TAX 9869 Lecture Notes - Lecture 51: Foreign Tax Credit, Controlled Foreign Corporation, Fiction Collective Two

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11 Aug 2020
Stock Attribution:
Stock attribution rules apply to determine the 10% shareholder and CFC status.
Three rules:
1) Direct Ownership
2) Indirect Ownership
3) Constructive Ownership
1) First determine who owns the stock directly.
2) The indirect ownership rule is basically a look through rule.
Shareholders, partners and beneficiaries will be deemed to own their proportionate share
of a foreign corporation that is owned by a corporation, partnership, trust, or estate.
Example: U.S. Corporation DC owns 20% of Foreign Corporation FC1, which in turn owns
50% of Foreign Corporation FC2. DC is deemed to own 10% of FC2
(20% of 50%).
Stock Attribution: (Continued)
3) The constructive ownership rules are similar to Sec. 318 attribution rules with
some modifications.
A. Family Attribution: Taxpayer’s spouse, children, grandchildren and parents. Not
siblings. Non-resident aliens family members are not included.
A and B are U.S. persons each owning 10% of foreign corporation X.
A and B are married. A and B, therefore, each own 10% directly and 10%
constructively, for a total of 20% each. Their 4 grandchildren who are non-resident
aliens each own 20% of foreign corporation X. Because the grandchildren are non-
resident aliens, their stock is not attributed to A and B and Foreign Corporation X is
not a CFC.
B. Partnerships and Estates: Partners or beneficiaries are deemed to own
proportionately the same amount of stock owned by the partnership or estate.
Partnerships or Estates are deemed to own the stock of their partners or beneficiaries.
However, this rule will not re-attribute the stock to the partnerships or estates to other
partners or beneficiaries (no “double attribution”).
Stock Attribution: (Continued)
C. Corporations:
•Stock owned by a corporation will be attributed proportionately to shareholders owning 10% or
•If a partnership, estate, trust or corporation owns 50% or more of a corporation, that entity is
deemed to own 100% of the stock of the corporation.
DC1 owns 60% of DC2, which owns 15% of FC1. DC1 is deemed to own 15% of FC1.
If an individual owns 50% or more of a corporation, that corporation is deemed to own the
stock of the individual.
Stock Options: If a U.S. person owns options to buy the stock of the corporation, that
person is deemed to own such stock.
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