[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: 26CFR1.956-2]

[Page 352-358]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.956-2  Definition of United States property.

    (a) Included property--(1) In general. For purposes of section 
956(a) and Sec. 1.956-1, United States property is (except as provided 
in paragraph (b) of this section) any property acquired (within the 
meaning of paragraph (d)(1) of this section) by a foreign corporation 
(whether or not a controlled foreign corporation at the time) during any 
taxable year of such foreign corporation beginning after December 31, 
1962, which is--
    (i) Tangible property (real or personal) located in the United 
States;
    (ii) Stock of a domestic corporation;
    (iii) An obligation (as defined in paragraph (d)(2) of this section) 
of a United States person (as defined in section 957(d)); or
    (iv) Any right to the use in the United States of--
    (a) A patent or copyright,
    (b) An invention, model, or design (whether or not patented),
    (c) A secret formula or process, or
    (d) Any other similar property right, which is acquired or developed 
by the

[[Page 353]]

foreign corporation for use in the United States by any person. Whether 
a right described in this subdivision has been acquired or developed for 
use in the United States by any person is to be determined from all the 
facts and circumstances of each case. As a general rule, a right 
actually used principally in the United States will be considered to 
have been acquired or developed for use in the United States in the 
absence of affirmative evidence showing that the right was not so 
acquired or developed for such use.
    (2) Illustrations. The application of the provisions of this 
paragraph may be illustrated by the following examples:

    Example 1. Foreign corporation R uses as a taxable year a fiscal 
year ending on June 30. Corporation R acquires on June 1, 1963, and 
holds on June 30, 1963, $100,000 of tangible property (not described in 
section 956(b)(2)) located in the United States. Corporation R's 
aggregate investment in United States property at the close of its 
taxable year ending June 30, 1963, is zero since the property which is 
acquired on June 1, 1963, is not acquired during a taxable year of R 
Corporation beginning after December 31, 1962. Assuming no change in R 
Corporation's aggregate investment in United States property during its 
taxable year ending June 30, 1964, R Corporation's increase in earnings 
invested in United States property for such taxable year is zero.
    Example 2. Foreign corporation S uses the calendar year as a taxable 
year and is a controlled foreign corporation for its entire taxable year 
1965. Corporation S is not a controlled foreign corporation at any time 
during its taxable years 1963 and 1964. Corporation S owns on December 
31, 1964, $100,000 of tangible property (not described in section 
956(b)(2)) located in the United States which it acquires during taxable 
years beginning after December 31, 1962. Corporation S's aggregate 
investment in United States property on December 31, 1964, is $100,000. 
Corporation S's current and accumulated earnings and profits (determined 
as provided in paragraph (b) of Sec. 1.956-1) as of December 31, 1964, 
are in excess of $100,000. Assuming no change in S Corporation's 
aggregate investment in United States property during its taxable year 
1965, S Corporation's increase in earnings invested in United States 
property for such taxable year is zero.
    Example 3. Foreign corporation T uses the calendar year as a taxable 
year and is a controlled foreign corporation for its entire taxable 
years 1963, 1964, and 1966. At December 31, 1964, T Corporation's 
investment in United States property is $100,000. Corporation T is not a 
controlled foreign corporation at any time during its taxable year 1965 
in which it acquires $25,000 of tangible property (not described in 
section 956(b)(2)) located in the United States. On December 31, 1965, T 
Corporation holds the United States property of $100,000 which it held 
on December 31, 1964, and, in addition, the United States property 
acquired in 1965. Corporation T's aggregate investment in United States 
property at December 31, 1965, is $125,000. Corporation T's current and 
accumulated earnings and profits (determined as provided in paragraph 
(b) of Sec. 1.956-1) as of December 31, 1965, are in excess of 
$125,000, and T Corporation pays no amount during 1965 to which section 
959 (c)(1) applies. Assuming no change in T Corporation's aggregate 
investment in United States property during its taxable year 1966, T 
Corporation's increase in earnings invested in United States property 
for such taxable year is zero.

    (3) Property owned through partnership. For purposes of section 956, 
if a controlled foreign corporation is a partner in a partnership that 
owns property that would be United States property, within the meaning 
of paragraph (a)(1) of this section, if owned directly by the controlled 
foreign corporation, the controlled foreign corporation will be treated 
as holding an interest in the property equal to its interest in the 
partnership and such interest will be treated as an interest in United 
States property. This paragraph (a)(3) applies to taxable years of a 
controlled foreign corporation beginning on or after July 23, 2002.
    (b) Exceptions--(1) Excluded property. For purposes of section 
956(a) and paragraph (a) of this section, United States property does 
not include the following types of property held by a foreign 
corporation:
    (i) Obligations of the United States.
    (ii) Money.
    (iii) Deposits with persons carrying on the banking business, unless 
the deposits serve directly or indirectly as a pledge or guarantee 
within the meaning of paragraph (c) of this section. See paragraph 
(e)(2) of Sec. 1.956-1.
    (iv) Property located in the United States which is purchased in the 
United States for export to, or use in, foreign countries. For purposes 
of this subdivision, property to be used outside the United States will 
be considered property to be used in a foreign country. Whether property 
is of a type

[[Page 354]]

described in this subdivision is to be determined from all the facts and 
circumstances in each case. Property which constitutes export trade 
assets within the meaning of section 971(c)(2) and paragraph (c)(3) of 
Sec. 1.971-1 will be considered property of a type described in this 
subdivision.
    (v) Any obligation (as defined in paragraph (d)(2) of this section) 
of a United States person (as defined in section 957(d)) arising in 
connection with the sale or processing of property if the amount of such 
obligation outstanding at any time during the taxable year of the 
foreign corporation does not exceed an amount which is ordinary and 
necessary to carry on the trade or business of both the other party to 
the sale or processing transaction and the United States person, or, if 
the sale or processing transaction occurs between related persons, would 
be ordinary and necessary to carry on the trade or business of both the 
other party to the sale or processing transaction and the United States 
person if such persons were unrelated persons. Whether the amount of an 
obligation described in this subdivision is ordinary and necessary is to 
be determined from all the facts and circumstances in each case.
    (vi) Any aircraft, railroad rolling stock, vessel, motor vehicle, or 
container used in the transportation of persons or property in foreign 
commerce and used predominantly outside the United States. Whether 
transportation property described in this subdivision is used in foreign 
commerce and predominantly outside the United States is to be determined 
from all the facts and circumstances in each case. As a general rule, 
such transportation property will be considered to be used predominantly 
outside the United States if 70 percent or more of the miles traversed 
(during the taxable year at the close of which a determination is made 
under section 956(a)(2)) in the use of such property are traversed 
outside the United States or if such property is located outside the 
United States 70 percent of the time during such taxable year.
    (vii) An amount of assets described in paragraph (a) of this section 
of an insurance company equivalent to the unearned premiums or reserves 
which are ordinary and necessary for the proper conduct of that part of 
its insurance business which is attributable to contracts other than 
those described in section 953(a)(1) and the regulations thereunder. For 
purposes of this subdivision, a reserve will be considered ordinary and 
necessary for the proper conduct of an insurance business if, under the 
principles of paragraph (c) of Sec. 1.953-4, such reserve would qualify 
as a reserve required by law. See paragraph (d)(3) of Sec. 1.954-2 for 
determining, for purposes of this subdivision, the meaning of insurance 
company and of unearned premiums.
    (viii) For taxable years beginning after December 31, 1975, the 
voting or nonvoting stock or obligations of an unrelated domestic 
corporation. For purposes of this subdivision, an unrelated domestic 
corporation is a domestic corporation which is neither a United States 
shareholder (as defined in section 951(b)) of the controlled foreign 
corporation making the investment, nor a corporation 25 percent or more 
of whose total combined voting power of all classes of stock entitled to 
vote is owned or considered as owned (within the meaning of section 958 
(b)) by United States shareholders of the controlled foreign corporation 
making the investment. The determination of whether a domestic 
corporation is an unrelated corporation is made immediately after each 
acquisition of stock or obligations by the controlled foreign 
corporations.
    (ix) For taxable years beginning after December 31, 1975, movable 
drilling rigs or barges and other movable exploration and exploitation 
equipment (other than a vessel or an aircraft) when used on the 
Continental Shelf (as defined in section 638) of the United States in 
the exploration for, development, removal, or transportation of natural 
resources from or under ocean waters. Property used on the Continental 
Shelf includes property located in the United States which is being 
constructed or is in storage or in transit within the United States for 
use on the Continental Shelf. In general, the type of property which 
qualifies for the exception under this subdivision includes any movable 
property which would be entitled to the investment

[[Page 355]]

credit if used outside the United States in certain geographical areas 
of the Western Hemisphere pursuant to section 48(a)(2)(B)(x) (without 
reference to sections 49 and 50).
    (x) An amount of--
    (a) A controlled foreign corporation's assets described in paragraph 
(a) of this section equivalent to its earnings and profits which are 
accumulated after December 31, 1962, and are attributable to items of 
income described in section 952(b) and the regulations thereunder, 
reduced by the amount of
    (b) The earnings and profits of such corporation which are applied 
in a taxable year of such corporation beginning after December 31, 1962, 
to discharge a liability on property, but only if the liability was in 
existence at the close of such corporation's taxable year immediately 
preceding its first taxable year beginning after December 31, 1962, and 
the property would have been United States property if it had been 
acquired by such corporation immediately before such discharge.

For purposes of this subdivision, distributions made by such corporation 
for any taxable year shall be considered first made out of earnings and 
profits for such year other than earnings and profits referred to in (a) 
of this subdivision.
    (2) Statement required. If a United States shareholder of a 
controlled foreign corporation excludes any property from the United 
States property of such controlled foreign corporation on the ground 
that section 956(b)(2) applies to such excluded property, he shall 
attach to his return a statement setting forth, by categories described 
in paragraph (a)(1) of this section, the amount of United States 
property of the controlled foreign corporation and, by categories 
described in subparagraph (1) of this paragraph, the amount of such 
property which is excluded.
    (c) Treatment of pledges and guarantees--(1) General rule. Except as 
provided in subparagraph (4) of this paragraph, any obligation (as 
defined in paragraph (d)(2) of this section) of a United States person 
(as defined in section 957(d)) with respect to which a controlled 
foreign corporation is a pledgor or guarantor shall be considered for 
purposes of section 956(a) and paragraph (a) of this section to be 
United States property held by such controlled foreign corporation.
    (2) Indirect pledge or guarantee. If the assets of a controlled 
foreign corporation serve at any time, even though indirectly, as 
security for the performance of an obligation of a United States person, 
then, for purposes of paragraph (c)(1) of this section, the controlled 
foreign corporation will be considered a pledgor or guarantor of that 
obligation. For this purpose the pledge of stock of a controlled foreign 
corporation will be considered as the indirect pledge of the assets of 
the corporation if at least 66 2/3 percent of the total combined voting 
power of all classes of stock entitled to vote is pledged and if the 
pledge of stock is accompanied by one or more negative covenants or 
similar restrictions on the shareholder effectively limiting the 
corporation's discretion with respect to the disposition of assets and 
the incurrence of liabilities other than in the ordinary course of 
business. This paragraph (c)(2) applies only to pledges and guarantees 
which are made after September 8, 1980. For purposes of this paragraph 
(c)(2) a refinancing shall be considered as a new pledge or guarantee.
    (3) Illustrations. The following examples illustrate the application 
of this paragraph (c):

    Example 1. A, a United States person, borrows $100,000 from a bank 
in foreign country X on December 31, 1964. On the same date controlled 
foreign corporation R pledges its assets as security for A's performance 
of A's obligation to repay such loan. The place at which or manner in 
which A uses the money is not material. For purposes of paragraph (b) of 
Sec. 1.956-1, R Corporation will be considered to hold A's obligation 
to repay the bank $100,000, and, under the provisions of paragraph 
(e)(2) of Sec. 1.956-1, the amount taken into account in computing R 
Corporation's aggregate investment in United States property on December 
31, 1964, is the unpaid principal amount of the obligation on that date 
($100,000).
    Example 2. The facts are the same as in example 1, except that R 
Corporation participates in the transaction, not by pledging its assets 
as security for A's performance of A's obligation to repay the loan, but 
by agreeing to buy for $1,00,000 at maturity the note representing A's 
obligation if A does not repay the loan. Separate arrangements are made 
with respect to the payment of the interest

[[Page 356]]

on the loan. The agreement of R Corporation to buy the note constitutes 
a guarantee of A's obligation. For purposes of paragraph (b) of Sec. 
1.956-1, R Corporation will be considered to hold A's obligation to 
repay the bank $100,000, and, under the provisions of paragraph (e)(2) 
of Sec. 1.956-1, the amount taken into account in computing R 
Corporation's aggregate investment in United States property on December 
31, 1964, is the unpaid principal amount of the obligation on that date 
($100,000).
    Example 3. A, a United States person, borrows $100,000 from a bank 
on December 10, 1981, pledging 70 percent of the stock of X, a 
controlled foreign corporation, as collateral for the loan. A and X use 
the calendar year as their taxable year. in the loan agreement, among 
other things, A agrees not to cause or permit X Corporation to do any of 
the following without the consent of the bank:
    (a) Borrow money or pledge assets, except as to borrowings in the 
ordinary course of business of X Corporation;
    (b) Guarantee, assume, or become liable on the obligation of 
another, or invest in or lend funds to another;
    (c) Merge or consolidate with any other corporation or transfer 
shares of any controlled subsidiary;
    (d) Sell or lease (other than in the ordinary course of business) or 
otherwise dispose of any substantial part of its assets;
    (e) Pay or secure any debt owing by X Corporation to A; and
    (f) Pay any dividends, except in such amounts as may be required to 
make interest or principal payments on A's loan from the bank.
    A retains the right to vote the stock unless a default occurs by A. 
Under paragraph (c)(2) of this section, the assets of X Corporation 
serve indirectly as security for A's performance of A's obligation to 
repay the loan and X Corporation will be considered a pledgor or 
guarantor with respect to that obligation. For purposes of paragraph (b) 
of Sec. 1.956-1, X Corporation will be considered to hold A's 
obligation to repay the bank $100,000 and under paragraph (e)(2) of 
Sec. 1.956-1, the amount taken into account in computing X 
Corporation's aggregate investment in United States property on December 
31, 1981, is the unpaid principal amount of the obligation on that date.

    (4) Special rule for certain conduit financing arrangements. The 
rule contained in subparagraph (1) of this paragraph shall not apply to 
a pledge or a guarantee by a controlled foreign corporation to secure 
the obligation of a United States person if such United States person is 
a mere conduit in a financing arrangement. Whether the United States 
person is a mere conduit in a financing arrangement will depend upon all 
the facts and circumstances in each case. A United States person will be 
considered a mere conduit in a financing arrangement in a case in which 
a controlled foreign corporation pledges stock of its subsidiary 
corporation, which is also a controlled foreign corporation, to secure 
the obligation of such United States person, where the following 
conditions are satisfied:
    (i) Such United States person is a domestic corporation which is not 
engaged in the active conduct of a trade or business and has no 
substantial assets other than those arising out of its relending of the 
funds borrowed by it on such obligation to the controlled foreign 
corporation whose stock is pledged; and
    (ii) The assets of such United States person are at all times 
substantially offset by its obligation to the lender.
    (d) Definitions--(1) Meaning of ``acquired''--(i) Applicable rules. 
For purposes of this section--
    (a) Property shall be considered acquired by a foreign corporation 
when such corporation acquires an adjusted basis in the property;
    (b) Property which is an obligation of a United States person with 
respect to which a controlled foreign corporation is a pledgor or 
guarantor (within the meaning of paragraph (c) of this section) shall be 
considered acquired when the corporation becomes liable as a pledgor or 
guarantor or is otherwise considered a pledgor or guarantor (within the 
meaning of paragraph (c)(2) of this section); and
    (c) Property shall not be considered acquired by a foreign 
corporation if--
    (1) Such property is acquired in a transaction in which gain or loss 
would not be recognized under this chapter to such corporation if such 
corporation were a domestic corporation;
    (2) The basis of the property acquired by the foreign corporation is 
the same as the basis of the property exchanged by such corporation; and
    (3) The property exchanged by the foreign corporation was not United 
States property (as defined in paragraph (a)(1) of this section) but 
would have been such property if it had been acquired by such 
corporation immediately before such exchange.

[[Page 357]]

    (ii) Illustrations. The application of this subparagraph may be 
illustrated by the following examples:

    Example 1. Foreign corporation R uses the calendar year as a taxable 
year and acquires before January 1, 1963, stock of domestic corporation 
M having as to R Corporation an adjusted basis of $10,000. The stock of 
M Corporation is not United States property of R Corporation on December 
31, 1962, since it is not acquired in a taxable year of R Corporation 
beginning on or after Janury 1, 1963. On June 30, 1963, R Corporation 
sells the M Corporation stock for $15,000 in cash and expends such 
amount in acquiring stock of domestic corporation N which has as to R 
Corporation an adjusted basis of $15,000. For purposes of determining R 
Corporation's aggregate investment in United States property on December 
31, 1963, R Corporation has, by virtue of acquiring the stock of N 
Corporation, acquired $15,000 of United States property.
    Example 2. Foreign corporation S, a controlled foreign corporation 
for the entire period here involved, uses the calendar year as a taxable 
year and purchases for $100,000 on December 31, 1963, tangible property 
(not described in section 956(b)(2)) located in the United States and 
having a remaining estimated useful life of 10 years, subject to a 
mortgage of $80,000 payable in 5 annual installments. The property 
constitutes United States property as of December 31, 1963, and the 
amount taken into account for purposes of determining the aggregate 
amount of S Corporation's investment in United States property under 
paragraph (b) of Sec. 1.956-1 is $20,000. No depreciation is sustained 
with respect to the property during the taxable year 1963. During the 
taxable year 1964, S Corporation pays $16,000 on the mortgage and 
sustains $10,000 of depreciation with respect to the property. As of 
December 31, 1964, the amount taken into account with respect to the 
property for purposes of determining the aggregate amount of S 
Corporation's investment in United States property under paragraph (b) 
of Sec. 1.956-1 is $26,000, computed as follows:

Cost of property.............................................   $100,000
  Less: Reserve for depreciation.............................     10,000
                                                    -----------
   Adjusted basis of property................................     90,000
  Less: Liability to which property is subject:
    Gross amount of mortgage.......................   $80,000  .........
    Payment during 1964............................    16,000  .........
                                                    ----------
                                                     ........     64,000
                                                              ----------
Amount taken into account (12-31-64).........................     26,000


    Example 3. Controlled foreign corporation T uses the calendar year 
as a taxable year and acquires on December 31, 1963, $10,000 of United 
States property not described in section 956(b)(2); no depreciation is 
sustained with respect to the property during 1963. Corporation T's 
current and accumulated earnings and profits (determined as provided in 
paragraph (b) of Sec. 1.956-1) as of December 31, 1963, are in excess 
of $10,000, and T Corporation's United States shareholders include in 
their gross income under section 951(a)(1)(B) their pro rata share of T 
Corporation's increase ($10,000) for 1963 in earnings invested in United 
States property. On January 1, 1964, T Corporation acquires an 
additional $10,000 of United States property not described in section 
956(b)(2). Each of the two items of property has an estimated useful 
life of 5 years, and T Corporation sustains $4,000 of depreciation with 
respect to such properties during its taxable year 1964. Corporation T's 
current and accumulated earnings and profits as of December 31, 1964, 
exceed $16,000, determined as provided in paragraph (b) of Sec. 1.956-
1. Corporation T pays no amounts during 1963 to which section 959(c)(1) 
applies. Corporation T's investment of earnings in United States 
property at December 31, 1964, is $16,000, and its increase for 1964 in 
earnings invested in United States property is $6,000.
    Example 4. Foreign corporation U uses the calendar year as a taxable 
year and acquires before January 1, 1963, stock in domestic corporation 
M having as to U Corporation an adjusted basis of $10,000. On December 
1, 1964, pursuant to a statutory merger described in section 368(a)(1), 
M Corporation merges into domestic corporation N, and U Corporation 
receives on such date one share of stock in N Corporation, the surviving 
corporation, for each share of stock it held in M Corporation. Pursuant 
to section 354 no gain or loss is recognized to U Corporation, and 
pursuant to section 358 the basis of the property received (stock of N 
Corporation) is the same as that of the property exchanged (stock of M 
Corporation). Corporation U is not considered for purposes of section 
956 to have acquired United States property by reason of its receipt of 
the stock in N Corporation.
    Example 5. The facts are the same as in example 4, except that U 
Corporation acquires the stock of M Corporation on February 1, 1963, 
rather than before January 1, 1963. For purposes of determining U 
Corporation's aggregate investment in United States property on December 
31, 1963, U Corporation has, by virtue of acquiring the stock of M 
Corporation, acquired $10,000 of United States property. Corporation U 
pays no amount during 1963 to which section 959(c)(1) applies. The 
reorganization and resulting acquisition on December 1, 1964, by U 
Corporation of N Corporation's stock also represents an acquisition of 
United States property; however, assuming no other change in U 
Corporation's aggregate investment in United States property during 
1964, U Corporation's increase for such year in earnings invested in 
United States property is zero.


[[Page 358]]


    (2) [Reserved]

(Secs. 956(c), 7805, Internal Revenue Code of 1954 (76 Stat. 1017, 68A 
Stat. 917; (26 U.S.C. 956(c) and 7805 respectively)))

[T.D. 6704, 29 FR 2601, Feb. 20, 1964, as amended by T.D. 7712, 45 FR 
52374, Aug. 7, 1980; T.D. 7797, 46 FR 57675, Nov. 25, 1981; T.D. 8209, 
53 FR 22171, June 14, 1988; T.D. 9008, 67 FR 48025, July 23, 2002]