---
kind: "range"
citation: "26 C.F.R. §§ 1.970-1–1.972-1"
title: "26"
from: "1.970-1"
to: "1.972-1"
count: 5
url: "https://uscodex.org/cfr/26/1.970-1..1.972-1"
---

# §1.970-1. Export trade corporations.

- (a) **In general.** [Sections 970 through 972](/cfr/26/970..972.md) provide in general that if a controlled foreign corporation is an export trade corporation for any taxable year, the [subpart F](/cfr/26/subpartF.md) income of such corporation shall, subject to limitations provided by [section 970(a)](/cfr/26/970.md?p=a) and [paragraph (b)](#b) of this section, be reduced by so much of such corporation's export trade income as constitutes foreign base company income. To the extent [subpart F](/cfr/26/subpartF.md) income of an export trade corporation is reduced under [section 970](/cfr/26/970.md) and this section, an amount is required by [section 970(b)](/cfr/26/970.md?p=b) and [paragraph (c)](#c) of this section to be included in gross income of United States shareholders of the corporation if there is a subsequent decrease in such corporation's investments in export trade assets. See [section 971(a)](/cfr/26/971.md?p=a) and [paragraph (a)](/cfr/26/1.971-1.md?p=a) of § 1.971-1 for definition of the term “export trade corporation”, [section 971(b)](/cfr/26/971.md?p=b) and [paragraph (b)](/cfr/26/1.971-1.md?p=b) of § 1.971-1 for definition of the term “export trade income”, and [section 971(c)](/cfr/26/971.md?p=c) and [paragraph (c)](/cfr/26/1.971-1.md?p=c) of § 1.971-1 for definition of the term “export trade assets”.
- (b) **Amount by which export trade income shall reduce subpart F income—**
  - (1) **Deductible amount.** The [subpart F](/cfr/26/subpartF.md) income, determined as provided in [section 952](/cfr/26/952.md) and the regulations thereunder but without regard to [section 970](/cfr/26/970.md) and this paragraph, of a controlled foreign corporation which is an export trade corporation for its taxable year shall be reduced by an amount equal to so much of its export trade income as constitutes foreign base company income for such taxable year, but only to the extent that such amount of export trade income does not exceed the limitation determined under [subparagraph (2)](#b-2) of this paragraph for such taxable year. See [section 972](/cfr/26/972.md) and [§ 1.972-1](/cfr/26/1.972-1.md) for rules relating to the consolidation of export trade corporations for purposes of determining the limitations described in [subparagraph (2)](#b-2) of this paragraph.
  - (2) **Limitation on the amount of export trade income deductible from subpart F income.** The amount by which [subpart F](/cfr/26/subpartF.md) income of an export trade corporation may be reduced for any taxable year under [subparagraph (1)](#b-1) of this paragraph may not exceed whichever of the following limitations is the smallest:
    - (i) The amount which is equal to 150 percent of the export promotion expenses, as defined in [section 971(d)](/cfr/26/971.md?p=d) and [paragraph (d)](/cfr/26/1.971-1.md?p=d) of § 1.971-1, of the export trade corporation paid or incurred during the taxable year which are properly allocable to the receipt or the production of so much of its export trade income as constitutes foreign base company income for such taxable year;
    - (ii) The amount which is equal to 10 percent of the gross receipts (other than from commissions, fees, or other compensation for services), plus 10 percent of the gross amount upon the basis of which are computed commissions, fees, or other compensation for services included in gross receipts, of the export trade corporation received or accrued during the taxable year from, or in connection with, the sale, installation, operation, maintenance, or use of property in respect of which such corporation derives export trade income which constitutes foreign base company income for such taxable year; or
    - (iii) The amount which bears the same ratio to the increase in investments in export trade assets, as defined in [section 970(c)(2)](/cfr/26/970.md?p=c-2) and [paragraph (d)(2)](#d-2) of this section, of the export trade corporation for its taxable year as the export trade income which constitutes foreign base company income of such corporation for such taxable year bears to the entire export trade income of the corporation for such year.
  - (3) **Determination of export promotion expense limitation.** For purposes of determining the limitation contained in [subparagraph (2)(i)](#b-2-i) of this paragraph for any taxable year of the export trade corporation, there shall be taken into account with respect to those items or categories of export trade income which constitute foreign base company income the entire amount of those export promotion expenses which are directly related to such items or categories of income and a ratable part of any other export promotion expenses which are indirectly related to such items or categories of income, except that no export promotion expense shall be allocated to an item or category of income to which it clearly does not apply and no deduction allowable to such corporation under [section 882(c)](/cfr/26/882.md?p=c) and the regulations thereunder shall be taken into account.
  - (4) **Application of section 482.** The limitations provided in [section 970(a)](/cfr/26/970.md?p=a) and [subparagraph (2)](#b-2) of this paragraph shall not affect the authority of the district director to apply the provisions of [section 482](/cfr/26/482.md) and the regulations thereunder, relating to allocation of income and deductions among taxpayers.
  - (5) **Illustrations.** The application of this paragraph may be illustrated by the following examples:
- (c) **Withdrawal of previously excluded export trade income—**
  - (1) **Inclusion of withdrawal in income of United States shareholders.** If—
    - (i) A controlled foreign corporation was an export trade corporation for any taxable year,
    - (ii) Such corporation in any such taxable year derived [subpart F](/cfr/26/subpartF.md) income which, under the provisions of [section 970(a)](/cfr/26/970.md?p=a) and [paragraph (b)](#b) of this section, was reduced, and
    - (iii) Such corporation has in a subsequent taxable year a decrease in investments in export trade assets,
  - (2) **Limitations applicable in determining amount includible in income—**
    - (i) **General.** A United States shareholder's pro rata share of a controlled foreign corporation's decrease in investments in export trade assets for any taxable year of such corporation shall, for purposes of determining an amount to be included in the gross income for any taxable year of such shareholder, not exceed the lesser of the limitations determined under (a) and (b) of this subdivision:

      (a) Such shareholder's pro rata share of the sum of the controlled foreign corporation's earnings and profits (or deficit in earnings and profits) for the taxable year, computed as of the close of the taxable year without diminution by reason of any distributions made during the taxable year, plus his pro rata share of the sum of its earnings and profits (or deficits in earnings and profits) accumulated for prior taxable years beginning after December 31, 1962, or

      (b)(1) Such shareholder's pro rata share of the sum of the amounts by which the [subpart F](/cfr/26/subpartF.md) income of such controlled foreign corporation for prior taxable years was reduced under [section 970(a)](/cfr/26/970.md?p=a) and [paragraph (b)](#b) of this section, plus

      (2) Such shareholder's pro rata share of the sum of the amounts which were not included in the [subpart F](/cfr/26/subpartF.md) income of such controlled foreign corporation for such prior taxable years by reason of the application of [section 972](/cfr/26/972.md) and [§ 1.972-1](/cfr/26/1.972-1.md), minus

      (3) Such shareholder's pro rata share of the sum of the amounts which were previously included in his gross income for prior taxable years under [section 951(a)(1)(A)(ii)](/cfr/26/951.md?p=a-1-A-ii) by reason of the application of [section 970(b)](/cfr/26/970.md?p=b) and this paragraph with respect to such controlled foreign corporation.

    - (ii) **Treatment of earnings and profits.** For purposes of determining earnings and profits of a controlled foreign corporation under subdivision (i) (a) of this subparagraph, such earnings and profits shall be considered not to include any amounts which are attributable to—

      (a) Amounts which are, or have been, included in the gross income of a United States shareholder of such controlled foreign corporation under [section 951(a)](/cfr/26/951.md?p=a) (other than an amount included in the gross income of a United States shareholder under [section 951(a)(1)(A)(ii)](/cfr/26/951.md?p=a-1-A-ii) or [section 951(a)(1)(B)](/cfr/26/951.md?p=a-1-B) for the taxable year) and have not been distributed, or

      (b)(1) Amounts which for the current taxable year, are included in the gross income of a United States shareholder of such controlled foreign corporation under [section 551(b)](/cfr/26/551.md?p=b) or would be so included under such section but for the fact that such amounts were distributed to such shareholder during the taxable year, or

      (2) Amounts which, for any prior taxable year, have been included in the gross income of a United States shareholder of such controlled foreign corporation under [section 551(b)](/cfr/26/551.md?p=b) and have not been distributed.

    - (iii) **Rules of application.** The determinations made under subdivision (i) of this subparagraph for purposes of determining the United States shareholder's pro rata share of a controlled foreign corporation's decrease in investments in export trade assets for any taxable year shall be made on the basis of the stock such shareholder owns, within the meaning of [section 958(a)](/cfr/26/958.md?p=a) and the regulations thereunder, in the controlled foreign corporation on the last day in the taxable year on which such corporation is a controlled foreign corporation even though such shareholder owned more or less stock in such corporation prior to that date. See [section 972](/cfr/26/972.md) and [paragraph (b)(3)](/cfr/26/1.972-1.md?p=b-3) of § 1.972-1 for rules relating to the allocation of a decrease in investments in export trade assets of export trade corporations in a consolidated chain of such corporations. See [section 951(a)(3)](/cfr/26/951.md?p=a-3) and the regulations thereunder for an additional limitation upon the amount of a United States shareholder's pro rata share determined under this paragraph.
  - (3) **Illustrations.** The application of this paragraph may be illustrated by the following examples:
- (d) **Investments in export trade assets—**
  - (1) **Amount of investments.** For purposes of [sections 970 through 972](/cfr/26/970..972.md) and [§§ 1.970-1 to 1.972-1](/cfr/26/1.970-1..1.972-1.md), inclusive, export trade assets shall be taken into account on the following bases:
    - (i) **Working capital.** Working capital to which [section 971(c)(1)](/cfr/26/971.md?p=c-1) applies shall be taken into account at the adjusted basis of current assets, determined as of the applicable determination date, less any current liabilities (except as provided in subdivision (iii) of this subparagraph).
    - (ii) **Other export trade assets.** Inventory to which [section 971(c)(2)](/cfr/26/971.md?p=c-2) applies, facilities to which [section 971(c)(3)](/cfr/26/971.md?p=c-3) applies, and evidences of indebtedness to which [section 971(c)(4)](/cfr/26/971.md?p=c-4) applies, shall be taken into account at their adjusted bases as of the applicable determination date, reduced by any liabilities (except as provided in subdivision (iii) of this subparagraph) to which such property is subject on such date. To be taken into account under this subparagraph, a liability must constitute a specific charge against the property involved. Thus, a liability evidenced by an open account or a liability secured only by the general credit of the controlled foreign corporation will not be taken into account. On the other hand, if a liability constitutes a specific charge against several items of property and cannot definitely be allocated to any single item of property, the liability shall be apportioned against each of such items of property in that ratio which the adjusted basis of such item on the applicable determination date bears to the adjusted basis of all such items on such date. A liability in excess of the adjusted basis of the property which is subject to such liability will not be taken into account for the purpose of reducing the adjusted basis of other property which is not subject to such liability. See [paragraph (c)(6)](/cfr/26/1.971-1.md?p=c-6) of § 1.971-1 for treatment of export trade assets which constitute working capital to which [section 971(c)(1)](/cfr/26/971.md?p=c-1) applies and which also constitute inventory to which [section 971(c)(2)](/cfr/26/971.md?p=c-2) applies or evidences of indebtedness to which [section 971(c)(4)](/cfr/26/971.md?p=c-4) applies.
    - (iii) **Treatment of certain liabilities.** For purposes of subdivisions (i) and (ii) of this subparagraph, a current liability, or a specific charge created with respect to any item of property, principally for the purpose of artificially increasing or decreasing the amount of a controlled foreign corporation's investments in export trade assets shall be taken into account in such a manner as to properly reflect the controlled foreign corporation's investments in export trade assets; whether a specific charge or current liability is created principally for such purpose will depend upon all the facts and circumstances of each case. One of the factors that will be considered in making such a determination with respect to a loan is whether the loan is from a related person, as defined in [section 954(d)(3)](/cfr/26/954.md?p=d-3) and [paragraph (e)](/cfr/26/1.954-1.md?p=e) of § 1.954-1.
    - (iv) **Statement required.** If for purposes of this section a United States shareholder of a controlled foreign corporation reduces the adjusted basis of property which constitutes an export trade asset on the ground that such property is subject to a liability, he shall attach to his return a statement setting forth the adjusted basis of the property before the reduction and the amount and nature of the reduction.
  - (2) **Increase in investments in export trade assets.** For purposes of [section 970(a)](/cfr/26/970.md?p=a) and [paragraph (b)](#b) of this section, the amount of increase in investments in export trade assets of a controlled foreign corporation for a taxable year shall be, except as provided in [§ 1.970-2](/cfr/26/1.970-2.md), the amount by which—
    - (i) The amount of its investments in export trade assets at the close of such taxable year, exceeds
    - (ii) **The amount of its investments in export trade assets at the close of the preceding taxable year.**
  - (3) **Decrease in investments in export trade assets.** For purposes of [section 970(b)](/cfr/26/970.md?p=b) and [paragraph (c)](#c) of this section, the amount of the decrease in investments in export trade assets of a controlled foreign corporation for a taxable year shall be, except as provided in [§ 1.970-2](/cfr/26/1.970-2.md), the amount by which—
    - (i) The amount of its investments in export trade assets at the close of the preceding taxable year, minus
    - (ii) An amount equal to the excess of recognized losses over recognized gains on sales, exchanges, involuntary conversions, assets or other dispositions, of export trade during the taxable year, exceeds
    - (iii) **The amount of its investments in export trade assets at the close of the taxable year.**

# §1.970-2. Elections as to date of determining investments in export trade assets.

- (a) **Nature of elections—**
  - (1) **In general.** In lieu of determining the increase under the provisions of [paragraph (d)(2)](/cfr/26/1.970-1.md?p=d-2) of § 1.970-1, or the decrease under the provisions of [paragraph (d)(3)](/cfr/26/1.970-1.md?p=d-3) of § 1.970-1, in a controlled foreign corporation's investments in export trade assets for a taxable year in the manner provided in such provisions, a United States shareholder of such corporation may elect, under the provisions of [section 970(c)(4)](/cfr/26/970.md?p=c-4) and this section, to determine such increase or decrease in accordance with the provisions of [subparagraph (2)](#a-2) of this paragraph or, in the case of export trade assets which are facilities described in [section 971(c)(3)](/cfr/26/971.md?p=c-3), in accordance with the provisions of [subparagraph (3)](#a-3) of this paragraph. Separate elections may be made under [subparagraph (2)](#a-2) and/or (3) of this paragraph with respect to each controlled foreign corporation with respect to which a person is a United States shareholder, within the meaning of [section 951(b)](/cfr/26/951.md?p=b).
  - (2) **Election of 75-day rule.** A United States shareholder of a controlled foreign corporation may elect with respect to a taxable year of such corporation to make the determinations under subparagraphs (2)(i) and (3)(iii) of paragraph (d) of [§ 1.970-1](/cfr/26/1.970-1.md) of the amount of such corporation's investments in export trade assets as of the 75th day after the close of the taxable year referred to in such subparagraphs of [paragraph (d)](/cfr/26/1.970-1.md?p=d) of § 1.970-1. The election provided by this subparagraph may be made with respect to export trade assets other than facilities described in [section 971(c)(3)](/cfr/26/971.md?p=c-3) or with respect to export trade assets which are facilities or with respect to both types of export trade assets (but the election under this paragraph with respect to export trade assets which are facilities or with respect to both types of export trade assets may be made only if the election provided by [subparagraph (3)](#a-3) of this paragraph is not made). If the election provided by this subparagraph is made, the amount of export trade assets with respect to which such election is made at the close of the preceding taxable year which is described in subparagraphs (2)(ii) and (3)(i) of paragraph (d) of [§ 1.970-1](/cfr/26/1.970-1.md) shall be the amount of export trade assets which was considered by application of the 75-day rule to be the amount of export trade assets at the close of such preceding taxable year; except that for the first taxable year of the controlled foreign corporation for which the 75-day rule is elected the amount of investments in export trade assets with respect to which such election is made at the close of such preceding year described in subparagraphs (2)(ii) and (3)(i) of paragraph (d) of [§ 1.970-1](/cfr/26/1.970-1.md) shall be the amount of investments in export trade assets at the actual close of such preceding year. In the case of a taxable year of such corporation beginning after December 31, 1962, and before December 31, 1963, the amount of investments in export trade assets with respect to which such election is made alternatively may be determined by the United States shareholder as of the 75th day after the close of the preceding taxable year referred to in subparagraphs (2)(ii) and (3)(i) of paragraph (d) of [§ 1.970-1](/cfr/26/1.970-1.md) rather than as of the close of such preceding taxable year.
  - (3) **Election for export trade assets which are facilities.** A United States shareholder of a controlled foreign corporation may elect with respect to a taxable year of such corporation to make the determinations under subparagraphs (2)(i) and (3)(iii) of paragraph (d) of [§ 1.970-1](/cfr/26/1.970-1.md) of the amount of such corporation's investments in export trade assets which are facilities described in [section 971(c)(3)](/cfr/26/971.md?p=c-3) as of the close of such corporation's taxable year following the taxable year referred to in such subparagraphs of [paragraph (d)](/cfr/26/1.970-1.md?p=d) of § 1.970-1. The election provided by this subparagraph may be made only if the United States shareholder does not elect the 75-day rule of [subparagraph (2)](#a-2) of this paragraph with respect to export trade assets which are facilities. If the election provided by this subparagraph is made, the amount of investments in export trade assets which are facilities at the close of the preceding taxable year which is described in subparagraphs (2)(ii) and (3)(i) of paragraph (d) of [§ 1.970-1](/cfr/26/1.970-1.md) shall be the amount of export trade assets which are facilities which was considered, by reason of the application of the following-year rule provided in this subparagraph with respect to such preceding taxable year, to be the amount of export trade assets which are facilities at the close of such preceding taxable year; except that for the first taxable year of the controlled foreign corporation for which such following-year rule is elected the amount of investments in export trade assets which are facilities at the close of the preceding taxable year described in subparagraphs (2)(ii) and (3)(i) of paragraph (d) of [§ 1.970-1](/cfr/26/1.970-1.md) shall be the amount of investments in export trade assets which are facilities at the actual close of such preceding taxable year.
- (b) **Time and manner of making elections—**
  - (1) **Without consent.** A United States shareholder may, with respect to any controlled foreign corporation, make one or both of the elections described in paragraph [(a)(2)](#a-2) or [(3)](#a-3) of this section without the consent of the Commissioner by filing a statement to such effect with his return for his taxable year in which or with which ends the first taxable year of such corporation in which—
    - (i) Such shareholder owns, within the meaning of [section 958(a)](/cfr/26/958.md?p=a), or is considered as owning, by applying the rules of section [958(b)](/cfr/26/958.md?p=b), [10](/cfr/26/10.md) percent or more of the total combined voting power of all classes of stock entitled to vote of such corporation, and
    - (ii) Such corporation realizes [subpart F](/cfr/26/subpartF.md) income which is reduced under [section 970(a)](/cfr/26/970.md?p=a) and [paragraph (b)](/cfr/26/1.970-1.md?p=b) of § 1.970-1.
  - (2) **With consent.** A United States shareholder may make one or both of the elections described in paragraph [(a)(2)](#a-2) or [(3)](#a-3) of this section with respect to any controlled foreign corporation at any time with the consent of the Commissioner. Consent will not be granted unless the shareholder and the Commissioner agree to the terms, conditions, and adjustments under which the election will be effected. The application for consent to elect shall be made by the shareholder's mailing a letter for such purpose to the Commissioner of Internal Revenue, Washington, DC 20224. The application shall be mailed before the close of the first taxable year of the controlled foreign corporation with respect to which the shareholder desires to determine an exclusion under [section 970(a)](/cfr/26/970.md?p=a) in accordance with one or both of the elections provided in [paragraph (a)](#a) of this section. The application shall include the following information:
    - (i) The name, address, and taxable year of the United States shareholder;
    - (ii) The name, address, and taxable year of the controlled foreign corporation;
    - (iii) A statement indicating which of the elections the shareholder desires to make;
    - (iv) The amount of the foreign corporation's investments in export trade assets (by a category which includes export trade assets other than facilities and a category which includes only export trade assets which are facilities) at the close of its preceding taxable year;
    - (v) The shareholder's pro rata share of the sum of the amounts by which the [subpart F](/cfr/26/subpartF.md) income of the foreign corporation, for all prior taxable years during which such shareholder was a United States shareholder of such corporation, was reduced under [section 970(a)](/cfr/26/970.md?p=a) and [paragraph (b)](/cfr/26/1.970-1.md?p=b) of § 1.970-1;
    - (vi) The shareholder's pro rata share of the sum of the amounts which were not included in the [subpart F](/cfr/26/subpartF.md) income of the foreign corporation, for all prior taxable years during which such shareholder was a United States shareholder of such corporation, by reason of the application of [section 972](/cfr/26/972.md) and [§ 1.972-1](/cfr/26/1.972-1.md); and
    - (vii) The shareholder's pro rata share of the sum of the amounts which were previously included in his gross income, for all prior taxable years during which such shareholder was a United States shareholder of such corporation, under [section 951(a)(1)(A)(ii)](/cfr/26/951.md?p=a-1-A-ii) by reason of the application of [section 970(b)](/cfr/26/970.md?p=b) and [paragraph (b)](/cfr/26/1.970-1.md?p=b) of § 1.970-1 to the foreign corporation.
- (c) **Effect of elections—**
  - (1) **In general.** Except as provided in subparagraphs [(3)](#c-3) and [(4)](#c-4) of this paragraph, an election made under [paragraph (a)](#a) of this section with respect to a controlled foreign corporation shall be binding on the United States shareholder and—
    - (i) In the case of the election described in [paragraph (a)(2)](#a-2) of this section, shall apply to all investments in export trade assets with respect to which such election is made acquired, or disposed of, by such corporation during the 75-day period following its taxable year for which [subpart F](/cfr/26/subpartF.md) income is first computed under the election and during all succeeding corresponding 75-day periods of such corporation, or
    - (ii) In the case of the election described in [paragraph (a)(3)](#a-3) of this section, shall apply to all investments in export trade assets which are facilities acquired, or disposed of, by such corporation during the taxable year following its taxable year for which [subpart F](/cfr/26/subpartF.md) income is first computed under the election and during all succeeding corresponding taxable years of such corporation.
  - (2) **Returns.** Any return of a United States shareholder required to be filed before the completion of a period with respect to which determinations are to be made as to a controlled foreign corporation's investments in export trade assets for purposes of computing such shareholder's taxable income shall be filed on the basis of an estimate of the amount of such corporation's investments in export trade assets at the close of the period. If the actual amount of such investments is not the same as the amount of the estimate, the shareholder shall immediately notify the Commissioner. The Commissioner will thereupon redetermine the amount of such shareholder's tax for the year or years with respect to which the incorrect amount was taken into account. The amount of tax, if any, due upon such redetermination shall be paid by the shareholder upon notice and demand by the district director. The amount of tax, if any, shown by such redetermination to have been overpaid shall be credited or refunded to the shareholder in accordance with the provisions of sections [6402](/cfr/26/6402.md) and [6511](/cfr/26/6511.md) and the regulations thereunder.
  - (3) **Revocation—**
    - (i) **In general—** (a) Consent required. Upon application by the United States shareholder, an election made under [paragraph (a)](#a) of this section may, subject to the approval of the Commissioner, be revoked. Approval will not be granted unless the shareholder and the Commissioner agree to the terms, conditions, and adjustments under which the revocation will be effected.

      (b) Revocation of 75-day rule. In the case of the revocation of an election described in [paragraph (a)(2)](#a-2) of this section, the change in the controlled foreign corporation's investments in export trade assets with respect to which such election was made for its first taxable year for which [subpart F](/cfr/26/subpartF.md) income or a decrease in investments in export trade assets is computed without regard to the election previously made shall, unless the agreement with the Commissioner provides otherwise, be considered to be the amount by which—

      (1) Such corporation's investments in export trade assets with respect to which such election was made at the close of such taxable year exceeds or, if applicable, is exceeded by

      (2) Such corporation's investments in export trade assets with respect to which such election was made at the close of the 75th day after the close of the preceding taxable year of such corporation.

      (c) Revocation of following-year rule. In the case of the revocation of an election described in [paragraph (a)(3)](#a-3) of this section, the change in the controlled foreign corporation's investments in export trade assets which are facilities for its first taxable year for which [subpart F](/cfr/26/subpartF.md) income or a decrease in investments in export trade assets is computed without regard to the election previously made shall, unless the agreement with the Commissioner provides otherwise, be considered to be zero.

    - (ii) **Time and manner of applying for consent to revocation—** (a) Application to Commissioner. The application for consent to revocation of an election shall be made by the United States shareholder's mailing a letter for such purpose to the Commissioner of Internal Revenue, Washington, DC, 20224. The application shall be mailed before the close of the first taxable year of the controlled foreign corporation with respect to which the shareholder desires to determine an exclusion under [section 970(a)](/cfr/26/970.md?p=a) or an inclusion under [section 970(b)](/cfr/26/970.md?p=b) without regard to such election.

      (b) Information required. The application shall include the following information:

      (1) The name, address, and taxable year of the United States shareholder;

      (2) The name, address, and taxable year of the controlled foreign corporation;

      (3) A statement indicating the election the shareholder desires to revoke under this subparagraph;

      (4) The information required under subdivisions (iv) through (vii) of [paragraph (b)(2)](#b-2) of this section;

      (5) In the case of an application for consent to revocation of an election made under [paragraph (a)(2)](#a-2) of this section, the amount of the foreign corporation's investments in export trade assets with respect to which such election was made at the close of the 75th day after the close of such corporation's taxable year immediately preceding the taxable year of such corporation; and

      (6) The reasons for the request for consent to revocation.

  - (4) **Transfer of stock—**
    - (i) **Election of 75-day rule in force.** (a) If during any taxable year of a controlled foreign corporation—

      (1) A United States shareholder who has made the election described in [paragraph (a)(2)](#a-2) of this section with respect to such corporation sells, exchanges, or otherwise disposes of all or part of his stock in such corporation, and

      (2) The foreign corporation is a controlled foreign corporation immediately after the sale, exchange, or other disposition,

      (b) If the United States shareholder's successor in interest makes an election under [paragraph (a)(2)](#a-2) of this section in order to determine an exclusion under [section 970(a)](/cfr/26/970.md?p=a) for the taxable year of such corporation in which the acquires such stock, the amount of the controlled foreign corporation's investments in export trade assets with respect to which such election is made at the close of its preceding taxable year shall be considered, with respect to the stock so acquired, to be the amount of such corporation's investments in export trade assets with respect to which such election is made at the close of the 75th day after the close of such preceding taxable year.

      (c) If the United States shareholder's successor in interest makes an election under [paragraph (a)(2)](#a-2) of this section in order to determine an exclusion under [section 970(a)](/cfr/26/970.md?p=a) for a taxable year of such corporation subsequent to the taxable year in which he acquired the stock, the amount of the controlled foreign corporation's investments in export trade assets with respect to which such election is made at the close of its taxable year immediately preceding such subsequent taxable year shall, with respect to the stock so acquired, be the amount of such corporation's investments in such assets at the actual close of such preceding taxable year.

    - (ii) **Election in force with respect to export trade assets which are facilities—** (a) If during any taxable year of a controlled foreign corporation—

      (1) A United States shareholder who has made the election described in [paragraph (a)(3)](#a-3) of this section with respect to such corporation sells, exchanges, or otherwise disposes of all or part of his stock in such corporation, and

      (2) The foreign corporation is a controlled foreign corporation immediately after the sale, exchange or other disposition,

      (b) If the United States shareholder's successor in interest makes an election under [paragraph (a)(3)](#a-3) of this section in order to determine an exclusion under [section 970(a)](/cfr/26/970.md?p=a) for the taxable year of such corporation in which he acquires such stock, the amount of the controlled foreign corporation's investments in export trade assets which are facilities at the close of its preceding taxable year shall be considered, with respect to the stock so acquired, to be the amount of such corporation's investments in export trade assets which are facilities at the close of the taxable year in which such stock is acquired.

      (c) If the United States shareholder's successor in interest makes an election under [paragraph (a)(3)](#a-3) of this section in order to determine an exclusion under [section 970(a)](/cfr/26/970.md?p=a) for a taxable year of such corporation subsequent to the taxable year in which he acquired the stock, the amount of the controlled foreign corporation's investments in export trade assets which are facilities at the close of its taxable year immediately preceding such subsequent taxable year shall, with respect to the stock so acquired, be the amount of such corporation's investments in such assets at the actual close of such preceding taxable year.

- (d) **Illustrations.** The principles contained in this section are illustrated by the examples set forth in paragraph (d) of § 1.955.3.

# §1.970-3. Effective date of subpart G.


[Sections 970 through 972](/cfr/26/970..972.md) and [§§ 1.970-1 through 1.972-1](/cfr/26/1.970-1..1.972-1.md) shall apply with respect to taxable years of foreign corporations beginning after December 31, 1962, and to taxable years of United States shareholders within which or with which such taxable years of such corporations end.


# §1.971-1. Definitions with respect to export trade corporations.

- (a) **Export trade corporations—**
  - (1) **In general.** For purposes of [sections 970 through 972](/cfr/26/970..972.md) and [§§ 1.970-1 to 1.972-1](/cfr/26/1.970-1..1.972-1.md), inclusive, the term “export trade corporation” means a controlled foreign corporation which for the period specified in [subparagraph (2)](#a-2) of this paragraph satisfies the conditions specified in [subparagraph (3)](#a-3) of this paragraph. However, no controlled foreign corporation may qualify as an export trade corporation for any taxable year beginning after October 31, 1971, unless it qualified as an export trade corporation for any taxable year beginning before such date. In addition, if a corporation fails to qualify as an export trade corporation for a period of any 3 consecutive taxable years beginning after October 31, 1971, then for any taxable year beginning after such 3-year period, such corporation shall not be included within the term “export trade corporation”.
  - (2) **Three-year period.** The period referred to in [subparagraph (1)](#a-1) of this paragraph is the 3-year period ending with the close of the controlled foreign corporation's current taxable year, or such part of such 3-year period as occurs on and after the beginning of the corporation's first taxable year beginning after December 31, 1962, whichever period is shorter.
  - (3) **Gross income requirements.** The conditions referred to in [subparagraph (1)](#a-1) of this paragraph are that the controlled foreign corporation derives—
    - (i) 90 percent or more of its gross income from sources without the United States, and
    - (ii) (a) 75 percent of more of its gross income from transactions, activities, or interest described in [section 971(b)](/cfr/26/971.md?p=b) and [paragraph (b)](#b) of this section, or

      (b) 50 percent or more of its gross income from transactions, activities, or interest described in [section 971(b)](/cfr/26/971.md?p=b) and [paragraph (b)](#b) of this section in respect of agricultural products grown in the United States.

  - (4) **Determination of sources of gross income.** The sources of gross income of a controlled foreign corporation shall be determined for purposes of [subparagraph (3)(i)](#a-3-i) of this paragraph in accordance with the rules for determining sources of gross income set forth in [sections 861 through 864](/cfr/26/861..864.md) and the regulations thereunder.
- (b) **Export trade income—**
  - (1) **General rule.** For purposes of [sections 970 through 972](/cfr/26/970..972.md) and [§§ 1.970-1 to 1.972-1](/cfr/26/1.970-1..1.972-1.md), inclusive, the term “export trade income” means the gross export trade income of a controlled foreign corporation derived from transactions, activities, or interest described in subdivisions (i) through (vii) of this subparagraph, less deductions allowed under subdivision (viii) of this subparagraph.
    - (i) **Sale of export property.** Gross export trade income of a controlled foreign corporation includes gross income it derives from the sale of export property (as defined in [paragraph (e)](#e) of this section) which it purchases, if the sale is made to an unrelated person for use, consumption, or disposition outside the United States. See [section 971(b)(1)](/cfr/26/971.md?p=b-1). As a general rule, property will be presumed to have been sold for use, consumption, or disposition in the country of destination of the sale. However, if at the time of the sale the controlled foreign corporation knows, or should have known from the facts and circumstances surrounding the sales transaction, that the property will probably be used, consumed, or disposed of in the United States, such property will be presumed to have been sold for use, consumption, or disposition in the United States unless the controlled foreign corporation establishes that such property was used, consumed, or disposed of outside the United States. For purposes of this subdivision, export property must be sold by a controlled foreign corporation in essentially the same form in which such property is purchased. Whether export property sold is in essentially the same form in which such property is purchased shall be determined on the basis of all the facts and circumstances in each case. Storage, handling, transportation, packaging, or servicing of property will be considered not to alter the form in which property is purchased. However, manufacture or production, within the meaning of [paragraph (a)(4)](/cfr/26/1.954-3.md?p=a-4) of § 1.954-3, will be considered to alter the form in which property is purchased and no part of the gross income from the sale of such property will be treated as export trade income. The application of this subdivision may be illustrated by the following example:
    - (ii) **Commissions and other income derived in connection with the sale of export property.** Gross export trade income of a controlled foreign corporation includes gross commissions, fees, compensation, or other income derived by such corporation from the performance for any person of commercial, industrial, financial, technical, scientific, managerial, engineering, architectural, skilled, or other services in respect of a sale by such corporation in a transaction described in subdivision (i) of this subparagraph or in respect of the sale by any other person of export property to a person unrelated to the controlled foreign corporation for use, consumption, or disposition outside the United States. Such gross export trade income includes payments received for surveys made prior to, and in connection with, the sale of such export property (whether or not such sales are ultimately consummated). See [section 971(b)(1)](/cfr/26/971.md?p=b-1). The term “any person” or “any other person” as used in this subdivision includes a related person as defined in [section 954(d)(3)](/cfr/26/954.md?p=d-3) and [paragraph (e)](/cfr/26/1.954-1.md?p=e) of § 1.954-1. The application of this subdivision may be illustrated by the following examples:
    - (iii) **Commissions and other income derived in connection with the installation or maintenance of export property.** Gross export trade income of a controlled foreign corporation includes gross commissions, fees, compensation, or other income derived by such corporation from the performance for any person of commercial, industrial, financial, technical, scientific, managerial, engineering, architectural, skilled, or other services in respect of the installation or maintenance of export property which has been sold by such corporation in a transaction described in subdivision (i) of this subparagraph or by any other person to a person unrelated to the controlled foreign corporation for use, consumption, or disposition outside the United States. See [section 971(b)(1)](/cfr/26/971.md?p=b-1). The term “any person” or “any other person” as used in this subdivision includes a related person as defined in [section 954(d)(3)](/cfr/26/954.md?p=d-3) and [paragraph (e)](/cfr/26/1.954-1.md?p=e) of § 1.954-1.
    - (iv) **Commissions and other income derived in connection with the use of patents, copyrights, and other like property.** Gross export trade income of a controlled foreign corporation includes gross commissions, fees, compensation, or other income derived by such corporation from the performance for any person of commercial, industrial, financial, technical, scientific, managerial, engineering, architectural, skilled, or other services in connection with the use outside of the United States by an unrelated person of patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises, and other like property, including gross income derived from obtaining licensees for patents, but only if the patent, copyright, or other like property is acquired, or developed, and owned by the manufacturer, producer, grower, or extractor of any export property, in respect of which the controlled foreign corporation also derives gross export trade income within the meaning of subdivision (i), (ii), or (iii) of this subparagraph. See [section 971(b)(2)](/cfr/26/971.md?p=b-2). The application of this subdivision may be illustrated by the following example:
    - (v) **Income attributable to use of export property by an unrelated person.** Gross export trade income of a controlled foreign corporation includes gross commissions, fees, rents, compensation, or other income which is received by such corporation from an unrelated person and is attributable to the use of export property by such unrelated person. See [section 971(b)(3)](/cfr/26/971.md?p=b-3). The application of this subdivision may be illustrated by the following example:
    - (vi) **Income attributable to the use of export property in the rendition of technical, scientific, or engineering services—** (a) General. Gross export trade income of a controlled foreign corporation includes gross commissions, fees, compensation, or other income which is received by such corporation from an unrelated person and is attributable to the use of export property in the performance of technical, scientific, or engineering services to such unrelated person. See [section 971(b)(3)](/cfr/26/971.md?p=b-3).

      (b) Rule of apportionment. If a commission, fee, or other income received by a controlled foreign corporation from an unrelated person under a contract or arrangement for the performance of technical, scientific, or engineering services is not solely attributable to the use of export property in the performance of such services and the amount of the gross income attributable to such use of export property cannot be established by reference to transactions between other unrelated persons, such gross income shall be an amount which bears the same ratio to total gross income from the contract or arrangement as the cost of the export property consumed in the performance of such services, including a reasonable allowance for depreciation with respect to the export property so used, bears to the total costs and expenses attributable to the production of income under the contract or arrangement.

      (c) Illustration. The application of this subdivision may be illustrated by the following example:

    - (vii) **Interest from export trade assets.** Gross export trade income of a controlled foreign corporation includes interest derived by it from export trade assets described in [section 971(c)(4)](/cfr/26/971.md?p=c-4) and [paragraph (c)(5)](#c-5) of this section. See [section 971(b)(4)](/cfr/26/971.md?p=b-4).
    - (viii) **Deductions to be taken into account.** Export trade income of a controlled foreign corporation for any taxable year shall be the amount determined by deducting from the items or categories of gross income described in subdivisions (i) through (vii) of this subparagraph the entire amount of those expenses, taxes, and other deductions properly allocable to such items or categories of income. For purposes of this section, expenses, taxes, and other deductions shall first be allocated to items or categories of gross income to which they directly relate; then, expenses, taxes, and other deductions which cannot definitely be allocated to some item or category of gross income shall be ratably apportioned among all items or categories of gross income, except that no expense, tax, or other deduction shall be allocated to an item or category of income to which it clearly does not apply and no deduction allowable to such controlled foreign corporation under [section 882(c)](/cfr/26/882.md?p=c) and the regulations thereunder shall be taken into account.
  - (2) **Cross reference.** For rules governing the determination of gross income and taxable income of a foreign corporation, see [§ 1.952-2](/cfr/26/1.952-2.md).
- (c) **Export trade assets—**
  - (1) **In general.** For purposes of [sections 970 through 972](/cfr/26/970..972.md) and [§§ 1.970-1 to 1.972-1](/cfr/26/1.970-1..1.972-1.md), inclusive, the term “export trade assets” means—
    - (i) Working capital reasonably necessary for the production of export trade income,
    - (ii) Inventory of export property held for use, consumption, or disposition outside the United States,
    - (iii) Facilities located outside the United States for the storage, handling, transportation, packaging, servicing, sale, or distribution of export property, and
    - (iv) Evidences of indebtedness executed by unrelated persons in connection with payment for purchases of export property for use, consumption, or disposition outside the United States, or in connection with the payment for services described in section [971(b)(2)](/cfr/26/971.md?p=b-2) or [(3)](/cfr/26/971.md?p=b-3) and paragraph [(b)(1)(iv)](#b-1-iv), [(v)](#b-1-v), or [(vi)](#b-1-vi) of this section.
  - (2) **Working capital.** For purposes of [subparagraph (1)(i)](#c-1-i) of this paragraph, working capital of a controlled foreign corporation is the excess of its current assets over its current liabilities. Liabilities maturing in one year or less shall be considered current liabilities. A determination of the amount of working capital of a controlled foreign corporation which is reasonably necessary for the production of export trade income will depend upon the nature and volume of the activities of the controlled foreign corporation which produce export trade income as they exist on the applicable determination date. In determining working capital which is reasonably necessary for the production of export trade income, the anticipated future needs of the business will be taken into account to the extent that such needs relate to the year of the controlled foreign corporation following the applicable determination date; anticipated future needs relating to a later period will not be taken into account unless it is clearly established that such needs are reasonably related to the production of export trade income as of the applicable determination date.
  - (3) **Inventory of export property.** For purposes of [subparagraph (1)(ii)](#c-1-ii) of this paragraph, the inclusion of items in inventory shall be determined in accordance with rules applicable to domestic corporations. See [§§ 1.471-1 through 1.471-9](/cfr/26/1.471-1..1.471-9.md). Inventory of export property of a controlled foreign corporation includes export property held for use, consumption, or disposition outside the United States regardless of where it is located on the applicable determination date. Thus, such property may be physically located in the United States on such date. However, for property physically located in the United States to constitute export property, it must have been acquired by the controlled foreign corporation with a clear intent that it would dispose of the property for use, consumption, or disposition outside the United States. As a general rule, if during the year following the applicable determination date export property which was physically located in the United States on such date is actually exported for use, consumption, or disposition outside the United States, such property will be deemed held for such purpose on the applicable determination date. On the other hand, the indefinite warehousing of export property in the United States by the controlled foreign corporation, or the subsequent sale of export property by such corporation for use, consumption, or disposition in the United States, will evidence a lack of intent by such corporation on the applicable determination date to hold such property for use, consumption, or disposition outside the United States.
  - (4) **Facilities located outside the United States—**
    - (i) **In general.** For purposes of [subparagraph (1)(iii)](#c-1-iii) of this paragraph, a facility, as defined in subdivision (ii)(a) of this subparagraph, will be considered an export trade asset only—

      (a) If such facility is located outside the United States, and

      (b) To the extent that such facility is used, within the meaning of subdivision (ii)(c) of this subparagraph, by the controlled foreign corporation for the storage, handling, transportation, packaging, servicing, sale, or distribution of export property in essentially the same form in which such property is acquired by such corporation.

    - (ii) **Special rules—** (a) Facility defined. For purposes of subdivision (i) of this subparagraph, the term “facility” includes any asset or group of assets used for the storage, handling, transportation, packaging, servicing, sale, or distribution of export property. Thus, such term includes warehouse, storage, or sales facilities (for example, sales office equipment), transportation equipment (for example, motor trucks, vessels, etc.), and machinery and equipment (for example, packaging equipment, servicing equipment, cranes, forklift trucks used in warehouses, etc.).

      (b) Determination of location of transportation facilities. A transportation facility shall be considered to be located outside the United States for purposes of subdivision (i)(a) of this subparagraph if such property is predominantly located outside the United States. As a general rule, on an applicable determination date a transportation facility will be considered to be predominantly located outside the United States if 70 percent or more of the miles traversed (during the 12-month period immediately preceding such determination date or for such part of such period as such facility is owned by the controlled foreign corporation) in the use of such facility are traversed outside the United States or if such facility is located outside the United States at least 70 percent of the time during such period or such part thereof.

      (c) Determination of use. For purposes of subdivision (i)(b) of this subparagraph, the extent to which a facility is used in carrying on the activities described in such subdivision depends on the use made of the facility for the 12-month period immediately preceding the applicable determination date or for such part of such period as such facility is owned by the controlled foreign corporation. The method of measuring such use will depend upon the facts and circumstances in each case. However, such determinations of use will generally be made for a facility as a whole and not on the basis of individual items used in the operation of a facility. Thus, a determination as to the use of a warehouse facility will generally be made with respect to the entire facility and not separately for the items used in such warehouse, such as forklift trucks, storage bins, etc.

  - (5) **Evidences of indebtedness.** For purposes of [subparagraph (1)(iv)](#c-1-iv) of this paragraph, the term “evidence of indebtedness” shall mean a note, installment sales contract, a time bill of exchange evidencing a sale on credit, or similar written instrument executed by an unrelated person which evidences the obligation of an unrelated person to pay for export property which an unrelated person purchases for use, consumption, or disposition outside the United States or to pay for services described in section [971(b)(2)](/cfr/26/971.md?p=b-2) or [(3)](/cfr/26/971.md?p=b-3) and paragraph [(b)(1)(iv)](#b-1-iv), [(v)](#b-1-v), or [(vi)](#b-1-vi) of this section which are performed for an unrelated person. Receivables which arise out of the delivery of export property, or the performance of services, which are evidenced by invoices, bills of lading, bills of exchange which do not evidence a sale on credit, sales slips, and similar documents created by the unilateral act of a creditor shall not be considered evidences of indebtedness for purposes of [section 971(c)(4)](/cfr/26/971.md?p=c-4).
  - (6) **Duplication of treatment and priority of application.** No asset which constitutes an export trade asset shall be taken into account more than once in determining the investments in export trade assets of a controlled foreign corporation. Assets which constitute working capital and also constitute inventory to which [section 971(c)(2)](/cfr/26/971.md?p=c-2) applies or evidences of indebtedness to which [section 971(c)(4)](/cfr/26/971.md?p=c-4) applies shall be taken into account in determining whether the amount of working capital of the controlled foreign corporation is reasonably necessary for the production of export trade income. However, to the extent that the amount of inventory to which [section 971(c)(2)](/cfr/26/971.md?p=c-2) applies or evidences of indebtedness to which [section 971(c)(4)](/cfr/26/971.md?p=c-4) applies is not included in working capital to which [section 971(c)(1)](/cfr/26/971.md?p=c-1) applies on the ground that such amount is not reasonably necessary for the production of export trade income, the amount shall be included under section [971(c)(2)](/cfr/26/971.md?p=c-2) or [971(c)(4)](/cfr/26/971.md?p=c-4), as the case may be, in a controlled foreign corporation's investments in export trade assets.
- (d) **Export promotion expenses—**
  - (1) **In general.** For purposes of [sections 970 through 972](/cfr/26/970..972.md) and [§§ 1.970-1 to 1.972-1](/cfr/26/1.970-1..1.972-1.md), inclusive, the term “export promotion expenses” means, subject to the provisions of [subparagraph (2)](#d-2) of this paragraph, all the ordinary and necessary expenses paid or incurred during the taxable year by the controlled foreign corporation which are reasonably allocable to the receipt or production of export trade income including—
    - (i) A reasonable allowance for salaries or other compensation for personal services actually rendered for such purpose,
    - (ii) Rentals or other payments for the use of property actually used for such purpose, and
    - (iii) A reasonable allowance for the exhaustion, wear and tear, or obsolescence of property actually used for such purpose.
  - (2) **Expenses incurred within the United States.** No expense incurred within the United States shall be treated as an export promotion expense for purposes of [section 971(d)](/cfr/26/971.md?p=d) and [subparagraph (1)](#d-1) of this paragraph unless at least—
    - (i) 90 percent of all salaries and other personal service compensation incurred in the receipt or the production of export trade income,
    - (ii) 90 percent of rents and other payments for the use of property used in the receipt or the production of export trade income,
    - (iii) 90 percent of the allowances for the exhaustion, wear and tear, or obsolescence of property used in the receipt or the production of export trade income, and
    - (iv) 90 percent of all other ordinary and necessary expenses reasonably allocable to the receipt or the production of export trade income,
- (e) **Export property.** For purposes of [sections 970 through 972](/cfr/26/970..972.md) and [§§ 1.970-1 to 1.972-1](/cfr/26/1.970-1..1.972-1.md), inclusive, the term “export property” means property, or any interest in property, which is manufactured, produced, grown, or extracted in the United States. Whether property will be considered manufactured or produced in the United States will depend on the facts and circumstances of each case. As a general rule, if—
  - (1) The property sold, serviced, used, or rented by the controlled foreign corporation is substantially transformed in the United States prior to its export from the United States, or
  - (2) The operations conducted in the United States with respect to the property sold, serviced, used, or rented by the controlled foreign corporation, whether performed in the United States by one person or a series of persons in a chain of distribution, are substantial in nature and are generally considered to constitute the manufacture or production of property,
- (f) **Unrelated person.** For purposes of [sections 970 through 972](/cfr/26/970..972.md) and [§§ 1.970-1 to 1.972-1](/cfr/26/1.970-1..1.972-1.md), inclusive, the term “unrelated person” means a person other than a related person as defined in [section 954(d)(3)](/cfr/26/954.md?p=d-3) and [paragraph (e)](/cfr/26/1.954-1.md?p=e) of § 1.954-1.

# §1.972-1. Consolidation of group of export trade corporations.

- (a) **Election to consolidate—**
  - (1) **In general.** One or more United States shareholders (as defined in [section 951(b)](/cfr/26/951.md?p=b)) owning (within the meaning of [section 958(a)](/cfr/26/958.md?p=a)) or who are considered as owning by applying the rules of ownership of [section 958(b)](/cfr/26/958.md?p=b) more than 50 percent of the total combined voting power of all classes of stock entitled to vote of an export trade corporation, which is the top-tier corporation in a chain (within the meaning of [subparagraph (2)](#a-2) of this paragraph) of export trade corporations, may, subject to the provisions of this section, elect to consolidate such chain for purposes of determining—
    - (i) The limitations, described in [section 970(a)](/cfr/26/970.md?p=a) and [paragraph (b)(2)](/cfr/26/1.970-1.md?p=b-2) of § 1.970-1, on the amount by which [subpart F](/cfr/26/subpartF.md) income of an export trade corporation in such chain shall be reduced as provided in [section 970(a)](/cfr/26/970.md?p=a) and [paragraph (b)(1)](/cfr/26/1.970-1.md?p=b-1) of § 1.970-1, and
    - (ii) The amount includible in gross income of such shareholders under [section 951(a)(1)(A)(ii)](/cfr/26/951.md?p=a-1-A-ii) with respect to such a corporation's decrease in investments in export trade assets to which [section 970(b)](/cfr/26/970.md?p=b) applies as described in [paragraph (c)](/cfr/26/1.970-1.md?p=c) of § 1.970-1.
  - (2) **“Chain” defined.** A chain of export trade corporations shall include—
    - (i) The top-tier export trade corporation referred to in [subparagraph (1)](#a-1) of this paragraph which is the first export trade corporation in a chain of ownership described in [section 958(a)](/cfr/26/958.md?p=a);
    - (ii) All export trade corporations 80 percent or more of the total combined voting power of all classes of stock entitled to vote of which is owned directly by such top-tier export trade corporation on the last day of its taxable year; and
    - (iii) All export trade corporations 80 percent or more of the total combined voting power of all classes of stock entitled to vote of which is owned directly by the export trade corporations described in subdivision (ii) of this subparagraph on the last day of the taxable year of the export trade corporation described in subdivision (i) of this subparagraph.
  - (3) **Inclusion requirement.** If an election is made by a United States shareholder under this paragraph with respect to a chain of export trade corporations (as defined in [subparagraph (2)](#a-2) of this paragraph), all export trade corporations which are included in the chain must be included in the consolidation. If such an election is made, the determinations under [section 970](/cfr/26/970.md) shall be made on a consolidated basis with respect to the entire interest which the electing United States shareholder owns in each of the export trade corporations in the chain, including any minority interests owned directly or indirectly by such shareholder in second-tier and third-tier corporations in the chain. A United States shareholder may elect to consolidate his interest in export trade corporations in one chain of such corporations without electing to consolidate his interest in export trade corporations in other chains.
  - (4) **Conditions for making initial election—**
    - (i) **Without consent.** The initial election to consolidate a chain of export trade corporations may be made without the consent of the Commissioner only if, immediately before the election to consolidate, each of the export trade corporations to be included in the consolidation is using the same taxable year and has the same elections under [section 970(c)(4)](/cfr/26/970.md?p=c-4) and [§ 1.970-2](/cfr/26/1.970-2.md) in force, or not in force, as the case may be. The election shall be made by the electing shareholder or shareholders with respect to the taxable year in which or with which ends the first taxable year of the top-tier corporation to which the election to consolidate applies and at the time of filing such shareholders' returns for such taxable year or within 90 days after final regulations under this section are published in the Federal Register, whichever date occurs later. Each United States shareholder making such an election shall attach to his return a statement showing:

      (a) The name, address, and taxable year of each export trade corporation in the chain of such corporations for which an election is made,

      (b) The amount and percentage of each class of stock owned by such shareholder (within the meaning of [section 958](/cfr/26/958.md)), corporation by corporation, in each of such export trade corporations, and

      (c) A list of the names and addresses, and a description of the ownership interests, of all other United States shareholders, if any, who are making the same election to consolidate and a statement that such shareholders are also making the election.

    - (ii) **With consent.** If, immediately before the election to consolidate, each of the export trade corporations in a chain of such corporations does not use the same taxable year or does not have the same elections under [section 970(c)(4)](/cfr/26/970.md?p=c-4) and [§ 1.970-2](/cfr/26/1.970-2.md) in force, or not in force, as the case may be, the initial election to consolidate such chain may be exercised by the electing shareholder or shareholders only with the consent of the Commissioner. Consent will not be granted unless each electing United States shareholder and the Commissioner agree to the terms, conditions, and adjustments under which such consolidation is to be effected and unless, subject to such terms, conditions, and adjustments as the Commissioner may prescribe, each of the export trade corporations in the chain adopts a common taxable year and has the same elections under [section 970(c)(4)](/cfr/26/970.md?p=c-4) and [§ 1.970-2](/cfr/26/1.970-2.md) in force, or not in force, as the case may be. The application for consent to consolidate shall be made by mailing a letter, signed by each of the electing United States shareholders, to the Commissioner of Internal Revenue, Washington, DC 20224. The application shall be mailed before the close of the first taxable year of the top-tier corporation with respect to which the electing shareholder or shareholders desire to make a consolidation or before the close of the 90th day after final regulations under this section are published in the Federal Register, whichever date occurs later, and shall include the statement described in subdivision (i) of this subparagraph.
  - (5) **Effect of election.** If an election to consolidate a chain of export trade corporations is made for a taxable year of a United States shareholder, such election shall, except as provided in [subparagraph (6)](#a-6) of this paragraph, be binding on such shareholder for such taxable year and for all succeeding taxable years. If, in a subsequent taxable year of the United States shareholder, an export trade corporation for the first time qualifies as a second-tier or third-tier corporation in such chain on the last day of the taxable year of the top-tier corporation which ends in or with the subsequent taxable year of such shareholder, the shareholder's interest in such export trade corporation shall be included in the consolidation to which the election applies, but only if such export trade corporation as of such last day uses the same taxable year and has the same elections under [section 970(c)(4)](/cfr/26/970.md?p=c-4) and [§ 1.970-2](/cfr/26/1.970-2.md) in force, or not in force, as the case may be, as such top-tier corporation. The United States shareholder shall, with respect to such additional export trade corporation, submit with his return for such subsequent taxable year the statement described in [subparagraph (4)(i)](#a-4-i) of this paragraph.
  - (6) **Termination of election.** An election under this paragraph to consolidate a chain of export trade corporations shall terminate for the first taxable year of the foreign corporation which during the period of consolidation is a top-tier corporation—
    - (i) At the close of which any foreign corporation which was included in such consolidation for the preceding taxable year ceases to qualify as an export trade corporation or to be eligible under this paragraph for inclusion in such chain,
    - (ii) At the close of which an export trade corporation for the first time qualifies as a second-tier or third-tier corporation in such chain but does not as of such close of the year use the same taxable year or have the same elections under [section 970(c)(4)](/cfr/26/970.md?p=c-4) and [§ 1.970-2](/cfr/26/1.970-2.md) in force, or not in force, as the case may be, as such top-tier corporation, or
    - (iii) (a) In respect of which the Commissioner, upon application made by a United States shareholder who made the election to consolidate, or his successor in interest, consents to a termination of the election. Approval will not be granted unless the United States shareholder and the Commissioner agree to the terms, conditions, and adjustments under which the termination will be effected.

      (b) The application for consent to termination shall be made by the United States shareholder's mailing a letter for such purpose to the Commissioner of Internal Revenue, Washington, DC 20224. The application shall be mailed before the close of the taxable year of the foreign corporations with respect to which the shareholder desires to terminate the consolidation and shall include the following information:

      (1) The name, address, and taxable year of each export trade corporation in the chain of such corporations for which the election was made,

      (2) The amount and percentage of each class of stock owned by such shareholder (within the meaning of [section 958](/cfr/26/958.md)), corporation by corporation, in each of such export trade corporations, and

      (3) A list of the names and addresses, and a description of the ownership interests, of all other United States shareholders, if any, who participated in making the election with such United States shareholder, or their successors in interest, and a statement whether such other persons are or are not terminating the election.

  - (7) **Election subsequent to initial election.** If a United States shareholder elects under [subparagraph (4)](#a-4) of this paragraph to consolidate his interest in a chain of export trade corporations and the election to consolidate such corporations terminates under the provisions of [subparagraph (6)](#a-6) of this paragraph, such shareholder may not thereafter elect under this section to consolidate his interest in any corporation which was in that chain of export trade corporations unless he receives the consent of the Commissioner to do so. Application to obtain such consent of the Commissioner shall be made by a letter mailed to the Commissioner of Internal Revenue, Washington, DC, 20224, before the close of the first taxable year of the top-tier corporation of the chain of export trade corporations in which the election to include such interest is to apply. Such application for consent shall include a statement showing:
    - (i) With respect to such chain, the information required to be shown in the statement described in [subparagraph (4)(i)](#a-4-i) of this paragraph, and
    - (ii) The United States shareholder's interest in such chain which was previously included in a consolidation, the taxable years of such previous consolidation, and the manner in which such previous consolidation was terminated.
  - (8) **Illustration.** The application of this paragraph may be illustrated by the following example:
- (b) **Effect of consolidation—**
  - (1) **Determination of subpart F income, export trade income, etc.** An election under [paragraph (a)](#a) of this section to consolidate export trade corporations in a chain of such corporations shall have no effect on the determination of the character of income as [subpart F](/cfr/26/subpartF.md) income or on the determination of export trade income, export trade income which constitutes foreign base company income, or earnings and profits of the individual export trade corporations in the chain. Thus, the consolidation of export trade corporations under this section shall not have the effect of reducing earnings and profits of such corporations or of changing the characterization of income from that which is, for example, foreign base company income to that which is not. The application of this paragraph may be illustrated by the following example:
  - (2) **Determination of amount by which consolidated subpart F income is reduced—**
    - (i) **In general.** In determining the amount by which the [subpart F](/cfr/26/subpartF.md) income of each export trade corporation includible in a consolidation of export trade corporations shall be reduced as provided in [section 970(a)](/cfr/26/970.md?p=a) and [paragraph (b)(1)](/cfr/26/1.970-1.md?p=b-1) of § 1.970-1 for any taxable year of consolidation, the limitations provided by [section 970(a)](/cfr/26/970.md?p=a) and [paragraph (b)(2)](/cfr/26/1.970-1.md?p=b-2) of § 1.970-1 on such amount for each such export trade corporation shall be determined on the basis of such corporation's separate share of—

      (a) Amounts included in the total export promotion expense,

      (b) The total gross receipts from the sale, installation, operation, maintenance, or use of property in respect of which each such corporation derives such export trade income as is properly allocable to the export trade income which constitutes foreign base company income, and

      (c) The total increase in investments in export trade assets,

    - (ii) **Limitations not effective.** If for any taxable year each of the limitations under [paragraph (b)(2)](/cfr/26/1.970-1.md?p=b-2) of § 1.970-1, determined on a consolidated basis, equals or exceeds the total export trade income which constitutes foreign base company income of all corporations includible in the consolidation of export trade corporations, the [subpart F](/cfr/26/subpartF.md) income of each includible corporation shall be reduced under [section 970(a)](/cfr/26/970.md?p=a) for such year by its separate export trade income which constitutes foreign base company income.
    - (iii) **Limitation effective.** If for any taxable year one of the limitations under [paragraph (b)(2)](/cfr/26/1.970-1.md?p=b-2) of § 1.970-1, determined on a consolidated basis, is less than the total export trade income which constitutes foreign base company income of all corporations includible in the consolidation of export trade corporations, the amount by which the [subpart F](/cfr/26/subpartF.md) income of each includible corporation shall be reduced under [section 970(a)](/cfr/26/970.md?p=a) for such year shall be an amount which bears the same ratio to the amount by which the [subpart F](/cfr/26/subpartF.md) income may be reduced on a consolidated basis as the export trade income which constitutes foreign base company income of each includible corporation bears to the total export trade income which constitutes foreign base company income of all export trade corporations includible in the consolidation of export trade corporations.
    - (iv) **Illustration.** The application of this subparagraph may be illustrated by the following example:
  - (3) **Determination of pro rata share of consolidated withdrawal of previously excluded export trade income—**
    - (i) **In general.** If, for any taxable year, there is a decrease in investments in export trade assets under [section 970(b)](/cfr/26/970.md?p=b) and [paragraph (c)(1)](/cfr/26/1.970-1.md?p=c-1) of § 1.970-1, determined on a consolidated basis, of export trade corporations includible in a consolidated chain of such corporations, each United States shareholder who has elected under [paragraph (a)](#a) of this section to consolidate his interest in such chain of corporations shall include in his gross income, under [section 951(a)(1)(A)(ii)](/cfr/26/951.md?p=a-1-A-ii) and the regulations thereunder as an amount to which [section 955](/cfr/26/955.md) (as in effect before the enactment of the Tax Reduction Act of 1975) applies, his pro rata share of the amount of such consolidated decrease in investments but only to the extent such pro rata share does not exceed the lesser of the limitations provided by [section 970(b)](/cfr/26/970.md?p=b) and [paragraph (c)(2)](/cfr/26/1.970-1.md?p=c-2) of § 1.970-1 with respect to such shareholder determined on a consolidated basis. The consolidated decrease in investments and the consolidated limitations shall be determined by aggregating the applicable amounts determined under [paragraph (c)](/cfr/26/1.970-1.md?p=c) of § 1.970-1 with respect to such shareholder's interest in each corporation includible in the consolidation.
    - (ii) **Allocation of pro rata share of consolidated decrease in investments in export trade assets.** For purposes of determining the amount referred to in [paragraph (c)(2)(i)(b)(3)](/cfr/26/1.970-1.md) of § 1.970-1 for a subsequent taxable year, a United States shareholder's pro rata share of a consolidated decrease in investments determined under subdivision (i) of this subparagraph for the current taxable year shall be allocated to such shareholder's interest in each of the export trade corporations includible in the consolidation in that ratio which—

      (a) The net amount determined under [paragraph (c)(2)(i)(b)](/cfr/26/1.970-1.md) of § 1.970-1 with respect to such shareholder's interest in such corporation for all prior taxable years (whether or not a taxable year occurring during the period of consolidation) bears to

      (b) The total of the net amounts determined under paragraph (c)(2)(i) (b) of [§ 1.970-1](/cfr/26/1.970-1.md) with respect to such shareholder's interests in all export trade corporations includible in such consolidation for all prior taxable years (whether or not a taxable year occurring during the period of consolidation).

    - (iii) **Illustration.** The application of this subparagraph may be illustrated by the following example: