[Title 26 CFR 1.964-1T]
[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. 1.964-1t - Special rules for computing earnings and profits of controlled foreign corporations in taxable years beginning after December 31, 1986]
[From the U.S. Government Printing Office]
26INTERNAL REVENUE102002-04-012002-04-01falseSpecial rules for computing earnings and profits of controlled foreign corporations in taxable years beginning after December 31, 19861.964-1TSec. 1.964-1TINTERNAL REVENUEINTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURYINCOME TAX (CONTINUED)INCOME TAXES
Sec. 1.964-1T Special rules for computing earnings and profits of controlled foreign corporations in taxable years beginning after December 31, 1986
(temporary).
(a)-(f) [Reserved]
[[Page 491]]
(g)(1) Earnings and profits computed in functional currency--(i)
Rule. For taxable years of a controlled foreign corporation (within the
meaning of section 957) beginning after December 31, 1986, earnings and
profits shall be computed in the controlled foreign corporation's
functional currency (determined under section 985 and the regulations
thereunder) in accordance with Sec. 1.964-1 as modified by this
paragraph (g). Accordingly, Sec. 1.964-1 (d), (e), and (f) and (to the
extent inconsistent with this paragraph (g)) Sec. 1.964-1(c) do not
apply for taxable years of a controlled foreign corporation beginning
after December 31, 1986. For purposes of this section, the term
``earnings and profits'' includes a deficit in earnings and profits.
(ii) Cross reference. In the case of a controlled foreign
corporation with a functional currency other than the United States
dollar (dollar), see sections 986(b) and 989(b) for rules regarding the
time and manner of translating distributions or inclusions of the
controlled foreign corporation's earnings and profits into dollars.
(2) Election required when first significant. Tax accounting methods
or elections may be adopted or made by, or on behalf of, a controlled
foreign corporation in the manner prescribed by the Code and regulations
no later than 180 days after the close of the first taxable year of the
controlled foreign corporation in which the computation of its earnings
and profits is significant for United States income tax purposes with
respect to its controlling United States shareholders (as defined in
Sec. 1.964-1(c)(5)). For taxable years of a controlled foreign
corporation beginning before January 1, 1989, only the events listed in
Sec. 1.964-1(c)(6) are considered to cause a controlled foreign
corporation's earnings and profits to have United States tax
significance. For taxable years of a controlled foreign corporation
beginning after December 31, 1988, events that cause a controlled
foreign corporation's earnings and profits to have United States tax
significance include, without limitation--
(i) The events listed in Sec. 1.964-1(c)(6),
(ii) A distribution from the controlled foreign corporation to its
shareholders with respect to their stock,
(iii) Any event making the controlled foreign corporation subject to
tax under section 882,
(iv) An election by the controlled foreign corporation's controlling
United States shareholders to use the tax book value method of
allocating interest expense under section 864(e)(4), and
(v) A sale or exchange of the controlled foreign corporation's stock
by the controlling United States shareholders.
The filing of the information return required by section 6038 shall not
itself constitute a significant event.
(3) Effect of failure to make required election. If an accounting
method or election is not timely adopted or made by, or on behalf of, a
controlled foreign corporation, and such failure is not shown to the
satisfaction of the Commissioner to be due to reasonable cause under
Sec. 1.964-1(c)(6), earnings and profits shall be computed in accordance
with this section. Such computation shall be made as if no elections had
been made and any permissible accounting methods not requiring an
election and reflected in the books of account regularly maintained by
the controlled foreign corporation for the purpose of accounting to its
shareholders had been adopted. Thereafter, any change in a particular
accounting method or methods may be made by, or on behalf of, the
controlled foreign corporation only with the Commission's consent.
(4) Computation of earnings and profits by a minority shareholder
prior to majority election or significant event. A minority United
States shareholder (as defined in section 951(b)) of a controlled
foreign corporation may be required to compute a controlled foreign
corporation's earnings and profits before the controlled foreign
corporation or its controlling United States shareholders make, or are
required under this section to make, an election or adopt a method of
accounting for United States tax purposes. In such a case, the minority
United States shareholder must
[[Page 492]]
compute earnings and profits in accordance with this section. Such
computation shall be made as if no elections had been made and any
permissible accounting methods not requiring an election and reflected
in the books of account regularly maintained by the controlled foreign
corporation for the purpose of accounting to its shareholders had been
adopted. However, a later, properly filed, and timely election or
adoption of method by, or on behalf of, the controlled foreign
corporation shall not be treated as a change in accounting method.
(5) Binding effect. For taxable years beginning after December 31,
1986, except as otherwise provided in the Code or regulations, earnings
and profits of a controlled foreign corporation shall be computed
consistently under the rules of sections 964(a) and 986(b) for all
federal income tax purposes. An election or adoption of a method of
accounting for United States tax purposes by a controlled foreign
corporation, or on its behalf pursuant to Sec. 1.964-1(c) or any other
provision of the regulations (e.g., Sec. 1.985-2(c)(3)), shall bind both
the controlled foreign corporation and its United States shareholders as
to the computation of the controlled foreign corporation's earnings and
profits under section 964(a) for the year of the election or adoption
and in subsequent taxable years unless the Commissioner consents to a
change. The preceding sentence shall apply regardless of--
(i) Whether the election or adoption of a method of accounting was
made in a pre-1987 or a post-1986 taxable year;
(ii) Whether the controlled foreign corporation was a controlled
foreign corporation at the time of the election or adoption of method;
(iii) When ownership was acquired; or
(iv) Whether the United States shareholder received the written
notice required by Sec. 1.964-1(c)(3).
Adjustments to the appropriate separate category (as defined in
Sec. 1.904-5(a)(1)) of earnings and profits and income of the controlled
foreign corporation shall be required using the principles of section
481 to prevent any duplication or omission of amounts attributable to
previous years that would otherwise result from any such election or
adoption.
(6) Examples. The following examples illustrate the rules of this
section.
Example 1: (i) P, a calendar year domestic corporation, owns all of
the outstanding stock of FX, a calendar year controlled foreign
corporation. None of the significant events specified in Sec. 1.964-
1(c)(6) or this section has occurred. In addition, neither P nor FX has
ever made or adopted, or been required to make or adopt, an election or
method of accounting for United States tax purposes with respect to FX.
On June 1, 1990, FX makes a distribution to P. FX does not act to make
any election or adopt a method of accounting for United States tax
purposes.
(ii) P must compute FX's earnings and profits in order to determine
if any portion of the distribution is taxable as a dividend and to
determine P's foreign tax credit on such portion under section 902. P
must satisfy the requirements of Sec. 1.964-1(c)(3) and file the written
statement and notice described therein within 180 days after the close
of FX's 1990 taxable year in order to make an election or to adopt a
method of accounting on behalf of FX. Any such election or adoption will
govern the computation of earnings and profits of FX for all federal
income tax purposes (including, e.g., the determination of foreign tax
credits on subpart F inclusions) in 1990 and subsequent taxable years
unless the Commissioner consents to a change.
(iii) If P fails to satisfy the regulatory requirements in a timely
manner and such failure is not shown to the satisfaction of the
Commissioner to be due to reasonable cause, the earnings and profits of
FX shall be computed as if no elections were made and any permissible
methods of accounting not requiring an election and reflected in its
books were adopted. Any subsequent attempt by FX or P to change an
accounting method shall be effective only if the Commissioner consents
to the change.
Example 2: (i) The facts are the same as in Example 1, except that P
elects to allocate its interest expense under section 864(e)(4) for its
1989 taxable year under the tax book value method of Sec. 1.861-12T(c)
of the Temporary Income Tax Regulations.
(ii) P must compute the earnings and profits of FX in order to
determine the adjustment to P's basis in the stock of FX for P's 1989
taxable year. P must satisfy the requirements of Sec. 1.964-1(c)(3) and
file the written statement and notice described therein within 180 days
after the close of FX's 1989 taxable year in order to make an election
or to adopt a method of accounting on behalf of FX. Any such election or
adoption will govern the computation of FX's earnings and profits in
1989 and subsequent taxable years
[[Page 493]]
for all federal income tax purposes (including, e.g., the
characterization of the June 1, 1990 distribution and the determination
of P's foreign tax credit, if any, with respect thereto) unless the
Commissioner consents to a change.
(iii) If P fails to satisfy the regulatory requirements in a timely
manner and such failure is not shown to the satisfaction of the
Commissioner to be due to reasonable cause, the earnings and profits of
FX shall be computed as if no elections were made and any permissible
methods of accounting not requiring an election and reflected in its
books were adopted. Any subsequent attempt by FX or P to change an
accounting method shall be effective only if the Commissioner consents
to the change.
Example 3: (i) The facts are the same as in Example 2, except that P
elects to allocate its interest expense under section 864(e)(4) for its
1988 taxable year under the tax book value method of Sec. 1.861-12T (c)
of the Temporary Income Tax Regulations.
(ii) P must compute the earnings and profits of FX in order to
determine the adjustment to P's basis in the stock of FX for P's 1988
taxable year. P must satisfy the requirements of Sec. 1.964-1(c)(3) and
file the written statement and notice described therein within 180 days
after the close of FX's 1988 taxable year in order to make an election
or to adopt a method of accounting on behalf of FX. Any such election or
adoption will govern the computation of FX's earnings and profits in
1988 and subsequent taxable years for all federal income tax purposes
(including, e.g., P's basis adjustment for purposes of section 864(e)(4)
in 1989 and the characterization of the June 1, 1990 distribution and
the determination of P's foreign tax credit, if any, with respect
thereto) unless the Commissioner consents to a change.
(iii) If P fails to satisfy the regulatory requirements in a timely
manner and such failure is not shown to the satisfaction of the
Commissioner to be due to reasonable cause, the earnings and profits of
FX for 1988 shall be computed as if no elections were made and any
permissible methods of accounting not requiring an election and
reflected in its books were adopted. However, a properly filed, timely
election or adoption of method by, or on behalf of, FX with respect to
its 1989 taxable year, when P's basis adjustment for purposes of section
864(e)(4) first constitutes a significant event, shall not be treated as
a change in accounting method. No recomputation of P's basis adjustment
for 1988 shall be required by reason of any such election or adoption of
method with respect to FX's 1989 taxable year, but prospective
adjustments to FX's earnings and profits and income shall be made to the
extent required by Sec. 1.964-1T(g)(5).
Example 4: (i) The facts are the same as in Example 3, except that
FX had subpart F income taxable to P in 1986, and P computed FX's
earnings and profits for purposes of determining the amount of the
inclusion and the foreign taxes deemed paid by P in 1986 under section
960 pursuant to Sec. 1.964-1 (a) through (e).
(ii) Any election made or method of accounting adopted on behalf of
FX by P pursuant to Sec. 1.964-1(c) in 1986 is binding on P and FX for
purposes of computing FX's earnings and profits in 1986 and subsequent
taxable years. Thus, in determining P's basis adjustment for purposes of
section 864(e)(4) in 1988 and 1989 and its deemed-paid credit with
respect to the 1990 dividend, FX's earnings and profits must be computed
consistently with the method used by P with regard to the 1986 subpart F
inclusion. (However, Sec. 1.964-1 (d), (e), and (f) do not apply in
computing FX's earnings and profits in post-1986 taxable years.)
Example 5: (i) The facts are the same as in Example 4, except that
FX made a dividend distribution to P on June 1, 1985, and P computed
FX's earnings and profits for purposes of computing the foreign taxes
deemed paid by P in 1985 under section 902 with respect to the
distribution under Sec. 1.964-1 exclusive of paragraphs (d), (e), and
(f) pursuant to a timely election under Sec. 1.902-1(g)(1).
(ii) Any election made or method of accounting adopted on behalf of
FX by P pursuant to Sec. 1.964-1(c) in 1985 is binding on P and FX for
purposes of computing FX's earnings and profits in 1985 and subsequent
taxable years. Thus, in determining P's basis adjustment for purposes of
section 864(e)(4) in 1988 and 1989 and its deemed-paid credit with
respect to the 1986 subpart F inclusion and the 1990 dividend, FX's
earnings and profits must be computed consistently with the method used
by P with regard to the 1985 dividend. If, rather than choosing under
Sec. 1.902-1(g)(1) to use the section 964 rules, P computed FX's
earnings and profits for purposes of section 902 in 1985 in all respects
as if FX were a domestic corporation, then P would have been free to
make elections or adopt a method of accounting on behalf of FX under
Sec. 1.964-1(c) with respect to the subpart F inclusion in 1986. Any
such election or adoption would be binding on P and FX as to the
computation of FX's earnings and profits in 1986 and subsequent taxable
years.
[T.D. 8283, 55 FR 2516, Jan. 25, 1990; 55 FR 7711, Mar. 5, 1990]