[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: 26CFR1.956-1T]

[Page 352]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.956-1T  Shareholder's pro rata share of a controlled foreign 

corporation's increase in earnings invested in United States property 
(temporary).

    (a) [Reserved]
    (b)(1)-(3) [Reserved]
    (4) Treatment of certain investments of earnings in United States 
Property--(i) Special rule. For purposes of Sec. 1.956-1(b)(1) of the 
regulations, a controlled foreign corporation will be considered to hold 
indirectly (A) the investments in United States property held on its 
behalf by a trustee or a nominee or (B) at the discretion of the 
District Director, investments in U.S. property acquired by any other 
foreign corporation that is controlled by the controlled foreign 
corporation, if one of the principal purposes for creating, organizing, 
or funding (through capital contributions or debt) such other foreign 
corporation is to avoid the application of section 956 with respect to 
the controlled foreign corporation. For purposes of this paragraph (b), 
a foreign corporation will be controlled by the controlled foreign 
corporation if the foreign corporation and the controlled foreign 
corporation are related parties under section 267(b). In determining for 
purposes of this paragraph (b) whether two or more corporations are 
members of the same controlled group under section 267(b)(3), a person 
is considered to own stock owned directly by such person, stock owned 
with the application of section 1563(e)(1), and stock owned with the 
application of section 267(c). The following examples illustrate the 
application of this paragraph.

    Example 1. P, a domestic corporation, owns all of the outstanding 
stock of FS1, a controlled foreign corporation, and all of the 
outstanding stock of FS2, also a controlled foreign corporation. FS1 
sells products to FS2 in exchange for trade receivables due in 60 days. 
FS2 has no earnings and profits. FS1 has substantial accumulated 
earnings and profits. FS2 loans to P an amount equal to the debt it owes 
FS1. FS2 pays the trade receivables according to the terms of the 
receivables. FS1 will not be considered to hold indirectly the 
investment in United States property under this paragraph (b)(4), 
because there was no transfer of funds to FS2.
    Example 2. The facts are the same as in Example 1, except that FS2 
does not pay the receivables. FS1 is considered to hold indirectly the 
investment in United States property under this paragraph (b)(4), 
because there was a transfer of funds to FS2, a principal purpose of 
which was to avoid the application of section 956 to FS1.

    (ii) Effective date. This section is effective June 14, 1988, with 
respect to investments made on or after June 14, 1988.
    (c)-(d) [Reserved]
    (e)(1)-(4) [Reserved]
    (e)(5) Excluded charges--(i) Special rule. For purposes of Sec. 
1.956-1(e)(1) of the regulations, in the case of an investment in United 
States property consisting of an obligation of a related person, as 
defined in section 954(d)(3) and paragraph (e) of Sec. 1.954-1, a 
liability will not be recognized as a specific charge if the liability 
representing the charge is with recourse with respect to the general 
credit or other assets of the investing controlled foreign corporation.
    (ii) Effective date. This section is effective June 14, 1988, with 
respect to investments made on or after June 14, 1988.

[T.D. 8209, 53 FR 22171, June 14, 1988]