Basis in CFC

Technical topics regarding tax preparation.
#1
NYCCPA  
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Hope everyone had a pleasant Thanksgiving.

Client is a US Taxpayer owning 50% of a foreign Corp. Client is selling his interest in the Corp by year end. Is it correct that his only basis in the foreign corp is the Subpart F income recognized since founding? Does he not receive basis for capital contributed to cover operating cost since inception?
 

#2
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You would also get basis for property contributed. If it was cash contributed, then the basis in the shares would increase by the amount of the cash contributed. Code §358. If property other than cash was contributed, the increase in the basis of the shares would depend on the basis of the property contributed, and whether gain was recognized on the contribution.
 

#3
supdat  
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Does he not receive basis for capital contributed to cover operating cost since inception?


Cash contributed to a CFC to cover operating costs definitely count as basis. But distributions from the corporation that exceed previously taxed Subpart F income and previously taxed GILTI will be dividends assuming there is sufficient E&P.

On a sale, Section 1248 is triggered to tax the gain as a dividend to the extent of E&P, but I don't think this rule should impact tax basis, which will include cash contributed.
 

#4
deniz  
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Supdat is correct, he/she is describing Previously Taxed Income, (Earnings and Profits) Sec. 959, tracked on Schedule J and P. You would also include the Sec. 965 transition tax from 2017 in PTI. There are many layers to this onion.
 

#5
deniz  
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The USSH’s basis in CFC stock will be reduced by the amount of PTI excluded from gross income. Section 961 adjusts the basis of CFC stock to prevent the repeat taxation of earnings as gain when stock is sold prior to distributing PTI to the USSH. The USSH’s new basis in the CFC equals its old basis less PTI utilized. A negative basis is not permitted. Instead, any PTI used in excess of the USSH’s basis is taxed as gain.
 


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