ration as of such last day uses the same taxable year and has the same elections under section 970 (c) (4) and § 1.970-2 in force, or not in force, as the case may be, as such top-tier corporation. The United States shareholder shali, with respect to such additional export trade corporation, submit with his return for such subsequent taxable year the statement described in subparagraph (4) (i) of this paragraph.

(6) Termination of election. An election under this paragraph to consolidate a chain of export trade corporations shall terminate for the first taxable year of the foreign corporation which during the period of consolidation is a top-tier corporation

(i) At the close of which any foreign corporation which was included in such consolidation for the preceding taxable year ceases to qualify as an export trade corporation or to be eligible under this paragraph for inclusion in such chain,

(ii) At the close of which an export trade corporation for the first time qualifies as a second-tier or third-tier corporation in such chain but does not as of such close of the year use the same taxable year or have the same elections under section 970 (c) (4) and § 1.970-2 in force, or not in force, as the case may be, as such top-tier corporation, or

(iii) (a) In respect of which the Commissioner, upon application made by a United States shareholder who made the election to consolidate, or his successor in interest, consents to a termination of the election. Approval will not be granted unless the United States shareholder and the Commissioner agree to the terms, conditions, and adjustments under which the termination will be effected.

(b) The application for consent to termination shall be made by the United States shareholder's mailing a letter for such purpose to the Commissioner of Internal Revenue, Washington, D.C., 20224. The application shall be mailed before the close of the taxable year of the foreign corporations with respect to which the shareholder desires to terminate the consolidation and shall include the following information:

(1) The name, address, and taxable year of each export trade corporation in the chain of such corporations for which the election was made,

(2) The amount and percentage of each class of stock owned by such shareholder (within the meaning of section

958), corporation by corporation, in each of such export trade corporations, and

(3) A list of the names and addresses, and a description of the ownership interests, of all other United States shareholders, if any, who participated in making the election with such United States shareholder, or their successors in interest, and a statement whether such other persons are or are not terminating the election.

(7) Election subsequent to initial election. If a United States shareholder elects under subparagraph (4) of this paragraph to consolidate his interest in a chain of export trade corporations and the election to consolidate such corporations terminates under the provisions of subparagraph (6) of this paragraph, such shareholder may not thereafter elect under this section to consolidate his interest in any corporation which was in that chain of export trade corporations unless he receives the consent of the Commissioner to do so. Application to obtain such consent of the Commissioner shall be made by a letter mailed to the Commissioner of Internal Revenue, Washington, D.C., 20224, before the close of the first taxable year of the top-tier corporation of the chain of export trade corporations in which the election to include such interest is to apply. Such application for consent shall include a statement showing:

(i) With respect to such chain, the information required to be shown in the statement described in subparagraph (4) (i) of this paragraph, and

(ii) The United States shareholder's interest in such chain which was previously included in a consolidation, the taxable years of such previous consolidation, and the manner in which such previous consolidation was terminated.

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

Example. Domestic corporation M owns 60 percent of the only class of stock of foreign corporation A, and 100 percent of the only class of stock of foreign corporation F, respectively. Corporation A owns 80 percent of the only class of stock of foreign corporations B and C, respectively. Corporation M also owns 20 percent of the stock of B Corporation. Corporation B owns 80 percent of the only class of stock of foreign corporation D. Corporations B and C each own 50 percent of the only class of stock of foreign corporation E. Corporation F owns 100 percent of the only class of stock of foreign corporation G, which owns 100 percent of the only class

of stock of foreign corporation H. Corporation F also owns 20 percent of the stock of C Corporation. Domestic corporations N and R own 30 percent and 10 percent, respectively, of the stock of A Corporation. All corporations use the calendar year as a taxable year, and all foreign corporations qualify as export trade corporations for 1963. Corporation M may elect for 1963 to consolidate its interest in the chain (the "A" chain) of export trade corporations which includes corporations A, B, C, D, and E; and Corporation M need not, but may, elect to consolidate its interest in the chain (the "F" chain) of export trade corporations which includes corporations F, G, and H. Consolidation of M Corporation's interest in the "A" chain with its interest in the "F" chain is not permitted. If M Corporation elects to consolidate the "A" chain, M Corporation must include in the consolidation its 20 percent directly owned interest in B Corporation and its 20 percent indirectly owned (through F Corporation) interest in C Corporation. Either N Corporation or R Corporation, or both, may join M Corporation in electing to consolidate their interests in the "A" chain. However, neither N Corporation nor R Corporation may elect to consolidate the "A" chain unless M Corporation also agrees to so elect, because corporations N and R, neither jointly nor separately, own more than 50 percent of the total combined voting power of all classes of stock entitled to vote of A Corporation. If corporations M, N, and R elect to consolidate the "A" chain, the determinations specified in subparagraph (1) of this paragraph will be made on a consolidated basis with respect to such corporations' respective interest in the chain as shown in the following tabulation:

acter of income as subpart F income or on the determination of export trade income, export trade income which constitutes foreign base company income, or earnings and profits of the individual export trade corporations in the chain. Thus, the consolidation of export trade corporations under this section shall not have the effect of reducing earnings and profits of such corporations or of changing the characterization of income from that which is, for example, foreign base company income to that which is not. The application of this paragraph may be illustrated by the following example:

Example. Corporation A, incorporated under the laws of foreign country X, and corporation B, incorporated under the laws of foreign country Y, are both wholly owned subsidiaries of domestic corporation M. Corporations A and B both qualify under section 971(a) as export trade corporations. Corporation A purchases personal property produced in the United States from an unrelated person and sells the property to B Corporation for use outside of country X. Corporation B resells the property to an unrelated person for use in foreign country Z. Corporations A and B each derive foreign base company sales income described in § 1.954-3 from the purchase and sale transactions. Consolidation of Corporations A and B under this section does not result in the two transactions being treated as one transaction which is a purchase of property from an unrelated person and a sale of property to an unrelated person or the nonrecognition of gain on the sale of export property by A Corporation to B Corporation.

by

(2) Determination of amount which consolidated subpart F income is reduced-(i) In general. In determining the amount by which the subpart F income of each export trade corporation includible in a consolidation of export trade corporations shall be reduced as provided in section 970(a) and paragraph (b)(1) of § 1.970-1 for any taxable year of consolidation, the limitations provided by section 970 (a) and paragraph (b)(2) of § 1.970-1 on such amount for each such export trade corporation shall be determined on the basis of such corporation's separate share of— (a) Amounts included in the total export promotion expense,

(b) The total gross receipts from the sale, installation, operation, maintenance, or use of property in respect of which each such corporation derives such export trade income as is properly allocable to the export trade income which constitutes foreign base company income, and

(c) The total increase in investments in export trade assets,

of all export trade corporations to which the consolidation applies for the taxable year.

(ii) Limitations not effective. If for any taxable year each of the limitations under paragraph (b) (2) of § 1.970–1, determined on a consolidated basis, equals or exceeds the total export trade income which constitutes foreign base company income of all corporations includible in the consolidation of export trade corporations, the subpart F income of each includible corporation shall be reduced under section 970(a) for such year by its separate export trade income which constitutes foreign base company income.

(iii) Limitation effective. If for any taxable year one of the limitations under paragraph (b) (2) of § 1.970-1, determined on a consolidated basis, is less than the total export trade income which constitutes foreign base company income of all corporations includible in the consolidation of export trade corporations, the amount by which the subpart F income of each includible corporation shall be reduced under section 970 (a) for such year shall be an amount which bears the same ratio to the amount by which the Subpart F income may be reduced on a consolidated basis as the export trade income which constitutes foreign base company income of each includible corporation bears to the total export trade income which constitutes foreign base company income of all export trade corporations includible in the consolidation of export trade corporations.

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

Example. (a) Domestic corporation M owns 100 percent of the only class of stock of controlled foreign corporation A, which, in turn, owns 100 percent of the only class of stock of controlled foreign corporation B. All corporations use the calendar year as the taxable year, and corporations A and B are export trade corporations throughout the period here involved. Corporation M elects under this section to consolidate corporations A and B for the entire period here involved. Corporation M elects under paragraph (a) (2) of 1.970-2 for 1963 to determine both A Corporation's and B Corporation's investments in export trade assets as of the close of the 75th day after the close of such corporations' taxable year.

(c) The amount by which subpart F income of corporations A and B is reduced for 1964 on a separate-company basis without regard to section 972 may be determined as set forth in items (1) through (vii) below, and the results of the consolidation of corporations A and B for 1964 are set forth in items (viii) through (x). Assuming an alternative case in which for 1964 the facts are the same as set forth in paragraphs (a) and (b) of this example except that B Corporation incurs export promotion expenses of $50 (rather than $80) which are allocable to the export trade income which constitutes foreign base company income, the results of the consolidation of corporations A and B for such year (a case where one of the limitations under paragraph (b) (2) of § 1.970-1 is effective) are set forth in items (xi) through (xiii):

(vi) Reduction in subpart F income on a separate company basis determined without regard to section 972 (item (ii), but not to exceed smallest of items (v) (a), (b), and (c), in columns (1) and (2))..

(vii) Subpart F income as reduced on a separate company basis (item (i) minus item (vi)).......

(viii) Reduction in subpart F income on a consolidated basis determined under section 972 (item (ii), but not to exceed smallest of items (v) (a), (b), and (c), in column (3)).

(ix) Apportionment of reduction in subpart F income (item (ii)).

(x) Subpart F income as reduced on a consolidated

(xi)

basis (item (i) minus item (ix)).

ALTERNATIVE CASE

Reduction in subpart F income on a consolidated basis determined under section 972 (item (ii) but not to exceed smallest of items (v) (a), (b), and (d), in column (3)).

(xii) Apportionment of reduction in subpart F income (item (xi) times [item (ii) of column (1) over item (ii) of column (3)] and item (xi) times [item (ii) of column (2) over item (ii) of column (3)]); ($90 X $25/$100)--

$22.50

77.50 132. 50 210

(3) Determination of pro rata share of consolidated withdrawal of previously excluded export trade income-(i) In general. If, for any taxable year, there is a decrease in investments in export trade assets under section 970 (b) and paragraph (c) (1) of § 1.970-1, determined on a consolidated basis, of export trade corporations includible in a consolidated chain of such corporations, each United States shareholder who has elected under paragraph (a) of this section to consolidate his interest in such chain of corporations shall include in his gross income, under section 951(a) (1) (A) (ii) and the regulations thereun

der as an amount to which section 955 applies, his pro rata share of the amount of such consolidated decrease in investments but only to the extent such pro rata share does not exceed the lesser of the limitations provided by section 970 (b) and paragraph (c) (2) of § 1.970-1 with respect to such shareholder determined on a consolidated basis. The consolidated decrease in investments and the consolidated limitations shall be determined by aggregating the applicable amounts determined under paragraph (c) of 1.970-1 with respect to such shareholder's interest in each corporation includible in the consolidation.

(ii) Allocation of pro rata share of consolidated decrease in investments in export trade assets. For purposes of determining the amount referred to in paragraph (c) (2) (i) (b) (3) of § 1.970-1 for a subsequent taxable year, a United States shareholder's pro rata share of a consolidated decrease in investments determined under subdivision (i) of this subparagraph for the current taxable year shall be allocated to such shareholder's interest in each of the export trade corporations includible in the consolidation in that ratio which

(a) The net amount determined under paragraph (c) (2) (i) (b) of § 1.9701 with respect to such shareholder's interest in such corporation for all prior taxable years (whether or not a taxable year occurring during the period of consolidation) bears to

(b) The total of the net amounts determined under paragraph (c) (2) (i) (b) of § 1.970-1 with respect to such shareholder's interests in all export trade corporations includible in such consolidation for all prior taxable years (whether or not a taxable year occurring during the period of consolidation).

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

Example. (a) Domestic corporation M owns 60 percent of the only class of stock of controlled foreign corporation A, which, in turn, owns 100 percent of the only class of stock of controlled foreign corporation B. All corporations use the calendar year as a taxable year, and corporations A and B are export trade corporations throughout the period here involved. Corporation M elects to consolidate corporations A and B for the entire period here involved.

(b) The following amounts are applicable to corporations A and B for 1964:

(i) Consolidated decrease in in

vestments in export trade assets (determined before application of § 1.970-1 (c) (2)) ... (ii) M Corporation's pro rata share of consolidated decrease (60)%--

(iii) M Corporation's pro rata share of earnings and profits for 1963 and 1964 (§ 1.970-1(c) (2) (i) (a)).

(iv) M Corporation's pro rata share of net amount determined under § 1.970-1 (c) (2) (i) (b) for 1963

(v) Amount includible in M Corporation's gross income for 1964 (smallest of items (ii), (iii), and (iv) in column (3))...

Corporation M must include $60 in its gross income for 1964 under section 951 (a) (1) (A) (ii) by reason of the application of section 970 (b) as its pro rata share of the consolidated decrease in investments in export trade assets; and, for purposes of determining the amount under paragraph (c) (2) (i) (b)(3) of § 1.970-1 with respect to M Corporation's interest in each of corporations A and B for a subsequent taxable year, such consolidated decrease for 1964 is allocated as follows: to M Corporation's interest in A Corporation, $45 ($60 times $180/$240); and to its interest in B Corporation, $15 ($60 times $60/$240).

(c) The following amounts are applicable to corporations A and B for 1965:

(i) Consolidated decrease in investments in export trade assets (determined before application of $1.970-1 (c) (2)).. (ii) M Corporation's pro rata share of consolidated decrease (60%)---.

(iii) M Corporation's pro rata share of earnings and profits (and deficits in earnings and profits) for 1963, 1964, and 1965 (§1.970-1 (c) (2) (i) (a))

(iv) M Corporation's pro rata share of the net amount determined under § 1.970-1 (c) (2) (i) (b) for 1963 and 1964

($180-$45).

($60-$15).

Total

80

(v) Amount includible in M Corporation's gross income for 1965 (smallest of items (ii), (iii), and (iv) in column (3)). Corporation M must include $80 in its gross income for 1965 under section 951 (a) (1) (A) (ii) by reason of the application of section 970(b) as its pro rata share of the consolidated decrease in investments in export trade assets; and, for purposes of determining the amount under paragraph (c)(2)(i) (b)(3) of § 1.970-1 with respect to M Corporation's interest in each of corporations A and B for a subsequent taxable year, such consolidated decrease for 1965 is allocated as follows: to

(i) Consolidated decrease in investments in export trade assets (determined before application of § 1.970-1 (c) (2)). (ii) M Corporation's pro rata share of consolidated decrease (60%) --

(iii) M Corporation's pro rata share of earnings and profits (and deficits in earnings and profits) for 1963, 1964, 1965, and 1966 (§ 1.970-1 (c) (2) (i)(a))..

(iv) M Corporation's pro rata share of the net amount determined under § 1.970-1 (c) (2) (i) (b) for 1963, 1964, and 1965 ($180 minus [$45+$60]). ($60-[$15+$20]) Total.

(v) Amount includible in M Corporation's gross income for 1966 (smallest of items (ii), (iii), and (iv) in column (3))..

A

ConB solidated

(1)

(2) (3)

Corporation M must include $100 in its gross income for 1966 under section 951 (a) (1) (A) (ii) by reason of the application of section 970(b) as its pro rata share of the consolidated decrease in investments in export trade assets; and, for purposes of determining the amount under paragraph (c) (2) (1) (b)(3) of § 1.970-1 with respect to M Corporation's interest in each of corporations A and B for a subsequent taxable year, such consolidated decrease for 1966 is allocated as follows: to M Corporation's interest in A Corporation, $75 ($100 times $75/$100); and to its interest in B Corporation, $25 ($100 times $25/$100).

[T.D. 6754, 29 F.R. 12714, Sept. 9, 1964] GAIN OR LOSS ON DISPOSITION OF PROPERTY DETERMINATION OF AMOUNT OF AND RECOGNITION OF GAIN OR LOSS

§ 1.1001 Statutory provisions; determination of amount of and recognition of gain or loss.

SEC. 1001. Determination of amount of and recognition of gain or loss-(a) Computation of gain or loss. The gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the adjusted basis provided in section 1011 for determining gain, and the loss shall be the excess of the adjusted basis provided in such section for determining loss over the amount realized.

(b) Amount realized. The amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of the property (other than money) received. In determining the amount realized