Cases: Stanford v. Commissioner, 152 F.3d 450 (5th Cir. 1998); Unisys Corp. v. United States, 30 Fed. Cl. 552 (Fed. Cl. 1994)
Final rules 4
(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—
Amended 1982, 1986
- 1986 Pub. L. 99-509 Pub. L. 99–509, § 8041(b)(1), added par. (5) and last sentence.
- 1982 Pub. L. 97-248 Pub. L. 97–248 inserted provision that the payments referred to in par. (4) are payments which would be unlawful under the Foreign Corrupt Practices Act of 1977 if the payor were a United States person.
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(1) insurance income (as defined under section 953),
Amended 1986
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 1221(b)(3)(A), amended par. (1) generally. Prior to amendment, par. (1) read as follows: “the income derived from the insurance of United States risks (as determined under section 953), and”.
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(2) the foreign base company income (as determined under section 954),
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(3) an amount equal to the product of—
Amended 1976
- 1976 Pub. L. 94-455 Pub. L. 94–455, § 1062(a), added par. (3).
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(A) the income of such corporation other than income which—
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(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),
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(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
Amended 1976
- 1976 Pub. L. 94-455 Pub. L. 94–455, § 1065(a)(1), added par. (4).
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(5) the income of such corporation derived from any foreign country during any period during which section 901(j) applies to such foreign country.
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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.
Amended 1966, 1986, 1997, 2007
- 2007 Pub. L. 110-172 Pub. L. 110–172 struck out second sentence which read as follows: “For purposes of the preceding sentence, income described in paragraph (2) or (3) of section 921(d) shall be treated as derived from sources within the United States.”
- 1997 Pub. L. 105-34 Pub. L. 105–34 inserted at end “For purposes of this subsection, any exemption (or reduction) with respect to the tax imposed by section 884 shall not be taken into account.”
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 1876(c)(1), inserted last sentence.
- 1966 Pub. L. 89-809 Pub. L. 89–809 substituted “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 “Subpart F income does not include any item includible in gross income under this chapter (other than this subpart) as income derived from sources within the United States of a foreign corporation engaged in trade or business in the United States”.
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(c) Limitation
Amended 1986
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 1221(f), added subsec. (c) and struck out former subsec. (c) which read as follows: “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 year reduced by the amount (if any) by which—
“(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.”
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(1) In general
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(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.
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(B) Certain prior year deficits may be taken into account
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(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.
Amended 2017
- 2017 Pub. L. 115-97 Pub. L. 115–97, § 14212(b)(1)(C), substituted “section 951(a)(1)(A)” for “section 951(a)(1)(A)(i)”.
(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—
Amended 1988, 2005
- 2005 Pub. L. 109-135 Pub. L. 109–135 substituted “subclause (II) or (III) of clause (iii)” for “clause (iii)(III) or (IV)” and “clause (iii)(I)” for “clause (iii)(II)” in concluding provisions.
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1012(i)(24), inserted at end “In determining the deficit attributable to qualified activities described in clause (iii)(III) or (IV), deficits in earnings and profits (to the extent not previously taken into account under this section) for taxable years beginning after 1962 and before 1987 also shall be taken into account. In the case of the qualified activity described in clause (iii)(II), the rule of the preceding sentence shall apply, except that ‘1982’ shall be substituted for ‘1962’.”
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(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), [OLRC note: See References in Text note below.] 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), 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,
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(II) foreign base company services income,
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(III) in the case of a qualified insurance company, insurance income or foreign personal holding company income, or
Amended 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1012(i)(22), (23), added subcls. (III) and (IV), redesignated former subcl. (III) as (V) and substituted “insurance income or foreign personal holding company income,” for “insurance income”, and redesignated former subcl. (IV) as (VI).
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(IV) in the case of a qualified financial institution, foreign personal holding company income.
Amended 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1012(i)(22), (23), added subcls. (III) and (IV), redesignated former subcl. (III) as (V) and substituted “insurance income or foreign personal holding company income,” for “insurance income”, and redesignated former subcl. (IV) as (VI).
Amended 1988, 2004, 2017
- 2017 Pub. L. 115-97 Pub. L. 115–97, § 14211(b)(1), redesignated subcls. (II) to (V) as (I) to (IV), respectively, and struck out former subcl. (I) which read as follows: “foreign base company oil related income,”.
- 2004 Pub. L. 108-357 Pub. L. 108–357 redesignated subcls. (II) to (VI) as (I) to (V), respectively, and struck out former subcl. (I) which read as follows: “foreign base company shipping income,”.
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1012(i)(22), (23), added subcls. (III) and (IV), redesignated former subcl. (III) as (V) and substituted “insurance income or foreign personal holding company income,” for “insurance income”, and redesignated former subcl. (IV) as (VI).
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(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.
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(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
Amended 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 6131(a), added cl. (vii).
(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.
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(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
Amended 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1012(i)(25)(A), added subpar. (C).
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(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).
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(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.
Amended 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1012(i)(16), added par. (3).
(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.
Amended 1976, 1986
- 1986 Pub. L. 99-509 Pub. L. 99–509, § 8041(b)(2), added subsec. (d).
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 1221(f), struck out subsec. (d), special rule in case of indirect ownership, which read as follows: “For purposes of subsection (c), if—
“(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.”
- 1976 Pub. L. 94-455 Pub. L. 94–455, § 1906(b)(13)(A), struck out “or his delegate” after “Secretary”.