§956 — Investment of earnings in United States property
28 cases·4 followed·7 distinguished·2 questioned·2 criticized·1 overruled·12 cited—14% support
Statute Text — 26 U.S.C. §956
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—
the excess (if any) of—
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
the amount of earnings and profits described in section 959(c)(1)(A) with respect to such shareholder, or
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.
For purposes of this section, the term “applicable earnings” means, with respect to any controlled foreign corporation, the sum of—
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
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).
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.
If any foreign corporation ceases to be a controlled foreign corporation during any taxable year—
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,
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
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.
For purposes of subsection (a), the term “United States property” means any property acquired after
December 31, 1962
, which is—
tangible property located in the United States;
stock of a domestic corporation;
an obligation of a United States person; or
any right to the use in the United States of—
a patent or copyright,
an invention, model, or design (whether or not patented),
a secret formula or process, or
any other similar right,
which is acquired or developed by the controlled foreign corporation for use in the United States.
For purposes of subsection (a), the term “United States property” does not include—
obligations of the United States, money, or deposits with—
any bank (as defined by section 2(c) of the Bank Holding Company Act of 1956 (
12 U.S.C. 1841(c)
), without regard to subparagraphs (C) and (G) of paragraph (2) of such section), or
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;
property located in the United States which is purchased in the United States for export to, or use in, foreign countries;
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;
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;
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);
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;
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;
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);
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;
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;
securities acquired and held by a controlled foreign corporation in the ordinary course of its business as a dealer in securities if—
the dealer accounts for the securities as securities held primarily for sale to customers in the ordinary course of business, and
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
an obligation of a United States person which—
is not a domestic corporation, and
is not—
a United States shareholder (as defined in section 951(b)) of the controlled foreign corporation, or
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.
Notwithstanding paragraph (2) (other than subparagraph (H) thereof), the term “United States property” includes any trade or service receivable if—
such trade or service receivable is acquired (directly or indirectly) from a related person who is a United States person, and
the obligor under such receivable is a United States person.
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).
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.
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.
Treasury Regulations
- Treas. Reg. §Treas. Reg. §1.956-1 Shareholder's pro rata share of the average of the amounts of United States property held by a controlled foreign corporation
- Treas. Reg. §Treas. Reg. §1.956-1(a) Overview and scope—(1) In general.
- Treas. Reg. §Treas. Reg. §1.956-1(b) Amount of United States property held indirectly by a controlled foreign corporation—(1) General rule.
- Treas. Reg. §Treas. Reg. §1.956-1(c) §1.956-1(c)
- Treas. Reg. §Treas. Reg. §1.956-1(e) Amount attributable to property—(1) General rule.
- Treas. Reg. §Treas. Reg. §1.956-1(f) §1.956-1(f)
- Treas. Reg. §Treas. Reg. §1.956-1(g) Applicability dates.
- Treas. Reg. §Treas. Reg. §1.956-1(i) Example 1—(A) Facts.
- Treas. Reg. §Treas. Reg. §1.956-1(v) Transfers to r elated persons.
- Treas. Reg. §Treas. Reg. §1.956-1T Shareholder's pro rata share of the average of the amounts of United States property held by a controlled foreign corporation
- Treas. Reg. §Treas. Reg. §1.956-1T(a) §1.956-1T(a)
- Treas. Reg. §Treas. Reg. §1.956-1T(e) §1.956-1T(e)
- Treas. Reg. §Treas. Reg. §1.956-1T(f) Effective/applicability date.
- Treas. Reg. §Treas. Reg. §1.956-1T(g) §1.956-1T(g)
- Treas. Reg. §Treas. Reg. §1.956-2 Definition of United States property
- Treas. Reg. §Treas. Reg. §1.956-2(a) §1.956-2(a)
- Treas. Reg. §Treas. Reg. §1.956-2(b) §1.956-2(b)
- Treas. Reg. §Treas. Reg. §1.956-2(c) §1.956-2(c)
- Treas. Reg. §Treas. Reg. §1.956-2(d) Definitions—(1) Meaning of “acquired”—(i) Applicable rules.
- Treas. Reg. §Treas. Reg. §1.956-2(e) Effective/applicability date.
- Treas. Reg. §Treas. Reg. §1.956-2(f) §1.956-2(f)
- Treas. Reg. §Treas. Reg. §1.956-2(g) §1.956-2(g)
- Treas. Reg. §Treas. Reg. §1.956-2(h) Effective/applicability date.
- Treas. Reg. §Treas. Reg. §1.956-2(i) §1.956-2(i)
- Treas. Reg. §Treas. Reg. §1.956-2(v) Any obligation (as defined in paragraph (d)(2) of this section) of a United States person (as defined in section 957(d)) arising in connection with the sale or processing of property if the amount of such obligation outstanding at any time during the taxable year of the foreign corporation does not exceed an amount which is 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, or, if the sale or proces
28 Citing Cases
Petitioners have stipulated that the PTI limitation does not apply here because no portion ofthe E&P attributable to the $21,055,123 debt cancel- lation was previously included in their gross income under subpart F.
In any event, the specific situation addressed in both documents is distinguishable from petitioner's case.
- 18 - Congress accomplished this limitation by providing that any section 956 inclusion must be reduced by previously taxed income (PTI) under section 959(c)(1)(A). Petitioner concedes that, except with respect to $2,184,843 oftrade receivables, s_ee supra p. 9, the PTI limitation ofsection 959(c)(1)(A) does not apply because petitioner has not previously included any amount in income on account ofthe CFCs' investments in United States property.
956(a) (2), (b) (1); sec. 1.952-1(c) (1), Income Tax Regs.8 As another example, whereas a dividend results in no increáse to the shareholder's stock basis, a section 951 inclusion does.8 Sec. 961(a); sec. 1.961-1, Income Tax Regs. In the light of these various considerations, the sentence in question from the 1962 legislative history does not control the issue of whether section 951 inclusions should be characterized as dividends for purposes of section 1(h) (11).
-63- [*63] As petitioner correctly notes, neither section 951 nor section 956 applies to the transactions at issue.
In pertinent part, section 956 provides: (a) General Rules.--For purposes of this subpart-- (1) Amount of investment.
property within the meaning of section 956, resulting in dividend income to petitioner”.
Internal Revenue Code and Regulations The principal provisions of the Internal Revenue Code at issue are sections 951 and 956. Sections 951 and 956 are found in subpart F of part III, subchapter N, chapter 1 of the Internal Revenue Code (subpart F). Subpart F concerns itself with controlled foreign corporations. The term “controlled f
corporations, with a domestic partnership (DP) interposed between the two tiers. For 2007 and 2008 DP included in its gross income under I.R.C. § 951 the subpart F income of the lower tier of foreign corporations as well as amounts determined under I.R.C. § 956. DP made no distributions to its partners in 2007 or 2008, and P did not increase its gross income on account of DP’s inclusions under I.R.C. § 951. In a prior opinion applying I.R.C. § 312, we held that DP’s inclusions under I.R.C. § 95
eviously subject to U.S. tax] to fund an acquisition of all or part of the stock of a domestic corporation from an unrelated party for cash, followed by an outbound asset reorganization of the domestic corporation to avoid an income inclusion under section 956.”29 Id. Under one of the rules that would be added to the regulations, the U.S. transferor of intangible property would “take into account income under section 367(d)(2)(A)(ii)(II)” to the extent that the stock of the transferee foreign co
EW LLC included in income under section 951(a) the subpart F income earned by the lower tier CFCs and amounts calculated under section 956 with respect to the lower tier CFCs.
iminish the constitutional significance ofthe establishment ofthe Tax Court under Article I. Burns, Stix Friedman & Co. v. Commissioner, 57 T.C. 392, 395 (1971). -10- order, rule, decree, or command" as is available to Article IIIjudges,¹° 1969 Act sec. 956, 83 Stat. at 732 (amending section 7456); see 18 U.S.C. sec. 401 (2012). As stated supra pp. 7-8, in the 1969 Act Congress deleted the designation of the Tax Court as an "independent agency in the Executive Branch ofthe Government". The only
Since the income required to be included under section 956 is limited to the adjusted basis that * * * [Bermuda] has in the * * * [Delaware] preferred stock, no amount should be included in Barnes' income as a result of * * * [Bermuda's] investment in the * * * [Delaware] preferred stock.
ch 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 issue for decision is more accurately described as whether those accruals reduced t