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   (1) Investment in less developed country shipping companies      $10,000 on December 31, 1975 (subdivision (ii)(A) amount).........(2) § 1.955-1(b)(2)(i)(b) limitation for 1976                50,000 (previously excluded subpart F income not withdrawn from investment in less developed countries) (subdivision (ii)(B) amount)...........................................(3) Subdivision (ii) amount (lesser of lines (1) and (2))..       10,000(4) Subdivision (iii) amount: Excess for 1977 of M's               2,000 previously excluded subpart F income withdrawn from investment in foreign base country shipping operations, $3,000, over the sum of the amounts determined under subparagraphs (2)(i)(A)(1) and (2) of this paragraph, $1,000....................................................                                                            ------------(5) Excess of line (3) over line (4).......................        8,000                                                            ============(6) Sum of M's earnings and profits accumulated for 1962          26,000 through 1975, determined on December 31, 1978.............(7) Amount described in this subparagraph for 1978 (lesser         8,000 of line (5) and line (6)).................................                                                            ============ 
  (c) For 1978, M's earnings and profits (reduced as provided in §1.955–1(b)(2)(ii)(a)(1)) are $19,000, and the amount of M's previously excluded subpart F income withdrawn from investment in less developed countries determined under §1.955–1(b)) is $42,000. Consequently, $23,000 of M's earnings and profits accumulated for 1962 through 1975 are attributable to such $42,000 amount, and will therefore be excluded under subparagraph (2)(ii))(A)(2) of this paragraph from M's earnings and profits accumulated for 1962 through 1975, determined as of December 31, 1979. No other portion of M's earnings and profits accumulated for 1962 through 1975 is distributed or included in the gross income of a United States shareholder in 1978.

(d) The amount described in this subparagraph for M's taxable year 1979 with respect to A is determined as follows, based on the additional facts shown in the following table:

   (1) Subdivision (ii) amount (line (3) from paragraph (b) of      $10,000 this example).............................................(2) Subdivision (iii) amount: (i) Excess for 1977 from line        2,000 (4) of paragraph (b) of this example...................... 
     (ii) Plus: excess for 1978 of M's previously excluded       0   subpart F income withdrawn from investment in foreign   base country shipping operations, $6,000, over the   sum of the amounts determined under subparagraphs   (2)(i)(A)(1) and (2) of this paragraph, $25,000......                                                         ------- 
     (iii) Subdivision (iii) amount...........................        2,000                                                            ------------(3) Excess of line (1) over line (2)(iii)..................        8,000                                                            ============(4) Sum of M's earnings and profits accumulated for 1962           3,000 through 1975, determined on December 31, 1979 ($26,000 minus $23,000)............................................(5) Amount described in this subparagraph for 1979 (lesser         3,000 of line (3) and line (4)).................................                                                            ============ 

(4) Amount excluded. For purposes of subparagraph (2)(i)(B) of this paragraph, the amount excluded under section 954(b)(2) from the foreign base company income of a controlled foreign corporation for any taxable year beginning after December 31, 1975, is the excess of—

(i) The amount which would have been equal to the subpart F income of such corporation for such taxable year if such corporation had had no increase in qualified investments in foreign base company shipping operations for such taxable year, over

(ii) The subpart F income of such corporation for such taxable year.

(c) Shareholder's pro rata share of amount withdrawn by controlled foreign corporation—(1) In general. A United States shareholder's pro rata share of a controlled foreign corporation's previously excluded subpart F income withdrawn for any taxable year from investment in foreign base company shipping operations is his pro rata share of the amount withdrawn for such year by such corporation, as determined under paragraph (b) of this section. See section 955(a)(3). Such pro rata share shall be determined in accordance with the principles of §1.195–1(e).

(2) Special rule. A United States shareholder's pro rata share of the net amount determined under paragraph (b)(2)(i)(B) of this section with respect to any stock of the controlled foreign corporation owned by such shareholder shall be determined without taking into account any amount attributable to a period prior to the date on which such shareholder acquired such stock. See section 1248 and the regulations thereunder for rules governing treatment of gain from sales or exchanges of stock in certain foreign corporations.

(d) Illustrations. The application of this section may be illustrated by the following examples:

Example 1.  A, a United States shareholder, owns 60 percent of the only class of stock of M Corporation, a controlled foreign coporation throughout the entire period here involved. Both A and M use the calendar year as a taxable year. The amount of M's previously excluded subpart F income withdrawn for 1978 from investment in foreign base company shipping operations is $40,000, and A's pro rata share of such amount is $24,000 determined as follows based on the facts shown in the following table:

   (a) Qualified investments in foreign base company shipping      $125,000 operations at the close of 1977...........................(b) Less: qualified investments in foreign base company           75,000 shipping operations at the close of 1978..................                                                            ------------(c) Balance................................................       50,000(d) Less: excess of recognized losses ($15,000) over              10,000 recognized gains ($5,000) on sales during 1978 of qualified investments in foreign base company shipping operations................................................                                                            ------------(e) Tentative decrease in qualified investment in foreign         40,000 base company shipping operations for 1978.................                                                            ============(f) Earnings and profits for 1976, 1977, and 1978..........       45,000(g) Plus: amount determined under paragraph (b)(3) of this             0 section...................................................                                                            ------------(h) Earnings and profits limitation........................       45,000                                                            ============(i) Excess of amount excluded under section 954(b)(2) from        50,000 foreign base company income for 1976 ($75,000) over amount of previously excluded subpart F income withdrawn for 1977 from investment in foreign base company shipping operations ($25,000)......................................(j) M's amount of previously excluded subpart F income            40,000 withdrawn for 1978 from investment in foreign base company shipping operations (item (e), but not to exceed the lesser of item (h) or item (i)............................(k) A's pro rata share of M Corporation's amount of               24,000 previously excluded subpart F in come withdrawn for 1978 from investment in foreign base company shipping operations (60 percent of $40,000)........................                                                            ============ 

Example 2.  The facts are the same as in example 1, except that M's earnings and profits (determined under paragraph (b)(2) of this section) for 1976, 1977, and 1978 (item (f)) are $30,000 instead of $45,000. M's amount of previously excluded subpart F income withdrawn for 1978 from investment in foreign base company shipping operations is $30,000. A's pro rata share of such amount is $18,000 (60 percent of $30,000).

Example 3.  The facts are the same as in example 1, except that the excess of the amount excluded under section 954(b)(2) for 1976 from M Corporation's foreign base company income over the amount of its previously excluded subpart F income withdrawn for 1977 from investment in foreign base company shipping operations (item (i)) is $20,000 instead of $50,000. M's amount of previously excluded subpart F income withdrawn for 1978 from investment in foreign base company shipping operations is $20,000. A's pro rata share of such amount is $12,000 (60 percent of $20,000).

[T.D. 7894, 48 FR 22530, May 19, 1983; 48 FR 40888, Sept. 12, 1983]

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