Rev. Rul. 84-6
1984-1 C.B. 178.
Internal Revenue Service
Revenue Ruling
DOMESTIC CORPORATE SHAREHOLDER; STOCK OWNERSHIP REQUIREMENT
Published: January 9, 1984
SECTION 902. - -CREDIT FOR CORPORATE STOCKHOLDER IN FOREIGN CORPORATION, 26 CFR 1.902-1: Credit for domestic corporate shareholder of a foreign corporation
Domestic corporate shareholder; stock ownership requirement. The ten percent voting stock ownership requirement of section 902 is determined on the basis of owning voting stock in a foreign corporation possessing at least ten percent of the total combined voting power of all shares of that corporation's voting stock.
ISSUE
Whether the 10 percent voting stock ownership requirement of section 902 of the Internal Revenue Code is satisfied in the situations described below?
FACTS
Situation 1: FX, a foreign corporation, has outstanding 100 shares of voting stock divided into two classes: 95 shares of Class A stock and 5 shares of Class B stock. The two classes of voting stock are identical in all respects except that the Class A stock, voting as a class, has the right to elect nine of the ten members on FX's board of directors and the Class B stock, voting as a class, has the right to elect one of FX's ten directors. X, a domestic corporation, owns all the Class A stock. Y, a domestic corporation unrelated to X, owns all the Class B stock.
Situation 2: FZ, a foreign corporation, has outstanding 200 shares of voting stock divided into two classes: 100 shares of Class C stock and 100 shares of Class D stock. The two classes of stock are identical in all respects except that each share of Class C stock has one vote for the election of directors and each share of Class D stock has two votes for the election of directors. Z, a domestic corporation, owns 20 shares of the Class C stock. The remainder of the Class C and Class D stock is owned by unrelated United States persons none of which owns more than 10 shares of either class of stock.
LAW AND ANALYSIS
Section 902(a) of the Code provides, in general, that a domestic corporation that owns at least ten percent of the voting stock of a foreign corporation from which it receives a dividend paid out of the accumulated profits of the foreign corporation shall be deemed to have paid a certain portion of any foreign income tax paid or deemed to have been paid by such foreign corporation on or with respect to such accumulated profits.
Section 902(b)(1) of the Code provides that if the foreign corporation described in section 902(a) owns ten percent or more of the voting stock of a second foreign corporation from which it receives a dividend paid out of the accumulated profits of the second foreign corporation, it shall be deemed to have paid a certain portion of any foreign income tax paid or deemed to have been paid by the second foreign corporation on or with respect to such accumulated profits.
Section 902(b)(2) of the Code provides that if the foreign corporation described in section 902(a) owns ten percent or more of the voting stock of a second foreign corporation which, in turn, owns ten percent or more of the voting stock of a third foreign corporation from which the second foreign corporation receives a dividend paid out of the accumulated profits of the third foreign corporation, the second foreign corporation shall be deemed to have paid a certain portion of any income taxes paid by the third foreign corporation on or with respect to such accumulated profits.
Neither section 902 of the Code nor the Income Tax Regulations thereunder indicate whether the ten percent voting stock ownership requirement, set forth in the underlined phrases above, is satisfied by ownership of at least ten percent of the (a) number, (b) value, or (c) voting power of all shares of stock of the foreign corporation entitled to vote. The more recent legislative history of section 902, however, defines that section's voting stock ownership requirement in terms of voting power. Specifically, when Congress enacted Pub.L. No. 91-684, 1971-1 C.B. 550, it amended section 902 in two ways: first, the voting stock ownership requirement in section 902(b)(1) was reduced from 50 percent to 10 percent; second, the predecessor to the current section 902(b)(2) was added to the Code, and it too imposed a 10 percent voting stock ownership requirement. In making these amendments Congress continued its use of the term "voting stock" in defining the stock ownership requirement imposed. Congress, in its explanation of these amendments, expressly stated that the "voting stock" ownership requirement is to be determined by "voting power". H.R.Rep.No. 91-1739, 91st Cong., 2d Sess. 3 (1970); and S.Rep.No. 91-1527, 91st Cong., 2d Sess. 3 (1970), 1971-1 C.B. 615, 616.
Since Congress intended that the "voting stock" ownership requirement of section 902(b) be determined by voting power, it is
reasonable to conclude that Congress had the same intent in using the identical term, that is "voting stock", in section 902(a).
The voting power held by a shareholder of any class of stock is the shareholder's proportionate share of the percentage of the total number of directors that that class of stock is entitled to elect as a class. See section 1.951-1(g)(2) of the regulations.
Thus, in Situation 1, X will be considered to own 90 percent of the voting stock of FX because X owns all the Class A stock and this class of voting stock is entitled to elect, as a class, 90 percent of FX's directors. Y will be considered to own 10 percent of the voting stock of FX because Y owns all the Class B stock and this class of voting stock is entitled to elect, as a class, 10 percent of FX's directors. Therefore, both X and Y will satisfy the voting stock ownership requirement of section 902(a) of the Code.
In Situation 2, Z will be considered to own only 6.67% of the voting stock of FZ since the Class C stock, as a class, constitutes one third of the voting power of all the FZ voting stock and Z owns only 20 percent of the Class C shares.
HOLDINGS
In Situation 1, both X and Y satisfy the 10 percent ownership requirement of section 902 of the Code.
In Situation 2, Z does not satisfy the 10 percent ownership requirement of section 902 of the Code.
Rev. Rul. 84-6, 1984-1 C.B. 178.