Rev. Rul. 76-44

Advice has been requested concerning the validity of an election under section 453 of the Internal Revenue Code of 1954 made by the shareholders of a foreign corporation under the circumstances described below. X, a foreign corporation incorporated in country M, is wholly owned by United States citizens, A and B, both of whom are United States shareholders within the meaning of section 951(b) of the Code. The voting stock of X is owned 60 percent by A and 40 percent by B. Both X and its two shareholders keep their books and records and file returns on a calendar year basis. Corporation X is not a less developed country corporation within the meaning of section 955(c), as it existed prior to the Tax Reduction Act of 1975.

Until 1970, X was actively engaged in manufacturing and selling products within country M. On June 30, 1970, X sold its land, building, and equipment, other than inventory, to an unrelated corporation in country M. The purchase price was payable to X in 10 equal and consecutive annual installments commencing on June 30, 1971, with interest payable at a rate of 7 percent a year.

On March 31, 1972, A and B filed with the Director of International Operations/*/, the written statement described in section 1.964-1(c)(3)(ii) of the Income Tax Regulations, in which they elected on behalf of X to have that portion of the gain on the 1970 sale reported on an installment basis in accordance with section 453 of the Code.

During its taxable years 1970, 1971, and 1972, X was not engaged in trade or business within the United States and had no United States source income. During its taxable years 1970 and 1971, X had no subpart F income, as that term is defined in section 952 of the Code, and was not subject of an election to secure an exclusion under section 963. Neither of X's shareholders filed the information with respect to X required by sections 6038 and 6046.

The first question presented is whether the section 453 election is valid for purposes of the subpart F provisions of the Code (sections 951 through 964 of the Code) and section 1248.

Section 964 of the Code provides, in part, that, for purposes of subpart F, the earnings and profits of any foreign corporation, and the deficit in earnings and profits of any foreign corporation for any taxable year shall be determined according to rules substantially similar to those applied to domestic corporations, under regulations prescribed by the Secretary or the Secretary's delegate.

Section 1.964-1(c)(1)(iv) of the regulations provides, in part, that effect shall be given to any election made in accordance with an applicable provision of the Code and the regulations thereunder and that, except as provided in section 1.964-1(c)(3), any requirement imposed by the Code or applicable regulations with respect to making an election must be satisfied by or on behalf of the foreign corporation just as though it were a domestic corporation if such election is to be taken into account in the computation of its earnings and profits.

Section 1.964-1(c)(3) of the regulations provides, in part, that an election shall be deemed made on behalf of a foreign corporation if its controlling United States shareholders (as defined in section 1.964-1(c)(5)) satisfy any requirements imposed by the Code or applicable regulations with respect to such election and if certain other written procedural requirements are met.

Section 1.453-8(b)(1) of the regulations provides, in part, that a taxpayer who sells or otherwise disposes of real property or who makes a casual sale or other casual disposition of personal property, and who elects to report the income therefrom on the installment method must set forth in his income tax return (or in a statement attached thereto) for the year of the sale or other disposition the computation of the gross profit on the sale or other disposition under the installment method.

Section 1.964-1(c)(6) of the regulations provides, in part, that notwithstanding any other provision of paragraph (c) of section 1.964-1, action by or on behalf of a foreign corporation (other than a foreign corporation subject to tax under section 882 of the Code) to make an election shall not be required until 180 days after the close of the first taxable year for which (i) an amount is includible in gross income with respect to such corporation under section 951(a), (ii) it is sought to be established that such corporation is a less developed country corporation (within the meaning of section 955(c), as it existed prior to the Tax Reduction Act of 1975), (iii) an amount is excluded from subpart F income (within the meaning of section 952) by section 952(c), section 952(d) or section 970(a), or (iv) such corporation is the subject of an election to secure an exclusion under section 963.

Section 1.1248-2(d)(1) of the regulations provides, in part, that for purposes of section 1248 of the Code, the earnings and profits accumulated for a taxable year of a foreign corporation shall be the earnings and profits for such year computed in accordance with the rules prescribed in section 1.964-1 and reduced by any distributions therefrom.

The import of section 1.964-1(c)(6) of the regulations is that under section 1.964-1, an election can be made by a foreign corporation at any time up to 180 days following the end of the taxable year in which one of the four enumerated events listed in section 1.964-1(c)(6) occurs. In the instant case none of such enumerated events occurred in any year preceding the year in which A and B filed the election under section 453 of the Code.

Accordingly, for purposes of the subpart F provisions of the Code and section 1248, A and B made a valid election under section 453 to report the gain from the June 30, 1970, sale on the installment method.

The second question presented is whether the election is valid for purposes of the foreign personal holding company provisions of the Code (sections 551 through 558).

Section 555 of the Code provides, in part, that for purposes of determining the gross income of a foreign personal holding company, gross income is computed as if the foreign corporation were a domestic corporation that is a personal holding company.

A corporation that is a personal holding company may make an installment sale election subject to the limitations prescribed in section 453 of the Code and the regulations thereunder. See Frederick Smith Enterprise Co. v. Commissioner, 167 F.2d 356 (6th Cir. 1948).

Rev. Rul. 65-297, 1965-2 C.B. 152, sets forth the circumstances under which the Internal Revenue Service will recognize as valid the election to report income from certain sales on the installment method under section 453 of the Code, if such election was not made on a timely filed original return for the year of sale. Rev. Rul. 65-297 provides, in part, that if, in good faith, a taxpayer failed to exercise the installment method election to report income from sales of real property and casual sales of personal property on a timely filed original return for the year of sale, the Service will recognize as valid those elections made on an amended return for the year of sale not barred by the statute of limitations or the operation of any other law or rule of law, if the facts indicate no election inconsistent with the installment election has been made with respect to the sale.

In the instant case, X was under no obligation to file any United States Federal income tax returns for 1970 or 1971. The written statement electing to report on the installment basis in accordance with section 453 of the Code was filed by A and B at a time when an amended return for the year of sale would not have been barred by the statute of limitations, had an original return been filed for the year of sale. No election inconsistent with the installment election was made with respect to the sale.

Accordingly, the filing by A and B of the written statement within the described period is acceptable as being in substantial compliance with the requirements set forth in Rev. Rul. 65-297. Therefore, the installment method election filed on behalf of X is valid for purposes of the foreign personal holding company provisions of the Code.

Rev. Rul. 65-297 is thus amplified to the extent that this Revenue Ruling sets forth the requirements for filing an installment method election after the year of sale with respect to a foreign corporation.

The remaining question is whether the failure of A and B to file the information required by sections 6038 and 6046 of the Code precludes them from making the section 453 election.

Section 6038 of the Code provides, in part, that every United States person that owns stock possessing more than 50 percent of the total combined voting power of all classes of stock entitled to vote of a foreign corporation, shall furnish for the annual accounting period of the foreign corporation ending with or within the United States person's taxable year, certain information with respect to such foreign corporation. Section 1.6038-1(b) of the regulations provides, in part, that the information return required by section 6038 should include a balance sheet and profit and loss statement of the foreign corporation. Section 6038(b) provides, in effect, that the failure of a United States person to furnish the information required by section 6038 results in a reduction of such person's foreign tax credit under sections 901, 902, and 960.

Section 6046 of the Code, in part, requires an information return similar to that required by section 6038 to be filed by each United States person that owns 5 percent or more in value of the stock of a foreign corporation. The penalties for violating section 6046 are in sections 6679 and 7203, which provides for certain fines, and, in the latter section, imprisonment.

Neither section 6038 nor section 6046 of the Code nor the regulations under such sections, contain any provision that would preclude a United States person from making an election under section 453 with regard to a foreign corporation in a year subsequent to the year of sale because of the failure of such person to file the information returns required by such sections in the year of sale.

Accordingly, the failure of A and B to file the information returns required by sections 6038 and 6046 of the Code does not affect the validity of their election under section 453.

Rev. Rul. 65-297 is amplified.

* For taxable years beginning after August 23, 1974, the written statement is filed with the Director of the Internal Revenue Service Center, 11601 Roosevelt Blvd., Philadelphia, Pennsylvania 19155.