Subchapter N - Tax Based On Income From Sources Within Or Without The U.s. (Overview)

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Section 861

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"Income from sources within the U.S."

Interest on domestic obligations; dividends from domestic corps; compensation for services performed in the US; rents/royalties from property in the US; sale of USRPI; gains/profits/income from sale of inventory purchased outside the US, but sold in the US; and social security benefits.

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Section 862

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"Income from sources without the U.S."

Sames as 861, but in reverse.

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Section 863

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"Special rules for determining source"

Expenses allocated to income by regulation between within/without the US

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Section 864

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"Definitions and special rules"

Provides various definitions including "ECI" as wells as rules such as the basis boost for E&P of 10% owned foreign entities.

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Section 865

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"Source rules for personal property sales"

Income from sale of personal property shall be sourced to US if seller is a US resident or sourced foreign, if the seller is not.

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Section 881

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"Tax on income of foreign corporations not connected with U.S. business"

A foreign corporation is subject to a 30% (or lower treaty rate) tax on FDAP from sources within the U.S. and not effectively connected with the conduct of a U.S. trade or business.

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Section 882

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"Tax on income of foreign corporations connected with U.S. business"

A nonresident alien individual or a foreign corporation engaged in a U.S. trade or business is taxed at regular U.S. rates on U.S. source income effectively connected with that trade or business.

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Section 883

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"Exclusions from gross income"

Some items of income of foreign corporations is not taxed, such as certain shipping income, aircraft income or income derived from satelite systems.

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Section 884

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"Branch profits tax"

In addition to the tax imposed by Section 882, a foreign corporation also pays a straight 30% on the dividends it pays out (unless a treaty says otherwise).

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Section 885

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"Cross references"

*842 - Foreign Insurance Company;
*864(b) - To see if foreign corporation has ECI;
*896 - Adjustments to income of corporations of certain countries;
*906 - Credit for foreign corporation;
*1446 - Withholding tax on payments to foreign corporations.

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Section 901

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"Taxes of foreign countries and of possessions of U.S."

Domestic corporations get a credit for taxes paid (or deemed paid) to foreign countries.

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Section 902

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"Deemed paid credit where domestic coporation owns 10 percent or more of voting stock of foreign corporation"

Domestic corporation with a 10% or more interest in a foreign corporation that receives a dividend is treated as having paid a pro-rata portion of the foreign corporation's foreign taxes.

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Section 903

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"Credit for taxes in lieu of income, etc., taxes"

The term "income, war profits, and excess profits taxes" includes payments in lieu of such taxes.

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Section 904

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"Limitation on credit"

FTCs can't exceed Foreign Source Taxable Income times 35%

Note: FTC carryforward/carryback is 1/10 (904(c))

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Section 905

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"Applicable rules"

In the event that taxes accrued and claimed as a credit are subsequently adjusted (up or down) by the foreign jurisdiction, § 905(c) requires the taxpayers to give prompt notice to the Service of such action, in which case any resulting U.S. tax deficiency determined to be attributable to a refund of foreign taxes will be payable on notice and demand, 372 while any overpayment attributable to an additional payment of foreign tax will be credited or refunded in accordance with the normal refund rules of §§ 6511 through 6515.

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Section 906

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"Nonresident alien individuals and foreign corporations"

A nonresident alien individual, or a foreign corporation engaged in a U.S. trade or business is allowed a foreign tax credit for the amount of any income, war profits, and excess profits taxes paid or accrued during the tax year to any foreign country or U.S. possession with respect to income effectively connected with the conduct of a U.S. trade or business.

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Section 907

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"Special rules in case of foreign oil and gas income"

In the case of corporations, the amount of foreign oil and gas extraction income taxes (FOGEI taxes) taken into account for purposes of the foreign tax credit is limited to the amount of the foreign oil and gas extraction income (FOGEI) multiplied by the highest U.S. corporate tax rate for the tax year.

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Section 908

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"Reduction of credit for particiaption in or cooperation with an international boycott"

If a person participates in an international boycott during the tax year, the foreign tax credit as to that person is reduced by either (1) the amount of the foreign taxes paid specifically attributable to operations complying with the boycott or (2) the otherwise allowable credit times the international boycott factor.

Note: Int'l Boycott occurs when you enter into a boycott based on on race, nationality, or religion.

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Section 951

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"Amounts included in gross income of U.S. shareholders"

If a foreign corporation is a CFC for 30 or more days during the year, then any U.S. shareholder who is a shareholder on the last day of the year shall include their share of subpart F income.

(U.S. Shareholdder has 10% or more voting stock in foreign corp.)

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Section 952

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"Subpart F income defined"

Subpart F income consists of:

(1) Income from insurance or reinsurance of certain foreign risks;
(2) Foreign base company income (FBCI);
(3) Income from operations that participate in or cooperate with an international boycott;
(4) Illegal bribes, kickbacks, or other payments that would be illegal under the Foreign Corrupt Practices Act of '77 if the payer were a U.S. person;
(5) Income from any foreign country during any period that Code Sec. 901(j) (which denies a foreign tax deduction or credit with respect to certain countries) applies to such foreign country.

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Section 953

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"Insurance income"

“Insurance income” is income that (1) “is attributable to the issuing (or reinsuring) of an insurance or annuity contract”; (2) would be taxed under subchapter L (the rules for insurance companies) if the CFC was a domestic insurance company; and (3) is not “exempt insurance income.”

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Section 954

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"Foreign base company income"

FBCI is comprised of:

(1) foreign personal holding company (FPHC) income;
(2) foreign base company sales income;
(3) foreign base company services income; and
(4) foreign base company oil related income.

There is an exception for de minimis amounts, a full inclusion rule for large amounts, and an exception for income subject to high foreign taxes.

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Section 955

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"Withdrawal of previously excluded subpart F income from qualified investment"

The amount of previously excluded income withdrawn from qualified shipping investment by the CFC, that is taxable to its U.S. shareholders in a tax year is the decrease in such investments for the year. However, such income may not exceed the amounts previously excluded as qualified investments reduced by so much of such amounts as were withdrawn in prior tax years.

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Section 956

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"Investment in U.S. Property"

A U.S. shareholder of a CFC is taxed on an amount equal to the lesser of (1) the U.S. shareholder's pro rata share of the average amount of U.S. property held (directly or indirectly) by the CFC as of the close of each quarter of the taxable year, less that portion of the CFC's E&P attributable to amounts included previously in that shareholder's gross income on account of investment in U.S. property or (2) that shareholder's pro rata share of the CFC's applicable earnings.

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Section 957

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"Controlled foreign corporations"

A foreign corporation is a CFC if more than 50% is met on any day during its tax year.

US Person is generally the same as the 7701(a)(30) definition - US Citizen, dom. corp., dom. pship, estate (not foreign) and a trust if under US jurisdiction.

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Section 958

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"Rules for determining stock ownership"

This section applies the constructive ownership rules of 318(a) and pro-rata lookthrough for foreign corps/pships/benes for purposes of 951(b), 954(d)(3), 956(c)(2) and 957.

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Section 959

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"Exclusion from gross income of previously taxed E&P"

When PTI is distributed, its not taxed.

Note: 959(c)(3) sets up the PTI pool.

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Section 960

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"Special rules for foreign tax credit"

Any amount included in gross income of the U.S. corporation as a distribution from E&P of CFC which is a member of the 902(a) qualified group is generally treated as a dividend for FTC purposes.

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Section 961

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"Adjustments to basis of stock in controlled foreign corporations and of other property"

Subpart F income increases your basis in CFC stock; distributions of PTI decreases your stock basis.

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Section 962

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"Election by individuals to be subject to tax at corporate rates"

An individual U.S. shareholder of a CFC can elect to be taxed as a domestic corporation on the CFC's undistributed income that is attributed to him. This means that the Code Sec. 11 U.S. corporate tax rates will apply to that income. And, the individual will be entitled to the Code Sec. 902 deemed paid foreign tax credit, which is normally available only to U.S. corporate shareholders.

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Section 964

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"Misc. provisions"

Various rules provided, including: (1) that the E&P of a foriegn corporation is computed under 312; (2) rules regarding blocked foreign income; (3) rules regarding foreign branches.

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Section 965

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"Temporary DRD"

Provided a one-time DRD for CFCs equal to 85% of the dividend.

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Section 985

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"Functional currency"

The basic mechanism for dealing with foreign currency transactions of U.S. taxpayers is the functional currency concept. Unless otherwise provided in regs to be issued, all U.S. taxpayers must make all federal income tax determinations in their functional currency. The term “functional currency” means the dollar, except for certain qualified business units (QBUs).

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Section 986

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"Determination of foreign taxes and foreign corporation E&P"

Generally, accrual method taxpayers determine their foreign taxes and foreign E&P by translating foreign income taxes at the average exchange rate for the tax year to which the taxes relate.

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Section 987

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"Branch transactions"

Any taxpayer having one or more QBUs with a functional currency other than the dollar must compute separately the taxable income or loss for each QBU in its functional currency.

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Section 988

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"Treatment of certain foreign currency transactions"

If a transaction (other than a forward, future, option, swap, or similar derivative) is subject to the Section 988 foreign currency rules, any foreign currency gain or loss attributable to the transaction is computed separately (i.e., effectively bifurcated from any other gain or loss recognized with respect to the transaction) and generally treated as ordinary income or loss, as the case may be.

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Section 991

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"Taxation of DISC"

A DISC is exempt from all federal income taxes. Thus, a DISC is exempt not only from the regular corporate income tax but also is exempt from the minimum tax on tax preferences and the accumulated earnings tax.

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Section 992

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"Requirements of DISC"

For a corporation to qualify as a DISC, at least 95 percent of its gross receipts must be qualified export receipts, and 95 percent of its assets must be qualified export assets.

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Section 993

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"Definitions"

Lots of definitions here, such as: (1) qualified export receipts; (2) qualified export assets; (3) export property, etc.

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Section 994

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"Inter-company pricing rules"

The special pricing rules apply to sales made to a DISC by a related person. They don't apply to sales to a DISC by an unrelated person, or to sales by a DISC to any person, whether related or unrelated. Thus, sales by a DISC to a related person are subject to the regular Code Sec. 482 rules. This prevents, for example, the diversion of income to foreign subs by underpricing on sales by a DISC to foreign affiliates.

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Section 995

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"Taxation of DISC income to shareholders"

A qualifying DISC may defer part of the federal tax on income from exports. However, the shareholders of a DISC are taxable currently on part of the profits and may generally defer taxation on the remaining part until the profits are withdrawn from the DISC or until the corporation ceases to qualify as a DISC.

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Section 996

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"Rules for allocation in the case of distributions and losses"

As explained in detail below, actual dividends or distributions to a DISC stockholder aren't taxed to the extent he was already taxed on undistributed DISC income. Where actual distributions exceed the amount on which the stockholder was previously taxed, the excess is taxed to the stockholder when received.

Except for distributions to qualify as a DISC (see below) and distributions on disposition of stock such as stock redemptions, actual distributions out of DISC E&P are treated as made—

(1) out of previously taxed income, to the extent thereof,
(2) out of accumulated DISC income, to the extent thereof, and
(3) out of other E&P.

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Section 997

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"Special subchapter C rules"

The amount of a distribution of property to a corporate stockholder by a DISC (or former DISC) is measured by the fair market value of the property to the extent the distribution is made out of previously taxed income or accumulated DISC income, as if the distribution had been made to an individual. The basis of the distributed property in the hands of the corporate distributee is its fair market value.

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Section 999

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"Reports by taxpayers; determinations"

In 1976, in an effort to discourage U.S. businesses from honoring the Arab boycott of Israel, Congress enacted § 999 , which penalizes a wide range of acts of participation in or cooperation with international boycotts and requires operations in a boycotting country or with its government, companies, or nationals to be reported to the Treasury.