Reg. § 1.907(c)-2 Section 907(c)(3) items (for taxable years beginning after December 31, 1982).
(a) Scope This section provides rules relating to certain items listed in section . The rules of this section are expressed in terms of FORI but apply for determining FOGEI by substituting “FOGEI” for “FORI” whenever appropriate. FOGEI does not include interest described in section . Dividends paid prior to January 1, 1987, and described in section , as in effect prior to amendment by the Technical and Miscellaneous Revenue Act of 1988, are included in FORI and not FOGEI.
(b) Dividend
(1) Section 1248 dividend A section dividend is a dividend described in section . Except as otherwise provided in this , gain (or loss) from the disposition of stock in any corporation is not FOGEI or FORI. See and .
(2) Section 78 dividend A section dividend is FORI to the extent it arises from a dividend described in section , or an amount described in section .
(c) Taxes deemed paid
(1) Voting stock test Items described in section (A) or (C) are FORI only if a deemed-paid-tax test is met under the criteria of section or . The purpose of this test is to require minimum direct or indirect ownership by a domestic corporation in the voting stock of a foreign corporation as a prerequisite for the item to qualify as FORI in the hands of the domestic corporation. The test is whether a domestic corporation would be deemed to pay any taxes of a foreign corporation when a dividend or an amount described in section (A) or (C), respectively, is included in the domestic corporation's gross income. In the case of interest described in section , the test is whether any taxes would be deemed paid if there were a hypothetical dividend.
(2) Dividends and interest For purposes of section , a domestic corporation is deemed under section to pay taxes in respect of dividends and interest received from a foreign corporation whether or not the foreign corporation:
(i) Actually pays or is deemed to pay taxes, or
(ii) In the case of interest, actually pays dividends.
This also applies to dividends received by a foreign corporation from a second-tier or third-tier foreign corporation (as defined in and , respectively). In the case of interest received by a foreign corporation from another foreign corporation, this applies if the taxes of both foreign corporations would be deemed paid under section (a) or (b) for purposes of applying section to the same taxpayer which is a domestic corporation. In the case of interest received by any corporation (whether foreign or domestic), all members of an affiliated group filing a consolidated return will be treated as the same taxpayer under section if the foreign taxes of the payor and (if the recipient is a foreign corporation) the foreign taxes of the recipient would be deemed paid under section by at least one member. The term “member” is defined in . Thus, for example, assume that P owns all of the stock of D1 and D2 and P. D1, and D2 are members of an affiliated group filing a consolidated return. Assume further that D1 owns all of the stock of F1 and D2 owns all of the stock of F2, where F1 and F2 are foreign corporations. Interest paid by F1 to P, D2, or F2 may be FORI.
(3) Amounts included under section 951(a) For purposes of section , a domestic corporation is deemed under section to pay taxes in respect of a foreign corporation, whether or not the foreign corporation actually pays taxes on the amounts included in gross income under section .
(d) Amount attributable to certain items
(1) Certain dividends
(i) General rule The portion of a dividend described in section that is FORI equals—
Amount of dividend × a/b
a = FORI accumulated profits in excess of FORI taxes paid or accrued, and
b = Total accumulated profits in excess of total foreign taxes paid or accrued.
This applies even though the FORI accumulated profits arose in a taxable year of a foreign corporation beginning before January 1, 1983. Determination of the FORI amount of dividends under this must be made separately for FORI accumulated profits and total accumulated profits that arose in taxable years beginning before January 1, 1987, and for FORI accumulated profits and total accumulated profits that arose in taxable years beginning after December 31, 1986. Dividends are deemed to be paid first out of FORI and total accumulated profits that arose in table years beginning after December 31, 1986. With regard to FORI accumulated profits and total accumulated profits that arose in taxable years beginning after December 31, 1986, the portion of a dividend that is FORI equals—
Amount of dividend × a/b
a = Post-1986 undistributed FORI earnings determined under the principles of section , and
b = Post-1986 undistributed earnings determined under the principles of section .
(ii) Cross-references See for the determination of a foreign corporation's earnings and profits and of those out of which a dividend is paid. See or for the determination of the earnings and profits attributable to the sale or exchange of stock in certain foreign corporations.
(2) Interest received from certain foreign corporations Interest described in section is FORI to the extent the corresponding interest expense of the paying corporation is properly allocable and apportionable to the gross income of the paying corporation that would be FORI were that corporation a domestic corporation. This allocation and apportionment is made in a manner consistent with the rules of section and .
(3) Dividends from domestic corporation The amount of a dividend from a corporation described in section , as in effect prior to amendment by the Technical and Miscellaneous Revenue Act of 1988, paid in a taxable year of that corporation beginning before December 31, 1986, that is FORI is determined under the principles of of this section with respect to its current earnings and profits under section or its accumulated earnings and profits under section , as the case may be.
(4) Amounts with respect to which taxes are deemed paid under section 906(a)
(i) Portion attributable to FORI The portion of an amount described in section that is FORI equals:
A = Amount described in section
B = FORI earnings and profits
C = Total earnings and profits
For taxable years ending after January 23, 1989, the facts and circumstances will be used to determined what part of the amount of the section amount is directly attributable to FOGEI, FORI and other income.
(ii) Earnings and profits Total earnings and profits are those of the foreign corporation for a taxable year under section and the regulations under that section.
(5) Section 78 dividend The portion of a section dividend that will be considered FORI will equal the amount of taxes deemed paid under either section or section with respect to the dividend to the extent the taxes deemed paid are FORI taxes under or . See .
(6) Special rule
(i) No item in the formula described in of this section includes amounts excluded from the gross income of a United States shareholder under section .
(ii) With respect to a foreign corporation, earnings and profits in the formula described in of this section do not include amounts excluded under section from its gross income.
(7) Deficits
(i) Allocation of deficits within a separate category In a taxable year in which a foreign corporation described in section pays a dividend or has income that is subject to inclusion under section , if the foreign corporation has positive post—1986 undistributed earnings in a separate category but within that separate category there is a deficit in post-1986 undistributed earnings attributable to earnings other than FOGEI and FORI, that deficit shall be allocated ratably between the FOGEI and FORI post-1986 undistributed earnings within that separate category. Any deficit in post-1986 undistributed earnings attributable to either FOGEI or FORI shall be allocated first to FOGEI or FORI post-1986 undistributed earnings (as the case may be) to the extent thereof. Post-1986 undistributed FORI earnings are the post-1986 undistributed earnings (as defined in section and the regulations under that section) attributable to FORI as defined in section (2) and (3). Post-1986 undistributed FOGEI earnings are the post-1986 undistributed earnings (as defined in section and the regulations under that section) attributable to FOGEI as defined in section (1) and (3).
Example.
Foreign corporation X for years 1987 and 1988 had the following undistributed earnings (none of which is income that is subject to inclusion under section ) and foreign taxes:
| Earnings | Taxes | |
|---|---|---|
| FOGEI | $800 | $400 |
| FORI | (750) | |
| Other | 700 | 250 |
| Total | $750 | $650 |
On December 31, 1988, X paid a dividend of all of its post-1986 undistributed earnings to its sole shareholder Y. Under and of this section and , $450 of Y's dividend is attributable to FOGEI ($50 from undistributed earnings plus a $400 section dividend) and $950 is attributable to other earnings ($700 from undistributed earnings plus a $250 section dividend).
(ii) Deficits allocated among separate categories If a deficit in a separate category (“first separate category”) is allocated to another separate category (“second separate category”) under sections and pursuant to notice 88-71, 1988-2 CB 374 and the regulations under those sections, the following rules shall apply. Any deficit in post-1986 undistributed earnings attributable to either FOGEI (or FORI) from the first separate category shall be allocated to post-1986 undistributed earnings in the second separate category to the extent thereof in the following order:
(A) FOGEI (or FORI),
(B) FORI (or FOGEI), and
(C) Other income.
Any deficit in post-1986 undistributed earnings attributable to other income from the first separate category shall be allocated first to other post-1986 undistributed earnings and then ratably to FOGEI and FORI post—1986 undistributed earnings in the second separate category.
(iii) Pre-1987 deficits The amount of a dividend paid by a foreign corporation described in section out of positive pre-1987 earnings that is attributable to FOGEI and FORI shall be determined in a manner similar to that used in and of this section except that the determinations shall be made on an annual basis.
(8) Illustrations The application of this is illustrated by the following examples.
Example 1. X, a domestic corporation, owns all of the stock of Y, a foreign corporation organized in country S. Y owns all of the stock of Z, a foreign corporation also organized in country S. Each corporation uses the calendar year as its taxable year. In 1983, Z has $150 of FOGEI earnings and profits and $250 of earnings and profits other than FOGEI or FORI. Assume that Z paid no taxes to S and X must include $100 in its gross income under section with respect to Z. Under of this section, $37.50 of the amount described in section is FOGEI ($100 × $150/$400). the remaining $62.50 of the section amount represents other income.
Example 2. Assume the same facts as in Example 1 except that the taxable year in question is 1988. In addition, under the facts and circumstances, it is determined that of the $100 section amount included in X's gross income, $30 is directly attributable to Z's FOGEI activity, $60 is directly attributable to Z's FORI activity and $10 is directly attributable to Z's other activity. Accordingly, under paragraph (d)(4)(i), $30 will be FOGEI and $60 will be FORI to X.
Example 3.
(i) Assume the same facts as in Example 1. Assume further that, in 1983, Z distributes its entire earnings and profits ($400) to Y which consists of a dividend of $300 and a section distribution of $100. Y has no other earnings and profits during 1983. Assume that the dividend and distribution are not foreign personal holding company income under section . Y pays no taxes to S. In 1983, Y distributes its entire earnings and profits to X.
(ii) Under and of this section, Y has FOGEI of $112.50, i.e., the amount of the dividend received by Y ($300) multiplied by the fraction described in paragraph (d)(1)(i). The numerator of the fraction is Z's FOGEI accumulated profits in excess of the FOGEI taxes paid ($112.50) and the denominator is Z's total accumulated profits in excess of total foreign taxes paid ($400) minus the amount excluded from Y's gross income under section ($100). The rule of of this section does not apply since X does not include any amount in its gross income under section with respect to Y. If Y paid taxes to S, this would apply to characterize those taxes as FOGEI taxes or other taxes. See and Example 2 (iii) under .
(iii) The distribution from Y to X is a dividend to the extent of $300, i.e., the amount of the distribution ($400) minus the amount excluded from X's gross income under section ($100). Under and of this section, $112.50 of the dividend is FOGEI, i.e., the amount of the dividend ($300) multiplied by a fraction. The numerator of the fraction is $112.50, i.e., the FOGEI accumulated profits of Y in excess of FOGEI taxes paid ($150) minus the FOGEI accumulated profits of Y in excess of FOGEI taxes paid excluded from X's gross income under section ($37.50). The denominator of the fraction is $300, i.e., the total accumulated profits of Y in excess of taxes paid ($400) minus the amount excluded from X's gross income under section ($100).
Example 4. Assume the same facts as in Example 1 with the following modifications: In 1983, Z's only earnings and profits are FORI earnings and profits which are included in X's gross income under section . Z distributes its entire earnings and profits to Y. In 1983, Y has total earnings and profits of $100 without regard to the dividend from Z, $60 of which are FORI earnings and profits. Y also has $40 which is included in X's gross income under section . Under of this section, the dividend from Z is disregarded for purposes of applying of this section to the $40 included in X's gross income under section with respect to Y. Accordingly, $24 of the amount described in section is FORI ($40 × $60/$100). Had these circumstances existed in 1988, and if the $40 included in X's gross income under section was directly attributable to FORI activity, all of that income would be FORI to X.
(e) Dividends, interest, and other amounts from sources within a possession FORI includes the items listed in (A) and (C) to the extent attributable to FORI of a corporation that is created or organized in or under the laws of a possession of the United States.
(f) Income from partnerships, trusts, etc FORI and FOGEI include a person's distributive share (determined under the principles of section ) of the income of any partnership and amounts included in income under subchapter J of chapter 1 of the Code (relating to the taxation of trusts, estates, and beneficiaries) to the extent the income and amounts are attributable to FORI and FOGEI. For taxable years beginning after 1986, the principles of and shall be applied to determine whether (and to what extent) a person's distributive share is FORI and FOGEI. Thus, for example, a less-than-10 percent corporate partner's share of income of the partnership would generally be treated as passive income to the partner, and not as FORI or FOGEI, unless an exception under and applies.
[T.D. 8338, 56 FR 11071, Mar. 15, 1991]