IRS Chief Counsel Attorney Memorandum advises election under section 952(c) is obsolete


In a recently released Chief Counsel Attorney Memorandum (“CCAM”), the IRS Associate Chief Counsel (International) concluded that the election out of the “same country exception” under section 952(c) is obsolete.

The guidance may have been issued in response to a concern that taxpayers could elect to treat insurance income as subpart F income and therefore avoid treating such income as global intangible low-taxed income (“GILTI”) under recently enacted section 951A.


The arguments made in the CCAM are based on a historical review of the purpose and history of the section 952(c) election in the context of changes in the application of subpart F and the same country exception to insurance companies over the past 35 years. The CCAM divides this history into the “Pre-Same Country Era,” the “Same Country Era,” and the “Post-Same Country Era.”

Pre-1986 (Pre-Same Country Era)

Before the Tax Reform Act of 1986, a controlled foreign corporation (“CFC”) that was an insurance company included in subpart F income insurance income derived from the insurance of U.S. risks (as determined under section 953(a)). An insurance CFC’s investment income, however, was generally excluded from foreign personal holding company income (“FPHCI”), and therefore from subpart F income, under former section 954(c)(4)(B) and (C), which provided a broad active financing exception from subpart F income. Subject to a cap on current earnings and profits (“E&P”), subpart F income could be reduced by current year deficits (the “current year E&P limitation”), accumulated deficits (the “accumulated deficit rule”), and current year deficits of other CFCs within the CFC’s same chain of ownership (the “chain deficit rule”).

1986-1998 (Same Country Era)

In 1986, Congress amended the subpart F rules because of concerns about the use of low-tax jurisdictions to shelter mobile and passive income and the use of losses to shelter income that would otherwise be subject to U.S. tax. Subpart F insurance income was expanded to include all insurance income (underwriting and related investment income) other than amounts that arose from insuring risks in the country where the CFC was created or organized (sometimes referred to as the “same country exception”). At the same time, Congress also repealed the active financing exception to FPHCI.

Additionally, Congress prohibited the use of prior year non-subpart F losses to offset subpart F income, and required the recapture of current year deficits in non-subpart F E&P that limited a subpart F inclusion. Congress restricted the use of deficits to offset subpart F income to “qualified deficits” that arose from the same “qualified activity” (which, in the case of an insurance CFC, meant subpart F insurance income or FPHCI), among other limitations. Thus, deficits from activities that did not generate subpart F income could be used only to create a timing benefit (in the case of the current year E&P limitation) or could not be used at all (in the case of the accumulated deficit rule and the chain deficit rule).

As a result, under post-1986 law, there was a mismatch between same country underwriting income (which was excluded from subpart F insurance income) and its related investment income (which was included in subpart F income as FPHCI). The changes to the deficit rules resulted in the systematic disallowance of underwriting losses of an insurance CFC that were clearly related to subpart F investment income inclusions, so that the U.S. shareholders of an active insurance CFC engaged in same country insurance could be subject to current taxation even after significant underwriting losses. The current year E&P limitation rule provided only temporary timing relief (i.e., as a result of the recapture rule) and required that the losses arise in the same year as the investment income. In addition, the accumulated deficit and chain deficit rules provided no relief because the non-subpart F same country underwriting losses did not meet the definition of a “qualified activity” even though they arose from the same business activity.

Congress enacted the section 952(c) election in 1988 to relieve some of the effects of the post-1986 changes to subpart F. It allows U.S. shareholders of insurance CFCs to elect to treat same country insurance income as subpart F insurance income. The effect is to allow same country underwriting losses to be offset against investment income, at the cost of treating all income from an active insurance business as subpart F income…Read more>>