PORTFOLIO

Foreign Personal Holding Companies (Portfolio 922)

Tax Management Portfolio, Foreign Personal Holding Companies, examines the U.S. taxation of U.S. shareholders of foreign personal holding companies before the 2004 repeal of the foreign personal holding company provisions of the Internal Revenue Code.

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DESCRIPTION

The Portfolio analyzes the provisions of former §§551 through 558 along with related provisions and the regulations promulgated thereunder.

The Portfolio also discusses the rules that determined foreign personal holding company status, amounts subject to taxation, and filing requirements. Finally, the portfolio addresses the relationships that existed among these rules, subpart F, the passive foreign investment company rules, and the personal holding company rules. The foreign personal holding company provisions were first enacted in 1937 as a complement to the personal holding company legislation of 1934. Both regimes were intended to deter U.S. citizens and residents from using corporations as so-called “incorporated pocketbooks” for their investment and personal services income. The personal holding company rules dealt with this problem by imposing a penalty tax on corporations that failed to distribute their undistributed personal holding company income. The foreign personal holding company provisions, by contrast, did not penalize foreign corporations that accumulate income. Rather, these provisions required the U.S. shareholders of such corporations to include in income a proportional share of the corporations’ “undistributed foreign personal holding company income.”
The term “foreign personal holding company” was defined as a foreign corporation which met certain gross income and stock ownership requirements. Under the gross income requirement, at least 60% of the corporation's gross income for the taxable year had to be foreign personal holding company income. Under the stock ownership requirement, at any time during the corporation's taxable year, more than 50% of the value of the corporation's stock was required to be owned by or for not more than five individuals who were citizens or residents of the United States. Once a foreign corporation was classified as a foreign personal holding company, a proportionate share of its “undistributed foreign personal holding company income” had to be included in the gross income of its U.S. shareholders as a dividend.
The foreign personal holding company provisions were repealed by §413 of the American Jobs Creation Act of 2004, P.L. 108-357. The repeal was effective for taxable years of foreign corporations beginning after December 31, 2004, and for taxable years of U.S. shareholders with or within which such corporate years end.


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AUTHORS

Foreign Personal Holding Companies was authored by the following experts.
DIRK J. J. SURINGA
Dirk J. J. Suringa, A.B., Princeton University (departmental honors, 1992), Phi Beta Kappa; J.D., Harvard Law School (magna cum laude, 1996), Board of Editors, Harvard Law Review; Law Clerk to Chief Judge Gerald B. Tjoflat, U.S. Court of Appeals for the Eleventh Circuit, 1996-97; admitted to bar, 1997, Florida; 1998, District of Columbia; member: Florida Bar Association, Fourth Circuit Bar Association, Sixth Circuit Bar Association, Eleventh Circuit Bar Association, District of Columbia Bar Association, American Bar Association.

TABLE OF CONTENTS

Detailed Analysis

I. Introduction

Introductory Material

A. Background

B. Legislative Response

1. Value of Deferral

2. Enactment of Foreign Personal Holding Company Rules

3. Similarity to Personal Holding Company Rules

4. Interplay of Foreign Personal Holding Company Rules with Other Limitations on Deferral

a. Foreign Personal Holding Company Rules and Subpart F

b. Passive Foreign Investment Companies

5. Repeal of Foreign Personal Holding Company Rules

II. Definition of a Foreign Personal Holding Company

Introductory Material

A. "Foreign Corporation"

B. Stock Ownership Test

1. In General

2. Determining Value Owned

3. Indirect Ownership

4. Constructive Ownership

a. General

b. Statutory Attribution Scheme

(1) Rule 1: Entity Attribution

(a) Attribution from Corporations

(b) Attribution from Partnerships

(c) Attribution from Trusts

(d) Attribution from Estates

(2) Rule 2: Family and Partnership Attribution

(a) Attribution from Family Members

(b) Attribution from Partners

(3) Rule 3: Option Ownership

(4) Reattribution of Constructively-Owned Stock

(5) Overlapping Option Ownership and Family Attribution

(6) Convertible Securities

c. Nonresident Aliens Becoming U.S. Residents

C. Gross Income Test

1. Threshold Percentage

2. Definition of "Gross Income"

a. General

b. Income Exempted by Tax Treaty

c. Dividends Excluded under Section 959

d. Related-Party Dividends and Interest

e. Gross Income Includes Certain Income of Lower-Tier Foreign Personal Holding Company

(1) Amount Included

(2) Dividend Treatment

D. Exceptions to Foreign Personal Holding Company Status

1. Tax-Exempt Organizations

2. Foreign Banks

III. Foreign Personal Holding Company Income

Introductory Material

A. Dividends, Interest, Royalties, and Annuities

1. Dividends

2. Interest

3. Look-Through Rules for Certain Interest and Dividends

a. General

b. Previous Law

c. Same-Country, Related Person

(1) General

(2) Related Person

4. Royalties

5. Annuities

B. Stock and Securities Transactions

C. Commodity Transactions

D. Estates and Trusts

E. Personal Service Contracts

F. Use of Corporation Property by Shareholders

G. Rents

IV. Taxation of U.S. Shareholders

Introductory Material

A. Deemed Dividend Distribution

1. General

a. Definition of "U.S. Shareholder"

b. Special Indirect Ownership Rule

(1) General

(2) Different Classes of Stock

(3) Regulations to Prevent Double Taxation

2. Deemed Dividend Amount

a. General

b. Multiple Classes of Stock

c. Partial-Year Foreign Personal Holding Company Status

(1) Statutory Provisions

(2) The Marsman Case

d. Restrictions on Actual Dividends

B. Undistributed Foreign Personal Holding Company Income

1. Taxable Income Minus Dividends Paid

a. General

b. Undistributed Foreign Personal Holding Company Income of Lower-Tier Foreign Personal Holding Company

2. Adjustments to Taxable Income

a. Taxes

b. Charitable Contributions

c. Dividends-Received and Other Special Corporate Deductions

d. Net Operating Losses

e. Expenses and Depreciation Applicable to Property

3. Computation of Undistributed Foreign Personal Holding Company Income

4. Dividends-paid deduction

a. General

b. Definition of Dividend

(1) Timing of Dividend Payments

(2) Distributions to Intervening Entities that Are Not Foreign Personal Holding Companies

(3) Dividend in Kind

(4) Liquidating Distributions

c. Preferential Dividends

d. Late-Paid Dividends

e. Consent Dividends

C. Subsequent Distributions by Foreign Personal Holding Companies-Capital Accounts

D. Effect of Deemed Dividend on Shareholder Basis

E. Exception to Carryover Basis at Death

F. Foreign Tax Credit

G. Sales of Foreign Personal Holding Company Stock

1. Section 1246-Foreign Investment Companies

2. Section 1248-CFC Stock Sales

3. Section 1291-Sales of § 1291 Funds

V. Comparison with Other Methods of Taxing U.S. Owners of Foreign Corporations

A. Subpart F

1. Background

2. Priority Rule

3. Structural Differences

a. Passive Income Requirement

b. Stock Ownership Requirement

(1) General

(2) Constructive Ownership Rules

(3) Prior Law

4. Manner of Inclusion in Income

a. Determination of Amount Includible

b. Prior Operating Losses

c. The "Hop-Scotch" Principle

d. Allocation of Distributions to Previously Taxed Earnings and Profits

e. Exclusion of Certain U.S. Source Income

f. Blocked Income

5. Definition of Foreign Personal Holding Company Income

a. Rents and Royalties

b. Dividends, Interest, Sales of Stock or Securities

c. Personal-Services and Shareholder-Use Income

d. Notional Principal Contracts and Securities Lending Arrangements

e. Miscellaneous Additions

B. Passive Foreign Investment Companies

1. General

2. Passive Income or Assets Test

VI. Information Reporting, Tax Year Requirements, and Statute of Limitations

A. Required Tax Year for Certain Foreign Personal Holding Companies

B. Returns of Officers, Directors and Shareholders

1. "10% Shareholder" Defined

2. Time for Filing

3. One Person May File for Others

4. Information Necessary to Complete Form 5471

a. Corporate Information

b. Shareholder Information

c. Income Information

C. Statement Required of 5% U.S. Shareholders

D. Fast-Pay Preferred Arrangements

E. Extended Statute of Limitations


WORKING PAPERS

Working Papers

Table of Worksheets

See the following Tax Management Portfolios for additional forms:

Worksheet 1 Comparison of Foreign Personal Holding Company, Subpart F, PFIC, and Personal Holding Company Rules

Worksheet 2 Excerpts from S. Rep. No. 1242, 75th Cong., 1st Sess. (1937)

Worksheet 3 Excerpts from H.R. Rep. No. 1546, 75th Cong., 1st Sess. (1937)

Worksheet 4 Excerpts from the Staff of the Joint Committee on Taxation, General Explanation of the Revue Provisions of the Deficit Reduction Act of 1984

Worksheet 5 Excerpts from the Staff of the Joint Committee on Taxation, Explanation of Technical Corrections to the Tax Reform Act of 1984 and Other Recent Tax Legislation

Worksheet 6 Excerpts from H.R. Rep. No. 100-795 [on H.R. 4333 that became P.L. 100-647, the Technical and Miscellaneous Revenue Act of 1988], 100th Cong., 2d Sess. 309-11 (1988)

Bibliography

OFFICIAL

Statutes:

Treasury Regulations:

Legislative History:

Administrative Pronouncements:

Cases:

UNOFFICIAL

Books:

Periodicals:

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