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On audit, respondent disallowed petitioners' use for 1990 of
the $1,406,365 total deficits in earnings and profits of Guardian
Services and of Stanford Financial to reduce the $2,789,722
subpart F income of Guardian Bank.
Respondent also reduced the $615,890 net operating loss that
petitioners carried forward from 1989 based on the disallowance
of petitioners' use of the $385,386 total 1989 deficits in
earnings and profits of Guardian Services and Stanford Financial
to reduce the 1989 $580,483 subpart F income of Guardian Bank.
For 1990, respondent determined against petitioners a late
filing addition to tax under section 6651(a)(1) and an accuracy-
related penalty under section 6662(a).
OPINION
Under subpart F of the Code, certain income (subpart F
income) of U.S. controlled foreign corporations (CFC's) is to be
included in income of U.S. shareholders of the CFC's regardless
of whether the CFC's income is distributed currently to the U.S.
shareholders. Sec. 951(a).
Under section 952(d), as applicable through 1986, U.S.
shareholders with subpart F income were permitted to reduce
subpart F income of profitable CFC's by deficits in earnings and
profits of unprofitable CFC's that were part of a chain of
controlled foreign corporations. This rule was referred to as
the "chain deficit rule". As applicable through 1986, deficits
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