Rev. Rul. 68-522

Advice has been requested by a domestic corporation whether an amount received in excess of the distribution required under section 963 of the Internal Revenue Code of 1954 would qualify as a minimum distribution.

X , a domestic corporation, owned all the one class of stock in Y , a controlled foreign corporation as defined in section 957 of the Code. Both X and Y employed the calendar year as their taxable year. The effective foreign tax rate in the country where Y paid its income tax was 10 percent and the earnings and profits of Y in the taxable year 1966 was 100 x dollars. On March 30, 1967, Y distributed 89 percent of its 1966 earnings and profits to X and X elected to treat the distribution as a minimum distribution and included such distribution in its 1966 Federal income tax return.

Section 957(a) of the Code provides, in relevant part, that the term `controlled foreign corporation' means any foreign corporation of which more than 50 percent of the total combined voting power of all classes of stock entitled to vote is owned by United States shareholders on any day during the taxable year of such foreign corporation.

Section 963(a) of the Code provides, in relevant part, that in the case of a United States shareholder which is a domestic corporation and which consents to all the regulations prescribed by the Secretary or his delegate prior to the last day prescribed by law for filing its return of the tax imposed by chapter 1 of the Code for the taxable year, no amount shall be included in gross income under section 951(a)(1)(A)(i) of the Code for the taxable year with respect to the subpart F income of a controlled foreign corporation, if in the case of a controlled foreign corporation described in section 963(c)(1) of the Code, the United States shareholder received a minimum distribution of the earnings and profits for the taxable year of such controlled foreign corporation. Section 963(b) of the Code provides, in relevant part, that a minimum distribution with respect to the earnings and profits for the taxable year of any controlled foreign corporation shall, in the case of any United States shareholder, be its pro rata share of an amount determined in accordance with certain tables applicable to the taxable year. Section 963(b)(3) of the Code provides that if the effective foreign tax rate is 9 percent or over but less than 18 percent then the required minimum distribution of earnings and profits is 79 percent.

Section 1.963-3(a)(1) of the Income Tax Regulations states, in part, that a distribution to the United States shareholder by a single first-tier corporation shall count toward a minimum distribution for the taxable year of such shareholder to which the election under section 963 of the Code relates only to the extent that (i ) it is received by such shareholder during such year or within 180 days thereafter, (ii) it is a qualifying distribution as described in section 1.963-3(b) of the regulations, (iii) under section 1.963-3(c) of the regulations it is deemed to be distributed from the earnings and profits of the foreign corporation for the taxable year of such corporation to which the election relates, and (iv) such shareholder chooses to include it in gross income for the taxable year of such shareholder to which the election relates notwithstanding that such distribution, by reason of its receipt after the close of such year, would ordinarily be includible in the gross income of a subsequent year. Amounts taken into account under section 1.963-3(a)(1) of the regulations as gross income of the United States shareholder for the taxable year to which the election relates shall not be considered to be includible in the gross income of such shareholder for a subsequent taxable year.

Section 1.963-2(a) of the regulations states, in part, that the amount of the minimum distribution required to be received by a United States shareholder with respect to stock to which the election under section 1.963-1(c) of the regulations applies for the taxable year in order to qualify for a section 963 exclusion for such year shall be the amount, if any, determined by the multiplication of the statutory percentages applicable for the taxable year by, in the case of a first-tier election, such shareholder's proportionate share of the earnings and profits for the taxable year of the single first-tier corporation to which the election relates.

Accordingly, in the instant situation, the amount of the required minimum distribution by Y to X pursuant to section 963 of the Code was 79 x dollars for the taxable year 1966. Therefore, 10 x dollars of the distribution made to X in 1967 did not qualify as a minimum distribution and such excess was not includible in X's taxable income for 1966. Further, the 10 x dollars is to be taken into account by X as a distribution received from Y in the taxable year 1967.

¹ Also released as Technical Information Release 990, dated Sept. 4, 1968.