Tax Reform Series 39 – Sales or Transfers Involving Specified 10-Percent Owned Foreign Corporations


Plain Language of Change:

  • If a domestic corporation sells or exchanges stock in a foreign corporation held for one year or more, any amount received by the domestic corporation that is treated as a dividend is treated as a dividend for purposes of the 100-percent participation exemption deduction for the foreign-source portion of dividends

  • This rule allows gain on the disposition of the foreign corporation stock to be reduced or eliminated as a result of the recharacterization of the gain as a dividend for which a 100-percent participation DRD is allowed

  • Solely for the purpose of determining a loss, a domestic corporate shareholder’s adjusted basis in the stock of a specified 10 percent-owned foreign corporation is reduced by an amount equal to the portion of any dividend received with respect to such stock from such foreign corporation that was not taxed by reason of a DRD

  • Special rules for sale by a CFC of a lower-tier CFC

  • If a domestic corporation transfers substantially all of the assets of a foreign branch to a specified 10 percent-owned foreign corporation with respect to which it is a U.S. shareholder after the transfer, the domestic corporation includes in gross income an amount equal to the transferred loss amount, subject to certain limitations

  • Transfers of property used in the active conduct of a trade or business from a U.S. corporation to a foreign corporation in an otherwise tax-free transaction will be treated as taxable exchanges since the foreign corporation will not be considered a corporation

Detailed Analysis of Sales or Transfers Involving Specified 10-Percent Owned Foreign Corporations

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