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Internal Revenue Code, § 956. Investment Of Earnings In United States Property

I.R.C. § 956(a) General Rule
In the case of any controlled foreign corporation, the amount determined under this section with respect to any United States shareholder for any taxable year is the lesser of—
I.R.C. § 956(a)(1)
the excess (if any) of—
I.R.C. § 956(a)(1)(A)
such shareholder's pro rata share of the average of the amounts of United States property held (directly or indirectly) by the controlled foreign corporation as of the close of each quarter of such taxable year, over
I.R.C. § 956(a)(1)(B)
the amount of earnings and profits described in section 959(c)(1)(A) with respect to such shareholder, or
I.R.C. § 956(a)(2)
such shareholder's pro rata share of the applicable earnings of such controlled foreign corporation.
The amount taken into account under paragraph (1) with respect to any property shall be its adjusted basis as determined for purposes of computing earnings and profits, reduced by any liability to which the property is subject.
I.R.C. § 956(b) Special Rules
I.R.C. § 956(b)(1) Applicable Earnings
For purposes of this section, the term “applicable earnings” means, with respect to any controlled foreign corporation, the sum of—
I.R.C. § 956(b)(1)(A)
the amount (not including a deficit) referred to in section 316(a)(1)to the extent such amount was accumulated in prior taxable years, and
I.R.C. § 956(b)(1)(B)
the amount referred to in section 316(a)(2),
but reduced by distributions made during the taxable year and by earnings and profits described in section 959(c)(1).
I.R.C. § 956(b)(2) Special Rule For U.S. Property Acquired Before Corporation Is A Controlled Foreign Corporation
In applying subsection (a) to any taxable year, there shall be disregarded any item of United States property which was acquired by the controlled foreign corporation before the first day on which such corporation was treated as a controlled foreign corporation. The aggregate amount of property disregarded under the preceding sentence shall not exceed the portion of the applicable earnings of such controlled foreign corporation which were accumulated during periods before such first day.
I.R.C. § 956(b)(3) Special Rule Where Corporation Ceases To Be Controlled Foreign Corporation
If any foreign corporation ceases to be a controlled foreign corporation during any taxable year—
I.R.C. § 956(b)(3)(A)
the determination of any United States shareholder's pro rata share shall be made on the basis of stock owned (within the meaning of section 958(a)) by such shareholder on the last day during the taxable year on which the foreign corporation is a controlled foreign corporation,
I.R.C. § 956(b)(3)(B)
the average referred to in subsection (a)(1)(A) for such taxable year shall be determined by only taking into account quarters ending on or before such last day, and
I.R.C. § 956(b)(3)(C)
in determining applicable earnings, the amount taken into account by reason of being described in paragraph (2) of section 316(a) shall be the portion of the amount so described which is allocable (on a pro rata basis) to the part of such year during which the corporation is a controlled foreign corporation.
I.R.C. § 956(c) United States Property Defined
I.R.C. § 956(c)(1) In General
For purposes of subsection (a), the term “United States property” means any property acquired after December 31, 1962, which is—
I.R.C. § 956(c)(1)(A)
tangible property located in the United States;
I.R.C. § 956(c)(1)(B)
stock of a domestic corporation;
I.R.C. § 956(c)(1)(C)
an obligation of a United States person; or
I.R.C. § 956(c)(1)(D)
any right to the use in the United States of--
I.R.C. § 956(c)(1)(D)(i)
a patent or copyright,
I.R.C. § 956(c)(1)(D)(ii)
an invention, model, or design (whether or not patented),
I.R.C. § 956(c)(1)(D)(iii)
a secret formula or process, or
I.R.C. § 956(c)(1)(D)(iv)
any other similar right, which is acquired or developed by the controlled foreign corporation for use in the United States.
I.R.C. § 956(c)(2) Exceptions
For purposes of subsection (a), the term “United States property” does not include—
I.R.C. § 956(c)(2)(A)
obligations of the United States, money, or deposits with—
I.R.C. § 956(c)(2)(A)(i)
any bank (as defined by section 2(c) of the Bank Holding Company Act of 1956 (12 U.S.C. 1841(c)), without regard to subparagraphs (C) and (G) of paragraph (2) of such section), or
I.R.C. § 956(c)(2)(A)(ii)
any corporation not described in clause (i) with respect to which a bank holding company (as defined by section 2(a) of such Act) or financial holding company (as defined by section 2(p) of such Act) owns directly or indirectly more than 80 percent by vote or value of the stock of such corporation;
I.R.C. § 956(c)(2)(B)
property located in the United States which is purchased in the United States for export to, or use in, foreign countries;
I.R.C. § 956(c)(2)(C)
any obligation of a United States person arising in connection with the sale or processing of property if the amount of such obligation outstanding at no time during the taxable year exceeds the amount which would be ordinary and necessary to carry on the trade or business of both the other party to the sale or processing transaction and the United States person had the sale or processing transaction been made between unrelated persons;
I.R.C. § 956(c)(2)(D)
any aircraft, railroad rolling stock, vessel, motor vehicle, or container used in the transportation of persons or property in foreign commerce and used predominantly outside the United States;
I.R.C. § 956(c)(2)(E)
an amount of assets of an insurance company equivalent to the unearned premiums or reserves ordinary and necessary for the proper conduct of its insurance business attributable to contracts which are contracts described in section 953(e)(2);
I.R.C. § 956(c)(2)(F)
the stock or obligations of a domestic corporation which is neither a United States shareholder (as defined in section 951(b)) of the controlled foreign corporation, nor a domestic corporation, 25 percent or more of the total combined voting power of which, immediately after the acquisition of any stock in such domestic corporation by the controlled foreign corporation, is owned, or is considered as being owned, by such United States shareholders in the aggregate;
I.R.C. § 956(c)(2)(G)
any movable property (other than a vessel or aircraft) which is used for the purpose of exploring for, developing, removing, or transporting resources from ocean waters or under such waters when used on the Continental Shelf of the United States;
I.R.C. § 956(c)(2)(H)
an amount of assets of the controlled foreign corporation equal to the earnings and profits accumulated after December 31, 1962, and excluded from subpart F income under section 952(b);
I.R.C. § 956(c)(2)(I)
deposits of cash or securities made or received on commercial terms in the ordinary course of a United States or foreign person's business as a dealer in securities or in commodities, but only to the extent such deposits are made or received as collateral or margin for (i) a securities loan, notional principal contract, options contract, forward contract, or futures contract, or (ii) any other financial transaction in which the Secretary determines that it is customary to post collateral or margin;
I.R.C. § 956(c)(2)(J)
an obligation of a United States person to the extent the principal amount of the obligation does not exceed the fair market value of readily marketable securities sold or purchased pursuant to a sale and repurchase agreement or otherwise posted or received as collateral for the obligation in the ordinary course of its business by a United States or foreign person which is a dealer in securities or commodities;
I.R.C. § 956(c)(2)(K)
securities acquired and held by a controlled foreign corporation in the ordinary course of its business as a dealer in securities if—
I.R.C. § 956(c)(2)(K)(i)
the dealer accounts for the securities as securities held primarily for sale to customers in the ordinary course of business, and
I.R.C. § 956(c)(2)(K)(ii)
the dealer disposes of the securities (or such securities mature while held by the dealer) within a period consistent with the holding of securities for sale to customers in the ordinary course of business; and
I.R.C. § 956(c)(2)(L)
an obligation of a United States person which—
I.R.C. § 956(c)(2)(L)(i)
is not a domestic corporation, and
I.R.C. § 956(c)(2)(L)(ii)
is not--
I.R.C. § 956(c)(2)(L)(ii)(I)
a United States shareholder (as defined in section 951(b)) of the controlled foreign corporation, or
I.R.C. § 956(c)(2)(L)(ii)(II)
a partnership, estate, or trust in which the controlled foreign corporation, or any related person (as defined in section 954(d)(3)), is a partner, beneficiary, or trustee immediately after the acquisition of any obligation of such partnership, estate, or trust by the controlled foreign corporation.
For purposes of subparagraphs (I), (J), and (K), the term “dealer in securities” has the meaning given such term by section 475(c)(1), and the term “dealer in commodities” has the meaning given such term by section 475(e), except that such term shall include a futures commission merchant.
I.R.C. § 956(c)(3) Certain Trade Or Service Receivables Acquired From Related United States Persons
I.R.C. § 956(c)(3)(A) In General
Notwithstanding paragraph (2) (other than subparagraph (H) thereof), the term “United States property” includes any trade or service receivable if—
I.R.C. § 956(c)(3)(A)(i)
such trade or service receivable is acquired (directly or indirectly) from a related person who is a United States person, and
I.R.C. § 956(c)(3)(A)(ii)
the obligor under such receivable is a United States person.
I.R.C. § 956(c)(3)(B) Definitions
For purposes of this paragraph, the term “trade or service receivable” and “related person” have the respective meanings given to such terms by section 864(d).
I.R.C. § 956(d) Pledges And Guarantees
For purposes of subsection (a), a controlled foreign corporation shall, under regulations prescribed by the Secretary, be considered as holding an obligation of a United States person if such controlled foreign corporation is a pledgor or guarantor of such obligations.
I.R.C. § 956(e) Regulations
The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this section, including regulations to prevent the avoidance of the provisions of this section through reorganizations or otherwise.
(Added Pub. L. 87-834, 12(a), Oct. 16, 1962, 76 Stat. 1015, and amended Pub. L. 94-455, title X, 1021(a), title XIX, 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1618, 1834; Pub. L. 98-369, div. A, title I, 123(b), title VIII, 801(d)(8), July 18, 1984, 98 Stat. 646, 996; Pub. L. 99-514, title XVIII, 1810(c)(1), Oct. 22, 1986, 100 Stat. 2824; Pub. L. 103-66, title XIII, Sec. 13232(a), (b), Aug. 10, 1993, 107 Stat. 312; Pub. L. 104-188, title I, Aug. 20, 1996, 110 Stat. 1755; Pub. L. 105-34, title XI, XVI, Sec. 1173(a), 1601(e), Aug. 5, 1997, 111 Stat 788; Pub. L. 108-357, title IV, VIII, Sec. 407(a), (b), 837(a), Oct. 22, 2004, 118 Stat. 1418; Pub. L. 110-172, Sec. 11(g)(15)(A), Dec. 29, 2007, 121 Stat. 2473; Pub. L. 115-141, Div. U, title IV, Sec. 401(a)(162)-(163), Mar. 23, 2018, 132 Stat. 348.)
BACKGROUND NOTES
AMENDMENTS
2018 — Subsec. (c)(2)(E). Pub. L. 115-141, Div. U, Sec. 401(a)(162), amended subpar. (E) by substituting “which are contracts described in section 953(e)(2)” for “which are not contracts described in section 953(a)(1)”.
Subsec. (e). Pub. L. 115-141, Div. U, Sec. 401(a)(163), amended par. (e) by substituting “provisions” for “provisons”.
2007 - Subsec. (c)(2)(I)-(M). Pub. L. 110-172, Sec. 11(g)(15)(A)(i), amended par. (2) by striking subpar. (I) and redesignating subpar. (J)-(M) as subpar. (I)-(L), respectively.
Subsec. (c)(2). Pub. L. 110-172, Sec. 11(g)(15)(A)(ii), amended par. (2) by substituting “subparagraphs (I), (J), and (K)” for “subparagraphs (J), (K), and (L)”.
2004 - Subsec. (c)(2)(A). Pub. L. 108-357, Sec. 837(a), amended subpar. (A). Before amendment it read as follows:
“(A) obligations of the United States, money, or deposits with persons carrying on the banking business;”.
Subsec. (c)(2). Pub. L. 108-357, Sec. 407(b), amended par. (2) by substituting “, (K), and (L)” for “and (K)” in the last sentence.
Subsec. (c)(2)(J)-(M). Pub. L. 108-357, Sec. 407(a), amended par. (2) by striking “and” at the end of subpar. (J); by inserting a semicolon for the period at the end of subpar. (K); and by adding subpar. (L) and (M).
1997--Subsec. (b)(1)(A). Pub. L. 105-34, Sec. 1601(e). Inserted “to the extent such amount was accumulated in prior taxable years" after “section 316(a)(1)” of subparagraph (A).
Subsec. (c)(2)(H(, (I). Pub. L. 105-34, Sec. 1173(a). Struck out “and” at the end of subparagraph (H), struck out the period at the end of subparagraph (I) and inserted a semicolon.
Subsec. (c)(2)(J), (K). Pub. L. 105-34, Sec. 1173(a). Added new subparagraphs (J) and (K) at the end of subparagraph (I).
1996--Subsec. (b)(1). Pub. L. 104-188, Sec. 1501(b), amended par. (1). Before amendment, par. (1) read as follows:
“(1) Applicable earnings. --
For purposes of this section, the term ‘applicable earnings’ has the meaning given to such term by section 956A(b), except that the provisions of such section excluding earnings and profits accumulated in taxable years beginning before October 1, 1993, shall be disregarded.”
Subsec. (b)(3). Pub. L. 104-188, Sec. 1501(b), amended par. (3). Before amendment, par. (3) read as follows:
“(3) Special rule where corporation ceases to be controlled foreign corporation.--Rules similar to the rules of section 956A(e) shall apply for purposes of this section.”
1993—Subsec. (a)-(d). Pub. L. 103-66, Sec. 13232(a), struck subsec. (a), redesignated subsec. (b) and (c) as subsec. (c) and (d), respectively, and added new subsec. (a) and (b). Before being struck, subsec. (a) read as follows:
“(a) General rules.—For purposes of this subpart--
“(1) Amount of investment.—The amount of earnings of a controlled foreign corporation invested in United States property at the close of any taxable year is the aggregate amount of such property held, directly or indirectly, by the controlled foreign corporation at the close of the taxable year, to the extent such amount would have constituted a dividend (determined after the application of section 955(a)) if it had been distributed.
“(2) Pro rata share of increase for year.—In the case of any United States shareholder, the pro rata share of the increase for any taxable year in the earnings of a controlled foreign corporation invested in United States property is the amount determined by subtracting his pro rata share of--
“(A) the amount determined under paragraph (1) for the close of the preceding taxable year, reduced by amounts paid during such preceding taxable year to which section 959(c)(1) applies, from
“(B) the amount determined under paragraph (1) for the close of the taxable year.
“The determinations under subparagraphs (A) and (B) shall be made on the basis of stock owned (within the meaning of section 958(a)) by such United States shareholder on the last day during the taxable year on which the foreign corporation is a controlled foreign corporation.
“(3) Amount attributable to property.—The amount taken into account under paragraph (1) or (2) with respect to any property shall be its adjusted basis, reduced by any liability to which the property is subject.”
Subsec. (e). Pub. L. 103-66, Sec. 13232(b), added subsec. (e).
1986--Subsec. (b)(3)(A). Pub. L. 99-514 inserted “(other than subparagraph (H) thereof)”.
1984--Subsec. (b)(2)(I). Pub. L. 98-369, 801(d)(8), added subpar. (I).
Subsec. (b)(3). Pub. L. 98-369, 123(b), added par. (3).
1976--Subsec. (b)(2)(F) to (H). Pub. L. 94-455, 1021(a), added subpars. (F) and (G) and redesignated former subpar. (F) as (H).
Subsec. (c). Pub. L. 94-455, 1906(b)(13)(A), struck out “or his delegate” after “Secretary”.
EFFECTIVE DATE OF 2018 AMENDMENTS
Amendments by Pub. L. 115-141, Div. U, Sec. 401(a)(162)-(163), effective March 23, 2018.
EFFECTIVE DATE OF 2007 AMENDMENTS
Amendments by Pub. L. 110-172, Sec. 11(g)(15)(A), effective on the date of the enactment of this Act [Enacted: Dec. 29, 2007].
EFFECTIVE DATE OF 2004 AMENDMENTS
Amendments by Pub. L. 108-357, Sec. 407, effective for taxable years of foreign corporations beginning after December 31, 2004, and to taxable years of United States shareholders with or within which such taxable years of foreign corporations end.
Amendment by Pub. L. 108-357, Sec. 837(a), effective on the date of the enactment of this Act [Enacted: Oct. 22, 2004].
EFFECTIVE DATE OF 1997 AMENDMENTS
Section 1601(j)(1) of Pub. L. 105-34 provided that:
“Except as provided in paragraph (2), the amendments made by this section shall take effect as if included in the provisions of the Small Business Job Protection Act of of 1996 to which they relate”.
Section 1601(j)(2) provided the following exception:
“The amendment made by subsection (d)(2)(D) shall apply to calendar years beginning after the date of the enactment of this Act [enacted: Aug. 5, 1997]”.
Subsec. 1173(b) of Pub. L. 105-34 provided that:
“The amendments made by this section shall apply to taxable years of foreign corporations beginning after December 31, 1997, and to taxable years of United States shareholders with or within which such taxable years of foreign corporations end”.
EFFECTIVE DATE OF 1996 AMENDMENTS
Amendments by Pub. L. 104-188, Sec. 1501(b), effective for taxable years of foreign corporations beginning after December 31, 1996, and for taxable years of United States shareholders within which or with which such taxable years of foreign corporations end.
EFFECTIVE DATE OF 1993 AMENDMENTS
Amendments by Pub. L. 103-66, Sec. 13232, effective for taxable years of controlled foreign corporations beginning after September 30, 1993, and for taxable years of United States shareholders in which or with which such taxable years of controlled foreign corporations end.
EFFECTIVE DATE OF 1986 AMENDMENTS
Amendment by Pub. L. 99-514 effective, except as otherwise provided, as if included in the provisions of the Tax Reform Act of 1984, Pub. L. 98-369, div. A, to which such amendment relates, see section 1881 of Pub. L. 99-514, set out as a note under section 48 of this title.
EFFECTIVE DATE OF 1984 AMENDMENTS
Amendment by section 123(b) of Pub. L. 98-369 applicable to accounts receivable and evidences of indebtedness transferred after Mar. 1, 1984, in taxable years ending after such date, with an exception, see section 123(c) of Pub. L. 98-369, set out as a note under section 864 of this title.
Amendment by section 801(d)(8) of Pub. L. 98-369 applicable to transactions after Dec. 31, 1984, in taxable years ending after such date, see section 805(a)(1) of Pub. L. 98-369, set out as an Effective Date note under section 921 of this title.
EFFECTIVE DATE OF 1976 AMENDMENTS
Section 1021(c) of Pub. L. 94-455, as amended by Pub. L. 99-514, 2, Oct. 22, 1986, 100 Stat. 2095, provided that: “The amendments made by this section [amending this section and section 958 of this title] shall apply to taxable years of foreign corporations beginning after December 31, 1975, and to taxable years of United States shareholders (within the meaning of section 951(b) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954]) within which or with which such taxable years of such foreign corporations end. In determining for purposes of any taxable year referred to in the preceding sentence the amount referred to in section 956(a)(2)(A) of the Internal Revenue Code of 1986 for the last taxable year of a corporation beginning before January 1, 1976, the amendments made by this section shall be deemed also to apply to such last taxable year.”