Example. Controlled foreign corporations X, Y, and Z are a related group for calendar year 1976. The excess group deduction for 1976 is $9, X's pro rata share of the group excess deduction is $6, and Y's pro rata share is $3, determined as follows on the basis of the facts shown in the following table:
X | Y | Z | Group | |
(1) Gross shipping income | $100 | $90 | $90 | |
(2) Shipping deductions | 60 | 70 | 80 | |
(3) Net shipping income | 40 | 20 | (9) | |
(4) Group excess deduction | 80 | |||
(5) X's pro rata share of group excess deduction ($9 * $40/$60) | 6 | |||
(6) Y's pro rata share of group excess deduction ($9 * $20/$60) | 3 |
Example.
(1) Qualified investments (determined without regard to paragraph (c)(3)) on December 31, 1977 | $105 |
(2) Less: Qualified investments in stock of another member of a related group (as required by paragraph (c)(3)) | 15 |
(3) Balance | 90 |
(1) Foreign base company shipping income | $180 | |
(2) Less: intragroup dividends (as required by paragraph (c)(1)) | 5 | |
(3) Balance | 175 | |
(4) Shipping deductions | $91 | |
(5) Less: deductions allocable to intragroup dividends (as required by paragraph (c)(1)) | 1 | |
(6) Balance | 90 | |
(7) Net shipping income (line (3) minus line (6)) | 85 |
R | S | T | |
(1) Qualified investments on December 31, 1977 (in the case of T, taken from line (3) of part (b) of this example) | $220 | $150 | $90 |
(2) Qualified investments on December 31, 1976 | 100 | 205 | 55 |
(3) Increase (decrease) (line (1) minus line (2)) | 120 | (55) | 35 |
R | S | T | |
(1) Gross foreign base company shipping income (in the case of T, taken from line (3) of part (c) of this example) | $200 | $180 | $175 |
(2) Shipping deductions (in the case of T, taken from line (6) of part (c) of this example) | 100 | 85 | 90 |
(3) Net shipping income (line (1) minus line (2)) | 100 | 95 | 85 |
R | S | T | Group | |
(1) Net shipping income (taken from line (3) of part (e) of this example) | $100 | $95 | $85 | |
(2) Increase (decrease) in qualified investments (taken from line (3) of part (d) of this example) | 120 | (55) | 35 | |
(3) Excess investment | 20 | $20 | ||
(4) Shortfall | 150 | 50 | 200 | |
(5) S's pro rata share of group excess investment ($20 * $150/$200) | 15 | |||
(6) T's pro rata share of group excess investment ($20 * $50/$200) | 5 |
R | S | T | |
(1) Qualified investments on December 31, 1977 (taken from line (1) of part (d) of this example) | $220 | $150 | $90 |
(2) Plus: pro rata share of group excess investment (as required by paragraph (c)(4)) (taken from lines (5) and (6) of part (f) of this example) | 15 | 5 | |
(3) Minus: Excess investment treated as investments of related group members (taken from line (3) of part (f) of this example) | 20 | ||
(4) Total qualified investments | 200 | 165 | 95 |
R | S | T | |
(1) Qualified investments on December 31, 1977 (taken from line (4) of part (g) of this example) | $200 | $165 | $95 |
(2) Qualified investments on December 31, 1976 (see line (2) of part (d) of this example) | 100 | 205 | 55 |
(3) Increase (decrease) (line (1) minus line (2)) | 100 | (40) | 40 |
Example. United States shareholder A owns 80 percent of the only class of stock of controlled foreign corporations X and Y. United States shareholder B owns the other 20 percent of the stock of X and Y. X and Y both use the calendar year as the taxable year. A elects to treat X and Y as a related group for 1977. For purposes of determining the amounts includible in B's gross income under section 951(a) in respect of X and Y, the election made by A shall be disregarded and all of B's computations shall be made without regard to this section, as illustrated in § 1.952-3(d) .
X | Y | |
(1) Foreign lease company shipping income | $1,000 | $1,000 |
(2) Less: amounts excluded from subpart F income under section 952(b) (relating to U.S. income) and amounts excluded from foreign base company income under section 945(b)(4) (relating to corporation not availed of to reduce taxes) | 0 | 0 |
(3) Balance | 1,000 | 1,000 |
(4) Less: deductions allocable under § 1.954-1(c) to balance | 800 | 1,040 |
(5) Remaining balance | 200 | 0 |
(6) Less: Increase in qualified investments in foreign base company shipping operations | 180 | |
(7) Foreign base company income | 20 |
(1) Qualified investments in foreign base company shipping operations at December 31, 1976 | $1,210 |
(2) Less: qualified investments in foreign base company shipping operations at December 31, 1977 | 1,170 |
(3) Balance | 40 |
(4) Less: excess of recognized losses over recognized gains on sales during 1977 of qualified investments in foreign base company shipping operations | 20 |
(5) Tentative decrease in qualified investments in foreign base company shipping operations for 1977 | 20 |
(6) Limitation described in § 1.955A-1(b)(2) | 160 |
(7) Y's amount of previously excluded subpart F income withdrawn from investment in foreign base company shipping operations (lesser of lines (5) and (6)) | 20 |
(1) Preliminary net foreign base company shipping income (line (b)(5) of example 1) | $200 |
(2) Less: X's pro rata share of group excess deduction | 40 |
(3) Remaining balance | 160 |
(4) Less: increase in qualified investments in foreign base company shipping operations | 180 |
(5) Foreign base company income | 0 |
(1) Qualified investments at December 31, 1976 | $1,210 |
(2)(i) Qualified investments at December 31, 1977 (determined without regard to paragraph (c)(4) of this section) | 1,170 |
(ii) Y's pro rata share of group excess investment | 20 |
(iii) Total qualified investments at December 31, 1977 (Line (i) plus line (ii) | 1,190 |
(3) Balance (line (1) minus line (2)(iii) | 20 |
(4) Less: excess of recognized losses over recognized gains on sales during 1977 of qualified investments in foreign base company shipping operations | 20 |
(5) Decrease in qualified investments for 1977 | 0 |
26 C.F.R. §1.955A-3
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 )