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uted. Further, when a foreign corporation distributes the stock of a second-tier foreign corporation to its U.S. shareholders, the earnings and profits of the second-tier foreign corporation to the extent accumulated after 1962 will be subject to a tax as a dividend when such earnings are distributed or are treated as having been distributed to the U.S. shareholder. A recent court case has held that when the firsttier foreign subsidiary is liquidated, the earnings and profits available for dividend taxation are reduced by the basis in the second-tier subsidiary.

Issue

The issue is whether the earnings and profits of a foreign corporation are subject to possible double taxation when it distributes appreciated property, and, if so, should relief be provided notwithstanding contrary court cases or the running of periods of limitations for bringing refund claims.

Explanation of provision

This provision was suggested by Senator Hartke. The provision adds a special rule in the case of certain past liquidations of a foreign subsidiary which entitles the taxpayer to apply the new provisions of the law and obtain a refund or a credit of any overpayment by reason of the application of the new provisions notwithstanding the fact that the refund or overpayment would otherwise be prevented by a court case or the statute of limitations. If a refund or a credit is allowed, however, no interest is to be paid on the refund or credit for any period prior to the date of enactment.

The situation provided for in the provision covers the case where a foreign subsidiary is liquidated by its U.S. parent and in an earlier year stock of a lower-tier foreign subsidiary was distributed to the parent as a dividend. Since the stock of the lower-tier subsidiary is stock described in section 1248, the accumulated earnings with respect to that stock are still subject to dividend treatment upon the sale or exchange of the stock at a gain. This, in effect, could result in double taxation of those earnings. Thus, the provision requires that the Secretary of the Treasury in promulgating his regulations under section 367 (b) write the rules dealing with the computation of earnings and profits and basis of stock in such a manner so that double taxation is avoided.

This provision benefits the H. H. Robertson Company.

22. Contiguous Country Branches of Domestic Life Insurance Companies (sec. 1043 of the bill)

Present law

Under present law, a domestic mutual life insurance company subject to tax on its worldwide taxable income. If the company pays foreign income taxes on its income from foreign sources it is allowed a foreign tax credit against its otherwise payable U.S. tax on foreign source income.

Issue

As a general rule, profits of a U.S. company although earned from sources outside the United States should be subject to U.S. tax when earned since those profits are available for distribution to the shareholders of the company or are available to the company to be used within or without the United States for new investments. However,

the profits derived by a Canadian branch of a U.S. mutual life insurance company are not generally available for use other than as reserves and surplus of the Canadian policyholders and may not be used to provide insurance for the U.S. policyholders. The issue is whether this feature of mutuality, in which the earnings are restricted to benefit the Canadian policyholders, distinguishes the branch operations of a mutual life insurance company from the branch operations of other businesses.

Explanation of provision

This provision was in the House bill and only minor changes were made in it by the Senate Finance Committee.

Mutual companies.-The provision establishes a special system for branches of U.S. mutual life insurance companies which are operated in a contiguous country (i.e., Canada or Mexico). To be eligible for this special treatment a mutual life insurance company must make an election with respect to a contiguous country life insurance branch. If a proper election is made there is excluded from each item involved in the determination of life insurance company taxable income the items separately accounted for in a separate contiguous country branch account which the mutual life insurance company is required to establish and maintain under the bill.

For purposes of this provision, a branch is a contiguous country life insurance branch if it satisfies three conditions. First, it must issue insurance contracts insuring risks in connection with the lives or health of residents of a country which is contiguous to the United States (i.e., Canada or Mexico). Second, the branch must have its principal place of business in the contiguous country for which it insures risks. Third, the branch, if it were a separate domestic corporation, must be able to qualify as a separate mutual life insurance company.

The election to establish a separate contiguous country branch is to be treated as a taxable disposition for purposes of recognizing any gain by the domestic company. If the aggregate fair market value of all the invested assets and tangible property which is separately accounted for by the company in the branch account exceeds the aggregate adjusted basis of those assets (for purposes of determining gain) then the company is to be treated as having sold those assets on the first day of the first taxable year for which the election is in effect at the fair market value on that day. The net gain on the deemed sale of these assets is to be recognized notwithstanding any other provision of the Code.

The provision also contains rules for the taxation of the contiguous country branch income if it is ever repatriated. First, payments, transfers, reimbursements, credits, or allowances which are made from a separate contiguous country branch account to one or more accounts of the domestic company as reimbursements for costs (e.g., home office services) incurred for or with respect to the insurance (including reinsurance) of risks accounted for in the separate branch account are to be taken into account by the domestic company in the same manner as if the payment, transfer, reimbursement, credit, or allowance were received from a separate person.

If amounts are directly or indirectly transferred or credited from a contiguous country branch account to one or more other accounts of

the domestic company they are to be added to the life insurance company taxable income of the domestic company except to the extent the transfers are reimbursements for home office services.

The election provided by this provision may be made for any taxable year beginning after December 31, 1975. Once an election is made it is to remain in effect for all subsequent years except that it may be revoked with the consent of the Secretary.

Transfers by stock companies.-The provision also establishes a special rule in the case of stock life insurance companies operating in Canada or Mexico. While it is easier for a stock life insurance company to operate through a subsidiary organized under foreign law than it is for a mutual company, problems would be encountered in transferring an existing business to a foreign subsidiary since such a transfer would require the satisfaction of the Secretary that one of its purposes was not the avoidance of Federal income taxes. Since the provision contains special rules for deemed transfers in the case of mutual life insurance companies, the committee felt it was appropriate to provide similar rules in the case of actual transfers by stock companies to a contiguous country subsidiary.

Under the provision a domestic stock life insurance company which has a contiguous country life insurance branch may elect to transfer the assets of that branch to a foreign corporation organized under the laws of that contiguous country without the application of section 367 or 1491. The insurance contracts which may be transferred to the subsidiary include only those of the types issued by a mutual life insurance company.

The provision requires that the net gain on the transfer be subject to tax. To the extent that the aggregate fair market value of all the invested assets in tangible property which are separately accounted for in the contiguous country life insurance branch exceeds the aggregate adjusted basis of all of these assets for purposes of determining gain, the domestic life insurance company is to be treated as having sold all of the assets on the first day of the first taxable year for which the election is in effect.

This provision also provides that the stock of the subsidiary for purposes of determining the income tax of the domestic stock life insurance company is to be given the same treatment as is accorded the assets of a contiguous country branch of a mutual company under the mutual company provision. Similarly, any dividends paid by the subsidiary to the domestic life insurance company will be added to its life insurance company taxable income.

The provisions applies to taxable years beginning after December 31, 1975.

These provisions affect both mutual and stock companies with operations in Canada.

Revenue effect

It is estimated that the mutual and stock company provisions will result in a decrease in budget receipts of $4 million in fiscal year 1977 and of $8 million thereafter.

23. Transitional Rule for Bond, Etc., Losses of Foreign Banks (sec. 1044 of the bill)

Present law

The Tax Reform Act of 1969 (Public Law 91-172) eliminated the preferential treatment accorded to certain financial institutions for transactions involving corporate and government bonds and other evidences of indebtedness. Previous to that legislation these financial institutions were allowed to treat net gains from these transactions as capital gains and to deduct the losses as ordinary losses. The 1969 Act (sec. 433, amending sec. 582 of the Code) provided parallel treatment to gains and losses pertaining to these transactions by treating net gains as ordinary income and by continuing the treatment of net losses as ordinary losses. The ordinary income and loss treatment provided under the 1969 Act was also applied to corporations which would be considered banks except for the fact that they are foreign corporations. Previous to the 1969 Act, these corporations had treated the abovedescribed transactions as resulting in either capital gains or capital

losses.

Issue

Some of the corporations which would be considered banks except for the fact that they are foreign corporations had capital loss carryovers predating the 1969 Act. However, any post-1969 gains realized by these corporations resulting from the sale or exchange of a bond, debenture, note, or other evidence of indebtedness is accorded ordinary income treatment. Thus, these corporations are left with capital loss carryforwards which, under present law, cannot be applied against any gains resulting from the same type of transactions which previously generated such losses.

Explanation of provision

This provision was added by the House and no change was made in it by the Senate Finance Committee. The provision establishes a special transitional rule for corporations which would be banks except for the fact that they are foreign corporations. Net gains (if any) for a taxable year on sales or exchanges of bonds, debentures, notes, or other evidences of indebtedness are considered as gain from the sale or exchange of a capital asset to the extent that such gain does not exceed the portion of any capital loss carryover to the taxable year where such capital loss is attributable to the same types of sales or exchanges for taxable years beginning before July 12, 1969. In addition, a refund or credit of any overpayment as a result of the application of the provision is not precluded by the operation of any law or rule of law (other than section 7122, relating to compromises) so long as the claim for credit or refund is filed within one year after the date of the enactment of the provision.

The provision applies to taxable years beginning after July 11, 1969. This provision will have general application to foreign banks with U.S. business. The Royal Bank of Canada has supported the provision.

74-375-763

24. Western Hemisphere Trade Corporations (sec. 1052 of the bill) Present law

Present law provides that an affiliated group filing a consolidated return is permitted to average the foreign source income and foreign taxes of any Western Hemisphere trade corporations ("WHTCs") included in the group with the foreign source income and foreign taxes of non-WHTCs included in the group if both derive their income from the same country and the per-country foreign tax credit limitation is used. However, except in the case of a public utility, the averaging of foreign income and taxes of WHTCS and non-WHTCs is not allowed if the overall foreign tax credit limitation is elected.

Issue

The bill generally would repeal both the per-country limitation and the WHTC provisions. The issue is whether there are circumstances under which affiliated groups thus required to use the overall limitation should be permitted to average the foreign income and taxes of WHTCS and non-WHTCs during the four-year phase-out period of the WHTC provisions.

Explanation of provision

This provision was suggested by Senator Curtis. The provision permits a foreign corporation which is treated as being a domestic company for consolidated return purposes to average its foreign taxes with other corporations in the group if they each derive 95 percent or more of their gross income from sources within a contiguous country and are primarily engaged in mining and related transportation in that contiguous country.

This provision is applicable to taxable years beginning during the years 1976 through 1979, the four year phase-out period of the WHTC provisions.

This provision affects the Hanna Mining Company.

25. Treatment of Certain Individuals Employed in Fishing As Self-Employed Individuals (sec. 1207 of the bill)

Present law

Under the present law, the Internal Revenue Service usually treats individuals employed on fishing boats, or on boats engaged in taking other forms of aquatic animal life, as regular employees. As a result, operators of the boats must withhold taxes from the wages of these crewmen, and must also deduct and pay the taxes on employees and employers under the Federal Insurance Contributions Act (the social security taxes).

Issue

The issue is whether fishing boat crewmen whose sole remuneration is a share of the catch should be treated as regular employees or as selfemployed.

Explanation of provision

This provision was suggested by Senator Hathaway. The provision established provides that boat crewmen, under certain circumstances, shall be treated as self-employed for purposes of income tax withhold

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