67 T.C. 736">*736 Respondent determined deficiencies in petitioner's Federal income tax as follows: 67 T.C. 736">*737

Other issues having been settled by the parties or severed for separate trial, ¹ those remaining for decision are as follows:

(1) Whether petitioner effectively elected for its taxable years ended October1977 U.S. Tax Ct. LEXIS 159">*163 31 of 1967 through 1970, a method of accelerated depreciation for computing the earnings and profits of three of its controlled foreign subsidiaries when it filed for its taxable years ended in 1964 through 1967 its "written statement" and related information with the District Director, Internal Revenue Service, rather than with the Director of International Operations, Internal Revenue Service, Washington, D.C. 20225, as directed by section 1.964-1(c)(3)(ii), Income Tax Regs., for those taxable periods.

(2) Whether petitioner has satisfied for its taxable year ended October 31, 1968, the "minimum overall tax burden" test prescribed by section 1.963-4(a), Income Tax Regs., so as to be entitled to exclude from gross income for such year the subpart F income of Hewlett-Packard S.A., Geneva, Switzerland, a controlled foreign corporation.

1977 U.S. Tax Ct. LEXIS 159">*164 FINDINGS OF FACT

Hewlett-Packard Co. (hereinafter petitioner), a California corporation, had its principal office in Palo Alto, Calif., at the time its petition herein was filed. For its taxable years ended October 31 of 1964, 1965, 1966, and 1967, petitioner filed its Federal income tax returns with the District Director of Internal Revenue, San Francisco, Calif. For its taxable years ended October 31 of 1968, 1969, and 1970, petitioner filed Federal income tax returns with the Internal Revenue Service Center, Ogden, Utah.

During the period from sometime prior to its taxable year ended in 1964 through its taxable year ended in 1970, petitioner owned 100 percent of the stock of Hewlett-Packard S.A., Geneva, Switzerland (hereinafter HPSA), which, in turn, owned 100 percent of the stock of two West German companies, Hewlett-Packard GmbH (hereinafter GmbH) and Hewlett-Packard VmbH (hereinafter VmbH). By reason of this ownership, HPSA, GmbH, and VmbH were controlled foreign corporations within the meaning of section 957(a). ² During the same period referred to above, HPSA, together with its several second-tier subsidiaries1977 U.S. Tax Ct. LEXIS 159">*165 including GmbH and VmbH, comprised a "chain of controlled foreign corporations," as defined in section 963(c)(2). Petitioner's taxable year ended October 31, 1964, was its first taxable year beginning after December 31, 1962, during which HPSA, GmbH, and VmbH were controlled foreign corporations or for which they were included in a chain election under section 963(c)(2).

Commencing with the taxable year ended October 31, 1964, and continuing through the taxable year ended October 31, 1970, the earnings and profits of HPSA, GmbH, and VmbH reflected adjustments for accelerated depreciation.

For each of its taxable years ended October 31, 1964, through October 31, 1970, petitioner filed Treasury Forms 2952 (Information1977 U.S. Tax Ct. LEXIS 159">*166 Return with Respect to Controlled Foreign Corporations) with its Federal income tax return on behalf of HPSA, GmbH, and VmbH. Each such Form 2952 with respect to GmbH and VmbH stated that HPSA owned 100 percent of the respective corporation's stock. Each such Form 2952 with respect to HPSA stated that petitioner owned 100 percent of that subsidiary's stock. For each of its taxable years ended October 31 of 1965 through 1970, petitioner also filed Forms 3646 (Income From Controlled Foreign Corporation) with its Federal income tax return on behalf of HPSA, GmbH, and VmbH. Form 3646 was not in existence at the time petitioner filed its tax return for its taxable year ended October 31, 1964. 67 T.C. 736">*739 Attached to and filed with each of petitioner's Federal income tax returns for its taxable years ended October 31, 1964, through October 31, 1970, was a statement of "Investments in Affiliates," which indicated that in each of these years petitioner owned 100 percent of HPSA, which, in turn, owned 100 percent of both GmbH and VmbH.

Attached to and made a part of petitioner's Federal income tax return for its taxable year ended October 31, 1964, timely filed on April 15, 1965, with the1977 U.S. Tax Ct. LEXIS 159">*167 District Director of Internal Revenue, San Francisco, Calif., was a statement entitled "Statements of Consent to Elections under IRS Sections." Paragraphs C and D of that statement are as follows:

D. We also elect that under the provisions of Code Section 964 the earnings and profits and the deficits in earnings of the foreign group (Part C) for the year ended October 31, 1964 were determined according to the rules substantially similar to those applicable to domestic corporations.

Also attached to and made a part of that return was a schedule containing a page 3 entitled "Information Required of U.S. Shareholders with income from Controlled Foreign Corporations -- Announcement 64-122 -- Year ended 10/31/64." Immediately above the figures on this page of the schedule appears the caption "Recast of Depr. 1964 Purchases from S.L. to 200% D.B. and Freight and Duty." With respect to HPSA, GmbH, and VmbH, the schedule identifies the amount of straight line depreciation per books of each and the amount of depreciation 1977 U.S. Tax Ct. LEXIS 159">*168 recast to a 200-percent declining balance. The schedule further shows that petitioner owned, directly or indirectly, 100 percent of the stock of HPSA, GmbH, and VmbH.

Attached to and made a part of petitioner's Federal income tax returns for its taxable years ended October 31, 1965, through October 31, 1967, each return timely filed with the District Director of Internal Revenue, San Francisco, Calif., were statements entitled "Statements of Consent to Elections under I.R.S. Sections." Paragraph D of the statement attached to the 1965 return is as follows:

We also elect that under the provisions of [Code] section 964 the earnings and profits and the deficits in earnings of the foreign group * * * for the 67 T.C. 736">*740 year ended October 31, 1965 were determined according to the rules substantially similar to those applicable to domestic corporations; i.e.,

1. Accounting methods reflect the provisions of section 446 and the regulations thereunder.

2. Inventories in accordance with the provisions of section 471 and 472 and the regulations thereunder.

3. Depreciation computed in accordance with section 167 and the regulations thereunder.

The statements attached to the returns for the1977 U.S. Tax Ct. LEXIS 159">*169 taxable years ended in 1966 and 1967 contain identical language with the exception of the applicable dates.

With respect to the years ended October 31, 1964, through October 31, 1967, petitioner's tax manager, who was responsible for filing its income tax returns, knew that a written statement was required in order to elect to adopt an accelerated depreciation accounting method for its controlled foreign corporations. However, for those years, he was not aware of the specific provisions of the Treasury regulations regarding such statements and was not aware that such statements were supposed to be filed with the Director of International Operations, Internal Revenue Service (sometimes hereinafter referred to as OIO), separate from its income tax returns. Prior to its taxable year ended October 31, 1964, petitioner's tax manager had never filed any forms with OIO on behalf of petitioner's foreign subsidiaries.

In 1968, during the course of an examination of petitioner's returns for the years ended October 31 of 1964 through 1967, an agent brought to the attention of petitioner's tax manager that these required statements should be more elaborate and detailed and should have been 1977 U.S. Tax Ct. LEXIS 159">*170 filed with OIO in Washington, D.C. With respect to each of its taxable years ended October 31, 1968, through October 31, 1970, petitioner timely filed with OIO, Washington, D.C., a statement in letter form with a subject heading "Statement of Consent to Elections Under I.R.S. Sections." Paragraph B of the statement filed in 1969 for the October 31, 1968, taxable year provides as follows:

We also elect that under the provisions of Code Section 964, the earnings and profits (or deficit in earnings and profits) of the foreign group * * * for the year ended October 31, 1968 were computed substantially as if such corporations were domestic corporations, i.e. [:]

1. Accounting methods reflect the provisions of Section 446 and the regulations thereunder; i.e., taxable income has been computed under the 67 T.C. 736">*741 accrual method of accounting. Adjustments for foreign accounting practices have been made to conform to U.S. accounting practices.

2. Inventories in accordance with the provisions of Section 471 and 472 and the regulations thereunder; i.e., inventories are valued at cost or market, whichever is lower, and freight and customs duty have been removed from its value.

3. Depreciation1977 U.S. Tax Ct. LEXIS 159">*171 computed in accordance with Section 167 and the regulations thereunder; i.e., new assets with useful life of three or more years, the sum of the years digits method, used assets 150% declining balance method or straight line method. Useful lives and methods are similar to those used by the U.S. parent shareholder.

The statements filed in 1970 and 1971 for the taxable years ended October 31 of 1969 and 1970, contain identical language with the exception of the applicable dates. Each of these statements also indicates that petitioner owned, directly or indirectly, 100 percent of the stock of HPSA, GmbH, and VmbH.

In its Federal income tax returns with respect to its taxable years ended October 31, 1967, through October 31, 1970, petitioner claimed accelerated depreciation deductions in computing the earnings and profits of HPSA, GmbH, and VmbH, which exceeded straight-line depreciation computations by the following amounts:

In his statutory notice of deficiency, respondent disallowed the use of1977 U.S. Tax Ct. LEXIS 159">*172 accelerated depreciation in computing the earnings and profits of HPSA, GmbH, and VmbH and decreased petitioner's claimed deductions by the above amounts.

For its taxable year ended October 31, 1968, petitioner elected to exclude HPSA's subpart F income from its own income by reason of the receipt of a "minimum distribution" with respect to the consolidated earnings and profits of its chain of controlled foreign corporations, as provided in section 963(a)(2). For purposes of computing the percentage of the earnings and profits of petitioner's chain of controlled foreign 67 T.C. 736">*742 corporations required to be distributed as the minimum distribution in accordance with section 963(b), the "effective foreign tax rate," as defined in section 963(d)(2), equaled or exceeded 47.38 percent. ³

1977 U.S. Tax Ct. LEXIS 159">*173 For petitioner's taxable year ended October 31, 1968, 83.3 percent of the days of that period were within the "surcharge period" referred to in section 963(b). The minimum distribution required under section 963(b)(1) for this portion within the surcharge period was zero percent of the earnings and profits of petitioner's chain of controlled foreign corporations because the effective foreign tax rate exceeded 47 percent.

For that portion of petitioner's taxable year ended in 1968 which was not within the surcharge period, the minimum distribution required under section 963(b)(3) was zero percent of the earnings and profits of petitioner's chain of controlled foreign corporations because the effective foreign tax rate exceeded 43 percent. Thus, for petitioner's entire taxable year ended October 31, 1968, the applicable minimum distribution requirement of section 963(a)(2), computed in accordance with section 963(b) but without reference to the "minimum overall tax burden" test prescribed by section 1.963-4(a), Income Tax Regs., was zero.

In the statutory notice of deficiency for petitioner's taxable year ended October 31, 1968, respondent determined that petitioner was not entitled1977 U.S. Tax Ct. LEXIS 159">*174 to exclude from its gross income HPSA's subpart F income because petitioner did not satisfy the "minimum overall tax burden" test provided for by section 1.963-4(a), Income Tax Regs.

For the purpose of section 1.963-4(a)(1), Income Tax Regs., the "overall United States and foreign income tax," as defined in regulations section 1.963-4(a)(2)(ii), of petitioner's chain of controlled foreign corporations for its taxable year ended October 31, 1968, was $ 3,172,537. The consolidated (pretax) earnings and profits of petitioner's chain of controlled foreign corporations for its taxable year ended October 31, 1968, as referred to in section 1.963-4(a)(1)(i), Income Tax Regs., was $ 7,002,953. ⁴

1977 U.S. Tax Ct. LEXIS 159">*175 67 T.C. 736">*743 OPINION

We hold that petitioner made valid elections to make adjustments for accelerated depreciation in computing the earnings and profits of its foreign subsidiaries for the taxable years ended October 31 of 1964 through 1970. As we view the evidence, petitioner effectively committed itself to employ such method beginning with its return for the taxable year ended October 31, 1964, and continuing through the year ended October 31, 1970, and adequately informed the Internal Revenue Service that it elected to do so. We base our holding on an analysis of the general scheme for taxing the income of controlled foreign corporations, the provisions of the statute, the applicable regulations concerning the adoption and change of accounting methods, and the peculiar facts of this case.

The key operative provision of subpart F of Part III, subchapter N, chapter 1, of the Code is section 951, which requires the United States shareholders of a controlled foreign corporation (defined in section 957(a)) to include in their gross income their pro rata shares of such corporation's subpart F income (defined in section 952(a)) for any taxable1977 U.S. Tax Ct. LEXIS 159">*176 year beginning after December 31, 1962. Section 952(c) limits, in general, a controlled foreign corporation's subpart F income for a taxable year to such corporation's earnings and profits for the taxable year. Therefore, in computing the controlled foreign corporation's subpart F income for any taxable year, it is necessary to determine the foreign corporation's earnings and profits for that year. Section 964(a) provides that:

For purposes of this subpart, the earnings and profits of any foreign corporation, and the deficit in earnings and profits of any foreign corporation, for any taxable year shall be determined according to rules 67 T.C. 736">*744 substantially similar to those applicable to domestic corporations, under regulations prescribed by the Secretary or his delegate.

The regulations under section 964(a) contemplate that the accounting methods employed by controlled foreign corporations will substantially conform with United States accounting practices for purposes of determining such corporations' earnings and profits. In order to effectuate such conformity, the regulations provide for various accounting and tax adjustments through the allowance of elections by the controlling1977 U.S. Tax Ct. LEXIS 159">*177 domestic shareholders. One of the required adjustments, the one with which we are here concerned, is that depreciation must be computed in accordance with section 167 and the regulations thereunder. Sec. 1.964-1(c)(1)(iii), Income Tax Regs. In general, the controlling domestic shareholders are permitted to make any election which is allowed for domestic corporations. Sec. 1.964-1(c)(1)(iv), Income Tax Regs.

Section 1.964-1(c)(2), Income Tax Regs., provides, with respect to a controlled foreign corporation, an exception to the procedural requirements which domestic corporations must satisfy for an election to adopt or change a method of accounting. That subparagraph provides in pertinent part as follows:

(2) Adoption of method. For the first taxable year beginning after December 31, 1962, in which the foreign corporation is a controlled foreign corporation (within the meaning of section 957) or for which it is included in a chain or group under section 963(c)(2)(B) or (3)(B) * * * there may be adopted or made by such corporation or on its behalf any method of accounting or election allowable under this section notwithstanding that, in previous years, its earnings and profits1977 U.S. Tax Ct. LEXIS 159">*178 were computed, or its books or financial statements prepared, on a different basis and notwithstanding that such election is required by the Code or regulations to be made in a prior taxable year. * * *

This transitional rule allows a qualifying foreign corporation to change its method of accounting in the first taxable year beginning after December 31, 1962 (hereinafter referred to as first post-1962 taxable year), without first securing the consent of the Commissioner. In other words, the foreign corporation is permitted to start with a clean slate in the first year in which it is covered by these provisions. Thus, any method of depreciation computation permissible under section 167 can be adopted for both new and used assets in the first 67 T.C. 736">*745 post-1962 taxable year, regardless of the method used theretofore for previously acquired assets. ⁵

1977 U.S. Tax Ct. LEXIS 159">*179 Normally, to elect to use one of the accelerated methods of depreciation specified in section 167(b)(2), (3), and (4) for a qualifying asset or group of assets, all a taxpayer has to do is compute the depreciation under the selected method for the taxable year "in which the property may first be depreciated by him." Sec. 1.167(c)-1(c), Income Tax Regs. However, section 1.964-1(c)(3), ⁶ Income Tax Regs., contemplates two added steps in making a depreciation accounting method election on behalf of a controlled foreign corporation in its first post-1962 taxable year. The first step, and the one on which this issue turns, is that the controlling United States shareholders should file a written statement, jointly executed by those shareholders, with the Director of International Operations, Internal Revenue Service, Washington, D.C. 20225, ⁷ within 67 T.C. 736">*746 180 days of the close of the taxable year of the foreign corporation with respect to which the election is made or the adoption or change of method effected, or before May 1, 1965, whichever is later. This written statement should set forth the name and country of organization of the foreign corporation, the names, addresses, 1977 U.S. Tax Ct. LEXIS 159">*180 and stock interests of the controlling United States shareholders, the nature of the action taken, the names and addresses of all other United States shareholders notified of the election or adoption or change of method, and such other information as the Commissioner may by forms require. Sec. 1.964-1(c)(3)(ii), Income Tax Regs.

The second step is that, before filing this written statement, the controlling United States shareholders should give written notice in a specified form of the election made or the adoption or change of method effected to all other persons known by them to be United States shareholders owning (within the meaning of section 958(a)) stock in the foreign corporation. Sec. 1.964-1(c)(3)(iii), Income Tax Regs. Since petitioner directly or indirectly owned all of the stock of the three foreign corporations here involved, this second step is not applicable in this case.

After the first post-1962 taxable year, an election on behalf of the controlled foreign corporation to adopt a method of depreciation accounting different from the one adopted for those assets (both new and used) in that year requires the consent of the Commissioner1977 U.S. Tax Ct. LEXIS 159">*182 (see section 1.964-1(c)(3)(i)(a), Income Tax Regs.), plus the filing of the written statement described in section 1.964-1(c)(3)(i)(b) and (ii), Income Tax Regs., and the notification of other shareholders under regulations section 1.964-1(c)(3)(i)(c) and (iii).

In the instant case, subpart F was first applicable to petitioner for its taxable year ended October 31, 1964. Prior to that taxable year, petitioner had depreciated the assets of HPSA, GmbH, and VmbH on its books on a straight line basis. In its first post-1962 taxable year, petitioner changed from straight line depreciation to the double declining balance method of depreciation with respect to those corporations' depreciable assets on hand at the beginning of the taxable 67 T.C. 736">*747 year as well as to assets acquired by them during the taxable year and used the double declining balance method in computing the earnings and profits of those controlled foreign corporations. It is stipulated that commencing with the taxable year ended October 31, 1964, and continuing through the taxable year ended October 31, 1970, the earnings and profits of all three corporations reflected adjustments for accelerated depreciation.

Respondent1977 U.S. Tax Ct. LEXIS 159">*183 contends that petitioner's election for the taxable year ended October 31, 1964, was invalid on the grounds that (1) the "written statement" filed by petitioner was not legally sufficient under section 1.964-1(c), Income Tax Regs., because it did not state in adequate detail what election the taxpayer was making, and (2) the "written statement" required by regulations section 1.964-1(c)(3)(ii) was filed with the District Director of Internal Revenue, San Francisco, Calif., rather than with the OIO in Washington, D.C. Respondent contends that as a result of petitioner's invalid election for the taxable year ended October 31, 1964, petitioner is not entitled to use the accelerated depreciation method of accounting for any assets, new or used, for the taxable years at issue herein. We disagree.

As noted above, petitioner was entitled, for purposes of choosing a method of depreciation, to treat previously acquired assets as newly acquired assets in the taxable year ended October 31, 1964. ⁸ To elect, on behalf of a foreign corporation, to use the accelerated depreciation method for those assets, both new and old, all petitioner had to do was compute depreciation under the selected1977 U.S. Tax Ct. LEXIS 159">*184 method for this first post-1962 taxable year and fulfill the written statement directions of section 1.964-1(c)(3)(ii), Income Tax Regs.⁹ Petitioner's return for the taxable year ended October 31, 1964, reflects that petitioner computed depreciation according to the double declining balance method. Thus, whether 67 T.C. 736">*748 petitioner validly elected to use the double declining balance method of depreciation for its first post-1962 taxable year depends on whether it complied sufficiently with the "written statement" directions of section 1.964-1(c)(3)(ii), Income Tax Regs.

1977 U.S. Tax Ct. LEXIS 159">*185 It is true that petitioner did not literally comply with the "written statement" portions of the election provisions of section 1.964-1(c)(3), Income Tax Regs. Petitioner filed nothing with OIO, Washington, D.C., for its taxable year ended October 31, 1964. Rather, it attached a "written statement" to, and included other pertinent information elsewhere in, its income tax return for that year which it filed with the District Director of Internal Revenue, San Francisco, Calif.

However, literal compliance with the procedural directions in Treasury regulations on making elections, such as the "written statement" and place-of-filing provisions with which we are here concerned, is not always required. Repeatedly this Court has held elections effective where the taxpayer complied with the essential requirements of a regulation even though the taxpayer failed to comply with certain procedural directions therein. Columbia Iron & Metal Co., 61 T.C. 5">61 T.C. 5, 61 T.C. 5">8-10 (1973) (copy of corporate minutes regarding a charitable contribution, filed subsequent to filing of return); Alfred N. Hoffman, 47 T.C. 218">47 T.C. 218, 47 T.C. 218">236-237 (1966), affd. per curiam1977 U.S. Tax Ct. LEXIS 159">*186 391 F.2d 930">391 F.2d 930 (5th Cir. 1968) (imperfect revocation of a subchapter S election); Fred J. Sperapani, 42 T.C. 308">42 T.C. 308, 42 T.C. 308">330-333 (1964) (failure to follow procedural details in election of a proprietorship to be taxed as a corporation); John P. Reaver, 42 T.C. 72">42 T.C. 72, 42 T.C. 72">80-83 (1964) (election of installment reporting in an amended, rather than original, return); Georgie S. Cary, 41 T.C. 214">41 T.C. 214 (1963) (information required, but furnished after return was filed, for election to treat a stock redemption as a dividend or an exchange). Although there exists no litmus test for determining whether literal compliance with a procedural regulation is called for, this Court in Octavio J. Valdes, 60 T.C. 910">60 T.C. 910, 60 T.C. 910">913 (1973), enumerated as follows certain factors which should be considered: ¹⁰

1977 U.S. Tax Ct. LEXIS 159">*187 67 T.C. 736">*749 In ascertaining whether a particular provision of a regulation stating how an election is to be made must be literally complied with, it is necessary to examine its purpose, its relationship to other provisions, the terms of the underlying statute, and the consequences of failure to comply with the provision in question. * * *

As to the legal sufficiency of petitioner's "written statement" filed with its income tax return for the taxable year ended October 31, 1964, quoted in pertinent part in our Findings, petitioner elected in this statement to determine the earnings and profits and the deficits in earnings of the foreign group according to the rules "substantially similar" to those applicable to domestic corporations. See sec. 1.964-1(a), Income Tax Regs. This statement standing alone was insufficient to notify respondent that an election to use accelerated depreciation was made or that petitioner was the sole shareholder of those foreign corporations on behalf of which the election was made. However, this statement, coupled with a schedule attached to the 1964 return, contains all the "written statement" information specified in section 1.964-1(c)(3), Income Tax 1977 U.S. Tax Ct. LEXIS 159">*188 Regs., quoted in part in footnote 6 above.

Page 3 of the schedule attached to the return for the October 31, 1964, taxable year is captioned "Information Required of U.S. Shareholders with income from Controlled Foreign Corporations -- Announcement 64-122 -- Year ended 10/31/64," and it lists the foreign corporations for which the section 964 election was made. Included in the information provided in that schedule are the name and country of organization of HPSA, GmbH, and VmbH, and the stock interest (100 percent) of petitioner in each of those controlled foreign corporations. ¹¹ The schedule prescribes the nature of the action taken as "Recast of Depr. 1964 Purchases from S.L. to 200% D.B. and Freight and Duty." From these entries in the 1964 return, it is clear (1) that petitioner was the sole United States shareholder of HPSA, GmbH, and VmbH, (2) that petitioner treated all assets of the controlled foreign 67 T.C. 736">*750 corporations as newly acquired in 1964, and (3) that petitioner elected for its first post-1962 taxable year to adopt the double declining balance method of depreciation. The return was filed within the time limit set for filing the written statement (i.e., "within1977 U.S. Tax Ct. LEXIS 159">*189 180 days after the close of the taxable year of the foreign corporation with respect to which the election is made * * * or before May 1, 1965, whichever is later"). Sec. 1.964-1(c)(3)(ii), Income Tax Regs.

We think the statement and material contained in the schedule referred to above, though not contained in a single document, substantially complied with the applicable regulation and thus were legally sufficient to constitute an election by petitioner. Petitioner obtained no advantage and caused respondent to suffer no inconvenience by failing to consolidate all the written statement data into a single document. Petitioner unequivocally committed itself to the double declining balance method of computing depreciation. If the shoe were on the other foot, respondent's position that petitioner1977 U.S. Tax Ct. LEXIS 159">*190 had made an election not changeable without permission, sec. 1.964-1(c)(3)(i)(a), Income Tax Regs., would be unassailable.

We also think that, in view of the regulatory scheme, the consequences of imprecise compliance, and the peculiar facts of this case, literal compliance as to the place-of-filing direction was not necessary, and petitioner's filing of the statement and schedule with the District Director of Internal Revenue substantially complied with the applicable regulation. See 60 T.C. 910">Octavio J. Valdes, supra at 913-914. The purpose of having United States shareholders file a written statement with the OIO is reflected by section 1.964-1(c), Income Tax Regs., viewed in its entirety. Immediately following the recitation of the written statement and shareholder notification directions of subparagraph (3) of that regulation, section 1.964-1(c)(4), ¹² Income Tax Regs., explains the effect which 67 T.C. 736">*751 the controlling domestic shareholders' election on behalf of a controlled foreign corporation will have on certain United States shareholders. The stated purpose of regulations section 1.964-1(c)(4) is to require that the controlling shareholders' election1977 U.S. Tax Ct. LEXIS 159">*191 or other action with respect to the computation of the controlled foreign corporation's earnings and profits be consistently reflected to the extent that it bears upon the tax liability of those United States shareholders who received actual notice of the election (or who have failed to provide respondent with the information necessary for their notification).

1977 U.S. Tax Ct. LEXIS 159">*192 To the extent that the controlling United States shareholders are aware of other United States shareholders, respondent places the burden of notification upon the controlling shareholders. Sec. 1.964-1(c)(3)(iii), Income Tax Regs. But in order to assure notification to those other shareholders of whom the controlling shareholders are unaware, section 1.964-1(c)(3)(ii), Income Tax Regs., requires the controlling shareholders to file the written statement (which is to include a list of the shareholders notified of the election) with the OIO. Then, by comparing the names and addresses of the shareholders listed on the written statement to the shareholder list prepared from information on the Forms 959 required also to be filed with the OIO pursuant to section 6046 and the regulations thereunder, ¹³ the OIO is able to determine who the unnotified shareholders are and to provide them with exactly the same information as the controlling shareholders would have provided under section 1.964-1(c)(3)(iii), Income Tax Regs., had they been aware of such 67 T.C. 736">*752 shareholders. Thus, the purpose of filing the written statement with the OIO becomes evident -- to enable that office to give 1977 U.S. Tax Ct. LEXIS 159">*193 notice of the action taken to persons whose status as United States shareholders is established by the OIO's records but is unknown to the controlling United States shareholders.

In the instant case, during the taxable years ended October 31, 1964, through October 31, 1970, petitioner owned, directly or indirectly, 100 percent of the stock of HPSA, GmbH, and VmbH. There were no other shareholders of these controlled foreign corporations to be notified of petitioner's election. 1977 U.S. Tax Ct. LEXIS 159">*194 The failure to file the written statement with the proper office did not, under these circumstances, cause any prejudice to either party or to the essential purpose of section 1.964-1(c)(3)(ii) of the regulations. See Octavio J. Valdes, 60 T.C. 910">60 T.C. 913.

The responsibility of the Director of International Operations, in the context of this regulatory provision, moreover, is essentially a ministerial or clerical one, and his receipt of the written statements involves no audit functions. ¹⁴ Jurisdiction to audit a return filed with the proper District Director by a United States shareholder of a foreign corporation which has subpart F income remains lodged with that District Director. I.R. Manual 1118.4(1); compare I.R. Manual 1113.56, 1113.562, and 1113.563. Therefore, where the controlling shareholders fail to comply with the notice and written statement requirements, the audit function is nonetheless safeguarded by the controlling shareholders' required compliance with the existing statutory rules and regulations which attend such election.

1977 U.S. Tax Ct. LEXIS 159">*195 67 T.C. 736">*753 Thus, we think that petitioner, having validly elected to use double declining balance depreciation for its first post-1962 taxable year for newly acquired assets (as well as for the assets treated as newly acquired), was bound in subsequent years to that method for those assets, unless and until it received the consent of the Commissioner to change that method. For the reasons discussed above with respect to its taxable year ended October 31, 1964, we think that petitioner also substantially complied with the regulations in electing to use a method of accelerated depreciation for those assets newly acquired in each of its taxable years ended October 31 of 1965, 1966, and 1967. Therefore, the earnings and profits for 1967 of the three foreign subsidiaries should reflect the methods of depreciation elected for assets acquired in each of the taxable years ended October 31 of 1964, 1965, 1966, and 1967. And, finally, since the "written statement" directions of the regulations were fully complied with for the taxable years ended October 31 of 1968, 1969, and 1970, the sum of the years-digits method of accelerated depreciation for assets placed in service during those years1977 U.S. Tax Ct. LEXIS 159">*196 may be used in computing the foreign subsidiaries' earnings and profits. ¹⁵

In concluding that petitioner's failure to file a written statement with the OIO did not nullify its accelerated depreciation election, we do not purport to lay down any general rule which would undermine the regulatory direction that such statements be filed with that office. We confine our holding to the facts of this case. Petitioner's failure to file a written statement literally complying with the directions of the regulations was a mistake, but that mistake was not "to any degree attributable to any willful misconduct" by its officers or employees. Edward F. Dixon, 60 T.C. 802">60 T.C. 802, 60 T.C. 802">805 (1973).1977 U.S. Tax Ct. LEXIS 159">*197 Petitioner had never filed any forms with the OIO on behalf of its foreign subsidiaries. Although its tax manager knew a written statement was to be filed, he was not aware that such statement was to be filed with the OIO.

Indeed, the regulations requiring the written statement to be filed with the OIO became final on October 27, 1964, only 4 67 T.C. 736">*754 days before the end of petitioner's first taxable year for which an election was to be made. T.D. 6764, 1964-2 C.B. 260, 265. Form 3646, requiring certain information from controlled corporations, was not in existence when petitioner filed its return for the taxable year ended October 31, 1964. Failure to comply with all the directions of the regulations caused no prejudice to the Internal Revenue Service, and since petitioner owned, directly or indirectly, all the foreign subsidiaries' stock, literal compliance would not have served any useful purpose. As soon as petitioner's tax manager learned during 1968 that written statements were to be filed with the OIO, he thereafter filed them with that office as directed by the regulations. Therefore, we think petitioner made a good-faith effort1977 U.S. Tax Ct. LEXIS 159">*198 to comply with the applicable regulations. See Bell Fibre Products Corp., 65 T.C. 753">65 T.C. 753, 65 T.C. 753">764-765 (1976).

Finally, the regulations do not contemplate that they will be given the harsh literal reading here advocated by respondent. The failure of the controlling United States shareholder to provide notice of an election to a person required to be notified under the regulations does not invalidate the election made "if it is established to the satisfaction of the Commissioner that reasonable cause existed for such failure." Sec. 1.964-1(c)(3)(iii), Income Tax Regs. Further, if failure to take any action within the prescribed time period required in making an election is "shown to the satisfaction of the Commissioner to be due to inadvertence or a reasonable cause," the Commissioner may specify a later date for compliance. Sec. 1.964-1(c)(6), Income Tax Regs. Thus, mere inadvertence is sufficient to excuse a taxpayer's failure to timely take all the steps required for a valid election.

Since we have concluded, in the light of the facts of this case, that petitioner's returns and accompanying statements and schedule, filed with the District Director of 1977 U.S. Tax Ct. LEXIS 159">*199 Internal Revenue, substantially complied with the directions of the regulations, these "escape" provisions are technically inapplicable. However, they serve to demonstrate that reason is to reign in applying the regulations. The written statement and place-of-filing directions are not intended to be traps for the unknowing. Rather, they are intended only to contribute to the effective administration of section 964, and in the 67 T.C. 736">*755 circumstances of this case, the form and content of the materials filed with the District Director served that purpose.

Section 963 permits a United States corporate shareholder to avoid a tax on its subpart F income where a timely election to take such exclusion was made and where certain prescribed standards of minimum distributions of earnings and profits to that shareholder were met. ¹⁶ The purpose of this provision is to relieve the United States shareholder of any tax with respect to the foreign subsidiary's undistributed income in those cases where the combined foreign tax and United States tax (to the extent the latter is paid on distributed income) is not substantially below the United States1977 U.S. Tax Ct. LEXIS 159">*200 corporate tax rate. S. Rept. No. 1881, 87th Cong., 2d Sess. (1962), 1962-3 C.B. 707, 794. Thus, as the effective foreign tax rate increases, the required minimum distribution of earnings and profits by the foreign subsidiary decreases. S. Rept. No. 1881, supra, 1962-3 C.B. at 794-795; see tables in sec. 963(b). To qualify for this relief, however, a corporation is required under section 963(a) ¹⁷ to consent in its election to "all the regulations prescribed by the Secretary or his delegate under this section."

1977 U.S. Tax Ct. LEXIS 159">*201 For its taxable year ended October 31, 1968, petitioner made a timely election under section 963. As reflected in our Findings, the foreign tax rate was sufficient to eliminate the necessity of any distribution in order to meet the minimum distribution requirements of section 963(b). There remains, 67 T.C. 736">*756 however, the issue as to whether the "minimum overall tax burden" test prescribed by section 1.963-4(a), Income Tax Regs., to which petitioner consented, has also been met.

This separate and additional test prescribed by regulations section 1.963-4(a) is to be met by a chain or group of corporations, as in the case of HPSA and its subsidiaries, GmbH and VmbH. ¹⁸ It deals with the problem not covered by the express language of section 963, of a United States corporate shareholder receiving grossly unequal distributions from the members of a chain or group of controlled foreign corporations. The amount of such distributions could be arranged so as to take advantage of the varying foreign tax rates in the foreign countries involved and yet still satisfy the minimum distribution test. Allowance of such a practice would have distorted the balance contemplated by section 963 between1977 U.S. Tax Ct. LEXIS 159">*202 the percentage of creditable foreign taxes and the percentage of earnings and profits required to be distributed. ¹⁹

1977 U.S. Tax Ct. LEXIS 159">*203 The means adopted to solve this problem was to require the actual overall foreign and United States tax burden on the earnings of a chain or group to be 90 percent of the tax which would have been imposed if those earnings and profits had been fully subject to United States taxation. If the overall burden was less than required, the United States shareholder might increase the distributions it received until the minimum 67 T.C. 736">*757 overall tax burden was met. Thus, the purpose of the "minimum overall tax burden" test was to insure that the relief granted by the "minimum distribution" provisions of section 963 was not abused by non-pro rata distributions.

The regulation (sec. 1.963-4(a)(1)(i)) provides that no exclusion should be allowed unless the overall United States and foreign income tax for the taxable year with respect to which the distribution is made equals or exceeds 90 percent of an amount determined by multiplying the sum of the consolidated earnings and profits and the consolidated foreign income taxes of the chain or group of corporations for the taxable year "by a percentage which equals the sum of the normal tax rate and the surtax rate (determined without regard to1977 U.S. Tax Ct. LEXIS 159">*204 the surtax exemption) prescribed by section 11 for the taxable year of the shareholder." The issue is narrowed to whether the surcharge imposed by section 51 is added to this percentage for petitioner's taxable year ended October 31, 1968.

Petitioner contends that, since the surcharge rate was imposed by section 51 rather than section 11, only the normal tax rate and the surtax rate prescribed by section 11, without regard for the surcharge rate prescribed by section 51(a)(2), is multiplied by the consolidated earnings and profits ($ 7,002,953) of petitioner's chain of controlled foreign corporations. Ninety percent of the resulting amount ($ 3,361,417) is $ 3,025,276. Since this amount is less than the overall United States and foreign income tax ($ 3,172,537), petitioner maintains that it satisfied the test and is entitled to exclude HPSA's subpart F income pursuant to section 963.

Respondent contends that, in applying the "minimum overall tax burden" test of regulations section 1.963-4(a)(1)(i), the surcharge rate prescribed by section 51(a)(2) is added to the normal tax rate and the surtax rate prescribed by section 11, and the total is multiplied by the consolidated (pretax) 1977 U.S. Tax Ct. LEXIS 159">*205 earnings and profits ($ 7,002,953) of petitioner's chain of controlled foreign corporations. ²⁰ The result is $ 3,641,536, and 67 T.C. 736">*758 90 percent of this amount is $ 3,277,382. Since this latter amount is greater than the overall United States and foreign income tax ($ 3,172,537), respondent contends that petitioner did not satisfy the test and is not entitled to exclude HPSA's subpart F income pursuant to section 963. We agree with respondent.

Section 51, added to the Internal Revenue1977 U.S. Tax Ct. LEXIS 159">*206 Code by section 102(a) of the Act of June 28, 1968, Pub. L. 90-364, 82 Stat. 251, imposed a surcharge on the income of individuals, estates and trusts, and corporations. Section 51(a)(1)(B) imposed on the income of every corporation a tax computed as a percentage of the adjusted tax (as defined in section 51(b)) in addition to the other taxes imposed by chapter 1 of the Code. For corporations, the surcharge was applicable for taxable years ended after December 31, 1967, and beginning before July 1, 1970. Sec. 51; sec. 1.51-1(c)(2), Income Tax Regs. The stated purpose for the surcharge on the tax liabilities of business corporations was to dampen inflationary pressures and keep the economy under control. H. Rept. No. 91-413 (Part 1), 91st Cong., 1st Sess. (1969), 1969-3 C.B. 200, 309. The section was not expected or intended to be a permanent addition to the Code.

When the surcharge was added to the Code in 1968, the "minimum distribution" provisions of section 963 were amended to reflect this original enactment. Sec. 102(b) of Act of June 28, 1968, Pub. L. 90-364, 82 Stat. 255. Subsequently, every time the surcharge was extended, section 963 was amended1977 U.S. Tax Ct. LEXIS 159">*207 to take into account such extensions. Sec. 5(b) of Act of Aug. 7, 1969, Pub. L. 91-53, 83 Stat. 95; sec. 701(b) of Tax Reform Act of 1969, Pub. L. 91-172, 83 Stat. 659. Thus, Congress expressly recognized the relationship between section 51 and the "minimum distribution" provisions of section 963.

Moreover, section 51(f) laid down the general rule that the surcharge rate, where attributable to another tax-imposing section of chapter 1 of the Code, should be considered as emanating from such other section. That section reads as follows:

67 T.C. 736">*759 For purposes of this title, to the extent the tax imposed by this section is attributable (under regulations prescribed by the Secretary or his delegate) to a tax imposed by another section of this chapter, such tax shall be deemed to be imposed by such other section.

Consistent with section 51(f), section 1.51-1(h)(1), Income Tax Regs., in part as follows, was adopted to provide that --

to the extent the tax imposed by section 51 is attributable to a tax imposed by another section of chapter 1 of the Code, such tax shall be deemed to be imposed by such other section. For example, if the only tax (other than the surcharge) imposed1977 U.S. Tax Ct. LEXIS 159">*208 under chapter 1 of the Code to which a particular corporation is subject is the tax imposed by section 11, then the surcharge imposed on such corporation shall be deemed to be imposed by section 11. * * *

Thus, section 51(f) and this implementing regulation have the effect of treating the section 51 surcharge as imposed by section 11.

Therefore, we do not believe that it can be disputed that Congress fully intended that during the surcharge period, the surcharge rate should apply to section 963 and to any regulations promulgated thereunder. To hold otherwise would allow the erosion of the "minimum distribution" provisions of section 963, which the "minimum overall tax burden" test of the regulations was designed to prevent. No requirements less stringent than those of section 963(b) could be applied if section 1.963-4(a), Income Tax Regs., is to serve its intended purpose.

In reaching this conclusion, we are applying the same commonsense interpretation to regulations section 1.963-4(a) as we have applied in the discussion of the accelerated depreciation election issue, above. The objective of this regulation section could not be achieved by reading it in isolation even though, 1977 U.S. Tax Ct. LEXIS 159">*209 as emphasized by petitioner, it is legislative in character. This section must be read in the light of section 51(f) and its implementing regulation which make it clear that the section 51 surcharge is to be deemed to have been imposed by section 11. While it might have been technically more elegant for the Commissioner to have amended section 1.963-4(a), Income Tax Regs., to refer to the temporary section 51 surcharge while it was in effect, we think it was permissible to achieve the same result by promulgating the general provision of section 1.51-1(h)(1), Income Tax Regs., quoted in pertinent part above.

67 T.C. 736">*760 Since the surcharge rate imposed by section 51(a)(1)(B) must be added to the normal tax rate and surtax rate imposed by section 11 of chapter 1 of the Internal Revenue Code for that part of petitioner's taxable year within the surcharge period, petitioner failed to satisfy the "minimum overall tax burden" test prescribed by section 1.963-4(a), Income Tax Regs., and is not entitled to exclude from gross income for the taxable year ended October 31, 1968, the subpart F income of HPSA.

The parties will be expected to file an appropriate motion in respect of the further1977 U.S. Tax Ct. LEXIS 159">*210 handling of the severed issue.

An appropriate order will be issued.