such 3-year period as such foreign corporation has been in existence) ending with the close of the taxable year of such foreign corporation which

(i) Ends with or within the taxable year next preceding such taxable year of such individual and at any time, during the period beginning with the beginning of such latter taxable year of such individual and ending not later than one year after the close of such taxable year of such foreign corporation, such individual directly owns stock in such foreign corporation, or

(ii) Ends within such taxable year of such individual and at any time, during the period beginning after the close of such taxable year of such foreign corporation and ending with the close of such taxable year of such individual, such individual directly owns stock in such foreign corporation,

then, such individual shall not be considered a United States person with respect to such corporation for the taxable year of such corporation which ends with or within the taxable year of such per

son.

The application of this paragraph may be illustrated by the following examples:

Example (1). Foreign corporation R, incorporated under the laws of Puerto Rico, is wholly owned by D, a United States citizen. D and corporation R use the calendar year as the taxable year. For 1961, 1962, and 1963, 60 percent of the gross income of R Corporation is derived from sources within Puerto Rico and 40 percent of the gross income of R Corporation is derived from sources within Panama, as determined under § 1.863-6. During all of 1964, D is a bona fide resident of Puerto Rico. D is not a United States person with respect to R Corporation for 1964. Accordingly, R Corporation is not a controlled foreign corporation at any time in 1964.

Example (2). Foreign corporation R is incorporated on January 1, 1962, under the laws of Puerto Rico. D, a United States citizen, owns all the one class of stock of R Corporation throughout 1962 and 1963. D and corporation R use the calendar year as the taxable year. For 1962, 55 percent of the gross income of R Corporation is derived from sources within Puerto Rico and 45 percent of the gross income of R Corporation is derived from sources within the Netherlands Antilles, as determined under § 1.863-6. For 1963, 40 percent of the gross income of R Corporation is derived from sources within Puerto Rico and 60 percent of the gross income of R Corporation is derived from sources within the Netherlands Antilles, as determined under § 1.863-6. During all of 1963, D is a bona fide resident of Puerto Rico.

With respect to R Corporation, D is not a United States person for 1963 because D is a bona fide resident of Puerto Rico for all of 1963; 55 percent of the gross income of R Corporation for 1962 is derived from sources within Puerto Rico; and D owns stock in R Corporation at some time during 1963. Accordingly, R Corporation is not a controlled foreign corporation at any time in 1963. In making this determination, it is immaterial that R Corporation does not satisfy the 50-percent gross income test for 1963, the taxable year during all of which D is a resident of Puerto Rico.

Example (3). Foreign corporation R is incorporated on January 1, 1962, under the laws of Puerto Rico. D, a United States citizen, owns all the one class of stock of R Corporation throughout 1962 and 1963. D and corporation R use the calendar year as the taxable year. For 1962, 45 percent of

the gross income of R Corporation is derived from sources within Puerto Rico and 55 percent of the gross income of R Corporation is derived from sources within the Netherlands Antilles, as determined under § 1.863-6. For 1963, 60 percent of the gross income of R Corporation is derived from sources within Puerto Rico and 40 percent of the gross income of R Corporation is derived from sources within the Netherlands Antilles, as determined under § 1.863-6. With respect to R Corporation, D is a United States person for 1963, since R Corporation does not satisfy the 50-percent gross income test for 1962. Accordingly, R Corporation is a controlled foreign corporation for all of 1963.

Example (4). Foreign corporation S is incorporated on July 1, 1962, under the laws of Puerto Rico. Corporation S uses the fiscal year ending on June 30 as the taxable year. For its fiscal year ending on June 30, 1963, 55 percent of the gross income of S Corporation is derived from sources within Puerto Rico and 45 percent of the gross income of S Corporation is derived from sources within Switzerland, as determined under § 1.863-6. For its fiscal years ending on June 30, 1964, and June 30, 1965, respectively, 40 percent of the gross income of S Corporation is derived from sources within Puerto Rico and 60 percent of the gross income of S Corporation is derived from sources within Switzerland, as determined under § 1.863-6. B, a United States citizen, who uses the calendar year as the taxable year, is a bona fide resident of Puerto Rico for all of 1964. On July 1, 1964, B acquires, and holds throughout the remainder of 1964, all of the one class of stock of S Corporation. With respect to S Corporation for its taxable year ending June 30, 1964, B is a United States person because

(a) Although B is a bona fide resident of Puerto Rico for his entire year 1964 in which ends S Corporation's taxable year ending June 30, 1964, and S Corporation meets the 50-percent gross income test for the applicable part of the 3-year period ending June 30, 1963, B does not own stock in S Corpora

tion during the period beginning January 1, 1964, and ending June 30, 1964, and

(b) Although B owns stock in S Corporation during the period beginning July 1, 1964, and ending December 31, 1964, S Corporation does not meet the 50-percent gross income test for the applicable part of the 3-year period ending June 30, 1964.

Accordingly, with respect to B, S Corporation is a controlled foreign corporation for its entire taxable year ending June 30, 1964.

Example (5). The facts are the same as in example (4), except B buys all of the stock of S Corporation on June 1, 1964, rather than on July 1, 1964. With respect to S Corporation for its taxable year ending June 30, 1964, B is not a United States person because B is a bona fide resident of Puerto Rico for his entire taxable year 1964 in which ends S Corporation's taxable year ending June 30, 1964; S Corporation meets the 50-percent gross income test for the applicable part of the 3-year period ending June 30, 1963; and B owns stock in S Corporation during the period beginning January 1, 1964, and ending June 30, 1964. Accordingly, with respect to B, S Corporation is not a controlled foreign corporation at any time during its taxable year ending June 30, 1964.

(c) Virgin Islands corporation and resident. With respect only to a foreign corporation created or organized in, or under the laws of, the Virgin Islands—

(1) If an individual (who, without regard to this paragraph, is a United States person) is a bona fide resident of the Virgin Islands as of the last day of his taxable year in which or with which the taxable year of such foreign corporation ends, and

(2) Such individual's income tax obligations under subtitle A (relating to income taxes) of the Code for his taxable year are satisfied, in accordance with section 28(a) of the Revised Organic Act of the Virgin Islands (48 U.S.C. 1642), by paying the tax on his income derived from all sources, both within and outside the Virgin Islands, into the treasury of the Virgin Islands, then, such individual shall not be considered a United States person with respect to such corporation for the taxable year of such corporation which ends with or within the taxable year of such person. The application of this paragraph may be illustrated by the following examples:

Example (1). Foreign corporation S, incorporated under the laws of the Virgin Islands, is wholly owned by D, a United States citizen. Corporation S uses the fiscal year ending on June 30 as the taxable year, and D uses the calendar year as the taxable

year. From September 1, 1963, to December 31, 1964, inclusive, D is a bona fide resident of the Virgin Islands. For 1963 and 1964, D satisfies his income tax obligations under section 28(a) of the Revised Organic Act of the Virgin Islands by paying the tax on his income derived from all sources, both within and outside the Virgin Islands, into the treasury of the Virgin Islands. With respect to S Corporation for its taxable years ending June 30, 1963, and 1964, D is not a United States person. Accordingly, S Corporation is not a controlled foreign corporation for such taxable years of such corporation.

Example (2). The facts are the same as in example (1), except that from August 15, 1964, to December 31, 1964, inclusive, D is a bona fide resident of the United States. Thus, D does not satisfy his income tax obligations for 1964 under section 28(a) of the Revised Organic Act of the Virgin Islands. The result is the same as in example (1), except that with respect to S Corporation for its taxable year ending June 30, 1964, D is a United States person and, accordingly, S Corporation is a controlled foreign corporation for such taxable year of such corporation.

(d) Corporation and resident of other United States possessions. With respect only to a foreign corporation created or organized in, or under the laws of, any possession of the United States (other than Puerto Rico or the Virgin Islands)

(1) If an individual (who, without regard to this paragraph, is a United States person) is a bona fide resident of such possession during his entire taxable year in which or with which the taxable year of such foreign corporation ends, and

(2) Any part or all of such individual's income (other than amounts includible in his gross income under section 951(a)) for his taxable year derived, in accordance with § 1.863-6, from sources within any possession of the United States (whether or not the possession of which such individual is a resident) is not, as a result of the application of section 931, included in his gross income for his taxable year,

then, such individual shall not be considered a United States person with respect to such corporation for the taxable year of such corporation which ends with or within the taxable year of such person. Subparagraph (2) of this paragraph shall apply only for purposes of determining whether an individual is a United States person; after such determination has been made, section 931 shall be applied to the gross income (including

amounts includible in gross income under section 951(a)) of such individual to determine the amount to be excluded from such individual's gross income under section 931. The application of this paragraph may be illustrated by the following examples:

Example (1). Foreign corporation R, incorporated under the laws of Guam, is wholly owned by D, a United States citizen. D and corporation R use the calendar year as the taxable year and the cash receipts and disbursements method of accounting. D is a bona fide resident of Guam for all of 1963 and all of his income of $30,000 (determined without taking into account amounts includible in his gross income under section 951(a)) is derived from sources within Guam. Of such income, $24,000 is received in Guam and $6,000 is received in the United States. D meets the 3-year test of section 931(a) and, but for the application of section 931(b), all of his income of $30,000 would be excluded from gross income for 1963 under section 931. However, in accordance with section 931(b) and paragraph (c) of §1.931-1, the $6,000 received in the United States is included in gross income. Nevertheless, since part ($24,000) of his income of $30,000 for 1963 derived, in accordance with § 1.863-6, from sources within Guam is not, as a result of the application of section 931, included in his gross income, D is not a United States person with respect to R Corporation for its taxable year 1963. Accordingly, R Corporation is not a controlled foreign corporation for its taxable year 1963.

Example (2). The facts are the same as in example (1), except that, instead of receiving the $6,000 in the United States, D receives $10,000 of the $30,000 in Guam for services performed for an agency of the United States. Under 1.863-6, all of D's income for 1963 is income derived from sources within Guam. However, since D's income of $10,000 from the agency of the United States is deemed under section 931 (i) to be derived from sources within the United States for purposes of section 931, at least 80 percent of his gross income for 1963, determined without the application of section 931, is not derived from sources within Guam. Accordingly, since no part

of D's gross income of $30,000 for 1963 derived, in accordance with § 1.863-6, from sources within Guam is, as a result of the application of section 931, excluded from gross income for 1963, D is a United States person with respect to R Corporation for R Corporation's taxable year 1963. Accordingly, R Corporation is a controlled foreign corporation for its taxable year 1963. [T.D. 6775, 29 F.R. 16082, Dec. 2, 1964]

§ 1.958 Statutory provisions; rules for determining stock ownership.

SEC. 958. Rules for determining stock ownership (a) Direct and indirect ownership— (1) General rule. For purposes of this subpart (other than sections 955(b)(1) (A) and (B), 955(c) (2) (A) (ii), and 960 (a) (1)), stock owned means

(A) Stock owned directly, and

(B) Stock owned with the application of paragraph (2).

(2) Stock ownership through foreign entities. For purposes of subparagraph (B) of paragraph (1), stock owned, directly or indirectly, by or for a foreign corporation, foreign partnership, or foreign trust or foreign estate (within the meaning of section 7701 (a) (31)) shall be considered as being owned proportionately by its shareholders, partners, or beneficiaries. Stock considered to be owned by a person by reason of the application of the preceding sentence shall, for purposes of applying such sentence, be treated as actually owned by such person.

(3) Special rule for mutual insurance companies. For purposes of applying paragraph (1) in the case of a foreign mutual insurance company, the term "stock" shall include any certificate entitling the holder to voting power in the corporation.

(b) Constructive ownership. For purposes of sections 951(b), 954(d) (3), and 957, section 318(a) (relating to constructive ownership of stock) shall apply to the extent that the effect is to treat any United States person as a United States shareholder within the meaning of section 951(b), to treat a person as a related person within the meaning of section 954(d) (3), or to treat a foreign corporation as a controlled foreign corporation under section 957, except that

(1) In applying paragraph (1)(A) of section 318(a), stock owned by a nonresident alien individual (other than a foreign trust or foreign estate) shall not be considered as owned by a citizen or by a resident alien individual.

(2) In applying subparagraphs (A), (B), and (C) of section 318 (a) (2), if a partnership, estate, trust, or corporation owns, directly or indirectly, more than 50 percent of the total combined voting power of all classes of stock entitled to vote of a corporation, it shall be considered as owning all the stock entitled to vote.

(3) In applying subparagraph (C) of section 318 (a) (2), the phrase "10 percent" shall be substituted for the phrase "50 percent" used in subparagraph (C).

(4) Subparagraphs (A), (B), and (C) of section 318(a) (3) shall not be applied so as to consider a United States person as owning stock which is owned by a person who is not a United States person.

[Sec. 958 as added by sec. 12(a), Rev. Act 1962 (76 Stat. 1006); as amended by sec. 4(b)(5),

Act of Aug. 31, 1964 (Pub. Law 88-554, 78 Stat. 763)]

[T.D. 6889, 31 F.R. 9454, July 12, 1966] § 1.958-1

Direct and indirect ownership

of stock.

(a) In general. Section 958 (a) provides that, for purposes of sections 951 to 964 (other than sections 955 (b) (1) (A) and (B), 955(c) (2) (A) (ii), and 960 (a) (1)), stock owned means—

(1) Stock owned directly; and

(2) Stock owned with the application of paragraph (b) of this section.

The rules of section 958 (a) and this section provide a limited form of stock attribution primarily for use in determining the amount taxable to a United States shareholder under section 951(a). These rules also apply for purposes of other provisions of the Code and regulations which make express reference to section 958(a).

(b) Stock ownership through foreign entities. For purposes of paragraph (a) (2) of this section, stock owned, directly or indirectly, by or for a foreign corporation, foreign partnership, or foreign trust or foreign estate (within the meaning of section 7701(a) (31)) shall be considered as being owned proportionately by its shareholders, partners, or beneficiaries, respectively. Stock considered to be owned by reason of the application of this paragraph shall, for purposes of reapplying this paragraph, be treated as actually owned by such person. Thus, this rule creates a chain of ownership; however, since the rule applies only to stock owned by a foreign entity, attribution under the rule stops with the first United States person in the chain of ownership running from the foreign entity. The application of this paragraph may be illustrated by the following example:

Example. Domestic corporation M owns 75 percent of the one class of stock in foreign corporation R, which in turn owns 80 percent of the one class of stock in foreign corporation S, which in turn owns 90 percent of the one class of stock in foreign corporation T. Under this paragraph, R Corporation is considered as owning 80 percent of the 90 percent of the stock which S Corporation owns in T Corporation, or 72 percent. Corporation

M is considered as owning 75 percent of such 72 percent of the stock in T Corporation, or 54 percent. Since M Corporation is a domestic corporation, the attribution under this paragraph stops with M Corporation,

even though, illustratively, such corporation is wholly owned by domestic corporation N.

(c) Rules of application-(1) Special rule for mutual insurance companies. For purposes of applying paragraph (a) of this section in the case of a foreign mutual insurance company, the term "stock" shall include any certificate entitling the holder to voting power in the corporation.

(2) Amount of interest in foreign corporation, foreign partnership, foreign trust, or foreign estate. The determination of a person's proportionate interest in a foreign corporation, foreign partnership, foreign trust, or foreign estate will be made on the basis of all the facts and circumstances in each case. Generally, in determining a person's proportionate interest in a foreign corporation, the purpose for which the rules of section 958(a) and this section are being applied will be taken into account. Thus, if the rules of section 958(a) are being applied to determine the amount of stock owned for purposes of section 951(a), a person's proportionate interest in a foreign corporation will generally be determined with reference to such person's interest in the income of such corporation. If the rules of section 958(a) are being applied to determine the amount of voting power owned for purposes of section 951(b) or 957, a person's proportionate interest in a foreign corporation will generally be determined with reference to the amount of voting power in such corporation owned by such person. However, any arrangement which artificially decreases a United States person's proportionate interest will not be recognized. See §§ 1.951-1 and 1.957-1.

(d) Illustration. The application of this section may be illustrated by the following examples:

Example (1). United States persons A and B own 25 percent and 50 percent, respectively, of the one class of stock in foreign corporation M. Corporation M owns 80 percent of the one class of stock in foreign corporation N, and N Corporation owns 60 percent of the one class of stock in foreign corporation P. Under paragraph (b) of this section, M Corporation is considered to own 48 percent (80 percent of 60 percent) of the stock in P Corporation; such 48 percent is treated as actually owned by M Corporation for the purpose of again applying paragraph (b) of this section. Thus, A and B are considered to own 12 percent (25 percent of 48

percent) and 24 percent (50 percent of 48 percent), respectively, of the stock in P Corporation.

Example (2). United States person C is a 60-percent partner in foreign partnership X. Partnership X owns 40 percent of the one class of stock in foreign corporation Q. Corporation Q is a 50-percent partner in foreign partnership Y, and partnership Y owns 100 percent of the one class of stock in foreign corporation R. By the application of paragraph (b) of this section, C is considered to own 12 percent (60 percent of 40 percent of 50 percent of 100 percent) of the stock in R Corporation.

Example (3). Foreign trust Z was created for the benefit of United States persons D, E, and F. Under the terms of the trust instrument, the trust income is required to be divided into three equal shares. Each beneficiary's share of the income may either be accumulated for him or distributed to him in the discretion of the trustee. In 1970, the trust is to terminate and there is to be paid over to each beneficiary the accumulated income applicable to his share and one-third of the corpus. The corpus of trust Z is composed of 90 percent of the one class of stock in foreign corporation S. By the application of this section, each of D, E, and F is considered to own 30 percent (% of 90 percent) of the stock in S Corporation.

Example (4). Among the assets of foreign estate W are Blackacre and a block of stock, consisting of 75 percent of the one class of stock of foreign corporation T. Under the terms of the will governing estate W, Blackacre is left to G, a nonresident alien, for life, remainder to H, a nonresident alien, and the block of stock is left to United States person K. By the application of this section, K is considered to own the 75 percent of the stock of T Corporation, and G and H are not considered to own any of such stock. [T.D. 6889, 31 F.R. 9455, July 12, 1966] § 1.958-2

stock.

Constructive ownership of

(a) In general. Section 958 (b) provides that, for purposes of sections 951 (b), 954(d) (3), and 957, the rules of section 318 (a) as modified by section 958 (b) and this section shall apply to the extent that the effect is to treat a United States person as a United States shareholder within the meaning of section 951(b), to treat a person as a related person within the meaning of section 954 (d) (3), or to treat a foreign corporation as a controlled foreign corporation under section 957. The rules contained in this section also apply for purposes of other provisions of the Code and regulations

which make express reference to section 958(b).

(b) Members of family—(1) In general. Except as provided in subparagraph (3) of this paragraph, an individual shall be considered as owning the stock owned, directly or indirectly, by or for

(i) His spouse (other than a spouse who is legally separated from the individual under a decree of divorce or separate maintenance); and

(ii) His children, grandchildren, and parents.

(2) Effect of adoption. For purposes of subparagraph (1)(ii) of this paragraph, a legally adopted child of an individual shall be treated as a child of such individual by blood.

(3) Stock owned by nonresident alien individual. For purposes of this paragraph, stock owned by a nonresident alien individual (other than a foreign trust or foreign estate) shall not be considered as owned by a United States citizen or a resident alien individual. See section 958 (b)(1).

(c) Attribution from partnerships, estates, trusts, and corporations—(1) In general. Except as provided in subparagraph (2) of this paragraph

(i) From partnerships and estates. Stock owned, directly or indirectly, by or for a partnership or estate shall be considered as owned proportionately by its partners or beneficiaries.

(ii) From trusts-(a) To beneficiaries. Stock owned, directly or indirectly, by or for a trust (other than an employees' trust described in section 401(a) which is exempt from tax under section 501(a)) shall be considered as owned by its beneficiaries in proportion to the actuarial interest of such beneficiaries in such trust.

(b) To owner. Stock owned, directly or indirectly, by or for any portion of a trust of which a person is considered the owner under sections 671 to 678 (relating to grantors and others treated as substantial owners) shall be considered as owned by such person.

(iii) From corporations. If 10 percent or more in value of the stock in a corporation is owned, directly or indirectly, by or for any person, such person shall be considered as owning the stock owned, directly or indirectly, by or for such corporation, in that proportion which the value of the stock which such person so