Reg. § 1.961-1 Increase in basis of stock in controlled foreign corporations and of other property.
(a) Increase in basis
(1) In general Except as provided in subparagraph (2) of this paragraph, the basis of a United States shareholder's—
(i) Stock in a controlled foreign corporation; or
(ii) Property (as defined in of this section) by reason of the ownership of which he is considered under section as owning stock in a controlled foreign corporation shall be increased under section , as of the last day in the taxable year of such corporation on which it is a controlled foreign corporation, by the amount required to be included with respect to such stock or such property in such shareholder's gross income under section for his taxable year in which or with which such taxable year of such corporation ends. The increase in basis provided by the preceding sentence shall be made only to the extent to which such amount required to be included in gross income under section was so included in gross income.
(2) Limitation on amount of increase in case of election under section 962 In the case of a United States shareholder who makes the election under section for the taxable year, the amount of the increase in basis provided by subparagraph (1) of this paragraph shall not exceed the amount of United States tax paid in accordance with such election with respect to the amounts included in such shareholder's gross income under section for such year (as determined under ).
(b) Rules of application
(1) Property defined The property of a United States shareholder referred to in of this section shall consist of—
(i) Stock in a foreign corporation;
(ii) An interest in a foreign partnership; or
(iii) A beneficial interest in a foreign estate or trust (as defined in section ).
(2) Increase with respect to each share of stock Any increase under of this section in the basis of a United States shareholder's stock in a foreign corporation shall be made in the amount included in gross income under section or in the amount of United States tax paid in accordance with an election under section , as the case may be, with respect to each share of such stock.
(c) Illustration The application of this section may be illustrated by the following examples:
Example 1. Domestic corporation M owns 800 of the 1,000 shares of the one class of stock in controlled foreign corporation R which owns all of the one class of stock in controlled foreign corporation S. Corporations M, R, and S use the calendar year as a taxable year. In 1964, S Corporation has $100,000 of earnings and profits after the payment of $11,250 of foreign income taxes, and $100,000 of subpart F income. Corporation R has no earnings and profits. With respect to S Corporation, M Corporation is required to include in gross income $80,000 (800/1,000 × $100,000) under section , and $9,000 ($80,000/$100,000 × $11,250) under section . On December 31, 1964, M Corporation must increase the basis of each share of its stock in R Corporation by $100 ($80,000/800).
Example 2. A, an individual United States shareholder, owns all of the 1,000 shares of the one class of stock in controlled foreign corporation T. Corporation T and A use the calendar year as a taxable year. In 1964, T Corporation has $80,000 of earnings and profits after the payment of $20,000 of foreign income taxes, and $80,000 of subpart F income. A makes the election under section for 1964 and in accordance with such election pays a United States tax of $23,000 with respect to the $80,000 included in his gross income under section . On December 31, 1964, A must increase the basis of each share of his stock in T Corporation by $23 ($23,000/1,000).
[T.D. 6850, 30 FR 11854, Sept. 16, 1965]