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What is a Subpart F?

Mary McMahon
Updated May 16, 2024
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Subpart F is a section of the Internal Revenue Code that covers income earned by Controlled Foreign Corporations (CFCs). Under the tax code, earnings from a CFC must be declared on a shareholder's gross income, whether or not those earnings have been distributed at the time that taxes are filed. Shareholders thus pay tax on the earnings. If the earnings have not yet been distributed, when they are, they will not be taxed again, as there are restrictions on taxing previously taxed income.

A CFC is a company with more than 50% of its value controlled by American shareholders. This can include holders of stock in the company, as well as people who own the company directly. A common situation is a foreign subsidiary of an American company. Subpart F allows the United States government to collect taxes on income earned by that company, under the argument that the American owners benefit whether or not that income is disbursed at the time it is earned.

This section of the tax code is designed to prevent situations where people use investments overseas as a form of tax deferral. It, along with other areas of the tax code, is used to collect taxes in a timely fashion. Periodic interest in reforming the tax code as it pertains to foreign earnings leads to a reworking of Subpart F. This makes it important for people with funds invested in CFCs and other foreign investments to consult with a tax attorney to make sure that they are declaring their incomes and filing their taxes properly.

A number of sources of income are covered by Subpart F. One particularly intriguing clause is the section that mandates including amounts paid in bribes and kickbacks on behalf of the company. Scrutinizers of the tax code can find a number of caveats like this one, requiring that people declare and pay taxes on illegal activity. Failure to do so may result in investigation by the Internal Revenue Service, as gangster Al Capone learned to his chagrin.

Subpart F contains a number of sections defining the different types of income covered and how to declare it. Because this information changes periodically, people should make sure that they are working with the most current information when they file their taxes. Forms for the current year should be used and the most recently updated version of the tax code should be consulted if there are questions.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Mary McMahon
By Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a SmartCapitalMind researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

Discussion Comments
By miriam98 — On Aug 04, 2011

@hamje32 - I, too, think that this is a good law; however, I don’t think it fundamentally solves problems of dishonesty.

There are still too many cases of people playing all sorts of shell and parlor games to funnel their money overseas and evade income taxes.

I’m not saying that I’m a great fan of income taxes. However, if we completely closed loopholes for people who are playing the shell games, perhaps tax rates could come down for those of us are honestly trying to follow the rules.

By hamje32 — On Aug 04, 2011

I think that it’s a fair law, although personally I’ve never had to make use of it, to the best of my knowledge anyway. All of my stock market investments have been with companies operating within the United States.

The closest I ever came to invoking any rules about foreign income was the foreign earned income exclusion. I lived in Asia for four years, and all of my income fell subject to the foreign earned income exclusion.

This meant that I didn’t have to pay U.S. taxes on it (since it was earned overseas), however I did still have to file taxes and fill out a form showing that my income was earned overseas. I believe that there is some limit to the exclusion amount; I forget what that limit was, but I never made enough money to worry about it.

By anon156218 — On Feb 26, 2011

very practical and made easy to understand.

Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a...

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