SECTION 3. NEW RULE: QUALIFIED

U.S. PERSON OWNERSHIP TEST

Treasury and the IRS have considered the comments received in response to T.D. 9218. Treasury and the IRS continue to believe that residents of countries that do not provide a reciprocal exemption to U.S. corporations on their income from the international operation of their ships or aircraft might attempt to use the CFC exception to circumvent the rules of section 883(c)(1) by owning more than 50 percent of the value of a foreign corporation through a U.S. fiscally transparent entity, such as a U.S. partnership. Treasury and the IRS continue to believe that this is contrary to the Congressional intent to ensure that the exclusion provided in section 883(a)(1) and (2) is provided only to foreign corporations that are owned by residents of foreign countries that provide a reciprocal exemption to U.S. corporations. See S. Rep. No. 313, 99 ^th

Cong., 2 ^nd Sess. 340–41 (1986); see also Joint Committee on Taxation, General Explanation of the Tax Reform Act of 1986, at 927–928. In addition, Treasury and the IRS continue to believe this result is also contrary to the Conference report accompanying the legislation that added the CFC exception, which states that: “corporations are not considered residents of countries that exempt U.S. persons unless 50 percent or more of the ultimate individual owners are U.S. shareholders of controlled foreign corporations.” H.R. Conf. Rep. No. 841, 99th Cong., 2d Sess. 598 (1986). However, Treasury and the IRS agree that the income inclusion test, as it was interpreted in T.D. 9218, is overly complex and unnecessary. As a result, based on the comments received and Congressional intent to increase the competitive

ness of U.S. shippers through the elimination of foreign base company shipping income as a type of subpart F income, Treasury and the IRS intend to amend §1.883–3 to replace the income inclusion test with a new ownership based test. Under the new test, a foreign corporation will satisfy the stock ownership test of §1.883–1(c)(2) if it meets a “qualified U.S. person ownership test” and satisfies the substantiation and reporting requirements of paragraphs (c) and (d), respectively, of § 1.883–3.

A foreign corporation shall satisfy the “qualified U.S. person ownership test” if, for more than half the days of the corporation’s taxable year: (i) it is a CFC, and (ii) more than 50 percent of the total value of all the outstanding stock of the CFC is owned (within the meaning of section 958(a), as modified for purposes of applying this notice) by one or more “qualified U.S. persons.”

A “qualified U.S. person” is a U.S. person (as defined in section 7701(a)(30)) that is a U.S. citizen, resident alien, or a domestic corporation. For purposes of applying the “qualified U.S. person ownership test,” the value of the stock in the CFC that is owned (directly or indirectly) through bearer shares shall not be considered in the numerator or denominator of the ownership fraction. In addition, for purposes of applying this test, stock owned by a domestic partnership, domestic trust or domestic estate, shall be treated as owned by its partners, beneficiaries or owners, respectively, applying the rules of section 958(a) as if such domestic entity were a foreign partnership, foreign trust, or foreign estate, respectively.