IRS Chief Counsel - Tax consequences of invalid section 953(d) election 

March 11: The IRS publicly released a memorandum* from the IRS Office of Chief Counsel concerning the tax consequences to U.S. shareholders of a controlled foreign corporation that made an invalid section 953(d) election. AM2014-002 (release date March 7, 2014, and dated February 12, 2014)

The Chief Counsel memo [PDF 91 KB] addresses a situation when the controlled foreign corporation (CFC) made an invalid section 953(d) election (invalid, generally, because the CFC would not have qualified to be treated as an insurance company for U.S. domestic tax purposes) and the U.S. shareholder did not file Form 5471. Among the issues was whether the statute of limitations on assessment was still open.

*The memorandum is legal advice, signed by executives in the National Office of the Office of Chief Counsel and issued to IRS personnel who are national program executives and managers. The memo is issued to assist IRS personnel in administering their programs by providing authoritative legal opinions on certain matters, such as industry-wide issues. It is not to be used or cited as precedent.


The taxpayer is a U.S. shareholder of a controlled foreign corporation (CFC).

The CFC “purportedly” made an election under section 953(d) to be treated as a domestic corporation and elected under section 831(b)(2)(A) to pay an alternative tax based only on its taxable investment income.

The taxpayer paid annual amounts, designated as “premiums,” to the CFC in exchange for what “was purported to be insurance coverage” with respect to the taxpayer’s business risks.

The CFC filed annually a Form 1120-PC, U.S. Property and Casualty Insurance Company Income Tax Return, and excluded the premiums it received, from gross income, for U.S. income tax purposes.

The taxpayer deducted the premiums paid to the CFC, and did not include its pro rata share of the CFC’s subpart F income and did not file Form 5471, Information Return of U.S Persons With Respect to Certain Foreign Corporations.

During an examination of the CFC, the IRS concluded that the CFC did not qualify as an insurance company under subchapter L (because it would not qualify if the CFC were a domestic company). The IRS found, thus, that the CFC was not eligible to make an election under section 953(d) and that, as a result, the election was invalid.

The questions presented focused on what would be the tax consequences of an invalid section 953(d) election—and the effect of this invalid election on the statute of limitations for assessment and on the obligations of the U.S. shareholders to file Form 5471.

Chief Counsel findings

The Chief Counsel memo concludes:

  • The CFC’s section 953(d) election was invalid because the CFC would not qualify as an insurance company (under subchapter L) if it were a domestic company.
  • The CFC remained a foreign corporation and was subject to U.S. tax under: (1) section 881 to the extent it had U.S. source fixed or determinable, annual, or periodical income; or (2) section 882, to the extent it has income that is effectively connected with a U.S. trade or business.
  • The statute of limitations on assessment is extended for U.S. shareholders that failed to report information required on Form 5471.
  • The U.S. shareholders’ obligation to file Form 5471 was not satisfied by the CFC’s filing of Form 1120-PC because it was not considered to be a return of the U.S. shareholders and also because the information provided on Form 1120-PC did not substantially comply with the requirements under Form 5471.

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