For purposes of this section, a reference to a top-tier corporation shall mean an export trade corporation described in subdivision (i) of this subparagraph, a reference to a second-tier corporation shall mean an export trade corporation described in subdivision (ii) of this subparagraph, and a reference to a third-tier corporation shall mean an export trade corporation described in subdivision (iii) of this subparagraph.
Example. Domestic corporation M owns 60 percent of the only class of stock of foreign corporation A, and 100 percent of the only class of stock of foreign corporation F, respectively. Corporation A owns 80 percent of the only class of stock of foreign corporations B and C, respectively. Corporation M also owns 20 percent of the stock of B Corporation. Corporation B owns 80 percent of the only class of stock of foreign corporation D. Corporations B and C each own 50 percent of the only class of stock of foreign corporation E. Corporation F owns 100 percent of the only class of stock of foreign corporation G, which owns 100 percent of the only class of stock of foreign corporation H. Corporation F also owns 20 percent of the stock of C Corporation. Domestic corporations N and R own 30 percent and 10 percent, respectively, of the stock of A Corporation. All corporations use the calendar year as a taxable year, and all foreign corporations qualify as export trade corporations for 1963. Corporation M may elect for 1963 to consolidate its interest in the chain (the "A" chain) of export trade corporations which includes corporations A, B, C, D, and E; and Corporation M need not, but may, elect to consolidate its interest in the chain (the "F" chain) of export trade corporations which includes corporations F, G, and H. Consolidation of M Corporation's interest in the "A" chain with its interest in the "F" chain is not permitted. If M Corporation elects to consolidate the "A" chain, M Corporation must include in the consolidation its 20 percent directly owned interest in B Corporation and its 20 percent indirectly owned (through F Corporation) interest in C Corporation. Either N Corporation or R Corporation, or both, may join M Corporation in electing to consolidate their interests in the "A" chain. However, neither N Corporation nor R Corporation may elect to consolidate the "A" chain unless M Corporation also agrees to so elect, because corporations N and R, neither jointly nor separately, own more than 50 percent of the total combined voting power of all classes of stock entitled to vote of A Corporation. If corporations M, N, and R elect to consolidate the "A" chain, the determinations specified in subparagraph (1) of this paragraph will be made on a consolidated basis with respect to such corporations' respective interest in the chain as shown in the following tabulation:
A % | B % | C % | D % | E % | |
M Corporation's interest: | |||||
Direct interest | 60 | ||||
(60% * 80%) + 20% direct interest | 68 | ||||
(60% * 80%) + 20% indirect interest | 68 | ||||
(68% * 80%) | 54.4 | ||||
(68% * 50%) + (68% * 50%) | 68 | ||||
N Corporation's interest: | |||||
Direct interest | 30 | ||||
(30% * 80%) | 24 | ||||
(30% * 80%) | 24 | ||||
(24% * 80%) | 19.2 | ||||
(24% * 50%) + (24% * 50%) | 24 | ||||
R Corporation's interest: | |||||
Direct interest | 10 | ||||
(10% * 80%) | 8 | ||||
(10% * 80%) | 8 | ||||
(8% * 80%) | 6.4 | ||||
(8% * 50%) + (8% * 50%) | 8 | ||||
Total interests to which consolidation applies | 100 | 100 | 100 | 80 | 100 |
Example. Corporation A, incorporated under the laws of foreign country X, and corporation B, incorporated under the laws of foreign country Y, are both wholly owned subsidiaries of domestic corporation M. Corporations A and B both qualify under section 971(a) as export trade corporations. Corporation A purchases personal property produced in the United States from an unrelated person and sells the property to B Corporation for use outside of country X. Corporation B resells the property to an unrelated person for use in foreign country Z. Corporations A and B each derive foreign base company sales income described in § 1.954-3 from the purchase and sale transactions. Consolidation of Corporations A and B under this section does not result in the two transactions being treated as one transaction which is a purchase of property from an unrelated person and a sale of property to an unrelated person or the nonrecognition of gain on the sale of export property by A Corporation to B Corporation.
of all export trade corporations to which the consolidation applies for the taxable year.
Example.
Corporation A | Corporation B | |
Subpart F income | $100 | $200 |
Export trade income which constitutes foreign base company income | 25 | 75 |
Other export trade income | 10 | 15 |
Export promotion expenses allocable to export trade income which constitutes foreign base company income | 10 | 80 |
Gross receipts from the sale of property in respect of which export trade income which constitutes foreign base company income is derived | 400 | 600 |
Increase in investments in export trade assets for period beginning with March 16, 1964, and ending with March 16, 1965 | 35 | 120 |
A Corporation (1) | B Corporation (2) | Total (3) | |
(i) Subpart F income | $100 | $200 | $300 |
(ii) Export trade income which constitutes foreign base company income | 25 | 75 | 100 |
(iii) Other export trade income | 10 | 15 | 25 |
(iv) Total export trade income | 35 | 90 | 125 |
(v) Limitations under § 1.970-1(b)(2) : | |||
(a) Increase in export trade assets limitation: | |||
($35 * $25/$35) | 25 | ||
($120 * $75/$90) | 100 | ||
([$35 + $120] * $100/ $125) | 124 | ||
(b) Gross receipts limitation: | |||
(10% of $400) | 40 | ||
(10% of $600) | 60 | ||
(10% of $1,000) | 100 | ||
(c) Export promotion expenses limitation: | |||
(150% of $10) | 15 | ||
(150% of $80) | 120 | ||
(150% of $90) | 135 | ||
(d) Export promotion expenses limitation (alternative case): | |||
(150% of $10) | 15 | ||
(150% of $50) | 75 | ||
(150% of $60) | 90 | ||
(vi) Reduction in subpart F income on a separate company basis determined without regard to section 972 (item (ii), but not to exceed smallest of items (v) (a), (b), and (c), in columns (1) and (2)) | 15 | 60 | 75 |
(vii) Subpart F income as reduced on a separate company basis (item (i) minus item (vi)) | 85 | 140 | 225 |
(viii) Reduction in subpart F income on a consolidated basis determined under section 972 (item (ii), but not to exceed smallest of items (v) (a), (b), and (c), in column (3)) | 100 | ||
(ix) Apportionment of reduction in subpart F income (item (ii)) | 25 | 75 | 100 |
(x) Subpart F income as reduced on a consolidated basis (item (i) minus item (ix)) | 75 | 125 | 200 |
ALTERNATIVE CASE | |||
(xi) Reduction in subpart F income on a consolidated basis determined under section 972 (item (ii) but not to exceed smallest of items (v) (a), (b), and (d), in column (3)) | 9 | ||
(xii) Apportionment of reduction in subpart F income (item (xi) times [item (ii) of column (1) over item (ii) of column (3)] and item (xi) times [item (ii) of column (2) over item (ii) of column (3)]); ($90 * $25/$100) | $22.50 | ||
($90 * $75/$100) | $67.50 | 90 | |
(xiii) Subpart F income as reduced on a consolidated basis (item (i) minus item (xii)) | 77.50 | 132.50 | 210 |
Example.
A (1) | B (2) | Consolidated (3) | |
(i) Consolidated decrease in investments in export trade assets (determined before application of § 1.970-1(c)(2) ) | $100 | ||
(ii) M Corporation's pro rata share of consolidated decrease (60%) | 60 | ||
(iii) M Corporation's pro rata share of earnings and profits for 1963 and 1964 (§ 1.970-1(c) (2)(i) (a) | $120 | $90 | 210 |
(iv) M Corporation's pro rata share of net amount determined under § 1.970-1(c)(2)(i) (b) for 1963 | 180 | 60 | 240 |
(v) Amount includible in M Corporation's gross income for 1964 (smallest of items (ii), (iii), and (iv) in column (3)) | 60 |
Corporation M must include $60 in its gross income for 1964 under section 951(a)(1)(A)(ii) by reason of the application of section 970(b) as its pro rata share of the consolidated decrease in investments in export trade assets; and, for purposes of determining the amount under paragraph (c)(2)(i)(b)(3) of § 1.970-1 with respect to M Corporation's interest in each of corporations A and B for a subsequent taxable year, such consolidated decrease for 1964 is allocated as follows: to M Corporation's interest in A Corporation, $45 ($60 times $180/$240); and to its interest in B Corporation, $15 ($60 times $60/$240).
A(1) | B(2) | Consolidated (3) | |
(i) Consolidated decrease in investments in export trade assets (determined before application of § 1.970-1(c)(2) ) | $150 | ||
(ii) M Corporation's pro rata share of consolidated decrease (60%) | 90 | ||
(iii) M Corporation's pro rata share of earnings and profits (and deficits in earnings and profits) for 1963, 1964, and 1965 (§ 1.970-1(c)(2)(i) (a)) | $100 | ($20) | 80 |
(iv) M Corporation's pro rata share of the net amount determined under § 1.970-1(c)(2)(i) (b) for 1963 and 1964 | |||
($180-$45) | 135 | ||
($60-$15) | 45 | ||
Total | 180 | ||
(v) Amount includible in M Corporation's gross income for 1965 (smallest of items (ii), (iii), and (iv) in column (3)). | 80 |
Corporation M must include $80 in its gross income for 1965 under section 951(a)(1)(A)(ii) by reason of the application of section 970(b) as its pro rata share of the consolidated decrease in investments in export trade assets; and, for purposes of determining the amount under paragraph (c)(2)(i)(b)(3) of § 1.970-1 with respect to M Corporation's interest in each of corporations A and B for a subsequent taxable year, such consolidated decrease for 1965 is allocated as follows: to M Corporation's interest in A Corporation, $60 ($80 times $135/$180); and to its interest in B Corporation, $20 ($80 times $45/$180).
A(1) | B(2) | Consolidated (3) | |
(i) Consolidated decrease in investments in export trade assets (determined before application of § 1.970-1(c)(2) ) | $200 | ||
(ii) M Corporation's pro rata share of consolidated decrease (60%) | 120 | ||
(iii) M Corporation's pro rata share of earnings and profits (and deficits in earnings and profits) for 1963, 1964, 1965, and 1966 (§ 1.970-1(c)(2)(i) (a)) | $120 | $50 | 170 |
(iv) M Corporation's pro rata share of the net amount determined under § 1.970-1(c)(2)(i)(b) for 1963, 1964, and 1965 | |||
($180 minus [$45 + $60]) | 75 | ||
($60-[$15 + $20]) | 25 | ||
Total | 100 | ||
(v) Amount includible in M Corporation's gross income for 1966 (smallest of items (ii), (iii), and (iv) in column (3)) | 100 |
Corporation M must include $100 in its gross income for 1966 under section 951(a)(1)(A)(ii) by reason of the application of section 970(b) as its pro rata share of the consolidated decrease in investments in export trade assets; and, for purposes of determining the amount under paragraph (c)(2)(i)(b)(3) of § 1.970-1 with respect to M Corporation's interest in each of corporations A and B for a subsequent taxable year, such consolidated decrease for 1966 is allocated as follows: to M Corporation's interest in A Corporation, $75 ($100 times $75/$100); and to its interest in B Corporation, $25 ($100 times $25/$100).
26 C.F.R. §1.972-1