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book gain from the sale of the Read-Rite shares in the amount of
$22,540,004.
Discussion
The subpart F provisions (sections 951 through 964) require
U.S. shareholders of a controlled foreign corporation (CFC) to
recognize certain income (subpart F income) at the time the CFC
earns that income, rather than later when such earnings are
distributed as a dividend.4 Subpart F income includes foreign
base company income as determined under section 954. See sec.
952(a)(2). Under section 954(a)(1), foreign base company income
includes foreign personal holding company income (FPHCI).
Current taxation of FPHCI under the subpart F regime is
intended to tax “income which is passive in character.” S.
Rept. 1881, 87th Cong., 2d Sess. (1962), 1962-3 C.B. 707, 788.
In enacting the FPHCI subpart F provisions, Congress intended to
tax income that arose from “portfolio types of investments” or
“where the company [was] merely passively receiving investment
income.” Id. at 789.
Accordingly, gains arising from a CFC’s passive or
portfolio investments typically create FPHCI under section 954.
See, e.g., sec. 954(c)(1)(A) (treating dividends, interest,
rents and annuities as FPHCI) and (B)(i) (treating the proceeds
4 The parties agree that Conner Malaysia is a CFC of Conner
U.S.
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