§ 1248. Gain from certain sales or exchanges of stock in certain foreign corporations
(a)
General rule
If—
(2)
such person owns, within the meaning of section
958
(a), or is considered as owning by applying the rules of ownership of section
958
(b),
10 percent or more of the total combined voting power of all classes of stock entitled to vote of such foreign corporation at any time during the 5-year period ending on the date of the sale or exchange when such foreign corporation was a controlled foreign corporation (as defined in section
957),
then the gain recognized on the sale or exchange of such stock shall be included in the gross income of such person as a dividend, to the extent of the earnings and profits of the foreign corporation attributable (under regulations prescribed by the Secretary) to such stock which were accumulated in taxable years of such foreign corporation beginning after December 31, 1962, and during the period or periods the stock sold or exchanged was held by such person while such foreign corporation was a controlled foreign corporation. For purposes of this section, a United States person shall be treated as having sold or exchanged any stock if, under any provision of this subtitle, such person is treated as realizing gain from the sale or exchange of such stock.
(b)
Limitation on tax applicable to individuals
In the case of an individual, if the stock sold or exchanged is a capital asset (within the meaning of section
1221) and has been held for more than 1 year, the tax attributable to an amount included in gross income as a dividend under subsection (a) shall not be greater than a tax equal to the sum of—
(1)
a pro rata share of the excess of—
(A)
the taxes that would have been paid by the foreign corporation with respect to its income had it been taxed under this chapter as a domestic corporation (but without allowance for deduction of, or credit for, taxes described in subparagraph (B)), for the period or periods the stock sold or exchanged was held by the United States person in taxable years beginning after December 31, 1962, while the foreign corporation was a controlled foreign corporation, adjusted for distributions and amounts previously included in gross income of a United States shareholder under section
951, over
(c)
Determination of earnings and profits
(2)
Earnings and profits of subsidiaries of foreign corporations
If—
(A)
subsection (a) or (f) applies to a sale, exchange, or distribution by a United States person of stock of a foreign corporation and, by reason of the ownership of the stock sold or exchanged, such person owned within the meaning of section
958
(a)(2) stock of any other foreign corporation; and
(B)
such person owned, within the meaning of section
958
(a), or was considered as owning by applying the rules of ownership of section
958
(b),
10 percent or more of the total combined voting power of all classes of stock entitled to vote of such other foreign corporation at any time during the 5-year period ending on the date of the sale or exchange when such other foreign corporation was a controlled foreign corporation (as defined in section
957),
then, for purposes of this section, the earnings and profits of the foreign corporation the stock of which is sold or exchanged which are attributable to the stock sold or exchanged shall be deemed to include the earnings and profits of such other foreign corporation which—
(C)
are attributable (under regulations prescribed by the Secretary) to the stock of such other foreign corporation which such person owned within the meaning of section
958
(a)(2) (by reason of his ownership within the meaning of section 958(a)(1)(A) of the stock sold or exchanged) on the date of such sale or exchange (or on the date of any sale or exchange of the stock of such other foreign corporation occurring during the 5-year period ending on the date of the sale or exchange of the stock of such foreign corporation, to the extent not otherwise taken into account under this section but not in excess of the fair market value of the stock of such other foreign corporation sold or exchanged over the basis of such stock (for determining gain) in the hands of the transferor); and
(d)
Exclusions from earnings and profits
For purposes of this section, the following amounts shall be excluded, with respect to any United States person, from the earnings and profits of a foreign corporation:
(1)
Amounts included in gross income under section
951
Earnings and profits of the foreign corporation attributable to any amount previously included in the gross income of such person under section
951, with respect to the stock sold or exchanged, but only to the extent the inclusion of such amount did not result in an exclusion of an amount from gross income under section
959.
(4)
United States income
Any item includible in gross income of the foreign corporation under this chapter—
(A)
for any taxable year beginning before January 1, 1967, as income derived from sources within the United States of a foreign corporation engaged in trade or business within the United States, or
(B)
for any taxable year beginning after December 31, 1966, as income effectively connected with the conduct by such corporation of a trade or business within the United States.
This paragraph shall not apply with respect to any item which is exempt from taxation (or is subject to a reduced rate of tax) pursuant to a treaty obligation of the United States.
(5)
Foreign trade income
Earnings and profits of the foreign corporation attributable to foreign trade income of a FSC (as defined in section
922) other than foreign trade income which—
For purposes of the preceding sentence, the terms “foreign trade income” and “exempt foreign trade income” have the respective meanings given such terms by section
923. Any reference in this paragraph to section
922,
923, or
927 shall be treated as a reference to such section as in effect before its repeal by the FSC Repeal and Extraterritorial Income Exclusion Act of 2000.
(6)
Amounts included in gross income under section
1293
Earnings and profits of the foreign corporation attributable to any amount previously included in the gross income of such person under section
1293 with respect to the stock sold or exchanged, but only to the extent the inclusion of such amount did not result in an exclusion of an amount under section
1293
(c).
(e)
Sales or exchanges of stock in certain domestic corporations
Except as provided in regulations prescribed by the Secretary, if—
(2)
such domestic corporation was formed or availed of principally for the holding, directly or indirectly, of stock of one or more foreign corporations,
such sale or exchange shall, for purposes of this section, be treated as a sale or exchange of the stock of the foreign corporation or corporations held by the domestic corporation.
(f)
Certain nonrecognition transactions
Except as provided in regulations prescribed by the Secretary—
(1)
In general
If—
(A)
a domestic corporation satisfies the stock ownership requirements of subsection (a)(2) with respect to a foreign corporation, and
(B)
such domestic corporation distributes stock of such foreign corporation in a distribution to which section
311
(a),
337,
355
(c)(1), or
361
(c)(1) applies,
then, notwithstanding any other provision of this subtitle, an amount equal to the excess of the fair market value of such stock over its adjusted basis in the hands of the domestic corporation shall be included in the gross income of the domestic corporation as a dividend to the extent of the earnings and profits of the foreign corporation attributable (under regulations prescribed by the Secretary) to such stock which were accumulated in taxable years of such foreign corporation beginning after December 31, 1962, and during the period or periods the stock was held by such domestic corporation while such foreign corporation was a controlled foreign corporation. For purposes of subsections (c)(2), (d), and (h), a distribution of stock to which this subsection applies shall be treated as a sale of stock to which subsection (a) applies.
(2)
Exception for certain distributions
In the case of any distribution of stock of a foreign corporation, paragraph (1) shall not apply if such distribution is to a domestic corporation—
(g)
Exceptions
This section shall not apply to—
(1)
distributions to which section
303 (relating to distributions in redemption of stock to pay death taxes) applies; or
(h)
Taxpayer to establish earnings and profits
Unless the taxpayer establishes the amount of the earnings and profits of the foreign corporation to be taken into account under subsection (a) or (f), all gain from the sale or exchange shall be considered a dividend under subsection (a) or (f), and unless the taxpayer establishes the amount of foreign taxes to be taken into account under subsection (b), the limitation of such subsection shall not apply.
(i)
Treatment of certain indirect transfers
(1)
In general
If any shareholder of a 10-percent corporate shareholder of a foreign corporation exchanges stock of the 10-percent corporate shareholder for stock of the foreign corporation, such 10-percent corporate shareholder shall recognize gain in the same manner as if the stock of the foreign corporation received in such exchange had been—
(B)
then distributed by the 10-percent corporate shareholder to such shareholder in redemption or liquidation (whichever is appropriate).
The amount of gain recognized by such 10-percent corporate shareholder under the preceding sentence shall not exceed the amount treated as a dividend under this section.
(2)
10-percent corporate shareholder defined
For purposes of this subsection, the term “10-percent corporate shareholder” means any domestic corporation which, as of the day before the exchange referred to in paragraph (1), satisfies the stock ownership requirements of subsection (a)(2) with respect to the foreign corporation.