Rev. Rul. 68-477

Advice has been requested whether, under the circumstances described below, there will be separate taxable years of the controlled foreign corporation ending with or within the taxable year of a United States shareholder which is a domestic corporation for purposes of the minimum distribution provisions of section 963 of the Internal Revenue Code of 1954 and whether the minimum distribution requirement has to be met for each of such years.

During its taxable year, X , a domestic corporation, owned all of the only class of outstanding stock of Y , a controlled foreign corporation within the meaning of section 957 of the Code. X reports its income on a calendar year basis. Y reported its income on a fiscal year basis ending November 30 but was granted permission by the Commissioner of Internal Revenue to change to a calendar year basis ending December 31. As a result, under section 441 of the Code, Y had two taxable years ending with or within the calendar year of X -the fiscal year ending November 30 and the short period beginning December 1 and ending December 31. X elected under section 1.963-1 of the Income Tax Regulations, to exclude from its gross income for its taxable year in which both the fiscal year and the short period of Y ended the income which would have been includible under section 951(a)(1)(A)(i) of the Code with respect to the subpart F income of Y for the taxable year of Y which ends within or with the taxable year of X , subject to receipt by X of the required minimum distribution of the earnings and profits of Y for such taxable year.

Section 951(a)(1)(A)(i) of the Code, in part, requires every person who is a United States shareholder, as defined in section 951(b) of the Code, of a controlled foreign corporation to include in his gross income for his taxable year in which or with which the taxable year of the foreign corporation ends the subpart F income of the foreign corporation for such year.

Section 963 of the Code is a relief provision which sets forth an exception to section 951(a)(1)(A)(i) of the Code by providing that a United States shareholder which is a domestic corporation may exclude from its gross income the subpart F income of a controlled foreign corporation if for the taxable year such shareholder consents to the regulations under section 963 of the Code and under section 1.963-1 of the regulations elects such exclusion. As a condition precedent to such exclusion, in the case of a single first-tier controlled foreign corporation described in section 963(c)(1) of the Code, the shareholder must receive a minimum distribution of the earnings and profits for the taxable year of the controlled foreign corporation, and in the case of a chain or group of controlled foreign corporations described in section 963(c)(2) and (3) of the Code, the shareholder must receive a minimum distribution with respect to the consolidated earnings and profits for the taxable year of all such controlled foreign corporations. Section 1.963-1(b) of the regulations defines `single first-tier corporation,' `chain,' and `group.'

Section 1.963-2(a) of the regulations provides that the amount of the minimum distribution required to be received by a United States shareholder for the taxable year shall be the amount determined by the multiplication of the appropriate statutory percentage in section 963(b)(1), (2), and (3) of the Code by the earnings and profits of the single first-tier corporation to which the election relates or in the case of a chain or group election, the consolidated earnings and profits of the chain or group to which the election relates.

Section 1.963-1(b)(6) of the regulations defines the term `taxable year of a single first-tier corporation,' `taxable year of a corporation in a chain,' or `taxable year of a corporation in a group' to mean the taxable year of the single first-tier corporation or the taxable year of each respective corporation in a chain or group ending with or within the taxable year of the electing United States shareholder. It is immaterial whether the taxable year of a corporation in a chain or group is the same as that of any other foreign corporation in such chain or group.

Revenue Procedure 63-7, C.B. 1963-1, 485, treats, for purposes of determining the taxable year of a foreign corporation for purposes of sections 951 through 972 and certain other sections of the Code, a foreign corporation which is not subject to United States income tax as though it were a taxpayer within the meaning of section 7701(a)(14) of the Code. It also provides that the taxable year of the foreign corporation shall be determined under section 441 of the Code and the regulations thereunder.

A taxable year includes a fractional part of a year within the meaning of section 7701(a)(23) of the Code.

In J. Radcliffe Jones, Jr. v. Commissioner , 12 B.T.A. 471 (1928) it was held that under the provisions of section 218(a) of the Revenue Act of 1918, the partner's share of the partnership net income for its two taxable periods ending within the taxable year of the partner is includible in the partner's net income for such taxable year. The rationale of this holding is applicable in determining a partner's taxable income under section 1.706-1 of the regulations and the taxable income of a shareholder of an electing small business corporation under section 1.1373-1 of the regulations.

Accordingly, each of the two taxable years of the controlled foreign corporation ending with or within the taxable year of a United States shareholder which is a domestic corporation will be treated as a separate taxable year under section 1.963-1(b)(6) of the regulations. Thus, in the instant case, Y's fiscal year ending November 30 and its short period beginning December 1 and ending December 31 will be treated as separate taxable years ending with or within X's taxable year.

The requirement that an electing United States shareholder must ceive a minimum distribution of the earnings and profits of Y for Y's taxable year of the controlled foreign corporation ending with or within the taxable year of such shareholder for the exclusion to apply means that the minimum distribution requirement has to be met for each of the taxable years of the foreign corporation ending with or within the taxable year of such shareholder before the subpart F income of any of the taxable years of the foreign corporation ending with or within such shareholder's taxable year can be excluded from the shareholder's gross income. Thus, in the instant case, X must receive a minimum distribution of the earnings and profits of Y for Y's fiscal year ending November 30 as well as for Y's short period beginning December 1 and ending December 31 before X can exclude from its gross income for the taxable year Y's subpart F income for Y's fiscal year ending November 30 or Y's subpart F income for Y's short period beginning December 1 and ending December 31. In case Y is a corporation in a chain or group, the consolidated earnings and profits of the chain or group with respect to X for X's taxable year includes Y's earnings and profits for Y's fiscal year ending November 30 as well as Y's earnings and profits for its short period beginning December 1 and ending December 31.