Source: https://www.law.cornell.edu/cfr/text/26/1.955A-3
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26 CFR 1.955A-3 - Election as to qualified investments by related persons. | US Law | LII / Legal Information Institute
CFR › Title 26 › Chapter I › Subchapter A › Part 1 › Section 1.955A-3
26 CFR 1.955A-3 - Election as to qualified investments by related persons.
(a)In general. If a United States shareholder elects the benefits of section 955(b) 2 with respect to a related group (as defined in paragraph (b)(1) of this section) of controlled foreign corporations, then an investment in foreign base company shipping operation made by one member of such group will be treated as having been made by another member to the extent provided in paragraph (c)(4) of this section, and each member will be subject to the other provisions of paragraph (c) of this section. An election once made shall apply for the taxable year for which it is made and for all subsequent years unless the election is revoked or a new election is made to add one or more controlled foreign corporations to election coverage. For the manner of making an election under section 955(b)(2), and for rules relating to the revocation of such an election, see paragraph (d) of this section. For rules relating to the coordination of sections 955(b)(2) and 955(b)(3), see paragraph (e) of this section.
(b)Related group -
(1)Related group defined. The term “related group” means two or more controlled foreign corporations, but only if all of the following requirements are met:
(v) An election under paragraph (b)(1)(iii) of this section will not be valid in the case of an election by a U.S. shareholder (the “first U.S. shareholder”) if -
(2)Group taxable years defined. The “group taxable year” is the common taxable year of a related group.
(3)Limitation. If a United States shareholder elects to treat two or more corporations as a related group for a group taxable year (the “first group taxable year”), then such United States shareholder (and any other United States shareholder which is controlled by such shareholder) may not also elect to treat two or more other corporations as a related group for a group taxable year any day of which falls within the first group taxable year.
Domestic corporation M owns 100 percent of the only class of stock of controlled foreign corporations A, B, C, D, and E. A, B, and C use the calendar year as the taxable year. D and E use the fiscal year ending on June 30 as the taxable year. M may elect to treat A, B and C as a related group. However, M may not elect to treat C, D, and E as a related group.
The facts are the same as in example 1. In addition, M elects to treat A, B, and C as a related group for the group taxable year which ends on December 31, 1976. M may not also elect to treat D and E as a related group for the group taxable year ending on June 30, 1977.
United States shareholder A owns 60 percent of the only class of stock of controlled foreign corporation X and 40 percent of the only class of stock of controlled foreign corporation Y. United States shareholder B owns the other 40 percent of the stock of X and the other 60 percent of the stock of Y. Neither A nor B (nor both together) may elect to treat X and Y as a related group.
(c)Effect of election. If a United States shareholder elects to treat two or more controlled foreign corporations as a related group for any group taxable year then, for purposes of determining the foreign base company income (see § 1.954-1) and the increase or decrease in qualified investments in foreign base company shipping operations (see §§ 1.954-7. 1.955A-1, and 1.955A-4) of each member of such group for such year, the following rules shall apply:
(1)Intragroup dividends. The gross income of each member of the related group shall be deemed not to include dividends received from any other member of such group, to the extent that such dividends are attributable (within the meaning of § 1.954-6(f)(4)) to foreign base company shipping income. In determining net foreign base company shipping income, deductions allocable to intragroup dividends attributable to foreign base company shipping income shall not be allowed.
(2)Group excess deduction.
(i) The deductions allocable under § 1.954-1(c) to the foreign base company shipping income of each member of the related group shall be deemed to include such member's pro rata share of the group excess deduction.
(ii) The group excess deduction for the group taxable year is the sum of the excesses for each member of the related group (having an excess) of -
(iii) A member's pro rata share of the group excess deduction is the amount which bears the same ratio to such group excess deduction as -
(iv) For purposes of this subparagraph, “foreign base company shipping income” means foreign base company shipping income (as defined in § 1.954-6), reduced by excluding therefrom all amounts which are -
Controlled foreign corporations X, Y, and Z are a related group for calendar year 1976. The excess group deduction for 1976 is $9, X's pro rata share of the group excess deduction is $6, and Y's pro rata share is $3, determined as follows on the basis of the facts shown in the following table:
(3)Intragroup investments. On both of the determination dates applicable to the group taxable year for purposes of section 954(g) or section 955(a)(2), the qualified investments in foreign base company shipping operations of each member of the related group shall be deemed not to include stock of any other member of the related group. In addition, neither the gains nor the losses on dispositions of such stock during the group taxable year shall be taken into account under § 1.955A-1(b)(1)(ii) in determining the decrease in qualified investments in foreign base company shipping operations of any member of such related group.
(4)Group excess investment.
(i) On the later (and only the later) of the two determination dates applicable to the group taxable year for purposes of section 954(g) or section 955(a)(2), the qualified investments in foreign base company shipping operations of each member of the related group shall be deemed to include such member's pro rata share of the group excess investment.
(ii) The group excess investment for the group taxable year is the sum of the excess for each member of the related group (having an excess) of -
(A) The member's increase in qualified investments in foreign base company shipping operations (determined under § 1.954-7 after the application of subparagraph (3) of this paragraph) for such year, over
(iii) A member's pro rata share of the group excess investment is the amount which bears the same ratio to such group excess investment as -
(iv) If a member has an increase in qualified investments in foreign base company shipping operations (determined as provided in § 1.954-7 after the application of subparagraph (3) of this paragraph) for the group taxable year, then such member's “shortfall in qualified investments” is the excess of -
(v) If a member has a decrease in qualified investments in foreign base company shipping operations (determined under § 1.955A-1(b)(1) or § 1.955A-4(a), whichever is applicable, after the application of subparagraph (3) of this paragraph) for the group taxable year, then such member's “shortfall in qualified investments” is the sum of -
(vi) For purposes of this subparagraph, “foreign base company shipping income” means foreign base company shipping income (as defined in subparagraph (2)(iv) of this paragraph), reduced by the deductions allocable thereto under § 1.954-1(c) (including the additional deductions described in subparagraph (2) of this paragraph).
(a) Controlled foreign corporations R, S, and T are a related group for calendar year 1977. R and S do not own the stock of any member of the related group.
(d) During 1977 (without regard to paragraph (c)(4)), R's increase in qualified investments in foreign base company shipping operations is $120; S's decrease is $55; and T's increase is $35, determined on the basis of the facts shown in the following table. In all cases, the listed amounts of qualified investments on December 31, 1976, reflect any adjustments required by paragraph (c)(3) for 1976, but not any adjustment required by paragraph (c)(4) for 1976 (see §§ 1.955A-3 (c)(3) and (4)(i)).
(h) After application of paragraph (c)(1), (3), and (4), during 1977, R's increase in qualified investments in foreign base company shipping operations is $100; S's decrease is $40; and T's increase is $40, determined as set forth in the table below. In all cases, the listed amounts of qualified investments on December 31, 1976, reflect any similar adjustments required by paragraph (c)(3) for 1976, but not any adjustment required by paragraph (c)(4) for 1976 (see § 1.955A-3(c)(3) and (4)(i)).
(5)Collateral effect.
(i) An election under this section by a United States shareholder to treat two or more controlled foreign corporations as a related group for a group taxable year shall have no effect on -
(C) The foreign personal holding company income, foreign base company sales income, and foreign base company services income, and the deductions allocable under § 1.954-1(c) thereto, of any member of such related group.
(ii) See § 1.952-1(c)(2)(ii) for the effect of an election under this section on the computation of earnings and profits and deficits in earnings and profits under section 952 (c) and (d).
United States shareholder A owns 80 percent of the only class of stock of controlled foreign corporations X and Y. United States shareholder B owns the other 20 percent of the stock of X and Y. X and Y both use the calendar year as the taxable year. A elects to treat X and Y as a related group for 1977. For purposes of determining the amounts includible in B's gross income under section 951(a) in respect of X and Y, the election made by A shall be disregarded and all of B's computations shall be made without regard to this section, as illustrated in § 1.952-3(d).
(d)Procedure -
(1)Time and manner of making election. A United States shareholder shall make an election under this section to treat two or more controlled foreign corporations as a related group for a group taxable year and subsequent years by filing a statement to such effect with the return for the taxable year within which or with which such group taxable year ends. The statement shall include the following information:
(2)Revocation.
(i) Except as provided in subdivision (ii) of this subparagraph, an election under this section by a United States shareholder shall be binding for the group taxable year for which it is made and for subsequent years.
(e)Coordination with section 955(b)(3). If a United States shareholder elects under this section to treat two or more controlled foreign corporations as a related group for any taxable year, and if such United States shareholder is required under § 1.955A-4(c)(2) for purposes of filing any return to estimate the qualified investments in foreign base company shipping operations of any member of such group, then such United States shareholder shall, for purposes of filing such return, determine the amount includible in his gross income in respect of each member of such related group on the basis of such estimate. If the actual amount of such investments is not the same as the amount of the estimate, the United States shareholder shall immediately notify the Commissioner. The Commissioner will thereupon redetermine the amount of tax of such United States shareholder for the year or years with respect to which the incorrect amount was taken into account. The amount of tax, if any, due upon such redetermination shall be paid by the United States shareholder upon notice and demand by the district director. The amount of tax, if any, shown by such redetermination to have been overpaid shall be credited or refunded to the United States shareholder in accordance with the provisions of sections 6402 and 6511 and the regulations thereunder. If a United States shareholder elects under this section and if the United States shareholder has made an election under section 955(b)(3) as to at least one member of the related group, then the qualified investment amounts necessary for the calculations of paragraphs (c)(3) and (4) of this section shall be obtained, for each member of the related group, as of the determination dates applicable to each of the members.
(a) Controlled foreign corporations X and Y are wholly owned subsidiaries of domestic corporation M, X and Y use the calendar year as the taxable year. For 1977, X and Y are not export trade corporations (as defined in section 971(a)), nor have they any income derived from the insurance of United States risks (within the meaning of section 963(a)). M does not elect to treat X and Y as a related group for 1977.
(b) For 1977, X and Y each have gross income (determined as provided in § 1.951-6(h)(1)) of $1,000. X's foreign base company income is $20 and Y's foreign base company imcome is $0, determined as follows, based on the facts shown in the following table:
(4) Less: deductions allocable under § 1.954-1(c) to balance 800 1,040
(6) Limitation described in § 1.955A-1(b)(2) 160
(a) The facts are the same as in example 1, except that M does elect to treat X and Y as a related group for 1977.