[Title 26 CFR 1.956-1]
[Code of Federal Regulations (annual edition) - April 1, 2002 Edition]
[Title 26 - INTERNAL REVENUE]
[Chapter I - INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY]
[Subchapter A - INCOME TAX (CONTINUED)]
[Part 1 - INCOME TAXES]
[Sec. 1.956-1 - Shareholder's pro rata share of a controlled foreign corporation's increase in earnings invested in United States property.]
[From the U.S. Government Printing Office]
26INTERNAL REVENUE102002-04-012002-04-01falseShareholder's pro rata share of a controlled foreign corporation's increase in earnings invested in United States property.1.956-1Sec. 1.956-1INTERNAL REVENUEINTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURYINCOME TAX (CONTINUED)INCOME TAXES
Sec. 1.956-1 Shareholder's pro rata share of a controlled foreign corporation's increase in earnings invested in United States property.
(a) In general. Section 956(a)(1) and paragraph (b) of this section
provide rules for determining the amount of a controlled foreign
corporation's earnings invested in United States property at the close
of any taxable year. Such amount is the aggregate amount invested in
United States property to the extent such amount would have constituted
a dividend if it had been distributed on such date. Subject to the
provisions of section 951(a)(4) and the regulations thereunder, a United
States shareholder of a controlled foreign corporation is required to
include in his gross income his pro rata share, as determined in
accordance with paragraph (c) of this section, of the controlled foreign
corporation's increase for any taxable year in earnings invested in
United States property but only to the extent such share is not
excludable from his gross income under the provisions of section
959(a)(2) and the regulations thereunder.
(b) Amount of a controlled foreign corporation's investment of
earnings in United States property--(1) Dividend limitation. The amount
of a controlled foreign corporation's earnings invested at the close of
its taxable year in United States property is the aggregate amount of
such property held, directly or indirectly, by such corporation at the
close of its taxable year to the extent such amount would have
constituted a dividend under section 316 and Secs. 1.316-1 and 1.316-2
(determined after the application of section 955(a)) if it had been
distributed on such closing day. For purposes of this subparagraph, the
determination of whether an amount would have constituted a dividend if
distributed shall be made without regard to the provisions of section
959(d) and the regulations thereunder.
(2) Aggregate amount of United States property. For purposes of
determining an increase in earnings invested in United States property
for any taxable year beginning after December 31, 1975, the aggregate
amount of United States property held by a controlled foreign
corporation at the close of--
(i) Any taxable year beginning after December 31, 1975, and
(ii) The last taxable year beginning before January 1, 1976 does not
include stock or obligations of a domestic corporation described in
section 956(b)(2)(F) or movable property described in section
956(b)(2)(G).
(3) Treatment of earnings and profits. For purposes of making the
determination under subparagraph (1) of this paragraph as to whether an
amount of investment would have constituted a dividend if distributed at
the close of any taxable year of a controlled foreign corporation,
earnings and profits of the controlled foreign corporation shall be
considered not to include any amounts which are attributable to--
(i) Amounts which have been included in the gross income of a United
States shareholder of such controlled foreign corporation under section
951(a)(1)(B) (or which would have been so included but for section
959(a)(2)) and have not been distributed, or
(ii)(a) Amounts which are included in the gross income of a United
States shareholder of such controlled foreign corporation under section
551(b) or would be so included under such section but for the fact that
such amounts were distributed to such shareholder during the taxable
year, or
(b) Amounts which, for any prior taxable year, have been included in
the gross income of a United States shareholder of such controlled
foreign corporation under section 551(b) and have not been distributed.
The rules of this subparagraph apply only in determining the limitation
on a controlled foreign corporation's increase in earnings invested in
United States property. See section 959 and
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the regulations thereunder for limitations on the exclusion from gross
income of previously taxed earnings and profits.
(4) [Reserved]
(c) Shareholder's pro rata share of increase--(1) General rule. A
United States shareholder's pro rata share of a controlled foreign
corporation's increase for any taxable year in earnings invested in
United States property is the amount determined by subtracting the
shareholder's pro rata share of--
(i) The controlled foreign corporation's earnings invested in United
States property at the close of its preceding taxable year, as
determined under paragraph (b) of this section, reduced by amounts paid
by such corporation during such preceding taxable year to which section
959(c)(1) and the regulations thereunder apply, from his pro rata share
of
(ii) The controlled foreign corporation's earnings invested in
United States property at the close of its current taxable year, as
determined under paragraph (b) of this section.
(2) Illustration. The application of this paragraph may be
illustrated by the following examples:
Example 1. A is a United States shareholder and direct owner of 60
percent of the only class of stock of R Corporation, a controlled
foreign corporation during the entire period here involved. Both A and R
Corporation use the calendar year as a taxable year. Corporation R's
aggregate investment in United States property on December 31, 1964,
which would constitute a dividend (as determined under paragraph (b) of
this section) if distributed on such date is $150,000. During the
taxable year 1964, R Corporation distributed $50,000 to which section
959(c)(1) applies. Corporation R's aggregate investment in United States
property on December 31, 1965, is $250,000; and R Corporation's current
and accumulated earnings and profits on such date (determined as
provided in paragraph (b) of this section) are $225,000. A's pro rata
share of R Corporation's increase for 1965 in earnings invested in
United States property is $75,000, determined as follows:
(i) Aggregate investment in United States property on $250,000
December 31, 1965...........................................
------------
(ii) Current and accumulated earnings and profits on December 225,000
31, 1965....................................................
------------
(iii) Amount of earnings invested in United States property 225,000
on December 31, 1965, which would constitute a dividend if
distributed on such date (lesser of item (i) or item (ii))..
(iv) Aggregate investment in United States $150,000
property on December 31, 1964, which would
constitute a dividend if distributed on such date
Less: Amounts distributed during 1964 to which 50,000 100,000
section 959(c)(1) applies......................
------------
(v) R Corporation's increase for 1965 in earnings invested in 125,000
United States property (item (iii) minus item (iv)).........
============
(vi) A's pro rata share of R Corporation's increase for 1965 75,000
in earnings invested in United States property (item (v)
times 60 percent)...........................................
Example 2. The facts are the same as in example 1, except that R
Corporation's current and accumulated earnings and profits on December
31, 1965, are $100,000 instead of $225,000. Accordingly, even through R
Corporation's aggregate investment in United States property on December
31, 1965, of $250,000 exceeds the net amount ($100,000) taken into
account under subparagraph (1)(i) of this paragraph as of December 31,
1964, by $150,000, there is no increase for taxable year 1965 in
earnings invested in United States property because of the dividend
limitation of paragraph (b)(1) of this section. Corporation R's
aggregate investment in United States property on December 31, 1966, is
unchanged ($250,000) Corporation R's current and accumulated earnings
and profits on December 31, 1966, are $175,000, and, as a consequence,
its aggregate investment in United States property which would
constitute a dividend if distributed on that date is $175,000.
Corporation R pays no amount during 1965 to which section 959(c)(1)
applies. Corporation R's increase for the taxable year 1966 in earnings
invested in United States property is $75,000, and A's pro rata share of
that amount is $45,000 ($75,000 times 60 percent).
(d) Date and basis of determinations. The determinations made under
paragraph (c)(1)(i) of this section with respect to the close of the
preceding taxable year of a controlled foreign corporation and under
paragraph (c)(1)(ii) with respect to the close of the current taxable
year of such controlled foreign corporation, for purposes of determining
the United States shareholder's pro rata share of such corporation's
increased investment of earnings in United States property for the
current taxable year, shall be made as of the last day of the current
taxable year of such corporation but on the basis of stock owned, within
the meaning of section 958(a) and the regulations thereunder, by such
United States
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shareholder on the last day of the current taxable year of the foreign
corporation on which such corporation is a controlled foreign
corporation. See the last sentence of section 956(a)(2). The application
of this paragraph may be illustrated from the following example:
Example. Domestic corporation M owns 60 percent of the only class of
stock of A Corporation, a controlled foreign corporation during the
entire period here involved. Both M Corporation and A Corporation use
the calendar year as a taxable year. Corporation A's investment of
earnings in United States property at the close of the taxable year 1963
is $100,000, as determined under paragraph (b) of this section, and M
Corporation includes its pro rata share of such amount ($60,000) in
gross income for its taxable year 1963. On June 1, 1964, M Corporation
acquires an additional 25 percent of A Corporation's outstanding stock
from a person who is not a United States person as defined in section
957(d). Corporation A's investment of earnings in United States property
at the close of the taxable year 1964, as determined under paragraph (b)
of this section, is unchanged ($100,000). Corporation A pays no amount
during 1963 to which section 959(c)(1) applies. Corporation M is not
required, by reason of the acquisition in 1964 of A Corporation's stock,
to include an additional amount in its gross income with respect to A
Corporation's investment of earnings in United States property even
though the earnings invested in United States property by A Corporation
attributable to the stock acquired by M Corporation were not previously
taxed. The determination made under paragraph (c)(1)(i) of this section
as well as the determination made under paragraph (c)(1)(ii) of this
section with respect to A Corporation's investment for 1964 of earnings
in United States property are made on the basis of stock owned by M
Corporation (85 percent) at the close of 1964.
(e) Amount attributable to property--(1) General rule. Except as
provided in subparagraph (2) of this paragraph, for purposes of
paragraph (b)(1) of this section the amount taken into account with
respect to any United States property shall be its adjusted basis, as of
the applicable determination date, reduced by any liability (other than
a liability described in subparagraph (3) of this paragraph) to which
such property is subject on such date. To be taken into account under
this subparagraph, a liability must constitute a specific charge against
the property involved. Thus, a liability evidenced by an open account or
a liability secured only by the general credit of the controlled foreign
corporation will not be taken into account. On the other hand, if a
liability constitutes a specific charge against several items of
property and cannot definitely be allocated to any single item of
property, the liability shall be apportioned against each of such items
of property in that ratio which the adjusted basis of such item on the
applicable determination date bears to the adjusted basis of all such
items at such time. A liability in excess of the adjusted basis of the
property which is subject to such liability shall not be taken into
account for the purpose of reducing the adjusted basis of other property
which is not subject to such liability.
(2) Rule for pledges and guarantees. For purposes of this section
the amount taken into account with respect to any pledge or guarantee
described in paragraph (c)(1) of Sec. 1.956-2 shall be the unpaid
principal amount on the applicable determination date of the obligation
with respect to which the controlled foreign corporation is a pledgor or
guarantor.
(3) Excluded charges. For purposes of subparagraph (1) of this
paragraph, a specific charge created with respect to any item of
property principally for the purpose of artificially increasing or
decreasing the amount of a controlled foreign corporation's investment
of earnings in United States property will not be recognized; whether a
specific charge is created principally for such purpose will depend upon
all the facts and circumstances of each case. One of the factors that
will be considered in making such a determination with respect to a loan
is whether the loan is from a related person, as defined in section 954
(d)(3) and paragraph (e) of Sec. 1.954-1.
(4) Statement required. If for purposes of this section a United
States shareholder of a controlled foreign corporation reduces the
adjusted basis of property which constitutes United States property on
the ground that such property is subject to a liability, he shall attach
to his return a statement setting forth the adjusted basis of the
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property before the reduction and the amount and nature of the
reduction.
(Secs. 956(c), 7805, Internal Revenue Code of 1954 (76 Stat. 1017, 68A
Stat. 917; (26 U.S.C. 956(c) and 7805 respectively)))
[T.D. 6704, 29 FR 2600, Feb. 20, 1964, as amended by T.D. 6795, 30 FR
942, Jan. 29, 1965; T.D. 7712, 45 FR 52374, Aug. 7, 1980; T.D. 8209, 53
FR 22171, June 14, 1988]