[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: 26CFR1.961-1]

[Page 422-423]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.961-1  Increase in basis of stock in controlled foreign 
corporations and of other property.

    (a) Increase in basis--(1) In general. Except as provided in 
subparagraph (2) of this paragraph, the basis of a United States 
shareholder's--
    (i) Stock in a controlled foreign corporation; or
    (ii) Property (as defined in paragraph (b)(1) of this section) by 
reason of the ownership of which he is considered under section 
958(a)(2) as owning stock in a controlled foreign corporation shall be 
increased under section 961(a), as of the last day in the taxable year 
of such corporation on which it is a controlled foreign corporation, by 
the amount required to be included with respect to such stock or such 
property in such shareholder's gross income under section 951(a) for his 
taxable year in which or with which such taxable year of such 
corporation ends. The increase in basis provided by the preceding 
sentence shall be made only to the extent to which such amount required 
to be included in gross income under section 951(a) was so included in 
gross income.
    (2) Limitation on amount of increase in case of election under 
section 962. In the case of a United States shareholder who makes the 
election under section 962 for the taxable year, the amount of the 
increase in basis provided by subparagraph (1) of this paragraph shall 
not exceed the amount of United States tax paid in accordance with such 
election with respect to the amounts included in such shareholder's 
gross income under section 951(a) for such year (as determined under 
Sec. 1.962-1).
    (b) Rules of application--(1) Property defined. The property of a 
United States shareholder referred to in paragraph (a)(1)(ii) of this 
section shall consist of--
    (i) Stock in a foreign corporation;
    (ii) An interest in a foreign partnership; or

[[Page 423]]

    (iii) A beneficial interest in a foreign estate or trust (as defined 
in section 7701(a)(31)).
    (2) Increase with respect to each share of stock. Any increase under 
paragraph (a) of this section in the basis of a United States 
shareholder's stock in a foreign corporation shall be made in the amount 
included in gross income under section 951(a) or in the amount of United 
States tax paid in accordance with an election under section 962, as the 
case may be, with respect to each share of such stock.
    (c) Illustration. The application of this section may be illustrated 
by the following examples:

    Example 1. Domestic corporation M owns 800 of the 1,000 shares of 
the one class of stock in controlled foreign corporation R which owns 
all of the one class of stock in controlled foreign corporation S. 
Corporations M, R, and S use the calendar year as a taxable year. In 
1964, S Corporation has $100,000 of earnings and profits after the 
payment of $11,250 of foreign income taxes, and $100,000 of subpart F 
income. Corporation R has no earnings and profits. With respect to S 
Corporation, M Corporation is required to include in gross income 
$80,000 (800/1,000x$100,000) under section 951(a), and $9,000 ($80,000/
$100,000x$11,250) under section 78. On December 31, 1964, M Corporation 
must increase the basis of each share of its stock in R Corporation by 
$100 ($80,000/800).
    Example 2. A, an individual United States shareholder, owns all of 
the 1,000 shares of the one class of stock in controlled foreign 
corporation T. Corporation T and A use the calendar year as a taxable 
year. In 1964, T Corporation has $80,000 of earnings and profits after 
the payment of $20,000 of foreign income taxes, and $80,000 of subpart F 
income. A makes the election under section 962 for 1964 and in 
accordance with such election pays a United States tax of $23,000 with 
respect to the $80,000 included in his gross income under section 
951(a). On December 31, 1964, A must increase the basis of each share of 
his stock in T Corporation by $23 ($23,000/1,000).

[T.D. 6850, 30 FR 11854, Sept. 16, 1978]