Rev. Rul. 71-518

Advice has been requested as to the determination of distributions counting toward the minimum distributions received by a domestic corporate shareholder under section 963 of the Internal Revenue Code of 1954 in the situations described below.

Situation (1). For 1969 M, a domestic corporation, made a chain election under section 963(c)(2) of the Code with respect to R, a controlled foreign corporation all the one class of stock of which is owned directly by M, and S, a controlled foreign corporation all the one class of stock of which is owned directly by R. M made no elections under section 963 for 1968 or 1970. M used the calendar year as its taxable year and R and S both used a fiscal year ending November 30, 1969, as the taxable year. M elected under section 1.963-3(g) of the Income Tax Regulations to have S's distribution period end on May 29, 1970, 180 days after the close of S's taxable year but no election was made with respect to R. Thus, by reason of section 1.963-3(g) of the regulations, R's distribution period for its fiscal year ended in 1969, began on January 30, 1969 (the 61st day), and ended on January 29, 1970 (the 60th day). S's distribution period for its fiscal year ending on November 30, 1969, began on January 30, 1969 (the 61st day), and ended on May 29, 1970 (the 180th day). On January 1, 1970, R, who had no predistribution earnings and profits, distributed 10x dollars to M. On April 1, 1970, S paid 10x dollars dividend to R out of its predistribution earnings and profits.

Situation (2). The facts are the same as in Situation (1) except M elected to extend R's distribution period to May 29, 1970, but not to extend S's distribution period. Thus, R's distribution period for its fiscal year ended in 1969 began on January 30, 1969 (the 61st day), and ended on May 29, 1970 (the 180th day). S's distribution period for its fiscal year ended in 1969 began on January 30, 1969 (the 61st day), and ended on January 29, 1970 (the 60th day). On January 1, 1970, S paid 10x dollars dividend to R and, in turn, R distributed 10x dollars to M on April 1, 1970.

In both situations, S's distribution if received by M would have constituted a qualifying distribution described in section 1.963-3(b) of the regulations and S had earnings and profits of 10x dollars for its fiscal year ended in 1969.

The specific issue in Situation (1) is whether S's distribution to R counts as part of the minimum distribution since it is paid within S's distribution period, or whether the distribution period of R controls. The specific issue in Situation (2) is whether S's distribution to R counts as part of the minimum distribution even though R passed through the dividend to M within R's distribution period but not within S's distribution period.

Section 1.963-3(c)(1) of the regulations provides, in part, that in determining whether a distribution to a United States shareholder by a foreign corporation in a chain or group is made from the earnings and profits of such foreign corporation for the taxable year to which the election under section 963 of the Code relates, section 316 of the Code shall apply except that a distribution of earnings and profits made by a foreign corporation either to another foreign corporation or to the United States shareholder shall be treated as having been paid from the earnings and profits of the distributing corporation for the taxable year of such corporation to which the election relates only if it is made during its distribution period described in section 1.963-3(g) of the regulations.

Section 1.963-3(c)(2) of the regulations, which provides rules relating to distributions from other corporations, states as follows:

The earnings and profits of the foreign corporation shall be determined in accordance with paragraph (d)(1) of section 1.963-2 * * * except that, in the case of a chain or group election, a distribution received by a foreign corporation in the chain or group from another foreign corporation in such chain or group shall be taken into account as earnings and profits of the recipient corporation for the taxable year of such recipient corporation to which the election relates but only to the extent that--

(i) The distribution is received by the recipient corporation during the distribution period for the taxable year of such recipient corporation to which the election relates, (ii) If the distribution had been received by the United States shareholder, it would have constituted a distribution of the type described in paragraph (b) of this section, and

(iii) The distribution is made from the earnings and profits of the distributing corporation for the taxable year of such distributing corporation to which the election relates

As required by sections 1.963-3(c)(1) and 1.963-3(c)(2)(i) of the regulations, a distribution from a foreign corporation in the chain to another foreign corporation in the chain must be made during the distribution periods of both corporations for the minimum distribution to count. A distribution by a foreign corporation in a chain to the United States shareholder must be made during the foreign corporation's distribution period for the taxable year of such corporation to which the election relates for the minimum distribution to count, but need not be made during the distribution period of another foreign corporation in the chain from which a distribution was received by the paying corporation for the taxable year to which the election relates.

The conclusions set forth below apply the foregoing regulations provisions to the factual situations presented above.

Situation (1). Since the dividend of 10x dollars paid by S to R on April 1, 1970, was not received by R during R's distribution period for its taxable year ending November 30, 1969 (period ending on January 29, 1970), as required by section 1.963-3(c)(2)(i) of the regulations, such distribution cannot be taken into account as earnings and profits of R for its taxable year ending November 30, 1969. As R had no predistribution earnings and profits for such taxable year, its distribution to M on January 1, 1970, even though made within R's distribution period (period ending on January 29, 1970), would not count toward a minimum distribution under section 1.963-3(b) of the regulations.

Situation (2). Since the dividend of 10x dollars paid by S to R on January 1, 1970, was made during S's distribution period for its taxable year ending on November 30, 1969 (period ending on January 29, 1970) as required by section 1.963-3(c)(1) of the regulations and received by R during R's distribution period for its taxable year ending on November 30, 1969 (period ending on May 29, 1970), as required by section 1.963-3(c)(2)(i) of the regulations, such dividend is taken into account as earnings and profits of R for its taxable year ending November 30, 1969. As the distribution of 10x dollars by R to M made on April 1, 1970, was made during R's distribution period for its taxable year ending November 30, 1969 (period ending May 29, 1970), and within 180 days after the close of M's taxable year for 1969 as required by section 1.963-3(a)(1)(i) of the regulations, such distribution counts toward the minimum distribution elected by M for 1969.