In a generic legal advice memorandum (GLAM), the IRS Office of Chief Counsel discussed the tax consequences of a controlled foreign corporation's (CFC's) invalid election under Section 953(d).
In the GLAM (AM 2014-002, April 7, 2014), the taxpayer was a Section 951(b) U.S. shareholder that owned shares of a CFC. In Year 1, the CFC purportedly made an election under Section 953(d), which allows a foreign insurance company to be treated as a domestic corporation, and an election under Section 831(b)(2)(A) to pay an alternative tax provided in Section 831(b) based on only its taxable investment income. The taxpayer paid annual amounts designated as "premiums" to the CFC in exchange for what was purported to be insurance coverage related to the taxpayer's business risks. The CFC's income consisted exclusively of premiums received from the taxpayer as well as investment income.
Since Year 1, the CFC has filed an annual Form 1120-PC, "U.S. Property and Casualty Insurance Company Income Tax Return," and excluded the premiums it received from gross income for U.S. income tax purposes. Consistent with that position, the taxpayer deducted the premiums paid to the CFC, did not include its pro-rata share of the CFC's subpart F income per Section 951(a), and did not file any Forms 5471, "Information Return of U.S. Persons with Respect to Certain Foreign Corporations." If the CFC and taxpayer's tax reporting was correct, the normal three-year period of limitations for assessment under Section 6501(a) would have expired for the CFC and taxpayer's Year 1 taxable years. However, during an examination of the CFC's taxable Year 4, the IRS concluded the CFC was ineligible to make an election under Section 953(d).
The first issue the GLAM addressed was the federal income tax consequences to the CFC and its U.S. shareholders where the CFC's purported election under Section 953(d) was determined to be invalid. The GLAM held that the CFC remained a foreign corporation subject to U.S. income tax under Section 881 (with respect to U.S.-source fixed or determinable, annual or periodic income) or Section 882 (with respect to income effectively connected with a U.S. trade or business).
The second issue was whether Section 6501(c)(8) applies to extend the general three-year limitation on assessment with respect to the CFC's U.S. shareholders. The GLAM concluded that because the Section 953(d) election was invalid, leaving the CFC as a controlled foreign corporation (as opposed to a domestic corporation), the CFC's U.S. shareholders (including the taxpayer) must file a Form 5471 and include in their gross income, their pro-rata share of the CFC's subpart F income for all taxable years that the CFC was a controlled foreign corporation.
Finally, the GLAM addressed whether the CFC's U.S. shareholders' Form 5471 filing obligations were satisfied by the CFC's filing of Form 1120-PC. The GLAM concluded that the Form 1120-PC filed by the CFC was not considered to be the return of its U.S. shareholders, and in any event, the information provided on the CFC's Form 1120-PC did not substantially comply with the information reporting requirements of Section 6038 and Form 5471. Thus, the taxpayer did not satisfy its Form 5471 filing obligations for the years in which the CFC had filed Forms 1120-PC.
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