§1247. Election by foreign investment companies to distribute income currently

(a) Election by foreign investment company

(1) In general

If a foreign investment company which is described in section 1246(b)(1) elects (in the manner provided in regulations prescribed by the Secretary) on or before December 31, 1962, with respect to each taxable year beginning after December 31, 1962, to-

(A) distribute to its shareholders 90 percent or more of what its taxable income would be if it were a domestic corporation;

(B) designate in a written notice mailed to its shareholders at any time before the expiration of 45 days after the close of its taxable year the pro rata amount of the amount (determined as if such corporation were a domestic corporation) of the net capital gain of the taxable year; and the portion thereof which is being distributed; and

(C) provide such information as the Secretary deems necessary to carry out the purposes of this section,

then section 1246 shall not apply with respect to the qualified shareholders of such company during any taxable year to which such election applies.

(2) Special rules

(A) Computation of taxable income

For purposes of paragraph (1)(A), the taxable income of the company shall be computed without regard to-

(i) the net capital gain referred to in paragraph (1)(B),

(ii) section 172 (relating to net operating losses), and

(iii) any deduction provided by part VIII of subchapter B (other than the deduction provided by section 248, relating to organizational expenditures).

(B) Distributions after the close of the taxable year

For purposes of paragraph (1)(A), a distribution made after the close of the taxable year and on or before the 15th day of the third month of the next taxable year shall be treated as distributed during the taxable year to the extent elected by the company (in accordance with regulations prescribed by the Secretary) on or before the 15th day of such third month.

(C) Carryover of capital losses from nonelection years denied

In computing the net capital gain referred to in paragraph (1)(B), section 1212 shall not apply to losses incurred in or with respect to taxable years before the first taxable year to which the election applies.

(b) Years to which election applies

The election of any foreign investment company under this section shall terminate as of the close of the taxable year preceding its first taxable year in which any of the following occurs:

(1) the company fails to comply with the provisions of subparagraph (A), (B), or (C) of subsection (a)(1), unless it is shown that such failure is due to reasonable cause and not due to willful neglect,

(2) the company is a foreign personal holding company, or

(3) the company is not a foreign investment company which is described in section 1246(b)(1).

(c) Qualified shareholders

For purposes of this section-

(1) In general

The term "qualified shareholder" means any shareholder who is a United States person (as defined in section 7701(a)(30)), other than a shareholder described in paragraph (2).

(2) Certain United States persons excluded from definition

A United States person shall not be treated as a qualified shareholder for the taxable year if for such taxable year (or for any prior taxable year) he did not include, in computing his long-term capital gains in his return for such taxable year, the amount designated by such company pursuant to subsection (a)(1)(B) as his share of the undistributed capital gains of such company for its taxable year ending within or with such taxable year of the taxpayer. The preceding sentence shall not apply with respect to any failure by the taxpayer to treat an amount as provided therein if the taxpayer shows that such failure was due to reasonable cause and not due to willful neglect.

(d) Treatment of distributed and undistributed capital gains by a qualified shareholder

Every qualified shareholder of a foreign investment company for any taxable year of such company with respect to which an election pursuant to subsection (a) is in effect shall include, in computing his long-term capital gains-

(1) for his taxable year in which received, his pro rata share of the distributed portion of the net capital gain for such taxable year of such company, and

(2) for his taxable year in which or with which the taxable year of such company ends, his pro rata share of the undistributed portion of the net capital gain for such taxable year of such company.

(e) Adjustments

Under regulations prescribed by the Secretary, proper adjustment shall be made-

(1) in the earnings and profits of the electing foreign investment company and a qualified shareholder's ratable share thereof, and

(2) in the adjusted basis of stock of such company held by such shareholder,

to reflect such shareholder's inclusion in gross income of undistributed capital gains.

(f) Election by foreign investment company with respect to foreign tax credit

A foreign investment company with respect to which an election pursuant to subsection (a) is in effect and more than 50 percent of the value (as defined in section 851(c)(4)) of whose total assets at the close of the taxable year consists of stock or securities in foreign corporations may, for such taxable year, elect the application of this subsection with respect to income, war profits, and excess profits taxes described in section 901(b)(1) which are paid by the foreign investment company during such taxable year to foreign countries and possessions of the United States. If such election is made-

(1) the foreign investment company-

(A) shall compute its taxable income, for purposes of subsection (a)(1)(A), without any deductions for income, war profits, or excess profits taxes paid to foreign countries or possessions of the United States, and

(B) shall treat the amount of such taxes, for purposes of subsection (a)(1)(A), as distributed to its shareholders;

(2) each qualified shareholder of such foreign investment company-

(A) shall include in gross income and treat as paid by him his proportionate share of such taxes, and

(B) shall treat, for purposes of applying subpart A of part III of subchapter N, his proportionate share of such taxes as having been paid to the country in which the foreign investment company is incorporated, and

(C) shall treat as gross income from sources within the country in which the foreign investment company is incorporated, for purposes of applying subpart A of part III of subchapter N, the sum of his proportionate share of such taxes and any dividend paid to him by such foreign investment company.

(g) Notice to shareholders

The amounts to be treated by qualified shareholders, for purposes of subsection (f)(2), as their proportionate share of the taxes described in subsection (f)(1)(A) paid by a foreign investment company shall not exceed the amounts so designated by the foreign investment company in a written notice mailed to its shareholders not later than 45 days after the close of its taxable year.

(h) Manner of making election and notifying shareholders

The election provided in subsection (f) and the notice to shareholders required by subsection (g) shall be made in such manner as the Secretary may prescribe by regulations.

(i) Loss on sale or exchange of certain stock held less than 1 year

If-

(1) under this section, any qualified shareholder treats any amount designated under subsection (a)(1)(B) with respect to a share of stock as long-term capital gain, and

(2) such share is held by the taxpayer for less than 1 year,

then any loss on the sale or exchange of such share shall, to the extent of the amount described in paragraph (1), be treated as loss from the sale or exchange of a capital asset held for more than 1 year.

(Added Pub. L. 87–834, §14(a)(1), Oct. 16, 1962, 76 Stat. 1037 ; amended Pub. L. 94–455, title XIV, §1402(b)(1)(X), (2), title XIX, §§1901(b)(33)(P), (R), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1732 , 1802, 1834; Pub. L. 98–369, div. A, title X, §1001(b)(21), (e), July 18, 1984, 98 Stat. 1012 .)

Amendments

1984-Subsec. (i)(2). Pub. L. 98–369 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.

1976-Subsec. (a)(1)(B), (C). Pub. L. 94–455, §1901(b)(33)(P), substituted "the amount (determined as if such corporation were a domestic corporation) of the net capital gain" for "the excess (determined as if such corporation were a domestic corporation) of the net long-term capital gain over the net short-term capital loss", and §1906(b)(13)(A) struck out "or his delegate" after "Secretary".

Subsec. (a)(2)(A)(i), (B), (C). Pub. L. 94–455, §1901(b)(33)(R), substituted in subpars. (A)(i) and (C) "the net capital gain" for "the excess of the net long-term capital gain over the net short-term capital loss,". §1906(b)(13)(A) struck out in subpara. (a)(2)(B) "or his delegate" after "Secretary".

Subsec. (d)(1), (2). Pub. L. 94–455, §1901(b)(33)(R), substituted "the net capital gain" for "the excess of the net long-term capital gain over the net short-term capital loss,".

Subsecs. (e), (h). Pub. L. 94–455, §1906(b)(13)(A), struck out "or his delegate" after "Secretary".

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

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

Effective Date of 1984 Amendment

Amendment by 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 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(b)(33)(P), (R) 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.

Effective Date

Section applicable with respect to taxable years beginning after Dec. 31, 1962, see section 14(c) of Pub. L. 87–834, set out as a note under section 1246 of this title.

Section Referred to in Other Sections

This section is referred to in sections 951, 1212, 1248, 1296 of this title.