certain foreign taxes paid with respect to the earnings and profits attributable to such amounts. Section 962 also provides rules for the treatment of an actual distribution of earnings and profits previously taxed in accordance with an election of the benefits of this section. See § 1.962-3. For transitional rules for certain taxable years, see § 1.962-4.

(b) Rules of application. For purposes of this section

(1) Application of section 11. For purposes of applying section 11 for a taxable year as provided in paragraph (a)(1) of this section in the case of an electing United States shareholder

(i) Determination of taxable income. The term "taxable income" as used in section 11 shall mean the sum of

(a) All amounts required to be inIcluded in his gross income under section 951(a) for such taxable year; plus

(b) All amounts which would be required to be included in his gross income under section 78 for such taxable year with respect to the amounts referred to in (a) of this subdivision if such shareholder were a domestic corporation. For purposes of this section, such sum shall not be reduced by any deduction of the United States shareholder even if such shareholder's deductions exceed his gross income.

(ii) Limitation on surtax exemption. The surtax exemption provided by section 11(c) shall not exceed an amount which bears the same ratio to $25,000 as the amounts included in his gross income under section 951 (a) for the taxable year bear to his pro rata share of the earnings and profits for the taxable year of all controlled foreign corporations with respect to which such United States shareholder includes any amount in his gross income under section 951(a) for the taxable year.

(2) Allowance of foreign tax credit— (i) In general. Subject to the applicable limitation of section 904 and to the provisions of this subparagraph, there shall be allowed as a credit against the United States tax on the amounts described in subparagraph (1)(i) of this paragraph the foreign income, war profits, and excess profits taxes deemed paid under section 960 (a) (1) by the electing United States shareholder with respect to such amounts.

(ii) Application of section 960(a)(1). In applying section 960 (a) (1) for purposes of this subparagraph in the case of an electing United States shareholder, the term "domestic corporation" as used in sections 960 (a) (1) and 78, and the term "corporation" as used in section 901, shall be treated as referring to such shareholder with respect to the amounts described in subparagraph (1)(i) of this paragraph.

(iii) Carryback and carryover of excess tax deemed paid. For purposes of this subparagraph, any amount by which the foreign income, war profits, and excess profits taxes deemed paid by the electing United States shareholder for any taxable year under section 960 (a) (1) exceed the limitation determined under subdivision (iv) (a) of this subparagraph shall be treated as a carryback and carryover of excess tax paid under section 904(d), except that in no case shall excess tax paid be deemed paid in a taxable year if an election under section 962 by such shareholder does not apply for such taxable year. Such carrybacks and carryovers shall be applied only against the United States tax on amounts described in subparagraph (1) (i) of this paragraph.

For pur

(iv) Limitation on credit. poses of determining the limitation under section 904 on the amount of the credit for foreign income, war profits, and excess profits taxes

(a) Deemed paid with respect to amounts described in subparagraph (1) (i) of this paragraph, the electing United States shareholder's taxable income shall be considered to consist only of the amounts described in such subparagraph (1) (i), and

(b) Paid with respect to amounts other than amounts described in subparagraph (1)(i) of this paragraph, the electing United States shareholder's taxable income shall be considered to consist only of amounts other than the amounts described in such subparagraph (1) (i).

(v) Effect of choosing benefits of sections 901 to 905. The provisions of this subparagraph shall apply for a taxable year whether or not the electing United States shareholder chooses the benefits of subpart A of part III of subchapter N of Chapter 1 (sections 901 to 905) of the Internal Revenue Code for such year.

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

Example. Throughout his taxable year ending December 31, 1964, A, an unmarried individual who is not the head of a household, owns 60 of the 100 shares of the one class of stock in foreign corporation M and 80 of the 100 shares of the one class of stock

in foreign corporation N. A and corporations M and N use the calendar year as a taxable year, corporations M and N are controlled foreign corporations throughout the period here involved, and neither corporation is a less developed country corporation. The earnings and profits and subpart F income of, and the foreign income taxes paid by, such corporations for 1964 are as follows:

Tax on amounts included under sec. 951(a):

Gross income--

Less:

Personal exemption.

Deductions

Taxable income__

$159, 110

$200, 600

$600

100, 000

100, 600

100, 000

59, 340 218, 450

Total tax ($159,110+$59,340).

[T.D. 6858, 30 F.R. 13695, Oct. 28, 1965]

§ 1.962-2 Election of limitation of tax for individuals.

(a) Who may elect. The election under section 962 may be made only by a United States shareholder who is an individual (including a trust or estate).

(b) Time and manner of making election. Except as provided in § 1.962–4, a United States shareholder shall make an election under this section by filing a statement to such effect with his return for the taxable year with respect to

which the election is made. The statement shall include the following information:

(1) The name, address, and taxable year of each controlled foreign corporation with respect to which the electing shareholder is a United States shareholder and of all other corporations, partnerships, trusts, or estates in any applicable chain of ownership described in section 958(a);

(2) The amounts, on a corporationby-corporation basis, which are included

in such shareholder's gross income for his taxable year under section 951 (a);

(3) Such shareholder's pro rata share of the earnings and profits (determined under § 1.964-1) of each such controlled foreign corporation with respect to which such shareholder includes any amount in gross income for his taxable year under section 951(a) and the foreign income, war profits, excess profits, and similar taxes paid on or with respect to such earnings and profits;

(4) The amount of distributions received by such shareholder during his taxable year from each controlled foreign corporation referred to in subparagraph (1) of this paragraph from excludable section 962 earnings and profits (as defined in paragraph (b) (1) (i) of § 1.962-3), from taxable section 962 earnings and profits (as defined in paragraph (b) (1) (ii) of § 1.962-3), and from earnings and profits other than section 962 earnings and profits, showing the source of such amounts by taxable year; and

(5) Such further information as the Commissioner may prescribe by forms and accompanying instructions relating to such election.

(c) Effect of election—(1) In general. Except as provided in subparagraph (2) of this paragraph and § 1.962-4, an election under this section by a United States shareholder for a taxable year shall be applicable to all controlled foreign corporations with respect to which such shareholder includes any amount in gross income for his taxable year under section 951 (a) and shall be binding for the taxable year for which such election is made.

(2) Revocation. Upon application by the United States shareholder, an election made under this section may, subject to the approval of the Commissioner, be revoked. Approval will not be granted unless a material and substantial change in circumstances occurs which could not have been anticipated when the election was made. The application for consent to revocation shall be made by the United States shareholder's mailing a letter for such purpose to Commissioner of Internal Revenue, Attention: T:R, Washington, D.C., 20224, containing a statement of the facts upon which such shareholder relies in requesting such consent. [T.D. 6858, 30 F.R. 13696, Oct. 28, 1965]

to

(a) In general. Section 962(d) provides that the earnings and profits of a foreign corporation attributable amounts which are, or have been, included in the gross income of an individual United States shareholder under section 951(a) by reason of such shareholder's ownership (within the meaning of section 958(a)) of stock in such corporation and with respect to which amounts an election under § 1.962-2 applies or applied shall, when such earnings and profits are distributed to such shareholder with respect to such stock, notwithstanding the provisions of section 959 (a) (1), be included in his gross income to the extent that such earnings and profits exceed the amount of income tax paid by such shareholder under this chapter on the amounts to which such election applies or applied. Thus, when such shareholder receives an actual distribution of section 962 earnings and profits (as defined in paragraph (b) (1) of this section) from a foreign corporation, only the excludable section 962 earnings and profits (as defined in paragraph (b) (1) (i) of this section) may be excluded from his gross income.

(b) Rules of application. For purposes of this section

(1) Section 962 earnings and profits defined. With respect to an individual United States shareholder, the term "section 962 earnings and profits" means the earnings and profits of a foreign corporation referred to in paragraph (a) of this section. Such earnings and profits include

(i) Excludable section 962 earnings and profits. Excludable section 962 earnings and profits which are the amount of the section 962 earnings and profits equal to the amount of income tax paid under this chapter by such shareholder on the amounts included in his gross income under section 951(a); and

(ii) Taxable section 962 earnings and profits. Taxable section 962 earnings and profits which are the excess of section 962 earnings and profits over the amount described in subdivision (i) of this subparagraph.

(2) Determinations made separately for each taxable year. If section 962 earnings and profits attributable to more than one taxable year are distributed by a foreign corporation, the determinations

under this section shall be made separately with respect to each such taxable year.

(3) Source of distributions—(i) In general. Except as otherwise provided in this subparagraph, the provisions of paragraphs (a) through (d) of § 1.959-3 shall apply in determining the source of distributions of earnings and profits by a foreign corporation.

(ii) Treatment of section 962 earnings and profits under § 1.959-3. For purposes of a section 959 (c) amount and year classification under paragraph (b) of § 1.959-3, a distribution of earnings and profits by a foreign corporation shall be first allocated to earnings and profits other than section 962 earnings and profits (as defined in subparagraph (1) of this paragraph) and then to section 962 earnings and profits. Thus distributions shall be considered first attributable to amounts described in paragraph (b) (1) of § 1.959-3 which are not section 962 earnings and profits and then to amounts described in such paragraph (b) (1) which are section 962 earnings and profits (first for the current taxable year and then for prior taxable years beginning with the most recent prior taxable year), secondly to amounts described in paragraph (b) (2) of § 1.959-3 which are not section 962 earnings and profits and then to amounts described in such paragraph (b) (2) which are section 962 earnings and profits (first for the current taxable year and then for prior taxable years beginning with the most recent prior taxable year), and finally to the amounts described in paragraph (b) (3) of § 1.959-3 (first for the current taxable year and then for prior taxable years beginning with the most recent prior taxable year).

(iii) Allocation to excludable section 962 earnings and profits. A distribution of section 962 earnings and profits by a foreign corporation for any taxable year shall be considered first attributable to the excludable section 962 earnings and profits (as defined in subparagraph (1) (i) of this paragraph) and then to taxable section 962 earnings and profits.

(iv) Allocation of deficits in earnings and profits. A United States shareholder's pro rata share (determined in accordance with the principles of paragraph (e) of § 1.951-1) of a foreign corporation's deficit in earnings and profits (determined under § 1.964-1) for any taxable year shall be applied in accordance with the provisions of paragraph

(c) of $1.959-3 except that such deficit shall also be applied to taxable section 962 earnings and profits (as defined in subparagraph (1) (ii) of this paragraph).

(4) Distribution in exchange for stock. The provisions of this section shall not apply to a distribution of section 962 earnings and profits which is treated as in part or full payment in exchange for stock under subchapter C of chapter 1 of the Internal Revenue Code. The application of this subparagraph may be illustrated by the following example:

Example. Individual United States shareholder A owns 60 percent of the only class of stock in foreign corporation M, the basis of which is $10,000. Both A and M Corporation use the calendar year as a taxable year. In each of the taxable years 1964, 1965, and 1966, M Corporation has $1,000 of earnings and profits and $1,000 of subpart F income. With respect to each such amount, A includes $600 in gross income under section 951(a), makes the election under section 962, and pays a United States tax of $132 (22 percent of $600). Accordingly, A increases the basis of his stock in M corporation under section 961(a) by $132 in each of the years 1964, 1965, and 1966, and thus on December 31, 1966, the adjusted basis for A's stock in M Corporation is $10,396. In 1967, M Corporation is completely liquidated (in a transaction described in section 331) and A receives $13,800, consisting of $1,800 of earnings and profits attributable to the amounts which A included in gross income under section 951 (a) in 1964, 1965, and 1966, and $12,000 attributable to the other assets of M Corporation. No amount of the $3,404 gain realized by A on such distribution ($13,800 minus $10,396) may be excluded from gross income under section 959 (a) (1). However, section 962 (d) will not prevent any part of such $3,404 from being treated as a capital gain under section 331.

(5) Illustration. The application of this paragraph may be illustrated by the following example:

Example. (a) M, a controlled foreign corporation is organized on January 1, 1963; A and B, individual United States shareholders, own 50 percent and 25 percent, respectively, of the only class of stock in M Corporation. Corporation M, A, and B use the calendar year as a taxable year, and M Corporation is a controlled foreign corporation throughout the period here involved. For the taxable years 1963, 1964, 1965, and 1966, A and B must include amounts in gross income under section 951 (a) with respect to M Corporation. For the years 1963, 1965, and 1966, A makes the election under section 962. On January 1, 1967, B sells his 25-percent interest in M Corporation to A; A satisfies the requirements of paragraph (d) of § 1.959-1 so as to qualify as B's successor