International Tax

CFCs — Sections 959-965 and 1248 (Portfolio 930)

  • This Portfolio describes the rules that apply to the repatriation of the earnings and profits of a CFC under Subpart F of the Internal Revenue Code.

Description

The Bloomberg Tax Portfolio, CFCs – Sections 959-965 and 1248, describes the rules that apply to the repatriation of the earnings and profits of a CFC under Subpart F of the IRC.

Subpart F is designed to tax the U.S. shareholder of a CFC on the shareholder’s pro rata share of the corporation’s Subpart F income, even when that income remains in corporate solution. In order to avoid double taxation of Subpart F income when it is repatriated to the shareholder, Subpart F contains a number of provisions dealing with previously taxed income, adjustments to the basis of CFC stock, the foreign tax credit, and disposition of stock in a CFC.

This Portfolio provides a detailed discussion of those provisions. Under §959, a shareholder of a CFC is permitted to exclude from income distributions of earnings and profits that were previously included in the shareholder’s income. This exclusion applies to actual distributions, as well as deemed distributions resulting from investments in U.S. property. Section 960 allows the U.S. corporate shareholder of a CFC to claim foreign tax credits for any foreign taxes deemed paid by the CFC on Subpart F amounts that are included in the income of the U.S. shareholder. Section 961 provides for adjustments to a U.S. shareholder’s basis in the stock of a CFC.

In general, the shareholder receives an increase in basis equal to the CFC earnings that are includible in the shareholder’s income, and basis is decreased by the amount of any distributions to the shareholder that are excluded from income as previously taxed. Section 962 provides that individual U.S. shareholders of a CFC may elect to be taxed at the corporate rates on Subpart F income and thereby qualify for the deemed paid foreign tax credits of §960. Section 964 contains rules for the determination of a CFC’s earnings and profits, which is critical to the determination of Subpart F income taxable to U.S. shareholders. Section 965 provides a temporary 85% dividends received deduction for certain dividends received from CFCs.

Finally, §1248 provides special rules for the sale of CFC stock by a U.S. shareholder. These rules have the effect of recharacterizing capital gain as ordinary income to the extent of the shareholder’s pro rata portion of the accumulated earnings and profits that have not been taxed under Subpart F.

Table of Contents

I. Introduction
II. Exclusion from Gross Income of Previously Taxed Earnings and Profits
III. Section 960 Deemed Paid Foreign Tax Credits
IV. Adjustments to Basis of CFC Stock and Other Property
V. Election by Individuals to Be Subject to Tax at Corporate Rates
VI. CFC Earnings and Profits
VII. Gain from Sale or Exchange of CFC Stock
VIII. Temporary 85% DRD for CFC Dividends

Lowell Yoder
Partner
McDermott Will & Emery LLP
Larry_R_Kemm_BTAX_Authors_042019
Larry Kemm
Carlton Fields
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