Source: https://www.law.cornell.edu/cfr/text/26/1.959-3
Timestamp: 2018-09-19 12:50:25
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26 CFR 1.959-3 - Allocation of distributions to earnings and profits of foreign corporations. | US Law | LII / Legal Information Institute
CFR › Title 26 › Chapter I › Subchapter A › Part 1 › Section 1.959-3
26 CFR 1.959-3 - Allocation of distributions to earnings and profits of foreign corporations.
(a)In general. For purposes of §§ 1.959-1 and 1.959-2, the source of the earnings and profits from which distributions are made by a foreign corporation as between earnings and profits attributable to increases in earnings invested in United States property, previously taxed subpart F income, previously excluded subpart F income withdrawn from investment in less developed countries, previously excluded subpart F income withdrawn from investment in foreign base company shipping operations, and other amounts shall be determined in accordance with section 959(c) and paragraphs (b) through (e) of this section.
(b)Applicability of section 316(a). For purposes of this section, section 316(a) shall be applied, in determining the source of distributions from the earnings and profits of a foreign corporation, by first applying section 316(a)(2) and then by applying section 316(a)(1) -
(1) First, as provided by section 959 (c)(1), to earnings and profits attributable to amounts included in gross income of a United States shareholder under section 951(a)(1)(B) (or which would have been so included but for section 959(a)(2) and paragraph (c) of § 1.959-1),
(2) Secondly, as provided by section 959(c)(2), to earnings and profits attributable to amounts included in gross income of a United States shareholder under section 951(a)(1)(A) (but reduced by amounts not included in such gross income under section 951(a)(1)(B) because of the exclusion provided by section 959(a)(2) and paragraph (c) of § 1.959-1), and
(3) Finally, as provided by section 959(c)(3), to other earnings and profits. Thus, distributions shall be considered first attributable to amounts, if any, described in subparagraph (1) of this paragraph (first for the current taxable year and then for prior taxable years beginning with the most recent prior taxable year), secondly to amounts, if any, described in subparagraph (2) of this paragraph (first for the current taxable year and then for prior taxable years beginning with the most recent prior taxable year), and finally to the amounts, if any, described in subparagraph (3) of this paragraph (first for the current taxable year and then for prior taxable years beginning with the most recent prior taxable year). See, however, paragraph (e) of § 1.963-3 (applied as if section 963 had not been repealed by the Tax Reduction Act of 1975) for a special rule for determination of the source of distributions counting as minimum distributions. Earnings and profits are classified as to year and as to section 959(c) amount in the year in which such amounts are included in gross income of a United States shareholder under section 951(a) and are reclassified as to section 959(c) amount in the year in which such amounts would be so included but for the provisions of section 959(a)(2); any subsequent distribution of such amounts to a higher tier in a chain of ownership described in section 958(a) does not of itself change such classifications. For example, earnings and profits of a foreign corporation attributable to amounts of previously excluded subpart F income withdrawn from investment in less developed countries (or from investments in export trade assets or foreign base company shipping operations) shall be reclassified as amounts to which subparagraph (2), rather than subparagraph (3), of this paragraph applies for purposes of determining priority of distribution, and such earnings and profits shall be considered attributable to the taxable year in which the withdrawal occurs. This paragraph shall apply to distributions by one foreign corporation to another foreign corporation and by a foreign corporation to a United States person. The application of this paragraph may be illustrated by the following example:
(a) M, a controlled foreign corporation, is organized on January 1, 1963, and is 100-percent owned by A, a United States shareholder. Both A and M Corporation use the calendar year as a taxable year, and M Corporation is a controlled foreign corporation throughout the period here involved. As of December 31, 1966, M Corporation's accumulated earnings and profits of $450 (before taking into account distributions made in 1966) applicable to A's interest in such corporation are classified for purposes of section 959(c) as follows:
Classification of earnings and profits for purposes of section 959
1963 $100
1964 100 $75
1965 75 $50
Allocation of distributions under section 959
Distribution No. 1 $100 1964 (c)(1)
50 1963 (c)(1)
Distribution No. 2 50 1963 (c)(1)
75 1965 (c)(2)
25 1964 (c)(2)
Distribution No. 3 50 1964 (c)(2)
50 1966 (c)(3)
50 1965 (c)(3)
(c) If, in addition to the above facts -
the $20 investment of earnings in United States property is excludable from A's gross income for 1966, under section 959(a)(2) and paragraph (c) of § 1.959-1, with respect to N Corporation and the $45 dividend received by M Corporation does not, under section 959(b) and § 1.959-2, constitute gross income of M Corporation for 1966 for purposes of determining amounts includible in A's gross income under section 951(a)(1)(A)(i) with respect to M Corporation. However, the $45 dividend paid by N Corporation to M Corporation is allocated under section 959(c) and this paragraph to the earnings and profits of N Corporation as follows: $20 to 1963 earnings described in section 959(c)(1) and $25 to 1963 earnings described in section 959(c)(2). In such case, M Corporation's earnings and profits of $495 (before taking into account distributions made in 1966) would be classified as follows for purposes of section 959(c):
1963 $120 $25
1964 100 75
Distribution No. 2 70 1963 (c)(1)
5 1964 (c)(2)
Distribution No. 3 70 1964 (c)(2)
25 1963 (c)(2)
5 1965 (c)(3)
(c)Treatment of deficits in earnings and profits. For purposes of this section, a United States shareholder's pro rata share (determined in accordance with the principles of paragraph (e) of § 1.951-1) of a foreign corporation's deficit in earnings and profits, determined under section 964(a) and § 1.964-1, for any taxable year shall be applied only to earnings and profits described in paragraph (b)(3) of this section.
(d)Treatment of certain foreign taxes. For purposes of this section, any amount described in subparagraph (1), (2), or (3) of paragraph (b) of this section which is distributed by a foreign corporation through a chain of ownership described in section 958(a)(2) shall be reduced by any income, war profits, or excess profits taxes imposed on or with respect to such distribution by any foreign country or possession of the United States.
(a) Domestic corporation M owns 100 percent of the only class of stock of foreign corporation A, which is incorporated under the laws of foreign country X and which, in turn, owns 100 percent of the only class of stock of foreign corporation B, which is incorporated under the laws of foreign country Y. All corporations use the calendar year as a taxable year and corporations A and B are controlled foreign corporations throughout the period here involved.
(b) During 1963, B Corporation (a less developed country corporation for 1963 within the meaning of § 1.955-5) derives $90 of subpart F income, after incurring $10 of foreign income tax allocable to such income under paragraph (c) of § 1.954-1, has earnings and profits in excess of $90, and makes no distributions. Corporation M must include $90 in its gross income for 1963 under section 951(a)(1)(A)(i). As of December 31, 1963, with respect to M Corporation, B Corporation has earnings and profits for 1963 described in section 959(c)(2) of $90.
(c) During 1964, B Corporation has neither earnings and profits nor a deficit in earnings and profits but distributes $90 to A Corporation, and, by reason of section 959(b) and § 1.959-2, such amount is not includible in the gross income of M Corporation for 1964 under section 951(a) with respect to A Corporation. Corporation A incurs a withholding tax of $13.50 on the $90 dividend distributed from B Corporation (15 percent of $90) and an additional foreign income tax of 10 percent or $7.65 by reason of the inclusion of the net distribution of $76.50 ($90 minus $13.50) in its taxable income for 1964. As of December 31, 1964, with respect to M Corporation, B Corporation's earnings and profits for 1963 described in section 959(c)(2) amount to zero ($90 minus $90); and A Corporation's earnings and profits for 1963 described in section 959(c)(2) amount to $68.85 ($90 minus $13.50 minus $7.65).
(e)Determination of foreign tax credit. For purposes of applying section 902 and section 960 in determining the foreign tax credit allowable under section 901 in a case in which distributions are made by a second-tier corporation or a first-tier corporation, as the case may be, from its earnings and profits for a taxable year which are attributable to an amount included in the gross income of a U.S. shareholder under section 951(a) or which are attributable to amounts excluded from the gross income of such foreign corporation under section 959(b) and § 1.959-2 with respect to a U.S. shareholder, the rules of paragraph (b) of this section shall apply except that in applying subparagraph (1) or (2) of such paragraph -
(a) Domestic corporation A, a United States shareholder, owns 100 percent of the only class of stock of foreign corporation R which, in turn, owns 100 percent of the only class of stock of foreign corporation S. All corporations use the calendar year as a taxable year, and corporations R and S are controlled foreign corporations throughout the period here involved.
(a) Domestic corporation A, a United States shareholder, owns 100 percent of the only class of stock of foreign corporation T which, in turn, owns 100 percent of the only class of stock of foreign corporation U. All corporations use the calendar year as a taxable year, and corporations T and U are controlled foreign corporations throughout the period here involved.
(f)Illustration. The application of this section may be illustrated by the following example:
(a) M, a controlled foreign corporation is organized on January 1, 1963, and is wholly owned by A, a United States shareholder. Both A and Corporation M use the calendar year as a taxable year.
Section 959(c)(1) amounts:
Earnings for 1963 attributable to increased investment in U.S. property which would have been included in A's gross income but for application of section 959(a)(2) and § 1.959-1(c) $50
Less: Distribution for 1963 allocated under section 959(c)(1) and paragraph (b)(1) of this section to such amounts 20 $30
Section 959(c)(2) amounts:
Earnings for 1963 attributable to subpart F income included in A's gross income under section 951(a)(1)(A)(i) 100
Less: Earnings for 1963 attributable to increased investment in U.S. property which would have been included in A's gross income but for application of section 959(a)(2) and § 1.959-1(c) 50 50
Section 959(c)(3) amounts:
Predistribution earnings for 1963 200
Less: Earnings for 1963 classified as:
Section 959(c)(1) amounts $50
Section 959(c)(2) amounts 50 100 100
A's total interest in M Corporation's earnings and profits 180
For 1963, A is required to include $100 of subpart F income in his gross income under section 951(a)(1)(A)(i). He would have been required to include $50 in his gross income under section 951(a)(1)(B) as M Corporation's increase in earnings invested in United States property, except that section 959(a)(2) and paragraph (c) of § 1.959-1 provide in effect that earnings and profits taxed to A under section 951(a)(1)(A) with respect to M Corporation (whether in the current taxable year or in prior years) may be invested in United States property without again being included in gross income under section 951(a). The $20 dividend from M Corporation is excluded from A's gross income under section 959(a)(1) and paragraph (b) of § 1.959-1, since such distribution is allocated under section 959(c)(1) and paragraph (b)(1) of this section to amounts described in section 959(c)(1).
Section 959 (c)(1) amounts:
Section 959(c)(1) net amount for 1963 (as determined under paragraph (b) of this example) $30
Less: Distribution for 1964 allocated under section 959(c)(1) and paragraph (b)(1) of this section to such amount 30
Section 959(c)(2) net amount for 1963 (as determined under paragraph (b) of this example) 50
Plus: Earnings for 1964 attributable to:
Subpart F income for 1964 included in A's gross income under section 951(a)(1)(A)(i) 75
Previously excluded subpart F income withdrawn in 1964 from investment in less developed countries and included in A's gross income under section 951(a)(1)(A)(ii) 15
Less: Distribution for 1964 allocated under section 959(c)(2) and paragraph (b)(2) of this section to such amounts 140
Section 959(c)(3) net amount for 1963 (as determined under paragraph (b) of this example) 100
Plus: Section 959(c)(3) net amount for 1964:
Predistribution earnings for 1964 $300
Earnings for 1964 classified as section 959(c)(1) amounts ($0) and as section 959(c)(2) amounts ($75 $15) $90
Distributions for 1964 allocated under section 959(c)(3) and paragraph (b)(3) of this section 80 170 130 $230
A's total interest in M Corporation's earnings and profits 230
For 1964, A is required to include in his gross income under section 951(a)(1)(A)(i) $75 of subpart F income, and under section 951 (a)(1)(A)(ii) $15 of previously excluded subpart F income withdrawn from investment in less developed countries. Of the $250 cash distribution, A may exclude $170 from his gross income under section 959(a)(1) and paragraph (b) of § 1.959-1 and $80 is includible in his gross income as a dividend.
Allocation of distribution under section 959
1963 $30 (c)(1).
1964 90 (c)(2).
1963 50 (c)(2).
1964 80 (c)(3).
[T.D. 6795, 30 FR 945, Jan. 29, 1965, as amended by T.D. 7334, 39 FR 44211, Dec. 23, 1974; T.D. 7545, 43 FR 19652, May 8, 1978; T.D. 7893, 48 FR 22510, May 19, 1983]
26 CFR 1.954-6 — Foreign Base Company Shipping Income.
26 CFR 1.851-2 — Limitations.
26 CFR 1.959-1 — Exclusion From Gross Income of United States Persons of Previously Taxed Earnings and Profits.
26 CFR 1.964-2 — Treatment of Blocked Earnings and Profits.
26 CFR 1.960-2 — Interrelation of Section 902 and Section 960 When Dividends Are Paid by Third-, Second-, or First-Tier Corporation.