§957 — Controlled foreign corporations; United States persons
32 citing cases
Statute Text — 26 U.S.C. §957
For purposes of this title, the term “controlled foreign corporation” means any foreign corporation if more than 50 percent of—
the total combined voting power of all classes of stock of such corporation entitled to vote, or
the total value of the stock of such corporation,
is owned (within the meaning of section 958(a)), or is considered as owned by applying the rules of ownership of section 958(b), by United States shareholders on any day during the taxable year of such foreign corporation.
For purposes only of taking into account income described in section 953(a) (relating to insurance income), the term “controlled foreign corporation” includes not only a foreign corporation as defined by subsection (a) but also one of which more than 25 percent of the total combined voting power of all classes of stock (or more than 25 percent of the total value of stock) is owned (within the meaning of section 958(a)), or is considered as owned by applying the rules of ownership of section 958(b), by United States shareholders on any day during the taxable year of such corporation, if the gross amount of premiums or other consideration in respect of the reinsurance or the issuing of insurance or annuity contracts not described in section 953(e)(2) exceeds 75 percent of the gross amount of all premiums or other consideration in respect of all risks.
For purposes of this subpart, the term “United States person” has the meaning assigned to it by section 7701(a)(30) except that—
with respect to a corporation organized under the laws of the Commonwealth of Puerto Rico, such term does not include an individual who is a bona fide resident of Puerto Rico, if a dividend received by such individual during the taxable year from such corporation would, for purposes of section 933(1), be treated as income derived from sources within Puerto Rico, and
with respect to a corporation organized under the laws of Guam, American Samoa, or the Northern Mariana Islands—
80 percent or more of the gross income of which for the 3-year period ending at the close of the taxable year (or for such part of such period as such corporation or any predecessor has been in existence) was derived from sources within such a possession or was effectively connected with the conduct of a trade or business in such a possession, and
50 percent or more of the gross income of which for such period (or part) was derived from the active conduct of a trade or business within such a possession,
such term does not include an individual who is a bona fide resident of Guam, American Samoa, or the Northern Mariana Islands.
For purposes of subparagraphs (A) and (B) of paragraph (2), the determination as to whether income was derived from the active conduct of a trade or business within a possession shall be made under regulations prescribed by the Secretary.
Treasury Regulations
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Treas. Reg. §1.957-1Definition of controlled foreign corporation
(a) In general. The term controlled foreign corporation means any foreign corporation of which more than 50 percent (or such lesser amount as is provided in section 957(b) or section 953(c)) of either—
(1) The total combined voting power of all classes of stock of the corporation entitled to vote; or
(2) The total value of the stock of the corporation, is owned within the meaning of section 958(a), or (except for purposes of section 953(c)) is considered as owned by applying the rules of section 958(b) and § 1.958-2, by United States shareholders on any day during the taxable year of such foreign corporation. For the definition of the term United States shareholder, see sections 951(b) and 953(c)(1)(A). For the definition of the term foreign corporation, see § 301.7701-5 of this chapter (Procedure and Administration Regulations). For the treatment of associations as corporations, see section 7701(a)(3) and §§ 301.7701-1 and 301.7701-2 of this chapter. For the definition of the term stock, see sections 958(a)(3) and 7701(a)(7). For the classification of a member in an association, joint stock company or insurance company as a shareholder, see section 7701(a)(8).
(b) Percentage of total combined voting power owned by United States shareholders—(1) Meaning of combined voting power. In determining for purposes of paragraph (a) of this section whether United States shareholders own the requisite percentage of total combined voting power of all classes of stock entitled to vote, consideration will be given to all the facts and circumstances of each case. In all cases, however, United States shareholders of a foreign corporation will be deemed to own the requisite percentage of total combined voting power with respect to such corporation—
(i) If they have the power to elect, appoint, or replace a majority of that body of persons exercising, with respect to such corporation, the powers ordinarily exercised by the board of directors of a domestic corporation;
(ii) If any person or persons elected or designated by such shareholders have the power, where such shareholders have the power to elect exactly one-half of the members of such governing body of such foreign corporation, either to cast a vote deciding an evenly divided vote of such body or, for the duration of any deadlock which may arise, to exercise the powers ordinarily exercised by such governing body; or
(iii) If the powers which would ordinarily be exercised by the board of directors of a domestic corporation are exercised with respect to such foreign corporation by a person whom such shareholders have the power to elect, appoint, or replace.
(2) Shifting of formal voting power. Any arrangement to shift formal voting power away from United States shareholders of a foreign corporation will not be given effect if in reality voting power is retained. The mere ownership of stock entitled to vote does not by itself mean that the shareholder owning such stock has the voting power of such stock for purposes of section 957. For example, if there is any agreement, whether express or implied, that any shareholder will not vote his stock or will vote it only in a specified manner, or that shareholders owning stock having not more than 50 percent of the total combined voting power will exercise voting power normally possessed by a majority of stockholders, then the nominal ownership of the voting power will be disregarded in determining which shareholders actually hold such voting power, and this determination will be made on the basis of such agreement. Moreover, where United States shareholders own shares of one or more classes of stock of a foreign corporation which has another class of stock outstanding, the voting power ostensibly provided such other class of stock will be deemed owned by any person or persons on whose behalf it is exercised or, if not exercised, will be disregarded if the percentage of voting power of such other class of stock is substantially greater than its proportionate share of the corporate earnings, if the facts indicate that the shareholders of such other class of stock do not exercise their voting rights independently or fail to exercise such voting rights, and if a principal purpose of the arrangement is to avoid the classification of such foreign corporation as a controlled foreign corporation under section 957.
(c) Illustrations. The application of this section may be illustrated by the following examples:
(d) Effective date. Paragraphs (a) and (c) Examples 8 through 10 of this section are effective for taxable years of a controlled foreign corporation beginning after November 6, 1995.
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Treas. Reg. §1.957-1(a)In general.
In general. The term controlled foreign corporation means any foreign corporation of which more than 50 percent (or such lesser amount as is provided in section 957(b) or section 953(c)) of either—
(1) The total combined voting power of all classes of stock of the corporation entitled to vote; or
(2) The total value of the stock of the corporation, is owned within the meaning of section 958(a), or (except for purposes of section 953(c)) is considered as owned by applying the rules of section 958(b) and § 1.958-2, by United States shareholders on any day during the taxable year of such foreign corporation. For the definition of the term United States shareholder, see sections 951(b) and 953(c)(1)(A). For the definition of the term foreign corporation, see § 301.7701-5 of this chapter (Procedure and Administration Regulations). For the treatment of associations as corporations, see section 7701(a)(3) and §§ 301.7701-1 and 301.7701-2 of this chapter. For the definition of the term stock, see sections 958(a)(3) and 7701(a)(7). For the classification of a member in an association, joint stock company or insurance company as a shareholder, see section 7701(a)(8).
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Treas. Reg. §1.957-1(b)Percentage of total combined voting power owned by United States shareholders—(1) Meaning of combined voting power.
Percentage of total combined voting power owned by United States shareholders—(1) Meaning of combined voting power. In determining for purposes of paragraph (a) of this section whether United States shareholders own the requisite percentage of total combined voting power of all classes of stock entitled to vote, consideration will be given to all the facts and circumstances of each case. In all cases, however, United States shareholders of a foreign corporation will be deemed to own the requisite percentage of total combined voting power with respect to such corporation—
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Treas. Reg. §1.957-1(c)Illustrations.
Illustrations. The application of this section may be illustrated by the following examples:
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Treas. Reg. §1.957-1(d)Effective date.
Effective date. Paragraphs (a) and (c) Examples 8 through 10 of this section are effective for taxable years of a controlled foreign corporation beginning after November 6, 1995.
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Treas. Reg. §1.957-1(i)§1.957-1(i)
If they have the power to elect, appoint, or replace a majority of that body of persons exercising, with respect to such corporation, the powers ordinarily exercised by the board of directors of a domestic corporation;
(ii) If any person or persons elected or designated by such shareholders have the power, where such shareholders have the power to elect exactly one-half of the members of such governing body of such foreign corporation, either to cast a vote deciding an evenly divided vote of such body or, for the duration of any deadlock which may arise, to exercise the powers ordinarily exercised by such governing body; or
(iii) If the powers which would ordinarily be exercised by the board of directors of a domestic corporation are exercised with respect to such foreign corporation by a person whom such shareholders have the power to elect, appoint, or replace.
(2) Shifting of formal voting power. Any arrangement to shift formal voting power away from United States shareholders of a foreign corporation will not be given effect if in reality voting power is retained. The mere ownership of stock entitled to vote does not by itself mean that the shareholder owning such stock has the voting power of such stock for purposes of section 957. For example, if there is any agreement, whether express or implied, that any shareholder will not vote his stock or will vote it only in a specified manner, or that shareholders owning stock having not more than 50 percent of the total combined voting power will exercise voting power normally possessed by a majority of stockholders, then the nominal ownership of the voting power will be disregarded in determining which shareholders actually hold such voting power, and this determination will be made on the basis of such agreement. Moreover, where United States shareholders own shares of one or more classes of stock of a foreign corporation which has another class of stock outstanding, the voting power ostensibly provided such other class of stock will be deemed owned by any person or persons on whose behalf it is exercised or, if not exercised, will be disregarded if the percentage of voting power of such other class of stock is substantially greater than its proportionate share of the corporate earnings, if the facts indicate that the shareholders of such other class of stock do not exercise their voting rights independently or fail to exercise such voting rights, and if a principal purpose of the arrangement is to avoid the classification of such foreign corporation as a controlled foreign corporation under section 957.
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Treas. Reg. §1.957-2Controlled foreign corporation deriving income from insurance of United States risks
(a) In general. For purposes of taking into account only the income derived from the insurance of United States risks under § 1.953-1, the term “controlled foreign corporation” means any foreign corporation of which more than 25 percent, but not more than 50 percent, of the total combined voting power of all classes of stock entitled to vote is owned within the meaning of section 958(a), or is considered as owned by applying the rules of ownership of section 958(b), by United States shareholders on any day of the taxable year of such foreign corporation, but only if the gross amount of premiums received by such foreign corporation during such taxable year which are attributable to the reinsuring and the issuing of insurance and annuity contracts in connection with United States risks, as defined in § 1.953-2 or 1.953-3, exceeds 75 percent of the gross amount of all premiums received by such foreign corporation during such year which are attributable to the reinsuring and the issuing of insurance and annuity contracts in connection with all risks. The subpart F income for a taxable year of a foreign corporation which is a controlled foreign corporation for such taxable year within the meaning of this paragraph shall, subject to the provisions of section 952(b), (c), and (d), and § 1.952-1, include only the income derived from the insurance of United States risks, as determined under § 1.953-1.
(b) Gross amount of premiums defined. For a foreign corporation which is engaged in the business of reinsuring or issuing insurance or annuity contracts and which, if it were a domestic corporation engaged only in such business, would be taxable as—
(1) A life insurance company to which part I (sections 801 through 820) of subchapter L of the Code applies,
(2) A mutual insurance company to which part II (sections 821 through 826) of subchapter L of the Code applies, or
(3) A mutual marine insurance or other insurance company to which part III (sections 831 and 832) of subchapter L of the Code applies,
the term “gross amount of premiums” means, for purposes of paragraph (a) of this section, the gross amount of premiums and other consideration which are taken into account by a life insurance company under section 809(c)(1). Determinations for purposes of this paragraph shall be made without regard to section 501(a).
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Treas. Reg. §1.957-2(a)In general.
In general. For purposes of taking into account only the income derived from the insurance of United States risks under § 1.953-1, the term “controlled foreign corporation” means any foreign corporation of which more than 25 percent, but not more than 50 percent, of the total combined voting power of all classes of stock entitled to vote is owned within the meaning of section 958(a), or is considered as owned by applying the rules of ownership of section 958(b), by United States shareholders on any day of the taxable year of such foreign corporation, but only if the gross amount of premiums received by such foreign corporation during such taxable year which are attributable to the reinsuring and the issuing of insurance and annuity contracts in connection with United States risks, as defined in § 1.953-2 or 1.953-3, exceeds 75 percent of the gross amount of all premiums received by such foreign corporation during such year which are attributable to the reinsuring and the issuing of insurance and annuity contracts in connection with all risks. The subpart F income for a taxable year of a foreign corporation which is a controlled foreign corporation for such taxable year within the meaning of this paragraph shall, subject to the provisions of section 952(b), (c), and (d), and § 1.952-1, include only the income derived from the insurance of United States risks, as determined under § 1.953-1.
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Treas. Reg. §1.957-2(b)Gross amount of premiums defined.
Gross amount of premiums defined. For a foreign corporation which is engaged in the business of reinsuring or issuing insurance or annuity contracts and which, if it were a domestic corporation engaged only in such business, would be taxable as—
(1) A life insurance company to which part I (sections 801 through 820) of subchapter L of the Code applies,
(2) A mutual insurance company to which part II (sections 821 through 826) of subchapter L of the Code applies, or
(3) A mutual marine insurance or other insurance company to which part III (sections 831 and 832) of subchapter L of the Code applies,
the term “gross amount of premiums” means, for purposes of paragraph (a) of this section, the gross amount of premiums and other consideration which are taken into account by a life insurance company under section 809(c)(1). Determinations for purposes of this paragraph shall be made without regard to section 501(a).
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Treas. Reg. §1.957-3United States person defined
(a) Basic rule—(1) In general. The term United States person has the same meaning for purposes of sections 951 through 965 that it has under section 7701(a)(30) and the regulations under that section, except as provided in paragraphs (b) and (c) of this section, which provide, with respect to corporations organized in possessions of the United States, that certain residents of such possessions are not United States persons. The effect of determining that an individual is not a United States person for such purposes is to exclude such individual in determining whether a foreign corporation created or organized in, or under the laws of, a possession of the United States is a controlled foreign corporation. See § 1.957-1 for the definition of the term “controlled foreign corporation.”
(2) Special provisions applicable to possessions of the United States. For purposes of this section—
(i) The term possession of the United States means Puerto Rico or any section 931 possession;
(ii) The term section 931 possession has the same meaning that it has under § 1.931-1(c)(1);
(iii) The rules of § 1.937-1 will apply for determining whether an individual is a bona fide resident of a possession of the United States;
(iv) Except as provided in paragraph (b)(2) of this section, the rules of § 1.937-2 will apply for determining whether income is from sources within a possession of the United States; and
(v) The rules of § 1.937-3 will apply for determining whether income is effectively connected with the conduct of a trade or business in a possession of the United States.
(b) Puerto Rico corporation and resident. An individual (who, without regard to this paragraph (b), is a United States person) will not be considered a United States person with respect to a foreign corporation created or organized in, or under the laws of, Puerto Rico for the taxable year of such corporation that ends with or within the taxable year of such individual if—
(1) Such individual is a bona fide resident of Puerto Rico during his entire taxable year in which or with which the taxable year of such foreign corporation ends; and
(2) A dividend received by such individual from such corporation during the taxable year of such corporation would, for purposes of section 933(1), be treated as income derived from sources within Puerto Rico. For purposes of this paragraph (b)(2), the rules of § 1.937-2(g)(1) will not apply.
(c) Section 931 possession corporation and resident. An individual (who, without regard to this paragraph (c), is a United States person) will not be considered a United States person with respect to a foreign corporation created or organized in, or under the laws of, a section 931 possession for the taxable year of such corporation that ends with or within the taxable year of such individual if—
(1) Such individual is a bona fide resident of such section 931 possession during his entire taxable year in which or with which the taxable year of such foreign corporation ends; and
(2) Such corporation satisfies the following conditions—
(i) 80 percent or more of its gross income for the 3-year period ending at the close of the taxable year (or for such part of such period as such corporation or any predecessor has been in existence) was derived from sources within section 931 possessions or was effectively connected with the conduct of a trade or business in section 931 possessions; and
(ii) 50 percent or more of its gross income for such period (or part) was derived from the active conduct of a trade or business within section 931 possessions.
(d) Effective/applicability date. This section applies to taxable years ending after April 9, 2008.
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Treas. Reg. §1.957-3(a)Basic rule—(1) In general.
Basic rule—(1) In general. The term United States person has the same meaning for purposes of sections 951 through 965 that it has under section 7701(a)(30) and the regulations under that section, except as provided in paragraphs (b) and (c) of this section, which provide, with respect to corporations organized in possessions of the United States, that certain residents of such possessions are not United States persons. The effect of determining that an individual is not a United States person for such purposes is to exclude such individual in determining whether a foreign corporation created or organized in, or under the laws of, a possession of the United States is a controlled foreign corporation. See § 1.957-1 for the definition of the term “controlled foreign corporation.”
(2) Special provisions applicable to possessions of the United States. For purposes of this section—
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Treas. Reg. §1.957-3(b)Puerto Rico corporation and resident.
Puerto Rico corporation and resident. An individual (who, without regard to this paragraph (b), is a United States person) will not be considered a United States person with respect to a foreign corporation created or organized in, or under the laws of, Puerto Rico for the taxable year of such corporation that ends with or within the taxable year of such individual if—
(1) Such individual is a bona fide resident of Puerto Rico during his entire taxable year in which or with which the taxable year of such foreign corporation ends; and
(2) A dividend received by such individual from such corporation during the taxable year of such corporation would, for purposes of section 933(1), be treated as income derived from sources within Puerto Rico. For purposes of this paragraph (b)(2), the rules of § 1.937-2(g)(1) will not apply.
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Treas. Reg. §1.957-3(c)Section 931 possession corporation and resident.
Section 931 possession corporation and resident. An individual (who, without regard to this paragraph (c), is a United States person) will not be considered a United States person with respect to a foreign corporation created or organized in, or under the laws of, a section 931 possession for the taxable year of such corporation that ends with or within the taxable year of such individual if—
(1) Such individual is a bona fide resident of such section 931 possession during his entire taxable year in which or with which the taxable year of such foreign corporation ends; and
(2) Such corporation satisfies the following conditions—
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Treas. Reg. §1.957-3(d)Effective/applicability date.
Effective/applicability date. This section applies to taxable years ending after April 9, 2008.
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Treas. Reg. §1.957-3(i)§1.957-3(i)
80 percent or more of its gross income for the 3-year period ending at the close of the taxable year (or for such part of such period as such corporation or any predecessor has been in existence) was derived from sources within section 931 possessions or was effectively connected with the conduct of a trade or business in section 931 possessions; and
(ii) 50 percent or more of its gross income for such period (or part) was derived from the active conduct of a trade or business within section 931 possessions.
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Treas. Reg. §1.957-3(v)The rules of § 1.
The rules of § 1.937-3 will apply for determining whether income is effectively connected with the conduct of a trade or business in a possession of the United States.
32 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.
(J:COM), a Japanese entity, making J:COM a CFC, as defined in section 957, for 2010.4 In a series of transactions that took place on February 18, 2010, Liberty Global’s interests in J:COM were transferred to an unaffiliated foreign corporation for $3,961,608,988 in a transaction treated as a sale for U.S.
years in issue Eaton was the parent ofan affiliated group of corporations (Eaton Group) that filed consolidated Federal income tax returns. Members ofthe Eaton Group were 100% shareholders offoreign corporations that were CFCs within the meaning ofsection 957. These CFCs collectively held (directly or indirectly) 100% ofthe membership interests in EW LLC. The CFCs that held membership interests in EW LLC during the years in issue were: (1) Eaton Holding III S.a.r.l., (2) Eaton Finance N.V., and
the years at issue, unless otherwise indicated. -4- March 31, 2006. Petitioner is also the parent ofnon-consolidated foreign affiliates. Petitioner's wholly-ownedBMC Software European Holding (BSEH)3 was a controlled foreign corporation (CFC) under section 957. II. Transfer Pricing Dispute Petitioner and BSEH collaboratively developed software. Two cost-sharing agreements (CSAs) governed that relationship. Under the CSAs, they co-owned the software and each held exclusive distribution rights for
ederal income tax return for the taxable year ended March 31, 2006. Petitioner is also the parent of non-consolidated foreign affiliates. Petitioner’s wholly-owned BMC Software European Holding (BSEH) was a controlled foreign corporation (CFC) under section 957. II. Transfer Pricing Dispute Petitioner and BSEH collaboratively developed software. Two cost-sharing agreements (CSAs) governed that relationship. Under the CSAs, they co-owned the software and each held exclusive distribution rights fo
of section 957, and that Mr . Anderson must therefore recognize a pro rata share of Gold & Appel's so-called subpart F income pursuant to section 951 . 'Respondent seeks summary judgment for all five of the tax years at issue (i .e,., both the years for which he pleaded guilty and the three prior years for which the charges were dismissed), , (continu
After concessions, the only issue for decision is whether accruals for the future payment of annuities made by a controlled foreign corporation (CFC), as that term is defined in section 957, reduced that CFC's earnings and profits available for the payment of dividends to shareholders .
After concessions, the only issue for decision is whether accruals for the future payment of annuities made by a controlled foreign corporation (CFC), as that term is defined in section 957, reduced that CFC’s earnings and profits available for the payment of dividends to shareholders.
The TAM states that a taxpayer may not rely on cases interpreting section 957 to interpret section 1504 because the cases interpreting section 957 (which the taxpayer cited) allowed the Commissioner, not the taxpayer, to apply the substance over form doctrine to prevent taxpayer abuse.
The TAM states that a taxpayer may not rely on cases interpreting section 957 to interpret section 1504 because the cases interpreting section 957 (which the taxpayer cited) allowed the Commissioner, not the taxpayer, to apply the substance over form doctrine to prevent taxpayer abuse.
tion 954(d)(3), to treat the stock of a domestic corporation as owned by a United States shareholder of the controlled foreign corporation for purposes of section 956(b)(2), or to treat a foreign corporation as a controlled foreign corporation under section 957, except that-- (1) In applying paragraph (1)(A) of section 318(a), stock owned by a nonresident alien individual (other than a foreign trust or foreign estate) shall not be considered as owned by a citizen or by a resident alien individua
ed foreign corporation shall include in his gross income, for his taxable year in which or with which such taxable year of the corporation ends-- (A) the sum of-- (i) his pro rata share * * * of the corporation’s subpart F income for such year * * * Section 957 then goes on to define a controlled foreign corporation (CFC) as a foreign corporation in which more than 50 percent of the total combined voting power or total value of stock is owned by United States shareholders on any day during the c
ion 954(d)(3), to treat the stock of a domestic corporation as owned by a United States shareholder of the controlled foreign corporation for purposes of section 956(b)(2), or to treat 'a foreign corporation as a controlled foreign corporation under section 957, except that— (1) In applying paragraph (1)(A) of section 318(a), stock owned by a nonresident alien individual (other than a foreign trust or foreign estate) shall not be considered as owned by a citizen or by a resident alien individual
as general - 15 - limitation income is not in and of itself inconsistent with the payments’ being in the nature of dividends, suggesting that such clarification “would prevent any misunderstanding of the relevant authorities by the general public.” Respondent points out that FIL appears to be a controlled foreign corporation (CFC), as defined in section 957, and therefore would be subject to the “look-thru” rules of section 904(d)(3).
as general - 15 - limitation income is not in and of itself inconsistent with the payments’ being in the nature of dividends, suggesting that such clarification “would prevent any misunderstanding of the relevant authorities by the general public.” Respondent points out that FIL appears to be a controlled foreign corporation (CFC), as defined in section 957, and therefore would be subject to the “look-thru” rules of section 904(d)(3).
MFE is a controlled foreign corporation within the meaning of section 957 and, with respect to MFE, petitioner is a U.S.
MFE is a controlled foreign corporation within the meaning of section 957 and, with respect to MFE, petitioner is a U.S.