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Foreign Corporation Earnings and Profits (Portfolio 932)

Product Code: TPOR43
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Foreign Corporation Earnings and Profits explains how the earnings and profits (E&P) of foreign corporations are computed, accounted for, and applied for U.S. tax purposes. Determining a foreign corporation's E&P is essential in many transactions, because E&P often controls the result of such issues as the amount of income recognized, the character of such income, the timing of recognition, and whether and to what extent a foreign tax credit is available. Co-authored by Daniel S. Lange, Richard A. Gordon, Esq., Timothy J. Pronley, Esq., Michael P. Layden, all of Deloitte & Touche LLP, and Darwin C. Broenen, CPA, this Portfolio describes how to compute post-1986 Tax Reform Act E&P under the functional currency method, the U.S. dollar approximate separate transactions method, and the U.S. dollar separate transactions method, and how to compute pre-1986 Tax Reform Act E&P under the §902 method, the partial §964 method, and the full §964 method. The discussion includes the effect of blocked E&P, the foreign corporation's tax accounting methods and elections, the corporation's taxable year, and foreign currency translation.

Foreign Corporation Earnings and Profits also discusses accounting aspects of E&P, including

(1) layering and pooling

(2) maintaining separate baskets of E&P

(3) source of E&P

(4) the effect of distributions, including distributions of previously taxed income

(5) the look-through rules for controlled foreign corporations

(6) the effect of tax redeterminations and adjustments

(7) reporting and recordkeeping requirements.

This Portfolio then analyzes the application of the E&P rules to: (1) the indirect foreign tax credit under §§902 and 960; (2) the E&P limitation on subpart F income; (3) investment in U.S. property by controlled foreign corporations; (4) sales or exchanges of foreign corporation stock subject to §1248; (5) reorganizations and incorporation transactions subject to §367; (6) §338 elections by foreign corporations; (7) passive foreign investment companies; and (8) §864(e) asset based interest expense allocation.

A detailed case study in the included Worksheets illustrates the principles described in this Portfolio’s detailed analysis.

Foreign Corporation Earnings and Profits allows you to benefit from:

  • Hundreds of hours of original research on specific tax planning topics from leading practitioners in this area
  • Invaluable practice documents including tables, charts and lists
  • Plain-English guidance from world-class experts
  • Real-world and in-depth analysis that lets you explore various options
  • Time-saving access to relevant sections of tax laws, regulations, court cases, IRS documents and more.
  • Alternative approaches to both common and unique tax scenarios

This Portfolio is part of the Foreign Income Portfolios Library, a comprehensive series containing more than 90 Portfolios, which covers critical transactions and issues in international taxation. This highly-regarded resource service offers commentary on a wide range of foreign income topics including: Foreign Tax Credit, Business Operations in more than 40 foreign countries, Branch ProfitsTax, Source of Income Rules, Subpart F (Controlled Foreign Corporations), Foreign Partnerships and Partners, Transfer Pricing, and more.

 

Detailed Analysis

I. Computation of Earnings and Profits

A. Introduction

1. Computation of Earnings and Profits

2. Accounting for Earnings and Profits

3. Application of Earnings and Profits

B. Computation of Earnings and Profits Before TRA 1986

1. Pre-1963 Earnings and Profits

a. In General

b. Earnings and Profits Before March 1, 1913

c. Earnings and Profits After February 28, 1913 and Prior to 1963

2. Post-1962 and Pre-1987 Earnings and Profits

a. Section 902 Method

b. Partial Section 964 Method

c. Full § 964 Method

(1) Applicability of the Full § 964 Rules

(2) Subpart F Income and Investments in U.S. Property

(3) Section 1248 - Dispositions of Stock in a Controlled Foreign Corporation

(4) Section 367 Reorganizations

(5) Methodology

d. U.S. Dollar Method

3. The Five Steps of Regs. § 1.964-1

a. In General

b. Profit and Loss Statement Preparation - Step One

c. U.S. GAAP Adjustments - Step Two

(1) Material Adjustment

(2) Mandatory U.S. GAAP Adjustments

(a) Clear Reflection of Income

(b) Physical Assets (e.g., Depreciation)

(c) Valuation of Assets and Liabilities

(d) Equalization of Income and Expenses

(e) Foreign Currency

(3) Material Adjustment

d. Tax Accounting Method Elections - Step Three

(1) In General

(2) Initial Adoption of Accounting Methods

(3) Adoption of Accounting Method Upon Attaining CFC Status

(4) Changes in Accounting Method

(5) Procedures for Adopting Accounting Methods Upon Attaining CFC Status

(a) Who May Act on Behalf of the Foreign Corporation

(b) How the Election Is Made

(c) Effect of Election

(d) Time for Filing Elections - Significant Event

(e) Late Elections

(f) Revocation of Election

e. Translation of Financial Statements into U.S. Dollars - Step Four

(1) Translation Period

(2) Appropriate Exchange Rate

(a) Source of Rates

(b) No Substantial Fluctuation

(c) Substantial Fluctuation

(d) Election of Representative Monthly Rate

(e) U.S. Dollar Transactions

(3) Items Required to Be Translated at Historical Rates

(a) Inventories and Cost of Goods Sold

(b) Depreciation, Depletion, and Amortization

(c) Prepaid Income or Expenses

f. Exchange Gain or Loss

(1) Time of Adjustment

(2) Calculation of Retained Earnings

(3) Determination of Exchange Gain or Loss

(4) Example

4. Blocked Earnings and Profits

a. When Restrictions or Limitations Are Imposed Under Foreign Law

(1) Manner of Imposition of Restriction

(2) "Restriction or Limitation"

(3) Period of Restriction

b. Effect of Voluntary Action

c. Requirement for Exhaustion of Procedures

d. Effect of Mandatory Reserves

e. Procedure for Claiming Existence of a Restriction or Limitation

f. Removal of Restriction

(1) When Removal of Restriction or Limitation Occurs

(2) Effect of Removal of Restriction or Limitation

(a) Deferred Income

(b) Earnings and Profits

(c) Translation into U.S. Dollars

C. Computation of Earnings and Profits After the Tax Reform Act of 1986

1. Introduction

a. Comparison of Pre- and Post-1986 TRA Methods of Computing Earnings and Profits

b. Comparison of Pre- and Post-1986 TRA Functional Currency Determination

c. Comparison of Pre- and Post-1986 TRA Methods of Translating Earnings and Profits

d. Effective Date of 1986 TRA Changes

2. Functional Currency

a. Overview

b. Qualified Business Unit

(1) In General

(2) Special Rule for Qualified Business Unit

c. Functional Currency as a Method of Accounting

d. Determination of Functional Currency

e. Treatment of Foreign Corporation Branch Transactions

f. Euro Conversion

(1) Automatic Change in Functional Currency

(2) Nonrecognition - The General Rule

(a) Example: Conversion of Nonfunctional Legacy Currency Receivable Held by a U.S. Corporation

(b) Example: Conversion by CFC's Currency to Euro

(c) Example: Conversion of Branch Currency to Euro

(d) Example: CFC § 988 Transaction

(e) Example: Hybrid Branch § 988 Transaction

(3) Exceptions to Nonrecognition

(a) Election with Respect to Legacy-Denominated Payables and Receivables

(b) Nonfunctional Currency Cash

(c) Conversions of Branches and Hybrid Branches

(d) Additional Adjustments for Corporations

3. Computational Methods

a. Functional Currency Method

b. Hyperinflationary Currency; Use of U.S. Dollar

(1) In General

(2) Pre-August 25, 1994 Taxable Years: Dollar Election Available

(a) Eligible QBU

(b) Time and Manner for U.S. Dollar Election

(c) Effect of U.S. Dollar Election

c. U.S. Dollar Approximate Separate Transactions Method of Accounting

(1) Taxable Years Before Effective Date of 1994 Regulations

(a) In General

(b) Profit and Loss Statement in Hyperinflationary Currency

(c) U.S. Accounting and Tax Adjustments

(d) Translation of Adjusted Profit and Loss Statement into U.S. Dollars

(e) Inventories and Cost of Goods Sold

(f) Depreciation, Depletion, and Amortization

(g) Prepaid Income or Expense

(h) Currency Gain or Loss Based on Balance Sheet Translation

(i) Inventory

(j) Bad Debt Reserves

(k) Prepaid Income or Expense

(l) Hyperinflationary Cash

(m) Physical Assets and Adjustments to Physical Assets

(n) Long-Term Liabilities

(o) Accrued Taxes

(p) Other Assets and Liabilities and Accounts Payable

(q) Alternative Method

(2) 1994 Final Regulations

(a) In General

(b) Determination of Income or Loss or E& P under DASTM

(c) Conversion Into U.S. Dollars

(d) Computation of DASTM Gain or Loss

(e) Allocation of DASTM Gain or Loss/In General

(f) The Small QBU Method

(g) The Nine-Step Allocation Method

4. Blocked Earnings and Profits

D. Tax Accounting Methods

1. Introduction

2. Means of Adoption

a. Regularly Used in Books and Records

b. Procedures for Electing Accounting Methods

(1) Pre-1986 TRA Methods

(a) Section 902 Method

(b) Partial Section 964 Method

(c) Full Section 964 Method

(d) U.S. Dollar Method

(2) Post-1986 TRA Methods

(a) Functional Currency Method

(b) U.S. Dollar Approximate Separate Transactions Method (DASTM)

(i) CFCs

(ii) Non-CFCs

(c) Alternative Method

(3) Interaction of Accounting Method Elections

c. Planning for Accounting Method Elections

d. Change in U.S. Law Requiring Change in Accounting Method

e. Changing Erroneous Accounting Methods

3. Taxable Year - Annual Accounting Period

a. Election

b. Change in Taxable Year

c. Section 898 Conformity Rules

4. Specific Accounting Method Elections

a. Depreciation

(1) Introduction

(2) Assets Placed in Service Before July 1, 1972

(3) Assets Placed in Service After June 30, 1972, but Before 1981

(a) In General

(b) Corporations with Less Than 20% U.S. Source Income

(c) Corporations with 20% or More U.S. Source Income

(4) Assets Placed in Service Between 1981 and 1986

(5) Assets Placed in Service After 1986

(6) Depreciation Recapture

b. Other Cost Recovery Considerations

(1) Organizational Expenditures

(2) Intangible Assets

(a) Pre-1993 RRA Intangibles

(b) Post-1993 RRA Intangibles

(3) Research and Development Expenditures

(4) Trademark and Trade Name Expenses

(a) Pre-1993 RRA

(b) Post-1993 RRA

(c) Contingent Payments

(5) Construction Period Carrying Charges

(a) Pre-1986 TRA

(b) Post-1986 TRA

(6) Farming Expenses

(7) Oil and Gas Operations

(a) Depletion

(b) Intangible Drilling Costs

c. Inventories

(1) In General

(2) Full Absorption

(3) Use of LIFO

(4) Inventory Reserves

(5) Uniform Capitalization

d. Foreign Pension and Profit Sharing Plans

e. Long-Term Contracts

f. Installment Sales

g. Bad Debt Reserve

h. Reserve Method of Accounting for Vacation Pay

i. Economic Performance Recurring Item Exception

(1) Overview

(2) Recurring-Item Exception

(3) Adopting the Recurring-Item Exception

j. Functional Currency

k. Full Section 964 Method - Translation of Inventory and Prepaid Income and Expenses

l. Allocation of Interest Expense - Modified Gross Income or Asset Method

II. Accounting for Earnings and Profits

A. Introduction

1. Layering, Pooling and Maintaining Earnings and Profits

2. Look-Through Rules for Controlled Foreign Corporations (CFCs)

3. Translation of Earnings and Profits and Taxes

4. Effect of Distributions on Earnings and Profits

5. Distributions of Previously Taxed Income of a Controlled Foreign Corporation

6. Tax Redeterminations and Adjustments

7. Reporting and Recordkeeping Requirements

B. Layering, Pooling, and Maintaining Earnings and Profits

1. Introduction

2. Definitions

a. Layering

b. Pooling

c. Baskets

d. Source

3. Calculation of Earnings and Profits

a. Reducing Earnings and Profits for Actual Dividend Distributions

b. Allocation of Earnings and Profits to Foreign Tax Credit Baskets

c. Dividends from Lower Tiers

d. Transitional Rules

(1) Inclusion of Pre-1986 TRA Earnings and Profits in the Post-1986 TRA Earnings and Profits Pool

(2) Inclusion of Post-1986 TRA Earnings and Profits in Pre-1986 TRA Earnings and Profits

4. Maintenance

C. Look-Through Rules for Controlled Foreign Corporations (CFCs)

1. Background

a. 1984 and 1986 TRA Changes

b. Transitional Rules

c. Treatment of Non-CFC Earnings and Profits

2. Overview

3. Subpart F Income Inclusions

4. Interest Received or Accrued from a CFC

a. In General

b. Allocation of Expenses, Including Related Person Interest

5. Rents and Royalties Received or Accrued from a CFC

6. Look-Through Rule for Dividends from a CFC

a. In General

b. Special Rules

c. Anti-avoidance Rule to Prevent Manipulation of the Character of Income

7. Allocation of Taxes to Separate Limitation Income

a. In General

b. Scope of Application

c. Allocation and Apportionment Rules

8. Application of Look-Through Rules to Lower-Tier and Related CFCs

9. U.S. Source Income Tracing Rules

a. Overview

b. Interest Payments

c. Dividend Payments

d. Other Income Inclusions

10. Ordering Rules for Application of Look-Through Rules to Related Persons

a. In General

b. Specific Ordering Rules

11. Interaction of Look-Through Rules and U.S. Source Income Tracing Rules

12. Treatment of a Post-1986 TRA Deficit in a Separate Category of E& P

D. Translation of Earnings and Profits and Taxes

1. In General

2. Translation of Earnings and Profits

a. Post-1986 TRA

b. Pre-1986 TRA

3. Translation of Foreign Income Taxes

a. Post-1986 TRA

b. Pre-1986 TRA

E. Effect of Distributions on Earnings and Profits

1. Overview

2. Effect on Earnings and Profits of the Distributing Corporation

a. In General

b. Distributions of Appreciated Property

(1) Recognition of Losses

(2) Recognition of Gains

(3) Effect on Earnings and Profits

(4) Application to Foreign Corporations

3. Effect on Earnings and Profits of Recipient Corporation

4. Consent Dividends

a. General Rule

b. Restrictions on Consent Dividend Elections

F. Distributions of Previously Taxed Income of a Controlled Foreign Corporation

1. Introduction

a. Definition of Previously Taxed Income (PTI)

b. Deemed Distributions Creating PTI

c. Importance of PTI

2. General Rules

a. Categories of Earnings and Profits

b. Election for Combination of § 959(c)(1) and (2) Accounts

c. Relieving the § 959(c) Accounts

d. Examples

e. Effect of PTI on a U.S. Shareholder's Basis in a CFC's Stock

f. Acquisition of PTI Accounts

g. Additional Foreign Taxes on PTI When Distributed

h. Transfer of PTI in "Cross-Chain" § 304 Sales

3. Distributions of PTI Through Tiers

a. General Rule

b. Operational Rules of PTI Distributions Through Tiers

(1) Source of Distributions

(2) Ownership of Less Than 100%

(3) Additional Taxes on PTI Distributed Through Tiers

4. Exchange Gain or Loss on PTI Distributions

a. Introduction

b. Pre-1986 TRA Distributions of PTI

c. Distributions of PTI After the 1986 TRA

d. Formula to Calculate the Exchange Gain or Loss-Post-1986 Distributions of PTI

e. Formula to Calculate Exchange Gain or Loss on Distributions of Pre-1987 PTI

f. Calculation of Exchange Gain or Loss With More Than One Separate Category of Income

g. Exchange Gain or Loss on Distributions Through Tiers

h. Special Rules

(1) Exchange Gain or Loss on a Disposition of a CFC

(2) Transitional Rules Source of Exchange Gain or Loss

(3) Transitional Rules - Distributions of Pre-Act and Post-Act PTI

5. Special Rules

a. Distribution of Property With a FMV Greater Than Adjusted Basis

b. Distribution of Property With a FMV Less Than the Adjusted Basis

c. Return of Capital Distributions and PTI

G. Tax Redeterminations and Adjustments

1. Introduction

a. Background

b. Definition of "Foreign Tax Redetermination"

c. General Scope and Application of Foreign Tax Redetermination Regulations

d. Effective Dates

2. Foreign Tax Redeterminations Requiring a Recalculation of U.S. Tax Liability

a. Situations Requiring a Recalculation of U.S. Tax

(1) Post-1986 Redeterminations of Taxes Directly Paid or Accrued By a U.S. Person

(2) Post-1986 Redeterminations of Taxes Deemed Paid by a U.S. Corporation on Earnings and Profits Accumulated in Pre-1987 Taxable Years

(3) Pre-1987 Redeterminations of Taxes Directly Paid or Accrued or Deemed Paid by a U.S. Person

(4) De Minimis Exception to Requirement of U.S. Tax Recalculation

b. Reporting Requirements

c. Payment or Refund of Tax

3. Post-1986 TRA Redeterminations of Taxes Deemed Paid on Post-1986 TRA Accumulated Earnings and Profits

a. Adjustments to Pools of Earnings and Profits and Foreign Taxes

b. Mechanics of the Pool Adjustments

(1) Refunds of Foreign Taxes

(2) Additional Assessments of Foreign Tax

(3) Refunds of Foreign Taxes of Lower-Tier Foreign Corporations Which Cause Deficits in Foreign Tax Pools

c. Exceptions to Pool Adjustments-Recalculation of U.S. Tax Liability Required

(1) Hyperinflationary Currencies

(2) Deemed Paid Foreign Tax Adjustment of 10% or More

(3) Deficit in Foreign Tax Pool

(4) Partial Refund of Predistribution Taxes

d. Reporting Requirements for Pool Adjustments

e. Foreign Tax Imposed on Foreign Refund

H. Reporting and Recordkeeping Requirements

1. Controlled Foreign Corporation Reporting Requirements

a. Introduction

b. Reporting In General

(1) Evolution of Reporting Requirements

(2) The Current Approach

(3) Computer-Generated Form 5471 and Schedules

(4) Electronic Filing of Form 5471

c. Form 5471

(1) Filing Requirements

(a) General

(b) Taxable Year Conformity Rule

(c) Post-1994 Annual Accounting Period Rule

(d) Who Must File

(2) Transactional Filing Requirements: Schedule O

(3) Filing on Behalf of Another

(4) Miscellaneous Filing Matters

(5) Failure to Meet Reporting Requirements: Penalties

(a) Generally

(b) Failure to File Form 5471

(6) Post-1986 Undistributed Earnings: § 902(c)

(7) Post-1994 Form 5471 Reporting Regulations

(8) Foreign Based Documentation

2. Foreign Partnership Reporting Requirements

a. General

b. Form 8865

(1) Filing Requirements

(2) Categories of Filers

(3) Special Rule for a Partnership Interest Owned on December 31, 1999

(4) Effective Dates

(5) Exceptions to Filing

(a) Multiple Category 1 Filers

(b) Constructive Owners

(c) Members of an Affiliated Group of Corporations Filing a Consolidated Return

(d) Exception for Certain Category 4 Filers

(6) Relief for Category 1 and 2 Filers When the Foreign Partnership Files Form 1065 or Form 1065-B

(7) Miscellaneous Filing Matters

c. Transaction Reporting Requirements - Schedule 0

(1) Transfers Reportable under § 6038B

(2) Dispositions Reportable under § 6038B

(3) Gain Recognition under § 904(f)(3) or (f)(5)(F)

(4) Acquisitions, Dispositions, and Changes of Interests in a Foreign Partnership - Schedule P

(5) Penalties

(a) Failure to Timely Submit All Information Required of Category 1 and 2 Filers

(b) Failure to File Information Required of Category 3 Filers

(c) Failure to File Information Required of Category 4 Filers

3. Transfers to Foreign Entities

a. General

b. Transfers of Property to Foreign Partnerships

(1) Background

(2) Who Must Report

(3) Effective Date

(4) How and When To Report

(5) Penalties

c. Transfers of Cash to Foreign Corporations

(1) Background

(2) Who Must Report

(3) Effective Date

(4) How and When To Report

(5) Penalties

4. Summary

5. Record Keeping

a. Introduction

b. Information Required to Compute Earnings and Profits

(1) Financial Statements

(2) Foreign Tax Returns

(3) Tax Account Analysis

(4) Fixed Asset Analysis

(5) Accrual and Reserve Analysis

(6) Retained Earnings Analysis

c. Statute of Limitations

d. Gathering Data

III. Application of Earnings and Profits

A. Introduction

B. Indirect Foreign Tax Credits Under § § 902 and 960

1. Introduction

2. Computation of Indirect Foreign Tax Credit

a. Pre-1997 TRA Rules

b. Post-1997 TRA Rules

c. Pre-Effective Date Reorganizations

d. Post-Effective Date Reorganizations - Acquisition of a Chain of Foreign Entities

e. Post-Effective Date Acquisition of Fourth-Tier Controlled Foreign Corporations

3. Deemed Distribution Under Subpart F

4. Years After 1986

5. 1986 TRA Transitional Rules

6. "Accumulated Profits" under the Pre-1986 TRA § 902 Formula

a. Introduction

b. Effect of Loss Carryback

c. Determined Under U.S. Tax Concepts

7. Deficit Allocation

a. Under § 902

b. Under § 960

8. Deficits in Earnings and Profits - Post-1986 TRA

a. Introduction

b. Actual Dividends

c. Deemed Dividends

d. Deficit Carryovers and Transitional Rules - 1986 TRA

(1) Introduction

(2) Actual Dividends - Post-1986

(a) Carryforward of Pre-1987 Accumulated Deficits

(b) Carryback of Post-1986 Deficits

9. Deemed Income Inclusions - Post-1986

a. Carryforward of Pre-1987 Deficits

b. Carryback of Post-1986 Deficits

C. Earnings and Profits Limitation of Subpart F Income - Controlled Foreign Corporations

1. General Rule

2. Timing Differences Between Recognition of Income and Earnings and Profits

a. Taxable Years Beginning Before 1987

b. Disallowance of Certain § 312(n) Adjustments in Years After 1986

3. Effect of Deficits of the Controlled Foreign Corporation

a. Current Deficits in Earnings and Profits

b. Prior Year Accumulated Deficits in Earnings and Profits

(1) Taxable Years Beginning Before 1987

(2) Taxable Years Beginning After 1986

4. The Chain Deficit Rule

a. Taxable Years Beginning Before 1987

b. Taxable Years Beginning After 1986

(1) In General

(2) Section 367(b) Regulations

D. Earnings and Profits Aspects of Investments in U.S. Property by Controlled Foreign Corporations

1. Introduction

a. Computation Before September 30, 1993 - Annual

b. Computation After September 30, 1993 - Quarterly

c. Earnings Invested in Excess Passive Assets - § 956A (Repealed)

d. Interplay with Subpart F Income Inclusions

e. Interplay with Actual Dividends

f. Determination of Earnings and Profits Before and After 1986 TRA

2. The Dividend Limitation on § 956 Investments in U.S. Property

3. Methods of Computing Earnings and Profits

4. Deficits in Earnings and Profits - Effect on § 956 Investments in U.S. Property

a. Generally

b. Use of Deficits for Dividend Limitation Purposes

(1) Pre-1987 Deficits

(2) Post-1986 Deficits

c. Carryover of Deficits for § 960 Deemed-Paid Credit Purposes

(1) Carryforward of Pre-1987 Accumulated Deficits

(2) Carryback of Post-1986 Deficits

5. Planning Considerations

E. Earnings and Profits Attributable to Controlled Foreign Corporation Stock Sold or Exchanged - § 1248

1. Introduction

2. Determination of Earnings and Profits Attributable to Controlled Foreign Corporation Stock Sold or Exchanged

a. Attribution of Earnings and Profits of Lower-Tier Subsidiaries

b. Relationship to § 964

c. Sale of Lower-Tier Controlled Foreign Corporations

d. Computation Methods

(1) General

(2) Simple Cases

(3) Complex Cases

(a) E& P for Each Taxable Year

(b) Tentative Ratable Share

(4) Section 1248 Implications of Receiving Dividends In Year of Sale

(5) Deficits and Distributions

3. Exclusion of Certain Earnings and Profits Under § 1248

a. Subpart F Income

b. Gain Realized Which Would Have Been Excluded from Income Under § 337 (Pre-1986 TRA)

c. Less Developed Country Corporation's Earnings and Profits (Prior Law)

d. Effectively Connected U.S. Trade or Business Income

e. Foreign Investment Company Income

f. Foreign Trade Income

g. Foreign Personal Holding Company Income

h. Passive Foreign Investment Company (PFIC) Income

4. Sale of Domestic Corporation Formed or Availed to Hold Stock in a CFC - § 1248(e)

a. General

b. Suspension of § 1248(e) After 1986 TRA

c. Restoration of § 1248(e) After 1990 TRA

5. Nontaxable Transfers - § 1248(f)

a. General

b. The Interplay Between § 1248(a) and § 1248(f) - After 1986 TRA

c. Continued Application of § 1248(f) After TAMRA

6. Consolidated Returns and § 1248 Suspense Accounts

a. Earnings and Profits Effects

b. Recognition of Income

c. Foreign Tax Credit Consequences

F. Earnings and Profits Aspects of Reorganizations and Transfers Involving Foreign Corporation Stock - § § 367 and 381

1. Introduction

2. Overview of § 367

a. In General

b. Section 367(a) - Outbound Transactions

(1) Current Taxability

(2) Amount of Recognized Gain

c. Section 367(b) - Certain Outbound Transactions, Inbound Asset Acquisitions and Foreign-to-Foreign Transactions

(1) Operation of § 367(b)

(2) Regulations

(a) In General

(b) Prior Regulations and Guidance

(c) Final Regulations

(d) Proposed Regulations

3. Pre-February 23, 2000 - Key Terms and Earnings and Profits Concepts Applicable to Inbound and Foreign-to-Foreign Transactions

a. Notice

b. Definitions

(1) Controlled Foreign Corporation

(2) U.S. Shareholder

(3) The § 1246 Amount

(4) The § 1248 Amount

(5) The § 1248(c)(2) Amount

(6) The All Earnings and Profits Amount

(7) The Additional Earnings and Profits Amount

c. Pre-February 23, 2000 - Inclusion, Addition and Attribution of Earnings and Profits Amounts: Conceptual Background

d. Inclusion

(1) General

(2) Application

(3) Failure to Include

(a) In General

(b) Planning Considerations - Taxable Exchange Election

e. Addition

(1) In General

(2) Application

(3) Basis Adjustments

(a) In General

(b) Consent Required

(c) Planning Considerations

f. Attribution

(1) In General

(2) Application

(3) Adjustments to Earnings and Profits or Deficit

(a) In General

(b) Increase for CFC Whose Stock Is Received

(c) Decrease for CFC Whose Stock Is Exchanged

(4) Adjustments to Basis

(a) In General

(b) Lower-Tier Subsidiaries of CFC Whose Stock Is Exchanged

(c) Lower-Tier Subsidiaries of CFC Whose Stock Is Received

4. Pre-February 23, 2000 - Liquidations

a. U.S. Parent Liquidates Foreign Subsidiary (Inbound)

(1) Inclusion

(2) Failure to Include

b. Foreign Parent Liquidates Foreign Subsidiary (Foreign-to-Foreign)

5. Pre-February 23, 2000 - § 351 Transfers

a. Inbound Transfers of Property

(1) Transfer of Property Other Than Stock of a Foreign Corporation That Has a U.S. Shareholder

(2) Transfer of Stock in a Foreign Corporation That Has a U.S. Shareholder

(a) Addition

(b) Basis Adjustment

b. Foreign-to-Foreign Transfer

(1) Transfer of Property Other Than CFC Stock

(2) Transfer of Stock in a CFC

(a) Transferor Receives Stock in a CFC

(i) Attribution

(ii) Adjustments to Earnings and Profits and Basis

(b) Transferor Receives Stock in a Non-CFC

(i) Addition

(ii) Basis Adjustment

c. Overlap - § § 351/361

6. Pre-February 23, 2000 - Reorganizations (Other Than § 355 Distributions)

a. In General

b. Inbound Reorganizations

(1) Involving First-Tier Foreign Corporation

(a) "B" Reorganization

(b) "C," "D," or "F" Reorganization

(i) Inclusion

(ii) Failure to Include

(2) Involving Second and Lower-Tier Foreign Corporation in a "B," "C," "D" or "F" Reorganization

(a) Addition

(b) Basis Adjustment

c. Foreign-To-Foreign Reorganization

(1) Stock or Assets of a First-Tier Foreign Corporation Exchanged

(a) Stock of a CFC Received

(i) Attribution

(ii) Adjustments to Earnings and Profits and Basis

(iii) Overlap - § 351/"B" Reorganization

(b) Stock of a Non-CFC Received

(2) Stock or Assets of Second- or Lower-Tier Foreign Corporation Exchanged

(a) Stock of a CFC Received

(i) Attribution

(ii) Adjustments to Earnings and Profits and Basis

(b) Stock of a Non-CFC Received

(i) Addition

(ii) Basis Adjustments

7. Pre-February 23, 2000 - Divisive Reorganizations: § 355

a. In General

b. Adjustments

(1) In General

(2) Allocation of Earnings and Profits

(3) Basis Adjustments

(4) Inclusion, Addition, and Attribution Concepts

(a) In General

(b) Inclusion

(c) Addition

(d) Attribution

(5) Inbound Distribution (First-Tier Distributor)

(a) U.S. Shareholder Receives CFC Stock

(b) U.S. Shareholder Receives Non-CFC Stock

(6) Foreign-to-Foreign Distribution (Second- or Lower-Tier Distributor)

(a) Exchanging CFC Receives CFC Stock

(b) Exchanging CFC Receives Non-CFC Stock

8. Pre-February 23, 2000 - Special Rules

a. Character of Amounts Computed Under the Principles of § 1248

b. Foreign Tax Credit

c. Section 1248(d) Exclusions

d. Treatment of § 1248 Amounts and § 1248(c)(2) Amounts Where No Attribution Is Made

e. Deficit in Earnings and Profits

f. Section 381 Amounts

9. Pre-February 23, 2000 - Subsequent Treatment of Attributed, Added or Included Earnings and Profits Amounts

a. Distributions After "Attribution"

b. Distributions After "Inclusion" and Certain "Additions"

c. Dispositions After an Attribution or Inclusion in Income

10. Post-February 22, 2000 Transactions - Key Terms and Earnings and Profits Concepts

a. Notice

(1) In General

(2) Failure to Comply

b. Definitions

(1) Controlled Foreign Corporation

(2) Section 1248 Shareholder

(3) The § 1248 Amount

(4) The All Earnings and Profits Amount

(a) General Rule

(i) E& P of the Foreign Acquired Corporation

(ii) E& P Attributable to Stock Under § 1248 Principles

(b) Lower-Tier E& P Excluded

c. Dividend Treatment

d. Ordering Rules

11. Post-February 22, 2000 - Inbound Asset Acquisitions

a. Scope

b. Income Inclusion

(1) General Rule

(2) U.S. Shareholder

c. Inbound Asset Acquisitions Requiring an Income Inclusion

(1) U.S. Shareholder of the Foreign Acquired Corporation

(a) General Rule

(b) Taxable Exchange Election

(i) In General

(ii) Transition Election: February 23, 2000 - February 23, 2001

(2) 10% U.S.-Owned Foreign Corporate Shareholders

(a) General Rule

(b) Deemed Dividend - Same Country Exception Does Not Apply

(3) Less Than 10% Shareholder of Foreign Acquired Corporation

(a) U.S. Person - General Rule

(b) De Minimis Exception

d. Other Inbound Asset Acquisitions Outside of Below § 367(b)

e. Carryover of Certain Attributes

f. Carryover of E& P if Not Included in All E& P Amount

12. Post-February 22, 2000 - Foreign-to-Foreign Transactions

a. Scope

b. Income Inclusion

(1) General Rule

(2) Deemed Dividend Is Not Foreign Personal Holding Company Income

(3) Basis Adjustment

c. Foreign-to-Foreign Transactions Requiring an Income Inclusion

(1) Exchange Results in the Loss of § 1248 Shareholder Status

(a) General Rule

(i) Section 1248 Shareholder Prior to the Exchange

(ii) Not a § 1248 Shareholder After the Exchange

(b) No Exception for Receipt of Domestic Stock

(2) Exchanging Shareholder Receives Certain Preferred or Other "Non-Common" Stock

(3) Certain Recapitalizations

d. Treatment of Exchanges Not Subject to Deemed Dividend Treatment: Attribution of Earnings and Profits

(1) Subsequent Exchanges By the Exchanging Shareholder

(2) Subsequent Exchanges by the Foreign Acquiring Corporation

(3) Special Limitations on E& P Attribution

13. Post-February 22, 2000 - § 355 Distributions

a. Scope

b. General Rule

(1) Basis Adjustment and/or Income Inclusion

(2) Notice

c. Section 355 Distributions Requiring Basis Adjustment and/or Income Inclusion

(1) Distribution by a Domestic Corporation

(a) Coordination With § 367(e)

(b) Individual Distributees

(c) Corporate and Other Distributees

(2) Distributions by Controlled Foreign Corporations

(a) In General

(i) General Rule

(ii) Definitions

(b) Pro Rata Distribution by a Controlled Foreign Corporation

(i) General Rule

(ii) Basis Adjustments

(iii) Deemed Dividend

(c) Non-Pro Rata Distribution by a Controlled Foreign Corporation

(i) General Rule

(ii) Basis Adjustments

(iii) Deemed Dividend

(iv) Notice

d. Allocation of E& P Between the Distributing and Controlled Corporations

(1) Section 312 Regulations

(a) "D"/355 Distribution

(b) Section 355 Distribution Only

(2) 1977 Temporary Regulations

(3) 1991 Proposed Regulations

(4) Proposed Regulations

(a) Scope

(b) Foreign Divisive Transactions

(i) Section 355 Distribution Only

(ii) "D"/355 With a New Controlled Corporation

(iii) "D"/355 With a Preexisting Controlled Corporation

14. Post-February 22, 2000 - Special Rules

a. Foreign Currency

(1) Post-Exchange Adjustments

(2) Exchange Gain or Loss on Previously Taxed Income

b. Exchange Gain or Loss on Capital Account

c. Section 368(a)(1)(F) Reorganizations

(1) General Rule

(2) Deemed "F" Reorganizations

d. Partnerships, Trusts and Estates

G. Foreign Corporation E& P Aspects of § 338

1. Section 338 Elections in General

a. Background

b. Tax Effect of a § 338 Election - Prior Law

c. Tax Effect of § 338 Election After 1986 TRA

2. Section 338 Elections in the International Area

a. Introduction

b. U.S. Seller - Effect of § 1248 on § 338 Election

H. Earnings and Profits Aspects of Passive Foreign Investment Companies

1. In General, Tax Treatment of U.S. Persons Owning Stock

2. Determination of Earnings and Profits of a PFIC

a. Qualified Electing Funds

b. Nonqualified Funds

(1) Excess Distributions

(2) Other Distributions

I. Effect of Foreign Corporation Earnings and Profits on Interest and Other Asset Based Expense Allocation Methods - § 864(e)(4)

1. Introduction

a. Overview

b. Pre-1986 TRA

(1) The Fungibility of Money Approach

(2) Apportionment Methods

c. Tax Reform Act of 1986: Summary of Changes

(1) In General

(2) Allocation and Apportionment Under 1986 TRA

2. Impact of the Tax Reform Act of 1986 on Asset Based Interest and Related Expense Allocation

a. Generally

b. Asset Method

(1) Valuation of Assets

(2) Treatment of Affiliated Group as a Single Corporation: Stock in Affiliated Corporations

(3) Basis Adjustment for Stock of Nonaffiliated 10% Owned Corporations

(a) Adjustment Based on Earnings and Profits

(b) Undistributed Earnings

Working Papers

Table of Worksheets

Worksheet 1 Committee Reports House of Representatives Ways and Means Committee Report H.R. Rep. No. 426, 99th Cong., 1st Sess., 460-464, 477-481 (1985)

Worksheet 2 General Explanation of the Tax Reform Act of 1986 Staff of the Joint Committee on Taxation 100th Cong., 1st Sess. 1089, 1108-1113 (1987)

Worksheet 3 Maintaining Earnings and Profits, Pre- and Post-1986 TRA

Worksheet 4 Case Study: Foreign Corporation Earnings and Profits

Bibliography

OFFICIAL

Statutes:

Treasury Regulations:

Committee Reports:

Treasury Rulings:

Cases:

UNOFFICIAL

Books and Treatises:

Periodicals:

1964

1986

1999

2000

2001

2005

Richard A. Gordon
Richard A. Gordon, B.A., New York University, 1964; LL.B., Duke University, 1967; tax principal, Washington International Tax Group, Deloitte Tax LLP, 2002-2005 (retired); tax partner, Director of International Specialty, Arthur Andersen, Washington, D.C., 1985-2002; Deputy Chief of Staff and International Tax Counsel, Joint Committee on Taxation, United States Congress, 1981-1985; Special Counsel for International Taxation, Internal Revenue Service, and Assistant to the Commissioner of Internal Revenue Service, Washington, D.C., 1979-1981; Associate, White & Case, Washington, D.C., 1976-1979; Attorney-Advisor, Office of International Tax Counsel, Office of Assistant Secretary of the Treasury (Tax Policy), 1972-1976; Attorney-Advisor, Legislation and Regulations Division, Office of the Chief Counsel, Internal Revenue Service, 1970-1972; Associate, Reynolds, Richards, LaVenture, Hadley & Davis, New York, 1967-1970; member, ABA; author and speaker on international tax issues. 
Daniel S. Lange
Daniel S. Lange, B.B.A., 1981, M.S., taxation, 1983, University of Wisconsin; managing partner, U.S. International Tax practice, Deloitte Tax LLP, 2002–present; tax partner, International Tax Specialty Team, Arthur Andersen, Milwaukee, Wisconsin, 1992-2002, manager, 1986-1991, staff, 1983-1985; member AICPA, WICPA; speaker, international tax issues; author, numerous articles on international tax issues.
Michael P. Layden
Michael P. Layden, B.S., Marquette University, 1990; Tax Senior Manager, Deloitte Tax LLP, Hartford, Connecticut, and Washington, D.C. (1997-1998); speaker on international tax issues. 
Timothy J. Pronley
Timothy J. Pronley, B.B.A., University of Wisconsin – Madison, 1990; J.D., University of Minnesota, 1993; Tax Senior Manager, Deloitte Tax LLP, Minneapolis, Minnesota; member Wisconsin Bar, ABA, WICPA; speaker on international tax issues; author, articles on international taxation, including contributions to Practicing Law Institute and American Bar Association publications.