[Title 26 CFR 1.955A-2]
[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. 1.955a-2 - Amount of a controlled foreign corporation's qualified investments in foreign base company shipping operations.]
[From the U.S. Government Printing Office]


26INTERNAL REVENUE102002-04-012002-04-01false1.955A-2Sec. 1.955A-2INTERNAL REVENUEINTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURYINCOME TAX (CONTINUED)INCOME TAXES
Sec. 1.955A-2  Amount of a controlled foreign corporation's qualified investments in foreign base company shipping operations.

    (a) Qualified investments--(1) In general. Under section 955(b), for 
purposes of sections 951 through 964, a controlled foreign corporation's 
``qualified investments in foreign base company shipping operations'' 
are investments in--
    (i) Any aircraft or vessel, to the extent that such aircraft or 
vessel is used (or hired or leased for use) in foreign commerce,
    (ii) Related shipping assets (within the meaning of paragraph (b) of 
this section),
    (iii) Stock or obligations of a related controlled foreign 
corporation, to the extent provided in paragraph (c) of this section,
    (iv) A partnership, to the extent provided in paragraph (d) of this 
section, and
    (v) Stock or obligations of a less developed country shipping 
company described in Sec. 1.955-5(b), as provided in paragraph (h) of 
this section.
    (2) Coordination of provisions. No amount shall be counted as a 
qualified investment in foreign base company shipping operations under 
more than one provision of this section. Thus, for example, if a $10,000 
investment in stock of a controlled foreign corporation is treated as a 
qualified investment in foreign base company shipping operations under 
both subparagraphs (1)(iii) and (v) of this paragraph, then such $10,000 
is counted only once as a qualified investment in foreign base company 
shipping operations.
    (3) Definitions. If the meaning of any term is defined or explained 
in Sec. 1.954-6, then such term shall have the same meaning when used in 
this section.
    (4) Extent of use. (i) For purposes of subparagraph (1)(i) of this 
paragraph and paragraph (b)(1) of this section, the extent to which an 
asset of a controlled foreign corporation is used during a taxable year 
in foreign base company shipping operations shall be determined on the 
basis of the proportion for such year which the foreign base company 
shipping income derived from the use of such asset bears to the total 
gross income derived from the use of such asset.
    (ii) For purposes of determining under subdivision (i) of this 
subparagraph the amounts of foreign base company shipping income and 
gross income of a controlled foreign corporation--
    (A) Such amounts shall be deemed to include an arm's length charge 
(see

[[Page 330]]

Sec. 1.954-6(h)(5)) for services performed by such corporation for 
itself,
    (B) Such amounts shall be deemed to include an arm's length charge 
for the use of an asset (such as a vessel under construction or laid up 
for repairs) which is held for use in foreign base company shipping 
operations, but is not actually so used,
    (C) Foreign base company shipping income shall be deemed to include 
amounts earned in taxable years beginning before January 1, 1976, and
    (D) The district director shall make such other adjustments to such 
amounts as are necessary to properly determine the extent to which any 
asset is used in foreign base company shipping operations.
    (b) Related shipping assets--(1) In general. For purposes of this 
section, the term ``related shipping asset'' means any asset which is 
used (or held for use) for or in connection with the production of 
income described in Sec. 1.954-6(b)(1)(i) or (ii), but only to the 
extent that such asset is so used (or is so held for use).
    (2) Examples. Examples of assets of a controlled foreign corporation 
which are used (or held for use) for or in connection with the 
production of income described in subparagraph (1) of this paragraph 
include--
    (i) Money, bank deposits, and other temporary investments which are 
reasonably necessary to meet the working capital requirements of such 
corporation in its conduct of foreign base company shipping operations,
    (ii) Accounts receivable and evidences of indebtedness which arise 
from the conduct of foreign base company shipping operations by such 
corporation or by a related person,
    (iii) Amounts (other than amounts described in subdivision (i) of 
this subparagraph) deposited in bank accounts or invested in readily 
marketable securities pursuant to a specific, definite, and feasible 
plan to purchase any tangible asset for use in foreign base company 
shipping operations,
    (iv) Amounts paid into escrow to secure the payment of (A) charter 
hire for an aircraft, vessel, or other asset used in foreign base 
company shipping operations or (B) a debt which constitutes a specific 
charge against such an asset,
    (v) Capitalized expenditures (such as progress payments) made under 
a contract to purchase any asset for use in foreign base company 
shipping operations,
    (vi) Prepaid expense and deferred charges incurred in the course of 
foreign base company shipping operations,
    (vii) Stock acquired and retained to insure a source of supplies or 
services used in the conduct of foreign base company shipping 
operations, and
    (viii) Currency futures acquired and retained as a hedge against 
international currency fluctuations in connection with foreign base 
company shipping operations.
    (3) Limitations--(i) Vessels generally. Notwithstanding any other 
provision of this paragraph, the term ``related shipping assets'' does 
not include any money or other intangible assets of a controlled foreign 
corporation, to the extent that such assets are permitted to accumulate 
in excess of the reasonably anticipated needs of the business.
    (ii) Safe harbor. If a controlled foreign corporation accumulates 
money or other intangible assets pursuant to a plan to purchase one or 
more vessels for use in foreign commerce, and if--
    (A) The amount so accumulated, plus
    (B) The sum of the amounts accumulated by other controlled foreign 
corporations which are related persons (within the meaning of section 
954(d)(3)) pursuant to similar plans, does not exceed 110 percent of a 
reasonable down payment on each vessel planned to be purchased within a 
reasonable period, then such plan will be considered to be feasible. For 
purposes of the preceding sentence, a reasonable down payment shall not 
exceed 28 percent of the total cost of acquisition. The determination 
dates applicable to the taxable year of a controlled foreign corporation 
are those set forth in paragraph (c)(2)(ii) of this section. In the case 
of accumulation of assets which do not come within the safe harbor 
limitation of this subdivision (ii), in determining whether such assets 
have accumulated beyond the reasonably anticipated needs of the 
business, factors to be taken into account include, but are not limited 
to, the availability of

[[Page 331]]

financing to purchase a vessel and the availability of a vessel suitable 
for the purposes to which the vessel is to be put.
    (iii) Other assets. In determining whether a plan to purchase any 
asset other than a vessel for use in foreign base company shipping 
operations is feasible, principles similar to those stated in 
subdivision (ii) of this subparagraph shall be applied.
    (4) Cross-reference. See Sec. 1.954-7(c) for additional 
illustrations bearing on the application of this paragraph.
    (c) Stock and obligations--(1) In general. Investments by a 
controlled foreign corporation (the ``first corporation'') in stock or 
obligations of a second controlled foreign corporation which is a 
related person (within the meaning of section 954(d)(3) are considered 
to be qualified investments in foreign base company shipping operations 
to the extent that the assets of such second corporation are used (or 
held for use) in foreign base company shipping operations. See 
subparagraph (2) of this paragraph. However, an investment in an 
obligation of the second corporation will not be considered a qualified 
investment in foreign base company shipping operations if the obligation 
represents a liability which constitutes a specific charge (nonrecourse 
or otherwise) against an asset of the second corporation which is not 
either--
    (i) An aircraft or vessel used (or held for use) to some extent in 
foreign commerce, or
    (ii) An asset described in paragraphs (a)(1)(ii) through (v) of this 
section.
    (2) Extent of use. On any determination date applicable to a taxable 
year of the first corporation, the extent to which the assets of the 
second corporation are used in foreign base company shipping operations 
shall be determined on the basis of the proportion which the amount of 
such second corporation's qualified investments in foreign base company 
shipping operations bears to its net worth, such proportion to be 
determined at the close of the second corporation's last taxable year 
which ends on or before such determination date. For purposes of the 
preceding sentence--
    (i) A controlled foreign corporation's net worth is the total 
adjusted basis of the corporate assets reduced by the total outstanding 
principal amount of the corporate liabilities, and
    (ii) The determination dates applicable to a taxable year of a 
controlled foreign corporation are--
    (A) Except as provided in (B) of this subdivision, the close of such 
taxable year and the close of the preceding taxable year, and
    (B) With respect to a United States shareholder who has made an 
election under section 955(b)(3) to determine such corporation's 
increase in qualified investments in foreign base company shipping 
operations at the close of the following taxable year, the close of such 
taxable year and the close of the taxable year immediately following 
such taxable year.
    (3) Illustrations. The application of this paragraph may be 
illustrated by the following examples:

    Example 1. On December 31, 1976, controlled foreign corporation X 
owns 100 percent of the single class of stock of controlled foreign 
corporation Y. X and Y both use the calendar year as the taxable year. 
On December 31, 1976, Y's assets consist of a vessel used in foreign 
commerce, related shipping assets, and other assets unrelated to its 
foreign base company shipping operations. On such date Y has qualified 
investments in foreign base company shipping operations (determined 
under paragraph (g) of this section) of $60,000, and a net worth of 
$100,000. If X's investment in the stock of Y is $50,000, then $30,000 
of such amount, i.e.,
[GRAPHIC] [TIFF OMITTED] TC09OC91.012


is a qualified investment in foreign base company shipping operations.
    Example 2. The facts are the same as in example 1, except that on 
December 31, 1976, Y's assets consist entirely of a vessel used in 
foreign commerce and related shipping assets, Y has qualified 
investments in foreign base company shipping operations (determined 
under paragraph (g) of this section) of $16,000 and (therefore) a net 
worth of $16,000. If X's investment in the stock of Y is $50,000, then 
the entire $50,000, i.e.,
[GRAPHIC] [TIFF OMITTED] TC09OC91.013


is a qualified investment in foreign base company shipping operations.

[[Page 332]]

    Example 3. On December 31, 1980, controlled foreign corporation J 
owns two notes of controlled foreign corporation K, which is a related 
person (within the meaning of section 954(d)(3)). Both J and K use the 
calendar year as the taxable year. J's adjusted basis in each of the two 
notes is $100,000. The first note is secured only by the general credit 
of K. The second note is secured by (and, therefore, constitutes a 
specific charge on) a hotel owned by K in a foreign country. On December 
31, 1980, K has qualified investments in foreign base company shipping 
operation with an adjusted basis of $500,000 (before applying the rules 
of paragraph (g) of this section). The adjusted basis of all of K's 
corporate assets is $1,100,000. K's only liabilities are the two notes. 
The amount of K's qualified investments in foreign base company shipping 
operations (determined under paragraph (g) of this section) is $450,000. 
K's net worth is $900,000. The amount of J's qualified investment in 
foreign base company shipping operations in respect of the first note is 
$50,000, i.e.,
[GRAPHIC] [TIFF OMITTED] TC09OC91.014


The amount of J's qualified investment in respect of the second note is 
zero (see the last sentence of paragraph (c)(1) of this section).

    (d) Partnerships--(1) In general. A controlled foreign corporation's 
investment in a partnership at the close of any taxable year of such 
corporation shall be considered a qualified investment in foreign base 
company shipping operations to the extent of the proportion which such 
corporation's foreign base company shipping income for such taxable year 
would bear to its gross income for such taxable year if--
    (i) Such corporation had realized no income other than its 
distributive share of the partnership gross income, and
    (ii) Such corporation's income were adjusted in accordance with the 
rules stated in paragraphs (a)(4)(ii)(B) and (D) of this section.
    (2) Transitional rule. For purposes of subparagraph (1)(i) of this 
paragraph, the controlled foreign corporation's distributive share of 
the partnership gross income shall not include any amount attributable 
to income earned by the partnership before the first day of such 
corporation's first taxable year beginning after December 31, 1975.
    (3) Cross-reference. See paragraph (g)(4) of this section for rules 
relating to the determination of the amount of a controlled foreign 
corporation's investment in a partnership.
    (e) Trusts--(1) In general. An investment in a trust is not a 
qualified investment in a foreign base company shipping operations.
    (2) Grantor trusts. Notwithstanding subparagraph (1) of this 
pargraph, if a controlled foreign corporation is treated as the owner of 
any portion of a trust under subpart E of part I of subchapter J 
(relating to grantors and others treated as substantial owners), then 
for purposes of this section such controlled foreign corporation is 
deemed to be the actual owner of such portion of the assets of the 
trust. Accordingly, its investments in such assets (as determined under 
paragraph (g)(5) of this section) may be treated as a qualified 
investment in foreign base company shipping operations.
    (3) Definitions. For purposes of this section, the term ``trust'' 
means a trust as defined in Sec. 301.7701-4.
    (f) Excluded property. For purposes of paragraph (a) of this 
section, property acquired principally for the purpose of artificially 
increasing the amount of a controlled foreign corporation's qualified 
investments in foreign base company shipping operations will not be 
recognized; whether an item of property is acquired 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 an item of property is whether the item is 
disposed of within 6 months after the date of its acquisition.
    (g) Amount attributable to property--(1) General rule. For purposes 
of this section, the amount taken into account under section 955(b)(4) 
with respect to any property which constitutes a qualified investment in 
foreign base company shipping operations shall be its adjusted basis as 
of the applicable determination date, reduced by the outstanding 
principal amount of any liability (other than a liability described in 
subparagraph (2) of this paragraph) to which such property is subject on 
such date including a liability secured

[[Page 333]]

only by the general credit of the controlled foreign corporation. 
Liabilities shall be taken into account in the following order:
    (i) The adjusted basis of each and every item of corporate property 
shall be reduced by any specific charge (non-recourse or otherwise) to 
which such item is subject. For this purpose, if a liability constitutes 
a specific charge against several items of property and cannot 
definitely be allocated to any single item of property, the specific 
charge 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 on such 
date. The excess against property over the adjusted basis of such 
property shall be taken into account as a liability secured only by the 
general credit of the corporation.
    (ii) A liability which is evidenced by an open account or which is 
secured only by the general credit of the controlled foreign corporation 
shall be apportioned against each and every item of corporate property 
in that ratio which the adjusted basis of such item on the applicable 
determination date (reduced as provided in subdivision (i) of this 
subparagraph) bears to the adjusted basis of all the corporate property 
on such date (reduced as provided in subdivision (i) of this 
subparagraph); provided that no liability shall be apportioned under 
this subdivision against any stock or obligations described in paragraph 
(h)(1) of this section.
    (2) Excluded charges. For purposes of subparagraph (1) of this 
paragraph, a liability created principally for the purpose of 
artificially increasing or decreasing the amount of a controlled foreign 
corporation's qualified investments in foreign base company shipping 
operations will not be recognized. Whether a liability 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 was both created after November 20, 1974, and is from a related 
person, as defined in section 954(d)(3) and paragraph (e) of Sec. 1.954-
1. Another such factor is whether the liability was created after March 
29, 1975, in a taxable year beginning before January 1, 1976. For 
purposes of this paragraph (g)(2), payments on liabilities which are 
represented by an open account are credited against the account 
transactions arising earliest in time.
    (3) Statement required. If for purposes of this section the adjusted 
basis of property which constitutes a qualified investment in foreign 
base company shipping operations by a controlled foreign corporation is 
reduced on the ground that such property is subject to a liability, each 
United States shareholder shall attach to his return a statement setting 
forth the adjusted basis of the property before the reduction and the 
amount and nature of the reduction.
    (4) Partnership interest. If a controlled foreign corporation is a 
partner in a partnership, its investment in the partnership taken into 
account under section 955(b)(4) shall be its adjusted basis in the 
partnership determined under section 722 or 742, adjusted as provided in 
section 705, and reduced as provided in subparagraph (1) of this 
paragraph. (However, if the partnership is not engaged solely in the 
conduct of foreign base company shipping operations, such amount shall 
be taken into account only to the extent provided in paragraph (d)(1) of 
this section).
    (5) Grantor trust. If a controlled foreign corporation is deemed to 
own a portion of the assets of a trust under paragraph (e)(2) of this 
section then the amount taken into account under section 955 (b)(4) with 
respect to such assets shall be determined as provided in subparagraph 
(1) of this paragraph by the application of the following rules:
    (i) Such controlled foreign corporation's adjusted basis in such 
assets shall be deemed to be a proportionate share of the trust's 
adjusted basis in such assets, and
    (ii) A proportionate share of the liabilities of the trust shall be 
deemed to be liabilities of such controlled foreign corporation and to 
constitute specific charges against such assets.

[[Page 334]]

    (6) Translation into United States dollars. The amounts determined 
in accordance with this paragraph shall be translated into United States 
dollars in accordance with the principles of Sec. 1.964-1(e)(4).
    (h) Investments in shipping companies under prior law--(1) In 
general. If an amount invested in stock or obligations of a less 
developed country shipping company described in Sec. 1.955-5(b) is 
treated as a qualified investment in less developed countries under 
Sec. 1.955-2 (applied without regard to paragraph (b)(5)(ii) thereof) on 
the applicable determination date for purposes of section 954(g) or 
section 955(a)(2) with respect to a taxable year beginning after 
December 31, 1975, then such amount shall be treated as a qualified 
investment in foreign base company shipping operations on such 
determination date. See section 955(b)(5).
    (2) Effect on prior law. See Sec. 1.955-2(b)(5)(ii) for the rule 
that investments which are treated as qualified investments in foreign 
base company shipping operations under subparagraph (1) of this 
paragraph shall not be treated as qualified investments in less 
developed countries for purposes of section 951(a)(1)(A)(ii).
    (3) Illustration. The application of this paragraph may be 
illustrated by the following example:

    Example. (a) Throughout the period here involved, controlled foreign 
corporation X owns 100 percent of the single class of stock of 
controlled foreign corporation Y, X and Y each use the calendar years as 
the taxable year. At the close of 1975, X's $50,000 investment in the 
stock of Y is treated as a qualified investment in less developed 
countries under Sec. 1.955-2 (applied without regard to Sec. 1.955-
2(b)(5)(ii), and Y is a less developed country shipping company 
described in Sec. 1.955-5(b).
    (b) On December 31, 1976, Y is still a less developed country 
shipping company and X's $50,000 investment in the stock of Y is still 
treated as a qualified investment in less developed countries under 
Sec. 1.955-2 (applied without regard to Sec. 1.955-2(b)(5)(ii). Under 
subparagraph (1) of this paragraph X's entire $50,000 investment in the 
stock of Y is treated as a qualified investment in foreign base company 
shipping operations.
    (c) For 1977, Y's gross income is $10,000 and Y's foreign base 
company shipping income is $7,500. Since Y fails to meet the 80-percent 
income test of Sec. 1.955-5(b)(1), Y is no longer a less developed 
country shipping company described in Sec. 1-955-5(b), and X's 
investment in the stock of Y is no longer treated as a qualified 
investment in less developed countries under Sec. 1.955-2 (applied 
without regard to Sec. 1.955-2(b)(5)(ii). However, assume that on 
December 31, 1977, Y's net worth (as defined in paragraph (c)(2)(1) of 
this section) is $100,000, that Y's qualified investments in foreign 
base company shipping operations (determined under this section) on 
December 31, 1977, are $75,000, and that X's investment in the stock of 
Y (as determined under paragraph (g) of this section) continues to be 
$50,000. Then $67,500, i.e.,
[GRAPHIC] [TIFF OMITTED] TC09OC91.015


of X's $50.000 investment in the stock of Y is treated as a qualified 
investment in foreign company shipping operations under paragraph (c) of 
this section.
    (d) For 1978, all of Y's gross income is foreign base company 
shipping income. Although Y is again a less developed country shipping 
company described in Sec. 1.955-5(b), X's investment in the stock of Y 
is no longer treated as a qualified investment in less developed 
countries under Sec. 1.955-2(b)(5)(iii). Thus, X's investment in the 
stock of Y is not treated as a qualified investment in foreign base 
company shipping operations under subparagraph (1) of this paragraph. 
However, X's investment in the stock of Y may be so treated under 
another provision of this section, as was the case in item (c) of this 
example.

(Secs. 955 (b)(2) and 7805 of the Internal Revenue Code of 1954 (89 
Stat. 63; 26 U.S.C. 955(b)(2), and 68A Stat. 917; 26 U.S.C. 7805))

[T.D. 7894, 48 FR 22532, May 19, 1983; 48 FR 40888, Sept. 12, 1983, as 
amended by T.D. 7959, 49 FR 22280, May 29, 1984]