Rev. Rul. 75-111

Advice has been requested whether, under the circumstances described below, the taxpayer can make a chain or group election under section 963 of the Internal Revenue Code of 1954, for the purpose of computing the earnings and profits under section 902 of the foreign corporations included in its chain or group election, whether or not any of such foreign corporations included in such an election have subpart F income.

For its taxable year 1972, X, a domestic corporation, made a chain election under section 963(c)(2) of the Code with respect to Y, a controlled foreign corporation all of whose stock is owned directly by X, and with respect to Z, a controlled foreign corporation all of whose stock is owned directly by Y. X, Y, and Z file returns on a calendar year basis. Although X did not determine whether Y or Z had subpart F income for 1972, X computed the earnings and profits of Y and Z for the purpose of computing its foreign tax credit under section 902 in accordance with section 1.964-1 of the Income Tax Regulations, including sections 1.964-1(d) and (e).

X satisfied the requirements of section 1.963-1(c) of the regulations relating to the manner of making the section 963 election.

Section 1.902-3(c)(5)(ii) of the regulations provides that for any taxable year of a foreign corporation with respect to which there applies under section 1.963-1(c)(1) an election by a corporate United States shareholder to exclude from its gross income for the taxable year the subpart F income of a controlled foreign corporation, the earnings and profits for purposes of section 902 of the Code of such foreign corporation for such year with respect to such shareholder must be determined under the rules provided by section 1.964-1, even though the amount of the minimum distribution required under section 1.963-2(a) to be received by such shareholder from such earnings and profits of such foreign corporation, or from the consolidated earnings and profits of the chain or group that includes such foreign corporation, is zero.

One of the major purposes of section 963 of the Code is to permit corporate shareholders with foreign subsidiaries to avoid the administrative and accounting complexities of subpart F. By making a section 963 election, the corporate shareholder could avoid the burden of determining the extent and amount of subpart F income of each of the foreign corporations in the chain or group.

Accordingly, X can make a chain or group election under section 963 of the Code in 1972 for the purpose of computing the earnings and profits of Y and Z under section 902 whether or not Y or Z had subpart F income for such year.