(a) General. For purposes of paragraph (a)(1)(ii) of Sec. 1.955.5, the determination whether a foreign corporation has derived 80 percent or more of its gross income from sources within less developed countries for any taxable year shall be made by the application of the provisions of sections 861 through 864, and Secs. 1.861-1 through 1.863-5, in application of which the name of a less developed country shall be substituted for ``the United States'', except that if income is derived by the foreign corporation from--
(1) Interest (other than interest to which subparagraph (3) of this paragraph applies), the rules set forth in paragraph (b) of this section shall apply;
(2) Dividends, the rules set forth in paragraph (c) of this section shall apply; or
(3) Income (including interest) derived in connection with the sale of tangible personal property, the rules set forth in paragraph (d) of this section shall apply. The source of income described in subparagraph (1), (2), or (3) of this paragraph shall be determined solely under the rules of this section and without regard to the rules of sections 861 through 864, and the regulations thereunder.
(b) Interest--(1) In general. Except as provided in subparagraph (2) of this paragraph and paragraph (d) of this section, gross income derived by the foreign corporation from interest on any indebtedness--
(1) In general. Except as provided in subparagraph (2) of this paragraph and paragraph (d) of this section, gross income derived by the foreign corporation from interest on any indebtedness--
(i) Of an individual shall be treated as income from sources within a less developed country if, but only if, such individual is a resident of one or more less developed countries and of no other country which is not a less developed country.
(ii) Of a corporation shall be treated as income from sources within less developed countries if, but only if, 80 percent or more of the gross income of the payer corporation for the 3-year period ending with the close of its annual accounting period in which such interest is paid, or for such part of such 3-year period as such corporation has been in existence, or for such part of such 3-year period as occurs on and after the beginning of such corporation's first annual accounting period beginning after December 31, 1962, whichever period is shortest, was derived from sources within less developed countries as determined in accordance with the principles of this section; or
(iii) Of a less developed country, including obligations issued or guaranteed by the government of such country or of a political subdivision thereof and obligations of any agency or instrumentality of such country, in which such country is financially committed shall be treated as income from sources within such country.
(2) Special rule. Gross income derived by the foreign corporation from interest on obligations of the United States shall be treated as income from sources within less developed countries without regard to the provisions of subparagraph (1) of this paragraph.
(3) Payers other than related persons. For purposes of subparagraph (1)(ii) of this paragraph, a payer corporation which as to the recipient corporation is not a related person as defined in section 954(d)(3) and paragraph (e) of Sec. 1.954-1 shall be deemed to have satisfied the 80-percent gross income requirement if, on the basis of ascertainable facts, it is reasonable for the recipient corporation to believe that such requirement is satisfied.
(c) Dividends--(1) In general. Gross income derived by the foreign corporation from dividends, as defined in section 316 and the regulations thereunder, shall be treated as income from sources within less developed countries if, but only if, 80 percent or more of the gross income of the payer corporation for the 3-year period ending with the close of its annual accounting period in which such dividends are distributed, or for such part of such 3-year period as such corporation has been in existence, or for such part of such 3-year period as occurs on and after the beginning of such corporation's first annual accounting period beginning after December 31, 1962, whichever period is shortest, was derived from sources within less developed countries as determined in accordance with the principles of this section.
(1) In general. Gross income derived by the foreign corporation from dividends, as defined in section 316 and the regulations thereunder, shall be treated as income from sources within less developed countries if, but only if, 80 percent or more of the gross income of the payer corporation for the 3-year period ending with the close of its annual accounting period in which such dividends are distributed, or for such part of such 3-year period as such corporation has been in existence, or for such part of such 3-year period as occurs on and after the beginning of such corporation's first annual accounting period beginning after December 31, 1962, whichever period is shortest, was derived from sources within less developed countries as determined in accordance with the principles of this section.
(2) Payers other than related persons. See paragraph (b)(3) of this section for rule governing satisfaction of the 80-percent gross income requirement by payers other than related persons.
(d) Sale of tangible personal property--(1) In general. Income (whether in the form of profits, commissions, fees, interest, or otherwise) derived by the foreign corporation in connection with the sale of tangible personal property shall be treated as income from sources within less developed countries if, but only if--
(1) In general. Income (whether in the form of profits, commissions, fees, interest, or otherwise) derived by the foreign corporation in connection with the sale of tangible personal property shall be treated as income from sources within less developed countries if, but only if--
(i) Such property is produced (within the meaning of subparagraph (2) of this paragraph) within less developed countries; or
(ii) Such property is sold for use, consumption, or disposition within less developed countries even though produced outside less developed countries and the selling corporation is engaged within less developed countries, in connection with sales of such property, in continuous operational activities which are substantial in relation to such sales, as evidenced, for example, by the maintenance within less developed countries of a substantial sales or service organization or substantial facilities for the storage, handling, transportation, assembly, packaging, or servicing of such property.
(2) Production defined. For purposes of this paragraph, the term ``produced'' means manufactured, grown, extracted, or constructed and includes a substantial transformation of property purchased for resale or the manufacture of a product when purchased components constitute part of the property which is sold. See paragraph (a)(4)(ii) and (iii) of Sec. 1.954-3 for a statement and illustration of the principles set forth in the preceding sentence. [T.D. 6683, 28 FR 11183, Oct. 18, 1963, as amended by T.D. 6688, 28 FR 11632, Oct. 31, 1963] Sec. 1.955A-1 Shareholder's pro rata share of amount of previously excluded subpart F income withdrawn from investment in foreign basecompany shipping operations.
(a) In general. Section 955 provides rules for determining the amount of a controlled foreign corporation's previously excluded subpart F income which is withdrawn for any taxable year beginning after December 31, 1975, from investment in foreign base company shipping operations. Pursuant to section 951(a)(1)(A)(iii) and the regulations thereunder, a United States shareholder of such controlled foreign corporation must include in his gross income his pro rata share of such amount as determined in accordance with paragraph (c) of this section.
(b) Amount withdrawn by controlled foreign corporation--(1) In general. For purposes of sections 951 through 964, the amount of a controlled foreign corporation's previously excluded subpart F income which is withdrawn for any taxable year from investment in foreign base company shipping operations is an amount equal to the decrease for such year in such corporation's qualified investments in foreign base company shipping operations. Such decrease is, except as provided in Sec. 1.955A-4--
(1) In general. For purposes of sections 951 through 964, the amount of a controlled foreign corporation's previously excluded subpart F income which is withdrawn for any taxable year from investment in foreign base company shipping operations is an amount equal to the decrease for such year in such corporation's qualified investments in foreign base company shipping operations. Such decrease is, except as provided in Sec. 1.955A-4--
(i) An amount equal to the excess of the amount of its qualified investments in foreign base company shipping operations at the close of the preceding taxable year over the amount of its qualified investments in foreign base company shipping operations at the close of the taxable year, minus
(ii) The amount (if any) by which recognized losses on sales or exchanges by such corporation during the taxable year of qualified investments in foreign base company shipping operations exceed its recognized gains on sales or exchanges during such year of qualified investments in foreign base company shipping operations, but only to the extent that the net amount so determined does not exceed the limitation determined under subparagraph (2) of this paragraph. See Sec. 1.955A-2 for determining the amount of qualified investments in foreign base company shipping operations.
(2) Limitation applicable in determining decreases--(i) In general. The limitation referred to in subparagraph (i) of this paragraph for any taxable year of a controlled foreign corporation shall be the lesser of the following two limitations:
(i) In general. The limitation referred to in subparagraph (i) of this paragraph for any taxable year of a controlled foreign corporation shall be the lesser of the following two limitations:
(A) The sum of (1) the controlled foreign corporation's earnings and profits (or deficit in earnings and profits) for the taxable year, computed as of the close of the taxable year without diminution by reason of any distribution made during the taxable year, (2) the sum of its earnings and profits (or deficits in earnings and profits) accumulated for prior taxable years beginning after December 31, 1975, and (3) the amount described in subparagraph (3) of this paragraph; or
(B) The sum of the amounts excluded under section 954(b)(2) (see subparagraph (4) of this paragraph) from the foreign base company income of such corporation for all prior taxable years beginning after December 31, 1975, minus the sum of the amounts (determined under this paragraph) of its previously excluded subpart F income withdrawn from investment in foreign base company shipping operations for all such prior taxable years.
(C) For purposes of the immediately preceding subparagrah (B), the amount excluded under section 954(b)(2) for a taxable year of a controlled foreign corporation (the ``first corporation'') includes (1) an amount excluded under section 954(b)(2) by another corporation which is a member of a related group (as defined in Sec. 1.955A-3(b)(1)) attributable to the first corporation's excess investment (see Sec. 1.955A-3(c)(4)) for a taxable year beginning after December 31, 1983, (2) an amount excluded by a corporation under Sec. 1.954-1(b)(4)(ii)(b) by reason of the application of the carryover rule there set forth, and (3) an amount equal to the first corporation's pro rata share of a group excess deduction (see Sec. 1.955A-3(c)(2)) of a related group for a taxable year beginning after December 31, 1983 (but not in excess of that portion of such pro rata share which would reduce the first corporation's foreign base company shipping income to zero). Such amounts will not be treated as excluded under section 954(b)(2) by any other corporation.
(ii) Certain exclusions from earnings and profits. For purposes of determining the earnings and profits of a controlled foreign corporation under subdivision (i)(A)(1) and (2) of this subparagraph, such earnings and profits shall be considered not to include any amounts which are attributable to--
(A)(1) Amounts which, for the current taxable year, are included in the gross income of a United States shareholder of such controlled foreign corporation under section 951(a)(1)(A)(i), or
(2) Amounts which, for any prior taxable year, have been included in the gross income of a United States shareholder of such controlled foreign corporation under section 951(a) and have not been distributed; or
(B)(1) Amounts which, for the current taxable year, are included in the gross income of a United States shareholder of such controlled foreign corporation under section 551(b) or would be so included under such section but for the fact that such amounts were distributed to such shareholder during the taxable year, or
(2) Amounts which, for any prior taxable year, have been included in the gross income of a United States shareholder of such controlled foreign corporation under section 551(b) and have not been distributed. The rules of this subdivision apply only in determining the limitation on a controlled foreign corporation's decrease in qualified investments in foreign base company shipping operations. See section 959 and the regulations thereunder for rules relating to the exclusion from gross income of previously taxed earnings and profits.
(3) Carryover of amounts relating to investments in less developed country shipping companies--(i) In general. The amount described in this subparagraph for any taxable year of a controlled foreign corporation beginning after December 31, 1975, is the lesser of--
(i) In general. The amount described in this subparagraph for any taxable year of a controlled foreign corporation beginning after December 31, 1975, is the lesser of--
(A) The excess of the amount described in subdivision (ii) of this subparagraph, over the amount described in subdivision (iii) of this subparagraph, or
(B) The limitation determined under subdivision (iv) of this subparagraph.
(ii) Previously excluded subpart F income invested in less developed country shipping companies. The amount described in this subdivision for all taxable years of a controlled foreign corporation beginning after December 31, 1975, is the lesser of--
(A) The amount of such corporation's qualified investments (determined under Sec. 1.955-2 other than paragraph (b)(5) thereof) in less developed country shipping companies described in Sec. 1.955-5(b) at the close of the last taxable year of such corporation beginning before January 1, 1976, or
(B) The limitation determined under Sec. 1.955-1(b)(2)(i)(b) (relating to previously excluded subpart F income) for the first taxable year of such corporation beginning after January 1, 1976.
(iii) Amounts previously carried over. The amount described in this subdivision for any taxable year of a controlled foreign corporation shall be the sum of the excesses determined for each prior taxable year beginning after December 31, 1976, of--
(A) The amount (determined under this paragraph) of such corporation's previously excluded subpart F income withdrawn from investment in foreign base company shipping operations, over
(B) The sum of the earnings and profits determined under subparagraph (2)(i)(A)(1) and (2) of this paragraph.
(iv) Extent attributable to accumulated earnings and profits. The limitation determined under this subdivision for any taxable year of a controlled foreign corporation is the sum of such controlled foreign corporation's earnings and profits (or deficits in earnings and profits) accumulated for taxable years beginning after December 31, 1962, and before January 1, 1976. For purposes of the preceding sentence, earnings and profits shall be determined by excluding the amounts described in subparagraph (2)(ii)(A) and (B) of this paragraph.
(v) Illustration. The application of this subparagraph may be illustrated by the following example:
(a) Throughout the period here involved, A is a United States shareholder of controlled foreign corporation M. M is not a foreign personal holding company, and M uses the calendar year as the taxable year.
(b) The amount described in this subparagraph for M's taxable year 1978 with respect to A is determined as follows, based on the facts shown in the following table: (1) Investment in less developed country shipping companies $10,000
on December 31, 1975 (subdivision (ii)(A) amount).........(2) Sec. 1.955-1(b)(2)(i)(b) limitation for 1976 50,000
(previously excluded subpart F income not withdrawn from
investment in less developed countries) (subdivision
(ii)(B) amount)...........................................(3) Subdivision (ii) amount (lesser of lines (1) and (2)).. 10,000(4) Subdivision (iii) amount: Excess for 1977 of M's 2,000
(B) amount)...........................................(3) Subdivision (ii) amount (lesser of lines (1) and (2)).. 10,000(4) Subdivision (iii) amount: Excess for 1977 of M's 2,000
previously excluded subpart F income withdrawn from
investment in foreign base country shipping operations,
$3,000, over the sum of the amounts determined under
subparagraphs (2)(i)(A)(1) and (2) of this paragraph,
$1,000....................................................
------------(5) Excess of line (3) over line (4)....................... 8,000
============(6) Sum of M's earnings and profits accumulated for 1962 26,000
through 1975, determined on December 31, 1978.............(7) Amount described in this subparagraph for 1978 (lesser 8,000
of line (5) and line (6)).................................
============
(c) For 1978, M's earnings and profits (reduced as provided in Sec. 1.955-1(b)(2)(ii)(a)(1)) are $19,000, and the amount of M's previously excluded subpart F income withdrawn from investment in less developed countries determined under Sec. 1.955-1(b)) is $42,000. Consequently, $23,000 of M's earnings and profits accumulated for 1962 through 1975 are attributable to such $42,000 amount, and will therefore be excluded under subparagraph (2)(ii))(A)(2) of this paragraph from M's earnings and profits accumulated for 1962 through 1975, determined as of December 31, 1979. No other portion of M's earnings and profits accumulated for 1962 through 1975 is distributed or included in the gross income of a United States shareholder in 1978.
(d) The amount described in this subparagraph for M's taxable year 1979 with respect to A is determined as follows, based on the additional facts shown in the following table: (1) Subdivision (ii) amount (line (3) from paragraph (b) of $10,000
this example).............................................(2) Subdivision (iii) amount: (i) Excess for 1977 from line 2,000
(4) of paragraph (b) of this example......................
(ii) Plus: excess for 1978 of M's previously excluded 0
subpart F income withdrawn from investment in foreign
base country shipping operations, $6,000, over the
sum of the amounts determined under subparagraphs
(2)(i)(A)(1) and (2) of this paragraph, $25,000......
(i)(A)(1) and (2) of this paragraph, $25,000......
(A)(1) and (2) of this paragraph, $25,000......
-------
(iii) Subdivision (iii) amount........................... 2,000
------------(3) Excess of line (1) over line (2)(iii).................. 8,000
============(4) Sum of M's earnings and profits accumulated for 1962 3,000
through 1975, determined on December 31, 1979 ($26,000
minus $23,000)............................................(5) Amount described in this subparagraph for 1979 (lesser 3,000
of line (3) and line (4)).................................
============
(4) Amount excluded. For purposes of subparagraph (2)(i)(B) of this paragraph, the amount excluded under section 954(b)(2) from the foreign base company income of a controlled foreign corporation for any taxable year beginning after December 31, 1975, is the excess of--
(i) The amount which would have been equal to the subpart F income of such corporation for such taxable year if such corporation had had no increase in qualified investments in foreign base company shipping operations for such taxable year, over
(ii) The subpart F income of such corporation for such taxable year.
(c) Shareholder's pro rata share of amount withdrawn by controlled foreign corporation--(1) In general. A United States shareholder's pro rata share of a controlled foreign corporation's previously excluded subpart F income withdrawn for any taxable year from investment in foreign base company shipping operations is his pro rata share of the amount withdrawn for such year by such corporation, as determined under paragraph (b) of this section. See section 955(a)(3). Such pro rata share shall be determined in accordance with the principles of Sec. 1.195-1(e).
(1) In general. A United States shareholder's pro rata share of a controlled foreign corporation's previously excluded subpart F income withdrawn for any taxable year from investment in foreign base company shipping operations is his pro rata share of the amount withdrawn for such year by such corporation, as determined under paragraph (b) of this section. See section 955(a)(3). Such pro rata share shall be determined in accordance with the principles of Sec. 1.195-1(e).
(2) Special rule. A United States shareholder's pro rata share of the net amount determined under paragraph (b)(2)(i)(B) of this section with respect to any stock of the controlled foreign corporation owned by such shareholder shall be determined without taking into account any amount attributable to a period prior to the date on which such shareholder acquired such stock. See section 1248 and the regulations thereunder for rules governing treatment of gain from sales or exchanges of stock in certain foreign corporations.
(d) Illustrations. The application of this section may be illustrated by the following examples:
Example 1. A, a United States shareholder, owns 60 percent of the only class of stock of M Corporation, a controlled foreign coporation throughout the entire period here involved. Both A and M use the calendar year as a taxable year. The amount of M's previously excluded subpart F income withdrawn for 1978 from investment in foreign base company shipping operations is $40,000, and A's pro rata share of such amount is $24,000 determined as follows based on the facts shown in the following table: (a) Qualified investments in foreign base company shipping $125,000
operations at the close of 1977...........................(b) Less: qualified investments in foreign base company 75,000
shipping operations at the close of 1978..................
------------(c) Balance................................................ 50,000(d) Less: excess of recognized losses ($15,000) over 10,000
recognized gains ($5,000) on sales during 1978 of
qualified investments in foreign base company shipping
operations................................................
------------(e) Tentative decrease in qualified investment in foreign 40,000
base company shipping operations for 1978.................
============(f) Earnings and profits for 1976, 1977, and 1978.......... 45,000(g) Plus: amount determined under paragraph (b)(3) of this 0
section...................................................
------------(h) Earnings and profits limitation........................ 45,000
============(i) Excess of amount excluded under section 954(b)(2) from 50,000
foreign base company income for 1976 ($75,000) over amount
of previously excluded subpart F income withdrawn for 1977
from investment in foreign base company shipping
operations ($25,000)......................................(j) M's amount of previously excluded subpart F income 40,000
withdrawn for 1978 from investment in foreign base company
shipping operations (item (e), but not to exceed the
lesser of item (h) or item (i)............................(k) A's pro rata share of M Corporation's amount of 24,000
previously excluded subpart F in come withdrawn for 1978
from investment in foreign base company shipping
operations (60 percent of $40,000)........................
============
Example 2. The facts are the same as in example 1, except that M's earnings and profits (determined under paragraph (b)(2) of this section) for 1976, 1977, and 1978 (item (f)) are $30,000 instead of $45,000. M's amount of previously excluded subpart F income withdrawn for 1978 from investment in foreign base company shipping operations is $30,000. A's pro rata share of such amount is $18,000 (60 percent of $30,000).
Example 3. The facts are the same as in example 1, except that the excess of the amount excluded under section 954(b)(2) for 1976 from M Corporation's foreign base company income over the amount of its previously excluded subpart F income withdrawn for 1977 from investment in foreign base company shipping operations (item (i)) is $20,000 instead of $50,000. M's amount of previously excluded subpart F income withdrawn for 1978 from investment in foreign base company shipping operations is $20,000. A's pro rata share of such amount is $12,000 (60 percent of $20,000). [T.D. 7894, 48 FR 22530, May 19, 1983; 48 FR 40888, Sept. 12, 1983] Sec. 1.955A-2 Amount of a controlled foreign corporation's qualified investments in foreign base company shipping operations.
(a) Qualified investments--(1) In general. Under section 955(b), for purposes of sections 951 through 964, a controlled foreign corporation's ``qualified investments in foreign base company shipping operations'' are investments in--
(1) In general. Under section 955(b), for purposes of sections 951 through 964, a controlled foreign corporation's ``qualified investments in foreign base company shipping operations'' are investments in--
(i) Any aircraft or vessel, to the extent that such aircraft or vessel is used (or hired or leased for use) in foreign commerce,
(ii) Related shipping assets (within the meaning of paragraph (b) of this section),
(iii) Stock or obligations of a related controlled foreign corporation, to the extent provided in paragraph (c) of this section,
(iv) A partnership, to the extent provided in paragraph (d) of this section, and
(v) Stock or obligations of a less developed country shipping company described in Sec. 1.955-5(b), as provided in paragraph (h) of this section.
(2) Coordination of provisions. No amount shall be counted as a qualified investment in foreign base company shipping operations under more than one provision of this section. Thus, for example, if a $10,000 investment in stock of a controlled foreign corporation is treated as a qualified investment in foreign base company shipping operations under both subparagraphs (1)(iii) and (v) of this paragraph, then such $10,000 is counted only once as a qualified investment in foreign base company shipping operations.
(3) Definitions. If the meaning of any term is defined or explained in Sec. 1.954-6, then such term shall have the same meaning when used in this section.
(4) Extent of use. (i) For purposes of subparagraph (1)(i) of this paragraph and paragraph (b)(1) of this section, the extent to which an asset of a controlled foreign corporation is used during a taxable year in foreign base company shipping operations shall be determined on the basis of the proportion for such year which the foreign base company shipping income derived from the use of such asset bears to the total gross income derived from the use of such asset.
(i) For purposes of subparagraph (1)(i) of this paragraph and paragraph (b)(1) of this section, the extent to which an asset of a controlled foreign corporation is used during a taxable year in foreign base company shipping operations shall be determined on the basis of the proportion for such year which the foreign base company shipping income derived from the use of such asset bears to the total gross income derived from the use of such asset.
(ii) For purposes of determining under subdivision (i) of this subparagraph the amounts of foreign base company shipping income and gross income of a controlled foreign corporation--
(A) Such amounts shall be deemed to include an arm's length charge (see Sec. 1.954-6(h)(5)) for services performed by such corporation for itself,
(B) Such amounts shall be deemed to include an arm's length charge for the use of an asset (such as a vessel under construction or laid up for repairs) which is held for use in foreign base company shipping operations, but is not actually so used,
(C) Foreign base company shipping income shall be deemed to include amounts earned in taxable years beginning before January 1, 1976, and
(D) The district director shall make such other adjustments to such amounts as are necessary to properly determine the extent to which any asset is used in foreign base company shipping operations.
(b) Related shipping assets--(1) In general. For purposes of this section, the term ``related shipping asset'' means any asset which is used (or held for use) for or in connection with the production of income described in Sec. 1.954-6(b)(1)(i) or (ii), but only to the extent that such asset is so used (or is so held for use).
(1) In general. For purposes of this section, the term ``related shipping asset'' means any asset which is used (or held for use) for or in connection with the production of income described in Sec. 1.954-6(b)(1)(i) or (ii), but only to the extent that such asset is so used (or is so held for use).
(2) Examples. Examples of assets of a controlled foreign corporation which are used (or held for use) for or in connection with the production of income described in subparagraph (1) of this paragraph include--
(i) Money, bank deposits, and other temporary investments which are reasonably necessary to meet the working capital requirements of such corporation in its conduct of foreign base company shipping operations,
(ii) Accounts receivable and evidences of indebtedness which arise from the conduct of foreign base company shipping operations by such corporation or by a related person,
(iii) Amounts (other than amounts described in subdivision (i) of this subparagraph) deposited in bank accounts or invested in readily marketable securities pursuant to a specific, definite, and feasible plan to purchase any tangible asset for use in foreign base company shipping operations,
(iv) Amounts paid into escrow to secure the payment of (A) charter hire for an aircraft, vessel, or other asset used in foreign base company shipping operations or (B) a debt which constitutes a specific charge against such an asset,
(v) Capitalized expenditures (such as progress payments) made under a contract to purchase any asset for use in foreign base company shipping operations,
(vi) Prepaid expense and deferred charges incurred in the course of foreign base company shipping operations,
(vii) Stock acquired and retained to insure a source of supplies or services used in the conduct of foreign base company shipping operations, and
(viii) Currency futures acquired and retained as a hedge against international currency fluctuations in connection with foreign base company shipping operations.
(3) Limitations--(i) Vessels generally. Notwithstanding any other provision of this paragraph, the term ``related shipping assets'' does not include any money or other intangible assets of a controlled foreign corporation, to the extent that such assets are permitted to accumulate in excess of the reasonably anticipated needs of the business.
(i) Vessels generally. Notwithstanding any other provision of this paragraph, the term ``related shipping assets'' does not include any money or other intangible assets of a controlled foreign corporation, to the extent that such assets are permitted to accumulate in excess of the reasonably anticipated needs of the business.
(ii) Safe harbor. If a controlled foreign corporation accumulates money or other intangible assets pursuant to a plan to purchase one or more vessels for use in foreign commerce, and if--
(A) The amount so accumulated, plus
(B) The sum of the amounts accumulated by other controlled foreign corporations which are related persons (within the meaning of section 954(d)(3)) pursuant to similar plans, does not exceed 110 percent of a reasonable down payment on each vessel planned to be purchased within a reasonable period, then such plan will be considered to be feasible. For purposes of the preceding sentence, a reasonable down payment shall not exceed 28 percent of the total cost of acquisition. The determination dates applicable to the taxable year of a controlled foreign corporation are those set forth in paragraph (c)(2)(ii) of this section. In the case of accumulation of assets which do not come within the safe harbor limitation of this subdivision (ii), in determining whether such assets have accumulated beyond the reasonably anticipated needs of the business, factors to be taken into account include, but are not limited to, the availability of financing to purchase a vessel and the availability of a vessel suitable for the purposes to which the vessel is to be put.
(iii) Other assets. In determining whether a plan to purchase any asset other than a vessel for use in foreign base company shipping operations is feasible, principles similar to those stated in subdivision (ii) of this subparagraph shall be applied.
(4) Cross-reference. See Sec. 1.954-7(c) for additional illustrations bearing on the application of this paragraph.
(c) Stock and obligations--(1) In general. Investments by a controlled foreign corporation (the ``first corporation'') in stock or obligations of a second controlled foreign corporation which is a related person (within the meaning of section 954(d)(3) are considered to be qualified investments in foreign base company shipping operations to the extent that the assets of such second corporation are used (or held for use) in foreign base company shipping operations. See subparagraph (2) of this paragraph. However, an investment in an obligation of the second corporation will not be considered a qualified investment in foreign base company shipping operations if the obligation represents a liability which constitutes a specific charge (nonrecourse or otherwise) against an asset of the second corporation which is not either--
(1) In general. Investments by a controlled foreign corporation (the ``first corporation'') in stock or obligations of a second controlled foreign corporation which is a related person (within the meaning of section 954(d)(3) are considered to be qualified investments in foreign base company shipping operations to the extent that the assets of such second corporation are used (or held for use) in foreign base company shipping operations. See subparagraph (2) of this paragraph. However, an investment in an obligation of the second corporation will not be considered a qualified investment in foreign base company shipping operations if the obligation represents a liability which constitutes a specific charge (nonrecourse or otherwise) against an asset of the second corporation which is not either--
(i) An aircraft or vessel used (or held for use) to some extent in foreign commerce, or
(ii) An asset described in paragraphs (a)(1)(ii) through (v) of this section.
(2) Extent of use. On any determination date applicable to a taxable year of the first corporation, the extent to which the assets of the second corporation are used in foreign base company shipping operations shall be determined on the basis of the proportion which the amount of such second corporation's qualified investments in foreign base company shipping operations bears to its net worth, such proportion to be determined at the close of the second corporation's last taxable year which ends on or before such determination date. For purposes of the preceding sentence--
(i) A controlled foreign corporation's net worth is the total adjusted basis of the corporate assets reduced by the total outstanding principal amount of the corporate liabilities, and
(ii) The determination dates applicable to a taxable year of a controlled foreign corporation are--
(A) Except as provided in (B) of this subdivision, the close of such taxable year and the close of the preceding taxable year, and
(B) With respect to a United States shareholder who has made an election under section 955(b)(3) to determine such corporation's increase in qualified investments in foreign base company shipping operations at the close of the following taxable year, the close of such taxable year and the close of the taxable year immediately following such taxable year.
(3) Illustrations. The application of this paragraph may be illustrated by the following examples:
Example 1. On December 31, 1976, controlled foreign corporation X owns 100 percent of the single class of stock of controlled foreign corporation Y. X and Y both use the calendar year as the taxable year. On December 31, 1976, Y's assets consist of a vessel used in foreign commerce, related shipping assets, and other assets unrelated to its foreign base company shipping operations. On such date Y has qualified investments in foreign base company shipping operations (determined under paragraph (g) of this section) of $60,000, and a net worth of $100,000. If X's investment in the stock of Y is $50,000, then $30,000 of such amount, i.e.,[GRAPHIC] [TIFF OMITTED] TC09OC91.012 is a qualified investment in foreign base company shipping operations.
Example 2. The facts are the same as in example 1, except that on December 31, 1976, Y's assets consist entirely of a vessel used in foreign commerce and related shipping assets, Y has qualified investments in foreign base company shipping operations (determined under paragraph (g) of this section) of $16,000 and (therefore) a net worth of $16,000. If X's investment in the stock of Y is $50,000, then the entire $50,000, i.e.,[GRAPHIC] [TIFF OMITTED] TC09OC91.013 is a qualified investment in foreign base company shipping operations.
Example 3. On December 31, 1980, controlled foreign corporation J owns two notes of controlled foreign corporation K, which is a related person (within the meaning of section 954(d)(3)). Both J and K use the calendar year as the taxable year. J's adjusted basis in each of the two notes is $100,000. The first note is secured only by the general credit of K. The second note is secured by (and, therefore, constitutes a specific charge on) a hotel owned by K in a foreign country. On December 31, 1980, K has qualified investments in foreign base company shipping operation with an adjusted basis of $500,000 (before applying the rules of paragraph (g) of this section). The adjusted basis of all of K's corporate assets is $1,100,000. K's only liabilities are the two notes. The amount of K's qualified investments in foreign base company shipping operations (determined under paragraph (g) of this section) is $450,000. K's net worth is $900,000. The amount of J's qualified investment in foreign base company shipping operations in respect of the first note is $50,000, i.e.,[GRAPHIC] [TIFF OMITTED] TC09OC91.014 The amount of J's qualified investment in respect of the second note is zero (see the last sentence of paragraph (c)(1) of this section).
(d) Partnerships--(1) In general. A controlled foreign corporation's investment in a partnership at the close of any taxable year of such corporation shall be considered a qualified investment in foreign base company shipping operations to the extent of the proportion which such corporation's foreign base company shipping income for such taxable year would bear to its gross income for such taxable year if--
(1) In general. A controlled foreign corporation's investment in a partnership at the close of any taxable year of such corporation shall be considered a qualified investment in foreign base company shipping operations to the extent of the proportion which such corporation's foreign base company shipping income for such taxable year would bear to its gross income for such taxable year if--
(i) Such corporation had realized no income other than its distributive share of the partnership gross income, and
(ii) Such corporation's income were adjusted in accordance with the rules stated in paragraphs (a)(4)(ii)(B) and (D) of this section.
(2) Transitional rule. For purposes of subparagraph (1)(i) of this paragraph, the controlled foreign corporation's distributive share of the partnership gross income shall not include any amount attributable to income earned by the partnership before the first day of such corporation's first taxable year beginning after December 31, 1975.
(3) Cross-reference. See paragraph (g)(4) of this section for rules relating to the determination of the amount of a controlled foreign corporation's investment in a partnership.
(e) Trusts--(1) In general. An investment in a trust is not a qualified investment in a foreign base company shipping operations.
(1) In general. An investment in a trust is not a qualified investment in a foreign base company shipping operations.
(2) Grantor trusts. Notwithstanding subparagraph (1) of this pargraph, if a controlled foreign corporation is treated as the owner of any portion of a trust under subpart E of part I of subchapter J (relating to grantors and others treated as substantial owners), then for purposes of this section such controlled foreign corporation is deemed to be the actual owner of such portion of the assets of the trust. Accordingly, its investments in such assets (as determined under paragraph (g)(5) of this section) may be treated as a qualified investment in foreign base company shipping operations.
(3) Definitions. For purposes of this section, the term ``trust'' means a trust as defined in Sec. 301.7701-4.
(f) Excluded property. For purposes of paragraph (a) of this section, property acquired principally for the purpose of artificially increasing the amount of a controlled foreign corporation's qualified investments in foreign base company shipping operations will not be recognized; whether an item of property is acquired principally for such purpose will depend upon all the facts and circumstances of each case. One of the factors that will be considered in making such a determination with respect to an item of property is whether the item is disposed of within 6 months after the date of its acquisition.
(g) Amount attributable to property--(1) General rule. For purposes of this section, the amount taken into account under section 955(b)(4) with respect to any property which constitutes a qualified investment in foreign base company shipping operations shall be its adjusted basis as of the applicable determination date, reduced by the outstanding principal amount of any liability (other than a liability described in subparagraph (2) of this paragraph) to which such property is subject on such date including a liability secured only by the general credit of the controlled foreign corporation. Liabilities shall be taken into account in the following order:
(1) General rule. For purposes of this section, the amount taken into account under section 955(b)(4) with respect to any property which constitutes a qualified investment in foreign base company shipping operations shall be its adjusted basis as of the applicable determination date, reduced by the outstanding principal amount of any liability (other than a liability described in subparagraph (2) of this paragraph) to which such property is subject on such date including a liability secured only by the general credit of the controlled foreign corporation. Liabilities shall be taken into account in the following order:
(i) The adjusted basis of each and every item of corporate property shall be reduced by any specific charge (non-recourse or otherwise) to which such item is subject. For this purpose, if a liability constitutes a specific charge against several items of property and cannot definitely be allocated to any single item of property, the specific charge shall be apportioned against each of such items of property in that ratio which the adjusted basis of such item on the applicable determination date bears to the adjusted basis of all such items on such date. The excess against property over the adjusted basis of such property shall be taken into account as a liability secured only by the general credit of the corporation.
(ii) A liability which is evidenced by an open account or which is secured only by the general credit of the controlled foreign corporation shall be apportioned against each and every item of corporate property in that ratio which the adjusted basis of such item on the applicable determination date (reduced as provided in subdivision (i) of this subparagraph) bears to the adjusted basis of all the corporate property on such date (reduced as provided in subdivision (i) of this subparagraph); provided that no liability shall be apportioned under this subdivision against any stock or obligations described in paragraph (h)(1) of this section.
(2) Excluded charges. For purposes of subparagraph (1) of this paragraph, a liability created principally for the purpose of artificially increasing or decreasing the amount of a controlled foreign corporation's qualified investments in foreign base company shipping operations will not be recognized. Whether a liability is created principally for such purpose will depend upon all the facts and circumstances of each case. One of the factors that will be considered in making such a determination with respect to a loan is whether the loan was both created after November 20, 1974, and is from a related person, as defined in section 954(d)(3) and paragraph (e) of Sec. 1.954-1. Another such factor is whether the liability was created after March 29, 1975, in a taxable year beginning before January 1, 1976. For purposes of this paragraph (g)(2), payments on liabilities which are represented by an open account are credited against the account transactions arising earliest in time.
(3) Statement required. If for purposes of this section the adjusted basis of property which constitutes a qualified investment in foreign base company shipping operations by a controlled foreign corporation is reduced on the ground that such property is subject to a liability, each United States shareholder shall attach to his return a statement setting forth the adjusted basis of the property before the reduction and the amount and nature of the reduction.
(4) Partnership interest. If a controlled foreign corporation is a partner in a partnership, its investment in the partnership taken into account under section 955(b)(4) shall be its adjusted basis in the partnership determined under section 722 or 742, adjusted as provided in section 705, and reduced as provided in subparagraph (1) of this paragraph. (However, if the partnership is not engaged solely in the conduct of foreign base company shipping operations, such amount shall be taken into account only to the extent provided in paragraph (d)(1) of this section).
(5) Grantor trust. If a controlled foreign corporation is deemed to own a portion of the assets of a trust under paragraph (e)(2) of this section then the amount taken into account under section 955 (b)(4) with respect to such assets shall be determined as provided in subparagraph (1) of this paragraph by the application of the following rules:
(i) Such controlled foreign corporation's adjusted basis in such assets shall be deemed to be a proportionate share of the trust's adjusted basis in such assets, and
(ii) A proportionate share of the liabilities of the trust shall be deemed to be liabilities of such controlled foreign corporation and to constitute specific charges against such assets.
(6) Translation into United States dollars. The amounts determined in accordance with this paragraph shall be translated into United States dollars in accordance with the principles of Sec. 1.964-1(e)(4).
(h) Investments in shipping companies under prior law--(1) In general. If an amount invested in stock or obligations of a less developed country shipping company described in Sec. 1.955-5(b) is treated as a qualified investment in less developed countries under Sec. 1.955-2 (applied without regard to paragraph (b)(5)(ii) thereof) on the applicable determination date for purposes of section 954(g) or section 955(a)(2) with respect to a taxable year beginning after December 31, 1975, then such amount shall be treated as a qualified investment in foreign base company shipping operations on such determination date. See section 955(b)(5).
(1) In general. If an amount invested in stock or obligations of a less developed country shipping company described in Sec. 1.955-5(b) is treated as a qualified investment in less developed countries under Sec. 1.955-2 (applied without regard to paragraph (b)(5)(ii) thereof) on the applicable determination date for purposes of section 954(g) or section 955(a)(2) with respect to a taxable year beginning after December 31, 1975, then such amount shall be treated as a qualified investment in foreign base company shipping operations on such determination date. See section 955(b)(5).
(2) Effect on prior law. See Sec. 1.955-2(b)(5)(ii) for the rule that investments which are treated as qualified investments in foreign base company shipping operations under subparagraph (1) of this paragraph shall not be treated as qualified investments in less developed countries for purposes of section 951(a)(1)(A)(ii).
(3) Illustration. The application of this paragraph may be illustrated by the following example:
(a) Throughout the period here involved, controlled foreign corporation X owns 100 percent of the single class of stock of controlled foreign corporation Y, X and Y each use the calendar years as the taxable year. At the close of 1975, X's $50,000 investment in the stock of Y is treated as a qualified investment in less developed countries under Sec. 1.955-2 (applied without regard to Sec. 1.955-2(b)(5)(ii), and Y is a less developed country shipping company described in Sec. 1.955-5(b).
(b) On December 31, 1976, Y is still a less developed country shipping company and X's $50,000 investment in the stock of Y is still treated as a qualified investment in less developed countries under Sec. 1.955-2 (applied without regard to Sec. 1.955-2(b)(5)(ii). Under subparagraph (1) of this paragraph X's entire $50,000 investment in the stock of Y is treated as a qualified investment in foreign base company shipping operations.
(c) For 1977, Y's gross income is $10,000 and Y's foreign base company shipping income is $7,500. Since Y fails to meet the 80-percent income test of Sec. 1.955-5(b)(1), Y is no longer a less developed country shipping company described in Sec. 1-955-5(b), and X's investment in the stock of Y is no longer treated as a qualified investment in less developed countries under Sec. 1.955-2 (applied without regard to Sec. 1.955-2(b)(5)(ii). However, assume that on December 31, 1977, Y's net worth (as defined in paragraph (c)(2)(1) of this section) is $100,000, that Y's qualified investments in foreign base company shipping operations (determined under this section) on December 31, 1977, are $75,000, and that X's investment in the stock of Y (as determined under paragraph (g) of this section) continues to be $50,000. Then $67,500, i.e.,[GRAPHIC] [TIFF OMITTED] TC09OC91.015 of X's $50.000 investment in the stock of Y is treated as a qualified investment in foreign company shipping operations under paragraph (c) of this section.
(d) For 1978, all of Y's gross income is foreign base company shipping income. Although Y is again a less developed country shipping company described in Sec. 1.955-5(b), X's investment in the stock of Y is no longer treated as a qualified investment in less developed countries under Sec. 1.955-2(b)(5)(iii). Thus, X's investment in the stock of Y is not treated as a qualified investment in foreign base company shipping operations under subparagraph (1) of this paragraph. However, X's investment in the stock of Y may be so treated under another provision of this section, as was the case in item (c) of this example. (Secs. 955 (b)(2) and 7805 of the Internal Revenue Code of 1954 (89 Stat. 63; 26 U.S.C. 955(b)(2), and 68A Stat. 917; 26 U.S.C. 7805)) [T.D. 7894, 48 FR 22532, May 19, 1983; 48 FR 40888, Sept. 12, 1983, as amended by T.D. 7959, 49 FR 22280, May 29, 1984] Sec. 1.955A-3 Election as to qualified investments by related persons.
(a) In general. If a United States shareholder elects the benefits of section 955(b) 2 with respect to a related group (as defined in paragraph (b)(1) of this section) of controlled foreign corporations, then an investment in foreign base company shipping operation made by one member of such group will be treated as having been made by another member to the extent provided in paragraph (c)(4) of this section, and each member will be subject to the other provisions of paragraph (c) of this section. An election once made shall apply for the taxable year for which it is made and for all subsequent years unless the election is revoked or a new election is made to add one or more controlled foreign corporations to election coverage. For the manner of making an election under section 955(b)(2), and for rules relating to the revocation of such an election, see paragraph (d) of this section. For rules relating to the coordination of sections 955(b)(2) and 955(b)(3), see paragraph (e) of this section.
(b) Related group--(1) Related group defined. The term ``related group'' means two or more controlled foreign corporations, but only if all of the following requirements are met:
(1) Related group defined. The term ``related group'' means two or more controlled foreign corporations, but only if all of the following requirements are met:
(i) All such corporations use the same taxable year.
(ii) The same United States shareholder controls each such corporation within the meaning of section 954(d)(3) at the end of such taxable year, and
(iii) Such United States shareholder elects to treat such corporations as a related group.
(iv) If any of the corporations is on a 52-53 week taxable year and if all of the taxable years of the corporations end within the same 7-day period, the rule of paragraph (b)(1)(i) of this section shall be deemed satisfied.
(v) An election under paragraph (b)(1)(iii) of this section will not be valid in the case of an election by a U.S. shareholder (the ``first U.S. shareholder'') if--
(A) The first U.S. shareholder controls a second U.S. shareholder,
(B) The second U.S. shareholder controls one or more controlled foreign corporations, and
(C) Any of the controlled foreign corporations are the subject of the election by the first U.S. shareholder, unless the second U.S. shareholder consents to the election by the first U.S. shareholder.
(2) Group taxable years defined. The ``group taxable year'' is the common taxable year of a related group.
(3) Limitation. If a United States shareholder elects to treat two or more corporations as a related group for a group taxable year (the ``first group taxable year''), then such United States shareholder (and any other United States shareholder which is controlled by such shareholder) may not also elect to treat two or more other corporations as a related group for a group taxable year any day of which falls within the first group taxable year.
(4) Illustrations. The application of this paragraph may be illustrated by the following examples:
Example 1. Domestic corporation M owns 100 percent of the only class of stock of controlled foreign corporations A, B, C, D, and E. A, B, and C use the calendar year as the taxable year. D and E use the fiscal year ending on June 30 as the taxable year. M may elect to treat A, B and C as a related group. However, M may not elect to treat C, D, and E as a related group.
Example 2. The facts are the same as in example 1. In addition, M elects to treat A, B, and C as a related group for the group taxable year which ends on December 31, 1976. M may not also elect to treat D and E as a related group for the group taxable year ending on June 30, 1977.
Example 3. United States shareholder A owns 60 percent of the only class of stock of controlled foreign corporation X and 40 percent of the only class of stock of controlled foreign corporation Y. United States shareholder B owns the other 40 percent of the stock of X and the other 60 percent of the stock of Y. Neither A nor B (nor both together) may elect to treat X and Y as a related group.
(c) Effect of election. If a United States shareholder elects to treat two or more controlled foreign corporations as a related group for any group taxable year then, for purposes of determining the foreign base company income (see Sec. 1.954-1) and the increase or decrease in qualified investments in foreign base company shipping operations (see Secs. 1.954-7. 1.955A-1, and 1.955A-4) of each member of such group for such year, the following rules shall apply:
(1) Intragroup dividends. The gross income of each member of the related group shall be deemed not to include dividends received from any other member of such group, to the extent that such dividends are attributable (within the meaning of Sec. 1.954-6(f)(4)) to foreign base company shipping income. In determining net foreign base company shipping income, deductions allocable to intragroup dividends attributable to foreign base company shipping income shall not be allowed.
(2) Group excess deduction. (i) The deductions allocable under Sec. 1.954-1(c) to the foreign base company shipping income of each member of the related group shall be deemed to include such member's pro rata share of the group excess deduction.
(i) The deductions allocable under Sec. 1.954-1(c) to the foreign base company shipping income of each member of the related group shall be deemed to include such member's pro rata share of the group excess deduction.
(ii) The group excess deduction for the group taxable year is the sum of the excesses for each member of the related group (having an excess) of--
(A) The member's deductions (determined without regard to this subparagraph) allocable to foreign base company shipping income for such year, over
(B) The member's foreign base company shipping income for such year.
(iii) A member's pro rata share of the group excess deduction is the amount which bears the same ratio to such group excess deduction as--
(A) The excess of such member's foreign base company shipping income over the deductions (so determined) allocable thereto, bears to
(B) The sum of such excesses for each member of the related group having an excess.
(iv) For purposes of this subparagraph, ``foreign base company shipping income'' means foreign base company shipping income (as defined in Sec. 1.954-6), reduced by excluding therefrom all amounts which are--
(A) Excluded from subpart F income under section 952(b) (relating to exclusion of United States income) or
(B) Excluded from foreign base company income under section 954(b)(4) (relating to exception for foreign corporation not availed of to reduce taxes).
(v) The application of this subparagraph may be illustrated by the following example:
Example. Controlled foreign corporations X, Y, and Z are a related group for calendar year 1976. The excess group deduction for 1976 is $9, X's pro rata share of the group excess deduction is $6, and Y's pro rata share is $3, determined as follows on the basis of the facts shown in the following table: ------------------------------------------------------------------------
(1) Gross shipping income................. $100 $90 $90(2) Shipping deductions................... 60 70 80(3) Net shipping income................... 40 20 (9)(4) Group excess deduction................ ...... ..... ..... 80(5) X's pro rata share of group excess 6
deduction ($9x$40/$60)...................(6) Y's pro rata share of group excess ...... 3 ..... ......
deduction ($9x$20/$60)...................------------------------------------------------------------------------
(3) Intragroup investments. On both of the determination dates applicable to the group taxable year for purposes of section 954(g) or section 955(a)(2), the qualified investments in foreign base company shipping operations of each member of the related group shall be deemed not to include stock of any other member of the related group. In addition, neither the gains nor the losses on dispositions of such stock during the group taxable year shall be taken into account under Sec. 1.955A-1(b)(1)(ii) in determining the decrease in qualified investments in foreign base company shipping operations of any member of such related group.
(4) Group excess investment. (i) On the later (and only the later) of the two determination dates applicable to the group taxable year for purposes of section 954(g) or section 955(a)(2), the qualified investments in foreign base company shipping operations of each member of the related group shall be deemed to include such member's pro rata share of the group excess investment.
(i) On the later (and only the later) of the two determination dates applicable to the group taxable year for purposes of section 954(g) or section 955(a)(2), the qualified investments in foreign base company shipping operations of each member of the related group shall be deemed to include such member's pro rata share of the group excess investment.
(ii) The group excess investment for the group taxable year is the sum of the excess for each member of the related group (having an excess) of--
(A) The member's increase in qualified investments in foreign base company shipping operations (determined under Sec. 1.954-7 after the application of subparagraph (3) of this paragraph) for such year, over
(B) The member's foreign base company shipping income for such year.
(iii) A member's pro rata share of the group excess investment is the amount which bears the same ratio to such group excess investment as--
(A) Such member's shortfall, in qualified investments bears to
(B) the sum of the shortfalls in qualified investments of each member of such related group having a shortfall.
(iv) If a member has an increase in qualified investments in foreign base company shipping operations (determined as provided in Sec. 1.954-7 after the application of subparagraph (3) of this paragraph) for the group taxable year, then such member's ``shortfall in qualified investments'' is the excess of--
(A) Such member's foreign base company shipping income for such year, over
(B) Such increase.
(v) If a member has a decrease in qualified investments in foreign base company shipping operations (determined under Sec. 1.955A-1(b)(1) or Sec. 1.955A-4(a), whichever is applicable, after the application of subparagraph (3) of this paragraph) for the group taxable year, then such member's ``shortfall in qualified investments'' is the sum of--
(A) Such member's foreign base company shipping income for such year and
(B) Such decrease.
(vi) For purposes of this subparagraph, ``foreign base company shipping income'' means foreign base company shipping income (as defined in subparagraph (2)(iv) of this paragraph), reduced by the deductions allocable thereto under Sec. 1.954-1(c) (including the additional deductions described in subparagraph (2) of this paragraph).
(vii) The application of paragraphs (c)(1), (3), and (4) of this section may be illustrated by the following example:
(a) Controlled foreign corporations R, S, and T are a related group for calendar year 1977. R and S do not own the stock of any member of the related group.
(b) On December 31, 1977, T has qualified investments in foreign base company shipping operations (determined without regard to paragraphs (c)(3) and (4)) of $105, of which $15 consists of stock of S. After application of paragraph (c)(3) (but before application of paragraph (c)(4)), on December 31, 1977, T has qualified investments in foreign base company shipping operations of $90, determined as follows: (1) Qualified investments (determined without regard to $105
paragraph (c)(3)) on December 31, 1977.........................(2) Less: Qualified investments in stock of another member of a 15
related group (as required by paragraph (c)(3))................
-------(3) Balance..................................................... 90
(c) During 1977, T's foreign base company shipping income is $180, determined without regard to paragraph (c)(1). Included in the $180 is $5 in dividends in respect of T's stock in S. During 1977, T has shipping deductions of $91. Of T's shipping deductions, $1 is allocable to the dividends from S. After application of paragraph (c)(1), T's net shipping income during 1977 is $85, determined as follows: (1) Foreign base company shipping income................. ..... $180(2) Less: intragroup dividends (as required by paragraph ..... 5
(c)(1)).................................................
(1)).................................................
-------(3) Balance.............................................. ..... 175(4) Shipping deductions.................................. $91(5) Less: deductions allocable to intragroup dividends 1
(as required by paragraph (c)(1)).......................
-------(6) Balance.............................................. 90(7) Net shipping income (line (3) minus line (6))........ ..... 85
(d) During 1977 (without regard to paragraph (c)(4)), R's increase in qualified investments in foreign base company shipping operations is $120; S's decrease is $55; and T's increase is $35, determined on the basis of the facts shown in the following table. In all cases, the listed amounts of qualified investments on December 31, 1976, reflect any adjustments required by paragraph (c)(3) for 1976, but not any adjustment required by paragraph (c)(4) for 1976 (see Secs. 1.955A-3 (c)(3) and (4)(i)). ------------------------------------------------------------------------
(1) Qualified investments on December 31, 1977 (in $220 $150 $90
the case of T, taken from line (3) of part (b) of
this example).....................................(2) Qualified investments on December 31, 1976..... 100 205 55
--------------------(3) Increase (decrease) (line (1) minus line (2)).. 120 (55) 35------------------------------------------------------------------------
(e) In 1977, R's net shipping income is $100; S's is $95; and T's is $85, determined as follows: ------------------------------------------------------------------------
(1) Gross foreign base company shipping income (in $200 $180 $175
the case of T, taken from line (3) of part (c) of
this example).....................................(2) Shipping deductions (in the case of T, taken 100 85 90
from line (6) of part (c) of this example)........
--------------------(3) Net shipping income (line (1) minus line (2)).. 100 95 85------------------------------------------------------------------------
(f) By application of paragraph (c)(4) for 1977, S's pro rata share of the group excess investment is $15, and T's pro rata share is $5, determined as follows: ------------------------------------------------------------------------
(1) Net shipping income (taken from line $100 $95 $85
(3) of part (e) of this example).........(2) Increase (decrease) in qualified 120 (55) 35
investments (taken from line (3) of part
(d) of this example).....................(3) Excess investment..................... 20 ..... ..... $20(4) Shortfall............................. ...... 150 50 200(5) S's pro rata share of group excess ...... 15
investment ($20x$150/$200)...............(6) T's pro rata share of group excess ...... ..... 5 ......
investment ($20x$50/$200)................------------------------------------------------------------------------
(g) After application of paragraph (c)(4), for purposes of determining their increase or decrease in qualified investments in foreign base company shipping operations for 1977, on December 31, 1977, the amount of R's qualified investments is $200; the amount of S's is $165; and the amount of T's is $95, determined as follows: ------------------------------------------------------------------------
(1) Qualified investments on December 31, 1977 $220 $150 $90
(taken from line (1) of part (d) of this example).(2) Plus: pro rata share of group excess investment ..... 15 5
(as required by paragraph (c)(4)) (taken from
lines (5) and (6) of part (f) of this example)....(3) Minus: Excess investment treated as investments 20
of related group members (taken from line (3) of
part (f) of this example).........................
--------------------(4) Total qualified investments.................... 200 165 95------------------------------------------------------------------------
(h) After application of paragraph (c)(1), (3), and (4), during 1977, R's increase in qualified investments in foreign base company shipping operations is $100; S's decrease is $40; and T's increase is $40, determined as set forth in the table below. In all cases, the listed amounts of qualified investments on December 31, 1976, reflect any similar adjustments required by paragraph (c)(3) for 1976, but not any adjustment required by paragraph (c)(4) for 1976 (see Sec. 1.955A-3(c)(3) and (4)(i)). ------------------------------------------------------------------------
(1) Qualified investments on December 31, 1977 $200 $165 $95
(taken from line (4) of part (g) of this example).(2) Qualified investments on December 31, 1976 (see 100 205 55
line (2) of part (d) of this example).............
--------------------(3) Increase (decrease) (line (1) minus line (2)).. 100 (40) 40------------------------------------------------------------------------
(5) Collateral effect. (i) An election under this section by a United States shareholder to treat two or more controlled foreign corporations as a related group for a group taxable year shall have no effect on--
(i) An election under this section by a United States shareholder to treat two or more controlled foreign corporations as a related group for a group taxable year shall have no effect on--
(A) Any other United States shareholder (including a minority shareholder of a member of such related group).
(B) Any other controlled foreign corporation, and
(C) The foreign personal holding company income, foreign base company sales income, and foreign base company services income, and the deductions allocable under Sec. 1.954-1(c) thereto, of any member of such related group.
(ii) See Sec. 1.952-1(c)(2)(ii) for the effect of an election under this section on the computation of earnings and profits and deficits in earnings and profits under section 952 (c) and (d).
(iii) The application of this subparagraph may be illustrated by the following example:
Example. United States shareholder A owns 80 percent of the only class of stock of controlled foreign corporations X and Y. United States shareholder B owns the other 20 percent of the stock of X and Y. X and Y both use the calendar year as the taxable year. A elects to treat X and Y as a related group for 1977. For purposes of determining the amounts includible in B's gross income under section 951(a) in respect of X and Y, the election made by A shall be disregarded and all of B's computations shall be made without regard to this section, as illustrated in Sec. 1.952-3(d).
(d) Procedure--(1) Time and manner of making election. A United States shareholder shall make an election under this section to treat two or more controlled foreign corporations as a related group for a group taxable year and subsequent years by filing a statement to such effect with the return for the taxable year within which or with which such group taxable year ends. The statement shall include the following information:
(1) Time and manner of making election. A United States shareholder shall make an election under this section to treat two or more controlled foreign corporations as a related group for a group taxable year and subsequent years by filing a statement to such effect with the return for the taxable year within which or with which such group taxable year ends. The statement shall include the following information:
(i) The name, address, taxpayer identification number, and taxable year of the United States shareholder;
(ii) The name, address, and taxable year of each controlled foreign corporation which is a member of the related group and is to be subject to the election; and
(iii) A schedule showing the calculations by which the amounts described in this section have been determined for the taxable year for which the election is first effective. With respect to each subsequent taxable year to which the election applies, a new schedule showing calculations of such amounts for that taxable year must be filed with the return for that taxable year. A consent to an election required by paragraph (b)(1)(v) of this section shall include the same information required for the election statement.
(2) Revocation. (i) Except as provided in subdivision (ii) of this subparagraph, an election under this section by a United States shareholder shall be binding for the group taxable year for which it is made and for subsequent years.
(i) Except as provided in subdivision (ii) of this subparagraph, an election under this section by a United States shareholder shall be binding for the group taxable year for which it is made and for subsequent years.
(ii) Upon application by the United States shareholder (and any other United States shareholder controlled by such shareholder which consented under paragraph (b)(1)(v) of this section to the election), an election made under this section may, subject to the approval of the Commissioner, be revoked. An application to revoke the election, as of a specified group taxable year, with respect to one or more (but not all) controlled foreign corporations, subject to an election shall be deemed to be an application to revoke the election. Approval will not be granted unless a material and substantial change in circumstances occurs which could not have been anticipated when the election was made. The application for consent to revocation shall be made by mailing a letter for such purpose to Commissioner of Internal Revenue, Attention: T:C:C, Washington, DC 20224, containing a statement of the facts which justify such consent. If a member of a related group subject to an election ceases to meet the requirements of paragraph (b) of this section for membership in the group by reason of any action taken by it or any member of the group or the electing United States shareholder, then the election will be deemed to be revoked as of the beginning of the taxable year in which such action occurred. If such action is taken principally for the purpose of revoking the election without applying for and obtaining the approval of the Commissioner to the revocation, then no further election covering any member of that related group may be made by any United States shareholder for the remainder of the taxable year in which the action occurred and the five succeeding taxable years.
(e) Coordination with section 955(b)(). If a United States shareholder elects under this section to treat two or more controlled foreign corporations as a related group for any taxable year, and if such United States shareholder is required under Sec. 1.955A-4(c)(2) for purposes of filing any return to estimate the qualified investments in foreign base company shipping operations of any member of such group, then such United States shareholder shall, for purposes of filing such return, determine the amount includible in his gross income in respect of each member of such related group on the basis of such estimate. If the actual amount of such investments is not the same as the amount of the estimate, the United States shareholder shall immediately notify the Commissioner. The Commissioner will thereupon redetermine the amount of tax of such United States shareholder for the year or years with respect to which the incorrect amount was taken into account. The amount of tax, if any, due upon such redetermination shall be paid by the United States shareholder upon notice and demand by the district director. The amount of tax, if any, shown by such redetermination to have been overpaid shall be credited or refunded to the United States shareholder in accordance with the provisions of sections 6402 and 6511 and the regulations thereunder. If a United States shareholder elects under this section and if the United States shareholder has made an election under section 955(b)(3) as to at least one member of the related group, then the qualified investment amounts necessary for the calculations of paragraphs (c)(3) and (4) of this section shall be obtained, for each member of the related group, as of the determination dates applicable to each of the members.
(f) Illustrations. The application of this section may be illustrated by the following examples:
(a) Controlled foreign corporations X and Y are wholly owned subsidiaries of domestic corporation M, X and Y use the calendar year as the taxable year. For 1977, X and Y are not export trade corporations (as defined in section 971(a)), nor have they any income derived from the insurance of United States risks (within the meaning of section 963(a)). M does not elect to treat X and Y as a related group for 1977.
(b) For 1977, X and Y each have gross income (determined as provided in Sec. 1.951-6(h)(1)) of $1,000. X's foreign base company income is $20 and Y's foreign base company imcome is $0, determined as follows, based on the facts shown in the following table: ------------------------------------------------------------------------
(1) Foreign lease company shipping income........... $1,000 $1,000(2) Less: amounts excluded from subpart F income 0 0
under section 952(b) (relating to U.S. income) and
amounts excluded from foreign base company income
under section 945(b)(4) (relating to corporation
not availed of to reduce taxes)....................
-------------------(3) Balance......................................... 1,000 1,000(4) Less: deductions allocable under Sec. 1.954- 800 1,040
1(c) to balance....................................
-------------------(5) Remaining balance............................... 200 0
===================(6) Less: Increase in qualified investments in 180
foreign base company shipping operations...........
-------------------(7) Foreign base company income..................... 20 ........------------------------------------------------------------------------
(c) For 1977, Y has a withdrawal of previously excluded Subpart F income from investment in foreign base company shipping operations of $20, determined as follows, on the basis of the facts shown in the following table: (1) Qualified investments in foreign base company shipping $1,210
operations at December 31, 1976..............................(2) Less: qualified investments in foreign base company 1,170
shipping operations at December 31, 1977.....................
---------(3) Balance................................................... 40(4) Less: excess of recognized losses over recognized gains on 20
sales during 1977 of qualified investments in foreign base
company shipping operations..................................
---------(5) Tentative decrease in qualified investments in foreign 20
base company shipping operations for 1977....................
=========(6) Limitation described in Sec. 1.955A-1(b)(2).............. 160(7) Y's amount of previously excluded subpart F income 20
withdrawn from investment in foreign base company shipping
operations (lesser of lines (5) and (6)).....................
=========
(a) The facts are the same as in example 1, except that M does elect to treat X and Y as a related group for 1977.
(b) The group excess deduction, which is solely attributable to Y's net shipping loss, is $40 (i.e., $1,040-$1,000). Since X is the only member of the related group with net shipping income, X's pro rata share of the group excess deduction is the entire $40 amount.
(c) X's foreign base company income for 1977 is zero, determined as follows: (1) Preliminary net foreign base company shipping income (line $200
(b)(5) of example 1).........................................(2) Less: X's pro rata share of group excess deduction........ 40
(5) of example 1).........................................(2) Less: X's pro rata share of group excess deduction........ 40
---------(3) Remaining balance......................................... 160(4) Less: increase in qualified investments in foreign base 180
company shipping operations..................................
---------(5) Foreign base company income............................... 0
=========
(d) The group excess investment, which is solely attributable to X's excess investment, is $20 (i.e., $180 minus $160). Since Y is the only member of the related group with a shortfall in qualified investments, Y's share of the group excess investment is the entire $20 amount.
(e) During 1976 and 1977, Y owns no stock of X. Y's withdrawal of previously excluded subpart F income from investment in foreign base company shipping operations for 1977 is zero, determined as follows: (1) Qualified investments at December 31, 1976................ $1,210(2)(i) Qualified investments at December 31, 1977 (determined 1,170
without regard to paragraph (c)(4) of this section)..........
(ii) Y's pro rata share of group excess investment.......... 20
---------
(iii) Total qualified investments at December 31, 1977 (Line 1,190
(i) plus line (ii).........................................
---------(3) Balance (line (1) minus line (2)(iii)..................... 20(4) Less: excess of recognized losses over recognized gains on 20
sales during 1977 of qualified investments in foreign base
company shipping operations..................................
---------(5) Decrease in qualified investments for 1977................ 0
=========
(Secs. 955 (b)(2) and 7805 of the Internal Revenue Code of 1954 (89 Stat. 63; 26 U.S.C. 955(b)(2), and 68A Stat. 917; 26 U.S.C. 7805)) [T.D. 7894, 48 FR 22535, May 19, 1983; 48 FR 40888, Sept. 12, 1983, as amended by T.D. 7959, 49 FR 22280, May 29, 1984] Sec. 1.955A-4 Election as to date of determining qualified investmentin foreign base company shipping operations.
(a) Nature of election. In lieu of determining the increase under the provisions of section 954(g) and Sec. 1.954-7(a) or the decrease under the provisions of section 955(a)(2) and Sec. 1.955A-1(b) in a controlled foreign corporation's qualified investments in foreign base company shipping operations for a taxable year in the manner provided in such provisions, a United States shareholder of such controlled foreign corporation may elect, under the provisions of section 955(b)(3) and this section, to determine such increase in accordance with the provisions of Sec. 1.954-7(b) and to determine such decrease by ascertaining the amount by which--
(1) Such controlled foreign corporation's qualified investments in foreign base company shipping operations at the close of such taxable year exceed its qualified investments in foreign base company shipping operations at the close of the taxable year immediately following such taxable year, and reducing such excess by
(2) The amount determined under Sec. 1.955A-1(b)(1)(ii) for such taxable year subject to the limitation provided in Sec. 1.995A-1(b)(2) for such taxable year. An election under this section may be made with respect to each controlled foreign corporation with respect to which a person is a United States shareholder within the meaning of section 951(b), but the election may not be exercised separately with respect to the increases and the decreases of such controlled foreign corporation. If an election is made under this section to determine the increase of a controlled foreign corporation in accordance with the provisions of Sec. 1.954-7(b), subsequent decreases of such controlled foreign corporation shall be determined in accordance with this paragraph and not in accordance with Sec. 1.955A-1(b).
(b) Time and manner of making election--(1) Without consent. An election under this section with respect to a controlled foreign corporation shall be made without the consent of the Commissioner by a United States shareholder's filing a statement to such effect with his return for his taxable year in which or with which ends the first taxable year of such controlled foreign corporation in which--
(1) Without consent. An election under this section with respect to a controlled foreign corporation shall be made without the consent of the Commissioner by a United States shareholder's filing a statement to such effect with his return for his taxable year in which or with which ends the first taxable year of such controlled foreign corporation in which--
(i) Such shareholder is a United States shareholder, and
(ii) Such controlled foreign corporation realizes foreign base company shipping income, as defined in Sec. 1.954-6. The statement shall contain the name and address of the controlled foreign corporation and identification of such first taxable year of such corporation.
(2) With consent. An election under this section with respect to a controlled foreign corporation may be made by a United States shareholder at any time with the consent of the Commissioner. Consent will not be granted unless the United States shareholder and the Commissioner agree to the terms, conditions, and adjustments under which the election will be effected. The application for consent to elect shall be made by the United States shareholder's mailing a letter for such purpose to the Commissioner of Internal Revenue, Washington, DC 20224. The application shall be mailed before the close of the first taxable year of the controlled foreign corporation with respect to which the shareholder desires to compute an amount described in section 954(b)(2) in accordance with the election provided in this section. The application shall include the following information.
(i) The name, address, and taxpayer identification number, and taxable year of the United States shareholder;
(ii) The name and address of the controlled foreign corporation;
(iii) The first taxable year of the controlled foreign corporation for which income is to be computed under the election;
(iv) The amount of the controlled foreign corporation's qualified investments in foreign base company shipping operations at the close of its preceding taxable year; and
(v) The sum of the amounts excluded under section 954(b)(2) and Sec. 1.954-1(b)(1) from the foreign base company income of the controlled foreign corporation for all prior taxable years during which such shareholder was a United States shareholder of such corporation and the sum of the amounts of its previously excluded subpart F income withdrawn from investment in foreign base company shipping operations for all prior taxable years during which such shareholder was a United States shareholder of such corporation.
(c) Effect of election--(1) General. Except as provided in subparagraphs (3) and (4) of this paragraph, an election under this section with respect to a controlled foreign corporation shall be binding on the United States shareholder and shall apply to all qualified investments in foreign base company shipping operations acquired, or disposed of, by such controlled foreign corporation during the taxable year following its taxable year for which income is first computed under the election and during all succeeding taxable years of such corporation.
(1) General. Except as provided in subparagraphs (3) and (4) of this paragraph, an election under this section with respect to a controlled foreign corporation shall be binding on the United States shareholder and shall apply to all qualified investments in foreign base company shipping operations acquired, or disposed of, by such controlled foreign corporation during the taxable year following its taxable year for which income is first computed under the election and during all succeeding taxable years of such corporation.
(2) Returns. Any return of a United States shareholder required to be filed before the completion of a period with respect to which determinations are to be made as to a controlled foreign corporation's qualified investments in foreign base company shipping operations for purposes of computing such shareholder's taxable income shall be filed on the basis of an estimate of the amount of the controlled foreign corporation's qualified investments in foreign base company shipping operations at the close of the period. If the actual amount of such investments is not the same as the amount of the estimate, the United States shareholder shall immediately notify the Commissioner. The Commissioner will thereupon redetermine the amount of tax of such United States shareholder for the year or years with respect to which the incorrect amount was taken into account. The amount of tax, if any, due upon such redetermination shall be paid by the United States shareholder upon notice and demand by the district director. The amount of tax, if any, shown by such redetermination to have been overpaid shall be credited or refunded to the United States shareholder in accordance with the provisions of sections 6402 and 6511 and the regulations thereunder.
(3) Revocation. Upon application by the United States shareholder, the election made under this section may, subject to the approval of the Commissioner, be revoked. Approval will not be granted unless the United States shareholder and the Commissioner agree to the terms, conditions, and adjustments under which the revocation will be effected. Unless such agreement provides otherwise, the change in the controlled foreign corporation's qualified investments in foreign base company shipping operations for its first taxable year for which income is computed without regard to the election previously made will be considered to be zero for purposes of effectuating the revocation. The application for consent to revocation shall be made by the United States shareholder's mailing a letter for such purpose to the Commissioner of Internal Revenue, Washington, DC 20224. The application shall be mailed before the close of the first taxable year of the controlled foreign corporation with respect to which the shareholder desires to compute the amounts described in section 954(b)(2) or 955(a) without regard to the election provided in this section. The application shall include the following information:
(i) The name, address, and taxpayer identification number of the United States shareholder:
(ii) The name and address of the controlled foreign corporation;
(iii) The taxable year of the controlled foreign corporation for which such amounts are to be computed;
(iv) The amount of the controlled foreign corporation's qualified investments in foreign base company shipping operations at the close of its preceding taxable year;
(v) The sum of the amounts excluded under section 954(b)(2) and Sec. 1.954-1(b)(1) from the foreign base company income of the controlled foreign corporation for all prior taxable years during which such shareholder was a United States shareholder of such corporation and the sum of the amounts of its previously excluded subpart F income withdrawn from investment in foreign base company shipping operations for all prior taxable years during which such shareholder was a United States shareholder of such corporation; and
(vi) The reasons for the request for consent to revocation.
(4) Transfer of stock. If during any taxable year of a controlled foreign corporation--
(i) A United States shareholder who has made an election under this section with respect to such controlled foreign corporation sells, exchanges, or otherwise disposes of all or part of his stock in such controlled foreign corporation, and
(ii) The foreign corporation is a controlled foreign corporation immediately after the sale, exchange, or other disposition, then, with respect to the stock so sold, exchanged, or disposed of, the change in the controlled foreign corporation's qualified investments in foreign base company shipping operations for such taxable year shall be considered to be zero. If the United States shareholder's successor in interest is entitled to and does make an election under paragraph (b)(1) of this section to determine the controlled foreign corporation's increase in qualified investments in foreign base company shipping operations for the taxable year in which he acquires such stock, such increase with respect to the stock so acquired shall be determined in accordance with the provisions of Sec. 1.954-7(b)(1). If the controlled foreign corporation realizes no foreign base company income from which amounts are excluded under section 954(b)(2) and Sec. 1.954-1(b)(1) for the taxable year in which the United States shareholder's successor in interest acquires such stock and such successor in interest makes an election under paragraph (b)(1) of this section with respect to a subsequent taxable year of such controlled foreign corporation, the increase in the controlled foreign corporation's qualified investments in foreign base company shipping operations for such subsequent taxable year shall be determined in accordance with the provisions of Sec. 1.954-7(b)(2).
(d) Illustrations. The application of this section may be illustrated by the following examples:
Example 1. Foreign corporation A is a wholly owned subsidiary of domestic corporation M. Both corporations use the calendar year as a taxable year. In a statement filed with its return for 1977, M makes an election under section 955(b)(3) and the election remains in force for the taxable year 1978. At December 31, 1978, A's qualified investments in foreign base company shipping operations amount to $100,000; and, at December 31, 1979, to $80,000. For purposes of paragraph (a)(1) of this section, A Corporation's decrease in qualified investments in foreign base company shipping operations for the taxable year 1978 is $20,000 and is determined by ascertaining the amount by which A Corporation's qualified investments in foreign base company shipping operations at December 31, 1978 ($100,000) exceed its qualified investments in foreign base company shipping operations at December 31, 1979 ($80,000).
Example 2. The facts are the same as in example 1 except that A experiences no changes in qualified investments in foreign base company shipping operations during its taxable years 1980 and 1981. If M's election were to remain in force, A's acquisitions and dispositions of qualified investments in foreign base company shipping operations during A's taxable year 1982 would be taken into account in determining whether A has experienced an increase or a decrease in qualified investments in foreign base company shipping operations for its taxable year 1981. However, M duly files before the close of A's taxable year 1981 as application for consent to revocation of M Corporation's election under section 955(b)(3), and, pursuant to an agreement between the Commissioner and M, consent is granted by the Commissioner. Assuming such agreement does not provide otherwise, A's change in qualifed investments in foreign base company shipping operations for its taxable year 1981 is zero because the effect of the revocation of the election is to treat acquisitions and dispositions of qualified investments in foreign base company shipping operations actually occurring in 1982 as having occurred in such year rather than in 1981.
Example 3. The facts are the same as in example 2 except that A's qualified investments in foreign base company shipping operations at December 31, 1982, amount to $70,000. For purposes of paragraph (b)(1)(i) of Sec. 1.955A-1, the decrease in A's qualified investments in foreign base company shipping operations for the taxable year 1982 is $10,000 and is determined by ascertaining the amount by which A's qualified investments in foreign base company shipping operations at December 31, 1981 ($80,000) exceed its qualified investments in foreign base company shipping operations at December 31, 1982 ($70,000).
Example 4. The facts are the same as in example 1. Assume further that on September 30, 1979, M sells 40 percent of the only class of stock of A to N Corporation, a domestic corporation. N uses the calendar year as a taxable year. A remains a controlled foreign corporation immediately after such sale of its stock. A's qualified investments in foreign base company shipping operations at December 31, 1980, amount to $90,000. The changes in A Corporation's qualified investments in foreign base company shipping operations occurring in its taxable year 1979 are considered to be zero with respect to the 40-percent stock interest acquired by N Corporation. The entire $20,000 reduction in A Corporation's qualified investments in foreign base company shipping operations which occurs during the taxable year 1979 is taken into account by M for purposes of paragraph (c)(1) of this section in determining its tax liability for the taxable year 1978. A's increase in qualified investments in foreign base company shipping operations for the taxable year 1979 with respect to the 60-percent stock interest retained by M is $6,000 and is determined by ascertaining M's pro rata share (60 percent) of the amount by which A's qualified investments in foreign base company shipping operations at December 31, 1980 ($90,000) exceed its qualified investments in foreign base company shipping operations at December 31, 1979 ($80,000). N does not make an election under section 955(b)(3) in its return for its taxable year 1980. Corporation A's increase in qualified investments in foreign base company shipping operations for the taxable year 1980 with respect to the 40-percent stock interest acquired by N is $4,000. [T.D. 7894, 48 FR 22539, May 19, 1983]