Treasury Regulations · 26 CFR
§ 1.1248-3. Earnings and profits attributable to stock in complex cases.
Regulation text, no changes From the eCFR, current as of October 15, 2026. The eCFR is an authoritative but unofficial editorial compilation of the Code of Federal Regulations; the official text is the annual CFR on govinfo. Compare it with this section on ecfr.gov (external site) or the official annual CFR on govinfo (external site).
Regulation under 26 U.S.C. § 1248
Cite as 26 CFR § 1.1248-3
At a glance
Read from the text and its source citation. Not part of the regulation.
- Status
- In the current eCFR
- Issued
- December 22, 1964 by T.D. 6779
- Last amended
- March 19, 2013 by T.D. 9614
- Issued under
- 26 U.S.C. § 1248
- Length
- 9,660 words · about 42 min to read
- Defines
- 1 term
- Cross-references
- cites 14 Code sections and 7 regulations; cited by 7
On December 31, 1967, Brown sells 10 shares of stock in foreign corporation X, which uses the calendar year as its taxable year. The 10 shares constitute a block of stock under subparagraph (5) of this paragraph. Under step 1, Brown's ratable shares of the earnings and profits of X attributable to the block are as follows:
| Taxble year of X | Ratable shares |
|---|---|
| 1963 | $100 |
| 1964 | 150 |
| 1965 | 1 50 |
| 1966 | 50 |
| 1967 | 100 |
| Sum | 350 |
| 1 Deficit. | |
The amount of the earnings and profits attributable to such block under step 3 is $350.
Assume the same facts as in example (1), except that in respect of X there are lower tier corporations Y and Z to which the provisions of paragraph (f) of this section apply. Brown's ratable shares of the earnings and profits of X, Y, and Z attributable to the block under steps 1 and 2 for each taxable year of X are as follows:
| Taxable year of X | Ratable shares | |||
|---|---|---|---|---|
| X | Y | Z | Total | |
| 1963 | $100 | $40 | $20 | $160 |
| 1964 | 150 | 40 | −60 | 130 |
| 1965 | −50 | 30 | 50 | 30 |
| 1966 | 50 | 50 | 30 | 130 |
| 1967 | 100 | −40 | 40 | 100 |
| Sum | 350 | 120 | 80 | 550 |
The amount of the earnings and profits attributable to such block under step 3 is $550.
(a) For any taxable year beginning before January 1, 1967, shall not include the excess of any item includible in gross income of the foreign corporation under section 882(b) as gross income derived from sources within the United States, and
(b) For any taxable year beginning after December 31, 1966, shall not include the excess of any item includible in gross income of the foreign corporation under section 882(b)(2) as income effectively connected for that year with the conduct by such corporation of a trade or business in the United States, whether derived from sources within or from sources without the United States,
Over any deductions allocable to such item under section 882(c). However, if the sale or exchange of stock in the foreign corporation by the U.S. person occurs before January 1, 1967, the provisions of (a) of this subdivision apply with respect to such sale or exchange even though the taxable year begins after December 31, 1966. See section 1248(d)(4). Any item which is required to be excluded from gross income, or which is taxed at a reduced rate, under an applicable treaty obligation of the United States shall not be excluded under this subdivision from earnings and profits accumulated for a taxable year.
X Corporation, which uses the calendar year as its taxable year, was organized on January 1, 1965, and was a controlled foreign corporation on each day of 1965. The amount of X's earnings and profits accumulated for 1965 (computed under this paragraph without regard to the adjustment for distributions under this subparagraph) is $400,000, of which $100,000 is distributed by X as dividends during 1965. The amount of X's earnings and profits accumulated for 1965 (computed under this paragraph) is $300,000 (that is, $400,000 minus $100,000). The result would be the same even if X was not a controlled foreign corporation on each day of 1965.
Assume the same facts as in example (1). Assume further that the amount of X's earnings and profits accumulated for 1966 (computed under this paragraph without regard to the adjustment for distributions under this subparagraph) is $150,000, and that X distributes the amount of $260,000 as dividends during 1966. Since $150,000 of the distribution is from earnings and profits accumulated for 1966 (computed without regard to the adjustment for distributions under this subparagraph), and since $110,000 is from earnings and profits accumulated for 1965, the earnings and profits of X accumulated for 1966 are a deficit of $110,000 (that is, $150,000 minus $260,000). However, the earnings and profits accumulated for 1965 are still $300,000 for purposes of computing in the manner prescribed in paragraph (c) of this section a person's tentative ratable share.
On each day of 1964, S owns a block consisting of 30 of the 100 shares of the only class of stock outstanding in F Corporation, and on each such day F is a controlled foreign corporation. F uses the calendar year as its taxable year and F's earnings and profits accumulated for 1964 (computed under paragraph (b) of this section) are $10,000. S's tentative ratable share with respect to the block is $3,000, computed as follows:
| Earnings and profits accumulated for taxable year | $10,000 |
| Multiplied by: | |
| Number of shares in block (30), divided by number of shares outstanding (100) | 30% |
| Multiplied by: | |
| Number of days in 1964 S held block while F was a controlled foreign corporation (365), divided by number of days in 1964 (365) | 100% |
| Tentative ratable share for block | $3,000 |
On December 31, 1964, X Corporation, a controlled foreign corporation which uses the calendar year as its taxable year, had 100 shares of one class of stock outstanding, 15 of which were owned by T. T's 15 shares were redeemed by X on March 14, 1965. On December 31, 1965, in addition to the remaining 85 shares, 10 new shares of stock (which were issued on May 26, 1965) were outstanding. Thus, during 1965, 15 shares were outstanding for 73 days, 10 for 219 days, and 85 for 365 days. The earnings and profits (computed under paragraph (b) of this section) accumulated for X's taxable year ending on December 31, 1965, are $18,800. T's tentative ratable share with respect to one share of stock is $40, computed as follows:
| Earnings and profits accumulated for taxable year | $18,800 | |
| Divided by: | ||
| Number of shares deemed outstanding each day of 1965: | ||
| 15 for 73 days (15 × 73/365) | 3 | |
| 10 for 219 days (10 × 219/365) | 6 | |
| 85 for 365 days (35 × 365/365) | 85 | |
| Total number of shares deemed outstanding each day of 1965 | 94 | |
| Earnings and profits accumulated per share | $200 | |
| Multiplied by: | ||
| Number of days in 1965 T held his share while X was a controlled foreign corporation (73), divided by number of days in 1965 (365) | 20% | |
| T's tentative ratable share per share of stock | $40 | |
Assume the same facts as in example (2) except that X was not a controlled foreign corporation after January 31, 1965. T's tentative ratable share with respect to one share of stock for 1965 is $17, computed as follows:
| Earnings and profits accumulated per share, determined in example (2) | $200 | |
| Multiplied by: | ||
| Number of days in 1965 T held X stock while X was a controlled foreign corporation (31), divided by number of days in 1965 (365) | 8.5% | |
| Tentative ratable share | $17 | |
On each day of 1965 X Corporation, which uses the calendar year as its taxable year, was a controlled foreign corporation having 100 shares of one class of stock outstanding, a block of 25 of which were owned by T, who acquired them in 1962 and sold them in 1967. The deficit in X's earnings and profits accumulated for 1965 (computed under paragraph (b) of this section without regard to the adjustment for distributions under subparagraph (3) thereof) is $100,000, and thus in respect of the block T's partial tentative ratable share computed under subparagraph (2) of this paragraph is a deficit of $25,000 (that is, $100,000 × 25/100). During 1965 X does not make any distributions in respect of its stock, and thus in respect of the block T's partial tentative ratable share computed under subparagraph (3) of this paragraph is zero. Accordingly, T's tentative ratable share in respect of the block of X stock for 1965 is a deficit of $25,000. If, however, X was a controlled foreign corporation for only 292 days during 1965, T's tentative ratable share in respect of the block for 1965 would be a deficit of $20,000 (that is, $25,000 × 292/365).
(i) Assume the same facts as in example (1) except that at no time during 1965 is X a controlled foreign corporation and that during 1965 X distributes $80,000 with respect to its stock. Assume further that X was a controlled foreign corporation on each day of 1964, but only for the first 146 days of 1963, and that X's earnings and profits accumulated for prior taxable years computed under paragraph (b) of this section are $70,000 for 1964 and $20,000 for 1963.
(ii) Since X was not a controlled foreign corporation on any day of 1965, in respect of the block T's partial tentative ratable share computed under subparagraph (2) of this paragraph is zero.
(iii) The partial tentative ratable share under subparagraph (3) of this paragraph is computed in the following manner: For 1965 the adjustment for distributions under paragraph (b)(3) of this section is $80,000. Under subparagraph (4) of this paragraph $70,000 of such adjustment is attributable to the distribution of all of the earnings and profits accumulated during 1964, on every day of which X was a controlled foreign corporation, and $10,000 of the adjustment is attributable to the distribution of $10,000 of the earnings and profits accumulated for 1963. The portion of the earnings and profits accumulated by X in 1963 attributable to the first 146 days in 1963 during which X was a controlled foreign corporation is $8,000 (that is, $20,000 × 146/365), and the portion attributable to the period in 1963 during which X was not a controlled foreign corporation is $12,000 (that is, $20,000 × 219/365). Under subparagraph (4)(ii) of this paragraph, the distribution in 1965 of $10,000 of earnings and profits accumulated during 1963 is attributable to the more recent period in 1963, that is, the period X was not a controlled foreign corporation. Accordingly, the portion of the adjustment for distributions under paragraph (b)(3) of this section attributable to earnings and profits accumulated during periods X was a controlled foreign corporation is $70,000, and in respect of the block T's partial tentative ratable share under subparagraph (3) of this paragraph is a deficit of $17,500 (that is, $70,000 × 25/100).
(iv) T's tentative ratable share in respect of the block of X stock for 1965 is a deficit of $17,500 (that is, the sum of the partial tentative ratable share for the block computed under subparagraph (2) of this paragraph, zero, plus the partial tentative ratable share for the block computed under subparagraph (3) of this paragraph, a deficit of $17,500).
(v) Assume that X had 100 shares of one class of stock outstanding on each day of 1964 and 1963. Notwithstanding the distributions in 1965 of earnings and profits accumulated during 1964 and 1963 (computed under paragraph (b) of this section), nevertheless, in respect of the block T's tentative ratable share for 1964 is $17,500 (that is, earnings and profits accumulated during 1964 so computed of $70,000, multiplied by 25 shares/100 shares) and in respect of the block T's tentative ratable share for 1963 is $2,000 (that is, earnings and profits accumulated during 1963 so computed of $20,000, multiplied by 25 shares/100 shares, and multiplied by the percentage that the number of days in 1963 on which X was a controlled foreign corporation bears to the total number of days in 1963, 146/365).
Assume the same facts as in example (2) except that X was a controlled foreign corporation on each day of 1965. The tentative ratable share with respect to the block of stock for 1965 is a deficit of $42,500, that is, the sum of the partial tentative ratable share under subparagraph (2) of this paragraph (as determined in example (1)), a deficit of $25,000, plus the partial tentative ratable share under subparagraph (3) of this paragraph (as determined in example (2)), a deficit of $17,500.
On December 31, 1975, Brown sells one share of stock in X Corporation, a controlled foreign corporation which has never been a less developed country corporation (as defined in section 902(d)). Both Brown and X use the calendar year as the taxable year. In respect of his share, Brown's tentative ratable share for 1971 (computed under paragraph (c) of this section) is $35. In respect of his share, Brown included $4 in his gross income for 1971 under section 951, and the amount of $3, which was distributed to him by X on January 15, 1972, is excluded from Brown's gross income under section 959(a)(1). In respect of the stock, Brown's ratable share for 1971 is $34, determined as follows:
Assume the same facts as in the example in subparagraph (2)(ii) of this paragraph except that X was a less developed country corporation for 1971. Assume further that Brown satisfies the requirements of paragraph (a) of § 1.1248-5. Brown's ratable share in respect of the stock for 1971 is zero.
(a) The conditions of paragraph (a)(2) of § 1.1248-1 are satisfied by the person in respect of such stock;
(b) By reason of his ownership of such stock, on the date of such sale or exchange such person owned, within the meaning of section 958(a)(2), stock in another foreign corporation (referred to as a lower tier corporation); and
(c) The conditions of paragraph (a)(2) of § 1.1248-1 would be satisfied by such person in respect of such stock in the lower tier corporation if such person were deemed to have sold or exchanged such stock in the lower tier corporation on the date he actually sold or exchanged such stock in the first tier corporation.
On each day of 1964 and 1965 corporations X and Y are controlled foreign corporations, and each has outstanding 100 shares of one class of stock. On January 15, 1965, T, a United States person, owns one share of stock in X and X directly owns 20 shares of stock in Y. Thus, T owns, within the meaning of section 958(a)(2), stock in Y. On that date, T sells his share in X and satisfies the conditions of paragraph (a)(2) of § 1.1248-1 in respect of his stock in X. Assuming that the conditions of paragraph (a)(2) of § 1.1248-1 would be satisfied by T in respect of the stock he indirectly owns in Y if, on January 15, 1965, he were deemed to have sold such stock in Y, the provisions of this paragraph apply.
In a year subsequent to 1969, Brown, a United States person, sells 5 of his shares of stock in X Corporation in a transaction as to which the provisions of this paragraph apply. Brown had purchased the 5 shares prior to 1969. On each day of 1969 X Corporation actually had 100 shares of one class of stock outstanding. On each such day X Corporation directly owned all of the shares of stock in Y Corporation, and Y Corporation directly owned all of the shares of stock in Z Corporation. Z Corporation on each such day was a controlled foreign corporation. Both X and Z use the calendar year as the taxable year. Z's earnings and profits accumulated for 1969 (computed under paragraph (b) of this section) are $2,000. Brown's tentative ratable share of the earnings and profits accumulated by Z attributable to the 1969 calendar year of X is $20 per share, computed as follows:
| (i) Z's earnings and profits for 1969 ($2,000), divided by the number of shares in X deemed outstanding each day of 1969 (100) | $20 | |
| Multiplied by: | ||
| (ii) Since on each day of 1969 Brown (by reason of owning directly his shares in X) owned, within the meaning of section 958(a)(2), stock in Z while Z was a controlled foreign corporation, the percentage determined under subparagraph (2)(ii) of this paragraph equals | 100% | |
| Multiplied by: | ||
| (iii) Since on each day of 1969 X owned 100 percent of the stock of Y while Y owned 100 percent of the stock in Z, the percentage determined under subparagraph (2)(iii) of this paragraph equals | 100% | |
| Multiplied by: | ||
| (iv) Since X and Z each use the same taxable year, the percentage determined under subparagraph (2)(iv) of this paragraph equals | 100% | |
| Total | $20 | |
Assume the same facts as in example (1), except that Brown sold his stock in X on October 19, 1969. Brown's tentative ratable share of the earnings and profits accumulated by Z attributable to the 1969 calendar year of X is $16 per share, computed as follows:
| (i) The amount determined in subdivision (i) of example (1) | $20 | |
| Multiplied by: | ||
| (ii) The number of days in the period during 1969 Brown (by reason of owning directly his stock in X) owned, within the meaning of section 958(a)(2), his stock in Z while Z was a controlled foreign corporation (292), divided by the number of days in 1969 (365), equals | 80% | |
| Multiplied by: | ||
| (iii) The percentage determined in subdivision | ||
| (iii) of example (1) | 100% | |
| Multiplied by: | ||
| (iv) The percentage determined in subdivision | ||
| (iv) of example (1) | 100% | |
| Total | $16 | |
Assume the same facts as in examples (1) and (2), except that on each day during 1969 Y owned (within the meaning of section 958(a)(2)) 81 of the 100 shares of Z's outstanding stock. Brown's tentative ratable share of the earnings and profits accumulated by Z attributable to the 1969 calendar year of X is $12.96 per share, computed as follows:
| (i) The amount determined in subdivision (i) of example (1) | $20 | |
| Multiplied by: | ||
| (ii) The percentage determined in subdivision (ii) of example (2) | 80% | |
| Multiplied by: | ||
| (iii) The average number of shares in Z which were owned (within the meaning of section 958(a)) by X during the applicable period (81), divided by the total number of shares in Z during such period (100) | 81% | |
| Multiplied by: | ||
| (iv) The percentage determined in subdivision (iv) of example (1) | 100% | |
| Total | $12.96 | |
The result would be the same if X owned (within the meaning of section 958(a)(2)) 81 percent of the stock in Y while Y so owned 100 percent of the stock in X, or if X so owned 90 percent of the stock in Y while Y so owned 90 percent of the stock in Z.
Assume the same facts as in example (3), except that Z Corporation uses a fiscal year ending June 30 as its taxable year. Assume further that Z's earnings and profits accumulated for its fiscal year ending June 30, 1969, and for its fiscal year ending June 30, 1970, are $3,000 and $2,000, respectively. Brown's tentative ratable share of the earnings and profits accumulated by Z attributable to the 1969 calendar year of X is $16.17 per share, computed as follows:
| In respect of Z's taxable year ending | ||
|---|---|---|
| June 30, 1969 | June 30, 1970 | |
| (i) Z's earnings and profits, divided by the number of shares in X deemed outstanding on each day of 1969: | ||
| $3,000/100 | $30 | |
| $2,000/100 | $20 | |
| Multiplied by: | ||
| (ii) The percentage determined in subdivision (ii) of example (2) | 80% | 80% |
| Multiplied by: | ||
| (iii) The percentage determined in subdivision (iii) of example (3) | 81% | 81% |
| Multiplied by: | ||
| (iv) Number of days in Z's taxable year which fall within 1969, divided by total number of days in Z's taxable year: | ||
| 181/365 | 49.6% | |
| 184/365 | 50.4% | |
| Totals | $9.64 | $6.53 |
| (v) Sum of tentative ratable shares of Z attributable to X's 1969 calendar year: | ||
| For Z's taxable year ending | ||
| June 30, 1969 | $9.64 | |
| June 30, 1970 | $6.53 | |
| Sum | $16.17 | |
Then such person's ratable share (or a deficit in such ratable share) for such taxable year of the lower tier corporation attributable to a taxable year of the first tier corporation (determined without regard to this paragraph) shall be reduced by an amount computed by multiplying such ratable share (so determined without regard to this paragraph) by the percentage computed under either subparagraph (2) or (4) of this paragraph, whichever is applicable.
On January 1, 1966, Smith, a United States person, recognizes gain upon the sale of one share of the only class of stock of F Corporation, which he has owned continuously since 1955. He includes a portion of the gain in his gross income as a dividend under section 1248(a). On January 1, 1966, F owns directly 60 shares of the 100 outstanding shares of the only class of stock of G Corporation, which F acquired in 1955 and owned continuously until such sale. F uses a taxable year ending June 30, and G uses the calendar year as the taxable year. For 1964, G was a less developed country corporation, and on each day of 1964 G was a controlled foreign corporation. Smith's ratable share for G's taxable year ending December 31, 1964, attributable to F's taxable year ending June 30, 1965 (determined without regard to this paragraph) is $6.00. Since the percentage computed under subparagraph (2) of this paragraph is 100 percent (60 shares divided by 60 shares), Smith's ratable share for G's taxable year ending December 31, 1964, attributable to F's taxable year ending June 30, 1965 (after the application of subparagraph (2) of this paragraph) is zero (that is, $6.00 reduced by 100 percent of $6.00).
Assume the same facts as in example (1) except that of the 60 shares of G Corporation which F Corporation owned on January 1, 1966, 20 shares were acquired in 1961. The percentage computed under subparagraph (2) of this paragraph is 66 2/3 percent (40 shares divided by 60 shares). Accordingly, Smith's ratable share for G's taxable year ending December 31, 1964, attributable to F's taxable year ending June 30, 1965 (after the application of subparagraph (2) or this paragraph) is $2.00 (that is, $6.00 reduced by 66 2/3 percent of $6.00).
On January 1, 1967, Brown, a United States person recognizes gain upon the sale of one share of the only class of stock of W Corporation, which he has owned continuously since 1955. He includes a portion of the gain in his gross income as a dividend under section 1248(a). W is the first tier corporation of a chain of foreign corporations W, X, Y, and Z. W and Z each use the calendar year as the taxable year. For 1964, Z was a less developed country corporation and on each day of 1964 Z was a controlled foreign corporation. Additional facts are set forth in the table below:
| Corporation—(1) | Shares directly owned by preceding tier— | Column (2) divided by column (3) (percent)—(4) | |
|---|---|---|---|
| For uninterrupted 10-year period ending Jan. 1, 1967—(2) | On Jan. 1, 1967—(3) | ||
| X | 40 | 60 | 662⁄3 |
| Y | 30 | 40 | 75 |
| Z | 20 | 30 | 662⁄3 |
For 1964, the percentage referred to in subparagraph (4) of this paragraph for Z is 33 1/3 percent (66 2/3% × 75% × 66 2/3%).
[T.D. 6779, 29 FR 18133, Dec. 22, 1964, as amended by T.D. 7293, 38 FR 32803, Nov. 28, 1973; T.D. 7545, 43 FR 19652, May 8, 1978; T.D. 9345, 72 FR 41445, July 30, 2007; T.D. 9614, 78 FR 17041, Mar. 19, 2013]
Terms defined here
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Cross-references
Computed from the citations in the text of 26 CFR.
Code sections it cites
- § 1223 Holding period of property
- § 316 Dividend defined
- § 882 Tax on income of foreign corporations connected with United States business
- § 1248 Gain from certain sales or exchanges of stock in certain foreign corporations
- § 337 Nonrecognition for property distributed to parent in complete liquidation of subsidiary
- § 341 Repealed
- § 302 Distributions in redemption of stock
- § 951 Amounts included in gross income of United States shareholders
- § 959 Exclusion from gross income of previously taxed earnings and profits
- § 962 Election by individuals to be subject to tax at corporate rates
- § 902 Repealed
- § 1246, 1247 Repealed
- § 1246, 1247 Repealed
- § 958 Rules for determining stock ownership
Regulations it cites
- § 1.1248-1 Treatment of gain from certain sales or exchanges of stock in certain foreign corporations.
- § 1.1248-2 Earnings and profits attributable to a block of stock in simple cases.
- § 1.1248-8 Earnings and profits attributable to stock following certain non-recognition transactions.
- § 1.964-1 Determination of the earnings and profits of a foreign corporation.
- § 1.1248-4 Limitation on tax applicable to individuals.
- § 1.951-1 Amounts included in gross income of United States shareholders.
- § 1.1248-5 Stock ownership requirements for less developed country corporations.
Cited by 7 other regulations
- § 1.1248-1 Treatment of gain from certain sales or exchanges of stock in certain foreign corporations.
- § 1.1248-4 Limitation on tax applicable to individuals.
- § 1.1248-5 Stock ownership requirements for less developed country corporations.
- § 1.1248-6 Sale or exchange of stock in certain domestic corporations.
- § 1.1248-7 Taxpayer to establish earnings and profits and foreign taxes.
- § 1.1248-8 Earnings and profits attributable to stock following certain non-recognition transactions.
- § 1.1248(f)-1 Certain nonrecognition distributions.
Amendment history
From the source citation at the end of the section, newest first. T.D. is a Treasury decision; FR is the Federal Register.
- Amended by T.D. 9614 (78 FR 17041)
- Amended by T.D. 9345 (72 FR 41445)
- Amended by T.D. 7545 (43 FR 19652)
- Amended by T.D. 7293 (38 FR 32803)
- Issued by T.D. 6779 (29 FR 18133)
Where it sits in 26 CFR
- Subchapter A Income tax
- Part 1 Income taxes
- Special Rules for Determining Capital Gains and Losses
Nearby sections
- § 1.1245-5 Adjustments to basis.
- § 1.1245-6 Relation of section 1245 to other sections.
- § 1.1248-1 Treatment of gain from certain sales or exchanges of stock in certain foreign corporations.
- § 1.1248-2 Earnings and profits attributable to a block of stock in simple cases.
- § 1.1248-3 Earnings and profits attributable to stock in complex cases.
- § 1.1248-4 Limitation on tax applicable to individuals.
- § 1.1248-5 Stock ownership requirements for less developed country corporations.
- § 1.1248-6 Sale or exchange of stock in certain domestic corporations.
- § 1.1248-7 Taxpayer to establish earnings and profits and foreign taxes.