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in earnings and profits of CFC’s could be used to reduce subpart
F income of U.S. shareholders regardless of the manner by which
the profitable and the unprofitable CFC's were related to each
other within the chain (i.e., regardless of whether the
profitable and the unprofitable CFC's had a parent/subsidiary or
a brother/sister relationship). Also, deficits in earnings and
profits of CFC’s could be used to reduce subpart F income of U.S.
shareholders regardless of whether the various CFC’s within the
chain were engaged in similar or related business activity.1
In 1986, section 952(d) was repealed, effective for any year
ending after 1986. Tax Reform Act of 1986, Pub. L. 99-514, sec.
1 Sec. 952(d), as applicable through 1986, provided, in part,
as follows:
(d) Special Rule in Case of Indirect Ownership.--For
purposes of subsection (c) [limitation on Subpart F income],
if--
(1) a United States shareholder owns * * *
[directly or indirectly] stock of a foreign
corporation, and by reason of such ownership owns * * *
[directly or indirectly] stock of any other foreign
corporation, and
(2) any of such foreign corporations has a deficit
in earnings and profits for the taxable year,
then the earnings and profits for the taxable year of each
such foreign corporation which is a controlled foreign
corporation shall, with respect to such United States
shareholder, be properly reduced to take into account any
deficit described in paragraph (2) in such manner as the
Secretary shall prescribe by regulations.
See also sec. 1.952-1(d)(2), Income Tax Regs., as in effect
through 1986.
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