(a) Determination of investments at close of taxable year—(1) In general. Under section 954(g), the increase in qualified investments in foreign base company shipping operations, for purposes of section 954(b)(2) and paragraph (b)(1) of § 1.954-1, of any controlled foreign corporation for any taxable year is, except as provided in paragraph (b) of this section, the amount by which—
(i) The controlled foreign corporation's qualified investments in foreign base company shipping operations at the close of the taxable year, exceed
(ii) Its qualified investments in foreign base company shipping operations at the close of the preceding taxable year.
(2) Preceding taxable year. For purposes of this section, a taxable year which begins before January 1, 1976, may be a preceding taxable year.
(3) Cross-reference. See section 955 (b) and § 1.955A-2 for the definition of the term “qualified investments in foreign base company shipping operations”.
(b) Election to determine investments at close of following taxable year—(1) General rule. In lieu of determining an increase in qualified investments in foreign base company shipping operations for a taxable year in the manner provided in paragraph (a) of this section, a United States shareholder of a controlled foreign corporation may make an election under section 955(b)(3) to determine the increase for the corporation's taxable year by ascertaining the amount by which—
(i) Such corporation's qualified investments in foreign base company shipping operations at the close of the taxable year immediately following such taxable year, exceed
(ii) Its qualified investments in foreign base company shipping operations at the close of the taxable year immediately preceding such following taxable year.
(2) Election with respect to first taxable year. Notwithstanding subparagraph (1) of this paragraph, if an election is made without consent by a United States shareholder under § 1.955A-4 (b)(1) with respect to a controlled foreign corporation, the increase in such controlled foreign corporation's qualified investments in foreign base company shipping operations for the first taxable year to which such election applies shall be the amount by which—
(i) Such corporation's qualified investments in foreign base company shipping operations at the close of the taxable year immediately following such first taxable year, exceed
(ii) Its qualified investments in foreign base company shipping operations at the close of the taxable year immediately preceding such first taxable year.
(3) Manner of making election. For the manner of making an election under section 955(b)(3), and for rules pertaining to the revocation of such an election, see § 1.955A-4.
(4) Coordination with prior law. If a United States shareholder makes an election without consent under § 1.955A-4(b)(1) with respect to a controlled foreign corporation, then such corporation's increase in qualified investments in foreign base company shipping operations for the first taxable year to which such election applies shall be determined by disregarding any change which occurs during such taxable year in the amount of such corporation's investments in stock or obligations of a less developed country shipping company described in § 1.955-5 (b) if both of the following conditions exist:
(i) Such taxable year is the first taxable year of such corporation which begins after December 31, 1975, and
(ii) Such United States shareholder has elected to determine the change in such corporation's qualified investments in less developed countries for its last taxable year beginning before January 1, 1976, under § 1.954-5(b) or § 1.955-3.
(5) Illustrations. The application of this paragraph may be illustrated by the following examples:
(a) Controlled foreign corporation X is a wholly owned subsidiary of domestic corporation M. X uses the calendar year as the taxable year. The amounts of X's qualified investments in foreign base company shipping operations at the close of 1975 through 1979 are as follows:
| Qualified investments at December 31, 1975 | $16,000 |
| Qualified investments at December 31, 1976 | 17,000 |
| Qualified investments at December 31, 1977 | 23,000 |
| Qualified investments at December 31, 1978 | 28,000 |
| Qualified investments at December 31, 1979 | 30,000 |
(b) Assume that M properly files without consent a timely election under § 1.955A-4(b)(1) to determine X's increase for 1976 in qualified investments in foreign base company shipping operations pursuant to this paragraph, and that the election remains in force through 1978. Then X's increases for 1976 through 1978 in qualified investments in foreign base company shipping operations are as follows:
| Increase for 1976 ($23,000 minus $16,000) | $7,000 |
| Increase for 1977 ($28,000 minus $23,000) | 5,000 |
| Increase for 1978 ($30,000 minus $28,000) | 2,000 |
Assume the same facts as in example 1, except that M never files an election under § 1.955A-4(b)(1). X's increases for 1976 through 1978 in qualified investments in foreign base company shipping operations are as follows:
| Increase for 1976 ($17,000 minus $16,000) | $1,000 |
| Increase for 1977 ($23,000 minus $17,000) | 6,000 |
| Increase for 1978 ($28,000 minus $23,000) | 5,000 |
The facts are the same as in example 1, except that X's qualified investments in foreign base company shipping operations include an investment in less developed country shipping companies described in § 1.955-5(b) of $500 on December 31, 1975, and $750 on December 31, 1976. Assume further that M has made an election under section 955(b)(3) (as in effect before the enactment of the Tax Reduction Act of 1975) with respect to X's taxable year 1975. Then X's increase in qualified investments in foreign base company shipping operations for 1976 is $6,750 (i.e., $7,000−$250).
(c) Illustration. The application of this section may be illustrated by the following example:
(a) Controlled foreign corporation X uses the calendar year as the taxable year. On December 31, 1975, X's qualified investments in foreign base company shipping operations (determined as provided in § 1.955A-2(g)) consist of the following amounts:
| Cash | $6,000 |
| Readily marketable securities | 1,000 |
| Stock of related controlled foreign corporations | 4,000 |
| Traffic and other receivables | 14,000 |
| Marine insurance claims receivables | 1,000 |
| Foreign income tax refunds receivable | 1,000 |
| Prepaid shipping expenses and shipping inventories ashore | 1,000 |
| Vessel construction funds | 0 |
| Vessels | 123,000 |
| Vessel plans and construction in progress | 3,000 |
| Containers and chassis | 0 |
| Terminal property and equipment | 2,000 |
| Shipping office (land and building) | 1,000 |
| Vessel spare parts ashore | 1,000 |
| Performance deposits | 2,000 |
| Deferred charges | 2,000 |
| Stock of less developed country shipping company described in § 1-955-5(b) | 10,000 |
| 172,000 |
(b) On December 31, 1976, X's qualified investments in foreign base company shipping operations (determined as provided in § 1.955A-2(g)) consists of the following amounts:
| Cash | $5,000 |
| Readily marketable securities | 2,000 |
| Stock of related controlled foreign corporations | 4,000 |
| Traffic and other receivables | 16,000 |
| Foreign income tax refunds receivable | 3,000 |
| Prepaid shipping expenses and shipping inventories ashore | 2,000 |
| Vessel construction funds | 1,000 |
| Vessels | 117,000 |
| Vessel plans and construction in progress | 12,000 |
| Containers and chassis | 4,000 |
| Terminal property and equipment | 2,000 |
| Shipping office (land and building) | 1,000 |
| Vessel spare parts ashore | 1,000 |
| Performance deposits | 2,000 |
| Deferred charges | 2,000 |
| Stock of less developed country shipping company described in § 1.955-5(b) | 0 |
| 174,000 |
(c) For 1976, X's increase in qualified investments in foreign base company shipping operations is $2,000, which amount is determined as follows:
| Qualified investments at Dec. 31, 1976 | $174,000 |
| Qualified investments at Dec. 31, 1975 | 172,000 |
| Increase for 1976 | 2,000 |
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