26 U.S.C. § 1248 — Gain from certain sales or exchanges of stock in certain foreign corporations
submitted 64 years ago by Pub. L. 87-834 to r/title-26-INTERNAL-REVENUE-CODE · 2,150 words · no verdicts yet
This section treats some gain from a United States person’s sale or exchange of stock in a controlled foreign corporation as a dividend. It also sets rules for calculating the relevant earnings and profits, exclusions, tax limits, nonrecognition transactions, and certain indirect transfers.
(a) General rule. If a United States person* sells or exchanges stock* in a foreign corporation*, and the person owned, or is treated as owning under section 958(b), at least 10 percent of the voting power of all voting classes of that corporation at some time during the 5-year period ending on the sale or exchange while the corporation was a controlled foreign corporation* under section 957, the recognized gain is included in the person’s gross income as a dividend. This applies only up to the amount of the foreign corporation’s earnings and profits attributable to that stock under regulations prescribed by the Secretary*. Those earnings and profits must have accumulated in taxable years beginning after December 31, 1962, during periods when the person held the stock and the corporation was a controlled foreign corporation. For this section, the person is treated as having sold or exchanged stock whenever another provision of this subtitle treats the person as realizing gain from its sale or exchange.
(b) Limitation on tax applicable to individuals. If the person is an individual, the stock is a capital asset under section 1221, and the person held it for more than 1 year, the tax on the amount treated as a dividend under subsection (a) cannot be more than a tax equal to the following two amounts added together:
(1) The person’s pro rata share of the excess of—
(A) the taxes the foreign corporation would have paid on its income if it had been taxed under this chapter as a domestic corporation, without deducting or crediting the taxes described in subparagraph (B), for the periods when the person held the stock in taxable years beginning after December 31, 1962 while the corporation was a controlled foreign corporation, adjusted for distributions and amounts previously included in a United States shareholder’s gross income under section 951; over
(B) the foreign corporation’s income, war-profits, or excess-profits taxes paid on that income; and
(2) the tax that would result from treating as long-term capital gain from the sale or exchange of a capital asset held more than 1 year an amount equal to the excess of—
(A) the amount treated as a dividend under subsection (a); over
(B) the amount determined under paragraph (1).
(c) Determination of earnings and profits.
(1) In general. Except as provided in section 312(k)(4), the earnings and profits of a foreign corporation for a taxable year* are determined under rules substantially similar to the rules for domestic corporations, under regulations prescribed by the Secretary.
(2) Earnings and profits of subsidiaries of foreign corporations. This paragraph applies if subsection (a) or (f) applies to a United States person’s sale, exchange, or distribution of foreign-corporation stock, and ownership of that stock caused the person to own stock of another foreign corporation under section 958(a)(2). It also requires that the person owned, or is treated as owning under section 958(b), at least 10 percent of the voting power of all voting classes of the other corporation at some time during the 5-year period ending on the sale or exchange while the other corporation was a controlled foreign corporation under section 957. In that case, the earnings and profits of the foreign corporation whose stock was sold or exchanged, to the extent attributable to that stock, are treated as including the other corporation’s earnings and profits that—
(C) are attributable under the Secretary’s regulations to the other corporation’s stock that the person owned under section 958(a)(2) because of the person’s ownership under section 958(a)(1)(A) of the stock sold or exchanged. This includes stock owned on the sale or exchange date, or stock sold or exchanged during the 5-year period ending on the sale or exchange of the first corporation’s stock, to the extent the earnings and profits were not otherwise taken into account under this section. But the amount included cannot exceed the fair market value of the other corporation’s stock sold or exchanged minus the transferor’s basis in that stock for determining gain; and
(D) accumulated in taxable years of the other corporation beginning after December 31, 1962, during periods when—
(i) the other corporation was a controlled foreign corporation; and
(ii) the person owned the other corporation’s stock under section 958(a).
(d) Exclusions from earnings and profits. For this section, the following amounts are excluded from a foreign corporation’s earnings and profits for any United States person:
(1) Amounts included in gross income under section 951. The foreign corporation’s earnings and profits attributable to an amount previously included in that person’s gross income under section 951 with respect to the stock sold or exchanged are excluded, but only to the extent that including the amount did not exclude an amount from gross income under section 959.
(2) Repealed. Paragraph (2) is repealed.
(3) Less developed country corporations under prior law. Earnings and profits accumulated during a taxable year beginning before January 1, 1976, while the corporation was a less developed country corporation under section 902(d), as that section existed before the Tax Reduction Act of 1975 was enacted.
(4) United States income. Any item included in the foreign corporation’s gross income under this chapter—
(A) for a taxable year beginning before January 1, 1967, as income from sources within the United States of a foreign corporation engaged in a trade or business* in the United States; or
(B) for a taxable year beginning after December 31, 1966, as income effectively connected with the corporation’s conduct of a trade or business in the United States.
This paragraph does not apply to an item that is exempt from tax, or subject to a reduced tax rate, under a treaty obligation of the United States.
(5) Foreign trade income. The foreign corporation’s earnings and profits attributable to foreign trade income of a FSC, as defined in section 922, are excluded, except for foreign trade income that—
(A) is section 923(a)(2) non-exempt income, within the meaning of section 927(d)(6); or
(B) would not be treated as exempt foreign trade income but for section 923(a)(4).
For the preceding sentence, “foreign trade income” and “exempt foreign trade income” have the meanings given to those terms by section 923. This section does not otherwise define those terms. Any reference here to section 922, 923, or 927 means the section as it existed before its repeal by the FSC Repeal and Extraterritorial Income Exclusion Act of 2000.
(6) Amounts included in gross income under section 1293. The foreign corporation’s earnings and profits attributable to an amount previously included in that person’s gross income under section 1293 for the stock sold or exchanged are excluded, but only to the extent that including the amount did not exclude an amount under section 1293(c).
(e) Sales or exchanges of stock in certain domestic corporations. Unless the Secretary’s regulations provide otherwise, a United States person’s sale or exchange of domestic-corporation stock is treated for this section as a sale or exchange of the stock of the foreign corporation or corporations held by the domestic corporation if the domestic corporation was formed or used mainly to hold, directly or indirectly, stock of one or more foreign corporations.
(f) Certain nonrecognition transactions. Unless the Secretary’s regulations provide otherwise:
(1) In general. If a domestic corporation satisfies subsection (a)(2)’s stock-ownership requirements for a foreign corporation and distributes that foreign corporation’s stock in a distribution covered by section 311(a), 337, 355(c)(1), or 361(c)(1), the domestic corporation must include in gross income, as a dividend, the fair market value of the stock minus its adjusted basis in the domestic corporation’s hands. This applies only up to the foreign corporation’s earnings and profits attributable to the stock under the Secretary’s regulations that accumulated in taxable years beginning after December 31, 1962, during periods when the domestic corporation held the stock and the foreign corporation was a controlled foreign corporation. For subsections (c)(2), (d), and (h), the distribution is treated as a sale of stock to which subsection (a) applies.
(2) Exception for certain distributions. Paragraph (1) does not apply to a distribution of foreign-corporation stock to a domestic corporation if—
(A) that recipient is treated under this section as holding the stock for the period the distributing corporation held it; and
(B) immediately after the distribution, the recipient satisfies subsection (a)(2)’s stock-ownership requirements for the foreign corporation.
(3) Application to cases described in subsection (e). To the extent earnings and profits are counted under this subsection, they are excluded and not counted for subsection (e).
(g) Exceptions. This section does not apply to—
(1) a distribution covered by section 303, concerning a distribution to redeem stock to pay death taxes; or
(2) an amount that another provision of this title treats as—
(A) a dividend, other than an amount treated as a dividend under subsection (f);
(B) ordinary income; or
(C) gain from selling an asset held for not more than 1 year.
(h) Taxpayer* to establish earnings and profits. Unless the taxpayer establishes the foreign corporation’s earnings and profits to be counted under subsection (a) or (f), all gain from the sale or exchange is treated as a dividend under subsection (a) or (f). Unless the taxpayer establishes the foreign taxes to be counted under subsection (b), the limitation in subsection (b) does not apply.
(i) Treatment of certain indirect transfers.
(1) In general. If a shareholder* of a 10-percent corporate shareholder of a foreign corporation exchanges stock of that 10-percent corporate shareholder for stock of the foreign corporation, the 10-percent corporate shareholder recognizes gain as if the foreign-corporation stock received had first been issued to it and then distributed by it to the shareholder in a redemption or liquidation, whichever is appropriate. The gain recognized cannot exceed the amount treated as a dividend under this section.
(2) 10-percent corporate shareholder defined. For this subsection, “10-percent corporate shareholder” means a domestic corporation that, on the day before the exchange described in paragraph (1), satisfies subsection (a)(2)’s stock-ownership requirements for the foreign corporation. This section does not otherwise define the term.
(j) Coordination with dividends received deduction. When a domestic corporation sells or exchanges stock in a foreign corporation that it held for at least 1 year, any amount it receives that this section treats as a dividend is treated as a dividend when applying section 245A.
(k) Cross reference. Section 959(e) provides the rule excluding from gross income, when later distributed, amounts previously taxed under this section.
If—
a United States person* sells or exchanges stock* in a foreign corporation*, and
such person owns, within the meaning of section 958(a), or is considered as owning by applying the rules of ownership of section 958(b), 10 percent or more of the total combined voting power of all classes of stock entitled to vote of such foreign corporation at any time during the 5-year period ending on the date of the sale or exchange when such foreign corporation was a controlled foreign corporation* (as defined in section 957),
then the gain recognized on the sale or exchange of such stock shall be included in the gross income of such person as a dividend, to the extent of the earnings and profits of the foreign corporation attributable (under regulations prescribed by the Secretary*) to such stock which were accumulated in taxable years of such foreign corporation beginning after December 31, 1962, and during the period or periods the stock sold or exchanged was held by such person while such foreign corporation was a controlled foreign corporation. For purposes of this section, a United States person shall be treated as having sold or exchanged any stock if, under any provision of this subtitle, such person is treated as realizing gain from the sale or exchange of such stock.
In the case of an individual, if the stock sold or exchanged is a capital asset (within the meaning of section 1221) and has been held for more than 1 year, the tax attributable to an amount included in gross income as a dividend under subsection (a) shall not be greater than a tax equal to the sum of—
a pro rata share of the excess of—
the taxes that would have been paid by the foreign corporation with respect to its income had it been taxed under this chapter as a domestic corporation (but without allowance for deduction of, or credit for, taxes described in subparagraph (B)), for the period or periods the stock sold or exchanged was held by the United States person in taxable years beginning after December 31, 1962, while the foreign corporation was a controlled foreign corporation, adjusted for distributions and amounts previously included in gross income of a United States shareholder* under section 951, over
the income, war profits, or excess profits taxes paid by the foreign corporation with respect to such income; and
an amount equal to the tax that would result by including in gross income, as gain from the sale or exchange of a capital asset held for more than 1 year, an amount equal to the excess of (A) the amount included in gross income as a dividend under subsection (a), over (B) the amount determined under paragraph (1).
Except as provided in section 312(k)(4), for purposes of this section, the earnings and profits of any foreign corporation for any taxable year* shall be determined according to rules substantially similar to those applicable to domestic corporations, under regulations prescribed by the Secretary.
If—
subsection (a) or (f) applies to a sale, exchange, or distribution by a United States person of stock of a foreign corporation and, by reason of the ownership of the stock sold or exchanged, such person owned within the meaning of section 958(a)(2) stock of any other foreign corporation; and
such person owned, within the meaning of section 958(a), or was considered as owning by applying the rules of ownership of section 958(b), 10 percent or more of the total combined voting power of all classes of stock entitled to vote of such other foreign corporation at any time during the 5-year period ending on the date of the sale or exchange when such other foreign corporation was a controlled foreign corporation (as defined in section 957),
then, for purposes of this section, the earnings and profits of the foreign corporation the stock of which is sold or exchanged which are attributable to the stock sold or exchanged shall be deemed to include the earnings and profits of such other foreign corporation which—
are attributable (under regulations prescribed by the Secretary) to the stock of such other foreign corporation which such person owned within the meaning of section 958(a)(2) (by reason of his ownership within the meaning of section 958(a)(1)(A) of the stock sold or exchanged) on the date of such sale or exchange (or on the date of any sale or exchange of the stock of such other foreign corporation occurring during the 5-year period ending on the date of the sale or exchange of the stock of such foreign corporation, to the extent not otherwise taken into account under this section but not in excess of the fair market value of the stock of such other foreign corporation sold or exchanged over the basis of such stock (for determining gain) in the hands of the transferor); and
were accumulated in taxable years of such other corporation beginning after December 31, 1962, and during the period or periods—
such other corporation was a controlled foreign corporation, and
such person owned within the meaning of section 958(a) the stock of such other foreign corporation.
For purposes of this section, the following amounts shall be excluded, with respect to any United States person, from the earnings and profits of a foreign corporation:
Earnings and profits of the foreign corporation attributable to any amount previously included in the gross income of such person under section 951, with respect to the stock sold or exchanged, but only to the extent the inclusion of such amount did not result in an exclusion of an amount from gross income under section 959.
Earnings and profits of a foreign corporation which were accumulated during any taxable year beginning before January 1, 1976, while such corporation was a less developed country corporation under section 902(d) as in effect before the enactment of the Tax Reduction Act of 1975.
Any item includible in gross income of the foreign corporation under this chapter—
for any taxable year beginning before January 1, 1967, as income derived from sources within the United States of a foreign corporation engaged in trade or business* within the United States, or
for any taxable year beginning after December 31, 1966, as income effectively connected with the conduct by such corporation of a trade or business within the United States.
This paragraph shall not apply with respect to any item which is exempt from taxation (or is subject to a reduced rate of tax) pursuant to a treaty obligation of the United States.
Earnings and profits of the foreign corporation attributable to foreign trade income of a FSC (as defined in section 922) other than foreign trade income which—
is section 923(a)(2) non-exempt income (within the meaning of section 927(d)(6)), or
would not (but for section 923(a)(4)) be treated as exempt foreign trade income.
For purposes of the preceding sentence, the terms “foreign trade income” and “exempt foreign trade income” have the respective meanings given such terms by section 923. Any reference in this paragraph to section 922, 923, or 927 shall be treated as a reference to such section as in effect before its repeal by the FSC Repeal and Extraterritorial Income Exclusion Act of 2000.
Earnings and profits of the foreign corporation attributable to any amount previously included in the gross income of such person under section 1293 with respect to the stock sold or exchanged, but only to the extent the inclusion of such amount did not result in an exclusion of an amount under section 1293(c).
Except as provided in regulations prescribed by the Secretary, if—
a United States person sells or exchanges stock of a domestic corporation, and
such domestic corporation was formed or availed of principally for the holding, directly or indirectly, of stock of one or more foreign corporations,
such sale or exchange shall, for purposes of this section, be treated as a sale or exchange of the stock of the foreign corporation or corporations held by the domestic corporation.
Except as provided in regulations prescribed by the Secretary—
If—
a domestic corporation satisfies the stock ownership requirements of subsection (a)(2) with respect to a foreign corporation, and
such domestic corporation distributes stock of such foreign corporation in a distribution to which section 311(a), 337, 355(c)(1), or 361(c)(1) applies,
then, notwithstanding any other provision of this subtitle, an amount equal to the excess of the fair market value of such stock over its adjusted basis in the hands of the domestic corporation shall be included in the gross income of the domestic corporation as a dividend to the extent of the earnings and profits of the foreign corporation attributable (under regulations prescribed by the Secretary) to such stock which were accumulated in taxable years of such foreign corporation beginning after December 31, 1962, and during the period or periods the stock was held by such domestic corporation while such foreign corporation was a controlled foreign corporation. For purposes of subsections (c)(2), (d), and (h), a distribution of stock to which this subsection applies shall be treated as a sale of stock to which subsection (a) applies.
In the case of any distribution of stock of a foreign corporation, paragraph (1) shall not apply if such distribution is to a domestic corporation—
which is treated under this section as holding such stock for the period for which the stock was held by the distributing corporation, and
which, immediately after the distribution, satisfies the stock ownership requirements of subsection (a)(2) with respect to such foreign corporation.
To the extent that earnings and profits are taken into account under this subsection, they shall be excluded and not taken into account for purposes of subsection (e).
This section shall not apply to—
distributions to which section 303 (relating to distributions in redemption of stock to pay death taxes) applies; or
any amount to the extent that such amount is, under any other provision of this title, treated as—
a dividend (other than an amount treated as a dividend under subsection (f)),
ordinary income, or
gain from the sale of an asset held for not more than 1 year.
Unless the taxpayer establishes the amount of the earnings and profits of the foreign corporation to be taken into account under subsection (a) or (f), all gain from the sale or exchange shall be considered a dividend under subsection (a) or (f), and unless the taxpayer establishes the amount of foreign taxes to be taken into account under subsection (b), the limitation of such subsection shall not apply.
If any shareholder* of a 10-percent corporate shareholder of a foreign corporation exchanges stock of the 10-percent corporate shareholder for stock of the foreign corporation, such 10-percent corporate shareholder shall recognize gain in the same manner as if the stock of the foreign corporation received in such exchange had been—
issued to the 10-percent corporate shareholder, and
then distributed by the 10-percent corporate shareholder to such shareholder in redemption or liquidation (whichever is appropriate).
The amount of gain recognized by such 10-percent corporate shareholder under the preceding sentence shall not exceed the amount treated as a dividend under this section.
For purposes of this subsection, the term “10-percent corporate shareholder” means any domestic corporation which, as of the day before the exchange referred to in paragraph (1), satisfies the stock ownership requirements of subsection (a)(2) with respect to the foreign corporation.
In the case of the sale or exchange by a domestic corporation of stock in a foreign corporation held for 1 year or more, any amount received by the domestic corporation which is treated as a dividend by reason of this section shall be treated as a dividend for purposes of applying section 245A.
For provision excluding amounts previously taxed under this section from gross income when subsequently distributed, see section 959(e).
Source credit: (Added Pub. L. 87–834, § 15(a), Oct. 16, 1962, 76 Stat. 1041; amended Pub. L. 89–809, title I, § 104(k), Nov. 13, 1966, 80 Stat. 1562; Pub. L. 91–172, title IV, § 442(b)(2), Dec. 30, 1969, 83 Stat. 628; Pub. L. 94–455, title X, §§ 1022(a), 1042(b), (c)(1), (3), title XIV, § 1402(b)(1)(Y), (2), title XIX, §§ 1901(b)(3)(H), (32)(B)(iii), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1619, 1636, 1637, 1732, 1793, 1800, 1834; Pub. L. 97–448, title I, § 102(c)(1), Jan. 12, 1983, 96 Stat. 2370; Pub. L. 98–369, div. A, title I, § 133(a), (b)(2), (c), title VIII, § 801(d)(6), title X, § 1001(b)(22), (e), July 18, 1984, 98 Stat. 667, 668, 996, 1012; Pub. L. 99–514, title VI, § 631(d)(2), title XVIII, §§ 1810(i)(1), 1875(g)(1), 1876(a)(2), Oct. 22, 1986, 100 Stat. 2272, 2829, 2897; Pub. L. 100–647, title I, §§ 1006(e)(14), 1012(p)(19), Nov. 10, 1988, 102 Stat. 3402, 3518; Pub. L. 104–188, title I, § 1702(g)(1), Aug. 20, 1996, 110 Stat. 1872; Pub. L. 108–357, title IV, § 413(c)(22), Oct. 22, 2004, 118 Stat. 1509; Pub. L. 110–172, § 11(g)(17), Dec. 29, 2007, 121 Stat. 2491; Pub. L. 115–97, title I, § 14102(a)(1), Dec. 22, 2017, 131 Stat. 2192.)
- 1962Enacted · Pub. L. 87-834 · 76 Stat. 1041
- 1966Amended · Pub. L. 89-809 · 80 Stat. 1562
- 1969Amended · Pub. L. 91-172 · 83 Stat. 628
- 1976Amended · Pub. L. 94-455 · 90 Stat. 1619, 1636, 1637, 1732, 1793, 1800, 1834
- 1983Amended · Pub. L. 97-448 · 96 Stat. 2370
- 1984Amended · Pub. L. 98-369 · 98 Stat. 667, 668, 996, 1012
- 1986Amended · Pub. L. 99-514 · 100 Stat. 2272, 2829, 2897
- 1988Amended · Pub. L. 100-647 · 102 Stat. 3402, 3518
- 1996Amended · Pub. L. 104-188 · 110 Stat. 1872
- 2004Amended · Pub. L. 108-357 · 118 Stat. 1509
- 2007Amended · Pub. L. 110-172 · 121 Stat. 2491
- 2017Amended · Pub. L. 115-97 · 131 Stat. 2192
A history note hasn’t been published yet. The record shows enactment by Pub. L. 87-834 on 1962-10-16.
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