REVENUE RULE 90-31

1990-1 C.B. 147, 1990-15 I.R.B. 19.

Internal Revenue Service
Revenue Ruling

EFFECT ON SECTION 1248 COMPUTATIONS OF DIVIDENDS PAID IN YEAR OF SALE

Published: April 9, 1990

Section 959. - Exclusion From Gross Income Of Previously Taxed Earnings and Profits, 26 CFR 1.959-1: Exclusion from gross income of United States persons of previously taxed earnings and profits.

(Also Section 1248; 1.1248-1.)

Effect on Section 1248 computations of dividends paid in year of sale. Earnings and profits of a controlled foreign corporation are decreased by amounts previously included in gross income of the transferor shareholder as a dividend under section 1248 of the Code at the time of the actual distribution of the section 951(a)(1)(A) amount attributable to such section 1248 dividend. Rev. Rul. 71-388 modified and Rev. RUl. 83-182 obsoleted.

ISSUE

Are the earnings and profits of a controlled foreign corporation decreased by the amount of gain from the sale of its stock that is treated as a dividend under section 1248 of the Internal Revenue Code of 1986?

LAW AND ANALYSIS

Rev. Rul. 71-388, 1971-2 C.B. 314, holds, in part, that the earnings and profits of a controlled foreign corporation are not decreased by the amount of gain from the sale of its stock that is treated as a dividend under section 1248 of the Code. Rev. Rul. 83-182, 1983-2 C.B. 149, suspends that part of Rev. Rul. 71-388, pending resolution of the issue.

The issue has now been resolved by amendments to section 959 of the Code. Section 959(e) was added by section 133(b)(1) of the Tax Reform Act of 1984, 1984-3 (Vol. 1) C.B. 175, 176. Section 959(e) provides, in part, that any amount included in the gross income of any person as a dividend by reason of subsection 1248(a) or (f) will be treated for purposes of section 959(a) as an amount included in the gross income of such person under section 951(a)(1)(A). H.R. Conf. Rep. No. 861, 98th Cong., 2d Sess. 960 (1984) 1984-3 (Vol. 2) C.B. 214. Section 959(a) provides that earnings and profits for a taxable year of a foreign corporation attributable to amounts included in the gross income of a U.S. shareholder under section 951(a) will not be included again in gross income when such amounts are distributed or would otherwise be included in gross income under section 951(a)(1)(B). Section 1226(b) of the Tax Reform Act of 1986, 1986-3 (Vol. 1) C.B. 476, 477, amended section 959(d) to clarify that distributions excluded from gross income under section 959(a) will immediately reduce earnings and profits. H.R. Conf. Rep. No. 841, 99th Cong., 2d Sess. 629(1986), 1986-3 (Vol. 4) C.B. 629.

Thus, if a transferor shareholder includes an amount in gross income as a dividend under section 1248 of the Code, the earnings and profits of the controlled foreign corporation are not reduced at the time of the recognition of the dividend amount. Instead, under section 959(e), an account under section 951(a)(1)(A) in the amount of the dividend is established on behalf of the transferee shareholder as if that amount had been included in gross income under section 951(a)(1)(A). See section 1.959-1(d) of the Income Tax regulations. When an amount is actually distributed to the transferee shareholder, the amounts previously taxed under section 951(a)(1)(A) are deemed to be distributed first. The amount previously taxed to the transferor shareholder as a dividend under section 1248 is treated as a section 951(a)(1)(A) amount and, thus, is not taxed again to the transferee shareholder when actually distributed. (The transferee shareholder, however, must satisfy the district director that the transferee shareholder is eligible for an exclusion from gross income under section 959(a). See section 1.959-1(d).) The earnings and profits of the controlled foreign corporation are reduced under section 959(d) at the time of the actual distribution of the section 951(a)(1)(A) amount attributable to the section 1248 dividend. H.R. Rep. No. 432, Part 2, 98th Cong. 2d Sess. 1327 (1984).

The transferor shareholder is allowed a foreign tax credit under section 902 of the Code if it is a domestic corporation that, on the date of the sale or exchange, directly owns at least 10 percent of the voting stock of the foreign corporation. The credit is for foreign taxes paid or accrued with respect to earnings and profits to the extent such earnings and profits result in the recharacterization of gain realized by the transferor shareholder on the transfer as a dividend under section 1248. See section 1.1248-l(d) of the regulations. The transferee shareholder is not allowed a foreign tax credit for foreign taxes paid or accrued with respect to earnings that result in the recharacterization of the transferor's gain as a dividend (whether or not such foreign taxes were deemed paid by the transferor under section 902).

HOLDING

Earnings and profits of a controlled foreign corporation are decreased by amounts previously included in gross income of the transferor shareholder as a dividend under section 1248 of the Code at the time of the actual distribution of the section 951(a)(1)(A) amount attributable to such section 1248 dividend. A transferee shareholder is not allowed a foreign tax credit at the time of such actual distribution for foreign taxes paid or accrued with respect to earnings that result in the recharacterization of the transferor's gain as a dividend (whether or not such foreign taxes were deemed paid by the transferor under section 902).

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 71-388 is modified. Rev. Rul. 83-182 is obsolete.

DRAFTING INFORMATION

The principal author of this revenue ruling is Carol P. Tello of the Office of Associate Chief Counsel (International). For further information regarding the revenue ruling, please telephone Ms. Tello on 202-377-9059 (not a toll-free call).

Rev. Rul. 90-31, 1990-1 C.B. 147, 1990-15 I.R.B. 19.