Application of Sec. 382 to foreign corporations.

• Author: Bakale, Anthony
• Position: Internal Revenue Code

Tax practitioners are quite familiar with the application of Sec. 382 to domestic corporations and are alert to the need for making certain that no ownership change has affected the ability of domestic C corporations to use net operating loss (NOL) carryovers and recognized built-in losses.

Less familiarity exists for foreign C corporations. One significant reason for this is that most foreign corporations do not have effectively connected income that is taxed on a net basis under Sec. 882 and therefore have no occasion to deal with NOLs. Another reason is that tax practitioners are working with subsidiaries or branches of foreign corporations and have little occasion to know the identities of immediate (let alone ultimate) shareholders.

Nevertheless, it is clear that Sec. 382 applies to all C corporations, both domestic and foreign. Sec. 382(k)(1) defines a "loss corporation" as (1) a corporation entitled to use an NOL carryover or having an NOL for the tax year in which the ownership change occurs, and (perhaps more importantly for foreign corporations) (2) any corporation with a net unrealized built-in loss. A few common situations exist in which Sec. 382 can have an effect, either directly on a foreign corporation or indirectly on its U.S. owners.

U.S. Branch Operations

This situation is the simplest example of a direct effect on a foreign corporation. A branch can have any or all of NOLs, NOL carryovers and a net unrealized built-in loss, the use of which could be affected by an ownership change. In fact, Sec. 382(e)(3) expressly provides, "in determining the value of any old loss corporation which is a foreign corporation, there shall be taken into account only items connected with the conduct of a trade or business in the United States." Accordingly, the Sec. 382 rules are directly applied to foreign C corporations in the same manner as they are applied to domestic C Corporations.

Foreign FPHCs

For a foreign personal holding company (FPHC), U.S. shareholders must include in gross income their share of its "undistributed foreign personal holding company income," defined in Sec. 556. For an FPHC, Sec. 555(a) provides that its gross income is "gross income computed (without regard to the provisions of subchapter N (sec. 861 and following)) as if the foreign corporation were a domestic corporation which is a personal holding company." In a parallel manner, Regs. Sec. 1.556-1 provides that taxable income of an FPHC (which is the starting...