income taxed by subpart f

Income Taxed by Subpart F—
 
Subpart F income consists of foreign personal holding company income, income from foreign base company sales, services, shipping and oil activities, insurance of risks outside CFC's country of residence, boycott operations and illegal payments to foreign officials. U.S. shareholders also taxed currently on increases in CFC earnings invested in U.S. property, and withdrawals of funds from investments allowed deferral in prior years under special Subpart F rules.
 
The Subpart F tax liability requires a U.S. shareholder (see §M:8.42) to take into income his pro rata share (see §M:8.162 ) of the following amounts:
 

the controlled foreign corporation's (CFC's) Subpart F income for the year;
 
amounts withdrawn by the CFC from previously qualified investments in less developed countries (see §M:8.84 );
 
amounts withdrawn by the CFC from previously qualified investments in foreign base company shipping operations (see §M:8.85);
 
the CFC's earnings that are deemed to have been invested in U.S. property (see §M:8.120 ); and
 
the CFC's accumulated earnings that are invested in excess passive assets (see §M:8.120 ).
 
Subpart F income is a composite income item, consisting of the following parts:
 
insurance income (see §M:8.61 );
 
foreign base company income, which includes the following elements:
 
foreign personal holding company income (see §M:8.63),
 
foreign base company sales income (see §M:8.64),
 
foreign base company services income (see §M:8.65),
 
foreign base company shipping income (see §M:8.66), and
 
foreign base company oil-related income (see §M:8.67),
 
boycott income (see §M:8.80 );
 
foreign Corrupt Practices Act income (bribes, kickbacks, etc.) (see §M:8.82); and
 
income from specific statutorily prescribed nations (see §M:8.83), which include nations that are politically unrecognized, as well as those recognized countries that support terrorism.
 
Subpart F income is a net income concept, and deductions are allowed from the gross income listed above. See §M:8.69. The includable amounts are calculated by allocating and apportioning the CFC's income and expenses into the various categories listed above. See §M:8.100 . The resulting amount is taken into account by the U.S. shareholders in proportion to their stockholding. See §M:8.162.
 
When the nature of Subpart F income is relevant for other U.S. tax purposes, for example, to determine if the shareholder is a personal holding company, the income retains the character it had in the CFC.1 
 
1 Reg. § 1.951-1(a); see Rev. Rul. 76-403, 1976-2 CB 229.
 
In addition, the character of an item of income included in a CFC's distributive share from a partnership includes the attributes of the income as would make it Subpart F income if realized directly by the CFC.2  See §M:8.64.
 
2 Brown Group, Inc v Commr, 104 TC 105 (1995); Rev. Rul. 89-72, 1989-1 CB 257.
 
NEW DEVELOPMENTS
 
IRS withdraws previously issued regulations and issues new proposed regulations on hybrid branch payments. As announced in Notice 98-35, the IRS has removed previously issued temporary and final regulations relating to hybrid branch payments. In addition, the IRS has withdrawn previously issued proposed regulations and issued new proposed regulations on the subject.
 
The regulations are proposed to be effective for payments made in tax years of a CFC commencing after five years after the date the regulations are finalized. The regulations are removed effective March 23, 1998. See §M:8.63 for discussion of the proposed regulations.
 
Proposed Reg §§ 1.952-1(b), 1.954-1, withdrawn by Notice of Proposed Rulemaking REG-113909-98 (July 12, 1999); Proposed Reg. §§ 1.954-1, 1.954-2 , 1.954-9 , issued with Notice of Proposed Rulemaking REG-113909-98 (July 12, 1999); Temporary Reg. § 1.954-1T, removed by T.D. 8827 (July 12, 1999).
 
Service intends to withdraw temporary and proposed regulations on hybrid branch payment rules and intends to issue proposed Subpart F hybrid branch regulations.  The Service intends to withdraw the temporary and proposed regulations issued on March 26, 1998, as Treasury Decision 8767 and Notice of Proposed Rulemaking REG-104537-97, discussed above, concerning hybrid branch transactions. The Service also announced its intention to issue a notice of proposed rulemaking covering hybrid transactions. Under these proposed regulations, payments, including accruals, between a controlled foreign corporation (CFC) and its hybrid branch, or between hybrid branches of the CFC, or between a CFC (and its hybrid branch) and the hybrid branch of a related CFC (collectively hybrid branch payments) will give rise to Subpart F income in certain circumstances. When certain conditions are present, the non-Subpart F income of the CFC, in the amount of the hybrid branch payment, will be recharacterized as Subpart F income of the CFC. Those conditions include that:
 
The hybrid branch payment reduces the foreign tax of the payer;
 
The hybrid branch payment would have been foreign personal holding company income if made between separate CFCs; and
 
There is a significant disparity between the effective rate of tax on the payment in the hands of the payee and the hypothetical rate of tax that would have applied if the income had been taxed in the hands of the payer.
 
It is intended that the proposed regulations on hybrid transactions, whether through branches or partnerships, will not be finalized before January 1, 2000. When finalized, the proposed regulations will generally be effective for all payments made on or after June 19, 1998, under hybrid arrangements. The proposed regulations will not apply to any payments made under hybrid arrangements entered into before June 19, 1998. This exception shall be permanent so long as the arrangement is not substantially modified on or after June 19, 1998. Additionally, to the extent that a payment is a qualifying hybrid branch payment made under an arrangement entered into on or after June 19, 1998, and before the date of finalization of the regulations, the proposed regulations will not apply earlier than the first tax year of the U.S. shareholder beginning on or after the expiration of five calendar years from the date of finalization of the regulations, to classify as Subpart F income any payment which would otherwise give rise to Subpart F income under the proposed regulations. This transition relief shall apply for so long as the arrangement is not substantially modified after the finalization of the regulations. However, in the case of a U.S. shareholder that disposes of the business with respect to which the grandfathered hybrid arrangement was established, this transition relief shall also apply to a newly-established hybrid arrangement entered into after the date of finalization of the regulations which does not provide materially greater tax benefits than the prior grandfathered hybrid arrangement, and subject to certain limits.
 
Notice 98-35, 1998-27 I.R.B. 35.
 
Service issues proposed regulations providing controlled foreign corporation's distributive share of any partnership income item is Subpart F income if it would have been if received directly.  The Service has issued proposed regulations providing that a controlled foreign corporation's (CFC's) distributive share of any item of income of a partnership is Subpart F income to the extent the income item would have been Subpart F income if received by the CFC directly. For specific rules regarding the treatment of a distributive share of partnership income under provisions of Subpart F, see §M:8.63, §M:8.64 , §M:8.65 and §M:8.123.
 
The proposed regulations apply for tax years of CFCs beginning on of after the date the final regulations are published in the Federal Register.
 
Proposed Reg. § 1.952-1(b), issued with Notice of Proposed Rulemaking REG-104537-97 (Mar 26, 1998).
 
Service issues temporary and proposed regulations denying allocation of expense against controlled foreign corporation's Subpart F income resulting from hybrid branch payment.  The Service has issued temporary regulations, which also serve as the text of proposed regulations, denying the allocation of expense against Subpart F income resulting from hybrid branch payments (see §M:8.63) giving rise to the expense. Except as provided below, an expense, including a distributive share of any expense, that would otherwise be allocable against the Subpart F income of a controlled foreign corporation (CFC) (see §M:8.69) is not allocated against the CFC's Subpart F income resulting from the payment giving rise to the expense if:
 
The expense arises from a payment between the CFC and a partnership in which the CFC is a partner and the partnership is not regarded as fiscally transparent, as defined under the rules for hybrid branches, by any country in which the CFC does business or has substantial assets; and
 
The payment from which the expense arises would have met the foreign tax reduction test and the tax disparity test of the rules for hybrid branches if those provisions had been applicable to the payment. Temporary Reg. § 1.954-1T(c)(1)(B).
 
This rule does not apply to the extent that the CFC partner has no income against which to allocate the expense, other than its distributive share of a payment described above. Similarly, to the extent an expense described above exceeds the CFC partner's distributive share of the payment from which the expense arises, this excess may reduce Subpart F income, other than the payment, to which it is properly allocable or apportionable. Temporary Reg. § 1.954-1T(c)(1)(C) . See §M:8.69.
 
These rules apply to all amounts paid or accrued after March 25, 1998, except for amounts paid or accrued pursuant to arrangements entered into before March 26, 1998, and not substantially modified, including, for example, by expansion of the arrangement, whether by exercise of an option or otherwise, such as by an increase in the amount of or term of any borrowing, leasing or licensing constituting the arrangement; changes in direct or indirect control of any entity that is a party to the arrangement; or any similar measure that materially increases the tax benefit of the arrangement after March 25, 1998.
 
Temporary Reg. § 1.954-1T(c)(1)(i)(E), added by T.D. 8767 (Mar 26, 1998); Proposed Reg. § 1.954-1(c)(1)(i) (E), issued with Notice of Proposed Rulemaking REG-104537-97 (Mar 26, 1998).
 
Gain recognized from controlled foreign corporation's sale of foreign corporation stock is treated as dividend.  The Taxpayer Relief Act provides that if a controlled foreign corporation (CFC) sells or exchanges stock in any other foreign corporation, gain recognized on the sale or exchange is included in the CFC's gross income as a dividend to the same extent that it would have been so included if the CFC were a U.S. person (see §M:8.180). For purposes of determining the amount which would have been so included, the determination of whether the other foreign corporation was a CFC is made without regard to this rule. The rules regarding receipts of dividends from related persons (see §M:8.63[2]) do not apply to any amount treated as a dividend because of this rule. For purposes of this rule, a CFC is treated as having sold or exchanged any stock if, under any income tax provision, the CFC is treated as having gain from the sale or exchange of the stock.
 
EXAMPLE:  If a CFC distributes stock in a foreign corporation to its shareholders, and the distribution results in the CFC recognizing gain as if the stock were sold for its fair market value to the shareholder, the CFC is treated as having sold or exchanged the stock. Dividend treatment would thus apply.
 
This applies to gain recognized on transactions occurring after August 5, 1997.
 
Code Sec. 964(e) , added by P.L. 105-34, 105th Cong., 1st Sess., §1111(a) (Aug 5, 1997).
 
Service announces nonacquiescence.  The Service announced that it does not acquiesce to the Eighth Circuit opinion in Brown Group, Inc. v. Commissioner, that held that a consolidated group did not receive Subpart F income from a second-tier controlled foreign corporation (CFC) because a foreign partnership from which the CFC received a distributive share of the partnership's commission income was not a related person of the CFC.
 
Brown Group, Inc & Subsidiaries v Commr, 77 F3d 217 (8th Cir 1996), vacating and remanding 104 TC 105 (1995), nonacq 1996-43 I.R.B. 4.
 
Service to issue regulations concerning character of income received by controlled foreign corporation as distributive share of partnership.  The Service, in response to Brown Group, Inc. v. Commissioner, discussed in the text, intends to issue regulations under Subpart F to confirm its position, currently published in Revenue Ruling 89-72, 1989-1 CB 257, that the character of income included in a controlled foreign corporation's (CFCs) distributive share from a partnership is determined as if the CFC received the income directly. Prior to issuing the specific regulations describing how the aggregate will apply, the Service will rely on general tax principles to apply the aggregate approach including partnership regulations that confirm that the Service has authority to treat a partnership as an aggregate of its partners in whole or in part as appropriate to carry out the purposes of a Code provision or regulation. See Chapter H:1 for discussion of the these regulations and the aggregate approach to partnership taxation.
 
Notice 96-39, 1996-2 CB 209.
 
For pre-1987 returns, partnership controlled by controlled foreign corporation is not related person of controlled foreign corporation.  The Eighth Circuit, reversing a Tax Court decision discussed in the text, held that a consolidated group did not receive Subpart F income from a second-tier controlled foreign corporation (CFC) because a foreign partnership from which the CFC received a distributive share of the partnership's commission income was not a related person of the CFC. For a discussion of the case, see §M:8.64[1] .
 
Brown Group, Inc & Subsidiaries v Commr, 77 F3d 217 (8th Cir 1996).
 

Popular posts from this blog

power elite vs pluralist explanation models

big 4 vs. law firm comparison from an industry perspective

california bar exam primer