Thus, for example, if the shareholders of a DISC which uses the calendar year as its taxable year (and which is a member of a controlled group in which all of the members use the calendar year as their taxable year) are treated under section 995(b)(1)(G) as receiving foreign investment attributable to producer's loans of a DISC of $0 in 1972, $10 in 1973, and $30 in 1974, or a total of $40, and if the smallest of the amounts described in subdivision (i) of this subparagraph at the end of 1975 is $90, then the amount of the foreign investment attributable to producer's loans of a DISC at the end of 1975 is $50, i.e., the excess (as of the close of 1975) of the smallest of the amounts described in subdivision (i) of this subparagraph ($90) over the sum of the amounts of foreign investment attributable to producer's loans treated under section 995(b)(1)(G) as deemed distributions by the DISC taxable as dividends for prior taxable years of the DISC ($40). If the separate corporate existence of the DISC as to which the amount described in subdivision (ii) of this subparagraph relates ceases to exist within the meaning of § 1.995-4(c)(2) , then such amount shall no longer be taken into account by the group for any purpose. For inclusion of amounts because of certain corporate acquisitions, see paragraph (d) of this section.
Example. X Corporation, which uses the calendar year as its taxable year, is a member of a controlled group (within the meaning of subparagraph (2) of this paragraph). X elects to be treated as a DISC beginning with 1972. The amount of foreign investment attributable to X's producer's loans treated under section 995(b)(1)(G) as a distribution taxable as a dividend as of the close of each group taxable year with respect to each taxable year of X from 1972 through 1975 are set forth in the table below, computed on the basis of the facts assumed (the amounts on lines (1), (2), (3), and (5) being running balances):
Taxable year of X | 1972 | 1973 | 1974 | 1975 |
(1) Net increase (or decrease) in foreign assets since January 1, 1972, at close of group taxable year | ($30) | $10 | $100 | $150 |
(2) Actual foreign investment at close of group taxable year | 20 | 60 | 80 | 140 |
(3) Outstanding producer's loans of X (the DISC) as of the close of group taxable year | 0 | 40 | 90 | 120 |
(4) Smallest of lines (1), (2), or (3) (not less than zero) | 0 | 10 | 80 | 120 |
(5) Less section 995(b)(1)(G) deemed distributions for prior taxable years (sum of lines (5) and (6) from prior year) | 0 | 0 | 10 | 80 |
(6) Section 995(b)(1)(G) deemed distribution as of close of taxable year | 0 | 10 | 70 | 40 |
Example. X Corporation is a member of a controlled group (within a meaning of paragraph (a)(2) of this section) every member of which uses the calendar year as its taxable year. On January 1, 1972, X issues in a public offering its stock to persons described in subdivision (i) of this subparagraph who, in the aggregate, pay $1,000 as consideration. X pays $100 in underwriting fees. On the same date, X receives $425 upon issuing a $500 debt obligation to such persons at a discount of $75 and pays $25 in underwriting fees. On December 31, 1972, the offset allowed under this subparagraph is $1,300, i.e., ($1,000 minus $100) plus ($425 minus $25). If, during 1973, X makes a distribution of $150 (not in redemption) from other than earnings and profits with respect to such stock, then the offset is reduced to $1,150.
For purposes of this subparagraph, foreign branches of United States banks are not considered to be United States persons.
Example. X Corporation, which uses the calendar year as its taxable year is a member of a controlled group (within the meaning of paragraph (a)(2) of this section). X elects to be treated as a DISC beginning with 1972. The amount of net increase in foreign assets of the group at the close of each group taxable year with respect to each taxable year of X from 1972 through 1975 are set forth in the table below, computed on the basis of the facts assumed (the amounts on each line being running balances):
Taxable year of X | 1972 | 1973 | 1974 | 1975 |
(1) Investment in foreign assets | $150 | $165 | $260 | $300 |
(2) Depreciation with respect to foreign assets of group | 20 | 40 | 60 | 80 |
(3) Amount of stock or debt outstanding issued after December 31, 1971 | 30 | 30 | 30 | 30 |
(4) One-half earnings and profits of foreign members | 40 | 70 | 100 | 130 |
(5) Royalties and fees paid by foreign members to domestic members | 10 | 15 | 20 | 20 |
(6) Uncommitted transitional funds | 10 | 10 | 10 | 10 |
(7) Sum of lines (2) through (6) | 110 | 165 | 220 | 270 |
(8) Net increase in foreign assets (line (1) minus line (6)) | 40 | 0 | 40 | 30 |
then, for purposes of computing foreign investment attributable to producer's loans with respect to the new controlled group as constituted after such acquisition, all amounts described in paragraphs (a) through (c) of this section, including the amount specified in paragraph (a)(1)(ii) of this section (relating to amounts treated under section 995(b)(1)(G) as deemed distributions by the DISC taxable as dividends for prior taxable years of the DISC), with respect to members of the second controlled group which become members of the new controlled group shall carry over to such new controlled group. For purposes of this subdivision (i), a controlled group may consist of only one member. With respect to certain transactions involving foreign corporations, see section 367.
(1) Fair market value of N's foreign assets described in paragraph (b)(2) of this section | $1,000,000 |
(2) Multiply by percentage of total combined voting power of all classes of N stock entitled to vote acquired by M | .8 |
(3) Amount considered expended | $800,000 |
The facts are the same as in example 2, except that individual A is not a United States person, and M acquires the 80 percent of N voting stock in exchange for cash of $100,000 and M stock having a fair market value on the date of the acquisition of $700,000. M is considered to have acquired assets described in paragraph (b)(2) of this section in the amount of $800,000 (see computations in example 2) and to have an offset under paragraph (b)(4) of this section (relating to outstanding stock or debt) of $700,000 (the fair market value of the M stock transferred to A who is not a United States person). However, the controlled group of which M is a member is not considered to have acquired any other amounts described in paragraphs (a) through (c) of this section with respect to N for taxable years prior to the taxable year of N during which the acquisition occurred.
(1) Fair market value of Q's foreign assets described in paragraph (b)(2) of this section as of the date the acquisition is deemed to have occurred under subparagraph (3) of this paragraph (December 31, 1974) | $5,000,000 |
(2) Multiply by percentage of total combined voting power of all classes of Q stock entitled to vote held by members of the group on such date | .7 |
$3,500,000 |
The facts are the same as in example 5. Assume further that on July 15, 1975, P acquires the remaining 30 percent of the total combined voting power of all classes of Q stock entitled to vote, and on such date the fair market value of Q's assets is $5,500,000. The group is considered to have expended $5,150,000 for the acquisition of assets described in paragraph (b)(2) of this section as of the close of 1975, computed as follows:
(1) Amount of prior years' investment | $3,500,000 |
(2) Investment during 1975: | |
(a) Fair market value of Q's foreign assets described in paragraph (b)(2) of this section on July 15, 1975 | $5,500,000 |
(b) Multiply by additional percentage acquired of total combined voting power of all classes of Q stock entitled to vote | .3 |
(c) Investment during 1975 | $1,650,000 |
(3) Amount considered expended for foreign assets described in paragraph (b)(2) of this section by reason of the acquisition of Q stock | $5,150,000 |
Example. Corporation X and corporation Y are members of the same controlled group and each has elected to be treated as a DISC. X uses a taxable year ending March 31, and Y uses a taxable year ending November 30. Notwithstanding the fact that all other members of the group use the calendar year as their taxable year, all computations for purposes of determining the amount of foreign investment attributable to producer's loans under section 995(d) must be made as if both DISC's use a taxable year ending either March 31 (X's taxable year) or November 30 (Y's taxable year).
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26 C.F.R. §1.995-5