by John BodurJanuary 6, 2023

Single-Entity Treatment of Consolidated Groups for Specific Purposes

Summary

Current Provision

Consolidated groups have the option to take the position that their aggregate 951(a)(1)(A) and 951A(a) inclusions are reduced by changing the ownership of stock of a CFC within the group. Specifically, taxpayers are taking the position that a group’s aggregate pro rata share of a lower-tier CFC’s subpart F income or tested income is reduced under section 951(a)(2)(B) by reason of both: 1.) a distribution made by the lower-tier CFC to a member, and 2.) a direct or indirect acquisition of stock of the lower-tier CFC by another member.

Related Regulations with Explanations

Section 951 (a)(1)(A)

Under section 951(a)(1)(A), a U.S. shareholder of a CFC must include in gross income its pro rata shares of the CFC’s subpart F income.

A U.S. shareholder’s pro rata share of the CFC’s subpart F income is calculated based on the U.S. shareholder’s proportionate share of a hypothetical distribution by the CFC. However, the amount is reduced by the amount in section 951(a)(2)(B) to reach the U.S. shareholder’s pro rata share of subpart F income.

Section 951 (a)(2)(B)

Section 951(a)(2)(B) addresses cases in which stock of a CFC owned by a U.S. shareholder was acquired by the U.S. shareholder during the CFC’s taxable year. The U.S. shareholder’s pro rata share of subpart F income or tested income is reduced by the amount of distributions received by any other person during the taxable year as a dividend of the acquired stock. The reduction is limited to an amount of the dividend that would have been received if the CFC had distributed an amount equal to its subpart F income multiplied by the number of days during the tax year the U.S. shareholder did not own the stock over the number of days of the tax year.

This reduction represents an amount of distributed income on which the U.S. shareholder otherwise would have been subject to U.S. tax, but is not allocable to the U.S. shareholder’s holding period in the acquired stock.

Section 951 A(a)

Section 951A(a) requires a U.S. shareholder of a CFC to include in gross income its GILTI inclusion amount. A U.S. shareholder’s GILTI inclusion amount is the sum of all of their pro rata income earned by CFC’s.

Conclusion

When members are treated as a single U.S. shareholder, direct or indirect acquisitions of stock of a CFC by one member from another member should not give rise to a section 951(a)(2)(B) reduction, because the section 951(a)(2)(B) fraction reflects the period that both members owned stock of the CFC. As a result, the group’s aggregate inclusions under sections 951(a)(1)(A) and 951A(a) for a CFC are not reduced under section 951(a)(2)(B) by reason of a section 959(b) distribution made by the CFC and changes in the location of ownership of stock of the CFC within the group.

John Bodur, MBA is a Senior Tax Consultant in the firm’s Global Business Services practice and is responsible for assisting clients and adding depth in all areas of the firm’s international tax consulting services including transfer pricing, and the firm’s compliance expertise.

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