The IRS has released Chief Counsel Advice (AM 2013-006), holding that when the earnings and profits (E&P) of a controlled foreign corporation (CFC) are reduced as a result of a Section 302 redemption, a corresponding reduction in the CFC's post-1986 foreign income taxes (foreign tax pool) must also be made.
The general facts provided that a U.S. parent (USP) owned 60% of the stock of a CFC immediately prior to the redemption. The other 40% of the stock was owned by an unrelated foreign party (FP). The CFC did not earn any subpart F income. In year 1, the CFC used cash to redeem all of the stock owned by the FP. Pursuant to Section 302(b)(3), this redemption was treated as a Section 302(a) distribution in full payment in exchange for the stock. After the redemption, the USP owned 100% of the CFC. As a result of the redemption, the CFC's year 1 E&P was decreased under Section 312(a) and Section 312(n)(7) by the E&P attributable to the stock of the FP that the CFC redeemed. In year 2, the CFC paid its entire remaining E&P to the USP as a dividend, and the USP claimed a Section 902 deemed-paid foreign tax credit equal to the CFCs foreign tax pool.
The advice concluded that Treas. Reg. Sec. 1.902-1(a)(8)(i) would apply to require the CFC to reduce its foreign tax pool as the result of the redemption.
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