FS owns 100% of the FT stock. On July 1, 1994, P buys 60% of the FT stock. On December 31, 1994, P buys the remaining 40% of the FT stock and makes a section 338 election for FT. For tax year 1994, FT has earnings and profits of $1,000, including earnings resulting from the deemed sale, and the section 338 election results in $500 of subpart F income.
As a result of the section 338 election, P must include in gross income an amount under section 951(a)(1)(A) (see § 1.951-1(b)(2)). FT’s subpart F income for 1994 is $500. That amount is reduced under section 951(a)(2)(A) for the period from January 1, 1994, through July 1, 1994, during which FT is not a controlled foreign corporation ($500 × 182/365 = $249.32).
Subpart F income as limited by section 951(a)(2)(A) is therefore $250.68. P’s pro rata share of that subpart F income, determined under section 951(a)(2)(A), is 60% × $250.68 = $150.41.
P buys 60% of FT on July 1, 1994, and the remaining 40% on December 31, 1994, making a section 338 election on the second purchase.
For 1994 FT has $1,000 of earnings and profits including the deemed sale, and the section 338 election results in $500 of subpart F income.
Because FT is not a controlled foreign corporation from January 1 to July 1, 1994, the $500 is reduced under section 951(a)(2)(A) by $500 × 182/365 = $249.32, leaving $250.68.
P’s pro rata share of the limited subpart F income under section 951(a)(2)(A) is 60% × $250.68 = $150.41.
