Bloomberg Bloomberg
Comprehensive Tax Research. Practitioner to Practitioner. ®

Internal Revenue Code, § 407. Certain Employees Of Domestic Subsidiaries Engaged In Business Outside The United States

I.R.C. § 407(a) Treatment As Employees Of Domestic Parent Corporation
I.R.C. § 407(a)(1) In General
For purposes of applying this part with respect to a pension, profit-sharing, or stock bonus plan described in section 401(a) or an annuity plan described in section 403(a), of a domestic parent corporation, an individual who is a citizen or resident of the United States and who is an employee of a domestic subsidiary (within the meaning of paragraph (2)) of such domestic parent corporation shall be treated as an employee of such domestic parent corporation, if—
I.R.C. § 407(a)(1)(A)
the plan of such domestic parent corporation expressly provides for contributions or benefits for individuals who are citizens or residents of the United States and who are employees of its domestic subsidiaries; and
I.R.C. § 407(a)(1)(B)
contributions under a funded plan of deferred compensation (whether or not a plan described in section 401(a) or 403(a)) are not provided by any other person with respect to the remuneration paid to such individual by the domestic subsidiary.
I.R.C. § 407(a)(2) Definitions
For purposes of this section—
I.R.C. § 407(a)(2)(A) Domestic Subsidiary
A corporation shall be treated as a domestic subsidiary for any taxable year only if—
I.R.C. § 407(a)(2)(A)(i)
such corporation is a domestic corporation 80 percent or more of the outstanding voting stock of which is owned by another domestic corporation;
I.R.C. § 407(a)(2)(A)(ii)
95 percent or more of its gross income for the three-year period immediately preceding the close of its taxable year which ends on or before the close of the taxable year of such other domestic corporation (or for such part of such period during which the corporation was in existence), was derived from sources without the United States; and
I.R.C. § 407(a)(2)(A)(iii)
90 percent or more of its gross income for such period (or such part) was derived from the active conduct of a trade or business.
If for the period (or part thereof) referred to in clauses (ii) and (iii) such corporation has no gross income, the provisions of clauses (ii) and (iii) shall be treated as satisfied if it is reasonable to anticipate that, with respect to the first taxable year thereafter for which such corporation has gross income, the provisions of such clauses will be satisfied.
I.R.C. § 407(a)(2)(B) Domestic Parent Corporation
The domestic parent corporation of any domestic subsidiary is the domestic corporation which owns 80 percent or more of the outstanding voting stock of such domestic subsidiary.
I.R.C. § 407(b) Special Rules For Application Of Section 401(a)
I.R.C. § 407(b)(1) Nondiscrimination Requirements
For purposes of applying section 401(a)(4) and section 410(b) with respect to an individual who is treated as an employee of a domestic parent corporation under subsection (a)
I.R.C. § 407(b)(1)(A)
if such individual is a highly compensated employee (within the meaning of section 414(q)), he shall be treated as having such capacity with respect to such domestic parent corporation; and
I.R.C. § 407(b)(1)(B)
the determination of whether such individual is a highly compensated employee (as so defined) shall be made by treating such individual's total compensation (determined with the application of paragraph (2) of this subsection) as compensation paid by such domestic parent corporation and by determining such individual's status with regard to such domestic parent corporation.
I.R.C. § 407(b)(2) Determination Of Compensation
For purposes of applying paragraph (5) of section 401(a) with respect to an individual who is treated as an employee of a domestic parent corporation under subsection (a), the total compensation of such individual shall be the remuneration paid to such individual by the domestic subsidiary which would constitute his total compensation if his services had been performed for such domestic parent corporation, and the basic or regular rate of compensation of such individual shall be determined under regulations prescribed by the Secretary.
I.R.C. § 407(c) [Repealed.]
I.R.C. § 407(d) Deductibility Of Contributions
For purposes of applying section 404 with respect to contributions made to or under a pension, profit-sharing, stock bonus, or annuity plan by a domestic parent corporation, or by another corporation which is entitled to deduct its contributions under section 404(a)(3)(B), on behalf of an individual who is treated as an employee of such domestic corporation under subsection (a)
I.R.C. § 407(d)(1)
except as provided in paragraph (2), no deduction shall be allowed to such domestic parent corporation or to any other corporation which is entitled to deduct its contributions under such sections,
I.R.C. § 407(d)(2)
there shall be allowed as a deduction to the domestic subsidiary of which such individual is an employee an amount equal to the amount which (but for paragraph (1)) would be deductible under section 404 by the domestic parent corporation if he were an employee of the domestic parent corporation, and
I.R.C. § 407(d)(3)
any reference to compensation shall be considered to be a reference to the total compensation of such individual (determined with the application of subsection (b)(2)).
Any amount deductible by a domestic subsidiary under this subsection shall be deductible for its taxable year with or within which the taxable year of such domestic parent corporation ends.
I.R.C. § 407(e) Treatment As Employee Under Related Provisions
An individual who is treated as an employee of a domestic parent corporation under subsection (a) shall also be treated as an employee of such domestic parent corporation, with respect to the plan described in subsection (a)(1)(A), for purposes of applying the following provisions of this title:
I.R.C. § 407(e)(1)
Section 72(f) (relating to special rules for computing employees' contributions).
I.R.C. § 407(e)(2)
Section 2039 (relating to annuities).
(Added Pub. L. 88-272, title II, Sec. 220(b), Feb. 26, 1964, 78 Stat. 60, and amended Pub. L. 91-172, title V, Sec. 515(c)(3), Dec. 30, 1969, 83 Stat. 646; Pub. L. 93-406, title II, Sec. 1016(a)(5), 2005(c)(13), Sept. 2, 1974, 88 Stat. 929, 992; Pub. L. 94-455, title XIX, Sec. 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834; Pub. L. 98-21, title III, Sec. 321(d), Apr. 20, 1983, 97 Stat. 119; Pub. L. 98-369, div. A, title IV, Sec. 491(d)(16)-(18), July 18, 1984, 98 Stat. 850; Pub. L. 99-514, title XI, Sec. 1112(d)(3), 1114(b)(9)(B), (C), title XVIII, Sec. 1852(e)(2)(D), Oct. 22, 1986, 100 Stat. 2445, 2451, 2868; Pub. L. 100-647, title I, Sec. 1011A(b)(1)(C), (16), Nov. 10, 1988, 102 Stat. 3472, 3475; Pub. L. 101-239, title VII, Sec. 7811(g)(3), 7831(f), Dec. 19, 1989, 103 Stat. 2409, 2427; Pub. L. 102-318, title V, Sec. 521(b)(15), July 3, 1992; Pub. L. 104-188, title I, Sec. 1401(b)(8), 1402(b)(2), Aug. 20, 1996, 110 Stat. 1755.)
BACKGROUND NOTES
AMENDMENTS
1996 - Subsec. (c). Pub. L. 104-188, Sec. 1401(b)(8), repealed subsec. (c). See effective date below. Before repeal, subsec. (c) read as follows:
“(c) Termination of status as deemed employee not to be treated as separation from service for purposes of limitations of tax
“For purposes of applying section 402(d) with respect to an individual who is treated as an employee of a domestic parent corporation under subsection (a), such individual shall not be considered as separated from the service of such domestic parent corporation solely by reason of the fact that--
“(1) the corporation of which such individual is an employee ceases, for any taxable year, to be a domestic subsidiary within the meaning of subsection (a)(2)(A),
“(2) such individual ceases to be an employee of a domestic subsidiary of such domestic parent corporation, if he becomes an employee of another corporation controlled by such domestic parent corporation, or
“(3) the provision of the plan described in subsection (a)(1)(A) is terminated.”
Subsec. (e)(2), (3). Pub. L. 104-188, Sec. 1402(b)(2), struck par. (2) and redesignated par. (3) as par. (2). Before being struck, par. (2) read as follows:
“(2) Section 101(b) (relating to employees' death benefits).”
1992 - Subsec. (c). Pub. L. 102-318, Sec. 521(b)(15), amended subsec. (c) by substituting “section 402(d)” for “section 402(e)”.
1989 - Subsec. (b)(1)(A). Pub. L. 101-239, Sec. 7831(f), made technical correction to Pub. L. 99-514, Sec. 1114(b)(9)(B), see 1986 Amendment note below.
Subsec. (c). Pub. L. 101-239, Sec. 7811(g)(3), substituted ‘purposes of limitation’ for ‘purposes limitation’ in heading.
1988 - Subsec. (c). Pub. L. 100-647, Sec. 1011A(b)(16), struck out ‘of capital gain provisions and’ after ‘service for purposes’ in heading and substituted ‘applying section 402(e)’ for ‘applying subsections (a)(2) and (e) of section 402, and section 403(a)(2)’ in text.
Subsec. (e). Pub. L. 100-647, Sec. 1011A(b)(1)(C), redesignated pars. (2) to (4) as (1) to (3), respectively, and struck out former par. (1) which read as follows: ‘Section 72(d) (relating to employees’ annuities).'
1986 - Subsec. (b)(1). Pub. L. 99-514, Sec. 1112(d)(3), struck out ‘(without regard to paragraph (1)(A) thereof)’ after ‘section 410(b)’ in introductory text.
Subsec. (b)(1)(A). Pub. L. 99-514, Sec. 1114(b)(9)(B), as amended by Pub. L. 101-239, Sec. 7831(f), substituted ‘a highly compensated employee (within the meaning of section 414(q))’ for ‘an officer, shareholder, or person whose principal duties consist in supervising the work of other employees of a domestic subsidiary’.
Subsec. (b)(1)(B). Pub. L. 99-514, Sec. 1114(b)(9)(C), inserted ‘(as so defined)’ after ‘employee’.
Subsec. (e)(5). Pub. L. 99-514, Sec. 1852(e)(2)(D), struck out par. (5) which read as follows: ‘Section 2517 (relating to certain annuities under qualified plans).’
1984 - Subsec. (a)(1). Pub. L. 98-369, Sec. 491(d)(16), substituted ‘or an annuity plan described in section 403(a)’ for ‘, an annuity plan described in section 403(a), or a bond purchase plan described in section 405(a)’.
Subsec. (a)(1)(B). Pub. L. 98-369, Sec. 491(d)(17), substituted ‘or 403(a)’ for ‘, 403(a), or 405(a)’.
Subsec. (d). Pub. L. 98-369, Sec. 491(d)(18)(A), (B), substituted in introductory provision ‘section 404’ for ‘sections 404 and 405(a)’, and ‘or annuity’ for ‘annuity, or bond purchase’.
Subsec. (d)(2). Pub. L. 98-369, Sec. 491(d)(18)(C), struck out ‘(or section 405(c))’ after ‘section 404’.
1983 - Subsec. (a)(1). Pub. L. 98-21 inserted ‘or resident’ after ‘citizen’, and inserted ‘or residents’ after ‘citizens’ in subpar. (A).
1976 - Subsec. (b)(2). Pub. L. 94-455 struck out ‘or his delegate’ after ‘Secretary’.
1974 - Subsec. (b)(1). Pub. L. 93-406, Sec. 1016(a)(5), substituted ‘section 401(a)(4) and section 410(b) (without regard to paragraph (1)(A) thereof)’ for ‘paragraphs (3)(B) and (4) of section 401(a)’.
Subsec. (c). Pub. L. 93-406, Sec. 2005(c)(13), substituted ‘subsections (a)(2) and (e) of section 402’ for ‘section 72(n), section 402(a)(2)’.
1969 - Subsec. (c). Pub. L. 91-172 substituted ‘provisions and limitation of tax’ for ‘provisions’ in heading, and substituted ‘section 72(n), section 402(a)(2),’ for ‘section 402(a)(2)’ in text.
EFFECTIVE DATE OF 1996 AMENDMENT
Amendment by section 1401(b) of Pub. L. 104-188 effective, except as otherwise provided, for taxable years beginning after December 31, 1999. Sec. 1401(c)(2) of Pub. L. 104-188 provided that:
(2) Retention of certain transition rules.--The amendments made by this section shall not apply to any distribution for which the taxpayer is eligible to elect the benefits of section 1122(h)(3) or (h)(5) of the Tax Reform Act of 1986. Notwithstanding the preceding sentence, individuals who elect such benefits after December 31, 1999, shall not be eligible for 5-year averaging under section 402(d) of the Internal Revenue Code of 1986 (as in effect immediately before such amendments).
Amendments by section 1402(b) of Pub. L. 104-188 effective with respect to decedents dying after the date of the enactment of this Act [Aug. 20, 1996].
EFFECTIVE DATE OF 1992 AMENDMENT
Amendment by section 521(b)(15) of Pub. L. 102-318 effective for distributions after December 31, 1992.
EFFECTIVE DATE OF 1989 AMENDMENT
Amendment by section 7811(g)(3) of Pub. L. 101-239 effective, except as otherwise provided, as if included in the provision of the Technical and Miscellaneous Revenue Act of 1988, Pub. L. 100-647, to which such amendment relates, see section 7817 of Pub. L. 101-239, set out as a note under section 1 of this title.
Amendment by section 7831(f) of Pub. L. 101-239 effective as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99-514, to which such amendment relates, see section 7831(g) of Pub. L. 101-239, set out as a note under section 1 of this title.
EFFECTIVE DATE OF 1988 AMENDMENT
Amendment by Pub. L. 100-647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99-514, to which such amendment relates, see section 1019(a) of Pub. L. 100-647, set out as a note under section 1 of this title.
EFFECTIVE DATE OF 1986 AMENDMENT
Amendment by section 1112(d)(3) of Pub. L. 99-514 applicable to plan years beginning after Dec. 31, 1988, with special rule regarding collective bargaining agreements ratified before Mar. 1, 1986, and with provision for waiver of excise tax on reversions, see section 1112(e) of Pub. L. 99-514, set out as a note under section 401 of this title.
Amendment by section 1114(b)(9)(B), (C) of Pub. L. 99-514 applicable to years beginning after Dec. 31, 1988, see section 1114(c)(3) of Pub. L. 99-514, set out as a note under section 414 of this title.
Amendment by section 1852(e)(2)(D) of Pub. L. 99-514 applicable to transfers after Oct. 22, 1986, see section 1852(e)(2)(E) of Pub. L. 99-514, set out as a note under section 406 of this title.
EFFECTIVE DATE OF 1984 AMENDMENT
Amendment by Pub. L. 98-369 applicable to obligations issued after Dec. 31, 1983, see section 491(f)(1) of Pub. L. 98-369, set out as a note under section 62 of this title.
EFFECTIVE DATE OF 1983 AMENDMENT
Amendment by Pub. L. 98-21 applicable to plans established after Apr. 20, 1983, except that at the election of any domestic parent corporation such amendment shall also apply to any plan established on or before Apr. 20, 1983, see section 321(f) of Pub. L. 98-21 set out as a note under section 406 of this title.
EFFECTIVE DATE OF 1974 AMENDMENT
Amendment by section 1016(a)(5) of Pub. L. 93-406 applicable, except as otherwise provided in section 1017(c) through (i) of Pub. L. 93-406, for plan years beginning after Sept. 2, 1974, but, in the case of plans in existence on Jan. 1, 1974, amendment by Pub. L. 93-406 applicable for plan years beginning after Dec. 31, 1975, see section 1017 of Pub. L. 93-406, set out as an Effective Date; Transitional Rules note under section 410 of this title.
Amendment by section 2005(c)(13) of Pub. L. 93-406 applicable only with respect to distributions or payments made after Dec. 31, 1973, in taxable years beginning after Dec. 31, 1973, see section 2005(d) of Pub. L. 93-406, set out as a note under section 402 of this title.
EFFECTIVE DATE OF 1969 AMENDMENT
Amendment by Pub. L. 91-172 applicable to taxable years ending after Dec. 31, 1969, see section 515(d) of Pub. L. 91-172, set out as a note under section 402 of this title.
EFFECTIVE DATE
Section applicable to taxable years ending after Dec. 31, 1963, see section 220(d) of Pub. L. 88-272, set out as a note under section 406 of this title.
PLAN AMENDMENTS NOT REQUIRED UNTIL JANUARY 1, 1989
For provisions directing that if any amendments made by subtitle A or subtitle C of title XI (Sec. 1101-1147 and 1171-1177) or title XVIII (Sec. 1800-1899A) of Pub. L. 99-514 require an amendment to any plan, such plan amendment shall not be required to be made before the first plan year beginning on or after Jan. 1, 1989, see section 1140 of Pub. L. 99-514, as amended, set out as a note under section 401 of this title.
ISSUANCE OF FINAL REGULATIONS
Secretary of the Treasury or his delegate to issue before Feb. 1, 1988, final regulations to carry out amendments made by sections 1112 and 1114 of Pub. L. 99-514, see section 1141 of Pub. L. 99-514, set out as a note under section 401 of this title.