In addition, such United States shareholder shall furnish to the district director such other information as he may require to verify the status of a currency or other restriction or limitation. [T.D. 6892, 31 F.R. 11142, Aug. 23, 1966]

§ 1.964-3 Records to be provided by United States shareholders.

(a) Shareholder's responsibility for providing records. For purposes of verifying his income tax liability in respect of amounts includible in income under section 951 for the taxable year of a controlled foreign corporation each United States shareholder (as defined in section 951(b)) who owns (within the meaning of section 958(a)) stock of such corporation shall, within a reasonable time after demand by the district director, provide the district director

(1) Such permanent books of account or records as are sufficient to satisfy the requirements of section 6001 and section 964 (c), or true copies thereof, as are reasonably demanded, and

(2) If such books or records are not maintained in the English language, either (i) an accurate English translation of such books or records or (ii) the services of a qualified interpreter satisfactory to the district director.

If such books or records are being used by another district director, the United States shareholder upon whom the district director has made a demand to provide such books or records shall file a statement of such fact with his district director, indicating the location of such books or records. For the length of time the United States shareholder of a controlled foreign corporation must cause such books or records as are under his control to be retained, see paragraph (e) of § 1.6001-1.

(b) Records to be provided. Except as otherwise provided in paragraph (c) of this section, the requirements of section 6001 and section 964 (c) for record keeping shall be considered satisfied if the books or records produced are sufficient to verify for the taxable year—

(1) The subpart F income of the controlled foreign corporation and, if any part of such income is excluded from the income of the United States shareholder under section 963 or section 970(a), the application of such exclusion,

(2) The previously excluded subpart F income of such corporation withdrawn from investment in less developed countries,

(3) The previously excluded export trade income of such corporation withdrawn from investment, and

(4) The increase in earnings invested by such corporation in United States property.

(c) Special rules. Verification of the subpart F income of the controlled foreign corporation for the taxable year shall not be required if

(1) It can be demonstrated to the satisfaction of the district director that

(i) The locus and nature of such corporation's activities were such as to make it unlikely that the foreign base company income of such corporation (determined in accordance with paragraph (d) (3) (i) of § 1.954-1) exceeded 20 percent of its gross income (determined in accordance with paragraph (d) (3)(ii) of § 1.954-1) for the taxable year, and

(ii) If such corporation reinsures or issues insurance or annuity contracts in connection with United States risks, the 5-percent minimum premium requirement prescribed in paragraph (b) of § 1.953-1 has not been exceeded for the taxable year, or

(2) The United States shareholder's pro rata share of such subpart F income is excluded in full from his income under section 963 and the books or records verify the application of such exclusion. [T.D. 6824, 30 F.R. 6480, May 11, 1965]

§ 1.964-4 Verification of certain classes of income.

(a) In general. The provisions of this section shall apply for purposes of determining when books or records are sufficient for purposes of § 1.964-3 to verify the classes of income described in such section.

(b) Subpart F income. Books or records sufficient to verify the subpart F income of a controlled foreign corporation must establish for the taxable year—

(1) Its gross income and deductions, (2) The income derived from the insurance of United States risks (as provided in paragraph (c) of this section),

(3) The foreign base company income (as provided in paragraph (d) of this section), and

(4) In the case of a United States shareholder claiming the benefit of the exclusion provided in section 952(b) or the limitation provided in section 952 (c)

(i) The items of income excluded from subpart F income by paragraph (b) of § 1.952-1 as income derived from sources within the United States, the United States income tax incurred with respect thereto, and the deductions properly allocable thereto and connected therewith, and

(ii) The earnings and profits, or deficit in earnings and profits, of any foreign corporation necessary for the determinations provided in paragraphs (c) and (d) of § 1.952-1.

(c) Income from insurance of United States risks. Books or records sufficient to verify the income of a controlled foreign corporation from the insurance of United States risks must establish for the taxable year

(1) That the 5-percent minimum premium requirement prescribed in paragraph (b) of § 1.953-1 has not been exceeded, or

(2) The taxable income, as determined under § 1.953-4 or § 1.953-5, which is attributable to the reinsuring or the issuing of any insurance or annuity contracts in connection with United States risks, as defined in § 1.953-2 or § 1.953-3.

(d) Foreign base company income and exclusions therefrom. Books or records sufficient to verify the income of a controlled foreign corporation which is foreign base company income must establish for the taxable year the following items:

(1) Foreign personal holding company income. The foreign personal holding company income to which section 954 (c) and 1.954-2 apply, for which purpose there must be established the gross income from—

(i) All rents and royalties,

(ii) Rents and royalties received in the active conduct of a trade or business from an unrelated person, as determined under section 954 (c) (3) (A) and paragraph (d) (1) of § 1.954-2,

(iii) Rents and royalties received from a related person for the use of property in the country of incorporation of the controlled foreign corporation, as determined under section 954 (c) (4) (C) and paragraph (e) (3) of § 1.954-2,

(iv) All dividends, interest, and, except where the controlled foreign corporation is a regular dealer in stock or securities, all gains and losses from the sale or exchange of stock or securities,

(v) Dividends, interest, and gains from the sale or exchange of stock or securities, received in the conduct of a banking, financing, or insurance business from an unrelated person, as determined under section 954 (c) (3) (B) and paragraph (d) (2) and (3) of § 1.954-2,

(vi) Dividends and interest received from a related corporation organized in the country of incorporation of the controlled foreign corporation, as determined under section 954(c) (4) (A) and paragraph (e) (1) of § 1.954-2,

(vii) Interest received in the conduct of a banking or other financing business from a related person, as determined under section 954 (c) (4) (B) and paragraph (e) (2) of § 1.954-2,

(viii) All annuities,

(ix) All gains from commodities transactions described in section 553 (a) (3), (x) All income from estates and trusts described in section 553(a)(4),

(xi) All income from personal service contracts described in section 553 (a) (5), and

(xii) All compensation for the use of corporate property by shareholders described in section 553 (a) (6).

(2) Foreign base company sales income. The foreign base company sales income to which section 954(d) and § 1.954-3 apply, for which purpose there must be established the gross income from

(i) All sales by the controlled foreign corporation of its personal property and all purchases or sales of personal property by such corporation on behalf of another person,

(ii) Purchases and/or sales of personal property in connection with transactions not involving related persons (as defined in paragraph (e) (2) of § 1.954-1),

(iii) Purchases and/or sales of personal property manufactured, produced, etc., in the country of incorporation of the controlled foreign corporation, as determined under paragraph (a)(2) of § 1.954-3,

(iv) Purchases and/or sales of personal property for use, etc., in the country of incorporation of the controlled

foreign corporation, as determined under paragraph (a) (3) of § 1.954-3, and

(v) Sales of personal property manufactured or produced by the controlled foreign corporation, as determined under paragraph (a) (4) of § 1.954-3.

If a

Where an item of income falls within more than one of subdivisions (ii) through (v) of this subparagraph, it shall be sufficient to establish that it falls within any one of them. branch or similar establishment is treated as a wholly owned subsidiary corporation through the application of section 954(d) (2) and paragraph (b) of §1.954-3, the requirements of this subparagraph shall be satisfied separately for each branch or similar establishment so treated and for the remainder of the controlled foreign corporation.

(3) Foreign base company services income. The foreign base company services income to which section 954 (e) and § 1.954-4 apply, for which purpose there must be established the gross income from

(i) All services performed by the controlled foreign corporation,

(ii) Services other than those (as determined under paragraph (b) of §1.954-4) performed for, or on behalf of, a related person,

(iii) Services performed in the country of incorporation of the controlled foreign corporation, as determined under paragraph (c) of § 1.954-4, and

(iv) Services performed in connection with the sale or exchange of, or with an offer or effort to sell or exchange, personal property manufactured, produced, etc., by the controlled foreign corporation, as determined under paragraph (d) of § 1.954-4.

Where an item of income falls within more than one of subdivisions (ii) through (iv) of this subparagraph, it shall be sufficient to establish that it falls within any one of them.

(4) Qualified investments in less developed countries. The gross income from dividends, interest, and gains received from qualified investments in less developed countries and excluded from foreign base company income under section 954(b) (1) and paragraph (b) (1) of $1.954-1. If the controlled foreign corporation has a qualified investment in a

less developed country corporation, it shall be necessary to establish, from the books or records of the less developed country corporation, that such less developed country corporation meets the requirements of section 955(c) and § 1.955-5.

(5) Income derived from aircraft or ships. The gross income derived from aircraft or ships which is excluded from foreign base company income under section 954 (b) (2) and paragraph (b) (2) of § 1.954-1.

(6) Income on which taxes are not substantially reduced. The gross income excluded from foreign base company income under section 954(b) (4) and paragraph (b) (3) of § 1.954-1 in the case of controlled foreign corporation not availed of to substantially reduce income taxes, the income or similar taxes incurred with respect thereto, and all other factors necessary to verify the application of such exclusion.

a

(7) Deductions. The deductions allocable, under paragraph (c) of § 1.954-1, to each of the classes and subclasses of gross income described in subparagraphs (1) through (6) of this paragraph.

(e) Exclusion under section 963. Books or records sufficient to verify the application of the exclusion provided by section 963 with respect to the subpart F income for the taxable year of a controlled foreign corporation must establish that the conditions set forth in paragraph (a) (2) of § 1.963-1 have been met.

(f) Exclusion under section 970(a). Books or records sufficient to verify the application for the taxable year of the exclusion provided by section 970(a) in respect of export trade income which is foreign base company income must establish for such year—

(1) That the controlled foreign corporation is an export trade corporation, as defined in section 971(a) and paragraph (a) of § 1.971-1,

(2) The export trade income, as determined under section 971(b) and paragraph (b) of § 1.971-1, which constitutes foreign base company income,

(3) The export promotion expenses, as determined under section 971(d) and paragraph (d) of § 1.971-1, which are allocable to the excludable export trade income,

(4) The gross receipts, and the gross amount on which is computed compensation included in gross receipts, from property in respect of which the excludable export trade income is derived, as described in section 970 (a) (1) (B) and paragraph (b) (2) (ii) of § 1.970-1, and

(5) The increase in investments in export trade assets, as determined under section 970 (c) (2) and paragraph (d) (2) of § 1.970-1.

(g) Withdrawal of previously excluded subpart F income from qualified investment. Books or records sufficient to verify the previously excluded subpart F income of the controlled foreign corporation withdrawn from investment in less developed countries for the taxable year must establish

(1) The sum of the amounts of income excluded from foreign base company income under section 954 (b) (1) and paragraph (b)(1) of § 1.954-1 for all prior taxable years,

(2) The sum of the amounts of previously excluded subpart F income withdrawn from investment in less developed countries for all prior taxable years, as determined under section 955(a) and paragraph (b) of § 1.955–1, and

(3) The amount withdrawn from investment in less developed countries for the taxable year as determined under section 955 (a) and paragraph (b) of § 1.955-1.

(h) Withdrawal of previously excluded export trade income from investment. Books or records sufficient to verify the previously excluded export trade income of the controlled foreign corporation withdrawn from investment for the taxable year must establish the United States shareholder's proportionate share of

(1) The sum of the amounts by which the subpart F income of such corporation was reduced for all prior taxable years under section 970 (a) and paragraph (b) of § 1.970-1,

(2) The sum of the amounts described in section 970 (b) (1) (B),

(3) The sum of the amounts of previously excluded export trade income of such corporation withdrawn from investment under section 970 (b) and paragraph (c) of § 1.970-1 for all prior taxable years, and

(4) The amount withdrawn from investment under section 970(b) and paragraph (c) of § 1.970-1 for the taxable year.

(i) Increase in earnings invested in United States property. Books or records sufficient to verify the increase for the taxable year in earnings invested by the controlled foreign corporation in United States property must establish

(1) The amount of such corporation's earnings invested in United States property (as defined in section 956(b) (1) and paragraph (a) of § 1.956-2) at the close of the current and preceding taxable years, as determined under paragraph (b) of 1.956-1,

(2) The amount of excluded property described in section 956(b) (2) and paragraph (b) of § 1.956-2 held by such corporation at the close of such years,

(3) The earnings and profits, to which section 959 (c) (1) and paragraph (b)(1) of $1.959-3 apply, distributed by such corporation during the preceding taxable year, and

(4) The amount of increase in earnings invested by such corporation in United States property which is excluded from the United States shareholder's gross income for the taxable year under section 959 (a) (2) and paragraph (c) of § 1.959-1.

[T.D. 6824, 30 F.R. 6481, May 11, 1965]

EXPORT TRADE CORPORATIONS

§ 1.970 Statutory provisions; reduction of subpart F income of export trade corporations.

Sec. 970. Reduction of subpart F income of export trade corporations-(a) Export trade income constituting foreign base company income-(1) In general. In the case of a controlled foreign corporation (as defined in section 957) which for the taxable year is an export trade corporation, the subpart F income (determined without regard to this subpart) of such corporation for such year shall be reduced by an amount equal to so much of the export trade income (as defined in section 971(b)) of such corporation for such year as constitutes foreign base company income (as defined in section 954), but only to the extent that such amount does not exceed whichever of the following amounts is the lesser:

(A) An amount equal to 11⁄2 times so much of the export promotion expenses (as defined in section 971(d)) of such corporation for such year as is properly allocable to

the export trade income which constitutes foreign base company income of such corporation for such year, or

(B) An amount equal to 10 percent of so much of the gross receipts for such year (or, in the case of gross receipts arising from commissions, fees, or other compensation for its services, so much of the gross amount upon the basis of which such commissions, fees, or other compensation is computed) accruing to such export trade corporation from the sale, installation, operation, maintenance, or use of property in respect of which such corporation derives export trade income as is properly allocable to the export trade income which constitutes foreign base company income of such corporation for such year.

The allocations with respect to export trade income which constitutes foreign base company income under subparagraphs (A) and (B) shall be made under regulations prescribed by the Secretary or his delegate. limitation.

(2) Overall The reduction under paragraph (1) for any taxable year shall not exceed an amount which bears the same ratio to the increase in the investments in export trade assets (as defined in section 971(c)) of such corporation for such year as the export trade income which constitutes foreign base company income of such corporation for such year bears to the entire export trade income of such corporation for such year.

(b) Inclusion of certain previously excluded amounts. Each United States shareholder of a controlled foreign corporation which for any prior taxable year was an export trade corporation shall include in his gross income under section 951(a)(1) (A) (ii), as an amount to which section 955 (relating to withdrawal of previously excluded subpart F income from qualified investment) applies, his pro rata share of the amount of decrease in the investments in export trade assets of such corporation for such year, but only to the extent that his pro rata share of such amount does not exceed an amount equal to

(1) His pro rata share of the sum of (A) the amounts by which the subpart F income of such corporation was reduced for all prior taxable years under subsection (a), and (B) the amounts not included in subpart F income (determined without regard to this subpart) for all prior taxable years by reason of the application of section 972, reduced by

(2) The sum of the amounts which were included in his gross income under section 951(a)(1)(A)(ii) under the provisions of this subsection for all prior taxable years.

(c) Investments in export trade assets(1) Amount of investments. For purposes

of this section, the amount taken into account with respect to any export trade asset shall be its adjusted basis, reduced by any liability to which the asset is subject.

(2) Increase in investments in export trade assets. For purposes of subsection (a), the amount of increase in investments in export trade assets of any controlled foreign corporation for any taxable year is the amount by which

(A) The amount of such investments at the close of the taxable year, exceeds (B) The amount of such investments at the close of the preceding taxable year.

(3) Decrease in investments in export trade assets. For purposes of subsection (b), the amount of decrease in investments in export trade assets of any controlled foreign corporation for any taxable year is the amount by which

(A) The amount of such investments at the close of the preceding taxable year (reduced by an amount equal to the amount of net loss sustained during the taxable year with respect to export trade assets), exceeds (B) The amount of such investments at the close of the taxable year.

(4) Special rule. A United States shareholder of an export trade corporation may, under regulations prescribed by the Secretary or his delegate, make the determinations under paragraphs (2) and (3) as of the close of the 75th day after the close of the years referred to in such paragraphs in lieu of on the last day of such years. A United States shareholder of an export trade corporation may, under regulations prescribed by the Secretary or his delegate, make the determinations under paragraphs (2) and (3) with respect to export trade assets described in section 971(c)(3) as of the close of the years following the years referred to in such paragraphs, or as of the close of such longer period of time as such regulations may permit, in lieu of on the last day of such years and in lieu of on the day prescribed in the preceding sentence. Any election under this paragraph made with respect to any taxable year shall apply to such year and to all succeeding taxable years unless the Secretary or his delegate consents to the revocation of such election.

[Sec. 970 as added by sec. 12(a), Rev. Act 1962 (76 Stat. 1006)]

[T.D. 6755, 29 F.R. 12704, Sept. 9, 1964]

§ 1.970-1 Export trade corporations.

(a) In general. Sections 970 through 972 provide in general that if a controlled foreign corporation is an export trade corporation for any taxable year, the subpart F income of such corpora