(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:

(c) Illustration. The application of this section may be illustrated by the following example:

[T.D. 7894, 48 FR 22528, May 19, 1983]