[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: 26CFR1.952-2]

[Page 218-220]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.952-2  Determination of gross income and taxable income of 
a foreign corporation.

    (a) Determination of gross income--(1) In general. Except as 
provided in subparagraph (2) of this paragraph, the gross income of a 
foreign corporation for any taxable year shall, subject to the special 
rules of paragraph (c) of this section, be determined by treating such 
foreign corporation as a domestic corporation taxable under section 11 
and by applying the principles of section 61 and the regulations 
thereunder.
    (2) Insurance gross income--(i) Life insurance gross income. The 
gross income for any taxable year of a controlled foreign corporation 
which is engaged in the business of reinsuring or issuing insurance or 
annuity contracts and which, if it were a domestic corporation engaged 
only in such business, would be taxable as a life insurance company to 
which part I (sections 801 through 820) of subchapter L of chapter 1 of 
the Code applies, shall, subject to the special rules of paragraph (c) 
of this section, be the sum of--
    (a) The gross investment income, as defined under section 804(b), 
except that interest which is excluded from gross income under section 
103 shall not be taken into account;
    (b) The sum of the items taken into account under section 809(c), 
except that advance premiums shall not be taken into account; and
    (c) The amount by which the net long-term capital gain exceeds the 
net short-term capital loss.
    (ii) Mutual and other insurance gross income. The gross income for 
any taxable year of a controlled foreign corporation which is engaged in 
the business of reinsuring or issuing insurance or annuity contracts and 
which, if it were a domestic corporation engaged only in such business, 
would be taxable as a mutual insurance company to which part II 
(sections 821 through 826) of subchapter L of chapter 1 of the Code 
applies or as a mutual marine insurance or other insurance company to 
which part III (sections 831 and 832) of subchapter L of chapter 1 of 
the Code applies, shall, subject to the special rules of paragraph (c) 
of this section, be--
    (a) The sum of--
    (1) The gross income, as defined in section 832(b)(1);
    (2) The amount of losses incurred, as defined in section 832(b)(5); 
and
    (3) The amount of expenses incurred, as defined in section 
832(b)(6); reduced by
    (b) The amount of interest which under section 103 is excluded from 
gross income.
    (b) Determination of taxable income--(1) In general. Except as 
provided in subparagraph (2) of this paragraph, the taxable income of a 
foreign corporation for any taxable year shall, subject to the special 
rules of paragraph (c) of this section, be determined by treating such 
foreign corporation as a domestic corporation taxable under section 11 
and by applying the principles of section 63.
    (2) Insurance taxable income. The taxable income for any taxable 
year of a controlled foreign corporation which is engaged in the 
business of reinsuring or issuing insurance or annuity contracts and 
which, if it were a domestic corporation engaged only in such business, 
would be taxable as an insurance company to which subchapter L of 
chapter 1 of the Code applies shall, subject to the special rules of 
paragraph (c) of this section, be determined by treating such 
corporation as a domestic corporation taxable under subchapter L of 
chapter 1 of the Code and by applying the principles of Sec. Sec. 
1.953-4 and 1.953-5 for determining taxable income.
    (c) Special rules for purposes of this section--(1) Nonapplication 
of certain provisions. Except where otherwise distinctly expressed, the 
provisions of subchapters F, G, H, L, M, N, S, and T of chapter 1 of the 
Internal Revenue Code shall not apply and, for taxable years of a 
controlled foreign corporation beginning after March 3, 1997, the

[[Page 219]]

provisions of section 103 of the Internal Revenue Code shall not apply.
    (2) Application of principles of Sec. 1.964-1. The determinations 
with respect to a foreign corporation shall be made as follows:
    (i) Books of account. The books of account to be used shall be those 
regularly maintained by the corporation for the purpose of accounting to 
its shareholders.
    (ii) Accounting principles. Except as provided in subparagraphs (3) 
and (4) of this paragraph, the accounting principles to be employed are 
those described in paragraph (b) of Sec. 1.964-1. Thus, in applying 
accounting principles generally accepted in the United States for 
purposes of reflecting in the financial statements of a domestic 
corporation the operations of foreign affiliates, no adjustment need be 
made unless such adjustment will have a material effect, within the 
meaning of paragraph (a) of Sec. 1.964-1.
    (iii) Translation into United States dollars--(a) In general. Except 
as provided in (b) of this subdivision, the amounts determined in 
accordance with subdivision (ii) of this subparagraph shall be 
translated into United States dollars in accordance with the principles 
of paragraph (d) of Sec. 1.964-1.
    (b) Special rule. In any case in which the value of the foreign 
currency in relation to the United States dollar fluctuates more than 10 
percent during any translation period (within the meaning of paragraph 
(d)(6) of Sec. 1.964-1), the subpart F income and non-subpart F income 
shall be separately translated as if each constituted all the income of 
the controlled foreign corporation for the translation period.
    (iv) Tax accounting methods. The tax accounting methods to be 
employed are those established or adopted by or on behalf of the foreign 
corporation under paragraph (c) of Sec. 1.964-1. Thus, such accounting 
methods must be consistent with the manner of treating inventories, 
depreciation, and elections referred to in subdivisions (ii), (iii), and 
(iv) of paragraph (c)(1) of Sec. 1.964-1 and used for purposes of such 
paragraph; however, if, in accordance with paragraph (c)(6) of Sec. 
1.964-1, a foreign corporation receives foreign base company income 
before any elections are made or before an accounting method is adopted 
by or on behalf of such corporation under paragraph (c)(3) of Sec. 
1.964-1, the determinations of whether an exclusion set forth in section 
954(b) applies shall be made as if no elections had been made and no 
accounting method had been adopted.
    (v) Exchange gain or loss--(a) Exchange gain or loss, determined in 
accordance with the principles of Sec. 1.964-1(e), shall be taken into 
account for purposes of determining gross income and taxable income.
    (b) Exchange gain or loss shall be treated as foreign base company 
shipping income (or as a deduction allocable thereto) to the extent that 
it is attributable to foreign base company shipping operations. The 
extent to which exchange gain or loss is attributable to foreign base 
company shipping operations may be determined under any reasonable 
method which is consistently applied from year to year. For example, the 
extent to which the exchange gain or loss is attributable to foreign 
base company shipping operations may be determined on the basis of the 
ratio which the foreign based company shipping income of the corporation 
for the taxable year bears to its total gross income for the taxable 
year, such ratio to be determined without regard to this subdivision 
(v).
    (c) The remainder of the exchange gain or loss shall be allocated 
between subpart F income and non-subpart F income under any reasonable 
method which is consistently applied from year to year. For example, 
such remainder may be allocated to subpart F income in the same ratio 
that the gross subpart F income (exclusive of foreign base company 
shipping income) of the corporation for the taxable year bears to its 
total gross income (exclusive of foreign base company shipping income) 
for the taxable year, such ratio to be determined without regard to this 
subdivision (v).
    (3) Necessity for recognition of gain or loss. Gross income of a 
foreign corporation (including an insurance company) includes gain or 
loss only if such gain or loss would be recognized under the provisions 
of the Internal Revenue Code if the foreign corporation were a domestic 
corporation taxable under

[[Page 220]]

section 11 (subject to the modifications of subparagraph (1) of this 
paragraph). See section 1002. However, a foreign corporation shall not 
be treated as a domestic corporation for purposes of determining whether 
section 367 applies.
    (4) Gross income and gross receipts. The term ``gross income'' may 
not have the same meaning as the term ``gross receipts''. For example, 
in a manufacturing, merchandising, or mining business, gross income 
means the total sales less the cost of goods sold, plus any income from 
investments and from incidental or outside operations or sources.
    (5) Treatment of capital loss and net operating loss. In determining 
taxable income of a foreign corporation for any taxable year--
    (i) Capital loss carryback and carryover. The capital loss carryback 
and carryover provided by section 1212(a) shall not be allowed.
    (ii) Net operating loss deduction. The net operating loss deduction 
under section 172(a) or the operations loss deduction under section 812 
shall not be allowed.
    (6) Corporations which have insurance income. For purposes of 
paragraphs (a)(2) and (b)(2) of this section, in determining whether a 
controlled foreign corporation which is engaged in the business of 
reinsuring or issuing insurance or annuity contracts and which, if it 
were a domestic corporation engaged only in such business, would be 
taxable as an insurance company to which subchapter L of chapter 1 of 
the Code applies, it is immaterial that--
    (i) The corporation would be exempt from taxation as an organization 
described in section 501(a),
    (ii) The corporation would not be taxable as an insurance company to 
which subchapter L of the Code applies, or
    (iii) The corporation would be subject to the alternative tax for 
small mutual insurance companies provided by section 821(c).

[T.D. 6795, 30 FR 941, Jan. 29, 1965, as amended by T.D. 7893, 48 FR 
22508, May 19, 1983; T.D. 7894, 48 FR 22516, May 19, 1983; T.D. 8704, 62 
FR 20, Jan. 2, 1997]