
From the U.S. Code Online via GPO Access
[wais.access.gpo.gov]
[Laws in effect as of January 2, 2001]
[Document affected by Public Law 107-16 Section 542(e)(5)(A)]
[CITE: 26USC1246]

 
                     TITLE 26--INTERNAL REVENUE CODE
 
                        Subtitle A--Income Taxes
 
                  CHAPTER 1--NORMAL TAXES AND SURTAXES
 
                 Subchapter P--Capital Gains and Losses
 
     PART IV--SPECIAL RULES FOR DETERMINING CAPITAL GAINS AND LOSSES
 
Sec. 1246. Gain on foreign investment company stock


(a) Treatment of gain as ordinary income

                          (1) General rule

        In the case of a sale or exchange (or a distribution which, 
    under section 302 or 331, is treated as an exchange of stock) after 
    December 31, 1962, of stock in a foreign corporation which was a 
    foreign investment company (as defined in subsection (b)) at any 
    time during the period during which the taxpayer held such stock, 
    any gain shall be treated as ordinary income, to the extent of the 
    taxpayer's ratable share of the earnings and profits of such 
    corporation accumulated for taxable years beginning after December 
    31, 1962.

                          (2) Ratable share

        For purposes of this section, the taxpayer's ratable share shall 
    be determined under regulations prescribed by the Secretary, but 
    shall include only his ratable share of the accumulated earnings and 
    profits of such corporation--
            (A) for the period during which the taxpayer held such 
        stock, but
            (B) excluding such earnings and profits attributable to--
                (i) any amount previously included in the gross income 
            of such taxpayer under section 951 (but only to the extent 
            the inclusion of such amount did not result in an exclusion 
            of any other amount from gross income under section 959), or
                (ii) any taxable year during which such corporation was 
            not a foreign investment company but only if--
                    (I) such corporation was not a foreign investment 
                company at any time before such taxable year, and
                    (II) such corporation was treated as a foreign 
                investment company solely by reason of subsection 
                (b)(2).

           (3) Taxpayer to establish earnings and profits

        Unless the taxpayer establishes the amount of the accumulated 
    earnings and profits of the foreign investment company and the 
    ratable share thereof for the period during which the taxpayer held 
    such stock, all the gain from the sale or exchange of stock in such 
    company shall be considered as ordinary income.

        (4) Holding period of stock must be more than 1 year

        This section shall not apply with respect to the sale or 
    exchange of stock where the holding period of such stock as of the 
    date of such sale or exchange is 1 year or less.

(b) Definition of foreign investment company

    For purposes of this section, the term ``foreign investment 
company'' means any foreign corporation which, for any taxable year 
beginning after December 31, 1962, is--
        (1) registered under the Investment Company Act of 1940, as 
    amended (15 U.S.C. 80a-1 to 80b-2), either as a management company 
    or as a unit investment trust, or
        (2) engaged (or holding itself out as being engaged) primarily 
    in the business of investing, reinvesting, or trading in--
            (A) securities (as defined in section 2(a)(36) of the 
        Investment Company Act of 1940, as amended),
            (B) commodities, or
            (C) any interest (including a futures or forward contract or 
        option) in property described in subparagraph (A) or (B),

    at a time when 50 percent or more of the total combined voting power 
    of all classes of stock entitled to vote, or the total value of all 
    classes of stock, was held directly (or indirectly through applying 
    paragraphs (2) and (3) of section 958(a) and paragraph (4) of 
    section 318(a)) by United States persons (as defined in section 
    7701(a)(30)).

(c) Stock having transferred or substituted basis

    To the extent provided in regulations prescribed by the Secretary, 
stock in a foreign corporation, the basis of which (in the hands of the 
taxpayer selling or exchanging such stock) is determined by reference to 
the basis (in the hands of such taxpayer or any other person) of stock 
in a foreign investment company, shall be treated as stock of a foreign 
investment company and held by the taxpayer throughout the holding 
period for such stock (determined under section 1223).

(d) Rules relating to entities holding foreign investment company stock

    To the extent provided in regulations prescribed by the Secretary--
        (1) trust certificates of a trust to which section 677 (relating 
    to income for benefit of grantor) applies, and
        (2) stock of a domestic corporation,

shall be treated as stock of a foreign investment company and held by 
the taxpayer throughout the holding period for such certificates or 
stock (determined under section 1223) in the same proportion that the 
investment in stock in a foreign investment company by the trust or 
domestic corporation bears to the total assets of such trust or 
corporation.

(e) Rules relating to stock acquired from a decedent

                              (1) Basis

        In the case of stock of a foreign investment company acquired by 
    bequest, devise, or inheritance (or by the decedent's estate) from a 
    decedent dying after December 31, 1962, the basis determined under 
    section 1014 shall be reduced (but not below the adjusted basis of 
    such stock in the hands of the decedent immediately before his 
    death) by the amount of the decedent's ratable share of the earnings 
    and profits of such company accumulated after December 31, 1962. Any 
    stock so acquired shall be treated as stock described in subsection 
    (c).

                    (2) Deduction for estate tax

        If stock to which subsection (a) applies is acquired from a 
    decedent, the taxpayer shall, under regulations prescribed by the 
    Secretary or his delegate, be allowed (for the taxable year of the 
    sale or exchange) a deduction from gross income equal to that 
    portion of the decedent's estate tax deemed paid which is 
    attributable to the excess of (A) the value at which such stock was 
    taken into account for purposes of determining the value of the 
    decedent's gross estate, over (B) the value at which it would have 
    been so taken into account if such value had been reduced by the 
    amount described in paragraph (1).

(f) Information with respect to certain foreign investment companies

    Every United States person who, on the last day of the taxable year 
of a foreign investment company, owns 5 percent or more in value of the 
stock of such company shall furnish with respect to such company such 
information as the Secretary shall by regulations prescribe.

(g) Coordination with section 1248

    This section shall not apply to any gain to the extent such gain is 
treated as ordinary income under section 1248 (determined without regard 
to section 1248(g)(2)).

(h) Cross reference

            For special rules relating to the earnings and profits of 
        foreign investment companies, see section 312(l).

(Added Pub. L. 87-834, Sec. 14(a)(1), Oct. 16, 1962, 76 Stat. 1036; 
amended Pub. L. 94-455, title XIV, Sec. 1402(b)(1)(W), (2), title XIX, 
Secs. 1901(a)(141), (b)(3)(I), (32)(B)(ii), 1906(b)(13)(A), title XX, 
Sec. 2005(a)(5), Oct. 4, 1976, 90 Stat. 1732, 1787, 1793, 1800, 1834, 
1877; Pub. L. 96-223, title IV, Sec. 401(a), Apr. 2, 1980, 94 Stat. 299; 
Pub. L. 97-34, title VIII, Sec. 832(a), Aug. 13, 1981, 95 Stat. 355; 
Pub. L. 98-369, div. A, title I, Sec. 134(a), title X, Sec. 1001(b)(20), 
(e), July 18, 1984, 98 Stat. 668, 1012; Pub. L. 99-514, title XII, 
Sec. 1235(b), Oct. 22, 1986, 100 Stat. 2574; Pub. L. 100-647, title I, 
Secs. 1012(p)(21), 1018(o)(2), Nov. 10, 1988, 102 Stat. 3519, 3585.)

                       References in Text

    The Investment Company Act of 1940, as amended, referred to in 
subsec. (b)(1), is title I of act Aug. 22, 1940, ch. 686, 54 Stat. 789, 
as amended, which is classified generally to subchapter I (Sec. 80a-1 et 
seq.) of chapter 2D of Title 15, Commerce and Trade. Section 2(a)(36) of 
such Act, referred to in subsec. (b)(2), is classified to section 80a-
2(a)(36) of Title 15. For complete classification of this Act to the 
Code, see section 80a-51 of Title 15 and Tables.


                               Amendments

    1988--Subsec. (f). Pub. L. 100-647, Sec. 1012(p)(21), redesignated 
subsec. (g), relating to information with respect to certain foreign 
investment companies, as (f). Former subsec. (f) redesignated (g).
    Subsec. (g). Pub. L. 100-647, Sec. 1018(o)(2), substituted 
``1248(g)(2)'' for ``1248(g)(3)''.
    Pub. L. 100-647, Sec. 1012(p)(21), redesignated former subsec. (f) 
as (g). Former subsec. (g), relating to information with respect to 
certain foreign investment companies, redesignated (f) and former 
subsec. (g), relating to cross reference, redesignated (h).
    Subsec. (h). Pub. L. 100-647, Sec. 1012(p)(21), redesignated subsec. 
(g), relating to cross reference, as (h).
    1986--Subsecs. (f), (g). Pub. L. 99-514 added subsec. (f) and 
redesignated former subsec. (f), relating to information with respect to 
certain foreign investment companies, as (g).
    1984--Subsec. (a)(4). Pub. L. 98-369, Sec. 1001(b)(20), (e), 
substituted ``6 months'' for ``1 year'', applicable to property acquired 
after June 22, 1984, and before Jan. 1, 1988. See Effective Date of 1984 
Amendment note below.
    Subsec. (b)(2). Pub. L. 98-369, Sec. 134(a), in amending par. (2) 
generally, substituted reference to securities, as defined in section 
2(a)(36) of the Investment Company Act of 1940, commodities, or any 
interest, including a futures or forward contract or option, in property 
described in subpars. (A) and (B) for reference to securities within the 
meaning of section 3(a)(1) of the Investment Company Act of 1940, as 
limited by pars. (2) through (10), except par. (6)(C), and pars. (12) 
through (15) of section 3(c) of such Act, and reference to pars. (2) and 
(3) of section 958(a) and par. (4) of section 318(a) for reference to 
section 958(a).
    1981--Subsec. (a)(2)(B). Pub. L. 97-34 designated existing 
provisions as cl. (i) and added cl. (ii).
    1980--Subsecs. (e) to (g). Pub. L. 96-223 repealed the amendment 
made by Pub. L. 94-455, Sec. 2005(a)(5). See 1976 Amendment note below.
    1976--Subsec. (a)(1), (2), (3). Pub. L. 94-455, Sec. 1901(b)(3)(I), 
substituted ``ordinary income'' for ``gain from the sale or exchange of 
property which is not a capital asset''. Sec. 1901(b)(13)(A) struck out 
``or his delegate'' after ``Secretary''.
    Subsec. (a)(4). Pub. L. 94-455, Sec. 1402(b)(2), provided that ``9 
months'' would be changed to ``1 year''.
    Pub. L. 94-455, Sec. 1402(b)(1)(W), provided that ``6 months'' would 
be changed to ``9 months'' for taxable years beginning in 1977.
    Subsecs. (c), (d). Pub. L. 94-455, Sec. 1906(b)(13)(a), struck out 
``or his delegate'' after ``Secretary''.
    Subsecs. (e) to (g). Pub. L. 94-455, Sec. 2005(a)(5), struck out 
subsec. (e) and redesignated subsecs. (f) and (g) as (e) and (f), 
respectively. See Repeals note below.
    Pub. L. 94-455, Secs. 1901(a)(141), (b)(32)(B)(ii), 1906(b)(13)(A), 
struck out ``or his delegate'' in subsecs. (e)(2) and (f), struck out 
``beginning after December 31, 1962'' after ``foreign investment 
company'' in subsec. (f), and substituted ``section 312(j)'' for 
``section 312(l)'' in subsec. (g).


                    Effective Date of 1988 Amendment

    Amendment by Pub. L. 100-647 effective, except as otherwise 
provided, as if included in the provision of the Tax Reform Act of 1986, 
Pub. L. 99-514, to which such amendment relates, see section 1019(a) of 
Pub. L. 100-647, set out as a note under section 1 of this title.


                    Effective Date of 1986 Amendment

    Amendment by Pub. L. 99-514 applicable to taxable years of foreign 
corporations beginning after Dec. 31, 1986, see section 1235(h) of Pub. 
L. 99-514, set out as an Effective Date note under section 1291 of this 
title.


                    Effective Date of 1984 Amendment

    Section 134(b) of Pub. L. 98-369 provided that:
    ``(1) In general.--Except as provided in paragraph (2), the 
amendment made by subsection (a) [amending this section] shall apply to 
sales and exchanges (and distributions) on or after September 29, 1983, 
in taxable years ending on or after such date.
    ``(2) Stock held on september 29, 1983.--In the case of a sale or 
exchange (or distribution) not later than the date which is 1 year after 
the date of the enactment of this Act [July 18, 1984], the amendment 
made by subsection (a) shall not apply with respect to stock held by the 
taxpayer continuously from September 29, 1983, to the date of such sale 
or exchange (or distribution).''
    Amendment by section 1001(b)(20) of Pub. L. 98-369 applicable to 
property acquired after June 22, 1984, and before Jan. 1, 1988, see 
section 1001(e) of Pub. L. 98-369, set out as a note under section 166 
of this title.


                    Effective Date of 1981 Amendment

    Section 832(b) of Pub. L. 97-34 provided that: ``The amendment made 
by subsection (a) [amending this section] shall apply to sales or 
exchanges after the date of the enactment of this Act [Aug. 13, 1981] in 
taxable years ending after such date.''


        Effective Date of 1980 Amendment and Revival of Prior Law

    Amendment by Pub. L. 96-223 (repealing section 2005(a)(5) of Pub. L. 
94-455 and the amendments made thereby, which had amended this section) 
applicable in respect of decedents dying after Dec. 31, 1976, and except 
for certain elections, this title to be applied and administered as if 
those repealed provisions had not been enacted, see section 401(b), (e) 
of Pub. L. 96-223, set out as a note under section 1023 of this title.


                    Effective Date of 1976 Amendment

    Section 1402(b)(1) of Pub. L. 94-455 provided that the amendment 
made by that section is effective with respect to taxable years 
beginning in 1977.
    Section 1402(b)(2) of Pub. L. 94-455 provided that the amendment 
made by that section is effective with respect to taxable years 
beginning after Dec. 31, 1977.
    Amendment by section 1901(a)(141), (b)(3)(I), (32)(B)(ii) of Pub. L. 
94-455 effective for taxable years beginning after Dec. 31, 1976, see 
section 1901(d) of Pub. L. 94-455, set out as a note under section 2 of 
this title.
    Amendment by section 2005(a)(5) of Pub. L. 94-455 applicable in 
respect of decedents dying after Dec. 31, 1976, see section 2005(f)(1) 
of Pub. L. 94-455, set out as an Effective Date note under section 1015 
of this title.


                             Effective Date

    Section 14(c) of Pub. L. 87-834 provided that: ``The amendments made 
by this section [enacting this section and section 1247 and amending 
sections 312, 751, and 1223 of this title] shall apply with respect to 
taxable years beginning after December 31, 1962.''


                                 Repeals

    Pub. L. 94-455, Sec. 2005(a)(5), cited as a credit to this section, 
and the amendments made thereby, were repealed by Pub. L. 96-223, title 
IV, Sec. 401(a), 94 Stat. 299, resulting in the text of this section 
reading as it read prior to enactment of section 2005(a)(5). See 
Effective Date of 1980 Amendment and Revival of Prior Law note above.

                  Section Referred to in Other Sections

    This section is referred to in sections 1, 312, 751, 904, 1223, 
1247, 1248, 1260, 1291, 1298 of this title.
