Rev. Rul. 83-101

ISSUE

Whether, under the circumstances described below, a dividend received by a controlled foreign corporation from its wholly owned subsidiary is "foreign personal holding company income" within the meaning of section 954(c)(4)(A) of the Internal Revenue Code?

FACTS

X, a domestic corporation, owns all of the stock of FP, a foreign corporation, which in turn owns all of the stock of FS, a foreign corporation. FP and FS are both organized in country FC. FP is a holding company and holds the stock of FS and other foreign corporations. FS is an international merchant and supplier of many commodities, including ferrous and nonferrous minerals and Metals, ferrous alloys, oil, and oil products. FS does not produce the vast majority of commodities which it markets, but acquires them from unrelated parties by purchases in the open market and by long term contractual supply arrangements. FS maintains offices with several hundred employees in a city in FC, which is a major international commodity trading center. FS conducts all of its commodity trading business in FC.

FC maintains all of its inventory in FC except for certain amounts of inventory which are stored in public warehouses in other countries in order to facilitate quick and inexpensive transportation to purchasers in such other countries. These inventories are represented by warehouse receipts which are held and transferred only in FC. For any given quarter during the taxable year, FS inventory maintained outside of FC has an average value of 25 percent of the total average value of the assets of FS used in its business. FS pays a dividend to FP during the taxable year.

LAW AND ANALYSIS

Section 954(a)(1) of the Code provides, in part, that the term "foreign base company income" for any taxable year includes the foreign personal holding company income for the taxable year as determined under section 954(c).

Section 954(c)(4)(A) of the Code provides, in part, that the term "foreign personal holding company income" does not include dividends received from a related person which is organized under the laws of the same foreign country under the laws of which the controlled foreign corporation is organized and which has a substantial part of its assets used in its trade or business located in such foreign country.

Section 954(d)(3)(B) of the Code provides, in part, that with respect to a controlled foreign corporation a person is a "related person" if such person is a corporation controlled by the controlled foreign corporation.

Section 1.954-2(e)(1)(i) of the Income Tax Regulations provides, in part, that a substantial part of the assets used by a foreign corporation in a trade or business will be considered to be located for the taxable year in the country under the laws of which it is organized if for each quarter during such taxable year the average value of its assets which are used in its trade or business and are located in such country constitutes 80 percent or more of the average value of all of its assets used in such trade or business. Where, as in this case, a foreign corporation cannot meet the 80 percent test, as described above, section 1.954-2(e)(1)(i) provides that whether a substantial part of the assets used by a foreign corporation in a trade or business will be considered to be located in the country under the laws of which it is organized will depend on the facts and circumstances of each case.

In this case, all of the employees, offices, and assets of FS are located in FC, except for some of its inventory that is stored outside of FC for reasonable business needs. FS conducts all of its business in FC. Therefore, FS maintains a substantial portion of its assets used in its business in FC.

HOLDING

The dividend received by FP from FS is not "foreign personal holding company income" by reason of section 954(c)(4)(A) of the Code and section 1.954-2(e)(1)(i) of the regulations.