such community income shall be treated as follows:
(1) Earned income (within the meaning of section 911(d)(2)), other than trade or business income and a partner's distributive share of partnership income, shall be treated as the income of the spouse who rendered the personal services,
(2) Trade or business income, and a partner's distributive share of partnership income, shall be treated as provided in section 1402(a)(5),
(3) Community income not described in paragraph (1) or (2) which is derived from the separate property (as determined under the applicable community property law) of one spouse shall be treated as the income of such spouse, and
(4) All other such community income shall be treated as provided in the applicable community property law.
(b) Exception where election under section 6013(g) is in effect
Subsection (a) shall not apply for any taxable year for which an election under subsection (g) or (h) of section 6013 (relating to election to treat nonresident alien individual as resident of the United States) is in effect.
(c) Definitions and special rules
For purposes of this section—
(1) Community income
The term "community income" means income which, under applicable community property laws, is treated as community income.
(2) Community property laws
The term "community property laws" means the community property laws of a State, a foreign country, or a possession of the United States.
(3) Determination of marital status
The determination of marital status shall be made under section 7703(a).
(Added
Editorial Notes
Amendments
1986—Subsec. (c)(3).
1984—
Subsec. (a).
1981—Subsec. (a)(1).
Statutory Notes and Related Subsidiaries
Effective Date of 1986 Amendment
Amendment by
Effective Date of 1984 Amendment
Effective Date of 1981 Amendment
Amendment by
Effective Date
Section applicable to taxable years beginning after Dec. 31, 1976, see section 1012(d) of
Subpart B—Foreign Corporations
Editorial Notes
Amendments
1986—
1966—
§881. Tax on income of foreign corporations not connected with United States business
(a) Imposition of tax
Except as provided in subsection (c), there is hereby imposed for each taxable year a tax of 30 percent of the amount received from sources within the United States by a foreign corporation as—
(1) interest (other than original issue discount as defined in section 1273), dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income,
(2) gains described in section 631(b) or (c),
(3) in the case of—
(A) a sale or exchange of an original issue discount obligation, the amount of the original issue discount accruing while such obligation was held by the foreign corporation (to the extent such discount was not theretofore taken into account under subparagraph (B)), and
(B) a payment on an original issue discount obligation, an amount equal to the original issue discount accruing while such obligation was held by the foreign corporation (except that such original issue discount shall be taken into account under this subparagraph only to the extent such discount was not theretofore taken into account under this subparagraph and only to the extent that the tax thereon does not exceed the payment less the tax imposed by paragraph (1) thereon), and
(4) gains from the sale or exchange after October 4, 1966, of patents, copyrights, secret processes and formulas, good will, trademarks, trade brands, franchises, and other like property, or of any interest in any such property, to the extent such gains are from payments which are contingent on the productivity, use, or disposition of the property or interest sold or exchanged,
but only to the extent the amount so received is not effectively connected with the conduct of a trade or business within the United States.
(b) Exception for certain possessions
(1) Guam, American Samoa, the Northern Mariana Islands, and the Virgin Islands
For purposes of this section and section 884, a corporation created or organized in Guam, American Samoa, the Northern Mariana Islands, or the Virgin Islands or under the law of any such possession shall not be treated as a foreign corporation for any taxable year if—
(A) at all times during such taxable year less than 25 percent in value of the stock of such corporation is beneficially owned (directly or indirectly) by foreign persons,
(B) at least 65 percent of the gross income of such corporation is shown to the satisfaction of the Secretary to be effectively connected with the conduct of a trade or business in such a possession or the United States for the 3-year period ending with the close of the taxable year of such corporation (or for such part of such period as the corporation or any predecessor has been in existence), and
(C) no substantial part of the income of such corporation is used (directly or indirectly) to satisfy obligations to persons who are not bona fide residents of such a possession or the United States.
(2) Commonwealth of Puerto Rico
(A) In general
If dividends are received during a taxable year by a corporation—
(i) created or organized in, or under the law of, the Commonwealth of Puerto Rico, and
(ii) with respect to which the requirements of subparagraphs (A), (B), and (C) of paragraph (1) are met for the taxable year,
subsection (a) shall be applied for such taxable year by substituting "10 percent" for "30 percent".
(B) Applicability
If, on or after the date of the enactment of this paragraph, an increase in the rate of the Commonwealth of Puerto Rico's withholding tax which is generally applicable to dividends paid to United States corporations not engaged in a trade or business in the Commonwealth to a rate greater than 10 percent takes effect, this paragraph shall not apply to dividends received on or after the effective date of the increase.
(3) Definitions
(A) Foreign person
For purposes of paragraph (1), the term "foreign person" means any person other than—
(i) a United States person, or
(ii) a person who would be a United States person if references to the United States in section 7701 included references to a possession of the United States.
(B) Indirect ownership rules
For purposes of paragraph (1), the rules of section 318(a)(2) shall apply except that "5 percent" shall be substituted for "50 percent" in subparagraph (C) thereof.
(c) Repeal of tax on interest of foreign corporations received from certain portfolio debt investments
(1) In general
In the case of any portfolio interest received by a foreign corporation from sources within the United States, no tax shall be imposed under paragraph (1) or (3) of subsection (a).
(2) Portfolio interest
For purposes of this subsection, the term "portfolio interest" means any interest (including original issue discount) which—
(A) would be subject to tax under subsection (a) but for this subsection, and
(B) is paid on an obligation—
(i) which is in registered form, and
(ii) with respect to which—
(I) the person who would otherwise be required to deduct and withhold tax from such interest under section 1442(a) receives a statement which meets the requirements of section 871(h)(5) that the beneficial owner of the obligation is not a United States person, or
(II) the Secretary has determined that such a statement is not required in order to carry out the purposes of this subsection.
(3) Portfolio interest shall not include interest received by certain persons
For purposes of this subsection, the term "portfolio interest" shall not include any portfolio interest which—
(A) except in the case of interest paid on an obligation of the United States, is received by a bank on an extension of credit made pursuant to a loan agreement entered into in the ordinary course of its trade or business,
(B) is received by a 10-percent shareholder (within the meaning of section 871(h)(3)(B)), or
(C) is received by a controlled foreign corporation from a related person (within the meaning of section 864(d)(4)).
(4) Portfolio interest not to include certain contingent interest
For purposes of this subsection, the term "portfolio interest" shall not include any interest which is treated as not being portfolio interest under the rules of section 871(h)(4).
(5) Special rules for controlled foreign corporations
(A) In general
In the case of any portfolio interest received by a controlled foreign corporation, the following provisions shall not apply:
(i) Subparagraph (A) of section 954(b)(3) (relating to exception where foreign base company income is less than 5 percent or $1,000,000).
(ii) Paragraph (4) of section 954(b) (relating to exception for certain income subject to high foreign taxes).
(iii) Clause (i) of section 954(c)(3)(A) (relating to certain income received from related persons).
(B) Controlled foreign corporation
For purposes of this subsection, the term "controlled foreign corporation" has the meaning given to such term by section 957(a).
(6) Secretary may cease application of this subsection
Under rules similar to the rules of section 871(h)(6), the Secretary may provide that this subsection shall not apply to payments of interest described in section 871(h)(6).
(7) Registered form
For purposes of this subsection, the term "registered form" has the meaning given such term by section 163(f).
(d) Tax not to apply to certain interest and dividends
No tax shall be imposed under paragraph (1) or (3) of subsection (a) on any amount described in section 871(i)(2).
(e) Tax not to apply to certain dividends of regulated investment companies
(1) Interest-related dividends
(A) In general
Except as provided in subparagraph (B), no tax shall be imposed under paragraph (1) of subsection (a) on any interest-related dividend (as defined in section 871(k)(1)) received from a regulated investment company.
(B) Exception
Subparagraph (A) shall not apply—
(i) to any dividend referred to in section 871(k)(1)(B), and
(ii) to any interest-related dividend received by a controlled foreign corporation (within the meaning of section 957(a)) to the extent such dividend is attributable to interest received by the regulated investment company from a person who is a related person (within the meaning of section 864(d)(4)) with respect to such controlled foreign corporation.
(C) Treatment of dividends received by controlled foreign corporations
The rules of subsection (c)(5)(A) shall apply to any interest-related dividend received by a controlled foreign corporation (within the meaning of section 957(a)) to the extent such dividend is attributable to interest received by the regulated investment company which is described in clause (ii) of section 871(k)(1)(E) (and not described in clause (i) or (iii) of such section).
(2) Short-term capital gain dividends
No tax shall be imposed under paragraph (1) of subsection (a) on any short-term capital gain dividend (as defined in section 871(k)(2)) received from a regulated investment company.
(f) Cross reference
For doubling of tax on corporations of certain foreign countries, see section 891.
For special rules for original issue discount, see section 871(g).
(Aug. 16, 1954, ch. 736,
Editorial Notes
References in Text
The date of the enactment of this paragraph, referred to in subsec. (b)(2)(B), is the date of enactment of
Amendments
2010—Subsec. (c)(2).
2005—Subsec. (e)(1)(C).
2004—Subsec. (b).
Subsec. (b)(1).
Subsec. (b)(2), (3).
Subsecs. (e), (f).
1993—Subsec. (c)(2)(B)(ii).
Subsec. (c)(4), (5).
Subsec. (c)(6).
Subsec. (c)(7).
1988—Subsec. (c)(4)(A)(ii) to (v).
"(ii) Paragraph (4) of section 954(b) (relating to corporations not formed or availed of to avoid tax).
"(iii) Subparagraph (B) of section 954(c)(3) (relating to certain income derived in active conduct of trade or business).
"(iv) Subparagraph (C) of section 954(c)(3) (relating to certain income derived by an insurance company).
"(v) Subparagraphs (A) and (B) of section 954(c)(4) (relating to exception for certain income received from related persons)."
1986—Subsec. (a)(3)(A).
Subsec. (a)(3)(B).
Subsec. (a)(4).
Subsec. (b)(1).
"(A) at all times during such taxable year less than 25 percent in value of the stock of such corporation is owned (directly or indirectly) by foreign persons, and
"(B) at least 20 percent of the gross income of such corporation is shown to the satisfaction of the Secretary to have been derived from sources within Guam or the Virgin Islands (as the case may be) for the 3-year period ending with the close of the preceding taxable year of such corporation (or for such part of such period as the corporation has been in existence)."
Subsec. (b)(2).
Subsec. (b)(2)(A).
Subsec. (b)(3), (4).
Subsec. (c).
Subsec. (c)(2).
Subsec. (c)(3)(C).
Subsec. (c)(4)(A)(i).
Subsecs. (d), (e).
1984—Subsec. (a).
Subsec. (a)(1).
Subsec. (a)(3).
Subsec. (b).
Subsec. (c).
Subsec. (d).
1976—Subsec. (a)(3)(A), (B).
1972—Subsecs. (b), (c).
1971—Subsec. (a)(1).
Subsec. (a)(3).
1966—Subsec. (a).
Statutory Notes and Related Subsidiaries
Effective Date of 2010 Amendment
Amendment by
Effective Date of 2004 Amendment
Amendment by section 411(a)(2) of
Effective Date of 1993 Amendment
Amendment by
Effective Date of 1988 Amendment
Amendment by
Effective Date of 1986 Amendment
Amendment by section 1211(b)(6) of
Amendment by section 1214(c)(2) of
Amendment by section 1223(b)(2) of
Amendment by section 1273(b)(1), (2)(A) of
Amendment by section 1810(d)(1)(B), (3)(C), (e)(2)(B) of
Effective Date of 1984 Amendment
Amendment by section 42(a)(10) of
Amendment by section 127(b) of
Amendment by section 128(b) of
Effective Date of 1976 Amendment
Amendment by
Effective Date of 1972 Amendment
Effective Date of 1971 Amendment
Amendment by
Effective Date of 1966 Amendment
Amendment by
Applicability of Certain Amendments by Pub. L. 99–514 in Relation to Treaty Obligations of United States
For nonapplication of amendments by sections 1211(b)(6) and 1214(c)(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
§882. Tax on income of foreign corporations connected with United States business
(a) Imposition of tax
(1) In general
A foreign corporation engaged in trade or business within the United States during the taxable year shall be taxable as provided in section 11, 55, or 59A,1 on its taxable income which is effectively connected with the conduct of a trade or business within the United States.
(2) Determination of taxable income
In determining taxable income for purposes of paragraph (1), gross income includes only gross income which is effectively connected with the conduct of a trade or business within the United States.
(3) [Cross reference 2]
For special tax treatment of gain or loss from the disposition by a foreign corporation of a United States real property interest, see section 897.
(b) Gross income
In the case of a foreign corporation, except where the context clearly indicates otherwise, gross income includes only—
(1) gross income which is derived from sources within the United States and which is not effectively connected with the conduct of a trade or business within the United States, and
(2) gross income which is effectively connected with the conduct of a trade or business within the United States.
(c) Allowance of deductions and credits
(1) Allocation of deductions
(A) General rule
In the case of a foreign corporation, the deductions shall be allowed only for purposes of subsection (a) and (except as provided by subparagraph (B)) only if and to the extent that they are connected with income which is effectively connected with the conduct of a trade or business within the United States; and the proper apportionment and allocation of the deductions for this purpose shall be determined as provided in regulations prescribed by the Secretary.
(B) Charitable contributions
The deduction for charitable contributions and gifts provided by section 170 shall be allowed whether or not connected with income which is effectively connected with the conduct of a trade or business within the United States.
(2) Deductions and credits allowed only if return filed
A foreign corporation shall receive the benefit of the deductions and credits allowed to it in this subtitle only by filing or causing to be filed with the Secretary a true and accurate return, in the manner prescribed in subtitle F, including therein all the information which the Secretary may deem necessary for the calculation of such deductions and credits. The preceding sentence shall not apply for purposes of the tax imposed by section 541 (relating to personal holding company tax), and shall not be construed to deny the credit provided by section 33 for tax withheld at source or the credit provided by section 34 for certain uses of gasoline.
(3) Foreign tax credit
Except as provided by section 906, foreign corporations shall not be allowed the credit against the tax for taxes of foreign countries and possessions of the United States allowed by section 901.
(4) Cross reference
For rule that certain foreign taxes are not to be taken into account in determining deduction or credit, see section 906(b)(1).
(d) Election to treat real property income as income connected with United States business
(1) In general
A foreign corporation which during the taxable year derives any income—
(A) from real property located in the United States, or from any interest in such real property, including (i) gains from the sale or exchange of real property or an interest therein, (ii) rents or royalties from mines, wells, or other natural deposits, and (iii) gains described in section 631(b) or (c), and
(B) which, but for this subsection, would not be treated as income effectively connected with the conduct of a trade or business within the United States,
may elect for such taxable year to treat all such income as income which is effectively connected with the conduct of a trade or business within the United States. In such case, such income shall be taxable as provided in subsection (a)(1) whether or not such corporation is engaged in trade or business within the United States during the taxable year. An election under this paragraph for any taxable year shall remain in effect for all subsequent taxable years, except that it may be revoked with the consent of the Secretary with respect to any taxable year.
(2) Election after revocation, etc.
Paragraphs (2) and (3) of section 871(d) shall apply in respect of elections under this subsection in the same manner and to the same extent as they apply in respect of elections under section 871(d).
(e) Interest on United States obligations received by banks organized in possessions
In the case of a corporation created or organized in, or under the law of, a possession of the United States which is carrying on the banking business in a possession of the United States, interest on obligations of the United States which is not portfolio interest (as defined in section 881(c)(2)) shall—
(1) for purposes of this subpart, be treated as income which is effectively connected with the conduct of a trade or business within the United States, and
(2) shall be taxable as provided in subsection (a)(1) whether or not such corporation is engaged in trade or business within the United States during the taxable year.
(f) Returns of tax by agent
If any foreign corporation has no office or place of business in the United States but has an agent in the United States, the return required under section 6012 shall be made by the agent.
(Aug. 16, 1954, ch. 736,
Editorial Notes
Amendments
2022—Subsec. (a)(1).
2017—Subsec. (a)(1).
2014—Subsec. (a)(1).
1988—Subsec. (a)(1).
Subsec. (b).
Subsec. (e).
1986—Subsec. (a)(1).
Subsec. (e).
1984—Subsec. (c)(2).
1983—Subsec. (c)(2).
1980—Subsec. (a)(3).
1978—Subsec. (a).
1976—Subsecs. (c)(1)(A), (2), (d).
1966—
Statutory Notes and Related Subsidiaries
Effective Date of 2022 Amendment
Amendment by
Effective Date of 2017 Amendment
Amendment by section 12001(b)(14) of
Amendment by section 13001(b)(2)(L) of
Amendment by section 14401(d)(2) of
Effective Date of 2014 Amendment
Amendment by
Effective Date of 1988 Amendment
Amendment by section 701(e)(4)(F) of
Amendment by
Effective Date of 1986 Amendment
Amendment by section 701(e)(4)(F) of
Effective Date of 1984 Amendment
Amendment by
Effective Date of 1983 Amendment
Amendment by
Effective Date of 1980 Amendment
Amendment by
Effective Date of 1978 Amendment
Amendment by
Effective Date of 1966 Amendment
Amendment by
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)(F) of
1 So in original. The comma probably should not appear.
2 Par. (3) heading editorially supplied.
§883. Exclusions from gross income
(a) Income of foreign corporations from ships and aircraft
The following items shall not be included in gross income of a foreign corporation, and shall be exempt from taxation under this subtitle:
(1) Ships operated by certain foreign corporations
Gross income derived by a corporation organized in a foreign country from the international operation of a ship or ships if such foreign country grants an equivalent exemption to corporations organized in the United States.
(2) Aircraft operated by certain foreign corporations
Gross income derived by a corporation organized in a foreign country from the international operation of aircraft if such foreign country grants an equivalent exemption to corporations organized in the United States.
(3) Railroad rolling stock of foreign corporations
Earnings derived from payments by a common carrier for the use on a temporary basis (not expected to exceed a total of 90 days in any taxable year) of railroad rolling stock owned by a corporation of a foreign country which grants an equivalent exemption to corporations organized in the United States.
(4) Special rules
The rules of paragraphs (6), (7), and (8) of section 872(b) shall apply for purposes of this subsection.
(5) Special rule for countries which tax on residence basis
For purposes of this subsection, there shall not be taken into account any failure of a foreign country to grant an exemption to a corporation organized in the United States if such corporation is subject to tax by such foreign country on a residence basis pursuant to provisions of foreign law which meets such standards (if any) as the Secretary may prescribe.
(b) Earnings derived from communications satellite system
The earnings derived from the ownership or operation of a communications satellite system by a foreign entity designated by a foreign government to participate in such ownership or operation shall be exempt from taxation under this subtitle, if the United States, through its designated entity, participates in such system pursuant to the Communications Satellite Act of 1962 (
(c) Treatment of certain foreign corporations
(1) In general
Paragraph (1) or (2) of subsection (a) (as the case may be) shall not apply to any foreign corporation if 50 percent or more of the value of the stock of such corporation is owned by individuals who are not residents of such foreign country or another foreign country meeting the requirements of such paragraph.
(2) Treatment of controlled foreign corporations
Paragraph (1) shall not apply to any foreign corporation which is a controlled foreign corporation (as defined in section 957(a)).
(3) Special rules for publicly traded corporations
(A) Exception
Paragraph (1) shall not apply to any corporation which is organized in a foreign country meeting the requirements of paragraph (1) or (2) of subsection (a) (as the case may be) and the stock of which is primarily and regularly traded on an established securities market in such foreign country, another foreign country meeting the requirements of such paragraph, or the United States.
(B) Treatment of stock owned by publicly traded corporation
Any stock in another corporation which is owned (directly or indirectly) by a corporation meeting the requirements of subparagraph (A) shall be treated as owned by individuals who are residents of the foreign country in which the corporation meeting the requirements of subparagraph (A) is organized.
(4) Stock ownership through entities
For purposes of paragraph (1), stock owned (directly or indirectly) by or for a corporation, partnership, trust, or estate shall be treated 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.
(Aug. 16, 1954, ch. 736,
Editorial Notes
References in Text
The Communications Satellite Act of 1962, referred to in subsec. (b), is
Amendments
2004—Subsec. (a)(4).
1989—Subsec. (a)(4).
Subsec. (a)(5).
1988—Subsec. (a)(1), (2).
Subsec. (c)(1).
Subsec. (c)(3).
"(A) the stock of which is primarily and regularly traded on an established securities market in the foreign country in which such corporation is organized, or
"(B) which is wholly owned (either directly or indirectly) by another corporation meeting the requirements of subparagraph (A) and is organized in the same foreign country as such other corporation."
1986—Subsec. (a)(1).
Subsec. (a)(2).
Subsec. (a)(4).
Subsec. (c).
1975—Subsec. (a)(3).
1968—
Statutory Notes and Related Subsidiaries
Effective Date of 2004 Amendment
Amendment by
Effective Date of 1989 Amendment
Amendment by
Effective Date of 1988 Amendment
Amendment by
Effective Date of 1986 Amendment
Amendment by
Effective Date of 1975 Amendment
Effective Date of 1968 Amendment
Applicability of Certain Amendments by Pub. L. 99–514 in Relation to Treaty Obligations of United States
For nonapplication of amendment by section 1212(c)(3)–(5) of
§884. Branch profits tax
(a) Imposition of tax
In addition to the tax imposed by section 882 for any taxable year, there is hereby imposed on any foreign corporation a tax equal to 30 percent of the dividend equivalent amount for the taxable year.
(b) Dividend equivalent amount
For purposes of subsection (a), the term "dividend equivalent amount" means the foreign corporation's effectively connected earnings and profits for the taxable year adjusted as provided in this subsection:
(1) Reduction for increase in U.S. net equity
If—
(A) the U.S. net equity of the foreign corporation as of the close of the taxable year, exceeds
(B) the U.S. net equity of the foreign corporation as of the close of the preceding taxable year,
the effectively connected earnings and profits for the taxable year shall be reduced (but not below zero) by the amount of such excess.
(2) Increase for decrease in net equity
(A) In general
If—
(i) the U.S. net equity of the foreign corporation as of the close of the preceding taxable year, exceeds
(ii) the U.S. net equity of the foreign corporation as of the close of the taxable year,
the effectively connected earnings and profits for the taxable year shall be increased by the amount of such excess.
(B) Limitation
(i) In general
The increase under subparagraph (A) for any taxable year shall not exceed the accumulated effectively connected earnings and profits as of the close of the preceding taxable year.
(ii) Accumulated effectively connected earnings and profits
For purposes of clause (i), the term "accumulated effectively connected earnings and profits" means the excess of—
(I) the aggregate effectively connected earnings and profits for preceding taxable years beginning after December 31, 1986, over
(II) the aggregate dividend equivalent amounts determined for such preceding taxable years.
(c) U.S. net equity
For purposes of this section—
(1) In general
The term "U.S. net equity" means—
(A) U.S. assets, reduced (including below zero) by
(B) U.S. liabilities.
(2) U.S. assets and U.S. liabilities
For purposes of paragraph (1)—
(A) U.S. assets
The term "U.S. assets" means the money and aggregate adjusted bases of property of the foreign corporation treated as connected with the conduct of a trade or business in the United States under regulations prescribed by the Secretary. For purposes of the preceding sentence, the adjusted basis of any property shall be its adjusted basis for purposes of computing earnings and profits.
(B) U.S. liabilities
The term "U.S. liabilities" means the liabilities of the foreign corporation treated as connected with the conduct of a trade or business in the United States under regulations prescribed by the Secretary.
(C) Regulations to be consistent with allocation of deductions
The regulations prescribed under subparagraphs (A) and (B) shall be consistent with the allocation of deductions under section 882(c)(1).
(d) Effectively connected earnings and profits
For purposes of this section—
(1) In general
The term "effectively connected earnings and profits" means earnings and profits (without diminution by reason of any distributions made during the taxable year) which are attributable to income which is effectively connected (or treated as effectively connected) with the conduct of a trade or business within the United States.
(2) Exception for certain income
The term "effectively connected earnings and profits" shall not include any earnings and profits attributable to—
(A) income not includible in gross income under paragraph (1) or (2) of section 883(a),
(B) income treated as effectively connected with the conduct of a trade or business within the United States under section 921(d) or 926(b) (as in effect before their repeal by the FSC Repeal and Extraterritorial Income Exclusion Act of 2000),
(C) gain on the disposition of a United States real property interest described in section 897(c)(1)(A)(ii),
(D) income treated as effectively connected with the conduct of a trade or business within the United States under section 953(c)(3)(C), or
(E) income treated as effectively connected with the conduct of a trade or business within the United States under section 882(e).
Property and liabilities of the foreign corporation treated as connected with such income under regulations prescribed by the Secretary shall not be taken into account in determining the U.S. assets or U.S. liabilities of the foreign corporation.
(e) Coordination with income tax treaties; etc.
(1) Limitation on treaty exemption
No treaty between the United States and a foreign country shall exempt any foreign corporation from the tax imposed by subsection (a) (or reduce the amount thereof) unless—
(A) such treaty is an income tax treaty, and
(B) such foreign corporation is a qualified resident of such foreign country.
(2) Treaty modifications
If a foreign corporation is a qualified resident of a foreign country with which the United States has an income tax treaty—
(A) the rate of tax under subsection (a) shall be the rate of tax specified in such treaty—
(i) on branch profits if so specified, or
(ii) if not so specified, on dividends paid by a domestic corporation to a corporation resident in such country which wholly owns such domestic corporation, and
(B) any other limitations under such treaty on the tax imposed by subsection (a) shall apply.
(3) Coordination with withholding tax
(A) In general
If a foreign corporation is subject to the tax imposed by subsection (a) for any taxable year (determined after the application of any treaty), no tax shall be imposed by section 871(a), 881(a), 1441, or 1442 on any dividends paid by such corporation out of its earnings and profits for such taxable year.
(B) Limitation on certain treaty benefits
If—
(i) any dividend described in section 861(a)(2)(B) is received by a foreign corporation, and
(ii) subparagraph (A) does not apply to such dividend,
rules similar to the rules of subparagraphs (A) and (B) of subsection (f)(3) shall apply to such dividend.
(4) Qualified resident
For purposes of this subsection—
(A) In general
Except as otherwise provided in this paragraph, the term "qualified resident" means, with respect to any foreign country, any foreign corporation which is a resident of such foreign country unless—
(i) 50 percent or more (by value) of the stock of such foreign corporation is owned (within the meaning of section 883(c)(4)) by individuals who are not residents of such foreign country and who are not United States citizens or resident aliens, or
(ii) 50 percent or more of its income is used (directly or indirectly) to meet liabilities to persons who are not residents of such foreign country or citizens or residents of the United States.
(B) Special rule for publicly traded corporations
A foreign corporation which is a resident of a foreign country shall be treated as a qualified resident of such foreign country if—
(i) the stock of such corporation is primarily and regularly traded on an established securities market in such foreign country, or
(ii) such corporation is wholly owned (either directly or indirectly) by another foreign corporation which is organized in such foreign country and the stock of which is so traded.
(C) Corporations owned by publicly traded domestic corporations
A foreign corporation which is a resident of a foreign country shall be treated as a qualified resident of such foreign country if—
(i) such corporation is wholly owned (directly or indirectly) by a domestic corporation, and
(ii) the stock of such domestic corporation is primarily and regularly traded on an established securities market in the United States.
(D) Secretarial authority
The Secretary may, in his sole discretion, treat a foreign corporation as being a qualified resident of a foreign country if such corporation establishes to the satisfaction of the Secretary that such corporation meets such requirements as the Secretary may establish to ensure that individuals who are not residents of such foreign country do not use the treaty between such foreign country and the United States in a manner inconsistent with the purposes of this subsection.
(5) Exception for international organizations
This section shall not apply to an international organization (as defined in section 7701(a)(18)).
(f) Treatment of interest allocable to effectively connected income
(1) In general
In the case of a foreign corporation engaged in a trade or business in the United States (or having gross income treated as effectively connected with the conduct of a trade or business in the United States), for purposes of this subtitle—
(A) any interest paid by such trade or business in the United States shall be treated as if it were paid by a domestic corporation, and
(B) to the extent that the allocable interest exceeds the interest described in subparagraph (A), such foreign corporation shall be liable for tax under section 881(a) in the same manner as if such excess were interest paid to such foreign corporation by a wholly owned domestic corporation on the last day of such foreign corporation's taxable year.
To the extent provided in regulations, subparagraph (A) shall not apply to interest in excess of the amounts reasonably expected to be allocable interest.
(2) Allocable interest
For purposes of this subsection, the term "allocable interest" means any interest which is allocable to income which is effectively connected (or treated as effectively connected) with the conduct of a trade or business in the United States.
(3) Coordination with treaties
(A) Payor must be qualified resident
In the case of any interest described in paragraph (1) which is paid or accrued by a foreign corporation, no benefit under any treaty between the United States and the foreign country of which such corporation is a resident shall apply unless—
(i) such treaty is an income tax treaty, and
(ii) such foreign corporation is a qualified resident of such foreign country.
(B) Recipient must be qualified resident
In the case of any interest described in paragraph (1) which is received or accrued by any corporation, no benefit under any treaty between the United States and the foreign country of which such corporation is a resident shall apply unless—
(i) such treaty is an income tax treaty, and
(ii) such foreign corporation is a qualified resident of such foreign country.
(g) Regulations
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including regulations providing for appropriate adjustments in the determination of the dividend equivalent amount in connection with the distribution to shareholders or transfer to a controlled corporation of the taxpayer's U.S. assets and other adjustments in such determination as are necessary or appropriate to carry out the purposes of this section.
(Added
Editorial Notes
References in Text
The FSC Repeal and Extraterritorial Income Exclusion Act of 2000, referred to in subsec. (d)(2)(B), is
Prior Provisions
A prior section 884 was renumbered
Amendments
2007—Subsec. (d)(2)(B).
1996—Subsec. (f)(1).
Subsec. (f)(1)(B).
Subsec. (f)(2).
1988—Subsec. (b)(2)(B).
Subsec. (d)(2)(E).
Subsec. (e)(1).
"(A) such foreign corporation is a qualified resident of such foreign country, or
"(B) such foreign corporation is not a qualified resident of such foreign country but such income tax treaty permits a withholding tax on dividends described in section 861(a)(2)(B) which are paid by such foreign corporation."
Subsec. (e)(3).
"(A)
"(B)
"(i) which are paid by such foreign corporation and with respect to which such foreign corporation is otherwise required to deduct and withhold tax under section 1441 or 1442, or
"(ii) which are received by such foreign corporation and are described in section 861(a)(2)(B)."
Subsec. (e)(4)(A)(i), (ii).
Subsec. (e)(4)(C), (D).
Subsec. (e)(5).
Subsec. (f)(1).
Subsec. (f)(3).
Statutory Notes and Related Subsidiaries
Effective Date of 1996 Amendment
Section 1704(f)(3)(B) of
Effective Date of 1988 Amendment
Amendment by section 1012(q)(1)(A), (2)–(6), (14) of
Amendment by section 6133(b) of
Effective Date
Section 1241(e) of
Determination of Earnings and Profits of Foreign Corporations
Section 1012(q)(1)(B) of
Applicability of Certain Amendments by Pub. L. 99–514 in Relation to Treaty Obligations of United States
For nonapplication of amendment by section 1241(a) of
§885. Cross references
(1) For special provisions relating to foreign corporations carrying on an insurance business within the United States, see section 842.
(2) For rules applicable in determining whether any foreign corporation is engaged in trade or business within the United States, see section 864(b).
(3) For adjustment of tax in case of corporations of certain foreign countries, see section 896.
(4) For allowance of credit against the tax in case of a foreign corporation having income effectively connected with the conduct of a trade or business within the United States, see section 906.
(5) For withholding at source of tax on income of foreign corporations, see section 1442.
(Aug. 16, 1954, ch. 736,
Editorial Notes
Amendments
1986—
1969—
1966—Par. (1).
Par. (2).
Par. (3).
Pars. (4), (5).
Par. (6).
Statutory Notes and Related Subsidiaries
Effective Date of 1969 Amendment
Amendment by
Effective Date of 1966 Amendment
Amendment by
Subpart C—Tax on Gross Transportation Income
§887. Imposition of tax on gross transportation income of nonresident aliens and foreign corporations
(a) Imposition of tax
In the case of any nonresident alien individual or foreign corporation, there is hereby imposed for each taxable year a tax equal to 4 percent of such individual's or corporation's United States source gross transportation income for such taxable year.
(b) United States source gross transportation income
(1) In general
Except as provided in paragraphs (2) and (3), the term "United States source gross transportation income" means any gross income which is transportation income (as defined in section 863(c)(3)) to the extent such income is treated as from sources in the United States under section 863(c)(2). To the extent provided in regulations, such term does not include any income of a kind to which an exemption under paragraph (1) or (2) of section 883(a) would not apply.
(2) Exception for certain income effectively connected with business in the United States
The term "United States source gross transportation income" shall not include any income taxable under section 871(b) or 882.
(3) Exception for certain income taxable in possessions
The term "United States source gross transportation income" does not include any income taxable in a possession of the United States under the provisions of this title as made applicable in such possession.
(4) Determination of effectively connected income
For purposes of this chapter, United States source gross transportation income of any taxpayer shall not be treated as effectively connected with the conduct of a trade or business in the United States unless—
(A) the taxpayer has a fixed place of business in the United States involved in the earning of United States source gross transportation income, and
(B) substantially all of the United States source gross transportation income (determined without regard to paragraph (2)) of the taxpayer is attributable to regularly scheduled transportation (or, in the case of income from the leasing of a vessel or aircraft, is attributable to a fixed place of business in the United States).
(c) Coordination with other provisions
Any income taxable under this section shall not be taxable under section 871, 881, or 882.
(Added
Editorial Notes
Amendments
1989—Subsec. (b)(1).
Subsec. (b)(3).
Subsec. (b)(4).
1988—Subsec. (b)(1).
Statutory Notes and Related Subsidiaries
Effective Date of 1989 Amendment
Amendment by
Effective Date of 1988 Amendment
Amendment by
Effective Date
Section applicable to taxable years beginning after Dec. 31, 1986, see section 1212(f) of
Applicability of Certain Amendments by Pub. L. 99–514 in Relation to Treaty Obligations of United States
For nonapplication of amendment by section 1212(b)(1) of
Subpart D—Miscellaneous Provisions
Editorial Notes
Amendments
1989—
1986—
1980—
1966—
1961—
§891. Doubling of rates of tax on citizens and corporations of certain foreign countries
Whenever the President finds that, under the laws of any foreign country, citizens or corporations of the United States are being subjected to discriminatory or extraterritorial taxes, the President shall so proclaim and the rates of tax imposed by sections 1, 3, 11, 801, 831, 852, 871, and 881 shall, for the taxable year during which such proclamation is made and for each taxable year thereafter, be doubled in the case of each citizen and corporation of such foreign country; but the tax at such doubled rate shall be considered as imposed by such sections as the case may be. In no case shall this section operate to increase the taxes imposed by such sections (computed without regard to this section) to an amount in excess of 80 percent of the taxable income of the taxpayer (computed without regard to the deductions allowable under section 151 and under part VIII of subchapter B). Whenever the President finds that the laws of any foreign country with respect to which the President has made a proclamation under the preceding provisions of this section have been modified so that discriminatory and extraterritorial taxes applicable to citizens and corporations of the United States have been removed, he shall so proclaim, and the provisions of this section providing for doubled rates of tax shall not apply to any citizen or corporation of such foreign country with respect to any taxable year beginning after such proclamation is made.
(Aug. 16, 1954, ch. 736,
Editorial Notes
Amendments
1986—
1984—
1959—
1956—Act Mar. 13, 1956, inserted reference to section 811.
Statutory Notes and Related Subsidiaries
Effective Date of 1986 Amendment
Amendment by
Effective Date of 1984 Amendment
Amendment by
Effective Date of 1959 Amendment
Amendment by
Effective Date of 1956 Amendment
Amendment by act Mar. 13, 1956, applicable only to taxable years beginning after Dec. 31, 1954, see section 6 of act Mar. 13, 1956, set out as a note under
§892. Income of foreign governments and of international organizations
(a) Foreign governments
(1) In general
The income of foreign governments received from—
(A) investments in the United States in—
(i) stocks, bonds, or other domestic securities owned by such foreign governments, or
(ii) financial instruments held in the execution of governmental financial or monetary policy, or
(B) interest on deposits in banks in the United States of moneys belonging to such foreign governments,
shall not be included in gross income and shall be exempt from taxation under this subtitle.
(2) Income received directly or indirectly from commercial activities
(A) In general
Paragraph (1) shall not apply to any income—
(i) derived from the conduct of any commercial activity (whether within or outside the United States),
(ii) received by a controlled commercial entity or received (directly or indirectly) from a controlled commercial entity, or
(iii) derived from the disposition of any interest in a controlled commercial entity.
(B) Controlled commercial entity
For purposes of subparagraph (A), the term "controlled commercial entity" means any entity engaged in commercial activities (whether within or outside the United States) if the government—
(i) holds (directly or indirectly) any interest in such entity which (by value or voting interest) is 50 percent or more of the total of such interests in such entity, or
(ii) holds (directly or indirectly) any other interest in such entity which provides the foreign government with effective control of such entity.
For purposes of the preceding sentence, a central bank of issue shall be treated as a controlled commercial entity only if engaged in commercial activities within the United States.
(3) Treatment as resident
For purposes of this title, a foreign government shall be treated as a corporate resident of its country. A foreign government shall be so treated for purposes of any income tax treaty obligation of the United States if such government grants equivalent treatment to the Government of the United States.
(b) International organizations
The income of international organizations received from investments in the United States in stocks, bonds, or other domestic securities owned by such international organizations, or from interest on deposits in banks in the United States of moneys belonging to such international organizations, or from any other source within the United States, shall not be included in gross income and shall be exempt from taxation under this subtitle.
(c) Regulations
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section.
(Aug. 16, 1954, ch. 736,
Editorial Notes
Amendments
1990—Subsec. (a)(2)(A).
1988—Subsec. (a)(2)(A).
Subsec. (a)(3).
1986—
Statutory Notes and Related Subsidiaries
Effective Date of 1988 Amendment
Amendment by
Effective Date of 1986 Amendment
Applicability of Certain Amendments by Pub. L. 99–514 in Relation to Treaty Obligations of United States
For nonapplication of amendment by section 1247(a) of
§893. Compensation of employees of foreign governments or international organizations
(a) Rule for exclusion
Wages, fees, or salary of any employee of a foreign government or of an international organization (including a consular or other officer, or a nondiplomatic representative), received as compensation for official services to such government or international organization shall not be included in gross income and shall be exempt from taxation under this subtitle if—
(1) such employee is not a citizen of the United States, or is a citizen of the Republic of the Philippines (whether or not a citizen of the United States); and
(2) in the case of an employee of a foreign government, the services are of a character similar to those performed by employees of the Government of the United States in foreign countries; and
(3) in the case of an employee of a foreign government, the foreign government grants an equivalent exemption to employees of the Government of the United States performing similar services in such foreign country.
(b) Certificate by Secretary of State
The Secretary of State shall certify to the Secretary of the Treasury the names of the foreign countries which grant an equivalent exemption to the employees of the Government of the United States performing services in such foreign countries, and the character of the services performed by employees of the Government of the United States in foreign countries.
(c) Limitation on exclusion
Subsection (a) shall not apply to—
(1) any employee of a controlled commercial entity (as defined in section 892(a)(2)(B)), or
(2) any employee of a foreign government whose services are primarily in connection with a commercial activity (whether within or outside the United States) of the foreign government.
(Aug. 16, 1954, ch. 736,
Editorial Notes
Amendments
1988—Subsec. (c).
Statutory Notes and Related Subsidiaries
Effective Date of 1988 Amendment
Amendment by
§894. Income affected by treaty
(a) Treaty provisions
(1) In general
The provisions of this title shall be applied to any taxpayer with due regard to any treaty obligation of the United States which applies to such taxpayer.
(2) Cross reference
For relationship between treaties and this title, see section 7852(d).
(b) Permanent establishment in United States
For purposes of applying any exemption from, or reduction of, any tax provided by any treaty to which the United States is a party with respect to income which is not effectively connected with the conduct of a trade or business within the United States, a nonresident alien individual or a foreign corporation shall be deemed not to have a permanent establishment in the United States at any time during the taxable year. This subsection shall not apply in respect of the tax computed under section 877(b).
(c) Denial of treaty benefits for certain payments through hybrid entities
(1) Application to certain payments
A foreign person shall not be entitled under any income tax treaty of the United States with a foreign country to any reduced rate of any withholding tax imposed by this title on an item of income derived through an entity which is treated as a partnership (or is otherwise treated as fiscally transparent) for purposes of this title if—
(A) such item is not treated for purposes of the taxation laws of such foreign country as an item of income of such person,
(B) the treaty does not contain a provision addressing the applicability of the treaty in the case of an item of income derived through a partnership, and
(C) the foreign country does not impose tax on a distribution of such item of income from such entity to such person.
(2) Regulations
The Secretary shall prescribe such regulations as may be necessary or appropriate to determine the extent to which a taxpayer to which paragraph (1) does not apply shall not be entitled to benefits under any income tax treaty of the United States with respect to any payment received by, or income attributable to any activities of, an entity organized in any jurisdiction (including the United States) that is treated as a partnership or is otherwise treated as fiscally transparent for purposes of this title (including a common investment trust under section 584, a grantor trust, or an entity that is disregarded for purposes of this title) and is treated as fiscally nontransparent for purposes of the tax laws of the jurisdiction of residence of the taxpayer.
(Aug. 16, 1954, ch. 736,
Editorial Notes
Amendments
1997—Subsec. (c).
1988—Subsec. (a).
1966—
Statutory Notes and Related Subsidiaries
Effective Date of 1997 Amendment
Effective Date of 1988 Amendment
Amendment by
Effective Date of 1966 Amendment
§895. Income derived by a foreign central bank of issue from obligations of the United States or from bank deposits
Income derived by a foreign central bank of issue from obligations of the United States or of any agency or instrumentality thereof (including beneficial interests, participations, and other instruments issued under section 302(c) of the Federal National Mortgage Association Charter Act (
(Added
Editorial Notes
Amendments
1966—
Statutory Notes and Related Subsidiaries
Effective Date of 1966 Amendment
Amendment by
Effective Date
§896. Adjustment of tax on nationals, residents, and corporations of certain foreign countries
(a) Imposition of more burdensome taxes by foreign country
Whenever the President finds that—
(1) under the laws of any foreign country, considering the tax system of such foreign country, citizens of the United States not residents of such foreign country or domestic corporations are being subjected to more burdensome taxes, on any item of income received by such citizens or corporations from sources within such foreign country, than taxes imposed by the provisions of this subtitle on similar income derived from sources within the United States by residents or corporations of such foreign country,
(2) such foreign country, when requested by the United States to do so, has not acted to revise or reduce such taxes so that they are no more burdensome than taxes imposed by the provisions of this subtitle on similar income derived from sources within the United States by residents or corporations of such foreign country, and
(3) it is in the public interest to apply pre-1967 tax provisions in accordance with the provisions of this subsection to residents or corporations of such foreign country,
the President shall proclaim that the tax on such similar income derived from sources within the United States by residents or corporations of such foreign country shall, for taxable years beginning after such proclamation, be determined under this subtitle without regard to amendments made to this subchapter and
(b) Imposition of discriminatory taxes by foreign country
Whenever the President finds that—
(1) under the laws of any foreign country, citizens of the United States or domestic corporations (or any class of such citizens or corporations) are, with respect to any item of income, being subjected to a higher effective rate of tax than are nationals, residents, or corporations of such foreign country (or a similar class of such nationals, residents, or corporations) under similar circumstances;
(2) such foreign country, when requested by the United States to do so, has not acted to eliminate such higher effective rate of tax; and
(3) it is in the public interest to adjust, in accordance with the provisions of this subsection, the effective rate of tax imposed by this subtitle on similar income of nationals, residents, or corporations of such foreign country (or such similar class of such nationals, residents, or corporations),
the President shall proclaim that the tax on similar income of nationals, residents, or corporations of such foreign country (or such similar class of such nationals, residents, or corporations) shall, for taxable years beginning after such proclamation, be adjusted so as to cause the effective rate of tax imposed by this subtitle on such similar income to be substantially equal to the effective rate of tax imposed by such foreign country on such item of income of citizens of the United States or domestic corporations (or such class of citizens or corporations). In implementing a proclamation made under this subsection, the effective rate of tax imposed by this subtitle on an item of income may be adjusted by the disallowance, in whole or in part, of any deduction, credit, or exemption which would otherwise be allowed with respect to that item of income or by increasing the rate of tax otherwise applicable to that item of income.
(c) Alleviation of more burdensome or discriminatory taxes
Whenever the President finds that—
(1) the laws of any foreign country with respect to which the President has made a proclamation under subsection (a) have been modified so that citizens of the United States not residents of such foreign country or domestic corporations are no longer subject to more burdensome taxes on the item of income derived by such citizens or corporations from sources within such foreign country, or
(2) the laws of any foreign country with respect to which the President has made a proclamation under subsection (b) have been modified so that citizens of the United States or domestic corporations (or any class of such citizens or corporations) are no longer subject to a higher effective rate of tax on the item of income,
he shall proclaim that the tax imposed by this subtitle on the similar income of nationals, residents, or corporations of such foreign country shall, for any taxable year beginning after such proclamation, be determined under this subtitle without regard to such subsection.
(d) Notification of Congress required
No proclamation shall be issued by the President pursuant to this section unless, at least 30 days prior to such proclamation, he has notified the Senate and the House of Representatives of his intention to issue such proclamation.
(e) Implementation by regulations
The Secretary shall prescribe such regulations as he deems necessary or appropriate to implement this section.
(Added
Editorial Notes
References in Text
The date of enactment of this section, referred to in the provisions following subsec. (a)(3), is the date of enactment of
Amendments
1976—Subsec. (e).
Statutory Notes and Related Subsidiaries
Effective Date
Section applicable with respect to taxable years beginning after Dec. 31, 1966, see section 105(d) of
§897. Disposition of investment in United States real property
(a) General rule
(1) Treatment as effectively connected with United States trade or business
For purposes of this title, gain or loss of a nonresident alien individual or a foreign corporation from the disposition of a United States real property interest shall be taken into account—
(A) in the case of a nonresident alien individual, under section 871(b)(1), or
(B) in the case of a foreign corporation, under section 882(a)(1),
as if the taxpayer were engaged in a trade or business within the United States during the taxable year and as if such gain or loss were effectively connected with such trade or business.
(2) Minimum tax on nonresident alien individuals
(A) In general
In the case of any nonresident alien individual, the taxable excess for purposes of section 55(b)(1) shall not be less than the lesser of—
(i) the individual's alternative minimum taxable income (as defined in section 55(b)(1)(D)) for the taxable year, or
(ii) the individual's net United States real property gain for the taxable year.
(B) Net United States real property gain
For purposes of subparagraph (A), the term "net United States real property gain" means the excess of—
(i) the aggregate of the gains for the taxable year from dispositions of United States real property interests, over
(ii) the aggregate of the losses for the taxable year from dispositions of such interests.
(b) Limitation on losses of individuals
In the case of an individual, a loss shall be taken into account under subsection (a) only to the extent such loss would be taken into account under section 165(c) (determined without regard to subsection (a) of this section).
(c) United States real property interest
For purposes of this section—
(1) United States real property interest
(A) In general
Except as provided in subparagraph (B) or subsection (k), the term "United States real property interest" means—
(i) an interest in real property (including an interest in a mine, well, or other natural deposit) located in the United States or the Virgin Islands, and
(ii) any interest (other than an interest solely as a creditor) in any domestic corporation unless the taxpayer establishes (at such time and in such manner as the Secretary by regulations prescribes) that such corporation was at no time a United States real property holding corporation during the shorter of—
(I) the period after June 18, 1980, during which the taxpayer held such interest, or
(II) the 5-year period ending on the date of the disposition of such interest.
(B) Exclusion for interest in certain corporations
The term "United States real property interest" does not include any interest in a corporation if—
(i) as of the date of the disposition of such interest, such corporation did not hold any United States real property interests,
(ii) all of the United States real property interests held by such corporation at any time during the shorter of the periods described in subparagraph (A)(ii)—
(I) were disposed of in transactions in which the full amount of the gain (if any) was recognized, or
(II) ceased to be United States real property interests by reason of the application of this subparagraph to 1 or more other corporations, and
(iii) neither such corporation nor any predecessor of such corporation was a regulated investment company or a real estate investment trust at any time during the shorter of the periods described in subparagraph (A)(ii).
(2) United States real property holding corporation
The term "United States real property holding corporation" means any corporation if—
(A) the fair market value of its United States real property interests equals or exceeds 50 percent of
(B) the fair market value of—
(i) its United States real property interests,
(ii) its interests in real property located outside the United States, plus
(iii) any other of its assets which are used or held for use in a trade or business.
(3) Exception for stock regularly traded on established securities markets
If any class of stock of a corporation is regularly traded on an established securities market, stock of such class shall be treated as a United States real property interest only in the case of a person who, at some time during the shorter of the periods described in paragraph (1)(A)(ii), held more than 5 percent of such class of stock.
(4) Interests held by foreign corporations and by partnerships, trusts, and estates
For purposes of determining whether any corporation is a United States real property holding corporation—
(A) Foreign corporations
Paragraph (1)(A)(ii) shall be applied by substituting "any corporation (whether foreign or domestic)" for "any domestic corporation".
(B) Assets held by partnerships, etc.
Under regulations prescribed by the Secretary, assets held by a partnership, trust, or estate shall be treated as held proportionately by its partners or beneficiaries. Any asset treated as held by a partner or beneficiary by reason of this subparagraph which is used or held for use by the partnership, trust, or estate in a trade or business shall be treated as so used or held by the partner or beneficiary. Any asset treated as held by a partner or beneficiary by reason of this subparagraph shall be so treated for purposes of applying this subparagraph successively to partnerships, trusts, or estates which are above the first partnership, trust, or estate in a chain thereof.
(5) Treatment of controlling interests
(A) In general
Under regulations, for purposes of determining whether any corporation is a United States real property holding corporation, if any corporation (hereinafter in this paragraph referred to as the "first corporation") holds a controlling interest in a second corporation—
(i) the stock which the first corporation holds in the second corporation shall not be taken into account,
(ii) the first corporation shall be treated as holding a portion of each asset of the second corporation equal to the percentage of the fair market value of the stock of the second corporation represented by the stock held by the first corporation, and
(iii) any asset treated as held by the first corporation by reason of clause (ii) which is used or held for use by the second corporation in a trade or business shall be treated as so used or held by the first corporation.
Any asset treated as held by the first corporation by reason of the preceding sentence shall be so treated for purposes of applying the preceding sentence successively to corporations which are above the first corporation in a chain of corporations.
(B) Controlling interest
For purposes of subparagraph (A), the term "controlling interest" means 50 percent or more of the fair market value of all classes of stock of a corporation.
(6) Other special rules
(A) Interest in real property
The term "interest in real property" includes fee ownership and co-ownership of land or improvements thereon, leaseholds of land or improvements thereon, options to acquire land or improvements thereon, and options to acquire leaseholds of land or improvements thereon.
(B) Real property includes associated personal property
The term "real property" includes movable walls, furnishings, and other personal property associated with the use of the real property.
(C) Constructive ownership rules
For purposes of determining under paragraph (3) whether any person holds more than 5 percent of any class of stock and of determining under paragraph (5) whether a person holds a controlling interest in any corporation, section 318(a) shall apply (except that paragraphs (2)(C) and (3)(C) of section 318(a) shall be applied by substituting "5 percent" for "50 percent").
(d) Treatment of distributions by foreign corporations
(1) In general
Except to the extent otherwise provided in regulations, notwithstanding any other provision of this chapter, gain shall be recognized by a foreign corporation on the distribution (including a distribution in liquidation or redemption) of a United States real property interest in an amount equal to the excess of the fair market value of such interest (as of the time of the distribution) over its adjusted basis.
(2) Exceptions
Gain shall not be recognized under paragraph (1)—
(A) if—
(i) at the time of the receipt of the distributed property, the distributee would be subject to taxation under this chapter on a subsequent disposition of the distributed property, and
(ii) the basis of the distributed property in the hands of the distributee is no greater than the adjusted basis of such property before the distribution, increased by the amount of gain (if any) recognized by the distributing corporation, or
(B) if such nonrecognition is provided in regulations prescribed by the Secretary under subsection (e)(2).
(e) Coordination with nonrecognition provisions
(1) In general
Except to the extent otherwise provided in subsection (d) and paragraph (2) of this subsection, any nonrecognition provision shall apply for purposes of this section to a transaction only in the case of an exchange of a United States real property interest for an interest the sale of which would be subject to taxation under this chapter.
(2) Regulations
The Secretary shall prescribe regulations (which are necessary or appropriate to prevent the avoidance of Federal income taxes) providing—
(A) the extent to which nonrecognition provisions shall, and shall not, apply for purposes of this section, and
(B) the extent to which—
(i) transfers of property in reorganization, and
(ii) changes in interests in, or distributions from, a partnership, trust, or estate,
shall be treated as sales of property at fair market value.
(3) Nonrecognition provision defined
For purposes of this subsection, the term "nonrecognition provision" means any provision of this title for not recognizing gain or loss.
[(f) Repealed. Pub. L. 104–188, title I, §1702(g)(2), Aug. 20, 1996, 110 Stat. 1873 ]
(g) Special rule for sales of interest in partnerships, trusts, and estates
Under regulations prescribed by the Secretary, the amount of any money, and the fair market value of any property, received by a nonresident alien individual or foreign corporation in exchange for all or part of its interest in a partnership, trust, or estate shall, to the extent attributable to United States real property interests, be considered as an amount received from the sale or exchange in the United States of such property.
(h) Special rules for certain investment entities
For purposes of this section—
(1) Look-through of distributions
Any distribution by a qualified investment entity to a nonresident alien individual, a foreign corporation, or other qualified investment entity shall, to the extent attributable to gain from sales or exchanges by the qualified investment entity of United States real property interests, be treated as gain recognized by such nonresident alien individual, foreign corporation, or other qualified investment entity from the sale or exchange of a United States real property interest. Notwithstanding the preceding sentence, any distribution by a qualified investment entity to a nonresident alien individual or a foreign corporation with respect to any class of stock which is regularly traded on an established securities market located in the United States shall not be treated as gain recognized from the sale or exchange of a United States real property interest if such individual or corporation did not own more than 5 percent of such class of stock at any time during the 1-year period ending on the date of such distribution.
(2) Sale of stock in domestically controlled entity not taxed
The term "United States real property interest" does not include any interest in a domestically controlled qualified investment entity.
(3) Distributions by domestically controlled qualified investment entities
In the case of a domestically controlled qualified investment entity, rules similar to the rules of subsection (d) shall apply to the foreign ownership percentage of any gain.
(4) Definitions and special rules
(A) Qualified investment entity
The term "qualified investment entity" means—
(i) any real estate investment trust, and
(ii) any regulated investment company which is a United States real property holding corporation or which would be a United States real property holding corporation if the exceptions provided in subsections (c)(3) and (h)(2) did not apply to interests in any real estate investment trust or regulated investment company.
(B) Domestically controlled
The term "domestically controlled qualified investment entity" means any qualified investment entity in which at all times during the testing period less than 50 percent in value of the stock was held directly or indirectly by foreign persons.
(C) Foreign ownership percentage
The term "foreign ownership percentage" means that percentage of the stock of the qualified investment entity which was held (directly or indirectly) by foreign persons at the time during the testing period during which the direct and indirect ownership of stock by foreign persons was greatest.
(D) Testing period
The term "testing period" means whichever of the following periods is the shortest:
(i) the period beginning on June 19, 1980, and ending on the date of the disposition or of the distribution, as the case may be,
(ii) the 5-year period ending on the date of the disposition or of the distribution, as the case may be, or
(iii) the period during which the qualified investment entity was in existence.
(E) Special ownership rules
For purposes of determining the holder of stock under subparagraphs (B) and (C)—
(i) in the case of any class of stock of the qualified investment entity which is regularly traded on an established securities market in the United States, a person holding less than 5 percent of such class of stock at all times during the testing period shall be treated as a United States person unless the qualified investment entity has actual knowledge that such person is not a United States person,
(ii) any stock in the qualified investment entity held by another qualified investment entity—
(I) any class of stock of which is regularly traded on an established securities market, or
(II) which is a regulated investment company which issues redeemable securities (within the meaning of section 2 of the Investment Company Act of 1940),
shall be treated as held by a foreign person, except that if such other qualified investment entity is domestically controlled (determined after application of this subparagraph), such stock shall be treated as held by a United States person, and
(iii) any stock in the qualified investment entity held by any other qualified investment entity not described in subclause (I) or (II) of clause (ii) shall only be treated as held by a United States person in proportion to the stock of such other qualified investment entity which is (or is treated under clause (ii) or (iii) as) held by a United States person.
(5) Treatment of certain wash sale transactions
(A) In general
If an interest in a domestically controlled qualified investment entity is disposed of in an applicable wash sale transaction, the taxpayer shall, for purposes of this section, be treated as having gain from the sale or exchange of a United States real property interest in an amount equal to the portion of the distribution described in subparagraph (B) with respect to such interest which, but for the disposition, would have been treated by the taxpayer as gain from the sale or exchange of a United States real property interest under paragraph (1).
(B) Applicable wash sales transaction
For purposes of this paragraph—
(i) In general
The term "applicable wash sales transaction" means any transaction (or series of transactions) under which a nonresident alien individual, foreign corporation, or qualified investment entity—
(I) disposes of an interest in a domestically controlled qualified investment entity during the 30-day period preceding the ex-dividend date of a distribution which is to be made with respect to the interest and any portion of which, but for the disposition, would have been treated by the taxpayer as gain from the sale or exchange of a United States real property interest under paragraph (1), and
(II) acquires, or enters into a contract or option to acquire, a substantially identical interest in such entity during the 61-day period beginning with the 1st day of the 30-day period described in subclause (I).
For purposes of subclause (II), a nonresident alien individual, foreign corporation, or qualified investment entity shall be treated as having acquired any interest acquired by a person related (within the meaning of section 267(b) or 707(b)(1)) to the individual, corporation, or entity, and any interest which such person has entered into any contract or option to acquire.
(ii) Application to substitute dividend and similar payments
Subparagraph (A) shall apply to—
(I) any substitute dividend payment (within the meaning of section 861), or
(II) any other similar payment specified in regulations which the Secretary determines necessary to prevent avoidance of the purposes of this paragraph.
The portion of any such payment treated by the taxpayer as gain from the sale or exchange of a United States real property interest under subparagraph (A) by reason of this clause shall be equal to the portion of the distribution such payment is in lieu of which would have been so treated but for the transaction giving rise to such payment.
(iii) Exception where distribution actually received
A transaction shall not be treated as an applicable wash sales transaction if the nonresident alien individual, foreign corporation, or qualified investment entity receives the distribution described in clause (i)(I) with respect to either the interest which was disposed of, or acquired, in the transaction.
(iv) Exception for certain publicly traded stock
A transaction shall not be treated as an applicable wash sales transaction if it involves the disposition of any class of stock in a qualified investment entity which is regularly traded on an established securities market within the United States but only if the nonresident alien individual, foreign corporation, or qualified investment entity did not own more than 5 percent of such class of stock at any time during the 1-year period ending on the date of the distribution described in clause (i)(I).
(i) Election by foreign corporation to be treated as domestic corporation
(1) In general
If—
(A) a foreign corporation holds a United States real property interest, and
(B) under any treaty obligation of the United States the foreign corporation is entitled to nondiscriminatory treatment with respect to that interest,
then such foreign corporation may make an election to be treated as a domestic corporation for purposes of this section, section 1445, and section 6039C.
(2) Revocation only with consent
Any election under paragraph (1), once made, may be revoked only with the consent of the Secretary.
(3) Making of election
An election under paragraph (1) may be made only—
(A) if all of the owners of all classes of interests (other than interests solely as a creditor) in the foreign corporation at the time of the election consent to the making of the election and agree that gain, if any, from the disposition of such interest after June 18, 1980, which would be taken into account under subsection (a) shall be taxable notwithstanding any provision to the contrary in a treaty to which the United States is a party, and
(B) subject to such other conditions as the Secretary may prescribe by regulations with respect to the corporation or its shareholders.
In the case of a class of interest (other than an interest solely as a creditor) which is regularly traded on an established securities market, the consent described in subparagraph (A) need only be made by any person if such person held more than 5 percent of such class of interest at some time during the shorter of the periods described in subsection (c)(1)(A)(ii). The constructive ownership rules of subsection (c)(6)(C) shall apply in determining whether a person held more than 5 percent of a class of interest.
(4) Exclusive method of claiming nondiscrimination
The election provided by paragraph (1) shall be the exclusive remedy for any person claiming discriminatory treatment with respect to this section, section 1445, and section 6039C.
(j) Certain contributions to capital
Except to the extent otherwise provided in regulations, gain shall be recognized by a nonresident alien individual or foreign corporation on the transfer of a United States real property interest to a foreign corporation if the transfer is made as paid in surplus or as a contribution to capital, in the amount of the excess of—
(1) the fair market value of such property transferred, over
(2) the sum of—
(A) the adjusted basis of such property in the hands of the transferor, plus
(B) the amount of gain, if any, recognized to the transferor under any other provision at the time of the transfer.
(k) Special rules relating to real estate investment trusts
(1) Increase in percentage ownership for exceptions for persons holding publicly traded stock
(A) Dispositions
In the case of any disposition of stock in a real estate investment trust, paragraphs (3) and (6)(C) of subsection (c) shall each be applied by substituting "more than 10 percent" for "more than 5 percent".
(B) Distributions
In the case of any distribution from a real estate investment trust, subsection (h)(1) shall be applied by substituting "10 percent" for "5 percent".
(2) Stock held by qualified shareholders not treated as United States real property interest
(A) In general
Except as provided in subparagraph (B)—
(i) stock of a real estate investment trust which is held directly (or indirectly through 1 or more partnerships) by a qualified shareholder shall not be treated as a United States real property interest, and
(ii) notwithstanding subsection (h)(1), any distribution to a qualified shareholder shall not be treated as gain recognized from the sale or exchange of a United States real property interest to the extent the stock of the real estate investment trust held by such qualified shareholder is not treated as a United States real property interest under clause (i).
(B) Exception
In the case of a qualified shareholder with one or more applicable investors—
(i) subparagraph (A)(i) shall not apply to the applicable percentage of the stock of the real estate investment trust held by the qualified shareholder, and
(ii) the applicable percentage of the amounts realized by the qualified shareholder with respect to any disposition of stock in the real estate investment trust or with respect to any distribution from the real estate investment trust attributable to gain from sales or exchanges of a United States real property interest shall be treated as amounts realized from the disposition of United States real property interests.
(C) Special rule for certain distributions treated as sale or exchange
If a distribution by a real estate investment trust is treated as a sale or exchange of stock under section 301(c)(3), 302, or 331 with respect to a qualified shareholder—
(i) in the case of an applicable investor, subparagraph (B) shall apply with respect to such distribution, and
(ii) in the case of any other person, such distribution shall be treated under section 857(b)(3)(F) 1 as a dividend from a real estate investment trust notwithstanding any other provision of this title.
(D) Applicable investor
For purposes of this subsection, the term "applicable investor" means, with respect to any qualified shareholder holding stock in a real estate investment trust, a person (other than a qualified shareholder) which—
(i) holds an interest (other than an interest solely as a creditor) in such qualified shareholder, and
(ii) holds more than 10 percent of the stock of such real estate investment trust (whether or not by reason of the person's ownership interest in the qualified shareholder).
(E) Constructive ownership rules
For purposes of subparagraphs (B)(i) and (D), the constructive ownership rules under subsection (c)(6)(C) shall apply.
(F) Applicable percentage
For purposes of subparagraph (B), the term "applicable percentage" means the percentage of the value of the interests (other than interests held solely as a creditor) in the qualified shareholder held by applicable investors.
(3) Qualified shareholder
For purposes of this subsection—
(A) In general
The term "qualified shareholder" means a foreign person which—
(i)(I) is eligible for benefits of a comprehensive income tax treaty with the United States which includes an exchange of information program and the principal class of interests of which is listed and regularly traded on 1 or more recognized stock exchanges (as defined in such comprehensive income tax treaty), or
(II) is a foreign partnership that is created or organized under foreign law as a limited partnership in a jurisdiction that has an agreement for the exchange of information with respect to taxes with the United States and has a class of limited partnership units which is regularly traded on the New York Stock Exchange or Nasdaq Stock Market and such class of limited partnership units value is greater than 50 percent of the value of all the partnership units,
(ii) is a qualified collective investment vehicle, and
(iii) maintains records on the identity of each person who, at any time during the foreign person's taxable year, holds directly 5 percent or more of the class of interest described in subclause (I) or (II) of clause (i), as the case may be.
(B) Qualified collective investment vehicle
For purposes of this subsection, the term "qualified collective investment vehicle" means a foreign person—
(i) which—
(I) is eligible for benefits under the comprehensive income tax treaty described in subparagraph (A)(i)(I), but only if the dividends article of such treaty imposes conditions on the benefits allowable in the case of dividends paid by a real estate investment trust, and
(II) is eligible under such treaty for a reduced rate of withholding with respect to ordinary dividends paid by a real estate investment trust even if such person holds more than 10 percent of the stock of such real estate investment trust,
(ii) which—
(I) is a publicly traded partnership (as defined in section 7704(b)) to which subsection (a) of section 7704 does not apply,
(II) is a withholding foreign partnership for purposes of chapters 3, 4, and 61, and
(III) if such foreign partnership were a domestic corporation, would be a United States real property holding corporation (determined without regard to paragraph (1)) at any time during the 5-year period ending on the date of disposition of, or distribution with respect to, such partnership's interests in a real estate investment trust, or
(iii) which is designated as a qualified collective investment vehicle by the Secretary and is either—
(I) fiscally transparent within the meaning of section 894, or
(II) required to include dividends in its gross income, but entitled to a deduction for distributions to persons holding interests (other than interests solely as a creditor) in such foreign person.
(4) Partnership allocations
(A) In general
For the purposes of this subsection, in the case of an applicable investor who is a nonresident alien individual or a foreign corporation and is a partner in a partnership that is a qualified shareholder, if such partner's proportionate share of USRPI gain for the taxable year exceeds such partner's distributive share of USRPI gain for the taxable year, then
(i) such partner's distributive share of the amount of gain taken into account under subsection (a)(1) by the partner for the taxable year (determined without regard to this paragraph) shall be increased by the amount of such excess, and
(ii) such partner's distributive share of items of income or gain for the taxable year that are not treated as gain taken into account under subsection (a)(1) (determined without regard to this paragraph) shall be decreased (but not below zero) by the amount of such excess.
(B) USRPI gain
For the purposes of this paragraph, the term "USRPI gain" means the excess (if any) of—
(i) the sum of—
(I) any gain recognized from the disposition of a United States real property interest, and
(II) any distribution by a real estate investment trust that is treated as gain recognized from the sale or exchange of a United States real property interest, over
(ii) any loss recognized from the disposition of a United States real property interest.
(C) Proportionate share of USRPI gain
For purposes of this paragraph, an applicable investor's proportionate share of USRPI gain shall be determined on the basis of such investor's share of partnership items of income or gain (excluding gain allocated under section 704(c)), whichever results in the largest proportionate share. If the investor's share of partnership items of income or gain (excluding gain allocated under section 704(c)) may vary during the period such investor is a partner in the partnership, such share shall be the highest share such investor may receive.
(l) Exception for qualified foreign pension funds
(1) In general
For purposes of this section, a qualified foreign pension fund shall not be treated as a nonresident alien individual or a foreign corporation. For purposes of the preceding sentence, an entity all the interests of which are held by a qualified foreign pension fund shall be treated as such a fund.
(2) Qualified foreign pension fund
For purposes of this subsection, the term "qualified foreign pension fund" means any trust, corporation, or other organization or arrangement—
(A) which is created or organized under the law of a country other than the United States,
(B) which is established—
(i) by such country (or one or more political subdivisions thereof) to provide retirement or pension benefits to participants or beneficiaries that are current or former employees (including self-employed individuals) or persons designated by such employees, as a result of services rendered by such employees to their employers, or
(ii) by one or more employers to provide retirement or pension benefits to participants or beneficiaries that are current or former employees (including self-employed individuals) or persons designated by such employees in consideration for services rendered by such employees to such employers,
(C) which does not have a single participant or beneficiary with a right to more than five percent of its assets or income,
(D) which is subject to government regulation and with respect to which annual information about its beneficiaries is provided, or is otherwise available, to the relevant tax authorities in the country in which it is established or operates, and
(E) with respect to which, under the laws of the country in which it is established or operates—
(i) contributions to such trust, corporation, organization, or arrangement which would otherwise be subject to tax under such laws are deductible or excluded from the gross income of such entity or arrangement or taxed at a reduced rate, or
(ii) taxation of any investment income of such trust, corporation, organization or arrangement is deferred, or such income is excluded from the gross income of such entity or arrangement or is taxed at a reduced rate.
(3) Regulations
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection.
(Added
Editorial Notes
References in Text
Section 2 of the Investment Company Act of 1940, referred to in subsec. (h)(4)(E)(ii)(II), is classified to
Section 857(b)(3)(F), referred to in subsec. (k)(2)(C)(ii), was redesignated section 857(b)(3)(E) and a new subsec. (b)(3)(F) added by
Amendments
2022—Subsec. (a)(2)(A)(i).
2018—Subsec. (a)(1)(A).
Subsec. (h)(4)(A)(ii).
Subsec. (k)(2).
Subsec. (k)(2)(B).
Subsec. (k)(2)(B)(i).
Subsec. (k)(2)(B)(ii).
Subsec. (k)(2)(D).
Subsec. (k)(2)(E).
Subsec. (k)(2)(F).
Subsec. (k)(3)(B)(i).
Subsec. (k)(3)(B)(ii)(II).
Subsec. (k)(3)(B)(ii)(III).
Subsec. (l).
Subsec. (l)(1).
"(A) a qualified foreign pension fund, or
"(B) any entity all of the interests of which are held by a qualified foreign pension fund."
Subsec. (l)(2)(B).
Subsec. (l)(2)(D).
Subsec. (l)(2)(E)(i).
Subsec. (l)(2)(E)(ii).
2017—Subsec. (a)(2)(A).
2015—Subsec. (c)(1)(A).
Subsec. (c)(1)(B)(iii).
Subsec. (h)(4).
Subsec. (h)(4)(A).
Subsec. (h)(4)(A)(ii).
Subsec. (h)(4)(E).
Subsec. (k).
Subsec. (l).
2014—Subsec. (h)(4)(A)(ii).
2013—Subsec. (h)(4)(A)(ii).
2010—Subsec. (h)(4)(A)(ii).
2008—Subsec. (h)(4)(A)(ii).
2006—Subsec. (h)(1).
Subsec. (h)(4)(A)(i)(II).
Subsec. (h)(4)(A)(ii).
Subsec. (h)(5).
2005—Subsec. (h)(1).
2004—Subsec. (h).
Subsec. (h)(1).
Subsec. (h)(2).
Subsec. (h)(3).
Subsec. (h)(4)(A).
Subsec. (h)(4)(B).
Subsec. (h)(4)(C), (D)(iii).
1996—Subsec. (f).
"(f)
"(1) the adjusted basis of such property before the distribution, increased by
"(2) the sum of—
"(A) any gain recognized by the distributing corporation on the distribution, and
"(B) any tax paid under this chapter by the distributee on such distribution."
1993—Subsec. (a)(2).
1990—Subsec. (k).
"(1) a foreign corporation adopts, or has adopted, a plan of liquidation described in section 334(b)(2)(A), and
"(2) the 12-month period described in section 334(b)(2)(B) for the acquisition by purchase of the stock of the foreign corporation, began after December 31, 1979, and before November 26, 1980,
then such foreign corporation may make an election to be treated, for the period following June 18, 1980, as a domestic corporation pursuant to section 897(i)(1). Notwithstanding an election under the preceding sentence, any selling shareholder of such corporation shall be considered to have sold the stock of a foreign corporation."
1988—Subsec. (l).
1986—Subsec. (a)(2).
"(i) the individual's alternative minimum taxable income (as defined in section 55(b)) for the taxable year, or
"(ii) the individual's net United States real property gain for the taxable year."
Subsec. (d).
Subsec. (i)(1), (4).
1982—Subsec. (a)(2)(A).
1981—Subsec. (c)(1)(A)(i).
Subsec. (c)(4)(B).
Subsec. (d)(1)(B).
Subsec. (i).
Subsecs. (j) to (l).
Statutory Notes and Related Subsidiaries
Effective Date of 2022 Amendment
Amendment by
Effective Date of 2018 Amendment
Amendment by section 101(p)(1)–(6), (q) of
Effective Date of 2017 Amendment
Amendment by
Effective Date of 2015 Amendment
"(1)
"(2)
"(A) which makes a distribution after December 31, 2014, and before the date of the enactment of this Act, and
"(B) which would (but for the second sentence of paragraph (1)) have been required to withhold with respect to such distribution under section 1445 of such Code,
such investment company shall not be liable to any person to whom such distribution was made for any amount so withheld and paid over to the Secretary of the Treasury."
Amendment by section 322(a)(1), (2)(A) of
"(2)
[(3) Repealed.
Effective Date of 2014 Amendment
"(1)
"(2)
"(A) which makes a distribution after December 31, 2013, and before the date of the enactment of this Act, and
"(B) which would (but for the second sentence of paragraph (1)) have been required to withhold with respect to such distribution under section 1445 of such Code,
such investment company shall not be liable to any person to whom such distribution was made for any amount so withheld and paid over to the Secretary of the Treasury."
Effective Date of 2013 Amendment
"(1)
"(2)
"(A) which makes a distribution after December 31, 2011, and before the date of the enactment of this Act; and
"(B) which would (but for the second sentence of paragraph (1)) have been required to withhold with respect to such distribution under section 1445 of such Code,
such investment company shall not be liable to any person to whom such distribution was made for any amount so withheld and paid over to the Secretary of the Treasury."
Effective Date of 2010 Amendment
"(1)
"(2)
"(A) which makes a distribution after December 31, 2009, and before the date of the enactment of this Act [Dec. 17, 2010]; and
"(B) which would (but for the second sentence of paragraph (1)) have been required to withhold with respect to such distribution under section 1445 of such Code,
such investment company shall not be liable to any person to whom such distribution was made for any amount so withheld and paid over to the Secretary of the Treasury."
Effective Date of 2008 Amendment
"(1)
"(2)
"(A) which makes a distribution after December 31, 2007, and before October 4, 2008, and
"(B) which would (but for the second sentence of paragraph (1)) have been required to withhold with respect to such distribution under section 1445 of such Code,
such investment company shall not be liable to any person to whom such distribution was made for any amount so withheld and paid over to the Secretary of the Treasury."
Effective Date of 2006 Amendment
Amendment by section 505(a) of
Effective Date of 2005 Amendment
Amendment by
Effective Date of 2004 Amendment
Amendment by section 411(c)(1) of
Amendment by section 418(a) of
Effective Date of 1996 Amendment
Amendment by
Effective Date of 1993 Amendment
Amendment by
Effective Date of 1988 Amendment
Amendment by
Effective Date of 1986 Amendment
Amendment by section 631(e)(12) of
Amendment by section 701(e)(4)(G) of
Amendment by section 1810(f)(1) of
Effective Date of 1982 Amendment
Amendment by
Effective Date of 1981 Amendment
Effective Date
"(a)
"(b)
Repeal
Savings Provision
For provisions that nothing in amendment by
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)(G) 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 Applying Section 897
"(a)
"(1) such United States real property holding company is a Delaware corporation incorporated on January 17, 1984,
"(2) the transfer, sale, exchange, or other disposition is to any member of a qualified ownership group,
"(3) the recipient of the share of stock elects, for purposes of such section 897, a carryover basis in the transferred shares,
"(4) the transfer, sale, exchange, or other disposition is part of a single integrated plan, whereby the stock of the corporation described in paragraph (1) becomes owned directly by the 2 corporations specifically referred to in subsection (b) or by such 2 corporations and by 1 or both of their jointly owned direct subsidiaries,
"(5) within 20 days after each transfer, sale, exchange, or other disposition, the person making such transfer, sale, exchange, or other disposition notifies the Internal Revenue Service of the transaction, the date of the transaction, the basis of the stock involved, the holding period for such stock, and such other information as the Internal Revenue Service may require, and
"(6) the integrated plan is completed before the date 4 years after the date of the enactment of the Technical and Miscellaneous Revenue Act of 1988 [Nov. 10, 1988].
In the case of any underpayment attributable to a failure to meet any requirement of this subsection, the period during which such underpayment may be assessed shall in no event expire before the date 5 years after the date of the enactment of the Technical and Miscellaneous Revenue Act of 1988.
"(b)
"(c) [Repealed.
"(d)
Gain From Disposition of Investment in United States Real Property by Nonresident Alien Individuals and Foreign Corporations
"(1)
"(2)
"(A) any treaty (hereinafter in this paragraph referred to as the 'old treaty') is renegotiated to resolve conflicts between such treaty and the provisions of section 897 of the Internal Revenue Code of 1986, and
"(B) the new treaty is signed on or after January 1, 1981, and before January 1, 1985,
then paragraph (1) shall be applied with respect to obligations under the old treaty by substituting for 'December 31, 1984' the date (not later than 2 years after the new treaty was signed) specified in the new treaty (or accompanying exchange of notes)."
Adjustment in Basis for Certain Transactions Between Related Persons
"(1)
"(2)
"(A) because the disposition occurred before June 19, 1980, or
"(B) because of any treaty obligation of the United States."
1 See References in Text note below.
§898. Taxable year of certain foreign corporations
(a) General rule
For purposes of this title, the taxable year of any specified foreign corporation shall be the required year determined under subsection (c).
(b) Specified foreign corporation
For purposes of this section—
(1) In general
The term "specified foreign corporation" means any foreign corporation—
(A) which is treated as a controlled foreign corporation for any purpose under subpart F of part III of this subchapter, and
(B) with respect to which the ownership requirements of paragraph (2) are met.
(2) Ownership requirements
(A) In general
The ownership requirements of this paragraph are met with respect to any foreign corporation if a United States shareholder owns, on each testing day, more than 50 percent of—
(i) the total voting power of all classes of stock of such corporation entitled to vote, or
(ii) the total value of all classes of stock of such corporation.
(B) Ownership
For purposes of subparagraph (A), the rules of subsections (a) and (b) of section 958 shall apply in determining ownership.
(3) United States shareholder
The term "United States shareholder" has the meaning given to such term by section 951(b), except that, in the case of a foreign corporation having related person insurance income (as defined in section 953(c)(2)), the Secretary may treat any person as a United States shareholder for purposes of this section if such person is treated as a United States shareholder under section 953(c)(1).
(c) Determination of required year
(1) In general
The required year is—
(A) the majority U.S. shareholder year, or
(B) if there is no majority U.S. shareholder year, the taxable year prescribed under regulations.
(2) 1-month deferral allowed
A specified foreign corporation may elect, in lieu of the taxable year under paragraph (1)(A), a taxable year beginning 1 month earlier than the majority U.S. shareholder year.
(3) Majority U.S. shareholder year
(A) In general
For purposes of this subsection, the term "majority U.S. shareholder year" means the taxable year (if any) which, on each testing day, constituted the taxable year of—
(i) each United States shareholder described in subsection (b)(2)(A), and
(ii) each United States shareholder not described in clause (i) whose stock was treated as owned under subsection (b)(2)(B) by any shareholder described in such clause.
(B) Testing day
The testing days shall be—
(i) the first day of the corporation's taxable year (determined without regard to this section), or
(ii) the days during such representative period as the Secretary may prescribe.
(Added
Editorial Notes
Amendments
2004—Subsec. (b)(1)(A).
"(A) which is—
"(i) treated as a controlled foreign corporation for any purpose under subpart F of part III of this subchapter, or
"(ii) a foreign personal holding company (as defined in section 552), and".
Subsec. (b)(2)(B).
Subsec. (b)(3).
Subsec. (c).
Statutory Notes and Related Subsidiaries
Effective Date of 2004 Amendment
Amendment by
Effective Date
"(1)
"(2)
"(A) such change shall be treated as initiated by the taxpayer,
"(B) such change shall be treated as having been made with the consent of the Secretary of the Treasury or his delegate, and
"(C) if, by reason of such change, any United States person is required to include in gross income for 1 taxable year amounts attributable to 2 taxable years of such foreign corporation, the amount which would otherwise be required to be included in gross income for such 1 taxable year by reason of the short taxable year of the foreign corporation resulting from such change shall be included in gross income ratably over the 4-taxable-year period beginning with such 1 taxable year."
PART III—INCOME FROM SOURCES WITHOUT THE UNITED STATES
Editorial Notes
Amendments
2004—
2000—
1986—
1984—
1982—
1978—
1976—
1966—
1962—
1 See 1976 Amendment note below.
Subpart A—Foreign Tax Credit
Editorial Notes
Amendments
2017—
2010—
1986—
1976—
1975—
1966—
§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 section 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 person 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. Under rules or regulations prescribed by the Secretary, in the case of any foreign trust of which the settlor or another person would be treated as owner of any portion of the trust under subpart E but for section 672(f), the allocable amount of any income, war profits, and excess profits taxes imposed by any foreign country or possession of the United States on the settlor or such other person in respect of trust income.
(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 1 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 section 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 (as in effect on the day before the date of the enactment of the Tax Technical Corrections Act of 2018) 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) Repealed. Pub. L. 110–172, §11(g)(9), Dec. 29, 2007, 121 Stat. 2490 ]
(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 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 section 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) 2 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.
(5) Waiver of denial
(A) In general
Paragraph (1) shall not apply with respect to taxes paid or accrued to a country if the President—
(i) determines that a waiver of the application of such paragraph is in the national interest of the United States and will expand trade and investment opportunities for United States companies in such country; and
(ii) reports such waiver under subparagraph (B).
(B) Report
Not less than 30 days before the date on which a waiver is granted under this paragraph, the President shall report to Congress—
(i) the intention to grant such waiver; and
(ii) the reason for the determination under subparagraph (A)(i).
(k) Minimum holding period for certain taxes on dividends
(1) Withholding taxes
(A) In general
In no event shall a credit be allowed under subsection (a) for any withholding tax on a dividend with respect to stock in a corporation if—
(i) such stock is held by the recipient of the dividend for 15 days or less during the 31-day period beginning on the date which is 15 days before the date on which such share becomes ex-dividend with respect to such dividend, or
(ii) to the extent that the recipient of the dividend is under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property.
(B) Withholding tax
For purposes of this paragraph, the term "withholding tax" includes any tax determined on a gross basis; but does not include any tax which is in the nature of a prepayment of a tax imposed on a net basis.
(2) Deemed paid taxes
In the case of income, war profits, or excess profits taxes deemed paid under section 853 or 960 through a chain of ownership of stock in 1 or more corporations, no credit shall be allowed under subsection (a) for such taxes if—
(A) any stock of any corporation in such chain (the ownership of which is required to obtain credit under subsection (a) for such taxes) is held for less than the period described in paragraph (1)(A)(i), or
(B) the corporation holding the stock is under an obligation referred to in paragraph (1)(A)(ii).
(3) 45-day rule in the case of certain preference dividends
In the case of stock having preference in dividends and dividends with respect to such stock which are attributable to a period or periods aggregating in excess of 366 days, paragraph (1)(A)(i) shall be applied—
(A) by substituting "45 days" for "15 days" each place it appears, and
(B) by substituting "91-day period" for "31-day period".
(4) Exception for certain taxes paid by securities dealers
(A) In general
Paragraphs (1) and (2) shall not apply to any qualified tax with respect to any security held in the active conduct in a foreign country of a business as a securities dealer of any person—
(i) who is registered as a securities broker or dealer under section 15(a) of the Securities Exchange Act of 1934,
(ii) who is registered as a Government securities broker or dealer under section 15C(a) of such Act, or
(iii) who is licensed or authorized in such foreign country to conduct securities activities in such country and is subject to bona fide regulation by a securities regulating authority of such country.
(B) Qualified tax
For purposes of subparagraph (A), the term "qualified tax" means a tax paid to a foreign country (other than the foreign country referred to in subparagraph (A)) if—
(i) the dividend to which such tax is attributable is subject to taxation on a net basis by the country referred to in subparagraph (A), and
(ii) such country allows a credit against its net basis tax for the full amount of the tax paid to such other foreign country.
(C) Regulations
The Secretary may prescribe such regulations as may be appropriate to carry out this paragraph, including regulations to prevent the abuse of the exception provided by this paragraph and to treat other taxes as qualified taxes.
(5) Certain rules to apply
For purposes of this subsection, the rules of paragraphs (3) and (4) of section 246(c) shall apply.
(6) Treatment of bona fide sales
If a person's holding period is reduced by reason of the application of the rules of section 246(c)(4) to any contract for the bona fide sale of stock, the determination of whether such person's holding period meets the requirements of paragraph (2) with respect to taxes deemed paid under section 960 shall be made as of the date such contract is entered into.
(7) Taxes allowed as 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.
(l) Minimum holding period for withholding taxes on gain and income other than dividends etc.
(1) In general
In no event shall a credit be allowed under subsection (a) for any withholding tax (as defined in subsection (k)) on any item of income or gain with respect to any property if—
(A) such property is held by the recipient of the item for 15 days or less during the 31-day period beginning on the date which is 15 days before the date on which the right to receive payment of such item arises, or
(B) to the extent that the recipient of the item is under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property.
This paragraph shall not apply to any dividend to which subsection (k) applies.
(2) Exception for taxes paid by dealers
(A) In general
Paragraph (1) shall not apply to any qualified tax with respect to any property held in the active conduct in a foreign country of a business as a dealer in such property.
(B) Qualified tax
For purposes of subparagraph (A), the term "qualified tax" means a tax paid to a foreign country (other than the foreign country referred to in subparagraph (A)) if—
(i) the item to which such tax is attributable is subject to taxation on a net basis by the country referred to in subparagraph (A), and
(ii) such country allows a credit against its net basis tax for the full amount of the tax paid to such other foreign country.
(C) Dealer
For purposes of subparagraph (A), the term "dealer" means—
(i) with respect to a security, any person to whom paragraphs (1) and (2) of subsection (k) would not apply by reason of paragraph (4) thereof, and
(ii) with respect to any other property, any person with respect to whom such property is described in section 1221(a)(1).
(D) Regulations
The Secretary may prescribe such regulations as may be appropriate to carry out this paragraph, including regulations to prevent the abuse of the exception provided by this paragraph and to treat other taxes as qualified taxes.
(3) Exceptions
The Secretary may by regulation provide that paragraph (1) shall not apply to property where the Secretary determines that the application of paragraph (1) to such property is not necessary to carry out the purposes of this subsection.
(4) Certain rules to apply
Rules similar to the rules of paragraphs (5), (6), and (7) of subsection (k) shall apply for purposes of this subsection.
(5) Determination of holding period
Holding periods shall be determined for purposes of this subsection without regard to section 1235 or any similar rule.
(m) Denial of foreign tax credit with respect to foreign income not subject to United States taxation by reason of covered asset acquisitions
(1) In general
In the case of a covered asset acquisition, the disqualified portion of any foreign income tax determined with respect to the income or gain attributable to the relevant foreign assets—
(A) shall not be taken into account in determining the credit allowed under subsection (a), and
(B) in the case of a foreign income tax paid by a foreign corporation, shall not be taken into account for purposes of section 960.
(2) Covered asset acquisition
For purposes of this section, the term "covered asset acquisition" means—
(A) a qualified stock purchase (as defined in section 338(d)(3)) to which section 338(a) applies,
(B) any transaction which—
(i) is treated as an acquisition of assets for purposes of this chapter, and
(ii) is treated as the acquisition of stock of a corporation (or is disregarded) for purposes of the foreign income taxes of the relevant jurisdiction,
(C) any acquisition of an interest in a partnership which has an election in effect under section 754, and
(D) to the extent provided by the Secretary, any other similar transaction.
(3) Disqualified portion
For purposes of this section—
(A) In general
The term "disqualified portion" means, with respect to any covered asset acquisition, for any taxable year, the ratio (expressed as a percentage) of—
(i) the aggregate basis differences (but not below zero) allocable to such taxable year under subparagraph (B) with respect to all relevant foreign assets, divided by
(ii) the income on which the foreign income tax referred to in paragraph (1) is determined (or, if the taxpayer fails to substantiate such income to the satisfaction of the Secretary, such income shall be determined by dividing the amount of such foreign income tax by the highest marginal tax rate applicable to such income in the relevant jurisdiction).
(B) Allocation of basis difference
For purposes of subparagraph (A)(i)—
(i) In general
The basis difference with respect to any relevant foreign asset shall be allocated to taxable years using the applicable cost recovery method under this chapter.
(ii) Special rule for disposition of assets
Except as otherwise provided by the Secretary, in the case of the disposition of any relevant foreign asset—
(I) the basis difference allocated to the taxable year which includes the date of such disposition shall be the excess of the basis difference with respect to such asset over the aggregate basis difference with respect to such asset which has been allocated under clause (i) to all prior taxable years, and
(II) no basis difference with respect to such asset shall be allocated under clause (i) to any taxable year thereafter.
(C) Basis difference
(i) In general
The term "basis difference" means, with respect to any relevant foreign asset, the excess of—
(I) the adjusted basis of such asset immediately after the covered asset acquisition, over
(II) the adjusted basis of such asset immediately before the covered asset acquisition.
(ii) Built-in loss assets
In the case of a relevant foreign asset with respect to which the amount described in clause (i)(II) exceeds the amount described in clause (i)(I), such excess shall be taken into account under this subsection as a basis difference of a negative amount.
(iii) Special rule for section 338 elections
In the case of a covered asset acquisition described in paragraph (2)(A), the covered asset acquisition shall be treated for purposes of this subparagraph as occurring at the close of the acquisition date (as defined in section 338(h)(2)).
(4) Relevant foreign assets
For purposes of this section, the term "relevant foreign asset" means, with respect to any covered asset acquisition, any asset (including any goodwill, going concern value, or other intangible) with respect to such acquisition if income, deduction, gain, or loss attributable to such asset is taken into account in determining the foreign income tax referred to in paragraph (1).
(5) Foreign income tax
For purposes of this section, the term "foreign income tax" means any income, war profits, or excess profits tax paid or accrued to any foreign country or to any possession of the United States.
(6) 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.
(7) Regulations
The Secretary may issue such regulations or other guidance as is necessary or appropriate to carry out the purposes of this subsection, including to exempt from the application of this subsection certain covered asset acquisitions, and relevant foreign assets with respect to which the basis difference is de minimis.
(n) 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 or partnership controlled by him, see section 6038.
(Aug. 16, 1954, ch. 736,
Editorial Notes
References in Text
Section 936, referred to in subsec. (g)(2), was repealed by
The date of the enactment of the Tax Technical Corrections Act of 2018, referred to in subsec. (g)(2), is the date of enactment of div. U of
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), was classified to
Sections 15(a) and 15C(a) of the Securities Exchange Act of 1934, referred to in subsec. (k)(4)(A)(i), (ii), are classified to sections 78o(a) and 78o–5(a), respectively, of Title 15, Commerce and Trade.
Amendments
2018—Subsec. (g)(2).
2017—Subsec. (a).
Subsec. (e)(2).
"(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".
Subsec. (f).
Subsec. (j)(1)(A).
Subsec. (j)(1)(B).
Subsec. (k)(2).
Subsec. (k)(6).
Subsec. (m)(1)(B).
2010—Subsecs. (m), (n).
2007—Subsec. (h).
2005—Subsec. (l)(2)(C)(i).
2004—Subsec. (b)(5).
Subsec. (k).
Subsec. (k)(1)(A)(i).
Subsec. (k)(3)(B).
Subsecs. (l), (m).
2000—Subsec. (j)(5).
1998—Subsec. (k)(4)(A).
1997—Subsec. (k).
Subsec. (l).
Subsec. (l)(4).
1996—Subsec. (b)(5).
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).
Statutory Notes and Related Subsidiaries
Effective Date of 2017 Amendment
Amendment by
Effective Date of 2010 Amendment
"(1)
"(2)
"(A) made pursuant to a written agreement which was binding on January 1, 2011, and at all times thereafter,
"(B) described in a ruling request submitted to the Internal Revenue Service on or before July 29, 2010, or
"(C) described on or before January 1, 2011, in a public announcement or in a filing with the Securities and Exchange Commission.
"(3)
Effective Date of 2005 Amendment
Amendment by
Effective Date of 2004 Amendments
Amendment by
Effective Date of 2000 Amendment
Effective Date of 1998 Amendment
Amendment by
Effective Date of 1997 Amendment
Amendment by section 1053(a) of
Amendment by section 1142(e)(4) of
Effective Date of 1996 Amendment
Amendment by
Effective Date of 1988 Amendment
Amendment by section 1012(j) of
Effective Date of 1987 Amendment
Effective Date of 1986 Amendments
Amendment by section 112(b)(3) of
Amendment by section 1876(p)(2) 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
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
Effective Date of 1966 Amendment
Amendment by section 106(a)(4), (5) of
Amendment by
Effective Date of 1964 Amendment
Amendment by
Effective Date of 1962 Amendment
Amendment by section 9(d)(3) of
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
Savings Provision
For provisions that nothing in amendment by
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
1 So in original. Probably should be followed by a comma.
2 See References in Text note below.
[§902. Repealed. Pub. L. 115–97, title I, §14301(a), Dec. 22, 2017, 131 Stat. 2221 ]
Section, act Aug. 16, 1954, ch. 736,
Statutory Notes and Related Subsidiaries
Effective Date of Repeal
Repeal applicable to taxable years of foreign corporations beginning after Dec. 31, 2017, and to taxable years of United States shareholders in which or with which such taxable years of foreign corporations end, see section 14301(d) of
§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,
Editorial Notes
Amendments
2004—
2000—
1988—
1964—
Statutory Notes and Related Subsidiaries
Effective Date of 2004 Amendment
Amendment by
Effective Date of 2000 Amendment
Amendment by
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.
(C) Coordination with capital gains rates
The Secretary may by regulations modify the application of this paragraph and paragraph (3) to the extent necessary to properly reflect any capital gain rate differential under section 1(h) and the computation of 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 year if subsection (h) of section 1 applies to such taxable year.
(E) Rate differential portion
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—
(I) the highest rate of tax set forth in subsection (a), (b), (c), (d), or (e) of section 1 (whichever applies), over
(II) the alternative rate of tax determined under section 1(h), bears to
(ii) that rate referred to in subclause (I).
(4) Treatment of dividends for which deduction is allowed under section 245A
For purposes of subsection (a), in the case of a domestic corporation which is a United States shareholder with respect to a specified 10-percent owned foreign corporation, such shareholder's taxable income from sources without the United States (and entire taxable income) shall be determined without regard to—
(A) the foreign-source portion of any dividend received from such foreign corporation, and
(B) any deductions properly allocable or apportioned to—
(i) income (other than amounts includible under section 951(a)(1) or 951A(a)) with respect to stock of such specified 10-percent owned foreign corporation, or
(ii) such stock to the extent income with respect to such stock is other than amounts includible under section 951(a)(1) or 951A(a).
Any term which is used in section 245A and in this paragraph shall have the same meaning for purposes of this paragraph as when used in such section.
(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 first preceding taxable year and in any of the first 10 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. This subsection shall not apply to taxes paid or accrued with respect to amounts described in subsection (d)(1)(A).
(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 902,1 907, and 960 shall be applied separately with respect to—
(A) any amount includible in gross income under section 951A (other than passive category income),
(B) foreign branch income,
(C) passive category income, and
(D) general category income.
(2) Definitions and special rules
For purposes of this subsection—
(A) Categories
(i) Passive category income
The term "passive category income" means passive income and specified passive category income.
(ii) General category income
The term "general category income" means income other than income described in paragraph (1)(A), foreign branch income, and passive category income.
(B) 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), subparagraph (E)(ii), or paragraph (3)(H), the term "passive income" includes any amount includible in gross income under section 1293 (relating to certain passive foreign investment companies).
(iii) Exceptions
The term "passive income" shall not include—
(I) any export financing interest, and
(II) 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.
(v) Specified passive category income
The term "specified passive category income" means—
(I) 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, and
(II) distributions from a former FSC (as defined in section 922) 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)).
Any reference in subclause (II) to section 922, 923, or 927 shall be treated as a reference to such section as in effect before its repeal by the FSC Repeal and Extraterritorial Income Exclusion Act of 2000.
(C) Treatment of financial services income and companies
(i) In general
Financial services income shall be treated as general category income in the case of—
(I) a member of a financial services group, and
(II) any other person if such person is predominantly engaged in the active conduct of a banking, insurance, financing, or similar business.
(ii) Financial services group
The term "financial services group" means any affiliated group (as defined in section 1504(a) without regard to paragraphs (2) and (3) of section 1504(b)) which is predominantly engaged in the active conduct of a banking, insurance, financing, or similar business. In determining whether such a group is so engaged, there shall be taken into account only the income of members of the group that are—
(I) United States corporations, or
(II) controlled foreign corporations in which such United States corporations own, directly or indirectly, at least 80 percent of the total voting power and value of the stock.
(iii) Pass-thru entities
The Secretary shall by regulation specify for purposes of this subparagraph the treatment of financial services income received or accrued by partnerships and by other pass-thru entities which are not members of a financial services group.
(D) 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), or
(II) passive income (determined without regard to subparagraph (B)(iii)(II)).
(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.
(E) Noncontrolled section 902 corporation
(i) Noncontrolled 10-percent owned foreign corporation
The term "noncontrolled 10-percent owned foreign corporation" means any foreign corporation which is—
(I) a specified 10-percent owned foreign corporation (as defined in section 245A(b)), or
(II) a passive foreign investment company (as defined in section 1297(a)) with respect to which the taxpayer meets the stock ownership requirements of section 902(a) (or, for purposes of applying paragraphs (3) and (4), the requirements of section 902(b)).
A controlled foreign corporation shall not be treated as a noncontrolled 10-percent owned foreign corporation with respect to any distribution out of its earnings and profits for periods during which it was a controlled foreign corporation. Any reference to section 902 in this clause shall be treated as a reference to such section as in effect before its repeal.
(ii) Treatment of inclusions under section 1293
If any foreign corporation is a noncontrolled 10-percent owned foreign 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 1 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) Treatment of income tax base differences
(i) In general
In the case of taxable years beginning after December 31, 2006, tax imposed under the law of a foreign country or possession of the United States on an amount which does not constitute income under United States tax principles shall be treated as imposed on income described in paragraph (1)(B).
(ii) Special rule for years before 2007
(I) In general
In the case of taxes paid or accrued in taxable years beginning after December 31, 2004, and before January 1, 2007, a taxpayer may elect to treat tax imposed under the law of a foreign country or possession of the United States on an amount which does not constitute income under United States tax principles as tax imposed on income described in subparagraph (C) or (I) of paragraph (1).
(II) Election irrevocable
Any such election shall apply to the taxable year for which made and all subsequent taxable years described in subclause (I) unless revoked with the consent of the Secretary.
(I) 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.
(J) Foreign branch income
(i) In general
The term "foreign branch income" means the business profits of such United States person which are attributable to 1 or more qualified business units (as defined in section 989(a)) in 1 or more foreign countries. For purposes of the preceding sentence, the amount of business profits attributable to a qualified business unit shall be determined under rules established by the Secretary.
(ii) Exception
Such term shall not include any income which is passive category income.
(K) Transitional rules for 2007 changes
For purposes of paragraph (1)—
(i) taxes carried from any taxable year beginning before January 1, 2007, to any taxable year beginning on or after such date, with respect to any item of income, shall be treated as described in the subparagraph of paragraph (1) in which such income would be described were such taxes paid or accrued in a taxable year beginning on or after such date, and
(ii) the Secretary may by regulations provide for the allocation of any carryback of taxes with respect to income from a taxable year beginning on or after January 1, 2007, to a taxable year beginning before such date for purposes of allocating such income among the separate categories in effect for the taxable year to which carried.
(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 passive category income.
(B) Subpart F inclusions
Any amount included in gross income under section 951(a)(1)(A) shall be treated as passive category income to the extent the amount so included is attributable to passive category income.
(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 passive category income to the extent it is properly allocable (under regulations prescribed by the Secretary) to passive category income of the controlled foreign corporation.
(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 passive category income in proportion to the ratio of—
(i) the portion of the earnings and profits attributable to passive category income, 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 passive category income, 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 passive category income if the requirements of section 954(b)(4) are met with respect to such income.
(F) Coordination with high-taxed income provisions
(i) In determining whether any income of a controlled foreign corporation is passive category income, subclause (II) of paragraph (2)(B)(iii) shall not apply.
(ii) Any income of the taxpayer which is treated as passive category income 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) 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) Look-thru applies to dividends from noncontrolled 10-percent owned foreign corporations
(A) In general
For purposes of this subsection, any dividend from a noncontrolled 10-percent owned foreign corporation with respect to the taxpayer shall be treated as income described in a subparagraph of paragraph (1) in proportion to the ratio of—
(i) the portion of earnings and profits attributable to income described in such subparagraph, to
(ii) the total amount of earnings and profits.
(B) Earnings and profits of controlled foreign corporations
In the case of any distribution from a controlled foreign corporation to a United States shareholder, rules similar to the rules of subparagraph (A) shall apply in determining the extent to which earnings and profits of the controlled foreign corporation which are attributable to dividends received from a noncontrolled 10-percent owned foreign corporation may be treated as income in a separate category.
(C) Special rules
For purposes of this paragraph—
(i) Earnings and profits
(I) In general
The rules of section 316 shall apply.
(II) Regulations
The Secretary may prescribe regulations regarding the treatment of distributions out of earnings and profits for periods before the taxpayer's acquisition of the stock to which the distributions relate.
(ii) Inadequate substantiation
If the Secretary determines that the proper subparagraph of paragraph (1) in which a dividend is described has not been substantiated, such dividend shall be treated as income described in paragraph (1)(A).
(iii) Coordination with high-taxed income provisions
Rules similar to the rules of paragraph (3)(F) shall apply for purposes of this paragraph.
(iv) Look-thru with respect to carryover of credit
Rules similar to subparagraph (A) also shall apply to any carryforward under subsection (c) from a taxable year beginning before January 1, 2003, of tax allocable to a dividend from a noncontrolled 10-percent owned foreign corporation with respect to the taxpayer. The Secretary may by regulations provide for the allocation of any carryback of tax allocable to a dividend from a noncontrolled 10-percent owned foreign corporation from a taxable year beginning on or after January 1, 2003, to a taxable year beginning before such date for purposes of allocating such dividend among the separate categories in effect for the taxable year to which carried.
(5) 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)).
(6) Separate application to items resourced under treaties
(A) In general
If—
(i) without regard to any treaty obligation of the United States, any item of income would be treated as derived from sources within the United States,
(ii) under a treaty obligation of the United States, such item would be treated as arising from sources outside the United States, and
(iii) the taxpayer chooses the benefits of such treaty obligation,
subsections (a), (b), and (c) of this section and sections 907 and 960 shall be applied separately with respect to each such item.
(B) Coordination with other provisions
This paragraph shall not apply to any item of income to which subsection (h)(10) or section 865(h) applies.
(C) Regulations
The Secretary may issue such regulations or other guidance as is necessary or appropriate to carry out the purposes of this paragraph, including regulations or other guidance which provides that related items of income may be aggregated for purposes of this paragraph.
(7) 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, 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) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990), 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).
(D) Application to certain dispositions of stock in controlled foreign corporation
(i) In general
This paragraph shall apply to an applicable disposition in the same manner as if it were a disposition of property described in subparagraph (A), except that the exception contained in subparagraph (C)(i) shall not apply.
(ii) Applicable disposition
For purposes of clause (i), the term "applicable disposition" means any disposition of any share of stock in a controlled foreign corporation in a transaction or series of transactions if, immediately before such transaction or series of transactions, the taxpayer owned more than 50 percent (by vote or value) of the stock of the controlled foreign corporation. Such term shall not include a disposition described in clause (iii) or (iv), except that clause (i) shall apply to any gain recognized on any such disposition.
(iii) Exception for certain exchanges where ownership percentage retained
A disposition shall not be treated as an applicable disposition under clause (ii) if it is part of a transaction or series of transactions—
(I) to which section 351 or 721 applies, or under which the transferor receives stock in a foreign corporation in exchange for the stock in the controlled foreign corporation and the stock received is exchanged basis property (as defined in section 7701(a)(44)), and
(II) immediately after which, the transferor owns (by vote or value) at least the same percentage of stock in the controlled foreign corporation (or, if the controlled foreign corporation is not in existence after such transaction or series of transactions, in another foreign corporation stock in 2 which was received by the transferor in exchange for stock in the controlled foreign corporation) as the percentage of stock in the controlled foreign corporation which the taxpayer owned immediately before such transaction or series of transactions.
(iv) Exception for certain asset acquisitions
A disposition shall not be treated as an applicable disposition under clause (ii) if it is part of a transaction or series of transactions in which the taxpayer (or any member of an affiliated group of corporations filing a consolidated return under section 1501 which includes the taxpayer) acquires the assets of a controlled foreign corporation in exchange for the shares of the controlled foreign corporation in a liquidation described in section 332 or a reorganization described in section 368(a)(1).
(v) Controlled foreign corporation
For purposes of this subparagraph, the term "controlled foreign corporation" has the meaning given such term by section 957.
(vi) Stock ownership
For purposes of this subparagraph, ownership of stock shall be determined under the rules of subsections (a) and (b) of section 958.
(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) Recharacterization of overall domestic loss
(1) General rule
For purposes of this subpart and section 936,1 in the case of any taxpayer who sustains an overall domestic loss for any taxable year beginning after December 31, 2006, that portion of the taxpayer's taxable income from sources within 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 of the taxpayer's taxable income from sources within the United States for such succeeding taxable year,
shall be treated as income from sources without the United States (and not as income from sources within the United States).
(2) Overall domestic loss
For purposes of this subsection—
(A) In general
The term "overall domestic loss" means—
(i) with respect to any qualified taxable year, the domestic loss for such taxable year to the extent such loss offsets taxable income from sources without the United States for the taxable year or for any preceding qualified taxable year by reason of a carryback, and
(ii) with respect to any other taxable year, the domestic loss for such taxable year to the extent such loss offsets taxable income from sources without the United States for any preceding qualified taxable year by reason of a carryback.
(B) Domestic loss
For purposes of subparagraph (A), the term "domestic loss" means the amount by which the gross income for the taxable year from sources within the United States is exceeded by the sum of the deductions properly apportioned or allocated thereto (determined without regard to any carryback from a subsequent taxable year).
(C) Qualified taxable year
For purposes of subparagraph (A), the term "qualified taxable year" means any taxable year for which the taxpayer chose the benefits of this subpart.
(3) Characterization of subsequent income
(A) In general
Any income from sources within the United States that is treated as income from sources without the United States under paragraph (1) shall be allocated among and increase the income categories in proportion to the loss from sources within the United States previously allocated to those income categories.
(B) Income category
For purposes of this paragraph, the term "income category" has the meaning given such term by subsection (f)(5)(E)(i).
(4) Coordination with subsection (f)
The Secretary shall prescribe such regulations as may be necessary to coordinate the provisions of this subsection with the provisions of subsection (f).
(5) Election to increase percentage of taxable income treated as foreign source
(A) In general
If any pre-2018 unused overall domestic loss is taken into account under paragraph (1) for any applicable taxable year, the taxpayer may elect to have such paragraph applied to such loss by substituting a percentage greater than 50 percent (but not greater than 100 percent) for 50 percent in subparagraph (B) thereof.
(B) Pre-2018 unused overall domestic loss
For purposes of this paragraph, the term "pre-2018 unused overall domestic loss" means any overall domestic loss which—
(i) arises in a qualified taxable year beginning before January 1, 2018, and
(ii) has not been used under paragraph (1) for any taxable year beginning before such date.
(C) Applicable taxable year
For purposes of this paragraph, the term "applicable taxable year" means any taxable year of the taxpayer beginning after December 31, 2017, and before January 1, 2028.
(h) 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), or
(ii) section 1293 (relating to current taxation of income from qualified funds).
(B) Interest.
(C) Dividends.
(2) Subpart F and 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 a dividend under section 1248.
(8) Coordination with subsection (f)
This subsection shall be applied before subsection (f).
(9) Treatment of certain domestic corporations
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 for purposes of this subsection 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 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).
(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) Certain individuals exempt
(1) In general
In the case of an individual to whom this subsection applies for any taxable year—
(A) the limitation of subsection (a) shall not apply,
(B) no taxes paid or accrued by the individual during such taxable year may be deemed paid or accrued under subsection (c) in any other taxable year, and
(C) no taxes paid or accrued by the individual during any other taxable year may be deemed paid or accrued under subsection (c) in such taxable year.
(2) Individuals to whom subsection applies
This subsection shall apply to an individual for any taxable year if—
(A) the entire amount of such individual's gross income for the taxable year from sources without the United States consists of qualified passive income,
(B) the amount of the creditable foreign taxes paid or accrued by the individual during the taxable year does not exceed $300 ($600 in the case of a joint return), and
(C) such individual elects to have this subsection apply for the taxable year.
(3) Definitions
For purposes of this subsection—
(A) Qualified passive income
The term "qualified passive income" means any item of gross income if—
(i) such item of income is passive income (as defined in subsection (d)(2)(B) without regard to clause (iii) thereof), and
(ii) such item of income is shown on a payee statement furnished to the individual.
(B) Creditable foreign taxes
The term "creditable foreign taxes" means any taxes for which a credit is allowable under section 901; except that such term shall not include any tax unless such tax is shown on a payee statement furnished to such individual.
(C) Payee statement
The term "payee statement" has the meaning given to such term by section 6724(d)(2).
(D) Estates and trusts not eligible
This subsection shall not apply to any estate or trust.
(k) Cross references
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(c).
(Aug. 16, 1954, ch. 736,
Editorial Notes
References in Text
Section 902, referred to in subsec. (d)(1), (2)(E)(i), (F)(ii), was repealed by
The FSC Repeal and Extraterritorial Income Exclusion Act of 2000, referred to in subsec. (d)(2)(B)(v), is
Section 172(h), referred to in subsec. (f)(2)(B)(i), was repealed by
The date of the enactment of the Revenue Reconciliation Act of 1990, referred to in subsec. (f)(2)(B)(i), is the date of enactment of
Section 936, referred to in subsec. (g)(1), was repealed by
Amendments
2018—Subsec. (b)(4), (5).
Subsec. (d)(2)(B)(ii).
Subsec. (f)(1).
2017—Subsec. (b)(2)(C).
Subsec. (b)(3)(D).
"(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))."
Subsec. (b)(3)(E).
Subsec. (b)(5).
Subsec. (c).
Subsec. (d)(1)(A).
Subsec. (d)(1)(B).
Subsec. (d)(1)(C).
Subsec. (d)(1)(D).
Subsec. (d)(2)(A)(ii).
Subsec. (d)(2)(E)(i).
Subsec. (d)(2)(E)(ii).
Subsec. (d)(2)(J).
Subsec. (d)(4).
Subsec. (d)(6)(A).
Subsec. (g)(5).
Subsec. (h)(10)(A).
Subsec. (k).
"(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)."
2014—Subsec. (d)(2)(J).
Subsec. (h)(7).
2013—Subsecs. (i) to (l).
2010—Subsec. (d)(6), (7).
Subsec. (h)(9).
"(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."
Subsec. (i).
2009—Subsec. (i).
2007—Subsec. (d)(2)(B)(v).
Subsec. (f)(3)(D)(iv).
2005—Subsec. (d)(2)(D).
Subsec. (g)(2).
"(A)
"(B)
Subsec. (i).
2004—Subsec. (c).
Subsec. (d)(1).
Subsec. (d)(1)(E).
Subsec. (d)(2)(A).
Subsec. (d)(2)(A)(ii).
Subsec. (d)(2)(B).
Subsec. (d)(2)(B)(iii).
Subsec. (d)(2)(B)(v).
Subsec. (d)(2)(C).
Subsec. (d)(2)(C)(iii).
Subsec. (d)(2)(D).
Subsec. (d)(2)(D)(i).
"(II) passive income (determined without regard to subclauses (I) and (III) of subparagraph (A)(iii)), or
"(III) export financing interest which (but for subparagraph (B)(ii)) would be high withholding tax interest."
Subsec. (d)(2)(D)(iii).
"(I) any high withholding tax interest, and
"(II) any export financing interest not described in clause (i)(III)."
Subsec. (d)(2)(E)(i).
Subsec. (d)(2)(E)(ii), (iii).
Subsec. (d)(2)(E)(iv).
Subsec. (d)(2)(H) to (J).
Subsec. (d)(2)(K).
Subsec. (d)(3).
Subsec. (d)(3)(F)(i).
Subsec. (d)(4).
Subsec. (f)(3)(D).
Subsec. (g).
Subsec. (h).
Subsec. (h)(1)(A).
Subsec. (h)(2).
Subsecs. (i), (j).
Subsec. (k).
Subsec. (k)(3)(A)(i).
Subsec. (l).
2002—Subsec. (h).
2001—Subsec. (h).
1999—Subsec. (h).
1997—Subsec. (b)(2)(C).
Subsec. (d)(1)(E).
Subsec. (d)(2)(C)(i)(II).
Subsec. (d)(2)(C)(iii)(II), (D).
Subsec. (d)(2)(E)(i).
Subsec. (d)(2)(E)(iv).
Subsec. (d)(4) to (6).
Subsecs. (j), (k).
1996—Subsec. (d)(3)(G).
Subsec. (f)(2)(B)(i).
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).
Statutory Notes and Related Subsidiaries
Effective Date of 2017 Amendment
Amendment by section 13001(b)(2)(M) of
Amendment by section 14101(d) of
Amendment by section 14301(c)(15)–(19) of
Effective Date of 2014 Amendment
Amendment by section 221(a)(72) of
Effective Date of 2013 Amendment
Amendment by
Effective and Termination Dates of 2010 Amendment
Amendment by section 217(c)(2) of
Amendment by
Amendment by
Effective Date of 2009 Amendment
Amendment by section 1004(b)(5) of
Amendment by section 1142(b)(1)(E) of
Amendment by section 1144(b)(1)(E) of
Effective Date of 2007 Amendment
Effective and Termination Dates of 2005 Amendment
Amendment by section 402(i)(3)(G) of
Amendment by section 402(i)(3)(G) of
Amendments by section 403(k), (o) of
Effective Date of 2004 Amendment
Amendment by section 402(a) of
Amendment by section 403(a), (b)(1)–(5) of
Amendment by section 403(a), (b)(1)–(5) of
"(1)
"(2)
Amendment by section 413(c)(14), (15) of
"(1)
"(2)
Amendment by
Effective Date of 2002 Amendment
Amendment by section 601(b)(1) of
Effective Date of 2001 Amendment
Amendment by sections 201(b), 202(f), and 618(b) of
Amendment by sections 201(b), 202(f), and 618(b) of
Amendment by section 201(b)(2)(G) of
Amendment by section 202(f)(2)(C) of
Amendment by section 618(b)(2)(D) of
Effective Date of 1999 Amendment
Amendment by
Effective Date of 1997 Amendment
Amendment by section 311(c)(3) of
Effective Date of 1996 Amendment
Amendment by section 1703(i)(1) of
Effective Date of 1993 Amendment
Amendment by section 13227(d) of
Effective Date of 1990 Amendment
Amendment by section 11101(d)(5) of
Effective Date of 1989 Amendment
Amendment by section 7811(i)(1) of
Effective Date of 1988 Amendment
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
"(1)
"[(2) Repealed.
"(3)
"(A)
"(B)
[
["(b)
["(c)
["(1)
["(2)
["(A)
["(B)
Amendment by section 1211(b)(3) of
Amendment by section 1235(f)(4) 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."
"(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
"(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 [former] 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 [former] 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."
"(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
"(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
"(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)
"(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)
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
Effective Date of 1964 Amendment
Amendment by
Effective Date of 1962 Amendment
Effective Date of 1960 Amendment
Effective Date of 1958 Amendment
Savings Provision
For provisions that nothing in amendment by section 401(d)(1)(D)(xiii), (xiv) of
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
"(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
Separate Application of Section 904 In Case of Income Covered by Transitional Rules
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 to accrued taxes
(1) In general
If—
(A) accrued taxes when paid differ from the amounts claimed as credits by the taxpayer,
(B) accrued taxes are not paid before the date 2 years after the close of the taxable year to which such taxes relate, or
(C) 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.
(2) Special rule for taxes not paid within 2 years
(A) In general
Except as provided in subparagraph (B), in making the redetermination under paragraph (1), no credit shall be allowed for accrued taxes not paid before the date referred to in subparagraph (B) of paragraph (1).
(B) Taxes subsequently paid
Any such taxes if subsequently paid—
(i) shall be taken into account for the taxable year to which such taxes relate, and
(ii) shall be translated as provided in section 986(a)(2)(A).
(3) Adjustments
The amount of tax (if any) due on any redetermination under paragraph (1) shall be paid by the taxpayer on notice and demand by the Secretary, and the amount of tax overpaid (if any) shall be credited or refunded to the taxpayer in accordance with subchapter B of
(4) Bond requirements
In the case of any tax accrued but not paid, the Secretary, as a condition precedent to the allowance of the credit provided in this subpart, may require the taxpayer to give a bond, with sureties satisfactory to and approved by the Secretary, in such sum as the Secretary may require, conditioned on the payment by the taxpayer of any amount of tax found due on any such redetermination. Any such bond shall contain such further conditions as the Secretary may require.
(5) Other special rules
In any redetermination under paragraph (1) by the Secretary of the amount of tax due from the taxpayer for the year or years affected by a refund, the amount of the taxes refunded for which credit has been allowed under this section shall be reduced by the amount of any tax described in section 901 imposed by the foreign country or possession of the United States with respect to such refund; but no credit under this subpart, or deduction under section 164, shall be allowed for any taxable year with respect to any such tax imposed on the refund. No interest shall be assessed or collected on any amount of tax due on any redetermination by the Secretary, resulting from a refund to the taxpayer, for any period before the receipt of such refund, except to the extent interest was paid by the foreign country or possession of the United States on such refund for such period.
(Aug. 16, 1954, ch. 736,
Editorial Notes
Amendments
2017—Subsec. (c)(1).
Subsec. (c)(2)(B)(i).
"(I) in the case of taxes deemed paid under section 902 or section 960, for the taxable year in which paid (and no redetermination shall be made under this section by reason of such payment), and
"(II) in any other case, for the taxable year to which such taxes relate, and".
1997—Subsec. (c).
1982—Subsec. (c).
1980—Subsec. (c).
1976—Subsec. (b).
Subsec. (c).
1958—Subsec. (b).
Statutory Notes and Related Subsidiaries
Effective Date of 2017 Amendment
Amendment by
Effective Date of 1997 Amendment
Effective Date of 1982 Amendment
Effective Date of 1980 Amendment
Amendment by
Effective Date of 1976 Amendment
Amendment by section 1901(a)(114) of
Effective Date of 1958 Amendment
§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 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), (5) Repealed.
(6) No credit shall be allowed under this section against the tax imposed by section 884.
(Added
Editorial Notes
Amendments
2017—Subsec. (a).
Subsec. (b)(4), (5).
"(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) 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."
2007—Subsec. (b)(5) to (7).
1988—Subsec. (b)(6), (7).
1986—Subsec. (b)(6).
1984—Subsec. (b)(5).
Statutory Notes and Related Subsidiaries
Effective Date of 2017 Amendment
Amendment by
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
§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 foreign oil and gas 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 combined foreign oil and gas 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) Combined foreign oil and gas income; foreign oil and gas taxes
For purposes of this section—
(1) Combined foreign oil and gas income
The term "combined foreign oil and gas income" means, with respect to any taxable year, the sum of—
(A) foreign oil and gas extraction income, and
(B) foreign oil related income.
(2) Foreign oil and gas taxes
The term "foreign oil and gas taxes" means, with respect to any taxable year, the sum of—
(A) oil and gas extraction taxes, and
(B) any income, war profits, and excess profits taxes paid or accrued (or deemed to have been paid or accrued under section 960) during the taxable year with respect to foreign oil related income (determined without regard to subsection (c)(4)) or loss which would be taken into account for purposes of section 901 without regard to this section.
(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) interest, to the extent the category of income of such interest is determined under section 904(d)(3),
(B) amounts with respect to which taxes are deemed paid under section 960, and
(C) the taxpayer's distributive share of the income of partnerships,
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 losses by recharacterizing later combined foreign oil and gas income
(A) In general
The combined foreign oil and gas income of a taxpayer for a taxable year (determined without regard to this paragraph) shall be reduced—
(i) first by the amount determined under subparagraph (B), and
(ii) then by the amount determined under subparagraph (C).
The aggregate amount of such reductions shall be treated as income (from sources without the United States) which is not combined foreign oil and gas income.
(B) Reduction for pre-2009 foreign oil extraction losses
The reduction under this paragraph shall be equal to the lesser of—
(i) the foreign oil and gas extraction income of the taxpayer for the taxable year (determined without regard to this paragraph), or
(ii) the excess of—
(I) the aggregate amount of foreign oil extraction losses for preceding taxable years beginning after December 31, 1982, and before January 1, 2009, over
(II) so much of such aggregate amount as was recharacterized under this paragraph (as in effect before and after the date of the enactment of the Energy Improvement and Extension Act of 2008) for preceding taxable years beginning after December 31, 1982.
(C) Reduction for post-2008 foreign oil and gas losses
The reduction under this paragraph shall be equal to the lesser of—
(i) the combined foreign oil and gas income of the taxpayer for the taxable year (determined without regard to this paragraph), reduced by an amount equal to the reduction under subparagraph (A) for the taxable year, or
(ii) the excess of—
(I) the aggregate amount of foreign oil and gas losses for preceding taxable years beginning after December 31, 2008, over
(II) so much of such aggregate amount as was recharacterized under this paragraph for preceding taxable years beginning after December 31, 2008.
(D) Foreign oil and gas loss defined
(i) In general
For purposes of this paragraph, the term "foreign oil and gas 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 combined foreign oil and gas 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) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990)) 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.
(iv) Foreign oil extraction loss
For purposes of subparagraph (B)(ii)(I), foreign oil extraction losses shall be determined under this paragraph as in effect on the day before the date of the enactment of the Energy Improvement and Extension Act of 2008.
(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 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 foreign oil and gas 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 foreign oil and gas taxes paid or accrued in the first preceding taxable year and in any of the first 10 succeeding taxable years, 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.
(2) Limitation
The amount of the unused foreign oil and gas 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 foreign oil and gas taxes paid or accrued during such taxable year, plus
(ii) the amounts of the foreign oil and gas 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 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 foreign oil and gas 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.
(4) Transition rules for pre-2009 and 2009 disallowed credits
(A) Pre-2009 credits
In the case of any unused credit year beginning before January 1, 2009, this subsection, as in effect on the day before the date of the enactment of the Energy Improvement and Extension Act of 2008, shall apply to unused oil and gas extraction taxes carried from such unused credit year to a taxable year beginning after December 31, 2008.
(B) 2009 credits
In the case of any unused credit year beginning in 2009, the amendments made to this subsection by the Energy Improvement and Extension Act of 2008 shall be treated as being in effect for any preceding year beginning before January 1, 2009, solely for purposes of determining how much of the unused foreign oil and gas taxes for such unused credit year may be deemed paid or accrued in such preceding year.
(Added
Editorial Notes
References in Text
The date of the enactment of the Energy Improvement and Extension Act of 2008, referred to in subsecs. (c)(4)(B)(ii)(II), (D)(iv) and (f)(4)(A), is the date of enactment of div. B of
Section 172(h), referred to in subsec. (c)(4)(D)(iii)(I), was repealed by
The date of the enactment of the Revenue Reconciliation Act of 1990, referred to in subsec. (c)(4)(D)(iii)(I), is the date of enactment of
The Energy Improvement and Extension Act of 2008, referred to in subsec. (f)(4)(B), is div. B of
Amendments
2018—Subsec. (c)(3)(C).
Subsec. (f)(1).
2017—Subsec. (b)(2)(B).
Subsec. (c)(3)(A).
Subsec. (c)(3)(B).
Subsec. (c)(5).
Subsec. (f)(2)(B)(i).
2014—Subsec. (f)(4)(A).
"(i) by substituting 'oil and gas extraction taxes' for 'foreign oil and gas taxes' each place it appears in paragraphs (1), (2), and (3), and
"(ii) by computing, for purposes of paragraph (2)(A), the limitation under subparagraph (A) for the year to which such taxes are carried by substituting 'foreign oil and gas extraction income' for 'foreign oil and gas income' in subsection (a)."
2008—Subsecs. (a), (b).
Subsec. (c)(4).
Subsec. (f).
Subsec. (f)(4).
2004—Subsec. (f)(1).
1996—Subsec. (c)(4)(B)(iii)(I).
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).
Statutory Notes and Related Subsidiaries
Effective Date of 2017 Amendment
Amendment by
Effective Date of 2014 Amendment
Amendment by
Effective Date of 2008 Amendment
Effective Date of 2004 Amendment
Amendment by section 417(b)(1) of
Effective Date of 1993 Amendment
Amendment by
Effective Date of 1988 Amendment
Amendment by
Effective Date of 1982 Amendment
"(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
"(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
"(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
"(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
"(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."
§908. Reduction of credit for participation in or cooperation 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 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
Editorial Notes
Amendments
2017—Subsec. (a).
Statutory Notes and Related Subsidiaries
Effective Date of 2017 Amendment
Amendment by
Effective Date
"(1)
"(2)
§909. Suspension of taxes and credits until related income taken into account
(a) In general
If there is a foreign tax credit splitting event with respect to a foreign income tax paid or accrued by the taxpayer, such tax shall not be taken into account for purposes of this title before the taxable year in which the related income is taken into account under this chapter by the taxpayer.
(b) Special rules with respect to specified 10-percent owned foreign corporations
If there is a foreign tax credit splitting event with respect to a foreign income tax paid or accrued by a specified 10-percent owned foreign corporation (as defined in section 245A(b) without regard to paragraph (2) thereof), such tax shall not be taken into account—
(1) for purposes of section 960, or
(2) for purposes of determining earnings and profits under section 964(a),
before the taxable year in which the related income is taken into account under this chapter by such specified 10-percent owned foreign corporation or a domestic corporation which is a United States shareholder with respect to such specified 10-percent owned foreign corporation.
(c) Special rules
For purposes of this section—
(1) Application to partnerships, etc.
In the case of a partnership, subsections (a) and (b) shall be applied at the partner level. Except as otherwise provided by the Secretary, a rule similar to the rule of the preceding sentence shall apply in the case of any S corporation or trust.
(2) Treatment of foreign taxes after suspension
In the case of any foreign income tax not taken into account by reason of subsection (a) or (b), except as otherwise provided by the Secretary, such tax shall be so taken into account in the taxable year referred to in such subsection (other than for purposes of section 986(a)) as a foreign income tax paid or accrued in such taxable year.
(d) Definitions
For purposes of this section—
(1) Foreign tax credit splitting event
There is a foreign tax credit splitting event with respect to a foreign income tax if the related income is (or will be) taken into account under this chapter by a covered person.
(2) Foreign income tax
The term "foreign income tax" means any income, war profits, or excess profits tax paid or accrued to any foreign country or to any possession of the United States.
(3) Related income
The term "related income" means, with respect to any portion of any foreign income tax, the income (or, as appropriate, earnings and profits) to which such portion of foreign income tax relates.
(4) Covered person
The term "covered person" means, with respect to any person who pays or accrues a foreign income tax (hereafter in this paragraph referred to as the "payor")—
(A) any entity in which the payor holds, directly or indirectly, at least a 10 percent ownership interest (determined by vote or value),
(B) any person which holds, directly or indirectly, at least a 10 percent ownership interest (determined by vote or value) in the payor,
(C) any person which bears a relationship to the payor described in section 267(b) or 707(b), and
(D) any other person specified by the Secretary for purposes of this paragraph.
(e) Regulations
The Secretary may issue such regulations or other guidance as is necessary or appropriate to carry out the purposes of this section, including regulations or other guidance which provides—
(1) appropriate exceptions from the provisions of this section, and
(2) for the proper application of this section with respect to hybrid instruments.
(Added
Editorial Notes
Amendments
2017—Subsec. (b).
Subsec. (b)(1).
Subsec. (d)(5).
Statutory Notes and Related Subsidiaries
Effective Date of 2017 Amendment
Amendment by
Effective Date
"(1) foreign income taxes (as defined in section 909(d) of the Internal Revenue Code of 1986, as added by this section) paid or accrued in taxable years beginning after December 31, 2010; and
"(2) foreign income taxes (as so defined) paid or accrued by a [former] section 902 corporation (as so defined) in taxable years beginning on or before such date (and not deemed paid under section 902(a) or 960 of such Code on or before such date), but only for purposes of applying sections 902 and 960 with respect to periods after such date.
Section 909(b)(2) of the Internal Revenue Code of 1986, as added by this section, shall not apply to foreign income taxes described in paragraph (2)."
Subpart B—Earned Income of Citizens or Residents of United States
Editorial Notes
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 equal to the exclusion amount for the calendar year in which such taxable year begins.
(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.
(D) Exclusion amount
(i) In general
The exclusion amount for any calendar year is $80,000.
(ii) Inflation adjustment
In the case of any taxable year beginning in a calendar year after 2005, the $80,000 amount in clause (i) shall be increased by an amount equal to the product of—
(I) such dollar amount, and
(II) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting "2004" for "2016" in subparagraph (A)(ii) thereof.
If any increase determined under the preceding sentence is not a multiple of $100, such increase shall be rounded to the next lowest multiple of $100.
(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 to the extent such expenses do not exceed the amount determined under paragraph (2), over
(B) an amount equal to the product of—
(i) 16 percent of the amount (computed on a daily basis) in effect under subsection (b)(2)(D) for the calendar year in which such taxable year begins, 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) Limitation
(A) In general
The amount determined under this paragraph is an amount equal to the product of—
(i) 30 percent (adjusted as may be provided under subparagraph (B)) of the amount (computed on a daily basis) in effect under subsection (b)(2)(D) for the calendar year in which the taxable year of the individual begins, 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).
(B) Regulations
The Secretary may issue regulations or other guidance providing for the adjustment of the percentage under subparagraph (A)(i) on the basis of geographic differences in housing costs relative to housing costs in the United States.
(3) 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).
(4) 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, unless such individual is serving in an area designated by the President of the United States by Executive order as a combat zone for purposes of section 112 in support of the Armed Forces of 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), (c)(1)(B)(ii), and (c)(2)(A)(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)(4)(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) Determination of tax liability
(1) In general
If, for any taxable year, any amount is excluded from gross income of a taxpayer under subsection (a), then, notwithstanding sections 1 and 55—
(A) if such taxpayer has taxable income for such taxable year, the tax imposed by section 1 for such taxable year shall be equal to the excess (if any) of—
(i) the tax which would be imposed by section 1 for such taxable year if the taxpayer's taxable income were increased by the amount excluded under subsection (a) for such taxable year, over
(ii) the tax which would be imposed by section 1 for such taxable year if the taxpayer's taxable income were equal to the amount excluded under subsection (a) for such taxable year, and
(B) if such taxpayer has a taxable excess (as defined in section 55(b)(1)(B)) for such taxable year, the amount determined under the first sentence of section 55(b)(1)(A) for such taxable year shall be equal to the excess (if any) of—
(i) the amount which would be determined under such sentence for such taxable year (subject to the limitation of section 55(b)(3)) if the taxpayer's taxable excess (as so defined) were increased by the amount excluded under subsection (a) for such taxable year, over
(ii) the amount which would be determined under such sentence for such taxable year if the taxpayer's taxable excess (as so defined) were equal to the amount excluded under subsection (a) for such taxable year.
For purposes of this paragraph, the amount excluded under subsection (a) shall be reduced by the aggregate amount of any deductions or exclusions disallowed under subsection (d)(6) with respect to such excluded amount.
(2) Special rules
(A) Regular tax
In applying section 1(h) for purposes of determining the tax under paragraph (1)(A)(i) for any taxable year in which, without regard to this subsection, the taxpayer's net capital gain exceeds taxable income (hereafter in this subparagraph referred to as the capital gain excess)—
(i) the taxpayer's net capital gain (determined without regard to section 1(h)(11)) shall be reduced (but not below zero) by such capital gain excess,
(ii) the taxpayer's qualified dividend income shall be reduced by so much of such capital gain excess as exceeds the taxpayer's net capital gain (determined without regard to section 1(h)(11) and the reduction under clause (i)), and
(iii) adjusted net capital gain, unrecaptured section 1250 gain, and 28-percent rate gain shall each be determined after increasing the amount described in section 1(h)(4)(B) by such capital gain excess.
(B) Alternative minimum tax
In applying section 55(b)(3) for purposes of determining the tax under paragraph (1)(B)(i) for any taxable year in which, without regard to this subsection, the taxpayer's net capital gain exceeds the taxable excess (as defined in section 55(b)(1)(B))—
(i) the rules of subparagraph (A) shall apply, except that such subparagraph shall be applied by substituting "the taxable excess (as defined in section 55(b)(1)(B))" for "taxable income", and
(ii) the reference in section 55(b)(3)(B) to the excess described in section 1(h)(1)(B), and the reference in section 55(b)(3)(C)(ii) to the excess described in section 1(h)(1)(C)(ii), shall each be treated as a reference to each such excess as determined under the rules of subparagraph (A) for purposes of determining the tax under paragraph (1)(A)(i).
(C) Definitions
Terms used in this paragraph which are also used in section 1(h) shall have the respective meanings given such terms by section 1(h), except that in applying subparagraph (B) the adjustments under part VI of subchapter A shall be taken into account.
(g) 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,
Inflation Adjusted Items for Certain Years
For inflation adjustment of certain items in this section, see Revenue Procedures listed in a table under
Editorial Notes
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
2018–Subsec. (d)(3).
Subsec. (d)(8)(B)(i).
2017—Subsec. (b)(2)(D)(ii)(II).
Subsec. (f)(1)(B).
Subsec. (f)(2)(B).
2014—Subsec. (b)(2)(D)(i).
Subsec. (f)(1).
Subsec. (f)(2)(B)(ii).
2007—Subsec. (f).
2006—Subsec. (b)(2)(D)(ii).
Subsec. (b)(2)(D)(ii)(II).
Subsec. (c)(1)(A).
Subsec. (c)(1)(B)(i).
Subsec. (c)(2) to (4).
Subsec. (d)(4).
Subsec. (d)(7).
Subsecs. (f), (g).
1997—Subsec. (b)(2)(A).
Subsec. (b)(2)(D).
1986—Subsec. (b)(2)(A).
| "In the case of taxable years beginning in: | The annual rate is: |
|---|---|
| 1983, 1984, 1985, 1986, or 1987 | $80,000 |
| 1988 | 85,000 |
| 1989 | 90,000 |
| 1990 and thereafter | 95,000." |
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), (d).
1958—Subsec. (c).
Statutory Notes and Related Subsidiaries
Effective Date of 2018 Amendment
Effective Date of 2017 Amendment
Amendment by section 11002(d)(9) of
Amendment by section 12001(b)(3)(E) of
Effective Date of 2014 Amendment
Amendment by section 202(b) of
Amendment by section 215(a) of
Amendment by section 221(a)(73) of
Effective Date of 2007 Amendment
Amendment by
Effective Date of 2006 Amendment
Effective Date of 1997 Amendment
Effective Date of 1986 Amendment
Effective Date of 1984 Amendment
Amendment by
Effective Date of 1983 Amendment
Amendment by
Effective Date of 1981 Amendment
Effective Date of 1980 Amendment
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
Amendment by section 703(e) of
Effective Date of 1978 Amendment; Election of Prior Law
"(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
Amendment by section 1901(a)(115) of
Effective Date of 1964 Amendment
Effective Date of 1962 Amendment
"(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
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
"(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
"(a)
"(b)
§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,
Editorial Notes
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
2018—Par. (1)(B).
1988—Par. (2).
1980—Par. (1)(A).
1961—Par. (3).
1960—
Statutory Notes and Related Subsidiaries
Effective Date of 1988 Amendment
Effective Date of 1980 Amendment
Amendment by
Effective Date of 1961 Amendment
[Section 201(d) of
Effective Date of 1960 Amendment
Repeals; Amendments and Application of Amendments Unaffected
Section 201(a) of
Treatment of Employees of Panama Canal Commission and Department of Defense
Executive Documents
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 Transportation with respect to Coast Guard when it is not operating as a service in the Navy, concerning civilian employees of nonappropriated fund instrumentalities of the armed forces, see section 201 of Ex. Ord. No. 11137, Jan. 7, 1964, as amended, set out as a note under
[§913. Repealed. Pub. L. 97–34, title I, §112(a), Aug. 13, 1981, 95 Stat. 194 ]
Section, added
Statutory Notes and Related Subsidiaries
Effective Date of Repeal
Repeal applicable with respect to taxable years beginning after Dec. 31, 1981, see section 115 of
[Subpart C—Repealed]
[§§921 to 927. Repealed. Pub. L. 106–519, §2, Nov. 15, 2000, 114 Stat. 2423 ]
Section 921, added
A prior section 921, acts Aug. 16, 1954, ch. 736,
Section 922, added
A prior section 922, acts Aug. 16, 1954, ch. 736,
Section 923, added
Section 924, added
Section 925, added
Section 926, added
Section 927, added
Statutory Notes and Related Subsidiaries
Effective Date of Repeal
Repeal applicable to transactions after Sept. 30, 2000, with special rules relating to existing foreign sales corporations, see section 5 of
Subpart D—Possessions of the United States
Editorial Notes
Amendments
2018—
2004—
1986—
1983—
1972—
1960—
1 See 2018 Amendment note below.
§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) 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).
(Aug. 16, 1954, ch. 736,
Editorial Notes
Amendments
2004—Subsec. (d).
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).
Statutory Notes and Related Subsidiaries
Effective Date of 2004 Amendment
Amendment by
Effective Date of 1986 Amendment
"(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
Effective Date of 1971 Amendment
Amendment by
Effective Date of 1966 Amendment
Authority of Guam, American Samoa, and the Northern Mariana Islands To Enact Revenue Laws
"(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)
§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 during the entire 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 during the entire 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 during the entire 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
Editorial Notes
Prior Provisions
A prior section 932, acts Aug. 16, 1954, ch. 736,
Amendments
2004—Subsecs. (a)(1)(A)(i), (c)(1)(A), (4)(A).
1988—Subsec. (c)(2).
Subsec. (c)(4).
Subsec. (e).
Statutory Notes and Related Subsidiaries
Effective Date of 2004 Amendment
Amendment by
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
Authority To Impose Nondiscriminatory Local Income Taxes
§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,
Editorial Notes
Amendments
1986—
Statutory Notes and Related Subsidiaries
Effective Date of 1986 Amendment
Amendment by
§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 United States or is effectively connected with the conduct of a trade or business within the United States shall be made under regulations prescribed by the Secretary.
(Added
Editorial Notes
Amendments
2004—Subsec. (b)(4).
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).
Statutory Notes and Related Subsidiaries
Effective Date of 2004 Amendment
Amendment by
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
"(1)
"(2)
Effective Date of 1982 Amendment
Amendment by
Effective Date of 1976 Amendment
Amendment by section 1901(a)(118) of
Effective Date
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
[§934A. Repealed. Pub. L. 99–514, title XII, §1275(c)(3), Oct. 22, 1986, 100 Stat. 2599 ]
Section, added
Statutory Notes and Related Subsidiaries
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
Statutory Notes and Related Subsidiaries
Amendment Subsequent to Repeal
Effective Date of Repeal
Repeal applicable to taxable years beginning after Dec. 31, 1986, with certain exceptions and qualifications, see section 1277 of
[§936. Repealed. Pub. L. 115–141, div. U, title IV, §401(d)(1)(C), Mar. 23, 2018, 132 Stat. 1206 ]
Section, added
Statutory Notes and Related Subsidiaries
Savings Provision
For provisions that nothing in repeal by
§937. Residence and source rules involving possessions
(a) Bona fide resident
For purposes of this subpart, section 865(g)(3), section 876, section 881(b), paragraphs (2) and (3) of section 901(b), section 957(c), section 3401(a)(8)(C), and section 7654(a), except as provided in regulations, the term "bona fide resident" means a person—
(1) who is present for at least 183 days during the taxable year in Guam, American Samoa, the Northern Mariana Islands, Puerto Rico, or the Virgin Islands, as the case may be, and
(2) who does not have a tax home (determined under the principles of section 911(d)(3) without regard to the second sentence thereof) outside such specified possession during the taxable year and does not have a closer connection (determined under the principles of section 7701(b)(3)(B)(ii)) to the United States or a foreign country than to such specified possession.
For purposes of paragraph (1), the determination as to whether a person is present for any day shall be made under the principles of section 7701(b).
(b) Source rules
Except as provided in regulations, for purposes of this title—
(1) except as provided in paragraph (2), rules similar to the rules for determining whether income is income from sources within the United States or is effectively connected with the conduct of a trade or business within the United States shall apply for purposes of determining whether income is from sources within a possession specified in subsection (a)(1) or effectively connected with the conduct of a trade or business within any such possession, and
(2) any income treated as income from sources within the United States or as effectively connected with the conduct of a trade or business within the United States shall not be treated as income from sources within any such possession or as effectively connected with the conduct of a trade or business within any such possession.
(c) Reporting requirement
(1) In general
If, for any taxable year, an individual takes the position for United States income tax reporting purposes that the individual became, or ceases to be, a bona fide resident of a possession specified in subsection (a)(1), such individual shall file with the Secretary, at such time and in such manner as the Secretary may prescribe, notice of such position.
(2) Transition rule
If, for any of an individual's 3 taxable years ending before the individual's first taxable year ending after the date of the enactment of this subsection, the individual took a position described in paragraph (1), the individual shall file with the Secretary, at such time and in such manner as the Secretary may prescribe, notice of such position.
(Added
Editorial Notes
References in Text
The date of the enactment of this subsection, referred to in subsec. (c)(2), is the date of enactment of
Statutory Notes and Related Subsidiaries
Effective Date
"(1)
"(2) 183-
"(3)
[Subpart E—Repealed]
[§§941 to 943. Repealed. Pub. L. 108–357, title I, §101(b)(1), Oct. 22, 2004, 118 Stat. 1423 ]
Section 941, added
A prior section 941, acts Aug. 16, 1954, ch. 736,
Section 942, added
A prior section 942, act Aug. 16, 1954, ch. 736,
Section 943, added
A prior section 943, acts Aug. 16, 1954, ch. 736,
Statutory Notes and Related Subsidiaries
Effective Date of Repeal
Repeal applicable to transactions after Dec. 31, 2004, see section 101(c) of
Subpart F—Controlled Foreign Corporations
Editorial Notes
Amendments
2017—
2004—
1996—
1986—
1975—
1962—
§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 at any time 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) his pro rata share (determined under paragraph (2)) of the corporation's subpart F income for such year, and
(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)).
(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.
For purposes of subparagraph (B), any gain included in the gross income of any person as a dividend under section 1248 shall be treated as a distribution received by such person with respect to the stock involved.
(b) United States shareholder defined
For purposes of this title, 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, or 10 percent or more of the total value of shares of all classes of stock of such foreign corporation.
(c) 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
Editorial Notes
Amendments
2017—Subsec. (a)(1).
Subsec. (a)(1)(A).
"(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; and".
Subsec. (a)(3).
"(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."
Subsec. (b).
2007—Subsecs. (c), (d).
"(1)
"(2)
2004—Subsecs. (c) to (f).
1997—Subsec. (a)(2).
1996—Subsec. (a)(1)(A) to (C).
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).
Statutory Notes and Related Subsidiaries
Effective Date of 2017 Amendment
Amendment by section 14101(e)(1) of
Amendment by section 14212(b)(1)(A), (2) of
Effective Date of 2004 Amendment
Amendment by
Effective Date of 1997 Amendment
Effective Date of 1996 Amendment
Amendment by
Effective Date of 1993 Amendment
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
Amendment by section 801(d)(4) of
Effective Date of 1975 Amendment
Amendment by
Effective Date
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
§951A. Global intangible low-taxed income included in gross income of United States shareholders
(a) In general
Each person who is a United States shareholder of any controlled foreign corporation for any taxable year of such United States shareholder shall include in gross income such shareholder's global intangible low-taxed income for such taxable year.
(b) Global intangible low-taxed income
For purposes of this section—
(1) In general
The term "global intangible low-taxed income" means, with respect to any United States shareholder for any taxable year of such United States shareholder, the excess (if any) of—
(A) such shareholder's net CFC tested income for such taxable year, over
(B) such shareholder's net deemed tangible income return for such taxable year.
(2) Net deemed tangible income return
The term "net deemed tangible income return" means, with respect to any United States shareholder for any taxable year, the excess of—
(A) 10 percent of the aggregate of such shareholder's pro rata share of the qualified business asset investment of each controlled foreign corporation with respect to which such shareholder is a United States shareholder for such taxable year (determined for each taxable year of each such controlled foreign corporation which ends in or with such taxable year of such United States shareholder), over
(B) the amount of interest expense taken into account under subsection (c)(2)(A)(ii) in determining the shareholder's net CFC tested income for the taxable year to the extent the interest income attributable to such expense is not taken into account in determining such shareholder's net CFC tested income.
(c) Net CFC tested income
For purposes of this section—
(1) In general
The term "net CFC tested income" means, with respect to any United States shareholder for any taxable year of such United States shareholder, the excess (if any) of—
(A) the aggregate of such shareholder's pro rata share of the tested income of each controlled foreign corporation with respect to which such shareholder is a United States shareholder for such taxable year of such United States shareholder (determined for each taxable year of such controlled foreign corporation which ends in or with such taxable year of such United States shareholder), over
(B) the aggregate of such shareholder's pro rata share of the tested loss of each controlled foreign corporation with respect to which such shareholder is a United States shareholder for such taxable year of such United States shareholder (determined for each taxable year of such controlled foreign corporation which ends in or with such taxable year of such United States shareholder).
(2) Tested income; tested loss
For purposes of this section—
(A) Tested income
The term "tested income" means, with respect to any controlled foreign corporation for any taxable year of such controlled foreign corporation, the excess (if any) of—
(i) the gross income of such corporation determined without regard to—
(I) any item of income described in section 952(b),
(II) any gross income taken into account in determining the subpart F income of such corporation,
(III) any gross income excluded from the foreign base company income (as defined in section 954) and the insurance income (as defined in section 953) of such corporation by reason of section 954(b)(4),
(IV) any dividend received from a related person (as defined in section 954(d)(3)), and
(V) any foreign oil and gas extraction income (as defined in section 907(c)(1)) of such corporation, over
(ii) the deductions (including taxes) properly allocable to such gross income under rules similar to the rules of section 954(b)(5) (or to which such deductions would be allocable if there were such gross income).
(B) Tested loss
(i) In general
The term "tested loss" means, with respect to any controlled foreign corporation for any taxable year of such controlled foreign corporation, the excess (if any) of the amount described in subparagraph (A)(ii) over the amount described in subparagraph (A)(i).
(ii) Coordination with subpart F to deny double benefit of losses
Section 952(c)(1)(A) shall be applied by increasing the earnings and profits of the controlled foreign corporation by the tested loss of such corporation.
(d) Qualified business asset investment
For purposes of this section—
(1) In general
The term "qualified business asset investment" means, with respect to any controlled foreign corporation for any taxable year, the average of such corporation's aggregate adjusted bases as of the close of each quarter of such taxable year in specified tangible property—
(A) used in a trade or business of the corporation, and
(B) of a type with respect to which a deduction is allowable under section 167.
(2) Specified tangible property
(A) In general
The term "specified tangible property" means, except as provided in subparagraph (B), any tangible property used in the production of tested income.
(B) Dual use property
In the case of property used both in the production of tested income and income which is not tested income, such property shall be treated as specified tangible property in the same proportion that the gross income described in subsection (c)(1)(A) produced with respect to such property bears to the total gross income produced with respect to such property.
(3) 1 Determination of adjusted basis
For purposes of this subsection, notwithstanding any provision of this title (or any other provision of law) which is enacted after the date of the enactment of this section, the adjusted basis in any property shall be determined—
(A) by using the alternative depreciation system under section 168(g), and
(B) by allocating the depreciation deduction with respect to such property ratably to each day during the period in the taxable year to which such depreciation relates.
(3) 1 Partnership property
For purposes of this subsection, if a controlled foreign corporation holds an interest in a partnership at the close of such taxable year of the controlled foreign corporation, such controlled foreign corporation shall take into account under paragraph (1) the controlled foreign corporation's distributive share of the aggregate of the partnership's adjusted bases (determined as of such date in the hands of the partnership) in tangible property held by such partnership to the extent such property—
(A) is used in the trade or business of the partnership,
(B) is of a type with respect to which a deduction is allowable under section 167, and
(C) is used in the production of tested income (determined with respect to such controlled foreign corporation's distributive share of income with respect to such property).
For purposes of this paragraph, the controlled foreign corporation's distributive share of the adjusted basis of any property shall be the controlled foreign corporation's distributive share of income with respect to such property.
(4) Regulations
The Secretary shall issue such regulations or other guidance as the Secretary determines appropriate to prevent the avoidance of the purposes of this subsection, including regulations or other guidance which provide for the treatment of property if—
(A) such property is transferred, or held, temporarily, or
(B) the avoidance of the purposes of this paragraph is a factor in the transfer or holding of such property.
(e) Determination of pro rata share, etc.
For purposes of this section—
(1) In general
The pro rata shares referred to in subsections (b), (c)(1)(A), and (c)(1)(B), respectively, shall be determined under the rules of section 951(a)(2) in the same manner as such section applies to subpart F income and shall be taken into account in the taxable year of the United States shareholder in which or with which the taxable year of the controlled foreign corporation ends.
(2) Treatment as United States shareholder
A person shall be treated as a United States shareholder of a controlled foreign corporation for any taxable year of such person only if such person owns (within the meaning of section 958(a)) stock in such foreign corporation on the last day in the taxable year of such foreign corporation on which such foreign corporation is a controlled foreign corporation.
(3) Treatment as controlled foreign corporation
A foreign corporation shall be treated as a controlled foreign corporation for any taxable year if such foreign corporation is a controlled foreign corporation at any time during such taxable year.
(f) Treatment as subpart F income for certain purposes
(1) In general
(A) Application
Except as provided in subparagraph (B), any global intangible low-taxed income included in gross income under subsection (a) shall be treated in the same manner as an amount included under section 951(a)(1)(A) for purposes of applying sections 168(h)(2)(B), 535(b)(10), 851(b), 904(h)(1), 959, 961, 962, 993(a)(1)(E), 996(f)(1), 1248(b)(1), 1248(d)(1), 6501(e)(1)(C), 6654(d)(2)(D), and 6655(e)(4).
(B) Exception
The Secretary shall provide rules for the application of subparagraph (A) to other provisions of this title in any case in which the determination of subpart F income is required to be made at the level of the controlled foreign corporation.
(2) Allocation of global intangible low-taxed income to controlled foreign corporations
For purposes of the sections referred to in paragraph (1), with respect to any controlled foreign corporation any pro rata amount from which is taken into account in determining the global intangible low-taxed income included in gross income of a United States shareholder under subsection (a), the portion of such global intangible low-taxed income which is treated as being with respect to such controlled foreign corporation is—
(A) in the case of a controlled foreign corporation with no tested income, zero, and
(B) in the case of a controlled foreign corporation with tested income, the portion of such global intangible low-taxed income which bears the same ratio to such global intangible low-taxed income as—
(i) such United States shareholder's pro rata amount of the tested income of such controlled foreign corporation, bears to
(ii) the aggregate amount described in subsection (c)(1)(A) with respect to such United States shareholder.
(Added
Editorial Notes
References in Text
The date of the enactment of this section, referred to in subsec. (d)(3), is the date of the enactment of
Statutory Notes and Related Subsidiaries
Effective Date
Section applicable to taxable years of foreign corporations beginning after Dec. 31, 2017, and to taxable years of United States shareholders in which or with which such taxable years of foreign corporations end, see section 14201(d) of
1 So in original. There are two pars. designated (3).
§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 this subsection, any exemption (or reduction) with respect to the tax imposed by section 884 shall not be taken into account.
(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) 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 subclause (II) or (III) of clause (iii),1 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)(I),1 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 sales income,
(II) foreign base company services income,
(III) in the case of a qualified insurance company, insurance income or foreign personal holding company income, or
(IV) 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
Editorial Notes
References in Text
The Foreign Corrupt Practices Act of 1977, referred to in subsec. (a), is title I of
Clause (iii), referred to in subsec. (c)(1)(B)(ii), means cl. (iii) of subsec. (c)(1)(B), which was amended by
Amendments
2017—Subsec. (c)(1)(B)(i).
Subsec. (c)(1)(B)(iii).
2007—Subsec. (b).
2005—Subsec. (c)(1)(B)(ii).
2004—Subsec. (c)(1)(B)(iii).
1997—Subsec. (b).
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).
Statutory Notes and Related Subsidiaries
Effective Date of 2017 Amendment
Amendment by section 14212(b)(1)(C) of
Effective Date of 2004 Amendment
Effective Date of 1997 Amendment
Effective Date of 1988 Amendment
Amendment by section 1012(i)(16), (22)–(25)(A) 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
Effective Date of 1966 Amendment
Amendment by
Determination of Corporate Earnings and Profits for Purposes of Applying Subsection (c)(1)(A)
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
1 See References in Text note below.
§953. Insurance income
(a) Insurance income
(1) In general
For purposes of section 952(a)(1), the term "insurance income" means any income which—
(A) is attributable to the issuing (or reinsuring) of an insurance or annuity contract, and
(B) would (subject to the modifications provided by subsection (b)) be taxed under subchapter L of this chapter if such income were the income of a domestic insurance company.
(2) Exception
Such term shall not include any exempt insurance income (as defined in subsection (e)).
(b) Special rules
For purposes of subsection (a)—
(1) The following provisions of subchapter L shall not apply:
(A) So much of section 805(a)(8) as relates to the deduction allowed under section 172.
(B) 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) Reserves for any insurance or annuity contract shall be determined in the same manner as under section 954(i).
(4) 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) 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.
(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.
(e) Exempt insurance income
For purposes of this section—
(1) Exempt insurance income defined
(A) In general
The term "exempt insurance income" means income derived by a qualifying insurance company which—
(i) is attributable to the issuing (or reinsuring) of an exempt contract by such company or a qualifying insurance company branch of such company, and
(ii) is treated as earned by such company or branch in its home country for purposes of such country's tax laws.
(B) Exception for certain arrangements
Such term shall not include income attributable to the issuing (or reinsuring) of an exempt contract 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 which is not an exempt contract.
(C) Determinations made separately
For purposes of this subsection and section 954(i), the exempt insurance income and exempt contracts of a qualifying insurance company or any qualifying insurance company branch of such company shall be determined separately for such company and each such branch by taking into account—
(i) in the case of the qualifying insurance company, only items of income, deduction, gain, or loss, and activities of such company not properly allocable or attributable to any qualifying insurance company branch of such company, and
(ii) in the case of a qualifying insurance company branch, only items of income, deduction, gain, or loss and activities properly allocable or attributable to such branch.
(2) Exempt contract
(A) In general
The term "exempt contract" means an insurance or annuity contract issued or reinsured by a qualifying insurance company or qualifying insurance company branch in connection with property in, liability arising out of activity in, or the lives or health of residents of, a country other than the United States.
(B) Minimum home country income required
(i) In general
No contract of a qualifying insurance company or of a qualifying insurance company branch shall be treated as an exempt contract unless such company or branch derives more than 30 percent of its net written premiums from exempt contracts (determined without regard to this subparagraph)—
(I) which cover applicable home country risks, and
(II) with respect to which no policyholder, insured, annuitant, or beneficiary is a related person (as defined in section 954(d)(3)).
(ii) Applicable home country risks
The term "applicable home country risks" means risks in connection with property in, liability arising out of activity in, or the lives or health of residents of, the home country of the qualifying insurance company or qualifying insurance company branch, as the case may be, issuing or reinsuring the contract covering the risks.
(C) Substantial activity requirements for cross border risks
A contract issued by a qualifying insurance company or qualifying insurance company branch which covers risks other than applicable home country risks (as defined in subparagraph (B)(ii)) shall not be treated as an exempt contract unless such company or branch, as the case may be—
(i) conducts substantial activity with respect to an insurance business in its home country, and
(ii) performs in its home country substantially all of the activities necessary to give rise to the income generated by such contract.
(3) Qualifying insurance company
The term "qualifying insurance company" means any controlled foreign corporation which—
(A) is subject to regulation as an insurance (or reinsurance) company by its home country, and is licensed, authorized, or regulated by the applicable insurance regulatory body for its home country to sell insurance, reinsurance, or annuity contracts to persons other than related persons (within the meaning of section 954(d)(3)) in such home country,
(B) derives more than 50 percent of its aggregate net written premiums from the issuance or reinsurance by such controlled foreign corporation and each of its qualifying insurance company branches of contracts—
(i) covering applicable home country risks (as defined in paragraph (2)) of such corporation or branch, as the case may be, and
(ii) with respect to which no policyholder, insured, annuitant, or beneficiary is a related person (as defined in section 954(d)(3)),
except that in the case of a branch, such premiums shall only be taken into account to the extent such premiums are treated as earned by such branch in its home country for purposes of such country's tax laws, and
(C) is engaged in the insurance business and would be subject to tax under subchapter L if it were a domestic corporation.
(4) Qualifying insurance company branch
The term "qualifying insurance company branch" means a qualified business unit (within the meaning of section 989(a)) of a controlled foreign corporation if—
(A) such unit is licensed, authorized, or regulated by the applicable insurance regulatory body for its home country to sell insurance, reinsurance, or annuity contracts to persons other than related persons (within the meaning of section 954(d)(3)) in such home country, and
(B) such controlled foreign corporation is a qualifying insurance company, determined under paragraph (3) as if such unit were a qualifying insurance company branch.
(5) Life insurance or annuity contract
For purposes of this section and section 954, the determination of whether a contract issued by a controlled foreign corporation or a qualified business unit (within the meaning of section 989(a)) is a life insurance contract or an annuity contract shall be made without regard to sections 72(s), 101(f), 817(h), and 7702 if—
(A) such contract is regulated as a life insurance or annuity contract by the corporation's or unit's home country, and
(B) no policyholder, insured, annuitant, or beneficiary with respect to the contract is a United States person.
(6) Home country
For purposes of this subsection, except as provided in regulations—
(A) Controlled foreign corporation
The term "home country" means, with respect to a controlled foreign corporation, the country in which such corporation is created or organized.
(B) Qualified business unit
The term "home country" means, with respect to a qualified business unit (as defined in section 989(a)), the country in which the principal office of such unit is located and in which such unit is licensed, authorized, or regulated by the applicable insurance regulatory body to sell insurance, reinsurance, or annuity contracts to persons other than related persons (as defined in section 954(d)(3)) in such country.
(7) Anti-abuse rules
For purposes of applying this subsection and section 954(i)—
(A) the rules of section 954(h)(7) (other than subparagraph (B) thereof) shall apply,
(B) there shall be disregarded any item of income, gain, loss, or deduction of, or derived from, an entity which is not engaged in regular and continuous transactions with persons which are not related persons,
(C) there shall be disregarded any change in the method of computing reserves a principal purpose of which is the acceleration or deferral of any item in order to claim the benefits of this subsection or section 954(i),
(D) a contract of insurance or reinsurance shall not be treated as an exempt contract (and premiums from such contract shall not be taken into account for purposes of paragraph (2)(B) or (3)) if—
(i) any policyholder, insured, annuitant, or beneficiary is a resident of the United States and such contract was marketed to such resident and was written to cover a risk outside the United States, or
(ii) the contract covers risks located within and without the United States and the qualifying insurance company or qualifying insurance company branch does not maintain such contemporaneous records, and file such reports, with respect to such contract as the Secretary may require,
(E) the Secretary may prescribe rules for the allocation of contracts (and income from contracts) among 2 or more qualifying insurance company branches of a qualifying insurance company in order to clearly reflect the income of such branches, and
(F) premiums from a contract shall not be taken into account for purposes of paragraph (2)(B) or (3) if such contract reinsures a contract issued or reinsured by a related person (as defined in section 954(d)(3)).
For purposes of subparagraph (D), the determination of where risks are located shall be made under the principles of section 953.
(8) Coordination with subsection (c)
In determining insurance income for purposes of subsection (c), exempt insurance income shall not include income derived from exempt contracts which cover risks other than applicable home country risks.
(9) Regulations
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection and section 954(i).
(10) Cross reference
For income exempt from foreign personal holding company income, see section 954(i).
(Added
Editorial Notes
Amendments
2017—Subsec. (b)(1)(A).
Subsec. (b)(1)(B).
Subsec. (b)(1)(C).
Subsec. (c)(1)(C).
Subsec. (d)(4)(B)(iv)(II).
2015—Subsec. (e)(10), (11).
2014—Subsec. (e)(10).
2013—Subsec. (e)(10).
2010—Subsec. (e)(10).
2008—Subsec. (e)(10).
2006—Subsec. (e)(10).
2002—Subsec. (e)(10).
1999—Subsec. (e)(10).
1998—Subsec. (a).
"(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."
Subsec. (b)(3), (4).
Subsec. (e).
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).
Statutory Notes and Related Subsidiaries
Effective Date of 2017 Amendment
Amendment by section 13511(b)(7) of
Amendment by section 13512(b)(8) of
Amendment by section 14212(b)(1)(D), (3) of
Effective Date of 2015 Amendment
Effective Date of 2014 Amendment
Effective Date of 2013 Amendment
Effective Date of 2010 Amendment
Effective Date of 2002 Amendment
Effective Date of 1999 Amendment
Effective Date of 1989 Amendment
Amendment by
Effective Date of 1988 Amendment
Amendment by section 1012(i)(1), (2), (4), (5), (7)–(9), (21) of
Effective Date of 1986 Amendment
Amendment by
Effective Date of 1984 Amendment
Amendment by
Effective Date of 1966 Amendment
Amendment by
§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)), and
(3) the foreign base company services income for the taxable year (determined under subsection (e) 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.
(5) Deductions to be taken into account
For purposes of subsection (a), the foreign personal holding company income, the foreign base company sales income, and the foreign base company services 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.
(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)) other than property which gives rise to income not treated as foreign personal holding company income by reason of subsection (h) or (i) for the taxable year,
(ii) which is an interest in a trust, partnership, or REMIC, or
(iii) which does not give rise to any income.
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(a)(1) 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 commodity hedging transactions (as defined in paragraph (5)(A)),
(ii) are active business gains or losses from the sale of commodities, but only if substantially all of the controlled foreign corporation's commodities are property described in paragraph (1), (2), or (8) of section 1221(a), 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.
(F) Income from notional principal contracts
(i) In general
Net income from notional principal contracts.
(ii) Coordination with other categories of foreign personal holding company income
Any item of income, gain, deduction, or loss from a notional principal contract entered into for purposes of hedging any item described in any preceding subparagraph shall not be taken into account for purposes of this subparagraph but shall be taken into account under such other subparagraph.
(G) Payments in lieu of dividends
Payments in lieu of dividends which are made pursuant to an agreement to which section 1058 applies.
(H) Personal service contracts
(i) Amounts received under a contract under which the corporation is to furnish personal services if—
(I) some person other than the corporation has the right to designate (by name or by description) the individual who is to perform the services, or
(II) the individual who is to perform the services is designated (by name or by description) in the contract, and
(ii) amounts received from the sale or other disposition of such a contract.
This subparagraph shall apply with respect to amounts received for services under a particular contract only if at some time during the taxable year 25 percent or more in value of the outstanding stock of the corporation is owned, directly or indirectly, by or for the individual who has performed, is to perform, or may be designated (by name or by description) as the one to perform, such services.
(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)). For purposes of the preceding sentence, rents derived from leasing an aircraft or vessel in foreign commerce shall not fail to be treated as derived in the active conduct of a trade or business if, as determined under regulations prescribed by the Secretary, the active leasing expenses are not less than 10 percent of the profit on the lease.
(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)).
(C) Exception for dealers
Except as provided by regulations, in the case of a regular dealer in property which is property described in paragraph (1)(B), forward contracts, option contracts, or similar financial instruments (including notional principal contracts and all instruments referenced to commodities), there shall not be taken into account in computing foreign personal holding company income—
(i) any item of income, gain, deduction, or loss (other than any item described in subparagraph (A), (E), or (G) of paragraph (1)) from any transaction (including hedging transactions and transactions involving physical settlement) entered into in the ordinary course of such dealer's trade or business as such a dealer, and
(ii) if such dealer is a dealer in securities (within the meaning of section 475), any interest or dividend or equivalent amount described in subparagraph (E) or (G) of paragraph (1) from any transaction (including any hedging transaction or transaction described in section 956(c)(2)(I)) entered into in the ordinary course of such dealer's trade or business as such a dealer in securities, but only if the income from the transaction is attributable to activities of the dealer in the country under the laws of which the dealer is created or organized (or in the case of a qualified business unit described in section 989(a), is attributable to activities of the unit in the country in which the unit both maintains its principal office and conducts substantial business activity).
(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).
(4) Look-thru rule for certain partnership sales
(A) In general
In the case of any sale by a controlled foreign corporation of an interest in a partnership with respect to which such corporation is a 25-percent owner, such corporation shall be treated for purposes of this subsection as selling the proportionate share of the assets of the partnership attributable to such interest. The Secretary shall prescribe such regulations as may be appropriate to prevent abuse of the purposes of this paragraph, including regulations providing for coordination of this paragraph with the provisions of subchapter K.
(B) 25-percent owner
For purposes of this paragraph, the term "25-percent owner" means a controlled foreign corporation which owns directly 25 percent or more of the capital or profits interest in a partnership. For purposes of the preceding sentence, if a controlled foreign corporation is a shareholder or partner of a corporation or partnership, the controlled foreign corporation shall be treated as owning directly its proportionate share of any such capital or profits interest held directly or indirectly by such corporation or partnership. If a controlled foreign corporation is treated as owning a capital or profits interest in a partnership under constructive ownership rules similar to the rules of section 958(b), the controlled foreign corporation shall be treated as owning such interest directly for purposes of this subparagraph.
(5) Definition and special rules relating to commodity transactions
(A) Commodity hedging transactions
For purposes of paragraph (1)(C)(i), the term "commodity hedging transaction" means any transaction with respect to a commodity if such transaction—
(i) is a hedging transaction as defined in section 1221(b)(2), determined—
(I) without regard to subparagraph (A)(ii) thereof,
(II) by applying subparagraph (A)(i) thereof by substituting "ordinary property or property described in section 1231(b)" for "ordinary property", and
(III) by substituting "controlled foreign corporation" for "taxpayer" each place it appears, and
(ii) is clearly identified as such in accordance with section 1221(a)(7).
(B) Treatment of dealer activities under paragraph (1)(C)
Commodities with respect to which gains and losses are not taken into account under paragraph (2)(C) in computing a controlled foreign corporation's foreign personal holding company income shall not be taken into account in applying the substantially all test under paragraph (1)(C)(ii) to such corporation.
(C) Regulations
The Secretary shall prescribe such regulations as are appropriate to carry out the purposes of paragraph (1)(C) in the case of transactions involving related parties.
(6) Look-thru rule for related controlled foreign corporations
(A) In general
For purposes of this subsection, dividends, interest, rents, and royalties received or accrued from a controlled foreign corporation which is a related person shall not be treated as foreign personal holding company income to the extent attributable or properly allocable (determined under rules similar to the rules of subparagraphs (C) and (D) of section 904(d)(3)) to income of the related person which is neither subpart F income nor income treated as effectively connected with the conduct of a trade or business in the United States. For purposes of this subparagraph, interest shall include factoring income which is treated as income equivalent to interest for purposes of paragraph (1)(E). The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out this paragraph, including such regulations as may be necessary or appropriate to prevent the abuse of the purposes of this paragraph.
(B) Exception
Subparagraph (A) shall not apply in the case of any interest, rent, or royalty to the extent such interest, rent, or royalty 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) Application
Subparagraph (A) shall apply to taxable years of foreign corporations beginning after December 31, 2005, and before January 1, 2026, and to taxable years of United States shareholders with or within which such taxable years of foreign corporations end.
(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.
Paragraph (1) shall also not apply to income which is exempt insurance income (as defined in section 953(e)) or which is not treated as foreign personal holding income by reason of subsection (c)(2)(C)(ii), (h), or (i).
[(f) Repealed. Pub. L. 108–357, title IV, §415(a)(2), Oct. 22, 2004, 118 Stat. 1511 ]
[(g) Repealed. Pub. L. 115–97, title I, §14211(b)(3), Dec. 22, 2017, 131 Stat. 2217 ]
(h) Special rule for income derived in the active conduct of banking, financing, or similar businesses
(1) In general
For purposes of subsection (c)(1), foreign personal holding company income shall not include qualified banking or financing income of an eligible controlled foreign corporation.
(2) Eligible controlled foreign corporation
For purposes of this subsection—
(A) In general
The term "eligible controlled foreign corporation" means a controlled foreign corporation which—
(i) is predominantly engaged in the active conduct of a banking, financing, or similar business, and
(ii) conducts substantial activity with respect to such business.
(B) Predominantly engaged
A controlled foreign corporation shall be treated as predominantly engaged in the active conduct of a banking, financing, or similar business if—
(i) more than 70 percent of the gross income of the controlled foreign corporation is derived directly from the active and regular conduct of a lending or finance business from transactions with customers which are not related persons,
(ii) it is engaged in the active conduct of a banking business and is an institution licensed to do business as a bank in the United States (or is any other corporation not so licensed which is specified by the Secretary in regulations), or
(iii) it is engaged in the active conduct of a securities business and is registered as a securities broker or dealer under section 15(a) of the Securities Exchange Act of 1934 or is registered as a Government securities broker or dealer under section 15C(a) of such Act (or is any other corporation not so registered which is specified by the Secretary in regulations).
(3) Qualified banking or financing income
For purposes of this subsection—
(A) In general
The term "qualified banking or financing income" means income of an eligible controlled foreign corporation which—
(i) is derived in the active conduct of a banking, financing, or similar business by—
(I) such eligible controlled foreign corporation, or
(II) a qualified business unit of such eligible controlled foreign corporation,
(ii) is derived from one or more transactions—
(I) with customers located in a country other than the United States, and
(II) substantially all of the activities in connection with which are conducted directly by the corporation or unit in its home country, and
(iii) is treated as earned by such corporation or unit in its home country for purposes of such country's tax laws.
(B) Limitation on nonbanking and nonsecurities businesses
No income of an eligible controlled foreign corporation not described in clause (ii) or (iii) of paragraph (2)(B) (or of a qualified business unit of such corporation) shall be treated as qualified banking or financing income unless more than 30 percent of such corporation's or unit's gross income is derived directly from the active and regular conduct of a lending or finance business from transactions with customers which are not related persons and which are located within such corporation's or unit's home country.
(C) Substantial activity requirement for cross border income
The term "qualified banking or financing income" shall not include income derived from 1 or more transactions with customers located in a country other than the home country of the eligible controlled foreign corporation or a qualified business unit of such corporation unless such corporation or unit conducts substantial activity with respect to a banking, financing, or similar business in its home country.
(D) Determinations made separately
For purposes of this paragraph, the qualified banking or financing income of an eligible controlled foreign corporation and each qualified business unit of such corporation shall be determined separately for such corporation and each such unit by taking into account—
(i) in the case of the eligible controlled foreign corporation, only items of income, deduction, gain, or loss and activities of such corporation not properly allocable or attributable to any qualified business unit of such corporation, and
(ii) in the case of a qualified business unit, only items of income, deduction, gain, or loss and activities properly allocable or attributable to such unit.
(E) Direct conduct of activities
For purposes of subparagraph (A)(ii)(II), an activity shall be treated as conducted directly by an eligible controlled foreign corporation or qualified business unit in its home country if the activity is performed by employees of a related person and—
(i) the related person is an eligible controlled foreign corporation the home country of which is the same as the home country of the corporation or unit to which subparagraph (A)(ii)(II) is being applied,
(ii) the activity is performed in the home country of the related person, and
(iii) the related person is compensated on an arm's-length basis for the performance of the activity by its employees and such compensation is treated as earned by such person in its home country for purposes of the home country's tax laws.
(4) Lending or finance business
For purposes of this subsection, the term "lending or finance business" means the business of—
(A) making loans,
(B) purchasing or discounting accounts receivable, notes, or installment obligations,
(C) engaging in leasing (including entering into leases and purchasing, servicing, and disposing of leases and leased assets),
(D) issuing letters of credit or providing guarantees,
(E) providing charge and credit card services, or
(F) rendering services or making facilities available in connection with activities described in subparagraphs (A) through (E) carried on by—
(i) the corporation (or qualified business unit) rendering services or making facilities available, or
(ii) another corporation (or qualified business unit of a corporation) which is a member of the same affiliated group (as defined in section 1504, but determined without regard to section 1504(b)(3)).
(5) Other definitions
For purposes of this subsection—
(A) Customer
The term "customer" means, with respect to any controlled foreign corporation or qualified business unit, any person which has a customer relationship with such corporation or unit and which is acting in its capacity as such.
(B) Home country
Except as provided in regulations—
(i) Controlled foreign corporation
The term "home country" means, with respect to any controlled foreign corporation, the country under the laws of which the corporation was created or organized.
(ii) Qualified business unit
The term "home country" means, with respect to any qualified business unit, the country in which such unit maintains its principal office.
(C) Located
The determination of where a customer is located shall be made under rules prescribed by the Secretary.
(D) Qualified business unit
The term "qualified business unit" has the meaning given such term by section 989(a).
(E) Related person
The term "related person" has the meaning given such term by subsection (d)(3).
(6) Coordination with exception for dealers
Paragraph (1) shall not apply to income described in subsection (c)(2)(C)(ii) of a dealer in securities (within the meaning of section 475) which is an eligible controlled foreign corporation described in paragraph (2)(B)(iii).
(7) Anti-abuse rules
For purposes of applying this subsection and subsection (c)(2)(C)(ii)—
(A) there shall be disregarded any item of income, gain, loss, or deduction with respect to any transaction or series of transactions one of the principal purposes of which is qualifying income or gain for the exclusion under this section, including any transaction or series of transactions a principal purpose of which is the acceleration or deferral of any item in order to claim the benefits of such exclusion through the application of this subsection,
(B) there shall be disregarded any item of income, gain, loss, or deduction of an entity which is not engaged in regular and continuous transactions with customers which are not related persons,
(C) there shall be disregarded any item of income, gain, loss, or deduction with respect to any transaction or series of transactions utilizing, or doing business with—
(i) one or more entities in order to satisfy any home country requirement under this subsection, or
(ii) a special purpose entity or arrangement, including a securitization, financing, or similar entity or arrangement,
if one of the principal purposes of such transaction or series of transactions is qualifying income or gain for the exclusion under this subsection, and
(D) a related person, an officer, a director, or an employee with respect to any controlled foreign corporation (or qualified business unit) which would otherwise be treated as a customer of such corporation or unit with respect to any transaction shall not be so treated if a principal purpose of such transaction is to satisfy any requirement of this subsection.
(8) Regulations
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection, subsection (c)(1)(B)(i), subsection (c)(2)(C)(ii), and the last sentence of subsection (e)(2).
(i) Special rule for income derived in the active conduct of insurance business
(1) In general
For purposes of subsection (c)(1), foreign personal holding company income shall not include qualified insurance income of a qualifying insurance company.
(2) Qualified insurance income
The term "qualified insurance income" means income of a qualifying insurance company which is—
(A) received from a person other than a related person (within the meaning of subsection (d)(3)) and derived from the investments made by a qualifying insurance company or a qualifying insurance company branch of its reserves allocable to exempt contracts or of 80 percent of its unearned premiums from exempt contracts (as both are determined in the manner prescribed under paragraph (4)), or
(B) received from a person other than a related person (within the meaning of subsection (d)(3)) and derived from investments made by a qualifying insurance company or a qualifying insurance company branch of an amount of its assets allocable to exempt contracts equal to—
(i) in the case of property, casualty, or health insurance contracts, one-third of its premiums earned on such insurance contracts during the taxable year (as defined in section 832(b)(4)), and
(ii) in the case of life insurance or annuity contracts, 10 percent of the reserves described in subparagraph (A) for such contracts.
(3) Principles for determining insurance income
Except as provided by the Secretary, for purposes of subparagraphs (A) and (B) of paragraph (2)—
(A) in the case of any contract which is a separate account-type contract (including any variable contract not meeting the requirements of section 817), income credited under such contract shall be allocable only to such contract, and
(B) income not allocable under subparagraph (A) shall be allocated ratably among contracts not described in subparagraph (A).
(4) Methods for determining unearned premiums and reserves
For purposes of paragraph (2)(A)—
(A) Property and casualty contracts
The unearned premiums and reserves of a qualifying insurance company or a qualifying insurance company branch with respect to property, casualty, or health insurance contracts shall be determined using the same methods and interest rates which would be used if such company or branch were subject to tax under subchapter L, except that—
(i) the interest rate determined for the functional currency of the company or branch, and which, except as provided by the Secretary, is calculated in the same manner as the Federal mid-term rate under section 1274(d), shall be substituted for the applicable Federal interest rate, and
(ii) such company or branch shall use the appropriate foreign loss payment pattern.
(B) Life insurance and annuity contracts
(i) In general
Except as provided in clause (ii), the amount of the reserve of a qualifying insurance company or qualifying insurance company branch for any life insurance or annuity contract shall be equal to the greater of—
(I) the net surrender value of such contract (as defined in section 807(e)(1)(A)), or
(II) the reserve determined under paragraph (5).
(ii) Ruling request, etc.
The amount of the reserve under clause (i) shall be the foreign statement reserve for the contract (less any catastrophe, deficiency, equalization, or similar reserves), if, pursuant to a ruling request submitted by the taxpayer or as provided in published guidance, the Secretary determines that the factors taken into account in determining the foreign statement reserve provide an appropriate means of measuring income.
(C) Limitation on reserves
In no event shall the reserve determined under this paragraph for any contract as of any time exceed the amount which would be taken into account with respect to such contract as of such time in determining foreign statement reserves (less any catastrophe, deficiency, equalization, or similar reserves).
(5) Amount of reserve
The amount of the reserve determined under this paragraph with respect to any contract shall be determined in the same manner as it would be determined if the qualifying insurance company or qualifying insurance company branch were subject to tax under subchapter L, except that in applying such subchapter—
(A) the interest rate determined for the functional currency of the company or branch, and which, except as provided by the Secretary, is calculated in the same manner as the Federal mid-term rate under section 1274(d), shall be substituted for the applicable Federal interest rate,
(B) the highest assumed interest rate permitted to be used in determining foreign statement reserves shall apply, and
(C) tables for mortality and morbidity which reasonably reflect the current mortality and morbidity risks in the company's or branch's home country shall be substituted for the mortality and morbidity tables otherwise used for such subchapter.
The Secretary may provide that the interest rate and mortality and morbidity tables of a qualifying insurance company may be used for 1 or more of its qualifying insurance company branches when appropriate.
(6) Definitions
For purposes of this subsection, any term used in this subsection which is also used in section 953(e) shall have the meaning given such term by section 953.
(Added
Editorial Notes
References in Text
Sections 15(a) and 15C(a) of the Securities Exchange Act of 1934, referred to in subsec. (h)(2)(B)(iii), are classified to sections 78o(a) and 78o–5(a), respectively, of Title 15, Commerce and Trade.
Amendments
2020—Subsec. (c)(6)(C).
2019—Subsec. (c)(6)(C).
2017—Subsec. (a)(5).
Subsec. (b)(4).
Subsec. (b)(5).
Subsec. (b)(6).
Subsec. (g).
Subsec. (i)(5)(B).
2015—Subsec. (c)(6)(C).
Subsec. (h)(9).
2014—Subsec. (c)(6)(C).
Subsec. (h)(9).
2013—Subsec. (c)(6)(C).
Subsec. (h)(9).
2010—Subsec. (c)(6)(C).
Subsec. (h)(9).
2008—Subsec. (c)(6)(C).
Subsec. (h)(9).
2007—Subsec. (c)(1)(F).
Subsec. (c)(1)(H), (I).
Subsec. (c)(2)(C)(ii).
Subsec. (c)(6)(B), (C).
2006—Subsec. (c)(6).
Subsec. (c)(6)(A).
Subsec. (h)(9).
2005—Subsec. (c)(1)(C)(i).
Subsec. (c)(1)(F).
Subsec. (c)(4)(B).
2004—Subsec. (a)(4).
Subsec. (b)(5).
Subsec. (b)(6) to (8).
Subsec. (c)(1)(C)(i), (ii).
"(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".
Subsec. (c)(1)(I).
Subsec. (c)(2)(A).
Subsec. (c)(2)(C)(i).
Subsec. (c)(4).
Subsec. (c)(5).
Subsec. (f).
Subsec. (h)(3)(E).
2002—Subsec. (c)(1)(B).
Subsec. (h)(9).
Subsec. (i)(4)(B).
"(i) the net surrender value of such contract (as defined in section 807(e)(1)(A)), or
"(ii) the reserve determined under paragraph (5)."
1999—Subsec. (c)(1)(B).
Subsec. (h)(9).
1998—Subsec. (c)(1)(B)(i).
Subsec. (c)(2)(C).
Subsec. (e)(2).
Subsec. (e)(2)(C).
Subsec. (h).
Subsec. (i).
1997—Subsec. (c)(1)(B).
Subsec. (c)(1)(F), (G).
Subsec. (c)(2)(C).
Subsec. (e)(2)(C).
Subsec. (h).
1996—Subsec. (c)(3)(A)(i).
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).
Statutory Notes and Related Subsidiaries
Effective Date of 2020 Amendment
Effective Date of 2019 Amendment
Effective Date of 2017 Amendment
Amendment by section 13517(b)(5) of
Amendment by section 14211(a), (b)(2), (3) of
Effective Date of 2015 Amendment
Amendment by section 128(b) of
Effective Date of 2014 Amendment
Amendment by section 134(b) of
Effective Date of 2013 Amendment
Amendment by section 322(b) of
Effective Date of 2010 Amendment
Amendment by section 750(a) of
Effective Date of 2008 Amendment
Effective Date of 2007 Amendment
Amendment by section 4(a) of
Effective Date of 2006 Amendment
Effective Date of 2005 Amendment
Amendment by section 403(m) of
Effective Date of 2004 Amendment
Amendment by section 413(b)(2) of
Amendment by section 415(a), (b), (c)(2) of
Effective Date of 2002 Amendment
Amendment by section 614(a)(2), (b)(1) of
Effective Date of 1999 Amendment
Amendment by section 503(a) of
Amendment by section 532(c)(2)(Q) of
Effective Date of 1998 Amendment
Amendment by section 4003(j) of
Effective Date of 1997 Amendment
Effective Date of 1993 Amendment
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
"(1)
"(2)
"(A)
"(i) the amendments made by subsection (c) [amending this section and
"(ii) [former] 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
Amendment by section 712(f) of
Effective Date of 1982 Amendment
Effective Date of 1976 Amendment
Effective Date of 1975 Amendment
Effective Date of 1969 Amendment
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
"(a)
"(b)
"(c)
Executive Documents
Line Item Veto
[§955. Repealed. Pub. L. 115–97, title I, §14212(a), Dec. 22, 2017, 131 Stat. 2217 ]
Section, added
A prior section 955, added
Statutory Notes and Related Subsidiaries
Effective Date of Repeal
Repeal applicable to taxable years of foreign corporations beginning after Dec. 31, 2017, and to taxable years of United States shareholders in which or with which such taxable years of foreign corporations end, see section 14212(c) of
§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" means, with respect to any controlled foreign corporation, the sum of—
(A) the amount (not including a deficit) referred to in section 316(a)(1) to the extent such amount was accumulated in prior taxable years, and
(B) the amount referred to in section 316(a)(2),
but reduced by distributions made during the taxable year and by earnings and profits described in section 959(c)(1).
(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
If any foreign corporation ceases to be a controlled foreign corporation during any taxable year—
(A) 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,
(B) the average referred to in subsection (a)(1)(A) for such taxable year shall be determined by only taking into account quarters ending on or before such last day, and
(C) 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.
(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—
(i) any bank (as defined by section 2(c) of the Bank Holding Company Act of 1956 (
(ii) any corporation not described in clause (i) with respect to which a bank holding company (as defined by section 2(a) of such Act) or financial holding company (as defined by section 2(p) of such Act) owns directly or indirectly more than 80 percent by vote or value of the stock of such corporation;
(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 contracts described in section 953(e)(2);
(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);
(I) deposits of cash or securities made or received on commercial terms in the ordinary course of a United States or foreign person's business as a dealer in securities or in commodities, but only to the extent such deposits are made or received as collateral or margin for (i) a securities loan, notional principal contract, options contract, forward contract, or futures contract, or (ii) any other financial transaction in which the Secretary determines that it is customary to post collateral or margin;
(J) an obligation of a United States person to the extent the principal amount of the obligation does not exceed the fair market value of readily marketable securities sold or purchased pursuant to a sale and repurchase agreement or otherwise posted or received as collateral for the obligation in the ordinary course of its business by a United States or foreign person which is a dealer in securities or commodities;
(K) securities acquired and held by a controlled foreign corporation in the ordinary course of its business as a dealer in securities if—
(i) the dealer accounts for the securities as securities held primarily for sale to customers in the ordinary course of business, and
(ii) the dealer disposes of the securities (or such securities mature while held by the dealer) within a period consistent with the holding of securities for sale to customers in the ordinary course of business; and
(L) an obligation of a United States person which—
(i) is not a domestic corporation, and
(ii) is not—
(I) a United States shareholder (as defined in section 951(b)) of the controlled foreign corporation, or
(II) a partnership, estate, or trust in which the controlled foreign corporation, or any related person (as defined in section 954(d)(3)), is a partner, beneficiary, or trustee immediately after the acquisition of any obligation of such partnership, estate, or trust by the controlled foreign corporation.
For purposes of subparagraphs (I), (J), and (K), the term "dealer in securities" has the meaning given such term by section 475(c)(1), and the term "dealer in commodities" has the meaning given such term by section 475(e), except that such term shall include a futures commission merchant.
(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 provisions of this section through reorganizations or otherwise.
(Added
Editorial Notes
Amendments
2018—Subsec. (c)(2)(E).
Subsec. (e).
2007—Subsec. (c)(2).
Subsec. (c)(2)(I) to (M).
2004—Subsec. (c)(2).
Subsec. (c)(2)(A).
Subsec. (c)(2)(L), (M).
1997—Subsec. (b)(1)(A).
Subsec. (c)(2).
1996—Subsec. (b)(1).
Subsec. (b)(3).
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).
Statutory Notes and Related Subsidiaries
Effective Date of 2004 Amendment
Effective Date of 1997 Amendment
Amendment by section 1601(e) of
Effective Date of 1996 Amendment
Amendment by
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
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
[§956A. Repealed. Pub. L. 104–188, title I, §1501(a)(2), Aug. 20, 1996, 110 Stat. 1825 ]
Section, added
Statutory Notes and Related Subsidiaries
Effective Date of Repeal
Repeal by
§957. Controlled foreign corporations; United States persons
(a) General rule
For purposes of this title, 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 not described in section 953(e)(2) 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 active conduct of a 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 the active conduct of a trade or business within a possession shall be made under regulations prescribed by the Secretary.
(Added
Editorial Notes
Amendments
2018—Subsec. (b).
2017—Subsec. (a).
2004—Subsec. (c).
Subsec. (c)(2)(B).
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)
Statutory Notes and Related Subsidiaries
Effective Date of 2017 Amendment
Amendment by
Effective Date of 2004 Amendment
Amendment by
Effective Date of 1986 Amendment
Amendment by section 1221(b)(3)(C) of
"(1)
"(2)
"(3)
"(A) who is a beneficiary of a trust which was established on December 7, 1979, under the laws of a foreign jurisdiction, and
"(B) who was not a citizen or resident of the United States on the date the trust was established,
amounts which are included in the gross income of such beneficiary under section 951(a) of the Internal Revenue Code of 1986 with respect to stock held by the trust (and treated as distributed to the trust) shall be treated as the first amounts which are distributed by the trust to such beneficiary and as amounts to which section 959(a) of such Code applies."
"(1)
"(2)
Amendment by section 1273(a) of
§958. Rules for determining stock ownership
(a) Direct and indirect ownership
(1) General rule
For purposes of this subpart (other than section 960), 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(c)(2), 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(c)(2), 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).
Paragraph (1) shall not apply for purposes of section 956(c)(2) to treat stock of a domestic corporation as not owned by a United States shareholder.
(Added
Editorial Notes
Amendments
2017—Subsec. (a)(1).
Subsec. (b).
Subsec. (b)(4).
1996—Subsec. (a)(1).
Subsec. (b).
1976—Subsec. (b).
1964—Subsec. (b).
Statutory Notes and Related Subsidiaries
Effective Date of 2017 Amendment
"(1) the last taxable year of foreign corporations beginning before January 1, 2018, and each subsequent taxable year of such foreign corporations, and
"(2) taxable years of United States shareholders in which or with which such taxable years of foreign corporations end."
Amendment by section 14301(c)(31) of
Effective Date of 1996 Amendment
Amendment by section 1703(i)(4) of
Effective Date of 1976 Amendment
Amendment by
Effective Date of 1964 Amendment
Amendment by
§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, or
(2) such amounts would, but for this subsection, be included under section 951(a)(1)(B) 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 paragraph (2) 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.
References in this subsection to section 951(a)(1)(C) and subsection (a)(3) shall be treated as references to such provisions as in effect on the day before the date of the enactment of the Small Business Job Protection Act of 1996.
(d) Distributions excluded from gross income not to be treated as dividends
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(c), 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, 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).
(2) Treatment of distributions
In applying this section, actual distributions shall be taken into account before amounts that would be included under section 951(a)(1)(B) (determined without regard to this section).
(Added
Editorial Notes
References in Text
The date of the enactment of the Small Business Job Protection Act of 1996, referred to in subsec. (c), is the date of enactment of
Amendments
2017—Subsec. (d).
Subsec. (e).
1996—Subsec. (a).
Subsec. (c).
Subsec. (f)(1).
"(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)."
Subsec. (f)(2).
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).
Statutory Notes and Related Subsidiaries
Effective Date of 2017 Amendment
Amendment by
Effective Date of 1996 Amendment
Amendment by
Effective Date of 1993 Amendment
Amendment by
Effective Date of 1988 Amendment
Effective Date of 1986 Amendment
Effective Date of 1984 Amendment
"(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."
§960. Deemed paid credit for subpart F inclusions
(a) In general
For purposes of subpart A of this part, if there is included in the gross income of a domestic corporation any item of income under section 951(a)(1) with respect to any controlled foreign corporation with respect to which such domestic corporation is a United States shareholder, such domestic corporation shall be deemed to have paid so much of such foreign corporation's foreign income taxes as are properly attributable to such item of income.
(b) Special rules for distributions from previously taxed earnings and profits
For purposes of subpart A of this part—
(1) In general
If any portion of a distribution from a controlled foreign corporation to a domestic corporation which is a United States shareholder with respect to such controlled foreign corporation is excluded from gross income under section 959(a), such domestic corporation shall be deemed to have paid so much of such foreign corporation's foreign income taxes as—
(A) are properly attributable to such portion, and
(B) have not been deemed to have to 1 been paid by such domestic corporation under this section for the taxable year or any prior taxable year.
(2) Tiered controlled foreign corporations
If section 959(b) applies to any portion of a distribution from a controlled foreign corporation to another controlled foreign corporation, such controlled foreign corporation shall be deemed to have paid so much of such other controlled foreign corporation's foreign income taxes as—
(A) are properly attributable to such portion, and
(B) have not been deemed to have been paid by a domestic corporation under this section for the taxable year or any prior taxable year.
(c) 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 2 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.
(d) Deemed paid credit for taxes properly attributable to tested income
(1) In general
For purposes of subpart A of this part, if any amount is includible in the gross income of a domestic corporation under section 951A, such domestic corporation shall be deemed to have paid foreign income taxes equal to 80 percent of the product of—
(A) such domestic corporation's inclusion percentage, multiplied by
(B) the aggregate tested foreign income taxes paid or accrued by controlled foreign corporations.
(2) Inclusion percentage
For purposes of paragraph (1), the term "inclusion percentage" means, with respect to any domestic corporation, the ratio (expressed as a percentage) of—
(A) such corporation's global intangible low-taxed income (as defined in section 951A(b)), divided by
(B) the aggregate amount described in section 951A(c)(1)(A) with respect to such corporation.
(3) Tested foreign income taxes
For purposes of paragraph (1), the term "tested foreign income taxes" means, with respect to any domestic corporation which is a United States shareholder of a controlled foreign corporation, the foreign income taxes paid or accrued by such foreign corporation which are properly attributable to the tested income of such foreign corporation taken into account by such domestic corporation under section 951A.
(e) Foreign income taxes
The term "foreign income taxes" means any income, war profits, or excess profits taxes paid or accrued to any foreign country or possession of the United States.
(f) Regulations
The Secretary shall prescribe such regulations or other guidance as may be necessary or appropriate to carry out the provisions of this section.
(Added
Editorial Notes
References in Text
The date of the enactment of the Revenue Reconciliation Act of 1993, referred to in subsec. (c)(3), is the date of enactment of
Amendments
2017—
Subsecs. (a) to (c).
Subsec. (d).
Subsecs. (e), (f).
2010—Subsec. (c).
1997—Subsec. (a)(1).
"(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."
1993—Subsec. (b).
1986—Subsec. (a)(1).
1976—Subsec. (a)(1).
Subsec. (b).
Statutory Notes and Related Subsidiaries
Effective Date of 2017 Amendment
Amendment by section 14201(b)(1) of
Amendment by section 14301(b) of
Effective Date of 2010 Amendment
Effective Date of 1997 Amendment
"(1)
"(2)
Effective Date of 1993 Amendment
Effective Date of 1986 Amendment
Effective Date of 1976 Amendment
Amendment by section 1031(b)(1) 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 [former] 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."
Increase in Earnings and Profits of Foreign Corporations Under Section 1023(e)(3)(C) of Pub. L. 99–514
2 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.
(c) Basis adjustments in stock held by foreign corporations
Under regulations prescribed by the Secretary, if a United States shareholder is treated under section 958(a)(2) as owning stock in a controlled foreign corporation which is owned by another controlled foreign corporation, then adjustments similar to the adjustments provided by subsections (a) and (b) shall be made to—
(1) the basis of such stock, and
(2) the basis of stock in any other controlled foreign corporation by reason of which the United States shareholder is considered under section 958(a)(2) as owning the stock described in paragraph (1),
but only for the purposes of determining the amount included under section 951 in the gross income of such United States shareholder (or any other United States shareholder who acquires from any person any portion of the interest of such United States shareholder by reason of which such shareholder was treated as owning such stock, 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). The preceding sentence shall not apply with respect to any stock to which a basis adjustment applies under subsection (a) or (b).
(d) Basis in specified 10-percent owned foreign corporation reduced by nontaxed portion of dividend for purposes of determining loss
If a domestic corporation received a dividend from a specified 10-percent owned foreign corporation (as defined in section 245A) in any taxable year, solely for purposes of determining loss on any disposition of stock of such foreign corporation in such taxable year or any subsequent taxable year, the basis of such domestic corporation in such stock shall be reduced (but not below zero) by the amount of any deduction allowable to such domestic corporation under section 245A with respect to such stock except to the extent such basis was reduced under section 1059 by reason of a dividend for which such a deduction was allowable.
(Added
Editorial Notes
Amendments
2017—Subsec. (d).
2005—Subsec. (c).
1997—Subsec. (c).
1976—Subsecs. (a), (b)(1).
Statutory Notes and Related Subsidiaries
Effective Date of 2017 Amendment
Effective Date of 2005 Amendment
Effective Date of 1997 Amendment
Dual Resident Companies
Basis adjustments of this section not applicable in certain circumstances involving dual resident companies, see section 6126 of
§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 section 11 if such amounts were received by a domestic corporation, and
(2) for purposes of applying the provisions of section 960 1 (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
Editorial Notes
References in Text
Section 960, referred to in subsec. (a)(2), was amended extensively by
Amendments
2017—Subsec. (a)(1).
1988—Subsec. (a)(1).
1978—Subsec. (c).
1976—Subsecs. (a), (b).
1975—Subsec. (c).
Statutory Notes and Related Subsidiaries
Effective Date of 2017 Amendment
Amendment by
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
1 See References in Text note below.
[§963. Repealed. Pub. L. 94–12, title VI, §602(a)(1), Mar. 29, 1975, 89 Stat. 58 ]
Section, added
Statutory Notes and Related Subsidiaries
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 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.
(e) Gain on certain stock sales by controlled foreign corporations treated as dividends
(1) In general
If a controlled foreign corporation sells or exchanges stock in any other foreign corporation, gain recognized on such sale or exchange shall be included in the gross income of such controlled foreign corporation as a dividend to the same extent that it would have been so included under section 1248(a) if such controlled foreign corporation were a United States person. For purposes of determining the amount which would have been so includible, the determination of whether such other foreign corporation was a controlled foreign corporation shall be made without regard to the preceding sentence.
(2) Same country exception not applicable
Clause (i) of section 954(c)(3)(A) shall not apply to any amount treated as a dividend by reason of paragraph (1).
(3) Clarification of deemed sales
For purposes of this subsection, a controlled foreign corporation shall be treated as having sold or exchanged any stock if, under any provision of this subtitle, such controlled foreign corporation is treated as having gain from the sale or exchange of such stock.
(4) Coordination with dividends received deduction
(A) In general
If, for any taxable year of a controlled foreign corporation beginning after December 31, 2017, any amount is treated as a dividend under paragraph (1) by reason of a sale or exchange by the controlled foreign corporation of stock in another foreign corporation held for 1 year or more, then, notwithstanding any other provision of this title—
(i) the foreign-source portion of such dividend shall be treated for purposes of section 951(a)(1)(A) as subpart F income of the selling controlled foreign corporation for such taxable year,
(ii) a United States shareholder with respect to the selling controlled foreign corporation shall include in gross income for the taxable year of the shareholder with or within which such taxable year of the controlled foreign corporation ends an amount equal to the shareholder's pro rata share (determined in the same manner as under section 951(a)(2)) of the amount treated as subpart F income under clause (i), and
(iii) the deduction under section 245A(a) shall be allowable to the United States shareholder with respect to the subpart F income included in gross income under clause (ii) in the same manner as if such subpart F income were a dividend received by the shareholder from the selling controlled foreign corporation.
(B) Application of basis or similar adjustment
For purposes of this title, in the case of a sale or exchange by a controlled foreign corporation of stock in another foreign corporation in a taxable year of the selling controlled foreign corporation beginning after December 31, 2017, rules similar to the rules of section 961(d) shall apply.
(C) Foreign-source portion
For purposes of this paragraph, the foreign-source portion of any amount treated as a dividend under paragraph (1) shall be determined in the same manner as under section 245A(c).
(Added
Editorial Notes
References in Text
The Foreign Corrupt Practices Act of 1977, referred to in subsec. (a), is title I of
Amendments
2017—Subsec. (b).
Subsec. (e)(4).
1997—Subsec. (e).
1988—Subsec. (d).
1982—Subsec. (a).
1981—Subsec. (a).
1976—Subsec. (a).
Subsecs. (b), (c)(1), (2).
1969—Subsec. (a).
Statutory Notes and Related Subsidiaries
Effective Date of 2017 Amendment
Amendment by section 14212(b)(4) of
Effective Date of 1997 Amendment
Effective Date of 1988 Amendment
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
§965. Treatment of deferred foreign income upon transition to participation exemption system of taxation
(a) Treatment of deferred foreign income as subpart F income
In the case of the last taxable year of a deferred foreign income corporation which begins before January 1, 2018, the subpart F income of such foreign corporation (as otherwise determined for such taxable year under section 952) shall be increased by the greater of—
(1) the accumulated post-1986 deferred foreign income of such corporation determined as of November 2, 2017, or
(2) the accumulated post-1986 deferred foreign income of such corporation determined as of December 31, 2017.
(b) Reduction in amounts included in gross income of United States shareholders of specified foreign corporations with deficits in earnings and profits
(1) In general
In the case of a taxpayer which is a United States shareholder with respect to at least one deferred foreign income corporation and at least one E&P deficit foreign corporation, the amount which would (but for this subsection) be taken into account under section 951(a)(1) by reason of subsection (a) as such United States shareholder's pro rata share of the subpart F income of each deferred foreign income corporation shall be reduced by the amount of such United States shareholder's aggregate foreign E&P deficit which is allocated under paragraph (2) to such deferred foreign income corporation.
(2) Allocation of aggregate foreign E&P deficit
The aggregate foreign E&P deficit of any United States shareholder shall be allocated among the deferred foreign income corporations of such United States shareholder in an amount which bears the same proportion to such aggregate as—
(A) such United States shareholder's pro rata share of the accumulated post-1986 deferred foreign income of each such deferred foreign income corporation, bears to
(B) the aggregate of such United States shareholder's pro rata share of the accumulated post-1986 deferred foreign income of all deferred foreign income corporations of such United States shareholder.
(3) Definitions related to E&P deficits
For purposes of this subsection—
(A) Aggregate foreign E&P deficit
(i) In general
The term "aggregate foreign E&P deficit" means, with respect to any United States shareholder, the lesser of—
(I) the aggregate of such shareholder's pro rata shares of the specified E&P deficits of the E&P deficit foreign corporations of such shareholder, or
(II) the amount determined under paragraph (2)(B).
(ii) Allocation of deficit
If the amount described in clause (i)(II) is less than the amount described in clause (i)(I), then the shareholder shall designate, in such form and manner as the Secretary determines—
(I) the amount of the specified E&P deficit which is to be taken into account for each E&P deficit corporation with respect to the taxpayer, and
(II) in the case of an E&P deficit corporation which has a qualified deficit (as defined in section 952), the portion (if any) of the deficit taken into account under subclause (I) which is attributable to a qualified deficit, including the qualified activities to which such portion is attributable.
(B) E&P deficit foreign corporation
The term "E&P deficit foreign corporation" means, with respect to any taxpayer, any specified foreign corporation with respect to which such taxpayer is a United States shareholder, if, as of November 2, 2017—
(i) such specified foreign corporation has a deficit in post-1986 earnings and profits,
(ii) such corporation was a specified foreign corporation, and
(iii) such taxpayer was a United States shareholder of such corporation.
(C) Specified E&P deficit
The term "specified E&P deficit" means, with respect to any E&P deficit foreign corporation, the amount of the deficit referred to in subparagraph (B).
(4) Treatment of earnings and profits in future years
(A) Reduced earnings and profits treated as previously taxed income when distributed
For purposes of applying section 959 in any taxable year beginning with the taxable year described in subsection (a), with respect to any United States shareholder of a deferred foreign income corporation, an amount equal to such shareholder's reduction under paragraph (1) which is allocated to such deferred foreign income corporation under this subsection shall be treated as an amount which was included in the gross income of such United States shareholder under section 951(a).
(B) E&P deficits
For purposes of this title, with respect to any taxable year beginning with the taxable year described in subsection (a), a United States shareholder's pro rata share of the earnings and profits of any E&P deficit foreign corporation under this subsection shall be increased by the amount of the specified E&P deficit of such corporation taken into account by such shareholder under paragraph (1), and, for purposes of section 952, such increase shall be attributable to the same activity to which the deficit so taken into account was attributable.
(5) Netting among United States shareholders in same affiliated group
(A) In general
In the case of any affiliated group which includes at least one E&P net surplus shareholder and one E&P net deficit shareholder, the amount which would (but for this paragraph) be taken into account under section 951(a)(1) by reason of subsection (a) by each such E&P net surplus shareholder shall be reduced (but not below zero) by such shareholder's applicable share of the affiliated group's aggregate unused E&P deficit.
(B) E&P net surplus shareholder
For purposes of this paragraph, the term "E&P net surplus shareholder" means any United States shareholder which would (determined without regard to this paragraph) take into account an amount greater than zero under section 951(a)(1) by reason of subsection (a).
(C) E&P net deficit shareholder
For purposes of this paragraph, the term "E&P net deficit shareholder" means any United States shareholder if—
(i) the aggregate foreign E&P deficit with respect to such shareholder (as defined in paragraph (3)(A) without regard to clause (i)(II) thereof), exceeds
(ii) the amount which would (but for this subsection) be taken into account by such shareholder under section 951(a)(1) by reason of subsection (a).
(D) Aggregate unused E&P deficit
For purposes of this paragraph—
(i) In general
The term "aggregate unused E&P deficit" means, with respect to any affiliated group, the lesser of—
(I) the sum of the excesses described in subparagraph (C), determined with respect to each E&P net deficit shareholder in such group, or
(II) the amount determined under subparagraph (E)(ii).
(ii) Reduction with respect to E&P net deficit shareholders which are not wholly owned by the affiliated group
If the group ownership percentage of any E&P net deficit shareholder is less than 100 percent, the amount of the excess described in subparagraph (C) which is taken into account under clause (i)(I) with respect to such E&P net deficit shareholder shall be such group ownership percentage of such amount.
(E) Applicable share
For purposes of this paragraph, the term "applicable share" means, with respect to any E&P net surplus shareholder in any affiliated group, the amount which bears the same proportion to such group's aggregate unused E&P deficit as—
(i) the product of—
(I) such shareholder's group ownership percentage, multiplied by
(II) the amount which would (but for this paragraph) be taken into account under section 951(a)(1) by reason of subsection (a) by such shareholder, bears to
(ii) the aggregate amount determined under clause (i) with respect to all E&P net surplus shareholders in such group.
(F) Group ownership percentage
For purposes of this paragraph, the term "group ownership percentage" means, with respect to any United States shareholder in any affiliated group, the percentage of the value of the stock of such United States shareholder which is held by other includible corporations in such affiliated group. Notwithstanding the preceding sentence, the group ownership percentage of the common parent of the affiliated group is 100 percent. Any term used in this subparagraph which is also used in section 1504 shall have the same meaning as when used in such section.
(c) Application of participation exemption to included income
(1) In general
In the case of a United States shareholder of a deferred foreign income corporation, there shall be allowed as a deduction for the taxable year in which an amount is included in the gross income of such United States shareholder under section 951(a)(1) by reason of this section an amount equal to the sum of—
(A) the United States shareholder's 8 percent rate equivalent percentage of the excess (if any) of—
(i) the amount so included as gross income, over
(ii) the amount of such United States shareholder's aggregate foreign cash position, plus
(B) the United States shareholder's 15.5 percent rate equivalent percentage of so much of the amount described in subparagraph (A)(ii) as does not exceed the amount described in subparagraph (A)(i).
(2) 8 and 15.5 percent rate equivalent percentages
For purposes of this subsection—
(A) 8 percent rate equivalent percentage
The term "8 percent rate equivalent percentage" means, with respect to any United States shareholder for any taxable year, the percentage which would result in the amount to which such percentage applies being subject to a 8 percent rate of tax determined by only taking into account a deduction equal to such percentage of such amount and the highest rate of tax specified in section 11 for such taxable year. In the case of any taxable year of a United States shareholder to which section 15 applies, the highest rate of tax under section 11 before the effective date of the change in rates and the highest rate of tax under section 11 after the effective date of such change shall each be taken into account under the preceding sentence in the same proportions as the portion of such taxable year which is before and after such effective date, respectively.
(B) 15.5 percent rate equivalent percentage
The term "15.5 percent rate equivalent percentage" means, with respect to any United States shareholder for any taxable year, the percentage determined under subparagraph (A) applied by substituting "15.5 percent rate of tax" for "8 percent rate of tax".
(3) Aggregate foreign cash position
For purposes of this subsection—
(A) In general
The term "aggregate foreign cash position" means, with respect to any United States shareholder, the greater of—
(i) the aggregate of such United States shareholder's pro rata share of the cash position of each specified foreign corporation of such United States shareholder determined as of the close of the last taxable year of such specified foreign corporation which begins before January 1, 2018, or
(ii) one half of the sum of—
(I) the aggregate described in clause (i) determined as of the close of the last taxable year of each such specified foreign corporation which ends before November 2, 2017, plus
(II) the aggregate described in clause (i) determined as of the close of the taxable year of each such specified foreign corporation which precedes the taxable year referred to in subclause (I).
(B) Cash position
For purposes of this paragraph, the cash position of any specified foreign corporation is the sum of—
(i) cash held by such foreign corporation,
(ii) the net accounts receivable of such foreign corporation, plus
(iii) the fair market value of the following assets held by such corporation:
(I) Personal property which is of a type that is actively traded and for which there is an established financial market.
(II) Commercial paper, certificates of deposit, the securities of the Federal government and of any State or foreign government.
(III) Any foreign currency.
(IV) Any obligation with a term of less than one year.
(V) Any asset which the Secretary identifies as being economically equivalent to any asset described in this subparagraph.
(C) Net accounts receivable
For purposes of this paragraph, the term "net accounts receivable" means, with respect to any specified foreign corporation, the excess (if any) of—
(i) such corporation's accounts receivable, over
(ii) such corporation's accounts payable (determined consistent with the rules of section 461).
(D) Prevention of double counting
Cash positions of a specified foreign corporation described in clause (ii), (iii)(I), or (iii)(IV) of subparagraph (B) shall not be taken into account by a United States shareholder under subparagraph (A) to the extent that such United States shareholder demonstrates to the satisfaction of the Secretary that such amount is so taken into account by such United States shareholder with respect to another specified foreign corporation.
(E) Cash positions of certain non-corporate entities taken into account
An entity (other than a corporation) shall be treated as a specified foreign corporation of a United States shareholder for purposes of determining such United States shareholder's aggregate foreign cash position if any interest in such entity is held by a specified foreign corporation of such United States shareholder (determined after application of this subparagraph) and such entity would be a specified foreign corporation of such United States shareholder if such entity were a foreign corporation.
(F) Anti-abuse
If the Secretary determines that a principal purpose of any transaction was to reduce the aggregate foreign cash position taken into account under this subsection, such transaction shall be disregarded for purposes of this subsection.
(d) Deferred foreign income corporation; accumulated post-1986 deferred foreign income
For purposes of this section—
(1) Deferred foreign income corporation
The term "deferred foreign income corporation" means, with respect to any United States shareholder, any specified foreign corporation of such United States shareholder which has accumulated post-1986 deferred foreign income (as of the date referred to in paragraph (1) or (2) of subsection (a)) greater than zero.
(2) Accumulated post-1986 deferred foreign income
The term "accumulated post-1986 deferred foreign income" means the post-1986 earnings and profits except to the extent such earnings—
(A) are attributable to income of the specified foreign corporation which is effectively connected with the conduct of a trade or business within the United States and subject to tax under this chapter, or
(B) in the case of a controlled foreign corporation, if distributed, would be excluded from the gross income of a United States shareholder under section 959.
To the extent provided in regulations or other guidance prescribed by the Secretary, in the case of any controlled foreign corporation which has shareholders which are not United States shareholders, accumulated post-1986 deferred foreign income shall be appropriately reduced by amounts which would be described in subparagraph (B) if such shareholders were United States shareholders.
(3) Post-1986 earnings and profits
The term "post-1986 earnings and profits" means the earnings and profits of the foreign corporation (computed in accordance with sections 964(a) and 986, and by only taking into account periods when the foreign corporation was a specified foreign corporation) accumulated in taxable years beginning after December 31, 1986, and determined—
(A) as of the date referred to in paragraph (1) or (2) of subsection (a), whichever is applicable with respect to such foreign corporation, and
(B) without diminution by reason of dividends distributed during the taxable year described in subsection (a) other than dividends distributed to another specified foreign corporation.
(e) Specified foreign corporation
(1) In general
For purposes of this section, the term "specified foreign corporation" means—
(A) any controlled foreign corporation, and
(B) any foreign corporation with respect to which one or more domestic corporations is a United States shareholder.
(2) Application to certain foreign corporations
For purposes of sections 951 and 961, a foreign corporation described in paragraph (1)(B) shall be treated as a controlled foreign corporation solely for purposes of taking into account the subpart F income of such corporation under subsection (a) (and for purposes of applying subsection (f)).
(3) Exclusion of passive foreign investment companies
Such term shall not include any corporation which is a passive foreign investment company (as defined in section 1297) with respect to the shareholder and which is not a controlled foreign corporation.
(f) Determinations of pro rata share
(1) In general
For purposes of this section, the determination of any United States shareholder's pro rata share of any amount with respect to any specified foreign corporation shall be determined under rules similar to the rules of section 951(a)(2) by treating such amount in the same manner as subpart F income (and by treating such specified foreign corporation as a controlled foreign corporation).
(2) Special rules
The portion which is included in the income of a United States shareholder under section 951(a)(1) by reason of subsection (a) which is equal to the deduction allowed under subsection (c) by reason of such inclusion—
(A) shall be treated as income exempt from tax for purposes of sections 705(a)(1)(B) and 1367(a)(1)(A), and
(B) shall not be treated as income exempt from tax for purposes of determining whether an adjustment shall be made to an accumulated adjustment account under section 1368(e)(1)(A).
(g) Disallowance of foreign tax credit, etc.
(1) In general
No credit shall be allowed under section 901 for the applicable percentage of any taxes paid or accrued (or treated as paid or accrued) with respect to any amount for which a deduction is allowed under this section.
(2) Applicable percentage
For purposes of this subsection, the term "applicable percentage" means the amount (expressed as a percentage) equal to the sum of—
(A) 0.771 multiplied by the ratio of—
(i) the excess to which subsection (c)(1)(A) applies, divided by
(ii) the sum of such excess plus the amount to which subsection (c)(1)(B) applies, plus
(B) 0.557 multiplied by the ratio of—
(i) the amount to which subsection (c)(1)(B) applies, divided by
(ii) the sum described in subparagraph (A)(ii).
(3) Denial of deduction
No deduction shall be allowed under this chapter for any tax for which credit is not allowable under section 901 by reason of paragraph (1) (determined by treating the taxpayer as having elected the benefits of subpart A of part III of subchapter N).
(4) Coordination with section 78
With respect to the taxes treated as paid or accrued by a domestic corporation with respect to amounts which are includible in gross income of such domestic corporation by reason of this section, section 78 shall apply only to so much of such taxes as bears the same proportion to the amount of such taxes as—
(A) the excess of—
(i) the amounts which are includible in gross income of such domestic corporation by reason of this section, over
(ii) the deduction allowable under subsection (c) with respect to such amounts, bears to
(B) such amounts.
(h) Election to pay liability in installments
(1) In general
In the case of a United States shareholder of a deferred foreign income corporation, such United States shareholder may elect to pay the net tax liability under this section in 8 installments of the following amounts:
(A) 8 percent of the net tax liability in the case of each of the first 5 of such installments,
(B) 15 percent of the net tax liability in the case of the 6th such installment,
(C) 20 percent of the net tax liability in the case of the 7th such installment, and
(D) 25 percent of the net tax liability in the case of the 8th such installment.
(2) Date for payment of installments
If an election is made under paragraph (1), the first installment shall be paid on the due date (determined without regard to any extension of time for filing the return) for the return of tax for the taxable year described in subsection (a) and each succeeding installment shall be paid on the due date (as so determined) for the return of tax for the taxable year following the taxable year with respect to which the preceding installment was made.
(3) Acceleration of payment
If there is an addition to tax for failure to timely pay any installment required under this subsection, a liquidation or sale of substantially all the assets of the taxpayer (including in a title 11 or similar case), a cessation of business by the taxpayer, or any similar circumstance, then the unpaid portion of all remaining installments shall be due on the date of such event (or in the case of a title 11 or similar case, the day before the petition is filed). The preceding sentence shall not apply to the sale of substantially all the assets of a taxpayer to a buyer if such buyer enters into an agreement with the Secretary under which such buyer is liable for the remaining installments due under this subsection in the same manner as if such buyer were the taxpayer.
(4) Proration of deficiency to installments
If an election is made under paragraph (1) to pay the net tax liability under this section in installments and a deficiency has been assessed with respect to such net tax liability, the deficiency shall be prorated to the installments payable under paragraph (1). The part of the deficiency so prorated to any installment the date for payment of which has not arrived shall be collected at the same time as, and as a part of, such installment. The part of the deficiency so prorated to any installment the date for payment of which has arrived shall be paid upon notice and demand from the Secretary. This subsection shall not apply if the deficiency is due to negligence, to intentional disregard of rules and regulations, or to fraud with intent to evade tax.
(5) Election
Any election under paragraph (1) shall be made not later than the due date for the return of tax for the taxable year described in subsection (a) and shall be made in such manner as the Secretary shall provide.
(6) Net tax liability under this section
For purposes of this subsection—
(A) In general
The net tax liability under this section with respect to any United States shareholder is the excess (if any) of—
(i) such taxpayer's net income tax for the taxable year in which an amount is included in the gross income of such United States shareholder under section 951(a)(1) by reason of this section, over
(ii) such taxpayer's net income tax for such taxable year determined—
(I) without regard to this section, and
(II) without regard to any income or deduction properly attributable to a dividend received by such United States shareholder from any deferred foreign income corporation.
(B) Net income tax
The term "net income tax" means the regular tax liability reduced by the credits allowed under subparts A, B, and D of part IV of subchapter A.
(i) Special rules for S corporation shareholders
(1) In general
In the case of any S corporation which is a United States shareholder of a deferred foreign income corporation, each shareholder of such S corporation may elect to defer payment of such shareholder's net tax liability under this section with respect to such S corporation until the shareholder's taxable year which includes the triggering event with respect to such liability. Any net tax liability payment of which is deferred under the preceding sentence shall be assessed on the return of tax as an addition to tax in the shareholder's taxable year which includes such triggering event.
(2) Triggering event
(A) In general
In the case of any shareholder's net tax liability under this section with respect to any S corporation, the triggering event with respect to such liability is whichever of the following occurs first:
(i) Such corporation ceases to be an S corporation (determined as of the first day of the first taxable year that such corporation is not an S corporation).
(ii) A liquidation or sale of substantially all the assets of such S corporation (including in a title 11 or similar case), a cessation of business by such S corporation, such S corporation ceases to exist, or any similar circumstance.
(iii) A transfer of any share of stock in such S corporation by the taxpayer (including by reason of death, or otherwise).
(B) Partial transfers of stock
In the case of a transfer of less than all of the taxpayer's shares of stock in the S corporation, such transfer shall only be a triggering event with respect to so much of the taxpayer's net tax liability under this section with respect to such S corporation as is properly allocable to such stock.
(C) Transfer of liability
A transfer described in clause (iii) of subparagraph (A) shall not be treated as a triggering event if the transferee enters into an agreement with the Secretary under which such transferee is liable for net tax liability with respect to such stock in the same manner as if such transferee were the taxpayer.
(3) Net tax liability
A shareholder's net tax liability under this section with respect to any S corporation is the net tax liability under this section which would be determined under subsection (h)(6) if the only subpart F income taken into account by such shareholder by reason of this section were allocations from such S corporation.
(4) Election to pay deferred liability in installments
In the case of a taxpayer which elects to defer payment under paragraph (1)—
(A) subsection (h) shall be applied separately with respect to the liability to which such election applies,
(B) an election under subsection (h) with respect to such liability shall be treated as timely made if made not later than the due date for the return of tax for the taxable year in which the triggering event with respect to such liability occurs,
(C) the first installment under subsection (h) with respect to such liability shall be paid not later than such due date (but determined without regard to any extension of time for filing the return), and
(D) if the triggering event with respect to any net tax liability is described in paragraph (2)(A)(ii), an election under subsection (h) with respect to such liability may be made only with the consent of the Secretary.
(5) Joint and several liability of S corporation
If any shareholder of an S corporation elects to defer payment under paragraph (1), such S corporation shall be jointly and severally liable for such payment and any penalty, addition to tax, or additional amount attributable thereto.
(6) Extension of limitation on collection
Any limitation on the time period for the collection of a liability deferred under this subsection shall not be treated as beginning before the date of the triggering event with respect to such liability.
(7) Annual reporting of net tax liability
(A) In general
Any shareholder of an S corporation which makes an election under paragraph (1) shall report the amount of such shareholder's deferred net tax liability on such shareholder's return of tax for the taxable year for which such election is made and on the return of tax for each taxable year thereafter until such amount has been fully assessed on such returns.
(B) Deferred net tax liability
For purposes of this paragraph, the term "deferred net tax liability" means, with respect to any taxable year, the amount of net tax liability payment of which has been deferred under paragraph (1) and which has not been assessed on a return of tax for any prior taxable year.
(C) Failure to report
In the case of any failure to report any amount required to be reported under subparagraph (A) with respect to any taxable year before the due date for the return of tax for such taxable year, there shall be assessed on such return as an addition to tax 5 percent of such amount.
(8) Election
Any election under paragraph (1)—
(A) shall be made by the shareholder of the S corporation not later than the due date for such shareholder's return of tax for the taxable year which includes the close of the taxable year of such S corporation in which the amount described in subsection (a) is taken into account, and
(B) shall be made in such manner as the Secretary shall provide.
(j) Reporting by S corporation
Each S corporation which is a United States shareholder of a specified foreign corporation shall report in its return of tax under section 6037(a) the amount includible in its gross income for such taxable year by reason of this section and the amount of the deduction allowable by subsection (c). Any copy provided to a shareholder under section 6037(b) shall include a statement of such shareholder's pro rata share of such amounts.
(k) Extension of limitation on assessment
Notwithstanding section 6501, the limitation on the time period for the assessment of the net tax liability under this section (as defined in subsection (h)(6)) shall not expire before the date that is 6 years after the return for the taxable year described in such subsection was filed.
(l) Recapture for expatriated entities
(1) In general
If a deduction is allowed under subsection (c) to a United States shareholder and such shareholder first becomes an expatriated entity at any time during the 10-year period beginning on the date of the enactment of the Tax Cuts and Jobs Act 1 (with respect to a surrogate foreign corporation which first becomes a surrogate foreign corporation during such period), then—
(A) the tax imposed by this chapter shall be increased for the first taxable year in which such taxpayer becomes an expatriated entity by an amount equal to 35 percent of the amount of the deduction allowed under subsection (c), and
(B) no credits shall be allowed against the increase in tax under subparagraph (A).
(2) Expatriated entity
For purposes of this subsection, the term "expatriated entity" has the same meaning given such term under section 7874(a)(2), except that such term shall not include an entity if the surrogate foreign corporation with respect to the entity is treated as a domestic corporation under section 7874(b).
(3) Surrogate foreign corporation
For purposes of this subsection, the term "surrogate foreign corporation" has the meaning given such term in section 7874(a)(2)(B).
(m) Special rules for United States shareholders which are real estate investment trusts
(1) In general
If a real estate investment trust is a United States shareholder in 1 or more deferred foreign income corporations—
(A) any amount required to be taken into account under section 951(a)(1) by reason of this section shall not be taken into account as gross income of the real estate investment trust for purposes of applying paragraphs (2) and (3) of section 856(c) to any taxable year for which such amount is taken into account under section 951(a)(1), and
(B) if the real estate investment trust elects the application of this subparagraph, notwithstanding subsection (a), any amount required to be taken into account under section 951(a)(1) by reason of this section shall, in lieu of the taxable year in which it would otherwise be included in gross income (for purposes of the computation of real estate investment trust taxable income under section 857(b)), be included in gross income as follows:
(i) 8 percent of such amount in the case of each of the taxable years in the 5-taxable year period beginning with the taxable year in which such amount would otherwise be included.
(ii) 15 percent of such amount in the case of the 1st taxable year following such period.
(iii) 20 percent of such amount in the case of the 2nd taxable year following such period.
(iv) 25 percent of such amount in the case of the 3rd taxable year following such period.
(2) Rules for trusts electing deferred inclusion
(A) Election
Any election under paragraph (1)(B) shall be made not later than the due date for the first taxable year in the 5-taxable year period described in clause (i) of paragraph (1)(B) and shall be made in such manner as the Secretary shall provide.
(B) Special rules
If an election under paragraph (1)(B) is in effect with respect to any real estate investment trust, the following rules shall apply:
(i) Application of participation exemption
For purposes of subsection (c)(1)—
(I) the aggregate amount to which subparagraph (A) or (B) of subsection (c)(1) applies shall be determined without regard to the election,
(II) each such aggregate amount shall be allocated to each taxable year described in paragraph (1)(B) in the same proportion as the amount included in the gross income of such United States shareholder under section 951(a)(1) by reason of this section is allocated to each such taxable year.
(III)
(ii) Acceleration of inclusion
If there is a liquidation or sale of substantially all the assets of the real estate investment trust (including in a title 11 or similar case), a cessation of business by such trust, or any similar circumstance, then any amount not yet included in gross income under paragraph (1)(B) shall be included in gross income as of the day before the date of the event and the unpaid portion of any tax liability with respect to such inclusion shall be due on the date of such event (or in the case of a title 11 or similar case, the day before the petition is filed).
(n) Election not to apply net operating loss deduction
(1) In general
If a United States shareholder of a deferred foreign income corporation elects the application of this subsection for the taxable year described in subsection (a), then the amount described in paragraph (2) shall not be taken into account—
(A) in determining the amount of the net operating loss deduction under section 172 of such shareholder for such taxable year, or
(B) in determining the amount of taxable income for such taxable year which may be reduced by net operating loss carryovers or carrybacks to such taxable year under section 172.
(2) Amount described
The amount described in this paragraph is the sum of—
(A) the amount required to be taken into account under section 951(a)(1) by reason of this section (determined after the application of subsection (c)), plus
(B) in the case of a domestic corporation which chooses to have the benefits of subpart A of part III of subchapter N for the taxable year, the taxes deemed to be paid by such corporation under subsections (a) and (b) of section 960 for such taxable year with respect to the amount described in subparagraph (A) which are treated as a dividends 2 under section 78.
(3) Election
Any election under this subsection shall be made not later than the due date (including extensions) for filing the return of tax for the taxable year and shall be made in such manner as the Secretary shall prescribe.
(o) Regulations
The Secretary shall prescribe such regulations or other guidance as may be necessary or appropriate to carry out the provisions of this section, including—
(1) regulations or other guidance to provide appropriate basis adjustments, and
(2) regulations or other guidance to prevent the avoidance of the purposes of this section, including through a reduction in earnings and profits, through changes in entity classification or accounting methods, or otherwise.
(Added
Editorial Notes
References in Text
The date of the enactment of the Tax Cuts and Jobs Act, referred to in subsec. (l)(1), probably means the date of the enactment of title I of
Amendments
2017—
2005—Subsec. (a)(2)(B).
Subsec. (b)(2)(A).
Subsec. (b)(3).
Subsec. (c)(1).
"(A) which is certified on or before June 30, 2003, as being prepared in accordance with generally accepted accounting principles, and
"(B) which is used for the purposes of a statement or report—
"(i) to creditors,
"(ii) to shareholders, or
"(iii) for any other substantial nontax purpose.
In the case of a corporation required to file a financial statement with the Securities and Exchange Commission, such term means the most recent such statement filed on or before June 30, 2003."
Subsec. (d)(2).
Subsec. (d)(4).
Subsec. (e)(1).
Subsec. (f).
Statutory Notes and Related Subsidiaries
Effective Date of 2005 Amendment
Amendments by
Effective Date
Section applicable to taxable years ending on or after Oct. 22, 2004, see section 422(d) of
1 See References in Text note below.
Subpart G—Export Trade Corporations
Editorial Notes
Amendments
1976—
1962—
§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 properly 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) Repealed. Pub. L. 115–97, title I, §14212(b)(5), Dec. 22, 2017, 131 Stat. 2217 ]
(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
Editorial Notes
Amendments
2017—Subsec. (b).
"(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."
1976—Subsec. (a)(1).
Subsec. (b)(1).
Subsec. (c)(4).
Statutory Notes and Related Subsidiaries
Effective Date of 2017 Amendment
Amendment by
Effective Date of 1976 Amendment
Amendment by section 1901(b)(27)(A) of
Export Trade Corporations
"(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 [former] section 970(b); and
"(H) any foreign income taxes which would have been deemed under [former] 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 [former] section 951(a)(1)(A)(ii) and under the provision of [former] 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 costs 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
Editorial Notes
Amendments
1971—Subsec. (a)(3).
Statutory Notes and Related Subsidiaries
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
[§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
Editorial Notes
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
Editorial Notes
Amendments
1984—Subsec. (d)(3), (4).
Statutory Notes and Related Subsidiaries
Effective Date of 1984 Amendment
Amendment by
Effective Date
Subpart J—Foreign Currency Transactions
Editorial Notes
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
Statutory Notes and Related Subsidiaries
Effective Date
"(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 income taxes
(1) Translation of accrued taxes
(A) In general
For purposes of determining the amount of the foreign tax credit, in the case of a taxpayer who takes foreign income taxes into account when accrued, the amount of any foreign income taxes (and any adjustment thereto) shall be translated into dollars by using the average exchange rate for the taxable year to which such taxes relate.
(B) Exception for certain taxes
Subparagraph (A) shall not apply to any foreign income taxes—
(i) paid after the date 2 years after the close of the taxable year to which such taxes relate, or
(ii) paid before the beginning of the taxable year to which such taxes relate.
(C) Exception for inflationary currencies
Subparagraph (A) shall not apply to any foreign income taxes the liability for which is denominated in any inflationary currency (as determined under regulations).
(D) Elective exception for taxes paid other than in functional currency
(i) In general
At the election of the taxpayer, subparagraph (A) shall not apply to any foreign income taxes the liability for which is denominated in any currency other than in the taxpayer's functional currency.
(ii) Application to qualified business units
An election under this subparagraph may apply to foreign income taxes attributable to a qualified business unit in accordance with regulations prescribed by the Secretary.
(iii) Election
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.
(E) Special rule for regulated investment companies
In the case of a regulated investment company which takes into account income on an accrual basis, subparagraphs (A) through (D) shall not apply and foreign income taxes paid or accrued with respect to such income shall be translated into dollars using the exchange rate as of the date the income accrues.
(F) Cross reference
For adjustments where tax is not paid within 2 years, see section 905(c).
(2) Translation of taxes to which paragraph (1) does not apply
For purposes of determining the amount of the foreign tax credit, in the case of any foreign income taxes to which subparagraph (A) or (E) of paragraph (1) does not apply—
(A) such 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 such 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 the original payment of such foreign income taxes.
(3) Authority to permit use of average rates
To the extent prescribed in regulations, the average exchange rate for the period (specified in such regulations) during which the taxes or adjustment is paid may be used instead of the exchange rate as of the time of such payment.
(4) Foreign income taxes
For purposes of this subsection, the term "foreign income taxes" means any income, war profits, or excess profits taxes paid or accrued 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
Editorial Notes
Amendments
2004—Subsec. (a)(1)(D).
Subsec. (a)(1)(E).
Subsec. (a)(1)(F).
Subsec. (a)(2).
1997—Subsec. (a).
"(a)
"(1)
"(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)
Subsec. (a)(3), (4).
1988—
Statutory Notes and Related Subsidiaries
Effective Date of 2004 Amendment
Effective Date of 1997 Amendment
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
§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
Editorial Notes
Amendments
1988—Par. (4).
Statutory Notes and Related Subsidiaries
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 manage risk of currency fluctuations with respect to property which is held or to be held by the taxpayer, or
(ii) to manage 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
(1) In general
The preceding provisions of this section shall not apply to any section 988 transaction entered into by an individual which is a personal transaction.
(2) Exclusion for certain personal transactions
If—
(A) nonfunctional currency is disposed of by an individual in any transaction, and
(B) such transaction is a personal transaction,
no gain shall be recognized for purposes of this subtitle by reason of changes in exchange rates after such currency was acquired by such individual and before such disposition. The preceding sentence shall not apply if the gain which would otherwise be recognized on the transaction exceeds $200.
(3) Personal transactions
For purposes of this subsection, the term "personal transaction" means any transaction entered into by an individual, except that such term shall not include any transaction to the extent that expenses properly allocable to such transaction meet the requirements of—
(A) section 162 (other than traveling expenses described in subsection (a)(2) thereof), or
(B) section 212 (other than that part of section 212 dealing with expenses incurred in connection with taxes).
(Added
Editorial Notes
Amendments
1999—Subsec. (d)(2)(A)(i), (ii).
1997—Subsec. (e).
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).
Statutory Notes and Related Subsidiaries
Effective Date of 1999 Amendment
Amendment by
Effective Date of 1997 Amendment
Effective Date of 1993 Amendment
Amendment by
Effective Date of 1989 Amendment
Amendment by
Effective Date of 1988 Amendment
Amendment by section 1012(v)(3), (4), (6)–(8) 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
§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) or 1293(a), the 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 average exchange rate for the taxable year of such qualified business unit.
For purposes of the preceding sentence, any amount included in income under section 951(a)(1)(B) 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),
(5) providing for the appropriate treatment of related party transactions (including transactions between qualified business units of the same taxpayer), and
(6) setting forth procedures for determining the average exchange rate for any period.
(Added
Editorial Notes
References in Text
The enactment of this subpart, referred to in subsec. (c)(1), probably means the date of enactment of
Amendments
2004—Subsec. (b)(3).
1997—Subsec. (b)(3), (4).
Subsec. (c)(6).
1996—Subsec. (b).
1993—Subsec. (b).
1988—Subsec. (b).
Statutory Notes and Related Subsidiaries
Effective Date of 2004 Amendment
Amendment by
Effective Date of 1997 Amendment
Amendment by
Effective Date of 1996 Amendment
Amendment by
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
PART IV—DOMESTIC INTERNATIONAL SALES CORPORATIONS
Editorial Notes
Amendments
1971—
1 Section numbers editorially supplied.
Subpart A—Treatment of Qualifying Corporations
§991. Taxation of a domestic international sales corporation
For purposes of the taxes imposed by this subtitle upon a DISC (as defined in section 992(a)), a DISC shall not be subject to the taxes imposed by this subtitle.
(Added
Editorial Notes
Amendments
1998—
Statutory Notes and Related Subsidiaries
Effective Date of 1998 Amendment
Amendment by
Effective Date
Transition Rules for DISC's
"(1)
"(A)
"(B)
"(2)
"(A)
"(B)
"(C)
"(i) such amount shall not be included in the gross income of any member of such organization when distributed in the form of a patronage dividend or otherwise, and
"(ii) no deduction shall be allowed to such organization by reason of any such distribution.
"(3)
"(A)
"(B)
"(i) in 1984, and
"(ii) after the date in 1984 on which the taxable year of such shareholder begins.
"(C)
"(D)
"(4)
"(5)
"(6)
Special Rule for Export Trade Corporations
"(1)
"(A) makes an election under [former] section 927(f)(1) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] to be treated as a FSC, or
"(B) elects 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 subsection (b) [section 805(b)(2) and (4) of
"(2)
"(A) makes an election described in paragraph (1), and
"(B) transfers before January 1, 1986, any portion of its property to a FSC in a transaction described in section 351 or 368(a)(1),
then, subject to such rules as the Secretary of the Treasury or his delegate may prescribe based on principles similar to the principles of section 505(a) and (b) of the Revenue Act of 1971 [
"(3)
Submission of Annual Reports to Congress
§992. Requirements of a domestic international sales corporation
(a) Definition of "DISC" and "former DISC"
(1) DISC
For purposes of this title, the term "DISC" means, with respect to any taxable year, a corporation which is incorporated under the laws of any State and satisfies the following conditions for the taxable year:
(A) 95 percent or more of the gross receipts (as defined in section 993(f)) of such corporation consist of qualified export receipts (as defined in section 993(a)),
(B) the adjusted basis of the qualified export assets (as defined in section 993(b)) of the corporation at the close of the taxable year equals or exceeds 95 percent of the sum of the adjusted basis of all assets of the corporation at the close of the taxable year,
(C) such corporation does not have more than one class of stock and the par or stated value of its outstanding stock is at least $2,500 on each day of the taxable year, and
(D) the corporation has made an election pursuant to subsection (b) to be treated as a DISC and such election is in effect for the taxable year.
(2) Status as DISC after having filed a return as a DISC
The Secretary shall prescribe regulations setting forth the conditions under and the extent to which a corporation which has filed a return as a DISC for a taxable year shall be treated as a DISC for such taxable year for all purposes of this title, notwithstanding the fact that the corporation has failed to satisfy the conditions of paragraph (1).
(3) "Former DISC"
For purposes of this title, the term "former DISC" means, with respect to any taxable year, a corporation which is not a DISC for such year but was a DISC in a preceding taxable year and at the beginning of the taxable year has undistributed previously taxed income or accumulated DISC income.
(b) Election
(1) Election
(A) An election by a corporation to be treated as a DISC 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) Such election 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 part shall apply to such corporation for the taxable year of the corporation for which made and for all succeeding taxable years and shall apply to each person who at any time is a shareholder of such corporation for all periods on or after the first day of the first taxable year of the corporation for which the election is effective.
(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 DISC
If a corporation is not a DISC for each of any 5 consecutive taxable years of the corporation for which an election under this subsection is effective, the election shall be terminated and not be in effect for any taxable year of the corporation after such 5th year.
(c) Distributions to meet qualification requirements
(1) In general
Subject to the conditions provided by paragraph (2), a corporation which for a taxable year does not satisfy a condition specified in paragraph (1)(A) (relating to gross receipts) or (1)(B) (relating to assets) of subsection (a) shall nevertheless be deemed to satisfy such condition for such year if it makes a pro rata distribution of property after the close of the 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—
(A) if the condition of subsection (a)(1)(A) is not satisfied, the portion of such corporation's taxable income attributable to its gross receipts which are not qualified export receipts for such year,
(B) if the condition of subsection (a)(1)(B) is not satisfied, the fair market value of those assets which are not qualified export assets on the last day of such taxable year, or
(C) if neither of such conditions is satisfied, the sum of the amounts required by subparagraphs (A) and (B).
(2) Reasonable cause for failure
The conditions under paragraph (1) shall be deemed satisfied in the case of a distribution made under such paragraph—
(A) if the failure to meet the requirements of subsection (a)(1)(A) or (B), and the failure to make such distribution prior to the date on which made, are due to reasonable cause; and
(B) the corporation pays, within the 30–day period beginning with the day on which such distribution is made, to the Secretary, if such corporation makes such distribution after the 15th day of the 9th month after the close of the taxable year, an amount determined by multiplying (i) the amount equal to 4½ percent of such distribution, by (ii) the number of its taxable years which begin after the taxable year with respect to which such distribution is made and before such distribution is made. For purposes of this title, any payment made pursuant to this paragraph shall be treated as interest.
(3) Certain distributions made within 8½ months after close of taxable year deemed for reasonable cause
A distribution made on or before the 15th day of the 9th month after the close of the taxable year shall be deemed for reasonable cause for purposes of paragraph (2)(A) if—
(A) at least 70 percent of the gross receipts of such corporation for such taxable year consist of qualified export receipts, and
(B) the adjusted basis of the qualified export assets held by the corporation on the last day of each month of the taxable year equals or exceeds 70 percent of the sum of the adjusted basis of all assets held by the corporation on such day.
(d) Ineligible corporations
The following corporations shall not be eligible to be treated as a DISC—
(1) a corporation exempt from tax by reason of section 501,
(2) a personal holding company (as defined in section 542),
(3) a financial institution to which section 581 applies,
(4) an insurance company subject to the tax imposed by subchapter L,
(5) a regulated investment company (as defined in section 851(a)), or
(6) an S corporation.
(e) Coordination with personal holding company provisions in case of certain produced film rents
If—
(1) a corporation (hereinafter in this subsection referred to as "subsidiary") was established to take advantage of the provisions of this part, and
(2) a second corporation (hereinafter in this subsection referred to as "parent") throughout the taxable year owns directly at least 80 percent of the stock of the subsidiary,
then, for purposes of applying subsection (d)(2) and section 541 (relating to personal holding company tax) to the subsidiary for the taxable year, there shall be taken into account under section 543(a)(5) (relating to produced film rents) any interest in a film acquired by the parent and transferred to the subsidiary as if such interest were acquired by the subsidiary at the time it was acquired by the parent.
(Added
Editorial Notes
Amendments
2018—Subsec. (d)(6), (7).
2007—Subsec. (a)(1)(C) to (E).
1996—Subsec. (d)(3).
1984—Subsec. (a)(1)(E).
1982—Subsec. (d)(7).
1976—Subsecs. (a)(2), (b)(1), (3), (c)(2)(B).
Statutory Notes and Related Subsidiaries
Effective Date of 1996 Amendment
Amendment by
Effective Date of 1984 Amendment
Amendment by
Effective Date of 1982 Amendment
Amendment by
Savings Provision
For provisions that nothing in amendment by
§993. Definitions and special rules
(a) Qualified export receipts
(1) General rule
For purposes of this part, except as provided by regulations under paragraph (2), the qualified export receipts of a corporation are—
(A) gross receipts from the sale, exchange, or other disposition of export property,
(B) gross receipts from the lease or rental of export property, which is used by the lessee of such property outside the United States,
(C) gross receipts for services which are related and subsidiary to any qualified sale, exchange, lease, rental, or other disposition of export property by such corporation,
(D) gross receipts from the sale, exchange, or other disposition of qualified export assets (other than export property),
(E) dividends (or amounts includible in gross income under section 951) with respect to stock of a related foreign export corporation (as defined in subsection (e)),
(F) interest on any obligation which is a qualified export asset,
(G) gross receipts for engineering or architectural services for construction projects located (or proposed for location) outside the United States, and
(H) gross receipts for the performance of managerial services in furtherance of the production of other qualified export receipts of a DISC.
(2) Excluded receipts
The Secretary may under regulations designate receipts from the sale, exchange, lease, rental, or other disposition of export property, and from services, as not being receipts described in paragraph (1) if he determines that such sale, exchange, lease, rental, or other disposition, or furnishing of services—
(A) is for ultimate use in the United States;
(B) is accomplished by a subsidy granted by the United States or any instrumentality thereof;
(C) is for use by the United States or any instrumentality thereof where the use of such export property or services is required by law or regulation.
For purposes of this part, the term "qualified export receipts" does not include receipts from a corporation which is a DISC for its taxable year in which the receipts arise and which is a member of a controlled group (as defined in paragraph (3)) which includes the recipient corporation.
(3) Definition of controlled group
For purposes of this part, the term "controlled group" has the meaning assigned to the term "controlled group of corporations" by section 1563(a), except that the phrase "more than 50 percent" shall be substituted for the phrase "at least 80 percent" each place it appears therein, and section 1563(b) shall not apply.
(b) Qualified export assets
For purposes of this part, the qualified export assets of a corporation are—
(1) export property (as defined in subsection (c));
(2) assets used primarily in connection with the sale, lease, rental, storage, handling, transportation, packaging, assembly, or servicing of export property, or the performance of engineering or architectural services described in subparagraph (G) of subsection (a)(1) or managerial services in furtherance of the production of qualified export receipts described in subparagraphs (A), (B), (C), and (G) of subsection (a)(1);
(3) accounts receivable and evidences of indebtedness which arise by reason of transactions of such corporation or of another corporation which is a DISC and which is a member of a controlled group which includes such corporation described in subparagraph (A), (B), (C), (D), (G), or (H), of subsection (a)(1);
(4) money, bank deposits, and other similar temporary investments, which are reasonably necessary to meet the working capital requirements of such corporation;
(5) obligations arising in connection with a producer's loan (as defined in subsection (d));
(6) stock or securities of a related foreign export corporation (as defined in subsection (e));
(7) obligations issued, guaranteed, or insured, in whole or in part, by the Export-Import Bank of the United States or the Foreign Credit Insurance Association in those cases where such obligations are acquired from such Bank or Association or from the seller or purchaser of the goods or services with respect to which such obligations arose;
(8) obligations issued by a domestic corporation organized solely for the purpose of financing sales of export property pursuant to an agreement with the Export-Import Bank of the United States under which such corporation makes export loans guaranteed by such bank; and
(9) amounts (other than reasonable working capital) on deposit in the United States that are utilized during the period provided for in, and otherwise in accordance with, regulations prescribed by the Secretary to acquire other qualified export assets.
(c) Export property
(1) In general
For purposes of this part, the term "export property" means property—
(A) manufactured, produced, grown, or extracted in the United States by a person other than a DISC,
(B) held primarily for sale, lease, or rental, in the ordinary course of trade or business, by, or to, a DISC, 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.
In applying 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
For purposes of this part, the term "export property" does not include—
(A) property leased or rented by a DISC for use by any member of a controlled group (as defined in subsection (a)(3)) which includes the DISC,
(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), goodwill, trademarks, trade brands, franchises, or other like property,
(C) products of a character with respect to which a deduction for depletion is allowable (including oil, gas, coal, or uranium products) under section 613 or 613A,
(D) products the export of which is prohibited or curtailed under section 7(a) 1 of the Export Administration Act of 1979 to effectuate the policy set forth in paragraph (2)(C) of section 3 1 of such Act (relating to the protection of the domestic economy), or
(E) any unprocessed timber which is a softwood.
Subparagraph (C) shall not apply to any commodity or product at least 50 percent of the fair market value of which is attributable to manufacturing or processing, except that subparagraph (C) shall apply to any primary product from oil, gas, coal, or uranium. For purposes of the preceding sentence, the term "processing" does not include extracting or handling, packing, packaging, grading, storing, or transporting. 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 be treated as property not described in paragraph (1) 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.
(d) Producer's loans
(1) In general
An obligation, subject to the rules provided in paragraphs (2) and (3), shall be treated as arising out of a producer's loan if—
(A) the loan, when added to the unpaid balance of all other producer's loans made by the DISC, does not exceed the accumulated DISC income at the beginning of the month in which the loan is made;
(B) the obligation is evidenced by a note (or other evidence of indebtedness) with a stated maturity date not more than 5 years from the date of the loan;
(C) the loan is made to a person engaged in the United States in the manufacturing, production, growing, or extraction of export property determined without regard to subparagraph (C) or (D) of subsection (c)(2), (referred to hereinafter as the "borrower"); and
(D) at the time of such loan it is designated as a producer's loan.
(2) Limitation
An obligation shall be treated as arising out of a producer's loan only to the extent that such loan, when added to the unpaid balance of all other producer's loans to the borrower outstanding at the time such loan is made, does not exceed an amount determined by multiplying the sum of—
(A) the amount of the borrower's adjusted basis determined at the beginning of the borrower's taxable year in which the loan is made, in plant, machinery, and equipment, and supporting production facilities in the United States;
(B) the amount of the borrower's property held primarily for sale, lease, or rental, to customers in the ordinary course of trade or business, at the beginning of such taxable year; and
(C) the aggregate amount of the borrower's research and experimental expenditures (within the meaning of section 174) in the United States during all preceding taxable years beginning after December 31, 1971,
by the percentage which the borrower's receipts, during the 3 taxable years immediately preceding the taxable year (but not including any taxable year commencing prior to 1972) in which the loan is made, from the sale, lease, or rental outside the United States of property which would be export property (determined without regard to subparagraph (C) or (D) of subsection (c)(2)) if held by a DISC is of the gross receipts during such 3 taxable years from the sale, lease, or rental of property held by such borrower primarily for sale, lease, or rental to customers in the ordinary course of the trade or business of such borrower.
(3) Increased investment requirement
An obligation shall be treated as arising out of a producer's loan in a taxable year only to the extent that such loan, when added to the unpaid balance of all other producer's loans to the borrower made during such taxable year, does not exceed an amount equal to—
(A) the amount by which the sum of the adjusted basis of assets described in paragraph (2)(A) and (B) on the last day of the taxable year in which the loan is made exceeds the sum of the adjusted basis of such assets on the first day of such taxable year; plus
(B) the aggregate amount of the borrower's research and experimental expenditures (within the meaning of section 174) in the United States during such taxable year.
(4) Special limitation in the case of domestic film maker
(A) In general
In the case of a borrower who is a domestic film maker and who incurs an obligation to a DISC for the making of a film, and such DISC is engaged in the trade or business of selling, leasing, or renting films which are export property, the limitation described in paragraph (2) may be determined (to the extent provided under regulations prescribed by the Secretary) on the basis of—
(i) the sum of the amounts described in subparagraphs (A), (B), and (C) thereof plus reasonable estimates of all such amounts to be incurred at any time by the borrower with respect to films which are commenced within the taxable year in which the loan is made, and
(ii) the percentage which, based on the experience of producers of similar films, the annual receipts of such producers from the sale, lease, or rental of such films outside the United States is of the annual gross receipts of such producers from the sale, lease, or rental of such films.
(B) Domestic film maker
For purposes of this paragraph, a borrower is a domestic film maker with respect to a film if—
(i) such borrower is a United States person within the meaning of section 7701(a)(30), except that with respect to a partnership, all of the partners must be United States persons, and with respect to a corporation, all of its officers and at least a majority of its directors must be United States persons;
(ii) such borrower is engaged in the trade or business of making the film with respect to which the loan is made;
(iii) the studio, if any, used or to be used for the taking of photographs and the recording of sound incorporated into such film is located in the United States;
(iv) the aggregate playing time of portions of such film photographed outside the United States does not or will not exceed 20 percent of the playing time of such film; and
(v) not less than 80 percent of the total amount paid or to be paid for services performed in the making of such film is paid or to be paid to persons who are United States persons at the time such services are performed or consists of amounts which are fully taxable by the United States.
(C) Special rules for application of subparagraph (B)(v)
For purposes of clause (v) of subparagraph (B)—
(i) there shall not be taken into account any amount which is contingent upon receipts or profits of the film and which is fully taxable by the United States (within the meaning of clause (ii)); and
(ii) any amount paid or to be paid to a United States person, to a non-resident alien individual, or to a corporation which furnishes the services of an officer or employee to the borrower with respect to the making of a film, shall be treated as fully taxable by the United States only if the total amount received by such person, individual, officer, or employee for services performed in the making of such film is fully included in gross income for purposes of this chapter.
(e) Related foreign export corporation
In determining whether a corporation (hereinafter in this subsection referred to as "the domestic corporation") is a DISC—
(1) Foreign international sales corporation
A foreign corporation is a related foreign export corporation if—
(A) stock possessing more than 50 percent of the total combined voting power of all classes of stock entitled to vote is owned directly by the domestic corporation,
(B) 95 percent or more of such foreign corporation's gross receipts for its taxable year ending with or within the taxable year of the domestic corporation consists of qualified export receipts described in subparagraphs (A), (B), (C), and (D) of subsection (a)(1) and interest on any obligation described in paragraphs (3) and (4) of subsection (b), and
(C) the adjusted basis of the qualified export assets (described in paragraphs (1), (2), (3), and (4) of subsection (b)) held by such foreign corporation at the close of such taxable year equals or exceeds 95 percent of the sum of the adjusted basis of all assets held by it at the close of such taxable year.
(2) Real property holding company
A foreign corporation is a related foreign export corporation if—
(A) stock possessing more than 50 percent of the total combined voting power of all classes of stock entitled to vote is owned directly by the domestic corporation, and
(B) its exclusive function is to hold real property for the exclusive use (under a lease or otherwise) of the domestic corporation.
(3) Associated foreign corporation
A foreign corporation is a related foreign export corporation if—
(A) less than 10 percent of the total combined voting power of all classes of stock entitled to vote of such foreign corporation is owned (within the meaning of section 1563 (d) and (e)) by the domestic corporation or by a controlled group of corporations (within the meaning of section 1563) of which the domestic corporation is a member, and
(B) the ownership of stock or securities in such foreign corporation by the domestic corporation is determined (under regulations prescribed by the Secretary) to be reasonably in furtherance of a transaction or transactions giving rise to qualified export receipts of the domestic corporation.
(f) Gross receipts
For purposes of this part, the term "gross receipts" means 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 gross income from all other sources. In the case of commissions on the sale, lease, or rental of property, the amount taken into account for purposes of this part as gross receipts shall be the gross receipts on the sale, lease, or rental of the property on which such commissions arose.
(g) United States defined
For purposes of this part, the term "United States" includes the Commonwealth of Puerto Rico and the possessions of the United States.
(Added
Editorial Notes
References in Text
Sections 3(2)(C) and 7(a) of the Export Administration Act of 1979, referred to in subsec. (c)(2)(D), were classified, respectively, to
Amendments
2018—
1993—Subsec. (c)(2).
Subsec. (c)(2)(E).
1984—Subsec. (a)(3).
1979—Subsec. (c)(1).
Subsec. (c)(2)(D).
1976—Subsecs. (a)(2), (b)(9).
Subsec. (c).
Subsec. (d)(1)(C).
Subsec. (d)(2).
Subsecs. (d)(4)(A), (e)(3)(B).
1975—Subsec. (c)(2).
1974—Subsec. (b)(3).
Statutory Notes and Related Subsidiaries
Effective Date of 1993 Amendment
Amendment by
Effective Date of 1984 Amendment
Amendment by
Effective Date of 1979 Amendments
Amendment by
Amendment by
Effective Date of 1976 Amendment
Effective Date of 1975 Amendment
"(1)
"(2)
Effective Date of 1974 Amendment
1 See References in Text note below.
§994. Inter-company pricing rules
(a) In general
In the case of a sale of export property to a DISC by a person described in section 482, the taxable income of such DISC and such person shall be based upon a transfer price which would allow such DISC 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) 4 percent of the qualified export receipts on the sale of such property by the DISC plus 10 percent of the export promotion expenses of such DISC attributable to such receipts,
(2) 50 percent of the combined taxable income of such DISC and such person which is attributable to the qualified export receipts on such property derived as the result of a sale by the DISC plus 10 percent of the export promotion expenses of such DISC attributable to such receipts, or
(3) taxable income based upon the sale price actually charged (but subject to the rules provided in section 482).
(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 DISC is seeking to establish or maintain a market for export property.
(c) Export promotion expenses
For purposes of this section, the term "export promotion expenses" means those expenses incurred to advance the distribution or sale of export property for use, consumption, or distribution outside of the United States, but does not include income taxes. Such expenses shall also include freight expenses to the extent of 50 percent of the cost of shipping export property aboard airplanes owned and operated by United States persons or ships documented under the laws of the United States in those cases where law or regulations does not require that such property be shipped aboard such airplanes or ships.
(Added
Editorial Notes
Amendments
1976—Subsec. (b).
Subpart B—Treatment of Distributions to Shareholders
§995. Taxation of DISC income to shareholders
(a) General rule
A shareholder of a DISC or former DISC shall be subject to taxation on the earnings and profits of a DISC as provided in this chapter, but subject to the modifications of this subpart.
(b) Deemed distributions
(1) Distributions in qualified years
A shareholder of a DISC shall be treated as having received a distribution taxable as a dividend with respect to his stock in an amount which is equal to his pro rata share of the sum (or, if smaller, the earnings and profits for the taxable year) of—
(A) the gross interest derived during the taxable year from producer's loans,
(B) the gain recognized by the DISC during the taxable year on the sale or exchange of property, other than property which in the hands of the DISC is a qualified export asset, previously transferred to it in a transaction in which gain was not recognized in whole or in part, but only to the extent that the transferor's gain on the previous transfer was not recognized,
(C) the gain (other than the gain described in subparagraph (B)) recognized by the DISC during the taxable year on the sale or exchange of property (other than property which in the hands of the DISC is stock in trade or other property described in section 1221(a)(1)) previously transferred to it in a transaction in which gain was not recognized in whole or in part, but only to the extent that the transferor's gain on the previous transfer was not recognized and would have been treated as ordinary income if the property had been sold or exchanged rather than transferred to the DISC,
(D) 50 percent of the taxable income of the DISC for the taxable year attributable to military property,
(E) the taxable income of the DISC attributable to qualified export receipts of the DISC for the taxable year which exceed $10,000,000,
(F) the sum of—
(i) in the case of a shareholder which is a C corporation, one-seventeenth of the excess of the taxable income of the DISC for the taxable year, before reduction for any distributions during the year, over the sum of the amounts deemed distributed for the taxable year under subparagraphs (A), (B), (C), (D), and (E),
(ii) an amount equal to 16/17 of the excess referred to in clause (i), multiplied by the international boycott factor determined under section 999, and
(iii) any illegal bribe, kickback, or other payment (within the meaning of section 162(c)) paid by or on behalf of the DISC directly or indirectly to an official, employee, or agent in fact of a government, and
(G) the amount of foreign investment attributable to producer's loans (as defined in subsection (d)) of a DISC for the taxable year.
Distributions described in this paragraph shall be deemed to be received on the last day of the taxable year of the DISC in which the income was derived. In the case of a distribution described in subparagraph (G), earnings and profits for the taxable year shall include accumulated earnings and profits.
(2) Distributions upon disqualification
(A) A shareholder of a corporation which revoked its election to be treated as a DISC or failed to satisfy the conditions of section 992(a)(1) for a taxable year shall be deemed to have received (at the time specified in subparagraph (B)) a distribution taxable as a dividend equal to his pro rata share of the DISC income of such corporation accumulated during the immediately preceding consecutive taxable years for which the corporation was a DISC.
(B) Distributions described in subparagraph (A) shall be deemed to be received in equal installments on the last day of each of the 10 taxable years of the corporation following the year of the termination or disqualification described in subparagraph (A) (but in no case over more than twice the number of immediately preceding consecutive taxable years during which the corporation was a DISC).
(3) Taxable income attributable to military property
(A) In general
For purposes of paragraph (1)(D), taxable income of a DISC for the taxable year attributable to military property shall be determined by only taking into account—
(i) the gross income of the DISC for the taxable year which is attributable to military property, and
(ii) the deductions which are properly apportioned or allocated to such income.
(B) Military property
For purposes of subparagraph (A), the term "military property" means any property which is an arm, ammunition, or implement of war designated in the munitions list published pursuant to section 38 of the Arms Export Control Act (
(4) Aggregation of qualified export receipts
(A) In general
For purposes of applying paragraph (1)(E), all DISC's which are members of the same controlled group shall be treated as a single corporation.
(B) Allocation
The dollar amount under paragraph (1)(E) shall be allocated among the DISC's which are members of the same controlled group in a manner provided in regulations prescribed by the Secretary.
(c) Gain on disposition of stock in a DISC
(1) In general
If—
(A) a shareholder disposes of stock in a DISC or former DISC any gain recognized on such disposition shall be included in gross income as a dividend to the extent provided in paragraph (2), or
(B) stock of a DISC or former DISC is disposed of in a transaction in which the separate corporate existence of the DISC or former DISC is terminated other than by a mere change in place of organization, however effected, any gain realized on the disposition of such stock in the transaction shall be recognized notwithstanding any other provision of this title to the extent provided in paragraph (2) and to the extent so recognized shall be included in gross income as a dividend.
(2) Amount included
The amounts described in paragraph (1) shall be included in gross income as a dividend to the extent of the accumulated DISC income of the DISC or former DISC which is attributable to the stock disposed of and which was accumulated in taxable years of such corporation during the period or periods the stock disposed of was held by the shareholder which disposed of such stock.
(d) Foreign investment attributable to DISC earnings
For the purposes of this part—
(1) In general
The amount of foreign investment attributable to producer's loans of a DISC for a taxable year shall be the smallest of—
(A) the net increase in foreign assets by members of the controlled group (as defined in section 993(a)(3)) which includes the DISC,
(B) the actual foreign investment by domestic members of such group, or
(C) the amount of outstanding producer's loans by such DISC to members of such controlled group.
(2) Net increase in foreign assets
The term "net increase in foreign assets" of a controlled group means the excess of—
(A) the amount incurred by such group to acquire assets (described in section 1231(b)) located outside the United States over,
(B) the sum of—
(i) the depreciation with respect to assets of such group located outside the United States;
(ii) the outstanding amount of stock or debt obligations of such group issued after December 31, 1971, to persons other than the United States persons or any member of such group;
(iii) one-half the earnings and profits of foreign members of such group and foreign branches of domestic members of such group;
(iv) one-half the royalties and fees paid by foreign members of such group to domestic members of such group; and
(v) the uncommitted transitional funds of the group as determined under paragraph (4).
For purposes of this paragraph, assets which are qualified export assets of a DISC (or would be qualified export assets if owned by a DISC) shall not be taken into account. Amounts described in this paragraph (other than in subparagraphs (B)(ii) and (v)) shall be taken into account only to the extent they are attributable to taxable years beginning after December 31, 1971.
(3) Actual foreign investment
The term "actual foreign investment" by domestic members of a controlled group means the sum of—
(A) contributions to capital of foreign members of the group by domestic members of the group after December 31, 1971,
(B) the outstanding amount of stock or debt obligations of foreign members of such group (other than normal trade indebtedness) issued after December 31, 1971, to domestic members of such group,
(C) amounts transferred by domestic members of the group after December 31, 1971, to foreign branches of such members, and
(D) one-half the earnings and profits of foreign members of such group and foreign branches of domestic members of such group for taxable years beginning after December 31, 1971.
As used in this subsection, the term "domestic member" means a domestic corporation which is a member of a controlled group (as defined in section 993(a)(3)), and the term "foreign member" means a foreign corporation which is a member of such a controlled group.
(4) Uncommitted transitional funds
The uncommitted transitional funds of the group shall be an amount equal to the sum of—
(A) the excess of—
(i) the amount of stock or debt obligations of domestic members of such group outstanding on December 31, 1971, and issued on or after January 1, 1968, to persons other than United States persons or any members of such group, but only to the extent the taxpayer establishes that such amount constitutes a long-term borrowing for purposes of the foreign direct investment program, over
(ii) the net amount of actual foreign investment by domestic members of such group during the period that such stock or debt obligations have been outstanding; and
(B) the amount of liquid assets to the extent not included in subparagraph (A) held by foreign members of such group and foreign branches of domestic members of such group on October 31, 1971, in excess of their reasonable working capital needs on such date.
For purposes of this paragraph, the term "liquid assets" means money, bank deposits (not including time deposits), and indebtedness of 2 years or less to maturity on the date of acquisition; and the actual foreign investment shall be determined under paragraph (3) without regard to the date in subparagraph (A) of such paragraph and without regard to subparagraph (D) of such paragraph.
(5) Special rule
Under regulations prescribed by the Secretary the determinations under this subsection shall be made on a cumulative basis with proper adjustments for amounts previously taken into account.
(e) Certain transfers of DISC assets
If—
(1) a corporation owns, directly or indirectly, all of the stock of a subsidiary and a DISC,
(2) the subsidiary has been engaged in the active conduct of a trade or business (within the meaning of section 355(b)) throughout the 5–year period ending on the date of the transfer and continues to be so engaged thereafter, and
(3) during the taxable year of the subsidiary in which its stock is transferred and its preceding taxable year, such trade or business gives rise to qualified export receipts of the subsidiary and the DISC,
then, under such terms and conditions as the Secretary by regulations shall prescribe, transfers of assets, stock, or both, will be deemed to be a reorganization within the meaning of section 368, a transaction to which section 355 applies, an exchange of stock to which section 351 applies, or a combination thereof. The preceding sentence shall apply only to the extent that the transfer or transfers involved are for the purpose of preventing the separation of the ownership of the stock in the DISC from the ownership of the trade or business which (during the base period) produced the export gross receipts of the DISC.
(f) Interest on DISC-related deferred tax liability
(1) In general
A shareholder of a DISC shall pay for each taxable year interest in an amount equal to the product of—
(A) the shareholder's DISC-related deferred tax liability for such year, and
(B) the base period T-bill rate.
(2) Shareholder's DISC-related deferred tax liability
For purposes of this subsection—
(A) In general
The term "shareholder's DISC-related deferred tax liability" means, with respect to any taxable year of a shareholder of a DISC, the excess of—
(i) the amount which would be the tax liability of the shareholder for the taxable year if the deferred DISC income of such shareholder for such taxable year were included in gross income as ordinary income, over
(ii) the actual amount of the tax liability of such shareholder for such taxable year.
Determinations under the preceding sentence shall be made without regard to carrybacks to such taxable year.
(B) Adjustments for losses, credits, and other items
The Secretary shall prescribe regulations which provide such adjustments—
(i) to the accounts of the DISC, and
(ii) to the amount of any carryover or carryback of the shareholder,
as may be necessary or appropriate in the case of net operating losses, credits, and carryovers, and carrybacks of losses and credits.
(C) Tax liability
The term "tax liability" means the amount of the tax imposed by this chapter for the taxable year reduced by credits allowable against such tax (other than credits allowable under sections 31, 32, and 34).
(3) Deferred DISC income
For purposes of this subsection—
(A) In general
The term "deferred DISC income" means, with respect to any taxable year of a shareholder, the excess of—
(i) the shareholder's pro rata share of accumulated DISC income (for periods after 1984) of the DISC as of the close of the computation year, over
(ii) the amount of the distributions-in-excess-of-income for the taxable year of the DISC following the computation year.
(B) Computation year
For purposes of applying subparagraph (A) with respect to any taxable year of a shareholder, the computation year is the taxable year of the DISC which ends with (or within) the taxable year of the shareholder which precedes the taxable year of the shareholder for which the amount of deferred DISC income is being determined.
(C) Distributions-in-excess-of-income
For purposes of subparagraph (A), the term "distributions-in-excess-of-income" means, with respect to any taxable year of a DISC, the excess (if any) of—
(i) the amount of actual distributions to the shareholder out of accumulated DISC income, over
(ii) the shareholder's pro rata share of the DISC income for such taxable year.
(4) Base period T-bill rate
For purposes of this subsection, the term "base period T-bill rate" means the annual rate of interest determined by the Secretary to be equivalent to the average of the 1-year constant maturity Treasury yields, as published by the Board of Governors of the Federal Reserve System, for the 1-year period ending on September 30 of the calendar year ending with (or of the most recent calendar year ending before) the close of the taxable year of the shareholder.
(5) Short years
The Secretary shall prescribe such regulations as may be necessary for the application of this subsection to short years of the DISC, the shareholder, or both.
(6) Payment and assessment and collection of interest
The interest accrued during any taxable year which a shareholder is required to pay under paragraph (1) shall be treated, for purposes of this title, as interest payable under section 6601 and shall be paid by the shareholder at the time the tax imposed by this chapter for such taxable year is required to be paid.
(7) DISC includes former DISC
For purposes of this subsection, the term "DISC" includes a former DISC.
(g) Treatment of tax-exempt shareholders
If any organization described in subsection (a)(2) or (b)(2) of section 511 (or any other person otherwise subject to tax under section 511) is a shareholder in a DISC—
(1) any amount deemed distributed to such shareholder under subsection (b),
(2) any actual distribution to such shareholder which under section 996 is treated as out of accumulated DISC income, and
(3) any gain which is treated as a dividend under subsection (c),
shall be treated as derived from the conduct of an unrelated trade or business (and the modifications of section 512(b) shall not apply). The rules of the preceding sentence shall apply also for purposes of determining any such shareholder's DISC-related deferred tax liability under subsection (f).
(Added
Editorial Notes
Amendments
2002—Subsec. (b)(3)(B).
2000—Subsec. (b)(3)(B).
Subsec. (f)(4).
1999—Subsec. (b)(1)(C).
1989—Subsec. (g).
1988—Subsec. (c)(1).
"(C) a shareholder distributes, sells, or exchanges stock in a DISC or former DISC in a transaction to which section 311, 336, or 337 applies, then an amount equal to the excess of the fair market value of such stock over its adjusted basis in the hands of the shareholder shall, notwithstanding any provision of this title, be included in gross income of the shareholder as a dividend to the extent provided in paragraph (2).
Subparagraph (C) shall not apply if the person receiving the stock in the disposition has a holding period for the stock which includes the period for which the stock was held by the shareholder disposing of such stock."
Subsec. (g).
1986—Subsec. (b)(1)(F)(i).
Subsec. (b)(1)(F)(ii).
Subsec. (f)(4) to (6).
Subsec. (f)(7).
1984—Subsec. (b)(1)(E).
Subsec. (b)(1)(F)(i).
Subsec. (b)(4).
Subsec. (e).
Subsec. (f).
Subsec. (g).
1978—Subsec. (b)(1).
Subsec. (c)(1).
1976—Subsec. (b)(1)(C).
Subsec. (b)(1)(D), (E).
Subsec. (b)(1)(F).
Subsec. (b)(1)(G).
Subsec. (b)(2)(B).
Subsec. (b)(3).
Subsec. (c).
Subsec. (d)(5).
Subsecs. (e) to (g).
Statutory Notes and Related Subsidiaries
Effective Date of 1999 Amendment
Amendment by
Effective Date of 1989 Amendment
Amendment by
Effective Date of 1988 Amendment
Amendment by section 1006(e)(15) of
Effective Date of 1986 Amendment
Amendment by
Effective Date of 1984 Amendment
Amendment by section 68(d) of
Amendment by section 802(a), (b) of
Effective Date of 1978 Amendment
Amendment by section 703(i)(1), (2) of
Effective Date of 1976 Amendment
Amendment by section 1063(a) of
Amendment by section 1065(a)(2) of
Amendment by section 1901(b)(3)(K) 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
Proration of Base Period in Case of Fixed Contracts
§996. Rules for allocation in the case of distributions and losses
(a) Rules for actual distributions and certain deemed distributions
(1) In general
Any actual distribution (other than a distribution described in paragraph (2) or to which section 995(c) applies) to a shareholder by a DISC (or former DISC) which is made out of earnings and profits shall be treated as made—
(A) first, out of previously taxed income, to the extent thereof,
(B) second, out of accumulated DISC income, to the extent thereof, and
(C) finally, out of other earnings and profits.
(2) Qualifying distributions
Any actual distribution made pursuant to section 992(c) (relating to distributions to meet qualification requirements), and any deemed distribution pursuant to section 995(b)(1)(G) (relating to foreign investment attributable to producer's loans), shall be treated as made—
(A) first, out of accumulated DISC income, to the extent thereof,
(B) second, out of the earnings and profits described in paragraph (1)(C), to the extent thereof, and
(C) finally, out of previously taxed income.
In the case of any amount of any actual distribution to a C corporation made pursuant to section 992(c) which is required to satisfy the condition of section 992(a)(1)(A), the preceding sentence shall apply to 16/17ths of such amount and paragraph (1) shall apply to the remaining 1/17th of such amount.
(3) Exclusion from gross income
Amounts distributed out of previously taxed income shall be excluded by the distributee from gross income except for gains described in subsection (e)(2), and shall reduce the amount of the previously taxed income.
(b) Ordering rules for losses
If for any taxable year a DISC, or a former DISC, incurs a deficit in earnings and profits, such deficit shall be chargeable—
(1) first, to earnings and profits described in subsection (a)(1)(C), to the extent thereof,
(2) second, to accumulated DISC income, to the extent thereof, and
(3) finally, to previously taxed income, except that a deficit in earnings and profits shall not be applied against accumulated DISC income which has been determined is to be deemed distributed to the shareholders (pursuant to section 995(b)(2)(A)) as a result of a revocation of election or other disqualification.
(c) Priority of distributions
Any actual distribution made during a taxable year shall be treated as being made subsequent to any deemed distribution made during such year. Any actual distribution made pursuant to section 992(c) (relating to distributions to meet qualification requirements) shall be treated as being made before any other actual distributions during the taxable year.
(d) Subsequent effect of previous disposition of DISC stock
(1) Shareholder previously taxed income adjustment
If—
(A) gain with respect to a share of stock of a DISC or former DISC is treated under section 995(c) as a dividend or as ordinary income, and
(B) any person subsequently receives an actual distribution made out of accumulated DISC income, or a deemed distribution made pursuant to section 995(b)(2), with respect to such share,
such person shall treat such distribution in the same manner as a distribution from previously taxed income to the extent that (i) the gain referred to in subparagraph (A), exceeds (ii) any other amounts with respect to such share which were treated under this paragraph as made from previously taxed income. In applying this paragraph with respect to a share of stock in a DISC or former DISC, gain on the acquisition of such share by the DISC or former DISC or gain on a transaction prior to such acquisition shall not be considered gain referred to in subparagraph (A).
(2) Corporate adjustment upon redemption
If section 995(c) applies to a redemption of stock in a DISC or former DISC, the accumulated DISC income shall be reduced by an amount equal to the gain described in section 995(c) with respect to such stock which is (or has been) treated as ordinary income, except to the extent distributions with respect to such stock have been treated under paragraph (1).
(e) Adjustment to basis
(1) Additions to basis
Amounts representing deemed distributions as provided in section 995(b) shall increase the basis of the stock with respect to which the distribution is made.
(2) Reductions of basis
The portion of an actual distribution made out of previously taxed income shall reduce the basis of the stock with respect to which it is made, and to the extent that it exceeds the adjusted basis of such stock, shall be treated as gain from the sale or exchange of property. In the case of stock includible in the gross estate of a decedent for which an election is made under section 2032 (relating to alternate valuation), this paragraph shall not apply to any distribution made after the date of the decedent's death and before the alternate valuation date provided by section 2032.
(f) Definition of divisions of earnings and profits
For purposes of this part:
(1) DISC income
The earnings and profits derived by a corporation during a taxable year in which such corporation is a DISC, before reduction for any distributions during the year, but reduced by amounts deemed distributed under section 995(b)(1), shall constitute the DISC income for such year. The earnings and profits of a DISC for a taxable year include any amounts includible in such DISC's gross income pursuant to section 951(a) for such year. Accumulated DISC income shall be reduced by deemed distributions under section 995(b)(2).
(2) Previously taxed income
Earnings and profits deemed distributed under section 995(b) for a taxable year shall constitute previously taxed income for such year.
(3) Other earnings and profits
The earnings and profits for a taxable year which are described in neither paragraph (1) nor (2) shall constitute the other earnings and profits for such year.
(g) Effectively connected income
In the case of a shareholder who is a nonresident alien individual or a foreign corporation, trust, or estate, gains referred to in section 995(c) and all distributions out of accumulated DISC income including deemed distributions shall be treated as gains and distributions which are effectively connected with the conduct of a trade or business conducted through a permanent establishment of such shareholder within the United States and which are derived from sources within the United States.
(Added
Editorial Notes
Amendments
1986—Subsec. (a)(2).
1984—Subsec. (g).
1978—Subsec. (a)(2).
1976—Subsec. (a)(2).
Subsec. (d).
Statutory Notes and Related Subsidiaries
Effective Date of 1986 Amendment
Amendment by
Effective Date of 1984 Amendment
Amendment by
Effective Date of 1978 Amendment
Amendment by
Effective Date of 1976 Amendment
Amendment by section 1101(e) of
Amendment by section 1901(b)(3)(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
§997. Special subchapter C rules
For purposes of applying the provisions of subchapter C of
(1) be treated as a distribution in the same amount as if such distribution of property were made to an individual, and
(2) have a basis, in the hands of the recipient corporation, equal to the amount determined under paragraph (1).
(Added
PART V—INTERNATIONAL BOYCOTT DETERMINATIONS
Editorial Notes
Amendments
1976—
§999. Reports by taxpayers; determinations
(a) International boycott reports by taxpayers
(1) Report required
If any person, or a member of a controlled group (within the meaning of section 993(a)(3)) which includes that person, has operations in, or related to—
(A) a country (or with the government, a company, or a national of a country) which is on the list maintained by the Secretary under paragraph (3), or
(B) any other country (or with the government, a company, or a national of that country) in which such person or such member had operations during the taxable year if such person (or, if such person is a foreign corporation, any United States shareholder of that corporation) knows or has reason to know that participation in or co-operation with an international boycott is required as a condition of doing business within such country or with such government, company, or national,
that person or shareholder (within the meaning of section 951(b)) shall report such operations to the Secretary at such time and in such manner as the Secretary prescribes, except that in the case of a foreign corporation such report shall be required only of a United States shareholder (within the meaning of such section) of such corporation.
(2) Participation and cooperation; request therefor
A taxpayer shall report whether he, a foreign corporation of which he is a United States shareholder, or any member of a controlled group which includes the taxpayer or such foreign corporation has participated in or cooperated with an international boycott at any time during the taxable year, or has been requested to participate in or cooperate with such a boycott, and, if so, the nature of any operation in connection with which there was participation in or cooperation with such boycott (or there was a request to participate or cooperate).
(3) List to be maintained
The Secretary shall maintain and publish not less frequently than quarterly a current list of countries which require or may require participation in or cooperation with an international boycott (within the meaning of subsection (b)(3)).
(b) Participation in or cooperation with an international boycott
(1) General rule
If the person or a member of a controlled group (within the meaning of section 993(a)(3)) which includes the person participates in or cooperates with an international boycott in the taxable year, all operations of the taxpayer or such group in that country and in any other country which requires participation in or cooperation with the boycott as a condition of doing business within that country, or with the government, a company, or a national of that country, shall be treated as operations in connection with which such participation or cooperation occurred, except to the extent that the person can clearly demonstrate that a particular operation is a clearly separate and identifiable operation in connection with which there was no participation in or cooperation with an international boycott.
(2) Special rule
(A) Nonboycott operations
A clearly separate and identifiable operation of a person, or of a member of the controlled group (within the meaning of section 993(a)(3)) which includes that person, in or related to any country within the group of countries referred to in paragraph (1) shall not be treated as an operation in or related to a group of countries associated in carrying out an international boycott if the person can clearly demonstrate that he, or that such member, did not participate in or cooperate with the international boycott in connection with that operation.
(B) Separate and identifiable operations
A taxpayer may show that different operations within the same country, or operations in different countries, are clearly separate and identifiable operations.
(3) Definition of boycott participation and cooperation
For purposes of this section, a person participates in or cooperates with an international boycott if he agrees—
(A) as a condition of doing business directly or indirectly within a country or with the government, a company, or a national of a country—
(i) to refrain from doing business with or in a country which is the object of the boycott or with the government, companies, or nationals of that country;
(ii) to refrain from doing business with any United States person engaged in trade in a country which is the object of the boycott or with the government, companies, or nationals of that country;
(iii) to refrain from doing business with any company whose ownership or management is made up, all or in part, of individuals of a particular nationality, race, or religion, or to remove (or refrain from selecting) corporate directors who are individuals of a particular nationality, race, or religion; or
(iv) to refrain from employing individuals of a particular nationality, race, or religion; or
(B) as a condition of the sale of a product to the government, a company, or a national of a country, to refrain from shipping or insuring that product on a carrier owned, leased, or operated by a person who does not participate in or cooperate with an international boycott (within the meaning of subparagraph (A)).
(4) Compliance with certain laws
This section shall not apply to any agreement by a person (or such member)—
(A) to meet requirements imposed by a foreign country with respect to an international boycott if United States law or regulations, or an Executive Order, sanctions participation in, or cooperation with, that international boycott,
(B) to comply with a prohibition on the importation of goods produced in whole or in part in any country which is the object of an international boycott, or
(C) to comply with a prohibition imposed by a country on the exportation of products obtained in such country to any country which is the object of an international boycott.
(c) International boycott factor
(1) International boycott factor
For purposes of sections 908(a), 952(a)(3), and 995(b)(1)(F)(ii), the international boycott factor is a fraction, determined under regulations prescribed by the Secretary, the numerator of which reflects the world-wide operations of a person (or, in the case of a controlled group (within the meaning of section 993(a)(3)) which includes that person, of the group) which are operations in or related to a group of countries associated in carrying out an international boycott in or with which that person or a member of that controlled group has participated or cooperated in the taxable year, and the denominator of which reflects the world-wide operations of that person or group.
(2) Specifically attributable taxes and income
If the taxpayer clearly demonstrates that the foreign taxes paid and income earned for the taxable year are attributable to specific operations, then, in lieu of applying the international boycott factor for such taxable year, the amount of the credit disallowed under section 908(a), the addition to subpart F income under section 952(a)(3), and the amount of deemed distribution under section 995(b)(1)(F)(ii) for the taxable year, if any, shall be the amount specifically attributable to the operations in which there was participation in or cooperation with an international boycott under section 999(b)(1).
(3) World-wide operations
For purposes of this subsection, the term "world-wide operations" means operations in or related to countries other than the United States.
(d) Determination with respect to particular operations
Upon a request made by the taxpayer, the Secretary shall issue a determination with respect to whether a particular operation of a person, or of a member of a controlled group which includes that person, constitutes participation in or cooperation with an international boycott. The Secretary may issue such a determination in advance of such operation in cases which are of such a nature that an advance determination is possible and appropriate under the circumstances. If the request is made before the operation is commenced, or before the end of a taxable year in which the operation is carried out, the Secretary may decline to issue such a determination before close of the taxable year.
(e) Participation or cooperation by related persons
If a person controls (within the meaning of section 304(c)) a corporation—
(1) participation in or cooperation with an international boycott by such corporation shall be presumed to be such participation or cooperation by such person, and
(2) participation in or cooperation with such a boycott by such person shall be presumed to be such participation or cooperation by such corporation.
(f) Willful failure to report
Any person (within the meaning of section 6671(b)) required to report under this section who willfully fails to make such report shall, in addition to other penalties provided by law, be fined not more than $25,000, imprisoned for not more than one year, or both.
(Added
Editorial Notes
Amendments
2004—Subsec. (c)(1).
2000—Subsec. (c)(1).
1986—Subsec. (c)(1), (2).
1984—Subsec. (c)(1), (2).
1978—Subsec. (c)(1).
Subsec. (c)(2).
Statutory Notes and Related Subsidiaries
Effective Date of 2004 Amendment
Amendment by
Effective Date of 2000 Amendment
Amendment by
Effective Date of 1986 Amendment
Amendment by
Effective Date of 1984 Amendment
Amendment by
Effective Date of 1978 Amendment
Amendment by
Effective Date
Section applicable to participation in or cooperation with an international boycott more than 30 days after Oct. 4, 1976, with special provisions for existing contracts, see section 1066(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