§1246. Gain on foreign investment company stock

(a) Treatment of gain as ordinary income

(1) General rule

In the case of a sale or exchange (or a distribution which, under section 302 or 331, is treated as an exchange of stock) after December 31, 1962, of stock in a foreign corporation which was a foreign investment company (as defined in subsection (b)) at any time during the period during which the taxpayer held such stock, any gain shall be treated as ordinary income, to the extent of the taxpayer's ratable share of the earnings and profits of such corporation accumulated for taxable years beginning after December 31, 1962.

(2) Ratable share

For purposes of this section, the taxpayer's ratable share shall be determined under regulations prescribed by the Secretary, but shall include only his ratable share of the accumulated earnings and profits of such corporation-

(A) for the period during which the taxpayer held such stock, but

(B) excluding such earnings and profits attributable to-

(i) any amount previously included in the gross income of such taxpayer under section 951 (but only to the extent the inclusion of such amount did not result in an exclusion of any other amount from gross income under section 959), or

(ii) any taxable year during which such corporation was not a foreign investment company but only if-

(I) such corporation was not a foreign investment company at any time before such taxable year, and

(II) such corporation was treated as a foreign investment company solely by reason of subsection (b)(2).

(3) Taxpayer to establish earnings and profits

Unless the taxpayer establishes the amount of the accumulated earnings and profits of the foreign investment company and the ratable share thereof for the period during which the taxpayer held such stock, all the gain from the sale or exchange of stock in such company shall be considered as ordinary income.

(4) Holding period of stock must be more than 1 year

This section shall not apply with respect to the sale or exchange of stock where the holding period of such stock as of the date of such sale or exchange is 1 year or less.

(b) Definition of foreign investment company

For purposes of this section, the term "foreign investment company" means any foreign corporation which, for any taxable year beginning after December 31, 1962, is-

(1) registered under the Investment Company Act of 1940, as amended (15 U.S.C. 80a–1 to 80b–2), either as a management company or as a unit investment trust, or

(2) engaged (or holding itself out as being engaged) primarily in the business of investing, reinvesting, or trading in-

(A) securities (as defined in section 2(a)(36) of the Investment Company Act of 1940, as amended),

(B) commodities, or

(C) any interest (including a futures or forward contract or option) in property described in subparagraph (A) or (B),

at a time when 50 percent or more of the total combined voting power of all classes of stock entitled to vote, or the total value of all classes of stock, was 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)).

(c) Stock having transferred or substituted basis

To the extent provided in regulations prescribed by the Secretary, stock in a foreign corporation, the basis of which (in the hands of the taxpayer selling or exchanging such stock) is determined by reference to the basis (in the hands of such taxpayer or any other person) of stock in a foreign investment company, shall be treated as stock of a foreign investment company and held by the taxpayer throughout the holding period for such stock (determined under section 1223).

(d) Rules relating to entities holding foreign investment company stock

To the extent provided in regulations prescribed by the Secretary-

(1) trust certificates of a trust to which section 677 (relating to income for benefit of grantor) applies, and

(2) stock of a domestic corporation,

shall be treated as stock of a foreign investment company and held by the taxpayer throughout the holding period for such certificates or stock (determined under section 1223) in the same proportion that the investment in stock in a foreign investment company by the trust or domestic corporation bears to the total assets of such trust or corporation.

(e) Rules relating to stock acquired from a decedent

(1) Basis

In the case of stock of a foreign investment company acquired by bequest, devise, or inheritance (or by the decedent's estate) from a decedent dying after December 31, 1962, the basis determined under section 1014 shall be reduced (but not below the adjusted basis of such stock in the hands of the decedent immediately before his death) by the amount of the decedent's ratable share of the earnings and profits of such company accumulated after December 31, 1962. Any stock so acquired shall be treated as stock described in subsection (c).

(2) Deduction for estate tax

If stock to which subsection (a) applies is acquired from a decedent, the taxpayer shall, under regulations prescribed by the Secretary or his delegate, be allowed (for the taxable year of the sale or exchange) a deduction from gross income equal to that portion of the decedent's estate tax deemed paid which is attributable to the excess of (A) the value at which such stock was taken into account for purposes of determining the value of the decedent's gross estate, over (B) the value at which it would have been so taken into account if such value had been reduced by the amount described in paragraph (1).

(f) Information with respect to certain foreign investment companies

Every United States person who, on the last day of the taxable year of a foreign investment company, owns 5 percent or more in value of the stock of such company shall furnish with respect to such company such information as the Secretary shall by regulations prescribe.

(g) Coordination with section 1248

This section shall not apply to any gain to the extent such gain is treated as ordinary income under section 1248 (determined without regard to section 1248(g)(2)).

(h) Cross reference

For special rules relating to the earnings and profits of foreign investment companies, see section 312(l).

(Added Pub. L. 87–834, §14(a)(1), Oct. 16, 1962, 76 Stat. 1036 ; amended Pub. L. 94–455, title XIV, §1402(b)(1)(W), (2), title XIX, §§1901(a)(141), (b)(3)(I), (32)(B)(ii), 1906(b)(13)(A), title XX, §2005(a)(5), Oct. 4, 1976, 90 Stat. 1732 , 1787, 1793, 1800, 1834, 1877; Pub. L. 96–223, title IV, §401(a), Apr. 2, 1980, 94 Stat. 299 ; Pub. L. 97–34, title VIII, §832(a), Aug. 13, 1981, 95 Stat. 355 ; Pub. L. 98–369, div. A, title I, §134(a), title X, §1001(b)(20), (e), July 18, 1984, 98 Stat. 668 , 1012; Pub. L. 99–514, title XII, §1235(b), Oct. 22, 1986, 100 Stat. 2574 ; Pub. L. 100–647, title I, §§1012(p)(21), 1018(o)(2), Nov. 10, 1988, 102 Stat. 3519 , 3585.)

References in Text

The Investment Company Act of 1940, as amended, referred to in subsec. (b)(1), is title I of act Aug. 22, 1940, ch. 686, 54 Stat. 789 , as amended, which is classified generally to subchapter I (§80a–1 et seq.) of chapter 2D of Title 15, Commerce and Trade. Section 2(a)(36) of such Act, referred to in subsec. (b)(2), is classified to section 80a–2(a)(36) of Title 15. For complete classification of this Act to the Code, see section 80a–51 of Title 15 and Tables.

Amendments

1988-Subsec. (f). Pub. L. 100–647, §1012(p)(21), redesignated subsec. (g), relating to information with respect to certain foreign investment companies, as (f). Former subsec. (f) redesignated (g).

Subsec. (g). Pub. L. 100–647, §1018(o)(2), substituted "1248(g)(2)" for "1248(g)(3)".

Pub. L. 100–647, §1012(p)(21), redesignated former subsec. (f) as (g). Former subsec. (g), relating to information with respect to certain foreign investment companies, redesignated (f) and former subsec. (g), relating to cross reference, redesignated (h).

Subsec. (h). Pub. L. 100–647, §1012(p)(21), redesignated subsec. (g), relating to cross reference, as (h).

1986-Subsecs. (f), (g). Pub. L. 99–514 added subsec. (f) and redesignated former subsec. (f), relating to information with respect to certain foreign investment companies, as (g).

1984-Subsec. (a)(4). Pub. L. 98–369, §1001(b)(20), (e), substituted "6 months" for "1 year", applicable to property acquired after June 22, 1984, and before Jan. 1, 1988. See Effective Date of 1984 Amendment note below.

Subsec. (b)(2). Pub. L. 98–369, §134(a), in amending par. (2) generally, substituted reference to securities, as defined in section 2(a)(36) of the Investment Company Act of 1940, commodities, or any interest, including a futures or forward contract or option, in property described in subpars. (A) and (B) for reference to securities within the meaning of section 3(a)(1) of the Investment Company Act of 1940, as limited by pars. (2) through (10), except par. (6)(C), and pars. (12) through (15) of section 3(c) of such Act, and reference to pars. (2) and (3) of section 958(a) and par. (4) of section 318(a) for reference to section 958(a).

1981-Subsec. (a)(2)(B). Pub. L. 97–34 designated existing provisions as cl. (i) and added cl. (ii).

1980-Subsecs. (e) to (g). Pub. L. 96–223 repealed the amendment made by Pub. L. 94–455, §2005(a)(5). See 1976 Amendment note below.

1976-Subsec. (a)(1), (2), (3). Pub. L. 94–455, §1901(b)(3)(I), substituted "ordinary income" for "gain from the sale or exchange of property which is not a capital asset". §1901(b)(13)(A) struck out "or his delegate" after "Secretary".

Subsec. (a)(4). Pub. L. 94–455, §1402(b)(2), provided that "9 months" would be changed to "1 year".

Pub. L. 94–455, §1402(b)(1)(W), provided that "6 months" would be changed to "9 months" for taxable years beginning in 1977.

Subsecs. (c), (d). Pub. L. 94–455, §1906(b)(13)(a), struck out "or his delegate" after "Secretary".

Subsecs. (e) to (g). Pub. L. 94–455, §2005(a)(5), struck out subsec. (e) and redesignated subsecs. (f) and (g) as (e) and (f), respectively. See Repeals note below.

Pub. L. 94–455, §§1901(a)(141), (b)(32)(B)(ii), 1906(b)(13)(A), struck out "or his delegate" in subsecs. (e)(2) and (f), struck out "beginning after December 31, 1962" after "foreign investment company" in subsec. (f), and substituted "section 312(j)" for "section 312(l)" in subsec. (g).

Effective Date of 1988 Amendment

Amendment by Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title.

Effective Date of 1986 Amendment

Amendment by Pub. L. 99–514 applicable to taxable years of foreign corporations beginning after Dec. 31, 1986, see section 1235(h) of Pub. L. 99–514, set out as an Effective Date note under section 1291 of this title.

Effective Date of 1984 Amendment

Section 134(b) of Pub. L. 98–369 provided that:

"(1) In general.-Except as provided in paragraph (2), the amendment made by subsection (a) [amending this section] shall apply to sales and exchanges (and distributions) on or after September 29, 1983, in taxable years ending on or after such date.

"(2) Stock held on september 29, 1983.-In the case of a sale or exchange (or distribution) not later than the date which is 1 year after the date of the enactment of this Act [July 18, 1984], the amendment made by subsection (a) shall not apply with respect to stock held by the taxpayer continuously from September 29, 1983, to the date of such sale or exchange (or distribution)."

Amendment by section 1001(b)(20) of Pub. L. 98–369 applicable to property acquired after June 22, 1984, and before Jan. 1, 1988, see section 1001(e) of Pub. L. 98–369, set out as a note under section 166 of this title.

Effective Date of 1981 Amendment

Section 832(b) of Pub. L. 97–34 provided that: "The amendment made by subsection (a) [amending this section] shall apply to sales or exchanges after the date of the enactment of this Act [Aug. 13, 1981] in taxable years ending after such date."

Effective Date of 1980 Amendment and Revival of Prior Law

Amendment by Pub. L. 96–223 (repealing section 2005(a)(5) of Pub. L. 94–455 and the amendments made thereby, which had amended this section) applicable in respect of decedents dying after Dec. 31, 1976, and except for certain elections, this title to be applied and administered as if those repealed provisions had not been enacted, see section 401(b), (e) of Pub. L. 96–223, set out as a note under section 1023 of this title.

Effective Date of 1976 Amendment

Section 1402(b)(1) of Pub. L. 94–455 provided that the amendment made by that section is effective with respect to taxable years beginning in 1977.

Section 1402(b)(2) of Pub. L. 94–455 provided that the amendment made by that section is effective with respect to taxable years beginning after Dec. 31, 1977.

Amendment by section 1901(a)(141), (b)(3)(I), (32)(B)(ii) of Pub. L. 94–455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94–455, set out as a note under section 2 of this title.

Amendment by section 2005(a)(5) of Pub. L. 94–455 applicable in respect of decedents dying after Dec. 31, 1976, see section 2005(f)(1) of Pub. L. 94–455, set out as an Effective Date note under section 1015 of this title.

Effective Date

Section 14(c) of Pub. L. 87–834 provided that: "The amendments made by this section [enacting this section and section 1247 and amending sections 312, 751, and 1223 of this title] shall apply with respect to taxable years beginning after December 31, 1962."

Repeals

Pub. L. 94–455, §2005(a)(5), cited as a credit to this section, and the amendments made thereby, were repealed by Pub. L. 96–223, title IV, §401(a), 94 Stat. 299 , resulting in the text of this section reading as it read prior to enactment of section 2005(a)(5). See Effective Date of 1980 Amendment and Revival of Prior Law note above.

Section Referred to in Other Sections

This section is referred to in sections 312, 751, 904, 1223, 1247, 1248, 1291, 1297 of this title.