[Code of Federal Regulations]
[Title 26, Volume 10]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.926(a)-1T]

[Page 107-108]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.926(a)-1T  Temporary regulations; distributions to shareholders.

    (a) Treatment of distributions. Any distribution by a FSC (or former 
FSC) to its shareholder with respect to its stock will be includible in 
the shareholder's gross income in accordance with the provisions of 
section 301. (Any further reference to a FSC in this section shall 
include a small FSC unless indicated otherwise.) See section 245(c) for 
treatment of distributions to domestic corporate shareholders of the 
FSC. If earnings and profits of a FSC (or former FSC) attributable to 
foreign trade income are distributed to a shareholder which is a foreign 
person (or a nonresident alien individual), that distribution shall be 
treated as United States source income which is effectively connected 
with the conduct of a trade or business conducted through a permanent 
establishment of such shareholder within the United States. For this 
purpose, distributions to a foreign partnership, foreign trust, foreign 
estate or other foreign entities that would be treated as pass-through 
entities under U.S. law shall be treated as made directly to the 
partners of beneficiaries in proportion to their respective interest in 
the entity.
    (b) Order of distributions--(1) In general. For guidance, see Sec. 
1.926(a)-1(b)(1).
    (2) Determination of earnings and profits. For purposes of this 
section, the earnings and profits of a FSC (or former FSC) shall be the 
earnings and profits computed in accordance with the rules, where 
applicable, prescribed in Sec. 1.964-1 (relating to determination of 
the earnings and profits of a foreign corporation) other than 
subsections (d) and (e) of that section.
    (c) Definition of ``former FSC''. Under section 926(c), the term 
``former FSC'' refers to a corporation which is not a FSC for a taxable 
year but which was a FSC for a prior taxable year. However, a 
corporation is not a former FSC for a taxable year unless such 
corporation has, at the beginning of such taxable year, earnings and 
profits attributable to foreign trade income. A corporation which is a 
former FSC for a taxable year is a former FSC for all purposes of the 
Code.
    (d) Personal holding company income--(1) Treatment of dividends. Any 
amount

[[Page 108]]

includible in a shareholder's gross income as a dividend with respect to 
the stock of a FSC (or former FSC) under paragraph (a) of this section 
shall be treated as a dividend for all purposes of the Code, except that 
that part of the dividend attributable to foreign trade income, other 
than an amount attributable to section 923(a)(2) non-exempt income, 
shall not be considered in applying the personal holding company and 
foreign personal holding company provisions (sections 541 through 547 
and 551 through 558, respectively).
    (2) Look through option. With regard to distributions from a FSC (or 
former FSC) which are not treated as personal holding company income 
under paragraph (d)(1) of this section, the shareholder may, however, 
treat any amount of that distribution as an item of income described 
under section 543 (or section 553) (for example, rents) if it 
establishes to the satisfaction of the Commissioner that such amount is 
attributable to earnings and profits of the FSC derived from such item 
of income. For example, distributions from a FSC relating to section 
923(a)(2) non-exempt income will be treated as dividends for purposes of 
the personal holding company provisions of sections 541 through 547 
unless the look through option is elected. Under this option, if 
earnings and profits out of which those distributions are made are 
attributable to the lease of export property, the FSC shareholder may 
treat the distribution for purposes of the personal holding company 
provisions as rents rather than as dividends. This may be beneficial to 
the shareholder because rents are not considered under section 543(a)(2) 
as personal holding company income, if in general, rents constitute 50% 
or more of the shareholder's adjusted ordinary gross income.
    (e) Sale of stock if section 1248 applies. For purposes of section 
1248, the earnings and profits of a FSC (or former FSC) shall not 
include earnings and profits attributable to foreign trade income.

[T.D. 8126, 52 FR 6458, Mar. 3, 1987, as amended by T.D. 8340, 56 FR 
11093, Mar. 15, 1991]