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Title 26 — Internal Revenue CodeRelease 119-73

§961 Adjustments to Basis of Stock in Controlled Foreign Corporations and of Other Property

Title 26 › Subtitle Subtitle A— Income Taxes › Chapter 1— NORMAL TAXES AND SURTAXES › Subchapter N— Tax Based on Income From Sources Within or Without the United States › Part III— INCOME FROM SOURCES WITHOUT THE UNITED STATES › Subpart F— Controlled Foreign Corporations › § 961

Last updated Apr 6, 2026|Official source

Summary

When a U.S. shareholder of a controlled foreign corporation has to report the foreign company's income on a U.S. return under section 951(a), the shareholder's basis (cost for tax purposes) in the stock goes up by the amount reported. This keeps that income from being taxed twice. Later, when the foreign company actually pays out that already-taxed money and it is excluded from income under section 959(a), the basis goes back down by the amount excluded. If the excluded payout is bigger than the remaining basis, the extra is taxed as gain from selling property. Similar adjustments apply when the shareholder owns the foreign company indirectly through another foreign company, and special limits apply for shareholders who made a section 962 election. There is also a loss-protection rule: if a U.S. corporation received a dividend from a 10-percent-owned foreign corporation and took the section 245A deduction for it, its basis in that stock is cut by the deduction (but not below zero) when figuring a loss on selling the stock. That rule applies to distributions made after December 31, 2017.

Full Legal Text

Title 26, §961

Internal Revenue Code — Source: USLM XML via OLRC

(a)Under regulations prescribed by the Secretary, the basis of a United States shareholder’s stock in a controlled foreign corporation, and the basis of property of a United States shareholder by reason of which he is considered under section 958(a)(2) as owning stock of a controlled foreign corporation, shall be increased by the amount required to be included in his gross income under section 951(a) with respect to such stock or with respect to such property, as the case may be, but only to the extent to which such amount was included in the gross income of such United States shareholder. In the case of a United States shareholder who has made an election under section 962 for the taxable year, the increase in basis provided by this subsection shall not exceed an amount equal to the amount of tax paid under this chapter with respect to the amounts required to be included in his gross income under section 951(a).
(b)(1)Under regulations prescribed by the Secretary, the adjusted basis of stock or other property with respect to which a United States shareholder or a United States person receives an amount which is excluded from gross income under section 959(a) shall be reduced by the amount so excluded. In the case of a United States shareholder who has made an election under section 962 for any prior taxable year, the reduction in basis provided by this paragraph shall not exceed an amount equal to the amount received which is excluded from gross income under section 959(a) after the application of section 962(d).
(2)To the extent that an amount excluded from gross income under section 959(a) exceeds the adjusted basis of the stock or other property with respect to which it is received, the amount shall be treated as gain from the sale or exchange of property.
(c)Under regulations prescribed by the Secretary, if a United States shareholder is treated under section 958(a)(2) as owning stock in a controlled foreign corporation which is owned by another controlled foreign corporation, then adjustments similar to the adjustments provided by subsections (a) and (b) shall be made to—
(1)the basis of such stock, and
(2)the basis of stock in any other controlled foreign corporation by reason of which the United States shareholder is considered under section 958(a)(2) as owning the stock described in paragraph (1),
(d)If a domestic corporation received a dividend from a specified 10-percent owned foreign corporation (as defined in section 245A) in any taxable year, solely for purposes of determining loss on any disposition of stock of such foreign corporation in such taxable year or any subsequent taxable year, the basis of such domestic corporation in such stock shall be reduced (but not below zero) by the amount of any deduction allowable to such domestic corporation under section 245A with respect to such stock except to the extent such basis was reduced under section 1059 by reason of a dividend for which such a deduction was allowable.

Legislative History

Notes & Related Subsidiaries

Editorial Notes

Amendments

2017—Subsec. (d). Pub. L. 115–97 added subsec. (d). 2005—Subsec. (c). Pub. L. 109–135 amended heading and text of subsec. (c) generally. Prior to amendment, text read as follows: “Under

Regulations

prescribed by the Secretary, if a United States shareholder is treated under section 958(a)(2) as owning any stock in a controlled foreign corporation which is actually owned by another controlled foreign corporation, adjustments similar to the adjustments provided by subsections (a) and (b) shall be made to the basis of such stock in the hands of such other controlled foreign corporation, but only for the purposes of determining the amount included under section 951 in the gross income of such United States shareholder (or any other United States shareholder who acquires from any person any portion of the interest of such United States shareholder by reason of which such shareholder was treated as owning such stock, but only to the extent of such portion, and subject to such proof of identity of such interest as the Secretary may prescribe by

Regulations

).” 1997—Subsec. (c). Pub. L. 105–34 added subsec. (c). 1976—Subsecs. (a), (b)(1). Pub. L. 94–455 struck out “or his delegate” after “Secretary”.

Statutory Notes and Related Subsidiaries

Effective Date

of 2017 Amendment Pub. L. 115–97, title I, § 14102(b)(2), Dec. 22, 2017, 131 Stat. 2192, provided that: “The

Amendments

made by this subsection [amending this section] shall apply to distributions made after December 31, 2017.”

Effective Date

of 2005 Amendment Pub. L. 109–135, title IV, § 409(d), Dec. 21, 2005, 119 Stat. 2636, provided that: “The

Amendments

made by this section [amending this section and section 6038B, 6411, and 6601 of this title] shall take effect as if included in the provisions of the Taxpayer Relief Act of 1997 [Pub. L. 105–34] to which they relate.”

Effective Date

of 1997 Amendment Pub. L. 105–34, title XI, § 1112(b)(2), Aug. 5, 1997, 111 Stat. 969, provided that: “The amendment made by paragraph (1) [amending this section] shall apply for purposes of determining inclusions for taxable years of United States shareholders beginning after December 31, 1997.” Dual Resident CompaniesBasis adjustments of this section not applicable in certain circumstances involving dual resident companies, see section 6126 of Pub. L. 100–647, set out as a note under section 1502 of this title.

Reference

Citations & Metadata

Citation

26 U.S.C. § 961

Title 26 — Internal Revenue Code

Last Updated

Apr 6, 2026

Release point: 119-73