§952 — Subpart F income defined
17 cases·1 followed·16 cited—6% support
Statute Text — 26 U.S.C. §952
For purposes of this subpart, the term “subpart F income” means, in the case of any controlled foreign corporation, the sum of—
insurance income (as defined under section 953),
the foreign base company income (as determined under section 954),
an amount equal to the product of—
the income of such corporation other than income which—
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
is described in subsection (b),
multiplied by
the international boycott factor (as determined under section 999),
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
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.
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.
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.
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.
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—
is attributable to the same qualified activity as the activity giving rise to the income being offset, and
has not previously been taken into account under this subparagraph.
For purposes of this paragraph, the term “qualified activity” means any activity giving rise to—
foreign base company sales income,
foreign base company services income,
in the case of a qualified insurance company, insurance income or foreign personal holding company income, or
in the case of a qualified financial institution, foreign personal holding company income.
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:
the close of the taxable year, or
the close of the taxable year in which the deficit arose.
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.
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.
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.
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.
In determining the deficit attributable to qualified activities described in subclause (II) or (III) of clause (iii),
1
1 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),
1
the rule of the preceding sentence shall apply, except that “1982” shall be substituted for “1962”.
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).
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—
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
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.
This subparagraph shall be applied after subparagraphs (A) and (B).
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).
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.
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.
Treasury Regulations
- Treas. Reg. §Treas. Reg. §1.952-1 Subpart F income defined
- Treas. Reg. §Treas. Reg. §1.952-1(a) §1.952-1(a)
- Treas. Reg. §Treas. Reg. §1.952-1(b) All foreign corporations in which such shareholder owns (within the meaning of section 958(a)(2)) stock, but only to the extent of the stock so owned by reason of his ownership of the stock referred to in (a) of this subdivision.
- Treas. Reg. §Treas. Reg. §1.952-1(c) The sum of such corporation's earnings and profits for prior taxable years beginning after December 31, 1962, which, with respect to such shareholder, are allocated to other earnings and profits under section 959(c)(3) and § 1.
- Treas. Reg. §Treas. Reg. §1.952-1(d) Treatment of deficits in earnings and profits attributable to stock of other foreign corporation indirectly owned by a United States shareholder—(1) In general.
- Treas. Reg. §Treas. Reg. §1.952-1(e) Application of current earnings and profits limitation—(1) In general.
- Treas. Reg. §Treas. Reg. §1.952-1(f) Recapture of subpart F income in subsequent taxable year—(1) In general.
- Treas. Reg. §Treas. Reg. §1.952-1(g) Treatment of distributive share of partnership income—(1) In general.
- Treas. Reg. §Treas. Reg. §1.952-1(i) First, proportionately reduce subpart F income in each separate category of the controlled foreign corporation, as defined in § 1.
- Treas. Reg. §Treas. Reg. §1.952-2 Determination of gross income and taxable income of a foreign corporation
- Treas. Reg. §Treas. Reg. §1.952-2(a) §1.952-2(a)
- Treas. Reg. §Treas. Reg. §1.952-2(b) Exchange gain or loss shall be treated as foreign base company shipping income (or as a deduction allocable thereto) to the extent that it is attributable to foreign base company shipping operations.
- Treas. Reg. §Treas. Reg. §1.952-2(c) The remainder of the exchange gain or loss shall be allocated between subpart F income and non-subpart F income under any reasonable method which is consistently applied from year to year.
- Treas. Reg. §Treas. Reg. §1.952-2(i) §1.952-2(i)
- Treas. Reg. §Treas. Reg. §1.952-2(v) Exchange gain or loss—(a) Exchange gain or loss, determined in accordance with the principles of § 1.
17 Citing Cases
During these years members of the Eaton Group were 100% shareholders of three foreign corporations that were CFCs within the meaning of section 957.
hose provisions and sec. 951(b) (defining the term “United States shareholder”), each United States shareholder of a controlled foreign corporation (CFC) includes in his gross income his pro rata share of the CFC’s (1) subpt. F income (as defined in sec. 952) and (2) earnings invested in United States property (as determined under sec. 956). The stipulation actually describes the issue as whether the CFC properly accrued the future annuity expenses; but, as discussed infra, it is clear that the
It applies primarily to the types of income described in section 952 (subpart F income).
It applies primarily to the types of income described in section 952 (subpart F income).
- 15 - Petitioners also rely on Treasury regulations applicable to the prior version of section 952, and thus applicable through the end of 1986, that have never been declared obsolete and that permitted the use of deficits in the earnings and profits of CFC's to reduce subpart F income of sister CFC's.
Petitioners also rely on Treasury regulations applicable to the prior version of section 952, and thus applicable through the end of 1986, that have never been declared obsolete and that permitted the use of deficits in the earnings and profits of CFC’s to reduce subpart F income of sister CFC’s.