Notice 2018-07

Guidance under Section 965

Notice 2018-07

SECTION 1. OVERVIEW
This notice announces that the Department of the Treasury (“Treasury Department”) and
the Internal Revenue Service (“IRS”) intend to issue regulations for determining amounts
included in gross income by a United States shareholder under section 951(a)(1) by reason of
section 965 of the Internal Revenue Code (“Code”) as amended by “An Act to provide for
reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year
2018,” P.L. 115-97 (the “Act”), which was enacted on December 22, 2017. Section 2 of this
notice provides background on section 965. Section 3 of this notice describes regulations that
the Treasury Department and the IRS intend to issue. Section 4 of this notice describes the
effective dates of those regulations. Section 5 of this notice requests comments and provides
contact information.
SECTION 2. BACKGROUND
.01 Treatment of Accumulated Post-1986 Deferred Foreign Income as Subpart F Income
Section 965(a) provides that for the last taxable year of a deferred foreign income
corporation (“DFIC”) that begins before January 1, 2018 (such year of the DFIC, the “inclusion
year”), the subpart F income of the corporation (as otherwise determined for such taxable year
under section 952) shall be increased by the greater of (1) the accumulated post-1986 deferred
foreign income of such corporation determined as of November 2, 2017, or (2) the accumulated
post-1986 deferred foreign income of such corporation determined as of December 31, 2017

(each such date, a “measurement date,” and the greater of the accumulated post-1986 deferred
foreign income of the corporation as of the measurement dates, the “section 965(a) earnings
amount”). Furthermore, under section 965(b)(1), the section 965(a) earnings amount which
would otherwise be taken into account under section 951(a)(1) by a United States shareholder
with respect to a DFIC is reduced by the amount of such United States shareholder’s aggregate
foreign E&P deficit which is allocated to such DFIC under section 965(b)(2). The section 965(a)
earnings amount reduced as described in the preceding sentence is referred to in this notice as
the “section 965(a) inclusion amount.” Neither the section 965(a) earnings amount nor the
section 965(a) inclusion amount is subject to the rules or limitations in section 952 or limited by
the accumulated earnings and profits of the DFIC on the date of the inclusion.
.02 Application of the Participation Exemption
Section 965(c)(1) provides that there shall be allowed as a deduction for the taxable year
of a United States shareholder in which a section 965(a) inclusion amount is included in the
gross income of such United States shareholder an amount equal to the sum of (A) the United
States shareholder’s 8 percent rate equivalent percentage (as defined in section 965(c)(2)(A)) of
the excess (if any) of (i) the section 965(a) inclusion amount, over (ii) the amount of such United
States shareholder’s aggregate foreign cash position, plus (B) the United States shareholder’s
15.5 percent rate equivalent percentage (as defined in section 965(c)(2)(B)) of so much of such
United States shareholder’s aggregate foreign cash position as does not exceed the section
965(a) inclusion amount.
Section 965(c)(3)(A) provides that the term “aggregate foreign cash position” means,
with respect to any United States shareholder, the greater of (i) the aggregate of such United
States shareholder’s pro rata share of the cash position of each specified foreign corporation of
such United States shareholder determined as of the close of the inclusion year, or (ii) one half
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of the sum of (I) the aggregate described in clause (i) determined as of the close of the last
taxable year of each such specified foreign corporation that ends before November 2, 2017,
plus (II) the aggregate described in clause (i) determined as of the close of the taxable year of
each such specified foreign corporation which precedes the taxable year referred to in
subclause (I). Each date referred to in the preceding sentence is referred to in this notice as a
“cash measurement date.”
The cash position of any specified foreign corporation is the sum of (i) cash held by such
corporation, (ii) the net accounts receivable of such corporation, and (iii) the fair market value of
the following assets held by such corporation: (I) personal property which is of a type that is
actively traded and for which there is an established financial market (“actively traded property”);
(II) commercial paper, certificates of deposit, the securities of the Federal government and of
any State or foreign government; (III) any foreign currency; (IV) any obligation with a term of
less than one year (“short-term obligation”); and (V) any asset which the Secretary identifies as
being economically equivalent to any asset described in section 965(c)(3)(B). Section
965(c)(3)(B). Also, for purposes of section 965(c), the term “net accounts receivable” means,
with respect to any specified foreign corporation, the excess (if any) of (i) such corporation’s
accounts receivable, over (ii) such corporation’s accounts payable (determined consistent with
the rules of section 461). Section 965(c)(3)(C).
Section 965(c)(3)(D) provides that net accounts receivable, actively traded property, and
short-term obligations shall not be taken into account by a United States shareholder in
determining its aggregate foreign cash position to the extent that such United States
shareholder demonstrates to the satisfaction of the Secretary that such amount is so taken into
account by such United States shareholder with respect to another specified foreign
corporation.
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Section 965(c)(3)(F) provides that if the Secretary determines that a principal purpose of
any transaction was to reduce the aggregate foreign cash position taken into account under
section 965(c), such transaction shall be disregarded for purposes of section 965(c).
.03 Definition of DFIC and Accumulated Post-1986 Deferred Foreign Income
For purposes of section 965, a DFIC is, with respect to any United States shareholder,
any specified foreign corporation of such United States shareholder that has accumulated post1986 deferred foreign income (as of a measurement date) greater than zero. Section 965(d)(1).
The term “accumulated post-1986 deferred foreign income” means the post-1986 earnings and
profits of the specified foreign corporation except to the extent such earnings and profits (A) are
attributable to income of the specified foreign corporation that is effectively connected with the
conduct of a trade or business within the United States and subject to tax under Chapter 1
(“effectively connected income”), or (B) in the case of a controlled foreign corporation (“CFC”), if
distributed, would be excluded from the gross income of a United States shareholder under
section 959 (“previously taxed income”). Section 965(d)(2).
Section 965(d)(2) further provides that, to the extent provided in regulations or other
guidance prescribed by the Secretary, in the case of any CFC that has shareholders that are not
United States shareholders, accumulated post-1986 deferred foreign income shall be
appropriately reduced by amounts which would be previously taxed income if such shareholders
were United States shareholders.
Section 965(d)(3) provides that the term “post-1986 earnings and profits” means the
earnings and profits of the foreign corporation (computed in accordance with sections 964(a)
and 986, and by only taking into account periods when the foreign corporation was a specified
foreign corporation) accumulated in taxable years beginning after December 31, 1986, and
determined (A) as of the measurement date that is applicable with respect to such foreign
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corporation, and (B) without diminution by reason of dividends distributed during the inclusion
year other than dividends distributed to another specified foreign corporation. Accordingly,
under section 965(d)(3)(B), dividends paid by a specified foreign corporation in the inclusion
year before a measurement date generally reduce the post-1986 earnings and profits of the
corporation as determined on such measurement date, except for dividends paid to a person
other than a specified foreign corporation (for example, a United States shareholder).
.04 Specified Foreign Corporation
Section 965(e)(1) provides that the term “specified foreign corporation” means (A) any
CFC, and (B) any foreign corporation with respect to which one or more domestic corporations
is a United States shareholder (10-percent corporation). For purposes of sections 951 and 961,
a 10-percent corporation is treated as a CFC solely for purposes of taking into account the
subpart F income of such corporation under section 965(a). Section 965(e)(2). However, if a
passive foreign investment company (as defined in section 1297) with respect to the
shareholder is not a CFC, then such corporation is not a specified foreign corporation.
Section 965(e)(3).
.05 Determinations of Pro Rata Share
Section 965(f)(1) provides that the determination of any United States shareholder’s pro
rata share of any amount with respect to any specified foreign corporation shall be determined
under rules similar to the rules of section 951(a)(2) by treating such amount in the same manner
as subpart F income (and by treating such specified foreign corporation as a CFC).
.06 Regulations or Other Guidance
Section 965(o) provides that the Secretary shall prescribe such regulations or other
guidance as may be necessary or appropriate to carry out the provisions of section 965,
including regulations or other guidance to provide appropriate basis adjustments, and
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regulations or other guidance to prevent the avoidance of the purposes of this section, including
through a reduction in earnings and profits, through changes in entity classification or
accounting methods, or otherwise.
SECTION 3. REGULATIONS TO BE ISSUED ADDRESSING THE APPLICATION OF
SECTION 965
.01 Determination of Aggregate Foreign Cash Position
(a) Allocation Between Multiple Inclusion Years
The Treasury Department and the IRS are aware that in cases where specified foreign
corporations have inclusion years that end in or with different taxable years of the same United
States shareholder, section 965 could result in double-counting such shareholder’s aggregate
foreign cash position for purposes of determining the shareholder’s deduction under section
965(c). For example, assume USP, a calendar year taxpayer, wholly owns CFC1, which has an
inclusion year ending December 31, 2017, and CFC2, which has an inclusion year ending
November 30, 2018. In addition, assume that USP’s pro rata share of the cash position of each
of CFC1 and CFC2 on all relevant cash measurement dates is $100, with the result that USP’s
aggregate foreign cash position is $200. Under section 965(c), the amount allowed as a
deduction in the taxable year of a United States shareholder for which the United States
shareholder takes a section 965(a) inclusion amount into gross income is based on the
aggregate foreign cash position of the United States shareholder. One interpretation of section
965(c) could result in the 15.5 percent rate equivalent percentage applying to as much as $400
of the aggregate section 965(a) inclusion amounts of CFC1 and CFC2 taken into account by
USP, because USP’s aggregate foreign cash position for its 2017 taxable year (in which CFC1’s
section 965(a) inclusion amount is taken into account) is $200 and its aggregate foreign cash

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position for its 2018 taxable year (in which CFC2’s section 965(a) inclusion amount is taken into
account) is also $200.
The Treasury Department and the IRS intend to issue regulations providing that in the
case of a United States shareholder that has a section 965(a) inclusion amount in more than
one taxable year, the aggregate foreign cash position taken into account in the first taxable year
will equal the lesser of the United States shareholder’s aggregate foreign cash position or the
aggregate of the section 965(a) inclusion amounts taken into account by the United States
shareholder in that taxable year. Furthermore, the amount of the United States shareholder’s
aggregate foreign cash position taken into account in any succeeding taxable year will be its
aggregate foreign cash position reduced by the amount of its aggregate foreign cash position
taken into account in any preceding taxable year.
Example. (i) Facts. USP, a domestic corporation, owns all of the stock of CFC1, a
foreign corporation, which owns all of the stock of CFC2, also a foreign corporation. USP is a
calendar year taxpayer. CFC1’s inclusion year ends December 31, 2017, and CFC2’s inclusion
year ends November 30, 2018. The cash position of each of CFC1 and CFC2 on all relevant
cash measurement dates is $200, with the result that USP has an aggregate foreign cash
position of $400. For its 2017 taxable year, USP takes into account CFC1’s section 965(a)
inclusion amount of $300, and for its 2018 taxable year, USP takes into account CFC2’s section
965(a) inclusion amount of $300.
(ii) Analysis. USP’s aggregate foreign cash position taken into account in 2017 is $300,
the lesser of USP’s aggregate foreign cash position ($400) or the section 965(a) inclusion
amount ($300) that USP takes into account in 2017. The amount of USP’s aggregate foreign
cash position taken into account in 2018 is $100, USP’s aggregate foreign cash position ($400)
reduced by the amount of its aggregate foreign cash position taken into account in 2017 ($300).
In addition, in cases in which, for example, a calendar year United States shareholder
owns specified foreign corporations with inclusion years that end in or with different taxable
years of the United States shareholder, at least one specified foreign corporation of such United
States shareholder will have a final cash measurement date in 2017 (for example, December
31, 2017) and at least one other such specified foreign corporation will have a final cash
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measurement date in 2018 (for example, November 30, 2018). The Treasury Department and
the IRS are aware that a United States shareholder in this situation may not be able to
determine its aggregate foreign cash position for purposes of calculating its deduction under
section 965(c) for its 2017 taxable year by the date that its return for such taxable year must be
filed (including extensions).
For purposes of determining the aggregate foreign cash position of a United States
shareholder for a taxable year in which it takes into account a section 965(a) inclusion amount,
future regulations will provide that the United States shareholder can assume that its pro rata
share of the cash position of any specified foreign corporation with an inclusion year ending
after the date the return for such taxable year of such United States shareholder is timely filed
(including extensions, if any) will be zero as of the cash measurement date with which the
inclusion year ends. If a United States shareholder’s pro rata share of the cash position of a
specified foreign corporation was treated as zero pursuant to the preceding sentence, and the
amount described in section 965(c)(3)(A)(i) in fact exceeds the amount described in section
965(c)(3)(A)(ii) with respect to such United States shareholder, the United States shareholder
must make appropriate adjustments to reflect that the 15.5 percent rate equivalent percentage
applies to a greater amount of the aggregate section 965(a) inclusion amounts taken into
account. The Treasury Department and the IRS expect to issue future guidance regarding the
appropriate method for making such an adjustment.
Example. (i) Facts. USP, a domestic corporation, owns all of the stock of CFC1, a
foreign corporation, which owns all of the stock of CFC2, also a foreign corporation. USP is a
calendar year taxpayer. CFC1’s inclusion year ends December 31, 2017, and CFC2’s inclusion
year ends November 30, 2018. The cash position of CFC1 on each of December 31, 2015,
December 31, 2016, and December 31, 2017, is $100. The cash position of CFC2 on each of
November 30, 2015, and November 30, 2016, is $200. CFC1 has a section 965(a) inclusion
amount.

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(ii) Analysis. In determining its aggregate foreign cash position for its 2017 taxable year,
USP may assume that its pro rata share of the cash position of CFC2 will be zero as of
November 30, 2018, for purposes of filing its U.S. federal income tax return due on April 15,
2018 (or due on October 15, 2018, with extension). Therefore, USP’s aggregate foreign cash
position is treated as $300, which is the greater of (a) $300, 50% of the sum of USP’s pro rata
shares of the cash position of CFC1 as of December 31, 2015, and December 31, 2016, and of
the cash position of CFC2 as of November 30, 2015, and November 30, 2016, and (b) $100,
USP’s pro rata share of the cash position of CFC1 as of December 31, 2017. If USP’s pro rata
share of the cash position of CFC2 as of November 30, 2018, in fact exceeds $200, which
would result in USP’s aggregate foreign cash position being greater than $300, USP must make
appropriate adjustments to reflect a higher aggregate foreign cash position, under future
guidance to be issued by the Treasury Department and the IRS.
(b) Treatment of Related-Party Transactions for Purposes of Determination of Cash Position
Net accounts receivables and short-term obligations between related specified foreign
corporations may inflate the aggregate foreign cash position of a United States shareholder
relative to the actual aggregate amount of liquid assets (other than the intercompany
receivables) owned by the specified foreign corporations of the United States shareholder. For
example, if a United States shareholder wholly owns two specified foreign corporations and one
specified foreign corporation makes a short-term loan to the other specified foreign corporation,
the borrowing corporation may invest the proceeds of such financing in illiquid assets or may
spend the cash on operating expenses. The resulting intercompany receivable would be
included in the United States shareholder’s aggregate foreign cash position, notwithstanding
that, if the specified foreign corporations were treated as a single corporation, the liquid assets
of the specified foreign corporations would have been reduced by the amount of the borrowed
proceeds.
Accordingly, for purposes of determining the cash position of a specified foreign
corporation with respect to net accounts receivable and short-term obligations, the Treasury
Department and the IRS intend to issue regulations providing that, with respect to a United
States shareholder, any receivable or payable of a specified foreign corporation from or to a
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related specified foreign corporation will be disregarded to the extent of the common ownership
of such specified foreign corporations by the United States shareholder. For this purpose, a
specified foreign corporation will be treated as related to another specified foreign corporation to
the extent that the specified foreign corporations are related persons within the meaning of
section 954(d)(3), substituting the term “specified foreign corporation” for “controlled foreign
corporation” in each place that it appears.
(c) Treatment of Derivative Financial Instruments and Hedging Transactions for Purposes of
Determination of Cash Position
Under section 965(c)(3)(B)(iii)(V), the Secretary may identify any asset as being
economically equivalent to any asset described in section 965(c)(3)(B). The Treasury
Department and the IRS intend to issue regulations that address the treatment of derivative
financial instruments for purposes of measuring the cash position of a specified foreign
corporation. Derivative financial instruments include notional principal contracts, options
contracts, forward contracts, futures contracts, short positions in securities and commodities,
and any similar financial instruments. These regulations will provide that the cash position of
any specified foreign corporation will include the fair market value of each derivative financial
instrument held by the specified foreign corporation that is not a “bona fide hedging transaction”
(as defined in this section 3.01(c)). The Treasury Department and the IRS are considering
whether future guidance should exclude derivative financial instruments that are not actively
traded or that do not reference an asset described in section 965(c)(3)(B) (a “cash-equivalent
asset”) from the definition of cash position. The value of each derivative financial instrument
that must be taken into account in determining the cash position of a specified foreign
corporation may be positive or negative; however, the aggregate amount taken into account for
all derivative financial instruments (excluding bona fide hedging transactions) of a specified
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foreign corporation cannot be less than zero. Furthermore, derivative financial instruments
between related specified foreign corporations will be disregarded on the same terms as
receivables and payables described in section 3.01(b) of this notice.
For purposes of this section 3.01(c), a bona fide hedging transaction means a hedging
transaction that meets the requirements of a bona fide hedging transaction described in §1.9542(a)(4)(ii) and that is properly identified as such in accordance with the requirements of that
subparagraph. Consistent with the definition of a bona fide hedging transaction in §1.9542(a)(4)(ii), in the case of an asset hedging transaction, the risk being hedged may be with
respect to ordinary property, section 1231 property, or a section 988 transaction. Because the
identification requirements of §1.954-2(a)(4)(ii) are generally relevant only to CFCs whereas
section 965 applies to all specified foreign corporations, the Treasury Department and the IRS
will provide guidance in the future on identifying bona fide hedging transactions of specified
foreign corporations that are not CFCs.
If a derivative financial transaction is a bona fide hedging transaction that is used to
hedge a cash-equivalent asset, the value of the cash-equivalent asset identified on the
taxpayer’s books and records as the asset being hedged must be adjusted by the fair market
value of the bona fide hedging transaction that is used to hedge such cash-equivalent asset
(such hedging transaction, a “cash-equivalent asset hedging transaction”). The value of a cashequivalent asset hedging transaction must be taken into account in determining the cash
position of a specified foreign corporation whether the cash-equivalent asset hedging
transaction has positive or negative value, but only to the extent that the cash-equivalent asset
hedging transaction (or transactions) does not reduce the fair market value of the asset being
hedged below zero.

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Finally, a bona fide hedging transaction with respect to an asset that is not a cashequivalent asset or with respect to a liability (as described in §1.1221-2(b)(2)) is not included in
a specified foreign corporation’s cash position for purposes of section 965(c)(3)(B).
.02 Determination of Accumulated Post-1986 Deferred Foreign Income
(a) Adjustments to Post-1986 Earnings and Profits to Account for Certain Amounts Paid or
Incurred Between Specified Foreign Corporations Between Measurement Dates
Certain transactions between specified foreign corporations may result in earnings and
profits of a specified foreign corporation being taken into account more than once or not at all by
a United States shareholder under section 965(a). In this regard, the Conference Report
accompanying the Act states:
In order to avoid double-counting and double non-counting of earnings, the
Secretary may provide guidance to adjust the amount of post-1986 earnings and
profits of a specified foreign corporation to ensure that a single item of a specified
foreign corporation is taken into account only once in determining the income of a
United States shareholder subject to this provision. Such an adjustment may be
necessary, for example, when there is a deductible payment (e.g., interest or
royalties) from one specified foreign corporation to another specified foreign
corporation between measurement dates.
H.R. Rep. No. 115-466, at 619 (2017). Consistent with congressional intent, the Treasury
Department and the IRS intend to issue regulations to address the possibility of double-counting
or double non-counting in the computation of post-1986 earnings and profits arising from
amounts paid or incurred (including certain dividends) between related specified foreign
corporations of a United States shareholder that occur between measurement dates and that
would otherwise reduce the post-1986 earnings and profits as of December 31, 2017, of the
specified foreign corporation that paid or incurred such amounts. For purposes of this section
3.02(a), the term “related” has the same meaning as given in section 3.01(b) of this notice.
The following examples illustrate fact patterns involving double-counting or double noncounting that will be addressed by future regulations.
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Example 1. (i) Facts. USP, a domestic corporation, owns all of the stock of CFC1, a
foreign corporation, which owns all of the stock of CFC2, also a foreign corporation. USP,
CFC1, and CFC2 have calendar year taxable years. On November 2, 2017, each of CFC1 and
CFC2 has post-1986 earnings and profits of 100u. Neither CFC1 nor CFC2 has previously
taxed income or effectively connected income for any taxable year, and therefore each of
CFC1’s and CFC2’s accumulated post-1986 deferred foreign income is equal to such
corporation’s post-1986 earnings and profits. On November 3, 2017, CFC2 makes a deductible
payment of 10u to CFC1. The payment does not constitute subpart F income. CFC1 and CFC2
have no other items of income or deduction.
(ii) Analysis. Absent any adjustments, on December 31, 2017, CFC1 has post-1986
earnings and profits of 110u (100u plus 10u income from the deductible payment), and CFC2
has post-1986 earnings and profits of 90u (100u minus 10u deductible expense). The section
965(a) earnings amount with respect to CFC1 would be 110u, the greater of 100u accumulated
post-1986 deferred foreign income on November 2, 2017, and 110u accumulated post-1986
deferred foreign income on December 31, 2017, and the section 965(a) earnings amount with
respect to CFC2 would be 100u, the greater of 100u accumulated post-1986 deferred foreign
income on November 2, 2017, and 90u accumulated post-1986 deferred foreign income on
December 31, 2017. Disregarding the intercompany deductible payment, CFC1 and CFC2
would have, in the aggregate, section 965(a) earnings amounts of 200u. However, taking the
deductible payment into account, CFC1 and CFC2 would have, in the aggregate, section 965(a)
earnings amounts of 210u, because the 10u of income from the deductible payment would
increase the post-1986 earnings and profits of CFC1 as of December 31, 2017, but the 10u of
deductible expense would not decrease the post-1986 earnings and profits of CFC2 as of
November 2, 2017. Under regulations to be issued by the Treasury Department and the IRS,
an adjustment would be made with the result that CFC1 and CFC2 would have, in the
aggregate, section 965(a) earnings amounts of 200u.
Example 2. (i) Facts. Assume the same facts as in Example 1, except instead of a
deductible payment to CFC1, CFC2 makes a 10u distribution on November 3, 2017. The
distribution increases CFC1’s post-1986 earnings and profits as of December 31, 2017, by 10u
and reduces CFC2’s post-1986 earnings and profits as of December 31, 2017, by the same
amount under section 965(d)(3)(B).
(ii) Analysis. Similar to the analysis in Example 1, the section 965(a) earnings amount
with respect to CFC1 would be 110u, and the section 965(a) earnings amount with respect to
CFC2 would be 100u, resulting in aggregate section 965(a) earnings amounts of 210u. Under
regulations to be issued by the Treasury Department and the IRS, an adjustment would be
made with the result that CFC1 and CFC2 would have, in the aggregate, section 965(a)
earnings amounts of 200u. For an additional rule relating to dividends paid by one specified
foreign corporation to another specified foreign corporation, see section 3.02(b) of this notice.
Example 3. (i) Facts. Assume the same facts as in Example 1, except that CFC2 does
not make a deductible payment to CFC1, and, between measurement dates, CFC2 accrues
gross income of 20u from a person that is not related to CFC2, and CFC1 incurs a deductible
expense of 20u to a person that is not related to CFC1.
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(ii) Analysis. Absent any adjustments, on December 31, 2017, CFC1 has post-1986
earnings and profits of 80u (100u minus 20u deductible expense), and CFC2 has post-1986
earnings and profits of 120u (100u plus 20u gross income). The section 965(a) earnings
amount with respect to CFC1 would be 100u, the greater of 100u accumulated post-1986
deferred foreign income on November 2, 2017, and 80u accumulated post-1986 deferred
foreign income on December 31, 2017, and the section 965(a) earnings amount with respect to
CFC2 would be 120u, the greater of 100u accumulated post-1986 deferred foreign income on
November 2, 2017, and 120u accumulated post-1986 deferred foreign income on December 31,
2017. CFC1 and CFC2 have, in the aggregate, section 965(a) earnings amounts of 220u. The
section 965(a) earnings amounts, in the aggregate, are 20u greater than in Example 1,
notwithstanding that CFC1 and CFC2 have, in the aggregate, earned no additional income.
However, the additional 20u of section 965(a) earnings amount does not arise from an amount
paid or incurred between specified foreign corporations that are related. The regulations to be
issued by the Treasury Department and the IRS will not adjust the aggregate section 965(a)
earnings amounts of CFC1 and CFC2.
Example 4. (i) Facts. Assume the same facts as in Example 3, except that CFC2 also
makes a deductible payment of 10u to CFC1 on November 3, 2017.
(ii) Analysis. Absent any adjustments, on December 31, 2017, CFC1 has post-1986
earnings and profits of 90u (100u minus 20u deductible expense plus 10u intercompany income
from the deductible payment), and CFC2 has post-1986 earnings and profits of 110u (100u plus
20u gross income minus10u intercompany deductible expense). The section 965(a) earnings
amount with respect to CFC1 would be 100u, the greater of 100u accumulated post-1986
deferred foreign income on November 2, 2017, and 90u accumulated post-1986 deferred
foreign income on December 31, 2017, and the section 965(a) earnings amount with respect to
CFC2 would be 110u, the greater of 100u accumulated post-1986 deferred foreign income on
November 2, 2017, and 110u accumulated post-1986 deferred foreign income on December 31,
2017. Taking the intercompany deductible payment into account, CFC1 and CFC2 would have,
in the aggregate, section 965(a) earnings amounts of 210u, because the 10u of income from the
deductible payment would not increase the post-1986 earnings and profits of CFC1 as of
November 2, 2017, but the 10u of deductible expense would decrease the post-1986 earnings
and profits of CFC2 as of December 31, 2017. However, disregarding the intercompany
deductible payment, CFC1 and CFC2 would have, in the aggregate, section 965(a) earnings
amounts of 220u. Under regulations to be issued by the Treasury Department and the IRS, an
adjustment would be made with the result that CFC1 and CFC2 would have, in the aggregate,
section 965(a) earnings amounts of 220u.
(b) Determination of Amount of Diminution by Reason of Distributions to Specified Foreign
Corporations
The post-1986 earnings and profits of a specified foreign corporation are reduced to
reflect dividends distributed during the corporation’s inclusion year to another specified foreign
corporation (“the dividend reduction rule”). Section 965(d)(3)(B). As a result, a dividend paid by
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a specified foreign corporation to another specified foreign corporation (whether in an inclusion
year or a prior taxable year, including a prior taxable year that includes a measurement date)
generally reduces the corporation’s post-1986 earnings and profits with respect to any
measurement date that such dividend precedes.
The dividend reduction rule is intended to address the potential double-counting of the
earnings and profits of the distributing specified foreign corporation in calculating the section
965(a) inclusion amounts taken into account by a United States shareholder with respect to the
distributing specified foreign corporation and the distributee specified foreign corporation. (See
Example 2 in section 3.02(a) of this notice illustrating double-counting arising from dividends
paid between measurement dates notwithstanding the application of the dividend reduction
rule.) To the extent that a portion of a distribution reduces the post-1986 earnings and profits of
a distributing specified foreign corporation (for example, by reason of a reduction pursuant to
section 312(a)(3)) in an amount in excess of the increase in the post-1986 earnings and profits
of the distributee specified foreign corporation, such reduction would not relieve double-counting
and thus would be inconsistent with the purpose of the rule.
Accordingly, the Treasury Department and the IRS intend to issue regulations to clarify
that the amount by which the post-1986 earnings and profits of a specified foreign corporation is
reduced under section 965(d)(3)(B) as a result of a distribution made to a specified foreign
corporation in the inclusion year may not exceed the amount by which the post-1986 earnings
and profits of the distributee corporation is increased as a result of the distribution.
(c) Determination of Accumulated Post-1986 Deferred Foreign Income in the Case of a
Controlled Foreign Corporation with Non-United States Shareholders
In the case of a CFC that has shareholders that are not United States shareholders on a
measurement date, the Treasury Department and the IRS intend to issue regulations providing
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that the accumulated post-1986 deferred foreign income of the CFC on such measurement date
will be reduced by amounts that would be described in section 965(d)(2)(B) if such shareholders
were United States shareholders. In such cases, the regulations will follow the principles of
Revenue Ruling 82-16, 1982-1 C.B. 106, in order to determine the amounts by which
accumulated post-1986 deferred foreign income is reduced.
Example. (i) Facts. USP, a domestic corporation, and FP, a foreign corporation
unrelated to USP, have owned 70% and 30% respectively, by vote and value, of the only class
of stock of FS, a foreign corporation, from January 1, 2016, until December 31, 2017. USP and
FS both have a calendar year taxable year. FS had no income until its taxable year ending
December 31, 2016, in which it had 100u of income, all of which constituted subpart F income,
and USP included 70u in income with respect to FS under section 951(a)(1) for such year. FS
earned no income in 2017. Therefore, FS’s post-1986 earnings and profits are 100u as of both
of the measurement dates.
(ii) Analysis. Because USP included 70u in income with respect to FS under section
951(a)(1), 70u of such post-1986 earnings and profits is previously taxed income and, if
distributed, would be excluded from the gross income of USP under section 959. Thus, FS’s
accumulated post-1986 deferred foreign income would be reduced by 70u pursuant to section
965(d)(2)(B). Furthermore, the accumulated post-1986 deferred foreign income of FS is
reduced by amounts that would be described in section 965(d)(2)(B) if FP were a United States
shareholder, consistent with the principles of Revenue Ruling 82-16. Accordingly, FS’s
accumulated post-1986 deferred foreign income would be reduced by the remaining 30u of the
100u of post-1986 earnings and profits to which USP’s 70u of section 951(a)(1) income
inclusions were attributable. Accordingly, FS’s accumulated post-1986 deferred foreign income
is 0u (100u minus 70u minus 30u).
(d) Coordination Between Sections 959 and 965 in the Inclusion Year
The accumulated post-1986 deferred foreign income of a specified foreign corporation
that is a CFC excludes earnings to the extent that they would, if distributed, be excluded from
the gross income of a United States shareholder under section 959 (that is, previously taxed
income). Section 965(d)(2)(B). Post-1986 earnings and profits of a specified foreign
corporation are determined without diminution by reason of dividends distributed during the
inclusion year, other than dividends distributed to another specified foreign corporation.
Section 965(d)(3)(B).
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In general, earnings and profits of a foreign corporation attributable to amounts which
are, or have been, included in the gross income of a United States shareholder under section
951(a) are not again included in the gross income of such United States shareholder when
distributed (or when they would but for section 959(a) be included under section 951(a)(1)(B)).
Section 959(a). For purposes of applying section 959(a), a distribution from a foreign
corporation is treated as attributable first to earnings and profits included in gross income under
section 951(a)(1)(B), then to earnings and profits included in gross income under section
951(a)(1)(A), and then to other earnings and profits. Section 959(c). A distribution excluded
from gross income under section 959(a) is treated, for purposes of Chapter 1, as a distribution
which is not a dividend, except that such distributions immediately reduce earnings and profits.
Section 959(d). Actual distributions are taken into account before amounts that would be
included under section 951(a)(1)(B). Section 959(f)(2).
The Treasury Department and the IRS intend to issue regulations to clarify the
interaction between the rules under sections 959 and 965 in the inclusion year of a DFIC and
the taxable year of a United States shareholder of the DFIC in which or with which such
inclusion year ends. Such regulations will describe the following steps for determining the
section 965(a) inclusion amount of a DFIC, the treatment of distributions under section 959, and
the amount of an inclusion under sections 951(a)(1)(B) and 956 with respect to a DFIC:
(1) First, the subpart F income of the DFIC is determined without regard to section 965(a),
and the United States shareholder’s inclusion under section 951(a)(1)(A) by reason of
such amount is taken into account.
(2) Second, the treatment of a distribution from the DFIC to another specified foreign
corporation that is made before January 1, 2018, is determined under section 959.

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(3) Third, the section 965(a) inclusion amount of the DFIC is determined, and the United
States shareholder’s inclusion under section 951(a)(1)(A) by reason of such amount is
taken into account.
(4) Fourth, the treatment of all distributions from the DFIC other than those described in step
2 is determined under section 959.
(5) Fifth, an amount is determined under section 956 with respect to the DFIC and the
United States shareholder, and the United States shareholder’s inclusion under section
951(a)(1)(B) is taken into account.
Example. (i) Facts. USP, a domestic corporation, owns all of the stock of CFC1, a
foreign corporation, which owns all of the stock of CFC2, also a foreign corporation. USP,
CFC1, and CFC2 all have taxable years ending December 31, 2017. As of January 1, 2017,
CFC1 has no earnings and profits, and CFC2 has 100u of earnings and profits described in
section 959(c)(3) that were accumulated in taxable years beginning after December 31, 1986,
while CFC2 was a specified foreign corporation. On March 1, 2017, CFC1 earns 30u of subpart
F income (as defined in section 952), and CFC2 earns 20u of subpart F income. On July 1,
2017, CFC2 distributes 40u to CFC1, and the exception described in section 954(c)(6)(A)
applies to such distribution. On November 1, 2017, CFC1 distributes 60u to USP.
(ii) Analysis. (A) Application of section 959 without regard to section 965. USP
determines its inclusion under section 951(a)(1)(A) without regard to section 965(a), which is
30u with respect to CFC1 and 20u with respect to CFC2 for their taxable years ending
December 31, 2017. As a result of the inclusions under section 951(a)(1)(A), CFC1 and CFC2
increase their earnings and profits described in section 959(c)(2) by 30u and 20u, respectively.
(B) Distributions between specified foreign corporations before January 1, 2018. The
distribution of 40u from CFC2 to CFC1 is treated as a distribution of 20u out of earnings and
profits described in section 959(c)(2) (attributable to inclusions under section 951(a)(1)(A) that
are not by reason of section 965(a)) and 20u out of earnings and profits described in section
959(c)(3).
(C) Section 965(a) inclusion amount. USP determines CFC1’s and CFC2’s section
965(a) inclusion amounts. Because there are no aggregate foreign E&P deficits to be allocated
to CFC1 and CFC2, the section 965(a) inclusion amount of CFC1 and CFC2 equals the section
965(a) earnings amount with respect to CFC1 and CFC2, respectively.

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(1) CFC1 section 965(a) earnings amount. The section 965(a) earnings amount with
respect to CFC1 is 20u, the amount of its accumulated post-1986 deferred foreign income as of
both November 2, 2017, and December 31, 2017, which is equal to 70u of post-1986 earnings
and profits (30u earned and 40u attributable to the CFC2 distribution) reduced by 50u of
previously taxed income described in section 959(c)(2) (30u earned and 20u attributable to the
CFC2 distribution) under section 965(d)(2)(B). Under section 965(d)(3)(B), the post-1986
earnings and profits of CFC1 are not reduced by the 60u distribution to USP.
(2) CFC2 section 965(a) earnings amount. The section 965(a) earnings amount with
respect to CFC2 is 80u, the amount of its accumulated post-1986 deferred foreign income as of
both November 2, 2017, and December 31, 2017, which is equal to the amount of CFC2’s post1986 earnings and profits of 80u. For purposes of calculating CFC2’s accumulated post-1986
deferred foreign income, CFC2 has no previously taxed income and therefore no adjustment is
made under section 965(d)(2)(B). CFC2’s 80u of post-1986 earnings and profits consists of
120u of earnings and profits that it earned, reduced by the 40u distribution to CFC1 under
section 965(d)(3)(B). The amount of the reduction to the post-1986 earnings and profits of
CFC2 for the 40u distribution is not limited by the rules described in section 3.02(b) of this notice
because CFC1’s post-1986 earnings and profits are increased by 40u as a result of the
distribution. Furthermore, because the 40u distribution was made on July 1, 2017, which is prior
to any measurement date, section 3.02(a) of this notice is not relevant.
(3) Effect on previously taxed income. CFC1 and CFC2 increase their previously taxed
income described in section 959(c)(2) by their section 965(a) inclusion amounts taken into
account by USP, 20u and 80u, respectively, and reduce their earnings and profits described in
section 959(c)(3) by an equivalent amount.
(D) Distribution to United States shareholder. The distribution from CFC1 to USP is
treated as a distribution of 60u out of the earnings and profits of CFC1 described in section
959(c)(2), which include earnings and profits attributable to the section 965(a) inclusion amount
taken into account by USP.
.03 Application of Section 961 to Amounts Treated as Subpart F Income Under Section 965
Section 965(o) authorizes the Treasury Department and the IRS to issue regulations or
other guidance to provide appropriate basis adjustments in order to carry out the provisions of
section 965. In order to provide certainty regarding the application of the rules described in
section 961 with respect to amounts included under section 965, the Treasury Department and
the IRS intend to issue regulations providing that if a United States shareholder receives
distributions from a DFIC during the inclusion year that are attributable to previously taxed
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income described in section 959(c)(2) by reason of section 965(a), the amount of gain
recognized by the United States shareholder with respect to the stock of the DFIC under section
961(b)(2) will be reduced (but not below zero) by the section 965(a) inclusion amount.
.04 Treatment of Affiliated Group Making a Consolidated Return For Purposes of Section 965
Pursuant to the Secretary’s authority under sections 965(o) and 1502, the Treasury
Department and the IRS intend to issue regulations providing that, solely with respect to the
calculation of the amount included in gross income by a consolidated group (as defined in
§1.1502-1(h)) under section 951(a)(1) by reason of section 965(a), all of the members of a
consolidated group that are United States shareholders of one or more specified foreign
corporations will be treated as a single United States shareholder. Thus, for example, all
members of a consolidated group that are United States shareholders will be treated as a single
United States shareholder for purposes of determining the aggregate foreign cash position of
the consolidated group and for purposes of taking such aggregate foreign cash position into
account under section 965(c)(1).
These regulations will provide that, consistent with the consolidated return regulations
(and notwithstanding the calculation of the amount described in the prior paragraph),
appropriate adjustments, for example, adjustments under §1.1502-32 to the basis of the stock of
each member that is a United States shareholder, will be made to reflect the impact of amounts
included in gross income under section 951(a)(1) by reason of section 965(a), and the impact of
other attributes of each member on this calculation, such as the ownership of E&P deficit foreign
corporations by particular members and the cash position of specified foreign corporations held
by particular members. These regulations will also provide that taxpayers must make
appropriate adjustments reflecting minority ownership interests in a member of the consolidated
group that are owned by a person that is not a member of the consolidated group.
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.05 Determination of Foreign Currency Gain or Loss under Section 986(c)
The Treasury Department and the IRS intend to issue regulations providing that any gain
or loss recognized under section 986(c) with respect to distributions of previously taxed income
described in section 959(c)(2) by reason of section 965(a) will be diminished proportionately to
the diminution of the taxable income resulting from section 965(a) by reason of the deduction
allowed under section 965(c). See H.R. Rep. No. 115-466, at 620.
The adjustments with respect to section 986(c) must be made so as to apply solely with
respect to distributions of previously taxed income described in section 959(c)(2) by reason of
section 965(a). Accordingly, future regulations will also provide ordering rules for determining
the portion of a distribution that will be treated as previously taxed income described in section
959(c)(2) by reason of section 965(a).
SECTION 4. EFFECTIVE DATES
Section 965 is effective for the last taxable years of foreign corporations that begin
before January 1, 2018, and with respect to United States shareholders, for the taxable years in
which or with which such taxable years of the foreign corporations end. The Treasury
Department and the IRS intend to provide that the regulations described in section 3 of this
notice are effective beginning the first taxable year of a foreign corporation (and with respect to
United States shareholders, the taxable years in which or with which such taxable years of the
foreign corporations end) to which section 965 applies. Before the issuance of the regulations
described in this notice, taxpayers may rely on the rules described in section 3.
SECTION 5. REQUEST FOR COMMENTS AND CONTACT INFORMATION
The Treasury Department and the IRS request comments on the rules described in this
notice. In addition, the Treasury Department and the IRS expect to issue additional guidance

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under section 965, and the Treasury Department and the IRS request comments on what
additional guidance should be issued to assist taxpayers in applying section 965.
Written comments may be submitted to the Office of Associate Chief Counsel
(International), Attention: Leni C. Perkins, Internal Revenue Service, IR-4549, 1111
Constitution Avenue, NW, Washington, DC 20224. Alternatively, taxpayers may submit
comments electronically to [email protected]. Comments will be
available for public inspection and copying.
The principal author of this notice is Ms. Perkins of the Office of Associate Chief Counsel
(International). For further information regarding this notice, contact Ms. Perkins at (202) 3176934 (not a toll free call).

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