Computing foreign base company income for U.S. individual shareholders

Computing foreign base company income

The IRS today released a new “practice unit”—the next item in a series of IRS examiner “job aides” and training materials intended to describe for IRS agents leading practices for specific international and transfer pricing issues and transactions. The topic of the new LB&I practice unit is “computing foreign base company income for U.S. individual shareholders.”

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The new LB&I practice unit has a release date of March 18, 2016. Text of the practice unit is available on the IRS practice unit webpage.


U.S. shareholders of controlled foreign corporations (CFCs) may have to include amounts in income under section 951(a)(1)(A)—subpart F inclusions—when the CFC earns certain types of income, even if the CFC does not distribute any of the income to the U.S. shareholder. 

As explained in the practice unit, there are many steps involved in calculating a subpart F inclusion. The first step is to calculate the CFC’s foreign base company income, as follows:

  • First, the examiner first determines the CFC’s gross income items that comprise the foreign base company income; these items are: (1) foreign personal holding company income; (2) foreign base company (FBC) sales income; (3) FBC services income; and (4) FBC oil related income. 
  • Next, the aggregate amount of foreign base company income and section 953 insurance income is adjusted by the de minimis and full inclusion rules. 
  • The “adjusted gross foreign base company income” is then reduced by deductions properly allocable to each item of foreign base company income. 
  • Finally, when applicable, the section 952(c) limitation and the high tax exception are applied—that may further reduce the amount of foreign base company income taken into account when computing a subpart F inclusion.

The practice unit covers the general rules for computing foreign base company income, but does not cover section 953 insurance income applicable to inclusions of subpart F income.

KPMG observation

The IRS practice units identify areas of strategic importance to the IRS, provide insight as to how IRS examiners will approach various transactions, and generally provide an understanding of the context in which an IRS examiner will approach a particular issue or transaction. 

Thus, taxpayers (and their tax advisers) facing an IRS examination or concerned with issue(s) presented by these practice units will want to review the relevant practice units, so as to have a better understanding of the issues that may arise either prior to or during an examination. For instance, the IRS practice units typically provide information that can help taxpayers:

  • Plan for appropriate documentation during return preparation
  • Effectively approach certain elections or certain transactions 
  • Respond appropriately to IRS correspondence

For taxpayers selected for a pending IRS examination, the practice units can provide information that may assist with preparation for the examination. For taxpayers actually under examination, the practice units may provide information that can assist taxpayers respond to IRS requests. 

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