n-05-21.pdf

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Part III - Administrative, Procedural, and Miscellaneous

Guidance Related to Section 936 Termination

Notice 2005-21

This notice provides guidance to U.S. corporations allowed a credit under section
936 or 30A of the Internal Revenue Code (section 936 corporations) with regard to the
termination of sections 936 and 30A. Specifically, this notice discusses certain issues
that are likely to arise depending on the manner in which the business of a section 936
corporation continues to be conducted after this termination.

BACKGROUND
Subject to certain limitations, special tax credits are available under section 936
(possession tax credit) or section 30A (Puerto Rico Economic Activity Credit) for taxable
income of a domestic corporation derived from the active conduct of a trade or business
in a possession of the United States, provided that an election is made under sections
936(a) and (e). The tax credits provided by sections 936 and 30A will not be allowed for
taxable years beginning after December 31, 2005. See
sections 936(j) and 30A(h).
The Treasury Department and the Internal Revenue Service (Service) anticipate that
certain issues are likely to arise in connection with the termination of sections 936 and

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30A (including election revocations in advance of such termination) and accordingly
provide guidance with respect to these issues in this notice. The Treasury Department
and the Service intend that these issues be resolved by applying existing provisions of
the Internal Revenue Code and the Treasury regulations. This notice provides
explanations and cross-references as appropriate to certain applicable statutory and
regulatory provisions. Other issues not discussed in this notice may also arise,
depending on a specific taxpayer’s facts and circumstances.
Whether certain issues are likely to arise will depend on the manner in which a
section 936 corporation’s business continues to be conducted following the termination
of sections 936 and 30A. Three possible situations and the issues that are likely to
arise in each are discussed in Sections I through III below.
Regardless of how a section 936 corporation’s business is conducted following
the termination of sections 936 and 30A, in the case of a section 936 corporation that
does not affirmatively revoke its election to be treated as a section 936 corporation and
has not otherwise allowed the election to terminate (for example, by not claiming the
possession tax credit on Form 5735 (“Possessions Corporation Tax Credit (Under
Sections 936 and 30A)”)), the election will terminate by operation of law for the taxable
years of such corporation beginning after December 31, 2005. No new filing
requirements (for example, a requirement to file a special form) will apply to such a
corporation.

SECTION I. THE SECTION 936 CORPORATION CONTINUES ITS ACTIVITIES AS A

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DOMESTIC CORPORATION.
One possible situation upon the termination of sections 936 and 30A (or earlier
election revocation) is for the former section 936 corporation to continue its activities as
a domestic corporation.
A. Membership in consolidated group

For taxable years following the last taxable year in which it was entitled to the
credit under section 936 or 30A, a former section 936 corporation that continues its
activities as a domestic corporation may be required to be included in an affiliated group
of corporations filing a consolidated income tax return. Section 1504(b)(4) provides that
section 936 corporations are not “includible corporations” that may join in a consolidated
return group. If the section 936 corporation would have been includible in a
consolidated return group were it not for section 1504(b)(4), the termination of sections
936 and 30A will automatically cause the corporation to be included in the consolidated
return group for the first taxable year it is not a section 936 corporation. No election
needs to be filed, and no approval from the Service needs to be obtained, to include the
former section 936 corporation in the consolidated return group. If the section 936
corporation and its parent corporation do not have the same annual accounting period,
the inclusion of the former section 936 corporation in the consolidated return group will
result in a short taxable year for the former section 936 corporation. See Rev. Proc.
2002-37, 2002-1 C.B. 1030, and Rev. Proc. 2002-39, 2002-1 C.B. 1046, for guidance
on changes to annual accounting periods.
When the former section 936 corporation becomes an includible corporation, the

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parent corporation is the agent for the group for many elections and other matters
related to the tax liability of the former section 936 corporation and the other
consolidated return group members. See
§ 1.1502-77 of the Income Tax Regulations.
If the former section 936 corporation becomes includible in a consolidated return
group, the carryover of specific tax attributes of the corporation will be governed by
applicable consolidated return provisions. The special rules governing prior losses and
earnings are discussed below.
B. Former section 936 corporation with loss history

Each taxable year that the corporation was a section 936 corporation is a
separate return limitation year (SRLY) in relation to the consolidated return group. See

§ 1.1502-1(f). Therefore, the rules of § 1.1502-21(c) will limit the extent to which net
operating loss (NOL) carryovers of the former section 936 corporation arising (or treated
as arising) in its SRLYs are included in the consolidated NOL deductions for the years
the corporation is included in the consolidated return group. In general, § 1.1502-
21(c)(1) provides that NOLs from SRLYs included in the group’s consolidated NOL
deduction may not exceed the aggregate consolidated taxable income for all
consolidated taxable years of the group determined by reference to only the member’s
items of income, gain, deduction, and loss, as explained in the regulation. Under
§ 1.1502-15, built-in losses of the former section 936 corporation arising (or treated as
arising) in its SRLYs may, in some cases, be limited by the SRLY limitation described
above as if the built-in loss were a hypothetical NOL carryover or net capital loss
carryover arising in a SRLY. SRLY limitations also apply to net capital losses (see

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§ 1.1502-22(c)), net section 1231 losses (see
§ 1.1502-23), general business credits
(see § 1.1502-3(d)), and minimum tax credits (see § 1.1502-55).
If a former section 936 corporation (whether or not includible in a consolidated
return group) continues its activities as a domestic corporation, section 382 will not
apply to limit the carryover of NOLs or built-in losses in the absence of an “ownership
change” (as defined in section 382(g)). The termination of sections 936 and 30A or the
revocation of a section 936 election alone will not constitute an ownership change for
that purpose.
If the section 936 corporation is an unaffiliated dual resident corporation or an
unaffiliated domestic owner that has filed an agreement described in § 1.1503-2(g)(2)
with respect to dual consolidated losses, becoming a member of a consolidated group
may cause the dual consolidated losses to be recaptured pursuant to § 1.1503-
2(g)(2)(iii)(A).
C. Accumulated earnings of section 936 corporation

When a former section 936 corporation becomes a member of a consolidated
return group, the treatment of the earnings and profits (E&P) of the former section 936
corporation will be determined by the rules provided in § 1.1502-33. When the former
section 936 corporation joins the consolidated group, any undistributed E&P earned
before it was a member of the consolidated return group carry over to the corporation’s
first taxable year in the group, and E&P earned after it becomes a member of the group
will tier up to higher-tier corporations in the group under § 1.1502-33(b). When a former
section 936 corporation becomes an includible corporation in a consolidated return

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group and distributes a dividend to its parent corporation attributable to E&P
accumulated while the distributing corporation was a section 936 corporation, such a
dividend will not result in an adjusted current earnings (ACE) adjustment under section
56(g)(4)(C) for alternative minimum tax (AMT) purposes. For regular tax purposes,
such a dividend is not included in the parent corporation’s gross income under
§ 1.1502-13(f)(2)(ii), and there is no change to the parent corporation’s E&P as a result
of such a distribution.

SECTION II. THE SECTION 936 CORPORATION LIQUIDATES INTO ITS DOMESTIC
PARENT CORPORATION.

Another possible situation upon the termination of sections 936 and 30A (or
earlier election revocation) is for the section 936 corporation to be completely liquidated
into its domestic parent corporation.
A. Recognition of gain or loss upon liquidation distributions

Section 332(a) provides, subject to the requirements in section 332(b), that no
gain or loss is recognized on receipt by a corporation of property distributed in complete
liquidation of another corporation. Section 337(a) provides that no gain or loss is
recognized to the liquidating corporation on the distribution of any property to the 80-
percent distributee (that is, the corporation that meets the 80-percent stock ownership
requirements in section 332(b)) in a complete liquidation to which section 332 applies.
If the section 936 corporation has one corporate shareholder that satisfies the
requirements of an 80-percent distributee, sections 332(a) and 337(a) allow the

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corporation to be liquidated into its parent corporation without recognition of gain or loss
by either the liquidating section 936 corporation or its parent corporation. But
see
section 337(c) (denying section 337 nonrecognition, but not section 332 nonrecognition,
if the liquidating corporation is owned by two or more members of a consolidated group
that together meet the 80-percent ownership requirements by reason of the aggregate
stock ownership rule of § 1.1502-34).
Section 901(g)(1) provides a special rule for taxes paid or accrued to foreign
countries or possessions of the United States with respect to distributions that are
attributable to periods during which the distributing corporation was a “possessions
corporation.” For this purpose, the term “possessions corporation” includes section 936
corporations. See
section 901(g)(2). Under this special rule, to the extent the
distribution is received in connection with a liquidation with respect to which gain or loss
is not recognized, such taxes shall not be treated as taxes paid to a foreign country or
U.S. possession. As a result, no foreign tax credit or deduction shall be allowed with
respect to any amount so paid or accrued.
If the section 936 corporation is an unaffiliated dual resident corporation or an
unaffiliated domestic owner that has filed an agreement described in § 1.1503-2(g)(2)
with respect to dual consolidated losses, the liquidation of such corporation may cause
the dual consolidated losses to be recaptured pursuant to § 1.1503-2(g)(2)(iii)(A).
B. Succession to section 381(c) items of the liquidated section 936
corporation

In the case of the acquisition of assets of a corporation by another corporation in

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a distribution to such other corporation to which section 332 applies, section 381
provides that the acquiring corporation shall succeed to and take into account, as of the
close of the day of the distribution and subject to certain conditions and limitations, the
items described in section 381(c). Section 381(c) enumerates more than twenty
separate items, which include (but are not limited to) NOL carryovers, E&P, capital loss
carryovers, and methods of accounting. When a section 936 corporation is liquidated
into its parent corporation under section 332, section 381 requires that the parent
corporation determine and take into account the items specified in section 381(c).
Section 381(c)(1) provides rules regulating the carryover of an NOL of a
liquidating corporation to its parent corporation’s first taxable year ending after the date
of the liquidation. In particular, section 381(c)(1)(B) limits the deductibility of the NOL
carryover for that taxable year of the parent to the proportion of the parent’s taxable
income that the number of days in the taxable year after the liquidation bears to the total
number of days in the year. Also, section 381(b)(3) provides that the parent corporation
may not carry back an NOL or a net capital loss for a taxable year ending after the date
of the liquidation to a taxable year of the liquidated corporation.
If the parent corporation is a member of a consolidated return group, NOLs, built-
in losses, and other tax attributes to which the parent corporation of a liquidated section
936 corporation succeeds are subject to the SRLY rules. The SRLY limitation applies to
a carryover of NOLs from the subsidiary under § 1.1502-21, to built-in losses on assets
distributed by the subsidiary under § 1.1502-15, and to certain other carryovers. All of
the items of income, gain, deduction, and loss of the parent (that is, not solely the items

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attributable to the assets distributed by the subsidiary) are included for purposes of
determining the SRLY limitation for the parent’s taxable years after a section 332
liquidation. See
§ 1.1502-15(d), Example 1, part (iv) (applying a similar rule when
assets are contributed to a corporation in a section 351 transaction).
The ACE adjustment under section 56(g)(4)(C) does not apply to a liquidation of
a section 936 corporation into its parent corporation because, under section 331(b), a
distribution in liquidation is not treated as a dividend.

SECTION III. THE SECTION 936 CORPORATION REINCORPORATES AS A
FOREIGN CORPORATION.
A third possible situation upon the termination of sections 936 and 30A (or earlier
election revocation) is for the section 936 corporation (or former section 936
corporation) to reincorporate as a foreign corporation. For these purposes, a foreign
corporation includes a corporation formed under the laws of a possession of the United
States. See
section 7701(a)(5).
A. Section 367 consequences of a section 368(a)(1)(F) reorganization
A common form of reincorporation is effected through “a mere change in identity,
form, or place of organization of one corporation, however effected,” as described in
section 368(a)(1)(F) (an “F reorganization”). Section 1.367(a)-1T(f) provides that, in
every F reorganization where the transferor corporation is a domestic corporation and
the acquiring corporation is a foreign corporation, there is considered to exist: (1) a
transfer of assets by the transferor corporation to the acquiring corporation under

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section 361(a) in exchange for stock of the acquiring corporation and the assumption by
the acquiring corporation of the transferor corporation’s liabilities; (2) a distribution of the
stock of the acquiring corporation by the transferor corporation to the shareholders of
the transferor corporation; and (3) an exchange by the transferor corporation’s
shareholders of the stock of the transferor corporation for stock of the acquiring
corporation under section 354(a).
Section 367(a) provides that, if in connection with any exchange described in
section 361(a) a U.S. person transfers property to a foreign corporation, such foreign
corporation shall not, for purposes of determining the extent to which gain will be
recognized on such transfer, be considered a corporation. The transferee’s loss of
corporate status for U.S. tax purposes denies the transferor the benefit of
nonrecognition treatment with respect to gain under section 361(a). A domestic
corporation subject to gain recognition under section 367(a) recognizes gain on the
transfer of its assets to a foreign corporation in a transaction described in section 361(a)
as if the property had been disposed of in a taxable exchange with the transferee
corporation. See
§ 1.367(a)-1T(b)(4). Section 367(a)(2) and (3), and the regulations
thereunder, provide special exceptions to the rule of gain recognition provided in section
367(a)(1) when a U.S. person transfers certain types of property to a foreign
corporation, including a limited exception for property transferred to a foreign
corporation for use by such foreign corporation in the active conduct of a trade or
business outside the United States. This exception, however, does not apply to certain
kinds of property, such as section 1221(a) inventory property or accounts receivable.

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These special exceptions also do not apply in certain cases where the transferor
corporation is widely held. See
section 367(a)(5).
Section 367 generally will apply to transfers of property by a section 936
corporation to a foreign corporation without regard to whether the section 936 election is
in effect at the time of the transfer. However, if the transfer is made while the section
936 election is in effect, the taxpayer may receive a possession tax credit with respect
to income recognized on the transfer, to the extent such income is from sources outside
the United States. See
sections 936(a)(1)(A)(ii) and 30A(a)(1)(B).
B. Effect of termination of section 936 on the use and transfer of intangibles

Section 367(d) provides that, if a U.S. person transfers any intangible property
(within the meaning of section 936(h)(3)(B)) to a foreign corporation in an exchange
described in section 351 or 361, the U.S. person transferring such property shall be
treated as having sold such intangible property in exchange for a series of annual
payments over the useful life of such property which are contingent upon the
productivity, use, or disposition of such property and which are commensurate with the
income attributable to such property. These deemed payments are treated as ordinary
income to the transferor.
Section 367(d) does not apply to the transfer of foreign goodwill or going concern
value. Section 1.367(d)-1T(b). For this purpose, § 1.367(a)-1T(d)(5)(iii) defines “foreign
goodwill or going concern value” as “the residual value of a business operation
conducted outside the United States after all other tangible and intangible assets have
been identified and valued.” The transfer of a section 936 corporation’s business to a

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foreign corporation typically will not involve the transfer of significant goodwill of the
section 936 corporation to the foreign corporation, but it may in certain cases. Goodwill
associated with a section 936 corporation’s business operations in a possession, to the
extent it exists, may or may not be considered “foreign goodwill” under § 1.367(a)-
1T(d)(5)(iii), depending on the facts and circumstances.
Section 936 contains special rules regarding intangibles that may affect the
application of section 367(d) to transfers of intangibles by a section 936 corporation or
former section 936 corporation.
Section 936(h) provides that the intangible property income of a section 936
corporation – that is, the gross income of a section 936 corporation attributable to any
intangible property (other than intangible property that has been licensed to the section
936 corporation since prior to 1948) – shall be included on a pro rata basis in the gross
income of the shareholders of the section 936 corporation as income from sources
within the United States. Under section 936(h)(5), however, the shareholders of a
section 936 corporation are not required to recognize such intangible property income if
an eligible section 936 corporation elects one of two alternative methods of computation
of taxable income: (1) the cost sharing method of section 936(h)(5)(C)(i) (“section 936
CSM”); or (2) the profit split method of section 936(h)(5)(C)(ii) (“section 936 profit split
method”). Under the section 936 CSM, the electing section 936 corporation pays a
“cost sharing payment” (as defined in section 936(h)(5)(C)(i)(I)) and is treated as an
owner (solely for purposes of earning a return thereon) of certain intangible property
related to the section 936 corporation’s economic activities in the possession. Under

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the section 936 profit split method, the electing section 936 corporation’s taxable
income is equal to 50 percent of the section 936(h)(5)(C)(ii)(II) “combined taxable
income” of the affiliated group from covered sales of products produced or services
rendered, in whole or in part, by the section 936 corporation in a possession.
Following the termination of sections 936 and 30A, the section 936 CSM and the
section 936 profit split method will no longer apply and the income of a former section
936 corporation (or a successor entity), including income from intangibles, will be
required to be determined under generally applicable federal income tax principles.
Thus, for example, the arm’s length amount charged in a controlled transfer of an
intangible to a former section 936 corporation must be determined under one of the four
methods listed in § 1.482-4(a), applied in accordance with all of the provisions of
§ 1.482-1, and must be commensurate with the income attributable to the intangible. In
this regard, it is important to note that Congress intended for cost sharing under section
936(h)(5)(C)(i) to remain separate and distinct from cost sharing arrangements under
section 482. See
section 936(h)(5)(C)(i)(I) (providing that amounts paid under cost
sharing agreements with related persons are not considered in the determination of
section 936 CSM payments). A section 936 corporation does not obtain an interest in
intangibles in exchange for payments it makes pursuant to an election of the section
936 CSM, but rather, it obtains a temporary limited entitlement to manufacturing
intangible income. See
section 936(h)(5)(C)(i)(II). That is, the statutorily determined
section 936 CSM payment entitles the section 936 corporation to manufacturing
intangible income only in the taxable year for which the payment is made. A section

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936 corporation or a former section 936 corporation will accordingly not possess any
interest in any intangible property as a result of payments made pursuant to an election
of the section 936 CSM.
To the extent that a section 936 corporation (or a former section 936 corporation)
does own intangible property (“possession-owned intangibles”), and transfers such
property to a foreign corporation, certain of the section 367 consequences may depend
on whether the section 936 election is in effect at the time of the property transfer.
Under section 936(h)(6), when a section 936 corporation transfers possession-owned
intangibles to a related foreign corporation, the shareholders of the section 936
corporation are generally required by section 936(h)(1) to include in gross income, on a
pro rata basis, the annual payments provided for by section 367(d) as U.S. source
ordinary income. In contrast, if a section 936 election is not in effect at the time of the
transfer (for example, following the termination of sections 936 and 30A), the transferor
of possession-owned intangibles (that is, a former section 936 corporation or a
successor corporation) to a foreign corporation will itself be treated as having sold such
possession-owned intangibles in exchange for the annual payments provided for by
section 367(d), with the source of such payments generally determined by the
applicable source rule in section 861(a)(4) or 862(a)(4), pursuant to section 865(d).
C. Subsequent dividends from earnings accumulated by the section 936
corporation

In a transfer connected with an F reorganization to which section 361 applies,
section 381 provides that the acquiring corporation shall succeed to and take into

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account, as of the close of the day of the distribution and subject to certain conditions
and limitations, the items described in section 381(c), which include E&P. See
section
381(c)(2). Section 243(e) provides that any dividend from a foreign corporation from
E&P accumulated by a domestic corporation during a period with respect to which the
domestic corporation was subject to taxation shall be entitled to a DRD as if it were
distributed by a domestic corporation which is subject to taxation for purposes of
applying section 243(a). Notwithstanding that section 936 provides for a credit against
taxes imposed on a corporation making a section 936 election, section 936 corporations
are domestic corporations subject to tax and thus meet the requirements of sections
243(a) and (e). Section 243(a) provides a 100-percent dividends received deduction
(DRD) for qualifying dividends. Section 243(b) provides that a qualifying dividend
includes any dividend received by a corporation if the corporation is a member of the
same affiliated group as the distributing corporation and the distributing corporation has
a section 936 election in effect. For this purpose, the exclusion of a section 936
corporation from the affiliated group under section 1504(b)(4) does not apply. See

section 243(b)(2)(A).
Section 1.243-3(b) provides that a foreign corporation shall, for purposes of
section 243(e), maintain separate accounts for E&P to which it succeeds that were
accumulated by a domestic corporation and for other accumulated E&P of the foreign
corporation. Under § 1.316-2, every distribution made by a corporation is considered to
be made first out of any current year E&P and then out of E&P accumulated in prior
taxable years. With respect to the accumulated E&P of the foreign corporation, § 1.243-

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3(c) provides that dividends paid by the foreign corporation shall be treated as having
been paid out of the most recently accumulated E&P of such foreign corporation
(regardless of whether such E&P was accumulated by a predecessor domestic
corporation or by the foreign corporation itself). To the extent that a dividend is paid out
of E&P accumulated by the foreign corporation and by a predecessor domestic
corporation for taxable years ending on the same day (so that neither is more recently
accumulated), then the portion of such dividend considered paid out of each account
shall be the same proportion of the total dividend as the amount of E&P in that account
bears to the sum of the E&P in all such accounts. Thus, for example, if a section 936
corporation is reincorporated as a newly formed foreign corporation, and the foreign
corporation subsequently makes distributions to its U.S. parent, the distributions will be
treated as first coming from current E&P, then from accumulated E&P with the latest
E&P accumulated being treated as distributed first. Subject to section 245, dividends
from earnings accumulated by the foreign corporation itself generally will not be entitled
to the DRD. However, dividends from E&P accumulated while the predecessor
corporation was a section 936 corporation will be entitled to the DRD.
Section 901(g)(1) provides in relevant part that no credit or deduction is allowed
for any tax that is paid or accrued to any foreign country or possession of the United
States with respect to any distribution from a corporation to the extent such distribution
is attributable to periods during which such corporation is a section 936 corporation and
a DRD is allowable with respect to such distribution. As a result, no foreign tax credit or
deduction is allowed with respect to any foreign or possession tax imposed on dividend

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distributions by a foreign corporation from earnings accumulated by a predecessor
section 936 corporation.
D. Alternative minimum tax

In determining ACE adjustments for AMT purposes, section 56(g)(4)(C)(i)
generally provides that a deduction shall not be allowed for any item if such item would
not be deductible for any taxable year for purposes of computing E&P. However,
section 56(g)(4)(C)(ii) provides an exception for any deduction allowable under section
243 for any dividend that is a “100-percent dividend” (that is, a dividend with respect to
which a 100-percent DRD is allowable), or that is received from a section 243(c)(2) “20-
percent owned corporation,” but only to the extent such dividend is attributable to
income of the paying corporation that is subject to tax (determined after the application
of sections 936 and 30A). Thus, to determine the effect on ACE of a distribution from a
foreign corporation that has succeeded to the E&P of a section 936 corporation, the
recipient of the distribution must determine: (1) the extent to which the section 243 DRD
would be allowed with respect to the distribution by the foreign corporation; and (2) the
extent to which the E&P comprising such distribution were accumulated in taxable years
for which the election under section 936 (or section 30A) was in effect and were subject
to tax in such taxable years.
For purposes of determining the alternative minimum foreign tax credit, section
56(g)(4)(C)(iii)(I) provides, subject to the limitation in section 56(g)(4)(C)(iii)(II), that 75
percent of any withholding or income taxes paid to a possession of the United States
shall be treated as a tax paid to a foreign country by the corporation receiving the

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dividend. Taxes paid to a U.S. possession by a section 936 corporation shall be treated
as a withholding tax paid with respect to any dividend distributed by such corporation to
the extent such taxes would be treated as paid by the corporation receiving the dividend
under rules similar to the rules of section 902. Section 56(g)(4)(C)(iii)(III). Section
56(g)(4)(C)(iii)(IV) provides that, in determining the alternative minimum foreign tax
credit, section 904(d) shall be applied as if dividends from a section 936 corporation
were a separate category of income referred to in a subparagraph of section 904(d)(1).
To the extent a dividend distributed by a foreign corporation comprises E&P
accumulated in taxable years for which an election under section 936 (or section 30A)
was in effect (and to which the foreign corporation has succeeded), the recipient of the
dividend will determine the alternative minimum foreign tax credit with respect to such
part of the dividend pursuant to the rules provided in section 56(g)(4)(C)(iii).
E. Recapture of dual consolidated losses

If the section 936 corporation is an unaffiliated dual resident corporation or an
unaffiliated domestic owner that has filed an agreement described in § 1.1503-2(g)(2)
with respect to dual consolidated losses, an outbound asset reorganization may cause
the dual consolidated losses to be recaptured pursuant to § 1.1503-2(g)(2)(iii)(A).
Depending on the facts and circumstances, recapture issues in addition to those
associated with dual consolidated losses may also arise. See
sections 367(a)(3)(C) and
904(f)(3).
F. Reporting requirements

Depending on the facts and circumstances, certain reporting requirements may

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apply with respect to the former section 936 corporation. For example, section 6038B
may require the transfer of tangible and intangible property to be reported on Form 926
(“Return by a U.S. Transferor of Property to a Foreign Corporation”). See
§ 1.6038B-1.
Form 5471 (“Information Return of U.S. Persons With Respect to Certain Foreign
Corporations”) and its schedules (for example, Schedule O (“Organization or
Reorganization of Foreign Corporation, and Acquisitions and Dispositions of its Stock”))
may also be required to be filed. See
generally sections 6038 and 6046.
G. Subpart F consequences to U.S. shareholders

Depending on the facts and circumstances, a section 936 corporation
reincorporated as a foreign corporation may be a controlled foreign corporation (CFC)
(as defined in section 957(a)) subject to the provisions of subpart F (sections 951
through 964). Section 951(a) requires that a United States shareholder (as defined in
section 951(b)) of a CFC include in its gross income for the taxable year its pro rata
share of certain items of the CFC’s income (“subpart F income”).
Certain taxpayers may choose to continue to conduct business in a possession
through a branch of a CFC organized or created elsewhere. Such a branch may
constitute a manufacturing branch for purposes of the regulations under section
954(d)(2). Under certain facts and circumstances, income derived by a CFC with a
manufacturing branch located outside the country under the laws of which the CFC is
organized may constitute foreign base company sales income, a form of subpart F
income that the United States shareholder must include in income. See
§ 1.954-3(b)(4),
Example (2).

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DRAFTING INFORMATION
The principal author of this notice is Edward R. Barret of the Office of Associate
Chief Counsel (International). However, other personnel from the Service and the
Treasury Department participated in its development. For further information regarding
this notice contact Thomas A. Vidano or Edward R. Barret at (202) 435-5265 (not a toll-
free call).